-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J5j/yr1VJy7Uo18oRWb09R0oQkuBlm6SHXQVktNvOmEygaFDMLo5T341s77xS5JG rvGCE/2fQn/K8UQ3kbZsPQ== 0000899243-00-002725.txt : 20001225 0000899243-00-002725.hdr.sgml : 20001225 ACCESSION NUMBER: 0000899243-00-002725 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20001222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER COMPRESSOR CO / CENTRAL INDEX KEY: 0000909413 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 752344249 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-50836 FILM NUMBER: 794037 BUSINESS ADDRESS: STREET 1: 12001 N HOUSTON ROSSLYN CITY: HOUSTON STATE: TX ZIP: 77086 BUSINESS PHONE: 2814478787 MAIL ADDRESS: STREET 1: 12001 NORTH HOUSTON ROSSLYN CITY: HOUSTON STATE: TX ZIP: 77086 FORMER COMPANY: FORMER CONFORMED NAME: HANOVER COMPRESSOR CO DATE OF NAME CHANGE: 19960716 S-4/A 1 0001.txt AMENDMENT NO. 1 TO FORM S-4 As filed with the Securities and Exchange Commission on December 22, 2000 Registration No. 333-50836 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ---------------- Hanover Compressor Company (Exact name of Registrant as specified in its charter) Delaware 7359 76-0625124 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification Code organization) Number) 12001 North Houston Rosslyn Houston, Texas 77086 (281) 447-8787 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------- Michael J. McGhan President and Chief Executive Officer 12001 North Houston Rosslyn Houston, Texas 77086 (281) 447-8787 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: Kyle Longhofer Jack D. Brannon Richard S. Meller Schlanger, Mills, Mayer & OEC Compression Latham & Watkins Silver, LLP Corporation 233 South Wacker Drive 109 North Post Oak 2501 Cedar Springs Road Suite 5800 Suite 300 Suite 600 Chicago, Illinois Houston, Texas 77024 Dallas, Texas 75201 60606 (713) 785-1700 (214) 953-9560 (312) 876-7000 ---------------- Approximate date of commencement of the proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and the merger of Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover Compressor Company, with and into OEC Compression Corporation, as described in the Agreement and Plan of Merger dated as of July 13, 2000, as amended, becomes effective. If 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. [_] The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8 of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8, may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [OEC LOGO] MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT The Boards of Directors of Hanover Compressor Company ("Hanover") and OEC Compression Corporation ("OEC") have agreed on a merger in which Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover, will be merged with and into OEC. As a result of such merger, OEC will become a wholly-owned subsidiary of Hanover. If the merger is completed, each outstanding share of OEC common stock will be converted into the right to receive between .0333333 and .0307692 shares of Hanover common stock. The actual number of shares that will be issued will be determined by dividing $1.00 by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock owned), and multiplying the result by the number of shares of OEC common stock outstanding. We estimate that immediately after the merger OEC stockholders will hold approximately 3% of the outstanding shares of Hanover. The Hanover common stock is listed on the New York Stock Exchange under the symbol "HC". The merger cannot be completed unless the stockholders of OEC approve it. OEC's stockholders will be asked to vote upon the merger at a special meeting to be held on January 26, 2001 starting at 10:00 a.m., local time, at 2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201. Hanover's stockholders will not be required to vote to approve the Merger pursuant to section 251(f)(3) of the Delaware General Corporation Law as the shares to be issued in connection with the Merger do not exceed 20% of the shares of common stock of Hanover outstanding as of July 13, 2000. Your vote is very important. Whether or not you plan to attend the meeting, please take the time to vote by completing and mailing the enclosed proxy card to us. This proxy statement/prospectus provides you with detailed information about the proposed merger and the other matters to be voted upon at your meeting. You should consider the matters discussed under "Risk Factors" beginning on page 14 of the enclosed proxy statement/prospectus before voting. Sincerely, [SIGNATURE OF RAY C. DAVIS] Ray C. Davis [SIGNATURE OF KELCY L. WARREN] Kelcy L. Warren Co-Chief Executive Officer and Co-Chief Executive Officer and Co-Chairman of the Board Co-Chairman of the Board OEC Compression Corporation OEC Compression Corporation Neither the Securities and Exchange Commission nor any state securities regulator has approved the Hanover common stock to be issued under this proxy statement/prospectus or determined if this proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. The proxy statement/prospectus is dated December 27, 2000 and is being first mailed to OEC stockholders on or about December 27, 2000. [OEC LOGO] ---------------- NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 26, 2001 ---------------- To the stockholders of OEC Compression Corporation: A special meeting of the stockholders of OEC Compression Corporation will be held on January 26, 2001, at 2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201 starting at 10:00 a.m., local time, for the following purposes: 1. To approve an Agreement and Plan of Merger, dated as of July 13, 2000 and amended as of November 14, 2000 among Hanover Compressor Company, Caddo Acquisition Corporation and OEC Compression Corporation, which provides that: (a) Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover Compressor Company, will be merged with and into OEC Compression Corporation, with OEC continuing as the surviving corporation and becoming a wholly-owned subsidiary of Hanover; and (b) If the merger is completed, each outstanding share of OEC common stock will be converted into the right to receive between .0333333 and .0307692 shares of Hanover common stock. The actual number of shares that will be issued will be determined by dividing $1.00 by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock owned) and multiplying the result by the number of shares of OEC common stock outstanding. 2. To transact such other business as may properly come before the meeting or any adjournments of the meeting. The OEC board of directors has fixed the close of business on December 21, 2000 as the record date for determining the OEC stockholders who are entitled to notice of, and to vote at, the special meeting. The approval of the Agreement and Plan of Merger will require the affirmative vote of the holders of a majority of the outstanding shares of OEC common stock as of the record date. The completion of the merger is conditioned upon approval of the Agreement and Plan of Merger by the OEC stockholders. All OEC stockholders are cordially invited to attend the special meeting in person. However, to ensure your representation at the meeting, please take the time to vote on the proposals submitted to you by completing and mailing the enclosed proxy card in the enclosed postage-prepaid envelope. You may revoke your proxy in the manner described in the accompanying proxy statement/prospectus at any time before it is voted at the special meeting of OEC stockholders. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of all of the above proposals. If you fail to return a properly executed proxy card and do not vote your shares in person at the meeting, it will have the same effect as a vote against approval of the Agreement and Plan of Merger. THE OEC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER. By Action of the Board of Directors, [SIGNATURE OF RAY C. DAVIS] [SIGNATURE OF KELCY L. WARREN] Ray C. Davis Kelcy L. Warren Co-Chief Executive Officer and Co-Chief Executive Officer and Co-Chairman of the Board Co-Chairman of the Board Dallas, Texas December 27, 2000 REFERENCES TO ADDITIONAL INFORMATION This proxy statement/prospectus incorporates important business and financial information about Hanover from documents that are not included or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers: OEC Compression Corporation Hanover Compressor Company 2501 Cedar Springs Road, Suite 600 12001 N. Houston Rosslyn Dallas, Texas 75201 Houston, Texas 77086 Telephone: (214) 953-9560 Telephone: (281) 447-8787 To obtain timely delivery of requested documents prior to the meetings, you must request them no later than January 19, 2001, which is five business days prior to the date of the OEC special meeting. See "Where You Can Find More Information" on page 72 of this proxy statement/prospectus. TABLE OF CONTENTS
Page ---- QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1 SUMMARY.................................................................... 3 The Companies............................................................ 3 The Meeting.............................................................. 4 Stockholders Entitled to Vote............................................ 4 Purposes of the OEC Special Meeting...................................... 5 Share Ownership of Management and Directors.............................. 5 The Merger............................................................... 5 Voting and Disposition Agreement......................................... 6 Risk Factors............................................................. 6 Recommendation of the OEC Board of Directors............................. 6 Opinion of Financial Advisor to OEC...................................... 6 Interests of Certain Persons in the Merger............................... 7 Material Contacts........................................................ 7 Management Following the Merger.......................................... 7 Conditions to the Merger................................................. 8 Termination.............................................................. 8 Dissenters' and Appraisal Rights......................................... 8 Material United States Federal Income Tax Consequences................... 9 Accounting Treatment..................................................... 9 Surrender of Certificates................................................ 9 Effects of the Merger on the Rights of Holders of OEC Common Stock....... 9 Selected Financial Data--Hanover......................................... 10 Comparative Per Share Data............................................... 12 Comparative Market Price Information..................................... 13 RISK FACTORS............................................................... 14 Risks Relating to the Merger............................................. 14 Risks Relating to Hanover................................................ 15 CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS...................... 18 THE OEC SPECIAL MEETING.................................................... 20 Date, Time and Place..................................................... 20 Matters to be Considered at the OEC Special Meeting...................... 20 The OEC Board of Directors Recommendations............................... 20 Vote Required............................................................ 20 Voting of Proxies........................................................ 20 Revocability of Proxies.................................................. 21 Record Date; Stock Entitled to Vote; Quorum.............................. 21 Solicitation of Proxies.................................................. 21 THE MERGER................................................................. 22 General.................................................................. 22 Background of the Merger................................................. 22 Reasons for the Merger................................................... 26 Recommendation of the OEC Board of Directors............................. 28 Opinion of OEC's Financial Advisor....................................... 28 Interests of Certain Persons in the Merger............................... 32 Material Contacts........................................................ 33
i
Page ---- Determination of Conversion Ratio....................................... 34 Regulatory Approval Required............................................ 34 The Prudential Agreement................................................ 34 Management and Operations Following the Merger.......................... 35 Accounting Treatment.................................................... 35 Material United States Federal Income Tax Consequences.................. 35 Dissenters' and Appraisal Rights........................................ 36 Listing of the Hanover Common Stock to be Issued in the Merger.......... 36 Delisting and Deregistration of OEC Common Stock after the Merger....... 37 Federal Securities Law Consequences..................................... 37 THE AGREEMENT AND PLAN OF MERGER.......................................... 38 General................................................................. 38 Conversion of Shares.................................................... 38 Procedure for the Exchange of Stock Certificates........................ 38 Representations and Warranties.......................................... 39 Certain Covenants Relating to Conduct of Business....................... 41 No Solicitation......................................................... 42 Additional Agreements................................................... 43 Director and Officer Indemnification.................................... 44 Conditions to the Merger................................................ 45 Termination; Termination Fees and Expenses.............................. 46 Amendment and Waiver.................................................... 48 VOTING AND DISPOSITION AGREEMENT.......................................... 49 NONCOMPETITION AGREEMENTS................................................. 50 OEC....................................................................... 51 Business................................................................ 51 General................................................................. 51 Gas Compression Operations.............................................. 52 Equipment Leasing and Contract Compression Services..................... 53 Lease/Contract Compression Terms........................................ 53 Remanufacturing Services................................................ 53 Compressor Sales........................................................ 54 Market and Customers.................................................... 54 Competition............................................................. 54 Compliance with Environmental Laws...................................... 54 Employees............................................................... 54 Properties and Facilities............................................... 54 Legal Proceedings....................................................... 55 Market for OEC's Common Equity.......................................... 55 Executive Officers of OEC............................................... 55 Security Ownership of Certain Beneficial Owners and Management.......... 56 Selected Historical Financial Data--OEC................................. 58 Supplementary Financial Information--OEC................................ 58 OEC Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 60 DESCRIPTION OF HANOVER COMMON STOCK....................................... 65 COMPARISON OF STOCKHOLDER RIGHTS.......................................... 66 Capital Stock........................................................... 66 Number, Election and Removal of Directors............................... 66
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Page ---- Amendments to Charter and Bylaws....................................... 67 Special Meetings of Stockholders....................................... 67 Action Without a Meeting............................................... 68 Inspection of Stockholder List......................................... 68 Limitation of Directors' Liability..................................... 68 Indemnification of Directors and Officers.............................. 69 Dissenters' and Appraisal Rights....................................... 70 Oklahoma Control Shares Act............................................ 71 Rights Plan............................................................ 71 Interested Stockholder Transactions.................................... 71 LEGAL MATTERS............................................................ 72 EXPERTS.................................................................. 72 WHERE YOU CAN FIND MORE INFORMATION...................................... 72 INDEX TO OEC CONSOLIDATED FINANCIAL STATEMENTS........................... F-1 Annex A--Agreement and Plan of Merger dated as of July 13, 2000 and amended as of November 14, 2000 Annex B--Opinion of Prudential Securities Annex C--Voting and Disposition Agreement
iii QUESTIONS AND ANSWERS ABOUT THE MERGER Q: What is the proposed transaction for which I am being asked to vote? A: OEC proposes to be acquired by Hanover pursuant to the terms of an Agreement and Plan of Merger as amended. Pursuant to the Agreement and Plan of Merger, Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover Compressor Company, will merge into OEC, with OEC surviving the merger. As a result, OEC will become a wholly-owned subsidiary of Hanover. Q: What will happen to my OEC common stock in the merger? A: In the merger, each issued and outstanding share of OEC common stock will be converted into the right to receive between .0333333 and .0307693 shares of Hanover common stock. The actual number of shares of Hanover common stock to be issued will be determined by dividing $1.00 by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock), and multiplying the result by the number of shares of OEC common stock outstanding. Each outstanding share of Hanover common stock will remain outstanding and be unaffected by the merger. As a result of such merger, you will receive between .0333333 and .0307692 shares of Hanover common stock for each share of OEC common stock you own. Q: When do you expect the merger to be completed? A: We are working toward completing the merger as quickly as possible. We expect to complete the merger by January 31, 2001. If necessary or desirable, either party may postpone the merger until March 1, 2001, and Hanover and OEC may agree to an even later date. Q: What do I need to do now? A: We urge you to read this proxy statement/prospectus carefully, including its annexes, and to consider how the merger would affect you as a stockholder. You also may want to review the documents referenced under "Where You Can Find More Information." Q: How do I vote? A: Indicate on your proxy card how you want to vote, and sign and mail your proxy card in the enclosed postage-prepaid return envelope as soon as possible so that your shares may be represented at your meeting. If you sign and send in your proxy card and do not indicate how you want to vote, your proxy will be counted as a vote in favor of each proposal applicable to you. If you fail to return your proxy card and do not vote in person at your meeting, the effect will be the same as a vote against the merger proposals applicable to you. Q: If my shares are held in a brokerage account, how will my shares be voted? A: Your broker will not vote your shares for you unless you provide your broker with written instructions on how to vote. As a result, it is important that you follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Q: May I change my vote after I have mailed a signed proxy card? A: Yes. You may change your vote in one of the following three ways at any time before your proxy is voted at your meeting. First, you may send a written notice stating that you would like to revoke your proxy. Second, you may complete a new, later-dated proxy card. Third, you can attend the appropriate meeting and vote in person. If you choose either of the first two methods, you must submit your notice of revocation or your new proxy to the Secretary of OEC. If you have instructed a broker to vote your shares, you must follow the directions received from your broker to change your vote or to vote in person at your meeting. 1 Q: Should I send my certificates now? A: No. After the merger is completed, we will send you written instructions for exchanging your stock certificates. Q: Whom do I call with questions? A: OEC stockholders who have questions about the merger should contact: Jack Brannon OEC Compression Corporation 2501 Cedar Springs Road, Suite 600 Dallas, Texas 75201 (214) 953-9560 2 SUMMARY This summary may not contain all of the information that is important to you. You should carefully read this entire document and the other documents we refer to for a more complete understanding of the merger. In addition, we incorporate by reference important business and financial information into this proxy statement/prospectus. You may obtain the information incorporated by reference without charge by following the instructions in the section "Where You Can Find More Information." Where necessary, we have included page references to direct you to a more complete description of the topics in this summary. The Companies Hanover The information provided in this prospectus gives effect to a restructuring of Hanover Compressor Company that was effected on December 9, 1999 (the "Restructuring"). The sole purpose of the Restructuring was to create a holding company, and the Restructuring has had and will have no effect on Hanover's business. As a result of the Restructuring, "old" Hanover Compressor Company was renamed Hanover Compression Inc. ("HCI") and became a wholly-owned subsidiary of a newly created holding company called Hanover Compressor Company. Each share of HCI was exchanged for one share of "new" Hanover Compressor Company, which replaced "old" Hanover Compressor Company as the publicly held company whose stock is traded on the New York Stock Exchange. Financial and other information discussed in this prospectus for periods prior to the Restructuring relates to HCI and its subsidiaries. The information provided in this prospectus also gives effect to the two-for-one split of Hanover's common stock effective June 13, 2000. Hanover is a leading provider of a broad array of natural gas compression services in the United States and select international markets. Hanover operates the largest compressor rental fleet, in terms of horsepower, in the gas compression industry and provides its services on a rental, contract compression, maintenance, and acquisition leaseback basis. Hanover's customers include independent and major producers and distributors of natural gas throughout the Western Hemisphere. Hanover's products and services are essential to the production, transportation, processing, and storage of natural gas. Founded in 1990 and publicly held since 1997, Hanover is the largest public company whose primary focus is in the natural gas compression business. Hanover's compression services are complemented by its compressor and oil and gas production equipment fabrication operations, which broaden its customer relationships both domestically and internationally. Through internal growth and a series of strategic acquisitions, Hanover has become the largest operator of rental compression horsepower capacity in the United States, serving an estimated 28% of the domestic rental market. Hanover began international operations in 1995 and has become one of the largest providers of compression services in the rapidly growing Latin American and Canadian markets. As of September 30, 2000, Hanover's compression rental fleet included the following:
Units Horsepower ----- ---------- U.S............................................................ 4,379 1,714,000 International.................................................. 426 384,000 ----- --------- Total Fleet.................................................... 4,805 2,098,000 ===== =========
In addition to our business of providing natural gas compression services, Hanover also fabricates gas compressors for sale to third parties and for inclusion in our rental fleet. Hanover was the second largest fabricator of natural gas compressors (by horsepower) in North America in 1999. 3 Complementing Hanover's gas compression businesses is its oil and gas production equipment fabrication business. Oil and gas production equipment is typically installed at the wellhead immediately before beginning large-scale production and remains at the site for the life of the well. Hanover fabricates equipment used by oil and gas producers to separate and treat oil and gas immediately after it is produced in order to facilitate further processing, transportation and sale. Caddo Acquisition Corporation is a company formed in Oklahoma by Hanover on July 11, 2000 solely for use in the merger. In addition to the acquisition of OEC, which is the subject of this proxy statement/prospectus, Hanover acquired the Dresser Rand compression services division from Ingersoll-Rand Company as of August 31, 2000. This acquisition adds 312 rental units having an aggregate capacity of approximately 240,000 horsepower. The Dresser-Rand transaction is described more fully in the Form 8-K filed with the Securities and Exchange Commission on July 13, 2000, the Form 8-K filed with the Securities and Exchange Commission on September 14, 2000, the Form 8-K/A filed with the Securities and Exchange Commission on November 13, 2000, and the Form 8-K filed on November 22, 2000, all of which are incorporated by reference into this proxy statement/prospectus. The mailing address of Hanover's principal executive office is 12001 N. Houston Rosslyn, Houston, Texas, 77086, and the telephone number is (281) 447-8787. OEC (Page 51) OEC Compression Corporation, formerly Equity Compression Services Corporation, formerly Hawkins Energy Corporation, is principally engaged in the leasing and contract management of gas compression equipment to operators of producing natural gas wells and gas gathering systems. OEC conducts its compressor operations through Ouachita Energy Corporation, its wholly-owned subsidiary. For the year ended December 31, 1999, its compressor service fleet consisted of 854 units with an aggregate capacity of 228,903 horsepower. In addition to its compressor operations, OEC is involved in the overhaul and rework of gas compression equipment owned by third parties and the direct sale of remanufactured gas compression equipment. For the year ended December 31, 1999, OEC had total revenues of $25,157,000 and net income of $121,000, or $0.00 per share (diluted). For the nine months ended September 30, 2000, OEC had total revenues of approximately $16,671,000 and net income of approximately $437,000, or $0.01 per share (diluted). The mailing address of OEC's principal executive office is 2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201, and the telephone number is (214) 953-9560. The Meeting (Page 20 ) The special meeting of OEC stockholders will be held on January 26, 2001 at 2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201 starting at 10:00 a.m., local time. Stockholders Entitled to Vote (Page 21) Holders of record of shares of OEC common stock at the close of business on the record date, December 21, 2000, are entitled to notice of, and to vote at, the special meeting of OEC stockholders. On the record date, there were approximately 37,060,766 shares of OEC common stock outstanding, each of which will be entitled to one vote on each matter to be acted upon at the special meeting of OEC stockholders. 4 Hanover's stockholders will not be required to vote to approve the Merger pursuant to section 251(f)(3) of the Delaware General Corporation Law as the shares to be issued in connection with the Merger do not exceed 20% of the shares of common stock of Hanover outstanding as of July 13, 2000. Purpose of the OEC Special Meeting At the special meeting of OEC stockholders, the stockholders of common stock will be asked to consider and vote upon proposals to approve: . the Agreement and Plan of Merger, dated as of July 13, 2000 and amended as of November 14, 2000, among Hanover Compressor Company, Caddo Acquisition Corporation and OEC Compression Corporation; and . any other matters that are properly brought before the special meeting or any adjournment or postponement of the meeting. The completion of the merger is conditioned upon OEC's stockholders' approval of the Agreement and Plan of Merger. Share Ownership of Management and Directors (Page 21) On the record date, directors and executive officers of OEC and their affiliates held and are entitled to vote approximately 45% of the OEC common stock outstanding on that date. The vote required for approval of the OEC merger proposal is a majority of the outstanding shares of OEC common stock. The Merger (Page 22) Upon completion of the merger, Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover, will be merged with and into OEC, with OEC continuing as the surviving corporation and becoming a wholly-owned subsidiary of Hanover. Each issued and outstanding share of OEC common stock will be converted into the right to receive between .0333333 and .0307692 shares of Hanover common stock. The actual number of shares of Hanover common stock to be issued will be determined by dividing $1.00 by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock), and multiplying the result by the number of shares of OEC common stock owned. As a result of such merger, OEC stockholders will receive between .0333333 and .0307692 shares of Hanover common stock for each share of OEC common stock held. Each outstanding share of Hanover common stock will remain outstanding and be unaffected by the merger. Based upon the number of outstanding shares of Hanover common stock and OEC common stock as of the record date, the holders of OEC common stock immediately prior to the merger will own approximately 3% of the outstanding shares of Hanover common stock immediately following the merger. The full text of the Agreement and Plan of Merger is attached as Annex A and is to be considered a part of this proxy statement/prospectus. OEC stockholders are urged to read carefully the Agreement and Plan of Merger in its entirety. 5 Voting and Disposition Agreement (Page 49) When Hanover and OEC entered into the Agreement and Plan of Merger, Hanover required certain stockholders to enter into a voting and disposition agreement under which those stockholders, among other things: . agreed to appear, in person or by proxy, for the purpose of obtaining a quorum at any meeting of the stockholders of OEC at which matters relating to the merger are considered; . agreed to vote their shares in favor of approval of the Agreement and Plan of Merger; . granted to Hanover an irrevocable proxy to vote all shares owned by them and in favor of the Agreement and Plan of Merger; and . agreed to certain restrictions on their ability to sell the shares of Hanover common stock they will receive in the merger. The voting and disposition agreement is attached to this proxy statement/prospectus as Annex C. Risk Factors (Page 14) In evaluating the merger and the proposals set forth in this proxy statement/prospectus, you should carefully consider the "Risk Factors." Recommendation of the OEC Board of Directors (Page 28) The OEC board of directors believes that the terms of the merger and the Agreement and Plan of Merger are advisable and fair to, and in the best interests of, OEC and its stockholders. See "The Merger--Recommendation of the OEC Board of Directors." The OEC board of directors has unanimously approved the Agreement and Plan of Merger and recommends that holders of OEC common stock vote FOR the approval of the Agreement and Plan of Merger. Opinion of Financial Advisor to OEC (Page 28) On July 14, 2000, Prudential Securities delivered its written opinion to the OEC board of directors to the effect that, as of that date, the consideration to be received by the OEC stockholders was fair, from a financial point of view. The full text of Prudential Securities' opinion, which sets forth the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken, is attached as Annex B and is to be considered a part of this proxy statement/prospectus. OEC stockholders are urged to read carefully the opinion of Prudential Securities in its entirety. 6 Interests of Certain Persons in the Merger (Page 32) Directors and officers of OEC have interests in the merger as directors or officers that are different from, or in addition to, those of other stockholders. Pursuant to the Agreement and Plan of Merger, Hanover is obligated to indemnify each present and former director and officer of OEC against certain liabilities and expenses incurred in connection with claims relating to certain matters prior to the closing of the merger. See also "The Agreement and Plan of Merger--Director and Officer Indemnification." Each of the options held by certain officers and employees of OEC will, as a result of the merger, become vested and exercisable at the time of the merger and will be cancelled and converted into the right to receive cash in an amount equal to the product of (a) $1.00 minus the exercise price per share of such OEC option, times (b) the number of shares of OEC common stock which may be purchased upon exercise of such option. Also, the merger will trigger certain rights under agreements between OEC and some of its officers and employees. Material Contacts (Page 33) In July 1999, Hanover and OEC entered into an agreement under which OEC sold natural gas compressors to Hanover for $2,265,000, of which $2,000,000 was paid on the date of the agreement with the remaining $265,000 to be paid 180 days thereafter unless Hanover or OEC exercised its repurchase option. The agreement contained provisions that permit OEC, at its option, to repurchase the compressors or Hanover, at its option, to sell the compressors back to OEC for a purchase price of $2,000,000 plus interest thereon at a rate of 10% per annum. Hanover elected to sell the equipment back to OEC, but the completion of the sale has been deferred pending completion of the merger between OEC and Hanover. OEC has treated the transaction as a loan for accounting purposes because of certain unexercised put and call features in the agreement, carrying the $2,000,000 amount payable to Hanover as a current note payable at September 30, 2000. In November 2000, OEC and Hanover entered into a management agreement under which OEC engaged Hanover to provide day to day management services for OEC's field and shop operations. The management agreement provides that Hanover will receive a fee of $900,000 per month for performing those services, including $900,000 for services performed by Hanover during the period ended October 31, 2000. The management fee is payable to Hanover only upon consummation of the merger. The management agreement provides that Hanover has no responsibility for OEC's marketing and sales operations, including making bids for new business, or OEC's financial reporting and accounting operations, all of which remain the responsibility of OEC's management. In June of 2000, Hanover sold to an affiliate of Ray C. Davis and Kelcy L. Warren, each of whom is a co-chief executive officer and co-chairman of the board of OEC, a 25% interest in an electrical generation plant in Venezuela for an aggregate amount of $5 million dollars. In June of 2000, a partnership owned by Mr. Davis and Mr. Warren sold a 50% interest in a power generation facility to be located in Florida to Hanover for an aggregate amount of $5 million dollars. Mr. Warren and Mr. Davis have engaged in discussions with Hanover with respect to formation of a potential joint venture to cooperate on power generation projects, but no agreement has been reached as to the terms of the potential joint venture. While Mr. Warren, Mr. Davis and Hanover may continue these discussions from time to time, it is not clear when they might reach an agreement on the terms of the joint venture or if they will be able to reach an agreement at all. Management Following the Merger (Page 35) Following the merger, OEC will be a wholly-owned subsidiary of Hanover Compressor Company. For more information on the directors and executive officers of Hanover, please see Hanover's most recent 10-K, 7 filed with the Securities and Exchange Commission on March 30, 2000 and incorporated by reference herein. See also "Where You Can Find More Information." Conditions to the Merger (Page 45) The obligations of OEC and Hanover to complete the merger are subject to the satisfaction of certain conditions, including: . obtaining the requisite approvals of OEC stockholders; . obtaining the requisite regulatory approvals; . the continuing accuracy at the time of the merger of the representations and warranties made by Hanover and OEC in the Agreement and Plan of Merger; . Two-year non-competition agreements shall have been executed and delivered to Hanover by all officers of and affiliates of OEC as requested by Hanover, including, but not limited to, Ray C. Davis and Kelcy L. Warren; . Hanover shall have received an Affiliate Agreement (as defined in the Agreement and Plan of Merger) from each person identified as an affiliate pursuant to Section 5.9 of the Agreement and Plan of Merger; . OEC's financial advisor, Prudential Securities, shall have rendered a fairness opinion with respect to the Agreement and Plan of Merger and the transactions contemplated thereby, and such opinion shall not have been withdrawn or adversely modified; and . All principal and accrued interest thereon under the promissory notes made by Dennis W. Estis and Barbara Estis in favor of OEC having principal amounts of $217,250 and $114,507 respectively, shall have been paid in full. Each party may waive any or all of the closing conditions referred to above. Hanover and OEC filed the required notifications and report forms with the Department of Justice and the Federal Trade Commission on August 28, 2000 and received clearance effective September 13, 2000. See also "The Merger-- Regulatory Approval Required." Termination (Page 46) The Agreement and Plan of Merger may be terminated as follows: . by mutual written consent of Hanover and OEC; . at the option of either Hanover or OEC if the merger is not completed by March 1, 2001; and . upon the occurrence of certain other events. Under some circumstances, either Hanover or OEC may be required to reimburse the other for expenses of up to $750,000. Under certain circumstances, OEC may also be required to pay Hanover a termination fee of $1,665,000. Dissenters' and Appraisal Rights (Page 36) Hanover stockholders will not be entitled to exercise dissenters' or appraisal rights under Delaware law as a result of the merger, since they are not required to vote to approve the Agreement and Plan of Merger pursuant to section 251(f)(3) of the Delaware General Corporation Law as the shares to be issued in connection with the merger do not exceed 20% of the shares of common stock of Hanover outstanding as of July 13, 2000. 8 OEC stockholders will not be entitled under Oklahoma law to exercise appraisal rights as a result of the merger or to demand payment for their shares since (i) the shares of Hanover common stock they will receive in the merger are registered on the New York Stock Exchange and (ii) because the holders of the OEC common stock will receive only shares of Hanover common stock and cash in lieu of fractional shares of Hanover common stock as a result of the merger. Material United States Federal Income Tax Consequences (Page 39) The merger is intended to qualify as a "reorganization" under the Internal Revenue Code, and both Hanover and OEC shall each use their respective best efforts to cause the merger to be treated as a "reorganization." Assuming the merger qualifies as a "reorganization," no gain or loss will be recognized by Hanover, OEC, or OEC stockholders who receive Hanover common stock as a result of the merger, except with respect to the receipt of cash in lieu of fractional shares of Hanover common stock by OEC stockholders. For a further discussion of the United States federal income tax consequences of the merger, see also "The Merger-- Material United States Federal Income Tax Consequences." Accounting Treatment (Page 39) The merger will be accounted for as a purchase for accounting and financial reporting purposes, which means that Hanover will include OEC's operating results in its financial statements only from the date of consummation of the merger. Surrender of Certificates (Page 38) Following the merger, the combined company will mail a letter of transmittal to all holders of record of OEC common stock, which will contain instructions for surrendering the holders' stock certificates in exchange for certificates representing shares of Hanover common stock. Certificates should not be surrendered until the letter of transmittal is received. Effects of the Merger on the Rights of Holders of OEC Common Stock (Page 38) Upon completion of the merger, holders of OEC common stock will become stockholders of Hanover. The internal affairs of Hanover are governed by the Delaware General Corporation Law and Hanover's certificate of incorporation and bylaws, which are different than the law governing the internal affairs of OEC and the articles of incorporation and bylaws of OEC. See also "Comparison of Stockholder Rights." THIS PROXY STATEMENT/PROSPECTUS, AS WELL AS THE OTHER DOCUMENTS TO WHICH WE REFER IN THIS PROXY STATEMENT/PROSPECTUS, DESCRIBE MANY OF THE POSITIVE FACTORS AFFECTING HANOVER'S AND OEC'S FUTURE BUSINESS PROSPECTS AND THE POSSIBLE OR ASSUMED BENEFITS OF THE MERGER. STOCKHOLDERS ALSO SHOULD BE AWARE OF FACTORS THAT COULD HAVE A NEGATIVE IMPACT ON THOSE PROSPECTS OR ON THE POSSIBLE OR ASSUMED PROSPECTS OF THE MERGER. THOSE FACTORS INCLUDE, POLITICAL, ECONOMIC OR OTHER CONDITIONS SUCH AS CURRENCY, EXCHANGE RATES, INFLATION RATES, RECESSIONARY OR EXPANSIONARY TRENDS, TAXES AND REGULATIONS AND LAWS AFFECTING HANOVER'S AND OEC'S BUSINESS, AVAILABILITY OF ADDITIONAL FINANCING, COMPETITIVE PRODUCTS AND SERVICES, PRICING, AND THE RISKS AND UNCERTAINTIES DESCRIBED UNDER "RISK FACTORS." WHEN WE USE SUCH WORDS AS "BELIEVES," "EXPECTS," "ANTICIPATES" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD-LOOKING STATEMENTS. ALL SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY ONLY ESTIMATES OF FUTURE RESULTS, AND THERE CAN BE NO ASSURANCE THAT ACTUAL RESULT WILL NOT MATERIALLY DIFFER FROM EXPECTATIONS. 9 Selected Financial Data--Hanover In the table below, we have provided you with selected historical consolidated financial data and pro forma combined condensed financial data of Hanover. The data for Hanover was derived as of the dates indicated and for each of the fiscal years in the five-year period ended December 31, 1999 from audited consolidated financial statements of Hanover. The data as of and for the nine months ended September 30, 1999 and 2000 was derived from unaudited condensed consolidated financial statements filed in the Quarterly Report on Form 10-Q by Hanover for the quarter ended September 30, 2000. In the opinion of Hanover's 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. On August 31, 2000, Hanover acquired the compression services division of Dresser-Rand Company for approximately $177 million in cash and Hanover common stock, subject to adjustment based upon the closing balance sheet pursuant to the acquisition agreement. The pro forma combined condensed financial data present the pro forma results of operations of Hanover as if the acquisition had occurred on January 1, 1999. This pro forma financial data was derived from the pro forma combined condensed statements of operations for the nine months ended September 30, 2000 and the year ended December 31, 1999 included in Hanover's Current Report on Form 8-K dated November 22, 2000. The pro forma financial data does not purport to be indicative of the results which would actually have been obtained had the acquisition 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, the combined financial statements of the compression services division of Dresser-Rand Company and related pro forma financial data incorporated by reference in this proxy statement/prospectus. See "Where You Can Find More Information." (in thousands, except per share amounts).
Year end December 31, ---------------------------------------------------------- 1995(1) 1996 1997 1998 1999 1999 ------- -------- -------- -------- -------- --------- Pro forma INCOME STATEMENT DATA: Total Revenues: $95,964 $136,011 $198,798 $281,957 $317,028 $476,134 ------- -------- -------- -------- -------- -------- Expenses: Operating.............. 56,256 75,031 109,432 150,652 151,169 269,943 Selling, general and administrative........ 12,542 16,439 20,782 26,626 33,782 47,105 Depreciation and amortization(2)....... 13,494 20,722 28,439 37,154 37,337 44,932 Lease expense.......... 6,173 22,090 22,090 Interest expense....... 4,560 6,594 10,728 11,716 8,786 15,911 Distributions on mandatorily redeemable convertible preferred securities............ 278 278 ------- -------- -------- -------- -------- -------- Total Costs and Expenses.............. 86,852 118,786 169,381 232,321 253,442 400,259 ------- -------- -------- -------- -------- -------- Income before income taxes.................. 9,112 17,225 29,417 49,636 63,586 75,875 Provision for income taxes.................. 3,498 6,844 11,314 19,259 23,145 27,618 ------- -------- -------- -------- -------- -------- Net income.............. $ 5,614 $ 10,381 $ 18,103 $ 30,377 $ 40,441 $ 48,257 ======= ======== ======== ======== ======== ======== Net income available to common stockholders: Net Income............. 5,614 10,381 18,103 30,377 40,441 48,257 Dividends on Series A and Series B preferred stock................. (832) (1,773) Series A preferred stock exchange........ (3,794) Series B preferred stock conversion...... (1,400) ------- -------- -------- -------- -------- -------- Net income available to common stockholders.... $ 4,782 $ 3,414 $ 18,103 $ 30,377 $ 40,441 $ 48,257 ======= ======== ======== ======== ======== ======== Weighted average common and common equivalent shares: Basic(3)............... 28,746 40,996 51,246 56,936 57,048 59,968 ------- -------- -------- -------- -------- -------- Diluted(3)............. 30,716 44,046 54,690 60,182 61,054 63,974 ------- -------- -------- -------- -------- -------- Earnings per common share: Basic(3)............... $.17 $.08 $.35 $.53 $.71 $.80 ======= ======== ======== ======== ======== ======== Diluted(3)(4).......... $.16 $.08 $.33 $.50 $.66 $.75 ======= ======== ======== ======== ======== ======== OTHER DATA: EBITDA(5).............. $27,166 $ 44,541 $ 68,584 $104,679 $132,077 ======= ======== ======== ======== ======== CASHFLOWS PROVIDED BY (USED IN): Operating activities... $ 9,088 $ 20,276 $ 32,219 $ 31,147 $ 68,222 Investing activities... (68,474) (87,683) (164,490) (14,699) (92,114) Financing activities... 62,206 71,740 129,510 (9,328) 18,218 BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents........... $ 2,989 $ 7,322 $ 4,561 $ 11,503 $ 5,756 Working capital........ 23,270 41,513 58,027 113,264 107,966 Net property, plant and equipment............. 198,074 266,406 394,070 392,498 497,465 Total assets........... 252,313 341,387 506,452 614,590 756,510 Long-term debt......... 50,451 122,756 158,838 156,943 69,681 Mandatorily redeemable convertible preferred securities............ 86,250 Preferred stockholders' equity................ 28,894 Common stockholders' equity................ 139,302 176,895 288,271 316,713 369,157
10
Nine Months Ended September 30, ------------------------------ 1999 2000 2000 -------- --------- --------- Pro forma INCOME STATEMENT DATA: Total Revenues: $227,838 $ 370,222 $426,686 -------- --------- -------- Expenses: Operating...................................... 108,837 196,326 238,675 Selling, general and administrative............ 24,232 34,481 41,102 Depreciation and amortization.................. 28,536 36,830 42,036 Lease expense.................................. 14,727 29,596 29,596 Interest expense............................... 7,841 5,560 10,310 Distributions on mandatorily redeemable convertible preferred securities.............. 4,776 4,776 -------- --------- -------- Total Costs and Expenses....................... 184,173 307,569 366,495 -------- --------- -------- Income before income taxes...................... 43,665 62,653 60,191 Provision for income taxes...................... 16,156 23,305 22,389 -------- --------- -------- Net income...................................... $ 27,509 $ 39,348 $ 37,802 -------- --------- -------- Net income available to common stockholders: Net Income..................................... 27,509 39,348 37,802 Dividends on Series A and Series B preferred stock......................................... Series A preferred stock exchange.............. Series B preferred stock conversion............ -------- --------- -------- Net income available to common stockholders..... $ 27,509 $ 39,348 $ 37,802 ======== ========= ======== Weighted average common and common equivalent shares: Basic(3)....................................... 56,966 60,324 62,937 -------- --------- -------- Diluted(3)..................................... 60,974 64,619 67,232 -------- --------- -------- Earnings per common share: Basic(3)....................................... $.48 $.65 $.60 ======== ========= ======== Diluted(3)..................................... $.45 $.61 $.56 ======== ========= ======== OTHER DATA: EBITDA(5)...................................... $ 94,769 $ 139,415 ======== ========= CASHFLOWS PROVIDED BY (USED IN): Operating activities........................... $ 41,427 $ 7,491 Investing activities........................... (12,386) (162,614) Financing activities........................... (31,376) 162,453 BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents...................... $ 9,090 $ 13,042 Working capital................................ 129,866 224,684 Net property, plant and equipment.............. 426,527 688,588 Total assets................................... 683,980 1,271,468 Long-term debt................................. 124,540 173,835 Mandatorily redeemable convertible preferred securities.................................... 86,250 Preferred stockholders' equity ................ Common stockholders' equity.................... 348,814 619,838
- -------- (1) The selected historical financial information includes the results of operations of the Company and its wholly-owned subsidiaries. During 1995, the Company acquired Astra Resources Compression, Inc., a significant subsidiary. (2) In order to more accurately reflect the estimated useful lives of natural gas compressor units in the rental fleet; effective January 1, 1996 the Company changed the lives over which these units are depreciated from 12 to 15 years. The effect of this change was a decrease in depreciation expense of $2.6 million and an increase in net income of $1.5 million ($.03 per diluted common share) for the year ended December 31, 1996. (3) In June 2000, the Company completed a 2 for 1 stock split effected in the form of a 100% stock dividend. All weighted average and common equivalent shares and earnings per common share information have been restated for all periods presented to reflect this stock split. (4) Diluted earnings per share in 1996 was $.24 per share before the effects of charging retained earnings for $1.8 million relating to dividends on redeemable preferred stock and one time charges to retained earnings for (i) $3.8 million related to the exchange of all Series A preferred stock for subordinated notes and (ii) $1.4 million related to the conversion of all Series B preferred stock to Common Stock. (5) EBITDA consists of the sum of consolidated net income before interest expense, lease expense, distributions on mandatorily redeemable convertible preferred securities, income tax, and depreciation and amortization. The Company believes that EBITDA is a meaningful measure of its operating performance and is also used to measure the Company's ability to meet debt service requirements. EBITDA should not be considered as an alternative performance measure prescribed by generally accepted accounting principles. 11 Comparative Per Share Data The following tables set forth historical per share data of Hanover and OEC. OEC stockholders should read the information in this section along with Hanover's and OEC's historical financial statements, accompanying notes and other financial information incorporated by reference in this proxy statement/prospectus. See "Where You Can Find More Information."
Per Share Data For Fiscal Years Ended -------------------------------------- December 31, December 31, December 31, 1997 1998 1999 ------------ ------------ ------------ Historical--Hanover: Net earnings--basic.................... $0.35 $0.53 $0.71 Net earnings--diluted.................. 0.33 0.50 0.66 Book value............................. 5.271 5.263 6.046 Per Share Data For Fiscal Years Ended -------------------------------------- December 31, December 31, December 31, 1997 1998 1999 ------------ ------------ ------------ Historical--OEC: Net earnings (loss)--basic............. $ (.07) $ .0 $ .0 Net earnings (loss)--diluted........... (.07) .0 .0 Book value............................. .988 .987 .988
12 Comparative Market Price Information Hanover common stock is traded on the New York Stock Exchange under the symbol "HC." OEC common stock is traded on the American Stock Exchange under the symbol "OOC." The table below sets forth, for the quarters indicated, the reported high and low sales prices of Hanover common stock and OEC common stock.
Hanover OEC Common Stock Common Stock --------------- --------------- High Low High Low ------- ------- ------- ------- Fiscal Year Ended December 31, 1998: First Quarter................................. $10.375 $ 8.657 $ 2.750 $ 2.063 Second Quarter................................ 14.813 11.625 2.563 2.063 Third Quarter................................. 14.344 8.750 2.313 1.688 Fourth Quarter................................ 13.532 8.844 1.938 1.063 Fiscal Year Ended December 31, 1999: First Quarter................................. $14.000 $ 9.625 $ 1.313 $ 0.875 Second Quarter................................ 17.782 13.063 1.750 1.000 Third Quarter................................. 19.063 15.688 1.438 1.000 Fourth Quarter................................ 19.188 14.032 1.250 .5630 Fiscal Year Ended December 31, 2000: First Quarter................................. $28.438 $16.906 $0.8125 $0.5625 Second Quarter................................ 38.000 22.719 0.8750 0.5000 Third Quarter................................. 40.688 25.250 1.0625 0.7500 Fourth Quarter (through December 20, 2000).... 39.375 28.375 1.00 0.7500
On July 12, 2000, the last full trading day prior to the public announcement of the execution of the Agreement and Plan of Merger, the New York Stock Exchange reported that the last sale price of Hanover common stock was $38.875 per share. The American Stock Exchange reported that the last sale price of OEC common stock was $0.9375 per share. On December 20, 2000, the most recent practicable date prior to the printing of this proxy statement/ prospectus, the New York Stock Exchange reported that the last sale price of Hanover common stock was $37.875 per share. The American Stock Exchange reported that the last sale price of OEC common stock was $0.9325 per share. Because the market price of Hanover common stock is subject to fluctuation, the market value of the shares of Hanover common stock that holders of OEC common stock will receive in the merger may increase or decrease prior to the merger. We urge you to obtain current market quotations for Hanover common stock and OEC common stock. 13 RISK FACTORS In addition to the other information included and incorporated by reference in this proxy statement/prospectus, OEC stockholders should consider carefully the matters described below in determining whether to approve the merger proposals. Risks Relating to the Merger Hanover may not be able to effectively and efficiently integrate OEC into its operations. Over the past six months, Hanover has completed four acquisitions in addition to OEC, and Hanover's ability to integrate successfully the operations and management of each of these companies into Hanover is a complex process. Hanover cannot assure you that this integration will be completed rapidly or will achieve all of the anticipated synergies and other benefits Hanover expects from the acquisitions. See "The Merger--Reasons for the Merger." Hanover may not be able to realize the expected benefits of the merger. Achieving the benefits Hanover expects from the merger will depend in large part on integrating the technology, operations and personnel of OEC into Hanover in a timely and efficient manner to minimize the impact on customers, employees and management. In addition, Hanover must persuade the personnel of Hanover and OEC that the business cultures of Hanover and OEC are compatible. Hanover cannot assure you that it will realize any of the anticipated benefits of the merger, and failure to do so could adversely affect the business of Hanover and OEC after the merger. Hanover will incur merger-related charges. Hanover expects the total merger-related costs to be approximately $500,000 consisting primarily of financial advisory, legal and accounting fees, employee benefit costs, financial printing costs and other related charges. The amount of these expenses is a preliminary estimate and is subject to change. OEC's officers have conflicts of interest that may influence them to support or approve the merger. The executive officers of OEC participate in arrangements that provide them with interests in the merger that are different from, or are in addition to, your interests as a stockholder. In particular, the Agreement and Plan of Merger provides that all of the unvested stock options will be cancelled and converted into the right to receive cash from Hanover. In addition, because the merger constitutes a change in control, many of the officers and employees of OEC are entitled to change of control payments after the completion of the merger, and enhanced severance benefits if, within ninety days after the merger, the officer or employee is terminated other than for cause or if the officer or employee terminates his or her employment after being demoted or relocated. See "The Merger--Interests of Certain Persons in the Merger." As a result, these officers could be more likely to vote to approve the Agreement and Plan of Merger than if they did not hold these interests. You should consider whether these interests may have influenced these officers to support or recommend the merger. Failure to complete the merger or delays in completing the merger could negatively impact Hanover's and OEC's stock prices and future business and operations. If the merger is not completed for any reason, Hanover and OEC may be subject to a number of material risks, including the following: . OEC may be required to pay Hanover a termination fee of $1,665,000; 14 . Hanover or OEC may be required to reimburse the other for up to $750,000 in merger related expenses; . the price of Hanover or OEC common stock may decline to the extent that the current market price of the common stock reflects a market assumption that the merger will be completed; and . costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. In addition, in response to the announcement of the merger, Hanover's or OEC's customers may delay or defer purchasing or leasing decisions. Any delay or deferral of purchasing or leasing decisions by customers could negatively affect the business and results of operations of Hanover and OEC, regardless of whether the merger is ultimately completed. Similarly, current and prospective employees of Hanover and OEC may experience uncertainty about their future roles with the companies until after the merger is completed or if the merger is not completed. This may adversely affect the ability of Hanover and OEC to attract and retain key management, marketing and technical personnel. Further, if the merger is terminated and the Hanover or OEC boards of directors determine to seek another merger or business combination, we cannot assure you that we will be able to find a transaction providing as much stockholder value as this merger. While the Agreement and Plan of Merger is in effect, subject to certain limited exceptions, OEC is prohibited from soliciting, initiating or encouraging or entering into any extraordinary transactions, such as a merger, sale of assets or other business combination, with any third party. Risks Relating to Hanover Industry Conditions--A prolonged, substantial reduction in oil or gas prices could adversely affect the business of Hanover. Hanover's 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 Hanover's 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 its business, results of operations and financial condition. Short Lease Terms-- Hanover's compressor leases have short initial terms, and it cannot be sure that the compressors will stay out on location after the end of the initial lease term. The length of Hanover's leases varies based on operating conditions and customer needs. In most cases, under currently prevailing lease rates, the initial lease terms are not long enough to enable Hanover to fully recoup the average cost of acquiring or manufacturing the compressors. Hanover cannot assure you that a substantial number of its lessees will continue to renew their leases or that it will be able to re-lease the compressors to new customers or that any renewals or re-leases will be at comparable lease rates. An inability to renew or re-lease a substantial portion of Hanover's compressor rental fleet would have a material adverse effect upon its business, results of operations and financial condition. Competition--Hanover operates in a highly competitive industry and competes against many larger companies with greater financial resources. Hanover competes with several large national and multinational companies which provide compression services to third parties, many of which have greater financial and other resources than it does. If its competitors were to substantially increase the resources they devote to the development and marketing of competitive products and services, Hanover cannot assure you that it will have sufficient resources to respond accordingly. 15 Potential Liability and Insurance--Natural gas operations entail inherent risks that may result in substantial liability to Hanover. Natural gas operations entail inherent risks, including equipment defects, malfunctions, failures and natural disasters which could result in uncontrollable flows of gas or well fluids, fires and explosions. These risks may expose Hanover to liability for personal injury, wrongful death, property damage, pollution and other environmental damage. Hanover has obtained insurance against liability for personal injury, wrongful death and property damage, but it cannot assure you that the insurance will be adequate to cover its liability. Similarly, Hanover cannot assure you that it will be able to obtain insurance in the future at a reasonable cost or at all. Hanover's business, results of operations and financial condition could be adversely affected if it incurs substantial liability and the damages are not covered by insurance or are in excess of policy limits. Governmental Regulation--Hanover is subject to a variety of governmental regulations relating to environmental, health and safety. Hanover's business is subject to a variety of federal, state and local laws and regulations relating to safety, health and the environment. 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 its current operations, Hanover is updating certain facility permits with respect to stormwater discharges and air emissions but does not believe such updates will have a material adverse effect on its operations as a result of any enforcement measures or capital costs. Based on Hanover's experience to date, it believes that the future cost of compliance with existing laws and regulations and the future cost of necessary investigation or remediation of contamination will not have a material adverse effect on its business, financial condition and results of operations. However, future events, such as discovery of unknown contamination, any third party claims made with respect to previously owned or leased properties, compliance with more stringent laws and regulations or more vigorous enforcement policies by regulatory agencies or stricter or different interpretations of existing laws and regulations could require it to make material expenditures. Hanover has conducted preliminary environmental site assessments with respect to certain properties currently owned or leased by it. Some of these assessments have revealed that soils and/or groundwater at some of its facilities are contaminated with hydrocarbons and various other regulated substances. Hanover does not believe that our operations caused any such contamination and is not currently under any orders or directives to undertake any remedial activity. In addition, Hanover has previously owned or leased certain properties that had in the past experienced soil contamination. Hanover has since conducted remedial operations at certain of these previously held properties as it believed necessary and either sold the owned properties to third parties or returned the leased properties to the lessors. Hanover is not currently aware of any further remedial obligations at such previously held properties. Hanover cannot be certain, however, that it will not be required to undertake any remedial activities involving any substantial costs on any of these properties in the future. Substantial Capital Requirements--Hanover requires a substantial amount of capital to expand its compressor rental fleet and its complementary businesses. Hanover will continue to make substantial capital investments to expand our compressor rental fleet and our complementary businesses. Hanover invested approximately $374.5 million in capital expenditures, including business acquisitions, during the nine months ended September 30, 2000, and expects to invest approximately $100 million in capital expenditures during the remainder of 2000. The amount of these expenditures may vary depending on the rate of return Hanover expects to earn from these investments, conditions in the natural gas industry and whether it makes any significant acquisitions. Historically, Hanover has funded these investments through internally generated funds, debt and sale and leaseback transactions and equity financing. While Hanover believe that cash flow from its operations and borrowings under Hanover's 16 existing $200 million bank credit facility will provide it with sufficient cash to fund these investments, Hanover cannot assure you that these sources will be sufficient. As of September 30, 2000, Hanover had approximately $35 million of credit capacity remaining on its $200 million bank credit facility (7.88% rate at September 30, 2000). In October 2000, Hanover received $176.5 million proceeds from the sale and lease back of compression equipment. These proceeds were utilized to pay outstanding borrowings on Hanover's $200 million bank credit facility. In order to fund the estimated levels of 2000 capital expenditures, Hanover anticipates arranging additional sources of debt and/or equity during 2000. Hanover would need the consent of the lenders under its bank credit facility and the lessors under its sale and leaseback transactions to complete any new financing. Failure to generate sufficient cash flow, together with the absence of alternative sources of capital, could have a material adverse effect on Hanover's growth, results of operations and financial condition. International Operations--There are many risks for Hanover associated with conducting operations in international markets. Hanover operates 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 its business, financial condition and results of operations. Additional risks inherent in Hanover's international business activities include the following: . difficulties in managing international operations; . unexpected changes in regulatory requirements; . tariffs and other trade barriers which may restrict its ability to enter into new markets; . potentially adverse tax consequences; . 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. Acquisition Strategy--Hanover may not be able to find suitable acquisition candidates or successfully integrate acquired companies into our business. As part of its business strategy, Hanover will continue to pursue the acquisition of other companies, assets and product lines that either complement or expand its 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 Hanover's operations as a result of that process. Hanover routinely conducts preliminary discussions with other companies, which have operations or assets that may be suitable for it to acquire. Given Hanover's selective approach to acquisitions, it is unable to predict whether or when it will find suitable acquisition candidates or whether it will be able to complete a material acquisition. Hanover may seek to finance acquisitions with cash or through the issuance of new debt and/or equity securities. A relatively large acquisition in which cash is the primary form of consideration would utilize a substantial portion of Hanover's existing financial resources. As the compression industry continues to consolidate, the size of the companies Hanover may consider acquiring may become larger and, as a result, the general risks inherent in acquisitions described above may become more significant. Concentrated Ownership--A significant amount of Hanover's stock is owned by one stockholder. Hanover's largest stockholder, GKH Partners, L.P. ("GKH"), controlled approximately 35.5% of its voting power as of December 20, 2000. GKH is in a position to exert substantial influence over the outcome of most corporate actions requiring stockholder approval, including the election of directors, the future issuance by Hanover of common stock or other securities, and the approval of transactions involving a change of control. The interests of GKH could conflict with the interests of Hanover's other stockholders. 17 Anti-Takeover Provisions--Hanover's certificate of incorporation and by-laws contain certain provisions that could make a takeover more difficult. Certain provisions of Hanover's certificate of incorporation and by-laws could make it more difficult for a third party to acquire control of Hanover, even if such a change in control would benefit its stockholders. Hanover's certificate of incorporation allows it to issue preferred stock without stockholder approval and its by-laws limit who may call special stockholder meetings. These provisions could make it more difficult for a third party to acquire Hanover and may discourage acquisition bids or limit the price that investors might be willing to pay in the future for shares of its common stock. The ownership of a substantial number of Hanover's shares of common stock by GKH and Hanover's officers, directors, employees and their affiliates also could discourage acquisition bids. There are also provisions of Delaware law that could delay or make difficult a merger, tender offer or proxy contest. Please read the "Description of Hanover Common Stock" section of this prospectus. Shares Eligible for Future Sale--The market price of Hanover common stock could be depressed by future sales. Future sales of Hanover's common stock, or the perception that these sales could occur, could adversely affect the market price of its common stock. Hanover cannot assure you as to when, and how many of, the shares of its common stock will be sold and the effect those sales may have on the market price of its common stock. In addition, Hanover may issue additional shares of common stock in connection with future acquisitions or other transactions. Although those securities may be subject to regulatory or contractual resale restrictions, as these restrictions lapse or if these shares are registered for sale to the public, they may be sold to the public. In the event Hanover issues a substantial number of shares of its common stock, which subsequently become available for unrestricted resale, there could be a material adverse effect on the prevailing market price for Hanover common stock. CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS Certain matters discussed or incorporated by reference in this proxy statement/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 proxy statement/prospectus. The risks and uncertainties include: .failure by Hanover and OEC to complete the merger on a timely basis or at all; . the inaccuracy of financial, regulatory and market trend projections used by Hanover and OEC and financial advisors in evaluating the merger; . failure to achieve anticipated cost savings and revenue enhancements as a result of the merger; . the risk that Hanover encounters greater than expected costs and difficulties in integrating the business of OEC; . inability to retain key personnel after the merger; . 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; 18 . new governmental safety, health and environmental regulations which could require us to make significant capital expenditures; and . changes in economic or political conditions in the countries in which we operate. In addition, these risks and uncertainties include those uncertainties and risk factors identified, among other places, under "Selected Pro Forma Condensed Financial Information," "Risk Factors," "The Merger--Reasons for the Merger," and "Opinion of OEC's Financial Advisor". The forward-looking statements included herein are only made as of the date of this proxy statement/prospectus and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 19 THE OEC SPECIAL MEETING Date, Time and Place This proxy statement/prospectus is being furnished to holders of OEC common stock in connection with the solicitation of proxies by the OEC board of directors for use at the OEC special meeting to be held on January 26, 2001, and at any adjournment or postponement of the special meeting. The OEC special meeting will be held at 2501 Cedar Springs Road, Suite 600, Dallas, Texas 75201, starting at 10:00 a.m., local time. Matters to be Considered at the OEC Special Meeting At the OEC special meeting, holders of OEC common stock will be asked to consider and vote upon proposals to approve: .the Agreement and Plan of Merger, which provides for: (a) the merger of Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover Compressor Company, with and into OEC, with OEC continuing as the surviving corporation and becoming a wholly-owned subsidiary of Hanover; and (b) the conversion of each issued and outstanding share of OEC common stock into Hanover common stock, with the number of shares of Hanover common stock to be issued to determined by dividing $1.00 by the average closing sales price per share of Hanover common stock for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock), and multiplying the result by the number of shares of OEC common stock outstanding, as a result of which, OEC stockholders will receive between .033333 and .0307692 shares of Hanover common stock for each share of OEC stock they hold. . any other matters that are properly brought before the OEC special meeting, or any adjournment or postponement of the meeting. The OEC Board of Directors Recommendation The OEC board of directors has unanimously approved the Agreement and Plan of Merger and recommends that holders of OEC common stock vote FOR the Agreement and Plan of Merger. Vote Required The approval of the Agreement and Plan of Merger will require the affirmative vote of the holders of a majority of the outstanding shares of OEC common stock. Stockholders owning approximately 45% of the outstanding OEC common stock have agreed with Hanover to vote their shares in favor of the merger. See "Voting and Disposition Agreement." Voting of Proxies All shares of OEC common stock which are entitled to vote and are represented at the OEC special meeting by properly executed proxies received prior to or at the special meeting, and not revoked, will be voted at the OEC special meeting in accordance with the instructions indicated on those proxies. If no instructions are indicated, the proxies will be voted for approval of the Agreement and Plan of Merger. If any other matters are properly presented at the OEC special meeting for consideration, including, among other things, consideration of a motion to adjourn the OEC special meeting to another time or place, including for the purposes of soliciting additional proxies or allowing additional time for the satisfaction of conditions to the merger, the persons named in the proxy will have discretion to vote on these matters in accordance with their best judgment. Proxies voted against the Agreement and Plan of Merger will not be voted in favor of adjournment for the purpose of the continued solicitation of proxies. 20 Revocability of Proxies Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by: . filing with the Secretary of OEC, at or before the voting at the OEC special meeting, a written notice of revocation bearing a later date than the proxy; . duly executing a proxy with a later date and delivering it to the Secretary of OEC before the voting at the OEC special meeting; or . attending the OEC special meeting and voting in person, although attendance at the meeting will not by itself constitute a revocation of a proxy. Any written notice of revocation or subsequent proxy should be sent to OEC Compression Corporation, 2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201, Attention: Secretary, or hand delivered to the Secretary of OEC at or before the voting at the OEC special meeting. Record Date; Stock Entitled to Vote; Quorum The OEC board of directors has fixed December 21, 2000 as the record date for determining the OEC stockholders entitled to notice of and to vote at the OEC special meeting. Accordingly, only OEC stockholders of record on the record date will be entitled to notice of and to vote at the OEC special meeting. As of the record date, 37,060,766 shares of OEC common stock were outstanding and entitled to vote, which shares were held by approximately 1,127 holders of record. Each holder of shares of OEC common stock on the record date is entitled to one vote per share. Votes may be cast either in person or by a properly executed proxy. The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding shares of OEC common stock entitled to vote at the OEC special meeting is necessary for a quorum. Shares of OEC common stock represented in person or by proxy will be counted for the purpose of determining whether a quorum is present at the OEC special meeting. Abstentions will have the same effect as a vote against the Agreement and Plan of Merger since this proposal requires the affirmative vote of the holders of a majority of the outstanding shares of OEC common stock. Shares represented by broker non-votes at the OEC special meeting will be counted as present for purposes of determining whether there is a quorum at the OEC meeting. As of the record date, directors and executive officers of OEC and their affiliates may be deemed to have or share beneficial ownership of approximately 45% of the outstanding shares of OEC common stock. Each of the directors and executive officers of OEC has advised OEC that he intends to vote or direct the vote of all shares of OEC common stock over which he has or shares voting control for approval of the Agreement and Plan of Merger. See "OEC--Security Ownership of Certain Beneficial Owners and Management." Solicitation of Proxies All expenses of OEC's solicitation of proxies, including the cost of mailing this proxy statement/prospectus to OEC stockholders, will be borne by OEC. In addition to solicitation by use of the mail, proxies may be solicited by directors, officers and employees of OEC in person or by telephone or other means of communication. These directors, officers and employees will not receive additional compensation, but may be reimbursed for reasonable out-of- pocket expenses in connection with this solicitation. OEC will make arrangements with brokerage houses, custodians, nominees and fiduciaries to forward proxy solicitation materials to beneficial owners of shares held of record by these brokerage houses, custodians, nominees and fiduciaries. OEC will reimburse these brokerage houses, custodians, nominees and fiduciaries for their reasonable expenses incurred in forwarding the proxy materials. You should not send in any stock certificates with your proxies. A transmittal form with instructions for the surrender of stock certificates for OEC common stock will be mailed to you as soon as practicable after completion of the merger. 21 THE MERGER This section of the proxy statement/prospectus describes material aspects of the proposed merger. While we believe that the description covers the material terms of the merger, this summary may not contain all of the information that is important to you. You should read this proxy statement/prospectus, the Agreement and Plan of Merger and the other documents referred to carefully for a more complete understanding of the merger. General The merger will be completed if the required approvals of the OEC stockholders are obtained and all other conditions to the merger are satisfied or waived. Upon completion of the merger, Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover Compressor Company, will be merged with and into OEC, with OEC continuing as the surviving corporation and becoming a wholly-owned subsidiary of Hanover. In the merger, each issued and outstanding share of OEC common stock will be converted into Hanover common stock, with the number of shares of Hanover common stock issued to be determined by dividing $1.00 by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock), and multiplying the result by the number of shares of OEC common stock outstanding. As a result of such merger, OEC stockholders will receive between .0333333 and .0307692 shares of Hanover common stock for each share of OEC stock held. Based on the number of outstanding shares of Hanover common stock and OEC common stock as of the record date, the holders of OEC common stock immediately prior to the merger would own approximately 3% of the outstanding shares of the Hanover immediately after the merger. Pursuant to the Agreement and Plan of Merger, each outstanding option to purchase OEC common stock will be cancelled and converted into the right to receive cash, as provided in the Agreement and Plan of Merger. See "The Agreement and Plan of Merger." Background of the Merger In March 1998, OEC engaged a national investment banking firm to explore strategic alternatives for the maximization of OEC stockholder value, including the possible sale of OEC. The firm prepared a descriptive memorandum concerning OEC and contacted in excess of 100 potential acquirers, including Hanover. Confidentiality agreements were executed by approximately 30 of the potential acquirers and confidential information was provided to each. At the end of the process, the firm asked for expressions of interest from the potential purchasers concerning the acquisition of OEC. The firm did not receive any indications or expressions of interest from any of the potential purchasers. After consultation between OEC and the firm, OEC ended the auction process and terminated the engagement of the investment banking firm. In November 1998, OEC received a letter from Dennis Estis, who at that time was both a director and OEC's Chief Operating Officer, stating that Mr. Estis was dissatisfied with current management of OEC and that he was requesting a special meeting of the shareholders of OEC be called to remove several directors of OEC as well as the President/Chief Executive Officer and Chief Financial Officer of OEC. Mr. Estis also demanded access to the shareholder records of OEC and indicated that if the OEC board of directors did not call a special meeting of the stockholders, he would solicit proxies or shareholders consents to call a special stockholders meeting. Mr. Estis informed OEC that he had also obtained the proxies of two other OEC shareholders in favor of calling a special meeting of OEC's shareholders. Mr. Estis also informed OEC that a lawsuit had been filed against OEC and certain directors or officers of OEC but the lawsuit would not be served while the parties were discussing his concerns and demands. 22 On November 11, 1998, the OEC board of directors held a special meeting at which Mr. Estis was given an opportunity to express his concerns about OEC and its management. The OEC board of directors carefully considered both the views of Mr. Estis and the position of the management of OEC and voted not to call a special meeting of the stockholders of OEC. In addition, the OEC board of directors adopted a resolution expressing confidence in the President/Chief Executive Officer and the Chief Financial Officer of OEC. The Board of Directors of OEC also authorized management of OEC to resist any solicitation of stockholder consents or proxies, to call a special meeting of the shareholders of OEC by Mr. Estis and to respond to any litigation instituted by Mr. Estis. Following further discussions between OEC and Mr. Estis, the parties decided to resolve the issues raised by the November 10 letter and the lawsuit and to avoid the necessity of a proxy contest. On December 16, 1998, OEC, Mr. Estis, the two shareholders who had granted a proxy to Mr. Estis and certain other parties entered into a settlement agreement under which (i) the proxy contest was terminated, (ii) Mr. Andy Payne resigned from the Board of Directors, (iii) all litigation was dismissed, (iv) the parties released each other as to certain matters, (v) Mr. Estis' and Mr. Payne's employment with OEC was terminated and (vi) the terms of Mr. Estis' non-competition covenants were revised. In February 1999, Hanover contacted OEC concerning a possible acquisition. A special committee of the OEC board of directors was formed to review the proposed transaction, and the special committee tentatively approved the transaction. During July 1999, Hanover and OEC exchanged drafts of a definitive merger agreement, and Hanover conducted extensive due diligence on OEC. In connection with the proposed transaction and to augment the working capital of OEC, in July 1999, Hanover and OEC entered into an agreement under which OEC sold compressors to Hanover for $2,265,000, of which $2,000,000 was paid on the date of the agreement with the remaining $265,000 to be paid 180 days thereafter unless Hanover or OEC exercised its repurchase option. The agreement contained provisions that permit OEC, at its option, to repurchase the compressors or Hanover, at its option, to sell the compressors back to OEC for a purchase price of $2,000,000 plus interest thereon at a rate of 10% per annum. Hanover elected to sell the equipment back to OEC, but the completion of the sale has been deferred pending completion of the merger between OEC and Hanover. OEC has treated the transaction as a loan for accounting purposes because of certain unexercised put and call features in the agreement, carrying the $2,000,000 amount payable to Hanover as a current note payable at June 30, 2000. Hanover and OEC never reached final agreement as to the structure of the acquisition and in August of 1999, Hanover informed OEC that because of internal Hanover issues, Hanover was not interested in pursuing a transaction with OEC at that time. The compressor purchase agreement with Hanover was left in place. In September 1999, Matthew S. Ramsey resigned as President and Chief Executive Officer of OEC, and Richard Brannon resigned as Chairman of the OEC board of directors. Ray C. Davis and Kelcy L. Warren agreed to assume the positions of Co-Chief Executive Officers and Co-Chairman of the OEC board of directors. Mr. Brannon and Mr. Ramsey remained as directors of OEC. Mr. Davis and Mr. Warren agreed to assume such offices and responsibilities for no compensation and have not received any compensation for their services to OEC. At the same time as this change in management was occurring, Mr. Davis and Mr. Warren proposed that OEC merge with a group of companies owned and controlled by Mr. Davis and Mr. Warren (the "ET Companies"). The OEC board of directors approved the transaction in principle and appointed a special committee of OEC's Board (the "OEC Special Committee") to negotiate the values and exchange ratios between the two companies. In October 1999, OEC and ET Company, Ltd. executed a non-binding letter of intent concerning the proposed merger of the ET Companies and OEC. The OEC Special Committee engaged counsel and an investment banking firm to review the proposed transaction. In December 1999, after several months of review the OEC Special Committee informed the Board 23 of OEC that in the opinion of the OEC Special Committee, a combination of the ET Companies and OEC was not in the best interest of OEC. Subsequently, Mr. Davis and Mr. Warren withdrew their offer to combine the ET Companies with OEC. After receiving the report from the OEC Special Committee regarding the ET Companies, the OEC board of directors discussed alternatives for OEC, including the sale or recapitalization of OEC. The OEC board of directors decided to engage an investment banking firm to advise OEC on strategic alternatives for the maximization of shareholder value for OEC, including the possible sale of OEC. In January 2000, OEC interviewed several investment banking firms and eventually engaged Prudential Securities, Incorporated ("Prudential"). Following its engagement, Prudential prepared a confidential descriptive memorandum concerning OEC and proceeded to contact potential acquirers. Prudential contacted 73 potential acquirers, including 25 companies who expressed an interest in evaluating the acquisition of OEC and who signed confidentiality agreements and received copies of the confidential descriptive memorandum. OEC and Prudential provided additional information to several additional bidders. Hanover was one of the companies initially contacted by Prudential. In February 2000, Mr. Warren discussed the proposed sale of OEC with Charles Erwin, Senior Vice President--Sales and Marketing of Hanover. In early May 2000, Mr. Warren asked Mr. Erwin if Hanover was interested in bidding for OEC. Mr. Erwin indicated that Hanover was not interested in participating in an auction but might offer $85 million for OEC, including assumption of debt and transaction expenses. During the negotiations with two other potential purchasers, a group led by Mr. Estis, Don A. Smith, C.M. Butler, III and Robert Gregory (the "Estis Group") informed OEC that the Estis Group intended to pursue a proxy contest to elect a slate of directors that excluded Mr. Davis, Mr. Warren, Mr. Ramsey, Mr. Richard Brannon, Mr. Finley, Mr. Stephenson and Mr. Hawthorne and to take control of OEC. Three members of the Estis Group (Mr. Estis, Mr. Smith and Mr. Butler, III) were directors and members of the Board of Directors of OEC and represented a majority of the members of the OEC Special Committee that had rejected the proposed merger of OEC with the ET Companies. At a meeting of the OEC board of directors held in May 2000, the Estis Group and OEC were advised by both counsel to OEC and Prudential that a proxy contest would be, at a minimum disruptive, and could possibly even eliminate as an option the sale of OEC. The Estis Group agreed to postpone the proxy contest for 30 days to allow Prudential additional time to pursue the sale of OEC. OEC and the Estis Group executed a limited standstill agreement pursuant to which such parties agreed not to institute any litigation during such 30 day period. Before the May 2000 meeting, Mr. Warren contacted Mr. Erwin of Hanover and discussed the pending proxy contest and the potential sale of OEC. Mr. Erwin reaffirmed that Hanover was interested in OEC at some price but did not want to engage in an auction. In April 2000, OEC continued extensive negotiations with the other two bidders who had expressed a serious interest in acquiring OEC before the public announcement of the proxy contest by the Estis Group. Eventually, both of these bidders lost interest in OEC and terminated negotiations. Prudential and OEC continued to contact potential purchasers of OEC. In early June 2000, one additional potential purchaser expressed an interest in OEC and executed a confidentiality agreement. The bidder conducted limited financial due diligence on OEC and indicated that it was interested in potentially making a bid for OEC. On June 9, 2000, Mr. Davis, Mr. Warren, counsel for OEC and counsel for the Estis Group met with William S. Goldberg, Executive Vice President of Hanover. The parties discussed a potential transaction and the ranges of values that Hanover was interested in paying for OEC. One issue discussed was a requirement by Hanover that the transaction be structured as 50% cash and 50% stock based on the enterprise value of OEC. 24 To meet this requirement, OEC discussed having its subordinated lender agree to exchange subordinated debt for Hanover stock. In addition, Hanover wanted certain officers and directors of OEC, including Mr. Warren, Mr. Davis, Mr. Estis and Mr. Smith, to enter into non-competition agreements on terms satisfactory to Hanover. OEC and Hanover negotiated the terms of a letter of intent from June 9, 2000 through June 13, 2000. At the same time the other bidder also provided OEC with a letter of intent pursuant to which OEC would be acquired for stock of the other bidder. On June 10, 2000, HACL, Ltd. exercised a warrant issued to it in December of 1996 and purchased 8,000,000 shares of OEC common stock at $.91 per share. OEC's Board met several times from June 9, 2000 to June 16, 2000 to consider a transaction with Hanover and the other bidder. The OEC board of directors carefully evaluated the terms of each bid and the relative value and marketability of stock to be received in each transaction. The OEC board of directors discussed the fact that Hanover had previously conducted extensive due diligence on OEC and that the other bidder's offer was conditioned on completion of due diligence. During this period, OEC and Hanover exchanged drafts of and negotiated a letter of intent concerning the proposed transaction. As part of such negotiations, Hanover insisted that non- competition agreements for Mr. Smith and Mr. Estis be in place at the time of the execution of the definitive merger agreement. Hanover and counsel for Mr. Smith and Mr. Estis agreed to the general terms of a non-competition and non- solicitation agreement. On June 16, 2000 the OEC board of directors authorized OEC to sign a letter of intent with Hanover, which was executed on June 19, 2000. On June 20, 2000, OEC and Hanover issued a press release concerning the letter of intent. On June 30, 2000, Hanover and an affiliate of Mr. Davis and Mr. Warren entered into an unrelated transaction in which Hanover sold a 25% interest in an electrical generation project in Venezuela to an entity owned by Mr. Davis and Mr. Warren; and a partnership owned by Mr. Davis and Mr. Warren sold a 50% interest in a power generation facility in Florida to Hanover. Following execution of the letter of intent, representatives of OEC and Hanover met on several occasions to negotiate a definitive Agreement and Plan of Merger. The OEC board of directors met several times from July 11 to July 13 of 2000 to review negotiations and the status of the merger agreement. On July 11, 2000 the Board of OEC met in person and by telephone to review the status of negotiations. Mr. Davis informed the OEC board of directors that there were a few remaining business issues to be resolved. Mr. Davis and Mr. Warren disclosed to the OEC board of directors the terms of the power generation transactions between themselves and Hanover. Counsel for OEC reviewed in detail the Agreement and Plan of Merger with the OEC board of directors and answered numerous questions by the Board. Prudential made a detailed presentation as to the financial terms of the proposed merger and reviewed Prudential's investigation of strategic alternatives for OEC. Prudential then rendered its oral opinion (which was confirmed in writing) that the consideration to be received by the OEC stockholders was fair from a financial point of view. On July 11, 2000, the respective boards of directors of Hanover and Caddo Acquisition Corporation unanimously approved the merger with OEC and authorized the officers of each corporation to enter into a Agreement and Plan of Merger with OEC. On July 12, 2000, OEC and Hanover reached final agreement on the remaining issues. The revised Agreement and Plan of Merger was circulated to the Board of OEC. On July 12, 2000, the OEC board of directors held another meeting to discuss the proposed merger with Hanover and the Agreement and Plan of Merger. At this meeting, counsel for OEC reviewed the Agreement and Plan of Merger and the changes made to the Agreement and Plan of Merger since the last draft circulated to the OEC board of directors. Prudential reaffirmed its opinion that the merger was fair to OEC's shareholders from a financial point of view. The OEC board of directors then discussed the transaction and asked additional questions about the Agreement and Plan of Merger and the transaction. Following such discussion and deliberation, the OEC board of directors unanimously (except for one director who was absent from the meeting) approved the merger with Hanover and authorized OEC to enter into a Agreement and Plan of Merger with Hanover. 25 On July 13, 2000, OEC held its annual shareholders meeting at which the nominees proposed by OEC were overwhelmingly re-elected. As a result, Mr. Smith, Mr. Butler, III and Mr. Estis ceased being members of the Board. On July 13, 2000, OEC and Hanover finalized and executed the definitive Agreement and Plan of Merger. In addition, Mr. Smith and Mr. Estis each executed non-competition agreements with OEC. On July 17, 2000, OEC and Hanover issued a press release announcing the execution of the definitive Agreement and Plan of Merger. On August 10, 2000, the new OEC board of directors reviewed, discussed and unanimously ratified the Agreement and Plan of Merger. On November 14, 2000, OEC's Board of Directors and Hanover agreed to amend the Agreement and Plan of Merger to extend the outside date for closing the merger from January 13, 2001 to March 1, 2001 and make other changes set forth in the amendment. Reasons for the Merger In reaching its decision to approve the Agreement and Plan of Merger and the merger and to recommend adoption of the Agreement and Plan of Merger by OEC stockholders, the OEC board of directors consulted with management, as well as its legal and financial advisors, and independently considered the proposed Agreement and Plan of Merger and the transactions contemplated by the Agreement and Plan of Merger. In unanimously approving the Agreement and Plan of Merger and the merger, the OEC board of directors considered a number of factors, including the following: . current industry, market and economic conditions; . the strategic fit between the two companies; . the complementary nature of the companies' product and service offerings; . OEC's business, capital structure, results of operations, assets, management, competitive position, operating performance, trading performance and prospects, including, in the case of the OEC board of directors, OEC's prospects if it were to continue as a separate company; and 26 . Hanover's business, financial condition, results of operations, assets, management, competitive position, operating performance, trading performance and prospects. In the course of deliberations, the OEC board of directors also considered a number of additional factors relevant to the merger, including: . the possibility of strategic alternatives to the merger for enhancing long-term stockholder value, including investigating strategic transactions with other companies; . the exchange ratio; . the market price of Hanover common stock over the last several years and the potential for an increase or decrease in the market price of Hanover common stock in the future; . the market price of OEC common stock over the last several years; . the opinion of Prudential Securities to the effect that, as of the date of the opinion and based on and subject to the matters described in the opinion, the consideration to be received by the OEC stockholders was fair, from a financial point of view; . the terms and conditions of the Agreement and Plan of Merger, including the termination fee and the closing conditions; . the expected qualification of the merger as a reorganization under Section 368(a) of the Internal Revenue Code; . the expected accounting of the merger; . the impact of the merger on OEC's customers, suppliers and employees; . the likelihood of the merger being approved by the appropriate regulatory authorities; . the likelihood that the merger will be completed; and . the effect of the public announcement of the merger on the market price of Hanover's and OEC's common stock. The OEC board of directors also identified and considered a number of potentially negative factors in its deliberations concerning the merger, including the risks that: . despite Hanover's and OEC's efforts after the merger, OEC may lose key personnel as a result of the merger; . a significant number of OEC's customers and suppliers might cease doing business with OEC after it becomes a subsidiary of Hanover; and . the potential benefits of the merger might not be fully realized. The OEC board of directors determined that OEC could avoid or mitigate these and other risks, and that, overall, these risks were outweighed by the potential benefits of the merger. The above discussion of the factors considered by the OEC board of directors in making its decision is not intended to be exhaustive. In view of the variety of factors considered in connection with their evaluation of the Agreement and Plan of Merger and the merger, the board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weight to the specific factors considered in reaching its determination. In addition, individual members of the OEC board of directors may have given different weight to different factors. 27 Recommendation of the OEC Board of Directors After careful consideration, the OEC board of directors unanimously determined that the terms of the Agreement and Plan of Merger and the merger are advisable and fair to, and in the best interests of, OEC and its stockholders and has unanimously approved the Agreement and Plan of Merger and the merger. The OEC board of directors unanimously recommends that the OEC stockholders vote "FOR" the adoption of the Agreement and Plan of Merger. Opinion of OEC's Financial Advisor This section of the proxy statement/prospectus describes material aspects of the opinion of Prudential Securities, the financial advisor to OEC. While we believe that the description covers the material aspects of the opinion, this summary may not contain all of the information that is important to you. OEC stockholders are urged to read the Prudential Securities Opinion in its entirety. A copy of the Prudential Securities Opinion, which sets forth the assumptions made, all material matters considered and limits on the review undertaken, is attached to this proxy statement as Annex B and is incorporated herein by reference. On July 11, 2000, Prudential Securities Incorporated delivered its oral opinion to the board of directors of OEC, which opinion was confirmed in writing on July 14, 2000, to the effect that, as of such date, the exchange ratio was fair, from a financial point of view, to OEC (the "Prudential Securities Opinion"). Prudential Securities presented the financial analysis and assumptions underlying its oral opinion at the meeting of the board of directors of OEC on July 11, 2000. In requesting the Prudential Securities Opinion, the OEC board of directors did not give any special instructions to Prudential Securities or impose any limitation upon the scope of the investigation that Prudential Securities used to deliver the Prudential Securities Opinion. The Prudential Securities Opinion is addressed to the board of directors of OEC and is directed only to the fairness of the exchange ratio to OEC as of July 14, 2000 from a financial point of view. It does not constitute a recommendation to any stockholder as to how such stockholder should vote at the meeting or as to any other action such stockholder should take regarding the merger. In conducting its analysis and arriving at the Prudential Securities Opinion, Prudential Securities reviewed such information and considered such financial data and other factors as Prudential Securities deemed relevant under the circumstances, including the following: . a draft, dated July 12, 2000, of the Agreement and Plan of Merger; . a draft, dated July 11, 2000, of the Voting and Disposition Agreement; . certain publicly available historical financial and operating data concerning OEC including, but not limited to: (a) OEC's Annual Report on Form 10-K for the fiscal year ended December 31, 1999; (b) OEC's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000; and (c) OEC's Proxy Statement for the Annual Meeting of Stockholders to be held on July 13, 2000. . certain internal financial statements and other financial and operating data relating to OEC, including financial forecasts for the fiscal years ending December 31, 2000 through December 31, 2004, prepared by the management of OEC; . publicly available financial, operating and stock market data concerning certain companies engaged in businesses Prudential Securities deemed reasonably similar to that of OEC or otherwise relevant to Prudential Securities' inquiry; . the financial terms of certain recent transactions Prudential Securities deemed relevant to its inquiry; 28 . the historical stock prices and trading volumes of OEC common stock; and . such other financial studies, analyses and investigations that Prudential Securities deemed appropriate. Prudential Securities assumed, with OEC's consent, that the drafts of the Agreement and Plan of Merger and the Voting and Disposition Agreement which it reviewed would conform in all material respects to those documents when in final form. Prudential Securities met with the senior management of OEC and Hanover to discuss: (i) the past and current operating and financial condition of OEC and Hanover, respectively; (ii) the prospects for OEC and Hanover, respectively; (iii) their estimates of the future financial performance of OEC and Hanover, respectively; and (iv) such other matters that Prudential Securities deemed relevant. With respect to certain financial forecasts provided to Prudential Securities by senior management of OEC, Prudential Securities assumed that such information (and the assumptions and bases therefore) represents senior management's best currently available estimate as to the future financial performance of OEC. The opinion is necessarily based on economic, financial and market conditions as they exist and can only be evaluated as of the date thereof and Prudential Securities assumes no responsibility to update or revise its opinion based upon events or circumstances occurring after the date thereof. Prudential Securities was retained by OEC to render a fairness opinion and received a fee upon rendering that opinion. In the ordinary course of business Prudential Securities may actively trade the shares of OEC Common Stock for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. In addition, Prudential Insurance Company of America ("Prudential Insurance"), of which Prudential Securities Incorporated is an indirect wholly-owned subsidiary, is the holder of a subordinated note of OEC in the principal amount of $15,000,000 and warrants to purchase shares of OEC common stock. Prudentials' note will become due and payable in accordance with its terms upon consummation of the merger. Prudential Insurance has agreed to surrender its warrants to OEC contemporaneously with the closing of the merger in exchange for a payment of $400,000 in cash if the merger is consummated on or before December 31, 2000. If the merger is not consummated before that date, Hanover and OEC will have to negotiate an alternative arrangement for the cancellation of the Prudential warrants. In connection with its review, analysis and preparation of the Prudential Securities Opinion, Prudential Securities relied upon the accuracy and completeness of the financial and other information publicly-available or otherwise provided to Prudential Securities by OEC and did not undertake any independent verification of such information or any independent valuation or appraisal of any of the assets or liabilities of OEC. With respect to certain financial forecasts provided to Prudential Securities by OEC, Prudential Securities assumed that such information and assumptions represented OEC would perform in accordance with such projections. Prudential Securities assumes no responsibility for and expresses no view as to such forecasts and the assumptions under which they were prepared. For the purposes of the Prudential Securities Opinion, Prudential Securities assumed the merger qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and that the transaction contemplated by the Agreement and Plan of Merger will be completed as described in the Agreement and Plan of Merger and in this document. The Prudential Securities Opinion is based on economic, financial and market conditions as they existed on July 11, 2000 and were evaluated as of that date. Prudential Securities assumes no responsibility to update or revise the Prudential Securities Opinion based upon events or circumstance occurring after such date. The Prudential Securities Opinion, including Prudential Securities' presentation of such opinion to the OEC board of directors, was one of the many factors that the board of directors took into consideration in making its determination to recommend approval of the Agreement and Plan of Merger. Consequently, Prudential Securities' analyses described below should not be viewed as determinative of the opinion of the OEC board of directors. The exchange ratio was determined through arm's length negotiations between OEC and Hanover and was approved by the OEC board of directors. 29 The Prudential Securities Opinion does not address nor should it be construed to address the relative merits of the merger or alternative business strategies that may be available to OEC. In addition, the Prudential Securities Opinion does not in any manner address the prices at which Hanover common stock will trade following completion of the merger. In arriving at the Prudential Securities Opinion, Prudential Securities performed a variety of financial analyses presented to the OEC board of directors at the July 11, 2000 meeting. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analyses and the application of these methods to the particular circumstance. Therefore, such an opinion is not necessarily susceptible to partial analysis or summary description. Prudential Securities believes that its analyses must be considered as a whole and selecting portions thereof or portions of the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying the Prudential Securities Opinion. Prudential Securities made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of OEC. Any estimates contained in Prudential Securities' analyses are not necessarily indicative of actual values or future results, which may be significantly more or less favorable that suggested by such analyses. Additionally, estimates of the values of businesses and securities do not purport to be appraisals or necessarily reflect the prices at which businesses and securities may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. Subject to the foregoing, the following is a summary of the material financial analyses, which include all of the material factors considered by Prudential Securities in its financial analyses, presented by Prudential Securities to the OEC board of directors on July 11, 2000 in connection with the delivery of the Prudential Securities Opinion. Precedent Transactions Analysis Prudential Securities analyzed the consideration paid in six merger and acquisition transactions that Prudential Securities deemed to be reasonably similar to the merger. In its analysis, Prudential Securities considered the multiple of the acquired entity's enterprise value (defined as equity value plus total debt, minus cash and cash equivalents) to the acquired entity's latest twelve months' revenue, the multiple of the acquired entity's enterprise value to the acquired entity's latest twelve months' EBITDA (defined as earnings before interest expense, taxes, depreciation and amortization), and the multiple of the acquired entity's equity value (defined as the price paid per share in the transaction) multiplied by the diluted number of shares outstanding) to the acquired entity's latest twelve months' net income, all based upon publicly available information for such transactions. Prudential Securities selected these transactions based on its knowledge of OEC's and Hanover's financial and operating characteristics, the financial terms of the merger, familiarity with and experience in the industries in which OEC and Hanover operate, and its review and assessment of the publicly-available financial terms of acquisition transactions. Prudential Securities did not identify any reasonably similar transactions that were excluded from its analysis. The transactions considered were the combinations of: . Castle Harlan and Tidewater Compression; . Equity Compression Services Corporation and Ouachita Energy Corporation; . Camco International, Inc. and Production Operators Corp.; . Weatherford Enterra and Energy Industries (a subsidiary of Zapata Corp.); . Tidewater Inc. and Halliburton Compression; and . Zapata Corp. and Energy Industries (a subsidiary of The Holt Companies). The precedent transactions used in this analysis were found to imply for the acquired entity enterprise values within a range of 1.5x to 6.1x based on latest twelve month's revenue and 8.5x to 13.3x latest twelve month's EBITDA and equity values within a range of 23.8x to 43.9x latest twelve month's net income. Based 30 upon OEC's operating results for the twelve months ended March 31, 2000 the offer implies multiples of 3.8x latest twelve month's revenues, 8.2x latest twelve month's EBITDA and 49.4x latest twelve month's net income. Publicly-Traded Compression Companies Analysis Prudential Securities employed an analysis of publicly-traded "compression" companies considered by Prudential Securities to be reasonably similar to OEC to establish a range of implied valuation multiples. Prudential Securities selected these companies, as well as those used in the publicly-traded midstream companies analysis summarized below, based on its knowledge of OEC's financial and operating characteristics, its familiarity with and experience in the industries in which OEC operates and its review and assessment of publicly available financial data for such companies. Prudential Securities did not identify any such companies that were excluded from its analysis. Prudential Securities analyzed publicly-available historical financial results, including multiples of current enterprise value to EBITDA for the twelve months ended March 31, 2000 and projected EBITDA for the full year ended December 31, 2000, and multiples of current equity value (defined as the closing stock price on July 7, 2000 multiplied by basic shares outstanding) to the latest twelve month's net income and cash flow from operations (defined as net income plus depreciation and amortization plus deferred taxes plus other non-cash charges) as of March 31, 2000 and projected for the full year ended December 31, 2000 of certain publicly-traded compression companies. The publicly-traded compression companies used in the analysis included: . Enerflex Systems, Inc.; . Hanover Compressor; and . Universal Compression. Based on the July 7, 2000 closing stock prices, the compression companies were found to have current enterprise values within a range of 11.9x to 21.4x latest twelve month's EBITDA and 10.2x to 17.9x projected 2000 EBITDA. The compression companies were found to have current equity values within a range of 30.3x to 53.9x latest twelve month's net income, 23.9x to 42.1x projected 2000 net income, 18.7x to 25.3x latest twelve month's cash flow from operations and 10.5x to 24.4x projected 2000 cash flow from operations. Based upon OEC's operating results for the twelve months ended March 31, 2000 the offer implies multiples of 8.2x latest twelve month's EBITDA and 7.0x projected 2000 EBITDA, 49.4x latest twelve month's net income and 22.2x projected 2000 net income, 6.0x latest twelve month's cash flow from operations and 4.2x projected 2000 cash flow from operations. Publicly-Traded Midstream Companies Analysis Prudential Securities employed an analysis of publicly-traded midstream companies considered by Prudential Securities to be reasonably similar to OEC to establish a range of implied valuation multiples. Prudential Securities analyzed publicly-available historical financial results, including multiples of current enterprise value to EBITDA for the twelve months ended March 31, 2000 and projected EBITDA for the full year ended December 31, 2000, and multiples of current equity value (defined as the closing stock price on July 7, 2000 multiplied by basic shares outstanding) to the latest twelve month's net income and cash flow from operations (defined as net income plus depreciation and amortization plus deferred taxes plus other non-cash charges) as of March 31, 2000 and projected for the full year ended December 31, 2000 of certain publicly-traded midstream companies. The publicly-traded midstream companies used in the analysis included: . Markwest Hydrocarbon; . Midcoast Energy; . Trans Montaigne; and . Western Gas Resources. 31 Based on the July 7, 2000 closing stock prices, the midstream companies were found to have current enterprise values within a range of 6.4x to 12.9x latest twelve month's EBITDA and 5.6x to 8.8x projected 2000 EBITDA. The midstream companies were found to have current equity values within a range of 11.8x to 58.2x latest twelve month's net income, 10.0x to 29.7x projected 2000 net income, 6.7x to 9.8x latest twelve month's cash flow from operations and 5.3x to 25.0x projected 2000 cash flow from operations. Based upon OEC's operating results for the twelve months ended March 31, 2000 the offer implies multiples of 8.2x latest twelve month's EBITDA and 7.0x projected 2000 EBITDA, 49.4x latest twelve month's net income and 22.2x projected 2000 net income, 6.0x latest twelve month's cash flow from operations and 4.2x projected 2000 cash flow from operations. None of the acquired entities or the publicly-traded companies in the above Precedent Transactions Analysis, Publicly-Traded Compression Companies Analysis, or Publicly-Traded Midstream Companies Analysis is identical to OEC, and none of the transactions is identical to the merger. Accordingly, a complete analysis of the results of the foregoing calculations cannot be limited to a quantitative review of such results and involves complex considerations and judgments concerning differences in financial and operating characteristics of the acquired entities and the publicly-traded companies and other factors that could affect the public trading value and consideration paid for each of the acquired entities and the publicly-traded companies, respectively, as well as that of OEC. Historical Stock Trading Analysis. Prudential Securities analyzed the implied premium of the offer price and merger consideration per share to the stock price for the respective days, listed below. Prudential also analyzed the implied premiums in comparable mergers and acquisitions transactions that Prudential Securities deemed to be reasonably similar to the merger. OEC's Common Stock was tracked for the following periods: . one day prior to the offer; . one month prior to the offer; and . three months prior to the offer. The OEC board of directors selected Prudential Securities to provide a fairness opinion because it is a nationally recognized investment banking firm engaged in the valuation of businesses and their securities in connection with merger and acquisition transactions and because it has substantial experience in transactions similar to the merger. Pursuant to an engagement letter with Prudential Securities dated February 16, 2000, Prudential Securities will receive a fee payable upon completion of the merger equal to 1.25% of the total consideration (as defined in the engagement letter) to be paid by Hanover, subject to a minimum fee of $1 million. OEC has agreed to reimburse all Prudential Securities' reasonable out-of-pocket expenses, including fees and disbursements of counsel, and will indemnify Prudential Securities and certain related persons against certain liabilities, including liabilities under securities laws, arising out of the merger or its engagement. Interests of Certain Persons in the Merger When considering the recommendations of the OEC board of directors, you should be aware that certain OEC directors and officers have interests in the merger that are different from, or are in addition to, your interests. In particular, two officers of OEC or its subsidiaries are parties to individual change of control agreements. The agreement with Jack Brannon, OEC's Chief Financial Officer, provides that following a change of control, such as the merger, and either (i) a reduction in his salary and/or bonus compensation, (ii) relocation or (iii) the election by Mr. Brannon to terminate his employment within thirty days of a change in control he will be paid an amount equal to the sum of the monthly rate or salary paid to him at the time of termination multiplied by 24 months. The agreement with Dan McCormick, OEC's Vice-President of Sales and Marketing, provides that 32 following a change of control and either (i) a reduction in has salary and/or bonus compensation, or (ii) relocation, that Mr. McCormick will be paid an amount equal to the sum of the monthly rate or salary paid him at the time of termination multiplied by 12 months, plus the greater of the bonus paid in the last fiscal year or the amount that he would have earned under the compensation policies in place as of the date of termination as if the operating results and financial performance of OEC were annualized as of that date. In addition to these individual agreements, there are two severance plans in place that provide severance and change of control benefits to both upper management and employees at OEC. The unfunded OEC upper management severance plan covers business development managers and management employees. Under the upper management severance plan the benefits are as follows: . upon a change of control, such as the merger, OEC shall make a lump sum cash payment to each manager who is employed by OEC on the date such change of control is consummated of 10% of his or her salary or current wages; . OEC shall make a lump sum cash severance payment to the manager if he or she is (i) terminated for other than good cause, (ii) demoted or (iii) relocated (mandatory) within 90 days of the change of control, equal to one month's salary or wages per each full year of service (maximum of eight months, minimum of three); and . the manager or his beneficiary, or any other person entitled to receive benefits with respect to the manager under any retirement plan, welfare plan (including health and dental plans, disability plans, survivor income plans, or life insurance plans) or other plan or program maintained by OEC or any affiliate or associate in which he or she participates at the date of termination of employment, within 90 days of a change of control, shall receive any and all benefits accrued under any such plan or other plan or program to the date of termination of employment, and the manager's employment shall be deemed to have terminated by reason of retirement, and without regard to vesting limitations in such plans, under circumstances that have the most favorable result for the manager thereunder. No OEC officers or directors are covered by this upper management severance plan. Pursuant to the Agreement and Plan of Merger, Hanover has agreed to indemnify each present and former director and officer of OEC against all liabilities or expenses incurred in connection with claims relating to matters that occur prior to the closing of the merger. See "The Agreement and Plan of Merger--Director and Officer Indemnification." The unfunded OEC broad based severance plan requires both change of control and severance payments to all employees of OEC to which the chief executive officer of OEC deems it should apply. The terms are substantially identical to those under the upper management severance plan, with the exception that the maximum termination payment is six months salary. Material Contacts In July 1999, Hanover and OEC entered into an agreement under which OEC sold compressors to Hanover for $2,265,000, of which $2,000,000 was paid on the date of the agreement with the remaining $265,000 to be paid 180 days thereafter unless Hanover or OEC exercised its repurchase option. The agreement contained provisions that permit OEC, at its option, to repurchase the compressors or Hanover, at its option, to sell the compressors back to OEC for a purchase price of $2,000,000 plus interest thereon at a rate of 10% per annum. Hanover elected to sell the equipment back to OEC, but the completion of the sale has been deferred pending completion of the merger between OEC and Hanover. OEC has treated the transaction as a loan for accounting purposes because of certain unexercised put and call features in the agreement, carrying the $2,000,000 amount payable to Hanover as a current note payable at June 30, 2000. In November 2000, OEC and Hanover entered into a management agreement under which OEC engaged Hanover to provide day to day management services for OEC's field and shop operations. The management agreement provides that Hanover will receive a fee of $900,000 per month for performing those services, including $900,000 for services performed by Hanover during the period ended October 31, 2000. The 33 management fee is payable only upon consummation of the merger. The management agreement provides that Hanover has no responsibility for OEC's marketing and sales operations, including making bids for new business, or OEC's financial reporting and accounting operations, all of which remain the responsibility of OEC's management. In June of 2000, Hanover sold to an affiliate of Ray C. Davis and Kelcy L. Warren, each of whom is a co-chief executive officer and co-chairman of the board of OEC, a 25% interest in an electrical generation plant in Venezuela for an aggregate amount of $5 million dollars. In June of 2000, a partnership owned by Mr. Davis and Mr. Warren sold a 50% interest in a power generation facility to be located in Florida to Hanover for an aggregate amount of $5 million dollars. Mr. Davis and Mr. Warren have engaged in discussions with Hanover with respect to formation of a potential joint venture to cooperate on power generation projects, but no agreement has been reached as to the terms of the potential joint venture. While Mr. Warren, Mr. Davis and Hanover may continue these discussions from time to time, it is not clear when they might reach an agreement on the terms of the joint venture or if they will be able to reach an agreement at all. Determination of Conversion Ratio The Conversion Ratio (as defined in the Agreement and Plan of Merger) for the OEC common stock was determined through arm's-length negotiations between Hanover and OEC. Regulatory Approval Required The merger is subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which prevents some transactions from being completed until required information and materials are furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission. In addition, a waiting period must expire. Hanover and OEC filed the required notifications and report forms with the Department of Justice and the Federal Trade Commission on August 28, 2000 and received clearance effective September 13, 2000. The Antitrust Division of the Department of Justice or the Federal Trade Commission may challenge the merger on antitrust grounds even after expiration of the waiting period. Accordingly, at any time before or after the completion of the merger, either the Antitrust Division of the Department of Justice or the Federal Trade Commission could take any action under the antitrust laws as it deems necessary or desirable in the public interest, or other persons, including private parties, could take action under the antitrust laws, including seeking to enjoin the merger. Additionally, at any time before or after the completion of the merger, any state could take any action under the antitrust laws as it deems necessary or desirable in the public interest. We cannot assure you that a challenge to the merger will not be made or that, if a challenge were made, it would be defeated. Any OEC stockholder that acquires Hanover common stock valued in excess of $15 million in the merger may also be required to make a filing under the Hart- Scott-Rodino Act. We advise you to consult with legal advisors regarding your potential filing obligation. The Prudential Agreement On October 3, 2000, Hanover, OEC and The Prudential Insurance Company of America ("Prudential Insurance") entered into a warrant cancellation agreement providing for the cancellation of the warrant to purchase shares of OEC's common stock held by Prudential Insurance in exchange for a $400,000 cash payment by Hanover. The obligation of Prudential Insurance to surrender the warrant for cancellation is subject to the fulfillment of certain conditions, including the completion of the merger and the repayment by OEC of the all principal, interest and other amounts due under certain subordinated notes issued by OEC to Prudential Insurance. The warrant cancellation agreement will terminate (i) if the Agreement and Plan of Merger is terminated or (ii) on December 31, 2000 if the warrant cancellation is not consummated on or before such date. If the merger is not consummated on or before December 31, 2000, OEC and Hanover will have to negotiate an alternative arrangement with respect to the warrant held by Prudential Insurance. Pursuant to the agreement, cancellation of the warrant will occur simultaneously with the completion of the merger. 34 Management and Operations Following the Merger Upon the closing of the merger, the officers of OEC following the merger will be officers of Hanover. For information regarding these directors and officers, their compensation and relationships or related transactions, please refer to Hanover's latest 10-Q filed with the Securities and Exchange Commission on November 13, 2000 and its latest 10-K filed with the Securities and Exchange Commission on March 30, 2000. See also "Where You Can Find More Information." The corporate headquarters of OEC after the merger will be located in Houston, Texas, at the location of the current headquarters of Hanover. Accounting Treatment Hanover expects to account for the acquisition of OEC by Hanover under the purchase method of accounting in accordance with generally accepted accounting principles. The purchase price will be allocated first among the assets and liabilities acquired based on their estimated fair values and any remaining purchase price will be recorded as goodwill. Material United States Federal Income Tax Consequences The following summary of material United States federal income tax consequences of the merger to the OEC common stockholders is based upon current provisions of the Internal Revenue Code of 1986, as amended, currently applicable United States Treasury regulations and judicial and administrative rulings and decisions as of the date hereof. The following summary is not binding on the Internal Revenue Service, and no rulings have been or will be sought from the Internal Revenue Service regarding any matters relating to the merger. In addition, legislative, judicial or administrative changes may be forthcoming that could alter or modify the statements set forth herein, possibly on a retroactive basis. This summary does not purport to deal with all aspects of United States federal income taxation that may be relevant to particular holders of OEC common stock in light of their individual circumstances, nor with certain types of holders who are subject to special treatment under the federal income tax laws (including, without limitation, tax-exempt organizations; insurance companies; financial institutions; broker- dealers; persons who hold such stock as part of a hedge, appreciated financial position, straddle or conversion transaction; holders whose functional currency is not the United States dollar; holders who acquired their stock pursuant to the exercise of employee stock options or otherwise as compensation; or holders who are neither citizens nor residents of the United States, or that are foreign corporations, foreign partnerships or foreign estates or trusts for United States federal income tax purposes). The summary also assumes that an OEC common stockholder holds its shares of OEC common stock as a capital asset. Finally, no foreign, state or local tax considerations are addressed herein. Consequently, each holder of OEC common stock is strongly urged to consult its own tax advisor regarding the tax consequences of the merger in light of each such holder's particular circumstances, including the applicability and effect of federal, state, local and foreign income and other tax laws. Except as otherwise provided, the following discussion assumes that the merger constitutes a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. Consequences of the Merger Based on the above assumptions and qualifications, the merger will generally result in the following United States federal income tax consequences: . no gain or loss will be recognized by OEC common stockholders on the exchange of their OEC common stock solely for Hanover common stock (except to the extent of cash received in lieu of fractional shares as discussed below); . the holding period of Hanover common stock received will include the holding period of shares of OEC common stock surrendered in the merger; 35 . the aggregate tax basis of Hanover common stock received by OEC common stockholders who exchange all of their OEC common stock solely for Hanover common stock in the merger will be the same as the aggregate tax basis of OEC common stock surrendered in the merger (reduced by any portion of such tax basis allocable to a fractional share of Hanover common stock for which cash is received); . cash payments received by OEC common stockholders in lieu of a fractional share of Hanover common stock will be treated as capital gain or loss measured by the difference, if any, between the cash payment received and the portion of the tax basis in the shares of OEC common stock allocable to the fractional share. This gain or loss will be long- term capital gain or loss if the holder's holding period in the OEC common stock exchanged for the fractional share of Hanover common stock is more than one year at the time of the merger; and . no gain or loss will be recognized by Hanover or OEC solely as a result of the merger. If the merger does not qualify as a "reorganization" for federal income tax purposes, then an OEC common stockholder would generally recognize capital gain or loss in an amount equal to the fair market value of Hanover common stock and any other property received in the merger less the stockholder's tax basis in its OEC common stock surrendered in the merger. Any capital gain or loss would be long-term in nature if the stockholder's holding period in the OEC common stock surrendered is more than one year at the time of the merger. An OEC common stockholder's tax basis in the Hanover common stock received would be equal to its fair market value at the time of the merger, and the holding period of the Hanover common stock would begin on the first day following the merger. Backup Withholding Backup withholding at the rate of 31% may apply with respect to certain payments received by an OEC common stockholder in the merger unless: . the recipient is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or . the recipient provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. An OEC common stockholder who does not provide Hanover with its correct taxpayer identification number may be subject to penalties imposed by the Internal Revenue Service. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the holder's federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. Dissenters' and Appraisal Rights Hanover's stockholders will not be required to vote to approve the Merger pursuant to section 251(f)(3) of the Delaware General Corporation Law as the shares to be issued in connection with the Merger do not exceed 20% of the shares of common stock of Hanover outstanding as of July 13, 2000, and thus will not be entitled to assert dissenters' or appraisal rights as result of the merger or to demand payment for their shares. OEC shareholders will not be entitled under Oklahoma law to exercise appraisal rights as a result of the merger or to demand payment for their shares since (i) the shares of Hanover common stock they will receive in the merger are registered on the New York Stock Exchange and (ii) because the holders of the OEC common stock will receive only shares of Hanover common stock and cash in lieu of fractional shares of Hanover common stock as a result of the merger. Listing of the Hanover Common Stock to be Issued in the Merger Hanover will use its best efforts to cause the shares of Hanover common stock to be issued in the merger to be approved for listing on the New York Stock Exchange, subject to official notice of issuance, before the 36 completion of the merger. The listing of the shares of Hanover common stock is a condition to the completion of the merger. Delisting and Deregistration of OEC Common Stock after the Merger If the merger is completed, OEC common stock will be delisted from the American Stock Exchange and will be deregistered under the Securities Exchange Act of 1934. Federal Securities Law Consequences All shares of Hanover common stock received by OEC stockholders in the merger will be freely transferable, except that shares of Hanover common stock received by persons who are deemed to be affiliates of OEC prior to the merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act, or Rule 144 in the case of persons who become affiliates of Hanover, or otherwise in compliance with, or pursuant to an exemption from, the registration requirements of the Securities Act. Persons deemed to be affiliates of Hanover or OEC are those individuals or entities that control, are controlled by, or are under common control with, the party and generally include executive officers, directors and principal stockholders of the party. This proxy statement/prospectus does not cover any resales of Hanover common stock received by affiliates of OEC in the merger. 37 THE AGREEMENT AND PLAN OF MERGER The following is a summary of the material provisions of the Agreement and Plan of Merger. This description is qualified in its entirety by reference to the Agreement and Plan of Merger, as amended, which is attached as Annex A to this proxy statement/prospectus. General The Agreement and Plan of Merger provides that Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover, will be merged with and into OEC at the effective time of the merger. OEC will continue as the surviving corporation in accordance with the Oklahoma General Corporation Act, becoming a wholly-owned subsidiary of Hanover. The merger will be completed after all conditions in the Agreement and Plan of Merger are met or waived and Hanover and OEC file a certificate of merger with the Secretary of State of the State of Oklahoma. The Agreement and Plan of Merger provides that the closing of the merger will take place at the offices of Latham & Watkins, Sears Tower, Suite 5800, Chicago, Illinois, 60606 not later than the second business day after satisfaction or waiver of the conditions to the merger. Hanover and OEC have tentatively agreed, and they presently expect, that the merger will be completed by January 31, 2001. However, Hanover and OEC may agree to a different date. Conversion of Shares The Agreement and Plan of Merger provides that each issued and outstanding share of OEC common stock, other than dissenting shares and shares owned by OEC or Hanover, will be converted into Hanover common stock with the number of shares of Hanover common stock to be issued to be determined by dividing $1.00 by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger (subject to a maximum of .0333333 and a minimum of .0307692 shares of Hanover common stock for each share of OEC common stock), and multiplying the result by the number of shares of OEC common stock outstanding. As a result, OEC stockholders will receive between .0333333 and .0307692 shares of Hanover common stock for each share of OEC common stock they own. Each outstanding share of Hanover common stock will remain outstanding and be unaffected by the merger. However, if prior to the merger, the outstanding shares of Hanover common stock are changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Conversion Ratio (as defined in the Agreement and Plan of Merger) will be adjusted accordingly. No fractional shares of Hanover common stock will be issued in the merger. Each holder of OEC common stock who would have otherwise been entitled to receive a fraction of a share of Hanover common stock will receive cash in lieu of a fractional share of Hanover common stock. The amount of cash will be equal to such fractional part of a share of Hanover common stock multiplied by the average closing sales price per share of Hanover common stock as reported by the New York Stock Exchange composite tape for the twenty consecutive trading days immediately preceding the second business day prior to the effective time of the merger. Procedure for the Exchange of Stock Certificates Exchange of Stock Certificates Hanover and OEC have designated ChaseMellon Stockholder Services to serve as exchange agent for the exchange of certificates representing OEC common stock for certificates representing Hanover common stock and for the payment of cash in lieu of fractional shares. Promptly after the merger is completed, the exchange 38 agent will mail transmittal forms and exchange instructions to each holder of record of OEC common stock. After receiving the transmittal form, each holder of certificates formerly representing OEC common stock will be able to surrender the certificates to the exchange agent and receive certificates evidencing the appropriate number of whole shares of Hanover common stock. After the merger, each certificate formerly representing OEC common stock, until surrendered and exchanged, will be deemed, for all purposes, to evidence only the right to receive a certificate representing the number of whole shares of Hanover common stock which the holder's shares of OEC common stock were converted in the merger, plus cash in lieu of fractional shares, if any. For stockholder meeting quorum and notice purposes, holders of unsurrendered OEC certificates will be considered to be record holders of the shares of Hanover common stock represented by their OEC certificates. Dividends and Distributions The holder of an unexchanged OEC certificate will not be entitled to receive any dividends or other distributions otherwise payable by Hanover until the certificate has been exchanged. Subject to applicable laws, following surrender of the certificates by the holder, Hanover will pay the holder any accrued and unpaid dividends and distributions that have become payable between the effective time of the merger and the time the certificate is surrendered, without interest. Lost Certificates A stockholder must provide an appropriate affidavit to the exchange agent if any OEC common stock certificates are lost, stolen or destroyed, in order to receive Hanover common stock or cash in lieu of fractional shares in respect of the lost, stolen or destroyed certificates. In addition, the surviving corporation may require the holder of lost, stolen or destroyed certificates to post a bond as indemnity against any claim that may be made against the surviving corporation or the exchange agent with respect to the certificates. No Liability Neither the surviving corporation nor the exchange agent will be liable to any former holder of shares of OEC common stock for shares of Hanover common stock, or dividends or distributions made with respect to those shares, delivered to a public official under any applicable abandoned property, escheat or similar law. Withholding Right Either the surviving corporation or the exchange agent, on behalf of the surviving corporation, is entitled to deduct and withhold from the consideration payable to any former holder of shares of OEC common stock the amount it is required to deduct and withhold from the consideration under the Internal Revenue Code or any provision of state, local or foreign tax law. Any amounts withheld will be treated as having been paid to the former holder of the OEC common stock. Please do not send in any stock certificates with your proxies. Please wait for the transmittal form and instructions from the exchange agent. Representations and Warranties OEC has made representations and warranties in the Agreement and Plan of Merger relating to the following: . its organization and the organization of its subsidiaries; . its capital structure; . the authorization, execution, delivery and enforceability of the Agreement and Plan of Merger and related matters; 39 . the absence of conflicts under its certificates or articles of incorporation, bylaws, agreements and applicable laws; . required consents or approvals; . documents and financial statements filed with the Securities and Exchange Commission and the accuracy of the information contained in those documents and financial statements; . the absence of undisclosed liabilities; . the absence of adverse events or changes reasonably expected to have a material adverse effect; . taxes and tax returns; . properties; . intellectual property; . agreements, contracts and commitments; . litigation; . environmental matters; . employee benefit plans; . compliance with laws; . accounting and tax matters; . the accuracy of information contained in the registration statement filed by Hanover and this proxy statement/prospectus; . labor matters; . insurance; . year 2000 compliance; . opinions of financial advisor; . brokers' fees and expenses with respect to the merger; . transactions with affiliates of OEC; . the absence of excess parachute or nondeductible payments; . the inapplicability to the merger of anti-takeover laws; . accuracy of information furnished to Hanover; . inventory; and . customers and suppliers. Hanover and Caddo Acquisition Corporation have made representations and warranties in the Agreement and Plan of Merger relating to the following: . their organization; . the authorization, execution, delivery and enforceability of the Agreement and Plan of Merger and related matters; . the absence of conflicts under their certificates or articles of incorporation, bylaws, agreements and applicable laws; . required consents or approvals; 40 . the validity and non-assesability of Hanover common stock to be issued in exchange for the OEC common stock; . documents and financial statements filed with the Securities and Exchange Commission and the accuracy of the information contained in those documents and financial statements; . the accuracy of information contained in the registration statement filed by Hanover and this proxy statement/prospectus; . the absence of adverse events or changes reasonably expected to have a material adverse effect; . no vote of Hanover's stockholders is required to approve the merger; . Caddo Acquisition Corporation was formed solely for the purpose of this merger and has no other obligations or liabilities; . brokers' fees and expenses with respect to the merger; and . accuracy of information furnished to OEC. Certain Covenants Relating to Conduct of Business Hanover and OEC have agreed that, during the period from the date of the Agreement and Plan of Merger until the completion of the merger, OEC will, and will cause its subsidiaries to: . carry on its business in the ordinary course; . pay its debts and taxes when due, subject to good faith disputes; . pay or perform other obligations when due; and . use reasonable efforts to preserve intact its present business organization, management team and business relationships. In addition, unless Hanover agrees in writing or the Agreement and Plan of Merger provides otherwise, OEC has agreed that before the merger, neither it nor any of its subsidiaries will: . adopt any amendment to its articles of incorporation or by-laws; . issue, sell, authorize or propose to issue or sell any shares of its capital stock or securities convertible into shares of its capital stock, or any subscriptions, rights, warrants or options to acquire or other agreements obligating it to issue any shares or other convertible securities, subject to certain exceptions; . declare or pay any dividends on or make other distributions in respect of any of its capital stock; . effect certain other changes in its capitalization; . increase the compensation payable to its officers or employees; . grant additional severance or termination pay or enter into employment or severance agreements with any employees, directors or officers; . enter into any collective bargaining agreement except as required by law; . adopt or amend any benefit plan for any directors, officers or employees; . sell, pledge, lease, dispose of, grant, encumber or otherwise authorize the sale, pledge, disposition, grant or encumbrance of any material property or assets; . acquire any corporation, partnership other business organization or any business thereof or any other assets; 41 . incur, assume or pre-pay any indebtedness except in the ordinary course of business consistent with past practice under existing lines of credit; . assume, guarantee, endorse or otherwise become liable for the obligations of any other person except in the ordinary course of business consistent with past practice; . make any advances, loans or capital contributions to, or investments in, any other person except in the ordinary course of business consistent with past practice (excluding wholly-owned subsidiaries); . authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of OEC or any of its subsidiaries; . make or rescind any express or deemed election relating to taxes, settle any claim or controversy relating to taxes, amend any tax return except in the ordinary course of business consistent with past practice, or, except as may be required by applicable law, make any change to its tax reporting practice from the prior tax year; . initiate, compromise or settle any litigation or arbitration proceeding; . take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures, subject to certain exceptions; . modify, amend or terminate any material contract or waive, release or assign any material rights or claims, except in the ordinary course of business consistent with past practice; . make any capital expenditures in excess of $100,000 individually or $300,000 in the aggregate; . amend, modify or terminate any standstill or confidentiality agreement or waive any rights hereunder; and . enter into any agreement, contract, commitment or arrangement to do any of the foregoing, or authorize, recommend, propose or announce an intention to do any of the foregoing. No Solicitation Under the Agreement and Plan of Merger, OEC has agreed not to: . solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, an acquisition proposal; . initiate or engage in negotiations or discussions concerning, or provide any non-public information to any third party or entity relating to, an acquisition proposal; or . agree to or recommend an acquisition proposal. However, the OEC board of directors may furnish non-public information to, or enter into discussions or negotiations with, any third party regarding an unsolicited bona fide written acquisition proposal, if: . the proposal identifies a price to be paid; . the board of directors believes in good faith, and after consultation with its financial advisor, that the acquisition proposal is reasonably capable of being completed on the terms proposed and would, if completed, result in a transaction more favorable to its stockholders than the merger; . the board of directors determines in good faith, and based upon the written advice of outside legal counsel, that these actions are required for the board of directors to comply with its fiduciary duties under applicable law; . OEC is not in breach of its obligations under the "no solicitation" provisions of the Agreement and Plan of Merger; and 42 . prior to taking these actions, the board of directors receives an executed confidentiality and standstill agreement from the third party with terms no less favorable than those contained in the confidentiality agreement between Hanover and OEC. The OEC board of directors may also respond to any tender offer that may be made in order to comply with the requirements of Rule 14e-2 under the Securities Exchange Act of 1934. OEC has agreed to notify Hanover, orally and in writing, immediately after receipt of an acquisition proposal or a request for non-public information or access to its properties, books or records in connection with an acquisition proposal. OEC has agreed to keep Hanover fully informed of the status of any acquisition proposal. If OEC receives an acquisition proposal which the board of directors believes is more favorable than the merger with Hanover, OEC has agreed not to accept the acquisition proposal for at least five days and notify Hanover of the proposal. During the five-day period, OEC shall afford Hanover the opportunity to beat or improve upon the terms and conditions contained in the acquisition proposal. Additional Agreements Stockholder Meeting OEC has agreed to call a meeting of its stockholders for the purpose of considering the approval of the Agreement and Plan of Merger as promptly as practicable following the date of the Agreement and Plan of Merger. The board of directors of OEC has agreed to declare advisable and recommend the adopting of the Agreement and Plan of Merger by the stockholders of OEC and, upon Hanover's request, to reconfirm such recommendation. However, in the event that OEC receives a third party acquisition proposal, the board of directors will not be required to make or reconfirm its recommendation of the merger with Hanover if OEC is not in breach of its obligations under the "no solicitation" provisions of the Agreement and Plan of Merger and the board of directors concludes in good faith (after having consulted with and considered the advice of outside legal counsel) that the proposal is a superior proposal and that such action is necessary for the board of directors to comply with its fiduciary duties under applicable law. Regardless of any permissible change in the recommendation of the OEC board of directors regarding the Agreement and Plan of Merger and the merger, OEC has agreed to submit the Agreement and Plan of Merger and the merger to the OEC stockholders for approval at the special meeting in order to give OEC stockholders the opportunity to vote on the Agreement and Plan of Merger and the merger in order to obtain the requisite approval of OEC's stockholders. Preparation of the Registration Statement and Proxy Statement Hanover and OEC have agreed to cooperate in the prompt preparation and filing of documents under federal and state securities laws and with applicable governmental authorities. Access to Information OEC has agreed to provide to the officers, employees, accountants, counsel and other representatives of Hanover reasonable access to all personnel, properties, books, contracts, commitments and records during the period between the date of the Agreement and Plan of Merger and the merger. OEC has agreed to furnish to Hanover copies of its monthly financial reports, documents filed or received by it pursuant to the requirements of the federal securities laws and other information about its business as Hanover may reasonably request. Compliance with the Securities Act of 1933 OEC has agreed to deliver to Hanover a list of names and addresses of affiliates of OEC as defined in Rule 145 under the Securities Act. OEC has agreed to use all reasonable efforts to deliver to Hanover an affiliate letter from each of the affiliates prior to the merger. 43 New York Stock Exchange Listing Hanover has agreed to use reasonable efforts to list the Hanover common stock issuable in the merger on the New York Stock Exchange. Fees and Expenses Hanover and OEC have agreed that, regardless of whether the merger is completed, all expenses incurred in connection with the Agreement and Plan of Merger and the merger will be paid by the party incurring those expenses. Certain fees and expenses may be payable by Hanover or OEC upon termination of the Agreement and Plan of Merger. See "The Agreement and Plan of Merger-- Termination; Termination Fees and Expenses." Tax Treatment Hanover and OEC have each agreed to use their reasonable efforts before and after completion of the merger to have the merger qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. Reasonable Efforts Hanover and OEC have each agreed to use their respective best efforts to take all actions and to do all things, necessary, proper or advisable to conclude and make effective the merger and any transactions that the Agreement and Plan of Merger contemplated, including, among other things: . obtaining all consents, approvals and actions by governmental entities; . obtaining all necessary consents, approvals or waivers from third parties; . defending any lawsuits or legal proceedings that challenge the Agreement and Plan of Merger; and . consulting and cooperating with one another in all actions taken with the proceedings under the Hart-Scott-Rodino Act or any other applicable law. Stock Options As of the record date, OEC had outstanding options to purchase a total of 1,663,657 shares of OEC common stock. These options were issued under OEC's employee and non-employee directors stock option plans. The Agreement and Plan of Merger provides that each of these stock options will be cancelled and converted into the right to receive cash from Hanover, within 10 days following the effective time, cash in an amount equal to the product of (a) $1.00 minus the exercise price of such option, times (b) the number of shares of common stock which may be purchased upon exercise of such option. Director and Officer Indemnification The Agreement and Plan of Merger provides that, after the merger, Hanover will indemnify and hold harmless each present and former director and officer of OEC against all liabilities or expenses, including attorneys' fees, arising out of any matters existing or occurring before the completion of the merger. This right to indemnification will apply regardless of whether the claim was asserted before or after the merger is completed. Hanover's indemnification obligations will be to the fullest extent permitted under Oklahoma law and are in addition to any other indemnification rights available to OEC's current and former directors and officers. In addition, for a period of three years after the effective time of the merger, Hanover will maintain or will cause the surviving corporation to maintain, to the extent available in the market, a director's and officer's liability insurance policy at least equal in respect to directors and officers covered, amount and scope as was OEC's coverage in effect as of July 13, 2000; provided that, Hanover is not required to expend in the aggregate 44 in excess of 150% of the annual premium paid as of July 13, 2000 for such coverage, but instead is only required to maintain insurance policies which provide the maximum and best coverage available at an annual premium equal to 150% of such amount. Conditions to the Merger Joint Conditions to the Merger The Agreement and Plan of Merger provides that the obligations of Hanover and OEC to effect the merger are subject to the satisfaction or waiver of the following conditions: . the OEC stockholders must approve the Agreement and Plan of Merger; . any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 must expire; . Hanover's registration statement must be effective under the Securities Act of 1933 and not be the subject of a stop order or proceeding seeking a stop order; . the absence of any order, injunction, judgment, statute, rule or regulation that makes the merger illegal or otherwise prohibits the completion of the merger; and . the shares of Hanover common stock to be issued in the merger must be approved for listing on the New York Stock Exchange. Hanover's Conditions to the Merger In addition, the Agreement and Plan of Merger provides that Hanover's and Caddo Acquisition Corporation's obligations to effect the merger are subject to the satisfaction or waiver of the following conditions: . OEC's representations and warranties that are qualified as to materiality or material adverse effect shall have been true and correct when made and shall be true and correct on and as of the closing date; . OEC's representations and warranties not qualified as to materiality or material adverse effect shall have been true and correct in all material respects when made and shall be true and correct in all material respects on and as of the closing date; . OEC must have performed or complied with all agreements and covenants required to be performed by it under the Agreement and Plan of Merger as of the closing date that are qualified as to materiality or material adverse effect, and shall have complied in all material respects with all agreements and covenants required to be performed by it under this agreement and not so qualified; . all regulatory approvals required to complete the merger shall have been received; . there shall have been no event, development or change of circumstance that constitutes, has had, individually or in the aggregate, or could be expected to have a material adverse effect on OEC and its subsidiaries; . all required third party consents shall have been obtained; . non-competition agreements shall have been executed by all officers of OEC and affiliates of OEC as requested by Hanover; . Hanover shall have received an executed affiliate agreement (as defined in the Agreement and Plan of Merger) from all designated affiliates; . no suit, action, investigation or other proceeding by any governmental entity shall have been instituted and be pending which imposes, seeks to impose or reasonably would be expected to impose 45 any remedy, condition or restriction that would have a material adverse effect or would materially restrict Hanover's ownership or operation of OEC; . if applicable, dissenters' rights shall not have been perfected with respect to more than 7.5% of the outstanding shares of OEC common stock See "The Merger--Dissenters' and Appraisal Rights"; . Prudential Securities shall have rendered a fairness opinion with respect to the Agreement and Plan of Merger and such opinion shall not have been withdrawn or adversely modified; and . all principal and accrued interest thereon under the promissory notes made by Dennis W. Estis and Barbara Estis in favor of OEC shall have been paid in full. OEC's Conditions to the Merger In addition, the Agreement and Plan of Merger provides that OEC's obligation to effect the merger is subject to the satisfaction or waiver of the following conditions: . Hanover's representations and warranties that are qualified as to materiality or material adverse effect shall have been true and correct when made and shall be true and correct on and as of the closing date; . Hanover's representations and warranties not qualified as to materiality or material adverse effect shall have been true and correct in all material respects when made and shall be true and correct in all material respects on and as of the closing date; and . Hanover must have performed or complied with all agreements and covenants required to be performed by it under the Agreement and Plan of Merger as of the closing date that are qualified as to materiality or material adverse effect, and shall have complied in all material respects with all agreements and covenants required to be performed by it under this agreement and not so qualified. Termination; Termination Fees and Expenses Termination of the Agreement and Plan of Merger The Agreement and Plan of Merger may be terminated at any time prior to the completion of the merger, before or after approval of the merger and related matters by the OEC stockholders: . by mutual written consent of Hanover and OEC; or . by either Hanover or OEC if: (a) the merger is not consummated by March 1, 2001, so long as the terminating party did not prevent the completion of the merger by failing to fulfill any of its obligations under the Agreement and Plan of Merger; (b) a court or other governmental entity has issued an order, decree or ruling which cannot be appealed and which prohibits the completion of the merger; (c) at the OEC stockholder's meeting, the requisite vote of the stockholders of OEC in favor of the approval of the Agreement and Plan of Merger shall not have been obtained; or (d) there has been a breach of any representation, warranty, covenant or agreement on the part of the other party, which breach will cause the conditions to the closing of the merger not to be satisfied. . by Hanover if: (a) the OEC board of directors withdraws, modifies or fails to reconfirm its recommendation of the merger or the Agreement and Plan of Merger; 46 (b) the OEC board of directors recommends an alternative transaction to the OEC stockholders; (c) a tender or exchange offer for 20% or more of the outstanding shares of OEC common stock is commenced, other than by Hanover, and the OEC board of directors fails to recommend that the OEC stockholders not tender their shares in the tender or exchange offer; (d) any person or group (other than Hanover) becomes the beneficial owner of 20% or more of the outstanding shares or OEC common stock; or (e) OEC fails to call and hold a stockholders' meeting by March 1, 2001, so long as Hanover has not breached a representation, warranty, covenant or agreement contained in the Agreement and Plan of Merger. . by OEC, if the OEC board of directors determines in good faith, based on written advice of outside legal counsel, that accepting a superior proposal is required for the board to comply with its fiduciary duties, so long as OEC has not breached the no solicitation covenant; provided that this termination shall not be effective until the termination fee has been paid. If the Agreement and Plan of Merger is terminated by either Hanover or OEC as provided above, the Agreement and Plan of Merger will become void and neither Hanover nor OEC will have any continuing liabilities or obligations under the Agreement and Plan of Merger, except for any obligation to reimburse expenses or pay a termination fee under the circumstances described below and except that termination will not limit liability for a willful breach of the Agreement and Plan of Merger. In addition, the confidentiality agreement between Hanover and OEC will remain in effect even if Hanover or OEC terminates the Agreement and Plan of Merger. Termination Fees and Expenses OEC has agreed to reimburse Hanover for up to $750,000 in merger-related expenses incurred by Hanover prior to the termination of the Agreement and Plan of Merger where OEC terminates the Agreement and Plan of Merger because: . OEC's stockholders fail to approve the Agreement and Plan of Merger; . the OEC board of directors withdraws, adversely modifies or fails to reconfirm its recommendation of the merger; . the OEC board of directors recommends an alternative transaction to the OEC stockholders; . a tender or exchange offer for 20% or more of the outstanding shares of OEC common stock is commenced, other than by Hanover, and the OEC board of directors fails to recommend that the OEC stockholders not tender their shares in the tender or exchange offer; . any person or group (other than Hanover) becomes the beneficial owner of 20% or more of the outstanding shares or OEC common stock; . OEC fails to call and hold a stockholders' meeting by March 1, 2001, so long as Hanover has not breached a representation, warranty, covenant or agreement contained in the Agreement and Plan of Merger; . the OEC board of directors determines in good faith, based on written advice of outside legal counsel, that accepting a superior proposal is required for the board to comply with its fiduciary duties, so long as OEC has not breached the no solicitation covenant; provided that this termination shall not be effective until the termination fee has been paid; . the merger is not completed by March 1, 2001; or 47 . OEC breaches any representation, warranty, covenant or agreement in the Agreement and Plan of Merger and the breach results in the failure of the closing conditions relating to the accuracy of OEC's representations and warranties or the performance by OEC of its covenants. Hanover has agreed to reimburse OEC for up to $750,000 in merger-related expenses incurred by OEC prior to termination of the Agreement and Plan of Merger where OEC terminates the Agreement and Plan of Merger because Hanover breaches any representation, warranty, covenant or agreement in the Agreement and Plan of Merger and the breach results in the failure of the closing conditions relating to the accuracy of Hanover's representations and warranties or the performance by Hanover of its covenants. These expense reimbursements must be made within two business days after a demand for payment and a documented itemization setting forth in reasonable detail all expenses. In addition, OEC may be required to pay a termination fee of $1,665,000 in addition to any expenses under the following circumstances: . OEC's stockholders fail to approve the Agreement and Plan of Merger; . the OEC board of directors withdraws, adversely modifies or fails to reconfirm its recommendation of the merger; . the OEC board of directors recommends an alternative transaction to the OEC stockholders; . a tender or exchange offer for 20% or more of the outstanding shares of OEC common stock is commenced, other than by Hanover, and the OEC board of directors fails to recommend that the OEC stockholders not tender their shares in the tender or exchange offer; . any person or group (other than Hanover) becomes the beneficial owner of 20% or more of the outstanding shares or OEC common stock; . OEC fails to call and hold a stockholders' meeting by March 1, 2001; . the OEC board of directors determines in good faith, based on written advice of outside legal counsel, that accepting a superior proposal is required for the board to comply with its fiduciary duties, so long as OEC has not breached the no solicitation covenant; provided that this termination shall not be effective until the termination fee has been paid; or . OEC breaches any representation, warranty, covenant or agreement in the Agreement and Plan of Merger and the breach results in the failure of the closing conditions relating to the accuracy of OEC's representations and warranties or the performance by OEC of its covenants. The payments under this section of expenses and termination are the sole and exclusive remedy of the other party with respect to the matters giving rise to the payment obligation. On November 14, 2000, Hanover, Caddo Acquisition Corporation and OEC entered into an amendment to the Agreement and Plan of Merger to extend the outside date for the completion of the merger to March 1, 2001 and made certain other changes. The amendment is included with the Agreement and Plan of Merger attached hereto as Annex A. Amendment and Waiver The Agreement and Plan of Merger may be amended at any time by action taken by the boards of directors of Hanover and OEC, before or after stockholder approval of the Agreement and Plan of Merger. However, once the Agreement and Plan of Merger is approved by the stockholders, no change can be made where further stockholder approval is required by law. Hanover and OEC may also extend the time for performance of the obligations or other acts of the other, may waive inaccuracies in the representations or warranties contained in the Agreement and Plan of Merger and may waive compliance with any agreements or conditions contained in the Agreement and Plan of Merger. 48 Voting and Disposition Agreement Voting and Proxies As a condition to Hanover's execution of the Agreement and Plan of Merger, HACL, Ltd. and Energy Investors Joint Venture were required to enter into a voting and disposition agreement with Hanover. Under the voting and disposition agreement, HACL Ltd. and Energy Investors Joint Venture have each agreed, among other things: . to vote all shares of OEC common stock held by them in favor of the merger, the adoption and execution by OEC of the Agreement and Plan of Merger and the approval of the terms thereof and each of the other transactions contemplated by the Agreement and Plan of Merger; . to vote all shares of OEC common stock held by them against the following actions (other than the merger and the transactions contemplated by the Agreement and Plan of Merger): (a) any merger, consolidation, business combination, recapitalization, sale of substantial assets, sale or acquisition of shares of capital stock or similar transaction involving OEC or any of its subsidiaries other than the merger; (b) any amendment of OEC's certificate of incorporation or bylaws or any change in the majority of the Board of Directors of OEC; (c) any material change in the present capitalization of OEC; (d) any other material change in OEC's corporate structure or business; (e) any other action which, in the case of each of matters referred to in clauses (b), (c) and (d) above, is intended or could reasonably be expect to impede, interfere with, delay, postpone, discourage or materially adversely affect the consummation of the merger or the transactions contemplated by the Agreement and Plan of Merger or the voting and disposition agreement; or (f) any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of OEC under the Agreement and Plan of Merger or any obligation of HACL Ltd. or Energy Investors Joint Venture under the voting and disposition agreement. In addition, each of HACL, Ltd. and Energy Investors Joint Venture has granted Caddo Acquisition Corporation an irrevocable proxy to vote its shares of OEC common stock in the manner described above. The voting and disposition agreement will terminate upon the earlier to occur of the termination of the Agreement and Plan of Merger or the completion of the merger. The aggregate number of shares of OEC common stock that is subject to the voting and disposition agreement is 16,000,000, or approximately 45% of all OEC common stock outstanding on December 20, 2000. Prohibited Actions Each of HACL, Ltd. and Energy Investors Joint Venture has also agreed that it will not: . solicit, initiate, encourage or respond to, or take any other action to knowingly facilitate any inquiries or the making of any proposal by and other person with respect to OEC that constitutes, or could reasonably be expected to lead to, an acquisition proposal or permit or authorize any person acting on the stockholder's behalf to do any of the foregoing; 49 . offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to or consent to the offer for sale, sale, transfer, pledge, encumbrance, assignment or other disposition of, any or all of the shares; . grant any proxy or power of attorney, deposit any of the shares into a voting trust or enter into a voting agreement with respect to the shares; . exercise any rights of appraisal or rights to dissent from the merger; or . request that OEC register the transfer of any certificate or uncertificated interest in the shares except in accordance with the voting and disposition agreement. Restrictions on Disposition of Hanover Common Stock Each of HACL, Ltd. and Energy Investors Joint Venture has also agreed, with respect to the shares of Hanover common stock issuable to it in the merger, not to sell or otherwise dispose of any Hanover common stock received by it in the merger for a period of 120 days from the date of completion of the merger, unless Hanover consents in writing. In addition, for each succeeding 30-day period thereafter, each of HACL, Ltd. and Energy Investors Joint Venture has agreed not to sell, offer or agree to sell or otherwise dispose of, more than 15% of the shares of Hanover common stock received by it in the merger, unless Hanover consents in writing. A copy of the voting and disposition agreement is attached as Annex C to this proxy statement/prospectus. Noncompetition Agreements In order to induce Hanover to enter into the Agreement and Plan of Merger, two OEC stockholders have each entered into noncompetition agreements at Hanover's request. These stockholders are Dennis W. Estis and Don E. Smith. Pursuant to the noncompetition agreements, each of Mr. Estis and Mr. Smith has agreed not to engage or participate in the business of renting, leasing or managing compression equipment within the States of Texas, Kansas, Arkansas, Mississippi, Alabama, certain parishes of Louisiana and certain counties of Oklahoma until August 19, 2001, unless Hanover or OEC consents, subject to certain exceptions. Each of Mr. Estis and Mr. Smith has agreed that prior to August 19, 2001 he will not solicit any person who was employed by Hanover or OEC on June 19, 2000 to leave the employ of Hanover or OEC, except for employees who are terminated or demoted by OEC or Hanover after June 19, 2000 or are required to relocated after completion of the merger in order to perform their jobs. In addition, it is a condition to completion of the merger that OEC's Co- Chief Executive Officers, Ray C. Davis and Kelcy L. Warren, and other affiliates of OEC as requested by Hanover enter into similar noncompetition agreements. 50 OEC Business The information in this section describes the business of OEC as it is currently conducted, without giving effect to the merger. For a more comprehensive discussion of OEC's business, you should read its recent annual report on Form 10-K, which was filed with the Securities and Exchange Commission on April 19, 2000. OEC's principal executive offices are located at 2501 Cedar Springs Road, Suite 600, Dallas, Texas, 75201. General OEC Compression Corporation, formerly Equity Compression Services Corporation, formerly Hawkins Energy Corporation is engaged in the leasing, contract management, outsourcing, remanufacturing and direct sale of gas compression equipment to operators of producing natural gas wells and gas gathering systems. Its principal geographical operating areas lie within the states of Alabama, Mississippi, Louisiana, Oklahoma, Arkansas, Kansas, New Mexico and Texas. OEC was incorporated as Hawkins Energy Corporation in the state of Oklahoma in June 1989 for the purpose of consolidating the businesses and assets of Equity Compressors, Inc. ("Equity Compressors") and ten Hawkins Exploration oil and gas limited partnerships (the "Hawkins Limited Partnerships"). To effect the consolidation, OEC extended an exchange offer to the stockholders of Equity Compressors and the partners of the Hawkins Limited Partnerships. Following approval by a majority in interest of the limited partners in each of the Hawkins Limited Partnerships, OEC acquired the assets and assumed the liabilities of the Hawkins Limited Partnerships and acquired the stock of Equity Compressors, all in exchange for common stock of OEC, and commenced operations on December 29, 1989. OEC acquired Equity Compressors when its sole business was the leasing of gas compression equipment to operators. Equity Compressors broadened its scope of operations through its acquisition in April 1990 of a compressor remanufacturing and service business. The business of the acquired company centered around the acquisition, remanufacture and sale of existing gas compressor units. By May 1990, this business was fully integrated into Equity Compressors. In June 1993, OEC acquired Mid-South Compressors, Inc., a privately held gas compression company ("Mid-South"). Mid-South leased compression equipment throughout the gas-producing regions of Mississippi, Alabama and Northern Louisiana. The transaction involved the issuance of approximately 5.4 million shares of Company common stock and the payment of $1.4 million in cash to Mid- South. OEC financed the cash portion of the acquisition through additional borrowings. In July 1993, OEC acquired all the outstanding shares of common stock of Owens Compression Service, Inc. ("Owens"), a privately held company that provided gas compression services primarily in East Texas and North Louisiana in exchange for cash consideration of $42,000 and approximately 3.2 million shares of Company common stock. During March 1995, the Boards of Directors of Equity Compressors, Mid-South and Owens each approved the formal merger of Mid-South and Owens with and into Equity Compressors. The companies merged their operations under the Equity Compressors name as of January 1, 1995. The businesses of Equity Compressors included leasing, direct sales and remanufacturing services of various types of gas compression equipment. During December 1996, the stockholders of OEC approved an increase in the number of authorized shares of common stock enabling OEC to sell 8 million shares of common stock and 8 million contingent warrants for a total cash consideration of $4.4 million to HACL, Ltd., a Dallas-based investment group. Additionally, stockholders voted to change the name of OEC to Equity Compression Services Corporation. On August 6, 1997, OEC acquired 100% of the common stock of Ouachita Energy Corporation ("Ouachita") and the majority of the assets of Ouachita Compression Group, LLC and Ouachita Energy 51 Partners, LTD. Under the terms of the acquisition agreements that were closed effective July 31, 1997, OEC issued to the stockholders 7.6 million shares of OEC's common stock and paid approximately $24 million in cash and assumption of debt. On October 30, 1997, OEC, through its wholly-owned subsidiary, Sunterra Energy Corporation, entered into a venture with Prize Petroleum, L.L.C. ("Prize") of Tulsa, Oklahoma, to form Sunterra Petroleum Company, L.L.C. ("Sunterra L.L.C."). Sunterra L.L.C. was initially capitalized with oil and gas properties and cash commitments with a value in excess of $9 million. On December 31, 1997, OEC closed its shop facilities in Oklahoma City, Oklahoma, Kilgore, Texas, and Columbia, Mississippi. The acquisition of Ouachita enabled OEC to consolidate the facilities operations into one state- of-the-art facility located in West Monroe, Louisiana. Although significant costs were incurred as a result of the closing of these facilities in the fourth quarter of 1997, the consolidation of the shop facilities allowed OEC greater control over product engineering and design, better quality equipment, more reliable service and increased control over expenses at the facility level. On March 6, 1998, OEC merged Equity Compressors into Ouachita. At December 31, 1999, the combined compressor fleet had 854 gas compression units with a total of approximately 229,000 horsepower. In March 1998, the number of authorized shares of common stock was increased and the name of OEC changed to OEC Compression Corporation. At December 31, 1998, Sunterra L.L.C.'s oil and gas properties were estimated to have proved reserves of 12,720,000 thousand cubic feet ("mcf") of natural gas and 163,000 barrels of oil. Natural gas reserves constituted approximately 93% of OEC's reserve base on a "gas equivalent" basis (converting each barrel of oil to six mcf of natural gas). On July 2, 1999, Sunterra sold 100% of its interest in Sunterra L.L.C. to Prize. Sunterra received $1 million in cash and the Will-O-Mills gas treating plant located in southwest Texas. The Will-O-Mills gas treating plant is a 300 gpm amine plant, which extracts carbon dioxide, and minor amounts of hydrogen sulfide from natural gas flowed to the plant by area producers under long-term treating contracts. The Sunterra L.L.C. sale effectively removed OEC from the oil and gas production business. The primary business plan of OEC is growth within the compression service sector of the natural gas industry. OEC plans to extend its activities in the compression service sector by expanding its customer base and its business with existing customers by providing the highest quality compression services. Additionally, OEC will pursue the purchase of customer owned compressors as well as the purchase of competitors. Gas Compression Operations General OEC conducts its compressor operations through Ouachita Energy Corporation, its wholly-owned subsidiary located in West Monroe, Louisiana. The age of a gas well usually affects its need for compression. A gas well has a natural flowing pressure which may or may not be adequate to overcome the pipeline pressure at the point where the gas is introduced into a gathering system or transmission pipeline. If the flowing pressure of the gas is not adequate to overcome the pipeline pressure, it is not physically possible to produce or transport the gas without the aid of compression. Gas compression is used to overcome this problem by boosting the flowing pressure of the gas. Theoretically, all gas wells will eventually need compression to boost natural well flowing pressure to exceed pipeline pressure. Historically, gas compressors have generally been purchased and operated by gas producers and gas transporters. However, over the last several years, these same groups have also used equipment leasing and contract compression services as an accepted means of providing for their gas compression needs. 52 Equipment Leasing and Contract Compression Services At year-end 1999, OEC's service fleet included 854 compressors located in Alabama, Arkansas, Kansas, Louisiana, Mississippi, Oklahoma, New Mexico and Texas. These compressors average 268 horsepower in size and their cost as a new unit of similar size averages about $230,000. OEC's rental fleet is comprised mostly of used, remanufactured equipment, which was acquired at a substantial discount to the cost of comparable new compressor units. The fleet includes engines and compressors of various manufacturers. Prior to the Ouachita acquisition in the third quarter of fiscal year 1997, OEC's core business was compression rental-with-maintenance to natural gas producers, processors and pipelines. With the Ouachita acquisition, OEC commenced providing full contract compression services, which is the complete "outsourcing" of a client's compression operations to OEC. The size and configuration of each compressor varies depending on the particular application for which it is utilized. Consideration is given to the differential between the wellhead and pipeline flowing pressures and the volumes of gas delivered from the wellhead. The following table sets forth certain data concerning OEC's activity in the acquisition and leasing of compressors:
September 30 December 31 2000 1999 1998 ------------ ------- ----------- Number of units............................. 845 854 843 Horsepower utilization rate at end of period..................................... 71% 72% 79% Equipment horsepower at end of period....... 229,177 228,903 217,663
Lease/Contract Compression Terms Generally, OEC's compressors are leased for contract compression services, which are provided to well operators under written agreements for periods ranging from month-to-month to six years. These contracts are sometimes renewed at the end of the specified term at which time the rentals and other terms may be renegotiated. The competitive marketplace determines the rental/contract rates used in new contracts and in renewals of existing contracts. Once the minimum term has expired, the equipment continues on a month-to-month basis, with either party having the right to terminate the contract by giving a 30-day written notice. The majority of the deployed compressors at December 31, 1999 were leased on a month-to-month basis. Under the typical rental-with-maintenance lease, the lessee pays the costs of transporting the compressor to the well site, installation, all fuel and other operating costs. The compressors are operated on a daily basis by the employees of the lessee. OEC maintains service departments which employ skilled compressor mechanics who service and maintain compression equipment. Under the most common type of lease, the lessee pays a flat fee for monthly compression inclusive of service, equipment rental, lubricants and all parts and maintenance. Under the typical contract compression service contract, OEC provides the customer with both the compression equipment and operates that equipment for the customer. OEC's personnel are responsible for both day-to-day operation and maintenance of the provided compression equipment for a monthly service fee. Revenues associated with contracts for rental-with-maintenance and contract compression services are recognized on the first day of the month in which the service is provided. Remanufacturing Services Remanufacturing services involve the overhaul and rework of equipment owned by third parties. These services are performed under contract with numerous customers, including gas gathering and transmission companies, major oil companies, large independents and small producers to overhaul and rework their gas compression equipment. Generally, OEC prepares a description of the work to be conducted and the parts to be provided. An estimate or a fixed bid of the costs to be charged to the customer for the overhaul work accompanies this description. In the event additional labor or parts are required once the work is in process, the owner of the unit is contacted regarding the work and additional charges are then agreed on. Overhaul work is normally guaranteed for a period of 90 days. 53 Compressor Sales OEC is also involved in the direct sales of remanufactured gas compression equipment. OEC acquires, rebuilds and sells previously owned gas compressor units to gas producers and transporters. OEC maintains an inventory of compression parts and equipment at its facility in West Monroe, Louisiana. OEC is able to sell its remanufactured equipment at a discount to the cost of comparable new equipment, and in most cases is able to customize and complete a compressor unit for a customer in substantially less time than the same customer could acquire the equipment new from the original manufacturer. OEC, via its field mechanics, is responsible for the service and maintenance of its direct sales units during their 90-day warranty period. Market and Customers OEC's customer base consists of over 180 U.S. companies engaged in all aspects of the oil and gas industry including major integrated oil and gas companies, large and small independent producers, natural gas processors, gatherers and pipelines. No individual customer accounted for more than 10% of OEC's consolidated revenues during 1998 or 1999. Competition The natural gas compression services business is highly competitive. Overall, OEC faces competition from companies with considerably greater financial resources as well as from several smaller companies on a more regional basis. OEC believes it is the sixth largest compressor services company, defined by total horsepower, in the onshore domestic markets in which it operates. Increased size and geographic breadth offer compressor services companies' significant advantages. Supporting staff costs (i.e. sales, accounting, engineering) do not rise proportionately with increases in the number of deployed compressors. As a result, companies the size of OEC or larger benefit from lower overall operating costs than competing smaller companies. OEC believes it competes effectively on the basis of price as well as the quality and reliability of service in the geographic markets it operates (Alabama, Mississippi, Louisiana, Arkansas, Oklahoma, Kansas, Texas and New Mexico). Compliance with Environmental Laws The design and operation of gas compressors is subject to certain federal and state environmental laws and regulations which, directly or indirectly, relate to the discharge of materials into the environment. Complete compliance with all of such laws and regulations may affect OEC's operations and costs as a result of their effect on the design, condition and operation of its gas compressors or its costs of repairing or remanufacturing them. Under most of the leases for the gas compressors, responsibility for compliance with the majority of these laws and regulations is placed on the lessee. However, there can be no assurance that OEC would not be liable for any penalties or fines that may be imposed as a result of any material noncompliance. It is not anticipated that OEC will be required in the near future to expend amounts that are material in the aggregate to OEC's overall operations by reason of such laws and regulations. Employees As of November 27, 2000, OEC had 98 full-time employees. OEC has 93 employees in its gas compression operations and 5 employees in its general corporate area. None of these employees are represented by a union or labor organization. OEC considers its relations with these employees to be satisfactory. Properties and Facilities OEC owns its shop facilities in West Monroe, Louisiana. The main building contains approximately 35,000 square feet, the majority of that space designed for the re-manufacturing and overhauling of OEC's compression fleet with the balance being office space. The property includes approximately eight acres of land. OEC owns 12 acres of land, office facilities and a warehouse in Bridgeport, Texas. OEC leases its executive office space in Dallas, which consists of approximately 4,500 square feet. 54 Legal Proceedings OEC is not currently involved in any material litigation or proceeding and is not aware of any such litigation or proceeding threatened against it. Market for OEC's Common Equity As of September 30, 2000, OEC had approximately 1,140 holders of record of its common stock. Effective September 3, 1998, OEC's common stock was approved for listing on the American Stock Exchange ("AMEX") under the symbol "OOC." The table below reflects the high and low bid prices per share of OEC's common stock for each calendar quarter during the time period from 1998 to 2000 as quoted by AMEX since September 3, 1998, and NASDAQ for prior periods. The bid quotations reflect inter-dealer prices without adjustment for retail markups, markdowns or commissions and may not reflect actual transactions.
2000 1999 1998 --------------- ------------- ------------- QUARTER High Low High Low High Low First.......................... $0.8125 $0.5625 $1.313 $0.875 $2.750 $2.063 Second......................... 0.8750 0.5000 1.750 1.000 2.563 2.063 Third.......................... 1.0625 0.7500 1.438 1.000 2.313 1.688 Fourth (through December 20, 2000)......................... 1.00 0.7500 1.250 0.563 1.938 1.063
Executive Officers of OEC Set forth below is certain information with respect to each executive officer of OEC. Executive officers are elected by the Board of Directors of OEC and serve at its discretion. Kelcy L Warren 44 Co-Chief Executive Officer Co-Chairman of the Board Ray C. Davis 57 Co-Chief Executive Officer Co-Chairman of the Board Jack D. Brannon 43 Senior Vice-President/ Chief Financial Officer
The following is a brief description of the business background of each of the executive officers of OEC. Mr. Ray C. Davis has served as Co-Chief Executive Officer and Co-Chairman of the Board of Directors since September 22, 1999. He is also a co-founder and senior partner of Energy Transfer Company, a group of partnerships focused on the acquisition and enhancement of natural gas related midstream assets and energy service companies. From March 1993 through May, 1996, Mr. Davis served as Chairman of the Board and Chief Executive Officer of Cornerstone Natural Gas, Inc., a publicly traded natural gas company focused on midstream assets. From 1988 through 1993, he served as Chairman of the Board of Capstone Partners, Inc., an investment and management company specializing in company acquisitions and special management situations. Mr. Davis received a B.S. and a B.A. from LeTourneau University. Mr. Kelcy Warren has served as Co-Chief Executive Officer and Co-Chairman of the Board of Directors since September 22, 1999. He is also a cofounder and senior partner of Energy Transfer Company, a group of partnerships focused on the acquisition and enhancement of natural gas related midstream assets and energy service companies. From March, 1993 through May, 1996, Mr. Warren served as President and Chief Operating Officer of Cornerstone Natural Gas, Inc., a publicly traded natural gas company focused on midstream assets. From 1981 through 1993, Endevco, Inc. (predecessor of Cornerstone Natural Gas) employed Mr. Warren in various capacities, the last as President. Mr. Warren received B.S. from the University of Texas at Arlington. Mr. Jack Brannon has served as Senior Vice President and Chief Financial Officer since January 1, 1997. Previously, he was employed by BOK Capital Services Corporation as Senior Vice President (1994--1996) and its affiliate, Bank of Oklahoma, N.A., as Vice President, Energy Group (1984 -1996). He holds three degrees from the University of Texas at Austin: a B.S. with honors, an M.A, and an M.B.A. 55 Security Ownership of Certain Beneficial Owners and Management The following table sets forth information concerning the beneficial ownership of OEC common stock as of the record date and as of the completion of the merger for the following: . each stockholder known by OEC to beneficially own 5% or more of the outstanding shares of OEC common stock; . each of OEC's directors; . OEC's chief executive officer and certain other highly compensated executive officers of OEC; and . all of OEC's executive officers and directors as a group. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Exchange Act, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under this rule, beneficial ownership includes any shares as to which the stockholder has voting power or investment power and any shares that the stockholder has the right to acquire within 60 days of the record date through the exercise of any stock option, warrant or other right. Unless otherwise indicated in the footnotes or the table, each stockholder has sole voting and investment power with respect to the shares shown as beneficially owned. The information relating to beneficial ownership of shares of common stock of the combined company after the merger does not include shares of Hanover common stock beneficially owned by the listed stockholders. OEC is not aware that any of these stockholders beneficially own shares of Hanover common stock.
Percent Name and Address of of Beneficial Owner Number of Shares Classes ------------------- ---------------- ------- HACL, Ltd., ........................................ 11,463,636(1) 31.42 a Texas Limited Partnership 2838 Woodside Street Dallas, TX 75206 Energy Investors.................................... 4,136,364 11.18 a Texas Joint Venture 2838 Woodside Street Dallas, TX 75206 Gregory & Cook, Inc................................. 3,037,251 8.21 7575 San Felipe, Suite 350, Houston, TX 77063 James D. Finley..................................... 148,788(2) * Neal A. Hawthorn.................................... 3,333(3) * Clifford S. Lewis................................... 94,911(4) * Jack D. Brannon..................................... 263,000(5) * Richard D. Brannon.................................. 1,101,136(6) 2.98 Ray C. Davis........................................ 4,491,742(7) 12.14 Matthew S. Ramsey................................... 229,182(8) * Jon P. Stephenson................................... 370,379(9) 1.00 Kelcy L. Warren..................................... 4,491,742(10) 12.14 Dennis W. Estis..................................... 5,370,487(11) 14.52 William J. (Bill) Murray............................ 185,623(12) 14.52 All Directors and Executive Officers as a Group (12 Persons) .......................................... 17,608,948(13) 48.00
56 - -------- * Less than 1% (1) Does not include the 4,136,364 shares of Common Stock held by Energy Investors, a Texas joint venture. HACL, Ltd. is the managing joint venturer of Energy Investors, but is obligated to vote the shares as directed by the other joint venturers (proportionately according to their interests) and HACL, Ltd. is not entitled to participate in the distribution or profits attributable to the shares until the other joint venturers receive a specified annual return on their investment in the shares. (2) Includes 3,333 shares which may be acquired upon the exercise of presently exercisable options and 145,455 share attributable to Mr. Finley's interest in Energy Investors. (3) Includes 3,333 shares which may be acquired upon the exercise of presently exercisable options. (4) Includes 63,332 shares which may be acquired upon the exercise of presently exercisable options, and 31,920 shares held by the 401(k) Plan and allocated to the account of Mr. Lewis. Excludes 650,000 shares owned by Hawkins Oil & Gas. (5) Includes 23,000 shares which may be acquired upon the exercise of presently exercisable options and 240,000 shares acquired upon the exercise of the HACL warrants. (6) Includes 3,333 shares which may be acquired upon the exercise of presently exercisable options, 1,101,136 shares attributable to Mr. Brannon's interest in HACL, Ltd. (7) Includes 3,333 shares which may be acquired upon the exercise of presently exercisable options, 4,491,742 shares attributable to Mr. Davis' interest in HACL, Ltd. (8) Includes 35,000 shares which may be acquired upon the exercise of presently exercisable options, 193,182 shares attributable to Mr. Ramsey's interest in HACL, Ltd. (9) Includes 3,333 shares which may be acquired upon the exercise of presently exercisable options, 367,045 shares attributable to Mr. Stephenson's interest in HACL, Ltd. (10) Includes 3,333 shares which may be acquired upon the exercise of presently exercisable options, 4,491,742 shares attributable to Mr. Warren's interest in HACL, Ltd. (11) Excludes 1,380,675 shares which are held by the ex-wife of the Mr. Estis. Mr. Estis disclaims beneficial ownership of such shares. Includes, 6,666 shares which may be acquired by currently exercisable options. (12) Includes 183,523 shares attributable to Mr. Murray's interest in a partner of HACL, Ltd. (13) Includes 217,165 shares which may be acquired upon the exercise of presently exercisable options, 51,638 shares held by the 401(k) Plan and allocated to the accounts of such individuals, 2,884,847 shares attributable to such persons' interests in HACL, Ltd., 5,923,024 shares which may be acquired upon the exercise of presently exercisable warrants and which are attributable to such persons' interests in HACL, Ltd. and 145,455 shares which are attributable to Mr. Finley's interest in Energy Investors. 57 Selected Historical Financial Data--OEC In the table below, we provide you with selected historical consolidated financial data of OEC. OEC prepared this information using its consolidated financial statements as of the dates indicated and for each of the fiscal years in the five-year period ended December 31, 1999, and for the nine-month periods ended September 30, 1999 and September 30, 2000. OEC derived the consolidated income statement data below for each of the years ended December 31, 1999 and 1998 from financial statements audited by Arthur Andersen LLP, independent public accountants. OEC derived the consolidated income statement data below for the years 1997, 1996 and 1995 from financial statements audited by PricewaterhouseCoopers LLP, independent accountants. OEC derived the remaining data from unaudited consolidated financial statements. The information in this section should be read along with OEC's consolidated financial statements, accompanying notes and other financial information attached to this proxy statement/prospectus at Page F-1.
Year Ended December 31, Nine Months Ended ------------------------------------------- ----------------------------- September 30, September 30, 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------- -------- -------- -------------- -------------- (In thousands, except for per share amounts) Revenues: Compressor rentals, service and treating fees................. $6,802 $6,445 $12,363 $ 23,125 $ 23,353 $ 17,484 $ 16,473 Compressor sales and remanufacturing...... 1,611 1,177 979 708 405 286 198 Oil and gas sales..... 1,530 1,821 2,685 2,409 1,399 1,399 -- ------ ------ ------- -------- -------- -------- -------- Total revenues........ 9,943 9,443 16,027 26,242 25,157 19,169 16,671 ------ ------ ------- -------- -------- -------- -------- Operating Expenses: Operating costs-- rentals, service and treating fees........ 3,558 2,643 5,063 9,700 9,488 7,358 5,767 Cost of compressor sales and remanufacturing...... 1,093 894 941 672 274 180 108 Operating costs--oil and gas.............. 621 516 804 728 470 510 -- Depreciation, depletion and amortization......... 2,326 2,201 3,687 5,970 6,346 4,829 4,360 Inventory write-down.. -- -- 404 -- -- -- -- Shop closing costs.... -- -- 307 -- -- -- -- General and administrative....... 1,881 2,080 4,110 4,299 3,923 2,939 1,759 Asset impairment...... 1,790 -- -- 162 -- -- -- ------ ------ ------- -------- -------- -------- -------- Total expenses....... 11,269 8,334 15,316 21,531 20,501 15,816 11,994 ------ ------ ------- -------- -------- -------- -------- Income (loss) from operations............. (1,326) 1,109 711 4,711 4,656 3,353 4,677 ------ ------ ------- -------- -------- -------- -------- Other income (expense): Merger related and employee retention expense.............. -- -- -- -- -- -- (608) Gain (loss) on sale of assets............... (23) (437) 10 (22) 276 335 748 Interest and other income............... 102 26 52 122 91 78 173 Interest expense...... (1,043) (927) (1,884) (4,536) (5,228) (3,915) (4,263) Contingent warrant expense.............. -- -- (1,440) -- -- -- -- Minority interest in results of oil and gas operations..... . -- -- (60) (146) (88) (88) -- ------ ------ ------- -------- -------- -------- -------- (964) (1,338) (3,322) (4,582) (4,949) (3,590) (3,950) ------ ------ ------- -------- -------- -------- -------- Net income (loss) before income taxes and extraordinary item..... (2,290) (229) (2,611) 129 (293) (237) 727
58
Year Ended December 31, Nine Months Ended ------------------------------------------ ----------------------------- September 30, September 30, 1995 1996 1997 1998 1999 1999 2000 ------- ------ ------- ------- ------- -------------- -------------- (In thousands, except for per share amounts) Income tax (expense) benefit................ 852 69 924 (75) 414 454 (290) ------- ------ ------- ------- ------- ------- ------- Net income (loss) before extraordinary item..... (1,438) (160) (1,687) 54 121 217 437 Extraordinary item: Write-off of unamortized debt issue costs on debt retirement (net of $28 tax)............... -- -- -- (42) -- -- -- Net income (loss)....... $(1,438) $ (160) $(1,687) $ 12 $ 121 $ 217 $ 437 ======= ====== ======= ======= ======= ======= ======= Basic and dilutive net income (loss) before extraordinary item per common share........... $ (.11) $ (.01) $ (.07) $ .00 $ .00 $ .01 $ .01 ======= ====== ======= ======= ======= ======= ======= Extraordinary item...... $ .00 $ .00 $ .00 $ .00 $ .00 $ .00 $ .00 ======= ====== ======= ======= ======= ======= ======= Basic and dilutive net income (loss) per common share........... $ (.11) $ (.01) $ (.07) $ .00 $ .00 $ (.01) $ .01 ======= ====== ======= ======= ======= ======= ======= Cash and cash equivalents............ 177 10 1 7 405 400 8,689 Working capital......... 930 787 1,260 4,300 921 (869) (28,653) Total assets............ 26,041 25,810 84,365 106,921 106,393 105,643 112,390 Total debt, including current maturities..... 9,682 11,013 54,212 58,829 61,299 61,289 60,682 Stockholder's equity.... 10,698 14,797 28,735 28,792 28,654 28,748 36,371
59 OEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is Management's discussion and analysis of certain significant factors which have affected the OEC's earnings and financial condition during the periods included in the accompanying Consolidated Balance Sheets, Statements of Operations and Cash Flows. Results of Operations: Nine Months Ended September 30, 2000 versus Nine Months Ended September 30, 1999 Gas compressor rentals, service & treating fees of $16.5 million for the nine months ended September 30, 2000 (the "September 30, 2000 Period") represented a 6% reduction from that achieved in the nine months ended September 30, 1999 (the "September 30, 1999 Period"). The decline was due to a slight drop in the average amount of compression horsepower deployed during the September 30, 2000 Period as compared to the September 30, 1999 Period and a slight increase in the average unit size of a deployed unit. As stated earlier, compression rental rates and, in general, operating costs, on a per horsepower basis is inversely related to unit size. The decline in rental service and treating fees was more than offset by a 22% decline, from September 30, 1999 Period levels, in the associated direct operating costs to $5.8 million. The comparative period cost reduction was due to (1) the previously described economies of scale in cost structure from deploying larger horsepower equipment, and (2) continued focus on cost structure efficiencies in OEC's field operations. As a result, OEC's gas compressor rentals, service and treating operations generated a gross profit (revenues--direct expense) of $10.7 million for the September 30, 2000 Period versus the September 30, 1999 Period's $10.1 million, a 6% improvement. The September 30, 2000 Period's and September 30, 1999 Period's gross margins for these operations (gross profit divided by revenue) were 65% and 58%, respectively. In the September 30, 2000 Period, compressor sales and remanufacturing revenues decreased 31% from September 30, 1999 Period levels to $198,000. The associated cost-of-goods-sold fell 40% from September 30, 1999 Period levels to $108,000. As a result the gross profit from these operations declined just 15% from September 30, 1999 Period levels to $90,000. The gross margin improved to 45% from the September 30, 1999 Period's 37%. OEC continues to minimize its focus on this business sector in favor of the typically more profitable gas compression rental, service and treating sector. Oil and gas revenues and the associated operating costs fell to $0 in the September 30, 2000 Period due to the July, 1999 sale of 100% of its oil and gas operations to Prize Petroleum. OEC exited the oil and gas production business to redirect its capital investment into its core gas compression, service and treating business. Depreciation, depletion and amortization costs for the September 30, 2000 Period fell 10% from September 30, 1999 Period levels. The loss of depletion due to the July, 1999 sale of the oil and gas operations was the predominant cause. In the September 30, 2000 Period, selling, general and administrative expense ("G&A") fell $1.8 million (-40%) from September 30, 1999 Period levels to $1.8 million. The decrease reflected OEC's continued focus on expense controls. The bulk of the G&A reduction was achieved through personnel reductions. The September 30, 2000 Period's G&A expense also includes an estimated $130,000 in legal, professional and other expenses associated with (1) OEC's response to a shareholder proxy solicitation instigated by three dissident directors of OEC, and (2) costs associated with OEC's support of the investment bank, engaged in February, 2000, in its efforts to market OEC. At the July 13, 2000 annual OEC shareholders' meeting, OEC's shareholders overwhelmingly rejected the dissident directors' alternative slate of directors in favor of the slate proposed by OEC and the three dissident directors were not reelected to OEC's board. Additionally, OEC rejected the dissident group's request, delivered by their legal counsel, to reimburse the dissident group's legal and proxy solicitation expenses. 60 OEC's improved cost structure in both its field operations and selling/administration more than offset the September 30, 2000 Period revenue decline from the comparative period. As a result, Income from Operations rose $1.3 million (39%) from September 30, 1999 Period levels to $4.7 million. Cashflow, defined here as earnings before interest, taxes, depreciation, amortization and non-recurring expenses (commonly referred to as "EBITDA"), rose $855,000 (10%) from September 30, 1999 Period's performance level to $9.0 million. Interest income for the September 30, 2000 Period of $173,000 represents a $95,000 increase over the September 30, 1999 Period levels and is due to the increase in short-term cash investments held by OEC during the last three months of the September 30, 2000 Period. As of September 30, 2000, OEC had $8.7 million in cash and short-term investments. The bulk of the cash investments are the result of a common stock warrant exercise by three officers of OEC in mid June, 2000. The September 30, 2000 Period interest expense of $4.3 million represented a 9% increase over the September 30, 1999 Period levels and was due to (1) slightly higher levels of senior debt, and (2) higher debt interest rates in the current period. On July 17, 2000, OEC and Hanover Compressor Company announced that the two companies have executed a definitive merger agreement under which Hanover would acquire OEC in an all-stock transaction. The merger, which is subject to the approval of OEC's shareholders, is expected to close in late December, 2000 or early January, 2001. Prior to the merger announcement, OEC's board approved a company wide employee retention plan to incentivise OEC employees to remain during the sale and merger process. During the September 30, 2000 Period, OEC incurred legal costs of approximately $150,000 associated with the planned merger and paid retention bonuses under the employee retention plan totaling $458,000. These combined costs have been included as a line item under "Other income (expense)" in the financial statements. In February, 2000, OEC sold a 50% undivided interest in the Will-o-Mills gas treating plant for cash proceeds of $2 million. The sale generated a gain-on- sale of $738,000 during the first quarter of 2000. This compares with a $310,000 gain taken in July, 1999 with the previously described sale of OEC's oil and gas operations to Prize Petroleum. Minority interest was eliminated with the Prize sale. As result of the improved operating margins and reduced G&A expenses, OEC reported pretax net income of $727,000 for the September 30, 2000 Period versus a $237,000 pretax loss for the comparative September 30, 1999 Period. The September 30, 2000 Period's pretax net income, before (1) the merger and employee retention Expenses, and (2) one time gains on asset sales, was $587,000. The comparative September 30, 1999 Period generated a pretax net loss before comparable expenses and sale gains of $572,000. Income tax expense for the September 30, 2000 Period of $290,000 resulted in net income for the period of $437,000. A $454,000 tax benefit in the comparative September 30, 1999 Period reversed the period's $237,000 pretax net loss to a positive net income of $217,000. 1999 versus 1998 Compression and gas treating service fees increased $228,000 or 1% from 1998. OEC did not experience the level of revenue growth in 1999 that it achieved in 1998. The reasons were twofold: OEC discontinued compression services in February 1999, for a client which represented approximately 6% of its deployed compression horsepower. Additionally, OEC believes the entire compression services industry experienced a general slowdown in compression demand growth apparently caused by the precipitous fall in 1998 of natural gas prices which subsequently impacted the industry's client base's capital budgets for 1999. OEC believes the rebound in the natural gas price in 1999 has refueled compression demand growth in the last half of the year. From July through December 1999, OEC's deployed compression horsepower grew 7%. July was OEC's lowest deployment level for all of 1999. Compression operating costs decreased $212,000 (3%) from 1998 due to continued focus on cost controls in the field operations. Compressor sales and remanufacturing revenue fell $303,000 (43%) from 1998. The decrease reflects OEC's continued focus on the higher margin contract compression services over third-party equipment sales. 61 The associated compressor sales and remanufacturing direct costs fell $398,000 (59%) from 1998 due to increased focus on job costing. Oil and gas sales decreased $1 million from 1998 due to the sale of the oil and gas operations in July 1999. OEC held 100% of its oil and gas producing interest in Sunterra. which was majority owned by OEC but operated by the minority owner Prize. On July 2, 1999, OEC sold 100% of its interest in Sunterra to Prize for $1 million in cash and 100% interest in the Will-O-Mills gas treating plant, a 300GPM Amine Plant in West Texas. OEC entered into the transaction to replace a depleting asset with a redeployable asset with a similar operating profile to gas compression. OEC reported a $421,000 gain on the sale. Oil and gas operating costs fell $258,000 from 1998 due to the previously described sale. Compressor depreciation increased $200,000 (4%) from 1998. The increase was due to 1) continued capital investment to upgrade the fleet and 2) a substantial turnover of compression equipment on existing compression jobs in the March--July 1999 period. OEC believes the latter was the result of an industry-wide turnover of equipment. The industry's collective client base, predominantly exploration and production companies, coming off a poor gas price year in 1998 and looking for cost and revenue efficiencies, made a major effort to "right size" their existing rental compression to the current application. The result was a major turnover of equipment on applications. The turnover generated a higher than normal level of capital investment in refurbishing idle equipment to replace the returning over or under sized equipment. Oil and gas depletion and depreciation fell $270,000 due to the July Sunterra sale described above. Intangibles amortization increased $233,000 from 1998 due to the amortization of the balance of the non-compete and non-solicitation agreements between OEC and two former executive officers of OEC who resigned in December 1998. General and administrative expense fell $375,000 (9%) from 1998. OEC's continued focus on cost controls was the principal reason for the cost reduction. Included in 1999 general and administrative costs is approximately $300,000 of predominately legal and professional costs surrounding the activities of two special committees of the Board of Directors established to review and evaluate certain merger and acquisition activities during the year. In November 1999, OEC sold and leased back virtually all of its owned vehicles to a subsidiary of GE Capital. The transaction generated a net loss on sale of $169,000. Interest expense increased $692,000 from 1998 due to substantial fleet growth in 1998 that was predominantly debt financed. That growth was being generated over all of 1998, the increased interest expense is fully realized in 1999. The July Sunterra sale eliminated minority interest expense beyond that point. As a result, this expense item fell $58,000. OEC reported a pre-tax loss of $293,000 for the 1999 fiscal year versus $129,000 pre-tax profit for 1998. However, an income tax benefit of $414,000 created after-tax net income of $121,000 versus 1998 net earnings of $12,000. Capital expenditures on the compressor fleet totaled $11.1 million in 1999 versus $21.1 million in 1998. The acquisition of compression equipment through purchase / leaseback transactions accounted for $1.5 million of the 1999 fleet capital expenditures. Roughly 85% of the aggregate purchase / leaseback investment occurred in December 1999 and, therefore, had little impact on 1999 earnings. Field capital expenditures, to sustain the value and operational performance of the operating fleet, totaled $3.1 million. Roughly 90% of the remaining $6.5 million capital investment represented investment in the existing fleet through shop operations to sustain and enhance the value of the existing fleet as it was deployed on new jobs. The balance represented purchases of equipment in the open market to fill job applications, which could not be matched with equipment in the existing fleet. OEC believes that the shop CAPEX levels on the existing fleet were inflated in 1999 due to the substantial turnover of equipment on existing jobs in the spring-through-summer period of 1999. As previously discussed, OEC believes the entire compression industry experienced a substantial turnover of equipment during the defined period as the industry's collective client base, mostly independent exploration and 62 production companies, attempted to "right size" their leased compression to gain cost and production efficiencies in the face of 1998 gas and oil price driven budget constraints. The immediate impact of the action is increased capital investment for little if any additional revenue. However, there are longer-term benefits in the form of decreased future capital investment. Capital Resources and Liquidity As of September 30, 2000, OEC has in place a $39.5 million senior credit facility with a major international bank. The facility is a borrowing base revolver effective through July 2001, due in full on July 31, 2001. The September 30, 2000 borrowing base is $48 million but is limited to the current commitment that reduces by $150,000 per month through the July 31, 2000 maturity. The credit facility is collateralized by substantially all of the assets of OEC. On September 30, 2000, the senior credit facility's outstanding balance was $39.3 million which was classified as a current maturity. In July 1997, OEC entered into a senior subordinated term note agreement and senior floating rate note agreement with The Prudential Insurance Company of North America ("Prudential") for $15 million and $5 million, respectively. The $15 million term note agreement contained a warrant purchase agreement authorizing Prudential to purchase up to 1 million shares of OEC's common stock at an initial exercise price of $2.80 per share until the termination date of the related term note. The fair value of the warrants, $870,000, was determined using the Black-Scholes model and was treated as an addition to paid-in capital. The resulting term note amount of $14,130,000 will be accreted over the 10-year term using its effective interest rate of 11.14%. The exercise price of the warrants was subsequently lowered to $1.00 per share in 1999 in connection with the waiver of covenants. OEC's cash interest payout over the term of the note is at the stated rate of 10.15%. Covenants related to the debt agreements include the maintenance of specific levels of working capital, tangible net worth, and various debt service ratios, as defined by the agreements. Further, the debt agreements prohibit the payment of dividends, limit OEC's repurchase of its own stock, and restrict new borrowings. At September 30, 2000, OEC was in compliance with all covenants in both its senior and subordinated credit facilities. OEC relies primarily on the collection of revenues associated with rental- with-maintenance and contract compression contracts to fund OEC's working capital and capital expenditure needs. Borrowings from OEC's senior credit facility are used primarily to finance the growth of OEC. The coordination of the cash flow from operations and borrowings from the senior credit facility allows OEC to optimize its cash flow. On June 12, 2000, OEC's Co-Chief Executive Officers and Chief Financial Officer exercised a warrant, issued by OEC in December 1996, for 8 million shares of OEC's common stock at an exercise price of $0.91 per share. OEC received cash proceeds of $7.28 million upon the warrant exercise. OEC has invested the cash in short-term liquid investments. In July 1999, OEC sold approximately 5,000 horsepower of idle compression equipment (approximately 2% of the total fleet) in a single transaction for $2 million. The purchase and sale agreement contains put and call features that permit 1) OEC to repurchase, at its option, ("Call") the equipment by the end of 1999 at cost, and (2) the purchaser to ("Put") the equipment back to OEC and recover the purchase price plus accrued interest at 10%. The Put and Call features, which were to expire on December 31, 1999, have been extended by mutual agreement of OEC and the purchaser to August 30, 2000. On July 17, 2000, OEC announced that it had executed a definitive Agreement and Plan of Merger with Hanover Compressor Company, the purchaser of the equipment. The merger is expected to close between late December, 2000 and early January, 2001. OEC expects that the existing terms of the equipment purchase and sale agreement will be extended until the merger's completion. Regardless, OEC has sufficient cash reserves to pay-off the note. OEC has treated the transaction as a loan for accounting purposes until such time as the put and call features have either been exercised or expire. To that end, the $2 million sale is carried as a $2 million current note payable at June 30, 2000. 63 Net cash provided by operating activities decreased to $3.8 million in the first nine months, ending September 30, 2000 from $7.0 million in the comparable nine months of 1999 primarily due to a $1.3 million reduction in accounts payable and accrued liabilities as well as the backing out of the $.748 million gain on asset sale from the previously described February, 2000 sale of a 50% interest in the Will-O-Mills gas treating plant. Net cash used in investing activities fell from 1999's $8.4 million to 2000's $2.0 million. The principal causes were (1) a $5.2 million reduction in capital expenditure levels for acquisitions to and enhancements of OEC's compressor fleet and (2) the $2 million cash proceeds from the previously described February 2000 Gas plant interest sale. Net cash provided by financing activities increased from 1999's $1.7 million to 2000's $6.5 million due primarily to the $7.28 million in cash proceeds received from the previously described June 12, 2000 stock warrant exercise and a $658 thousand net reduction in borrowings. At September 30, 2000, OEC had current assets of $17.0 million and current liabilities, excluding the $39.3 million senior revolver balance, of $7.3 million. OEC has minimal availability under its senior credit facility and does not have access to the borrowing base above the current $39.0 million commitment (as of November 8, 2000) unless additional lenders are recruited into the credit facility. Given the planned Hanover merger, OEC has no plans to recruit additional lenders at this time. Further, as of September 30, 2000, OEC possesses $8.7 million in cash reserves which management believes is sufficient, along with cash from operations, to support working capital and capital investments through completion of the Hanover merger. 64 DESCRIPTION OF HANOVER COMMON STOCK The following is a summary of the material terms of Hanover's common stock. Because it is only a summary, it does not contain all the information that may be important to you. Accordingly, you should read carefully the more detailed provisions of Hanover's certificate of incorporation and bylaws. General Hanover's authorized capital stock currently consists of 200,000,000 shares of common stock and 3,000,000 shares of preferred stock, $.001 par value per share. The following summary description relating to the capital stock does not purport to be complete. For a detailed description, reference is made to Hanover's certificate of incorporation. Common Stock As of November 11, 2000, 62,864,191 shares of Hanover common stock were issued and held of record by approximately 294 stockholders. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferential rights with respect to Hanover preferred stock, holders of common stock are entitled to receive ratably any dividends declared by its board of directors out of legally available funds. On liquidation, dissolution, sale or winding up of Hanover, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights. Holders of common stock have no preemptive or subscription rights. The outstanding shares of common stock are, and the shares of common stock to be issued upon conversion of the preferred securities will be, fully paid and nonassessable. Hanover has never declared a dividend of cash or property on the common stock, and its bank credit agreement prohibits the payment of dividends on common stock without the lenders' prior written consent. The payment of any such dividends also will be subject to, and may be limited by, the terms of any preferred stock Hanover may issue in the future. Transfer Agent And Registrar The transfer agent and registrar for the common stock is ChaseMellon Shareholder Services. 65 COMPARISON OF STOCKHOLDER RIGHTS The following is a summary of certain of the material differences between the rights of holders of Hanover common stock and the rights of holders of OEC common stock. Hanover is organized under the laws of the State of Delaware and OEC is organized under the laws of the State of Oklahoma. The rights of stockholders of the two corporations arise from both state laws and the certificate of incorporation and bylaws of Hanover and the articles of incorporation and bylaws of OEC, as applicable. The Oklahoma General Corporation Act was first adopted in 1986 and was modeled on the Delaware General Corporation Law. Consequently, there are a great many similarities in the state corporate laws governing the two companies. The following summary is not a complete statement or comparison of the rights of holders of Hanover common stock or holders of OEC common stock and is qualified in its entirety by reference to the Delaware General Corporation Law and the Oklahoma General Corporation Act and the respective charter and bylaw documents of Hanover and OEC. - -------------------------------------------------------------------------------- Hanover Stockholder Rights OEC Stockholder Rights - -------------------------------------------------------------------------------- Capital Stock The total number of authorized shares of Hanover capital stock is 203,000,000, which consists of 200,000,000 shares of common stock, par value $.001 per share, and 3,000,000 shares of preferred stock, par value $.001. The total number of authorized shares of OEC capital stock is 61,000,000, which consists of 60,000,000 shares of common stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $1.00. Number, Election and Removal of Directors Number of Directors Under the Delaware General Corporation Law, the certificate of incorporation or bylaws of a corporation may specify the number of directors of the corporation. Hanover's bylaws provide that the number of directors of Hanover will be seven or such other number as may be determined by the board of directors. The Hanover board of directors is currently set at seven. Under the Oklahoma General Corporation Act, the certificate of incorporation or bylaws of a corporation may specify the number of directors of the corporation. OEC's bylaws provide that the number of directors of OEC will be not less than one nor more 15 or such other number as may be determined by the board of directors. The OEC board of directors is currently set at nine. Election of Directors Hanover's bylaws provide that directors will be elected at the annual meeting of stockholders by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote. Under the Delaware General Corporation Law, stockholders do not have the right to cumulative voting unless a corporation's certificate of incorporation provides for cumulative voting. Hanover's certificate of incorporation does not provide for cumulative voting. OEC's bylaws provide that directors will be elected at the annual meeting of stockholders by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote. Under the Oklahoma General Corporation Act, stockholders do not have the right to cumulative voting unless a corporation's certificate of incorporation provides for cumulative voting. OEC's certificate of incorporation does not provide for cumulative voting. Under OEC's bylaws, OEC shareholders must give advance notification of any nominations of directors in lieu of the slate of directors being nominated by the OEC Board of directors. Such notice must be given to OEC not less than 60 nor more than 90 days prior to a shareholders meeting. 66 Vacancies on the Board of Directors Vacancies on the Hanover board of directors and newly created directorships shall be filled by a majority of the directors then in office. Vacancies on the OEC board of directors and newly created directorships shall be filled by a majority of the directors then in office, even though less than a quorum. Removal Under Hanover's bylaws, any of Hanover's directors or its entire board of directors may be removed from office at any time, with or without cause, by the holders of a majority of the outstanding shares of Hanover common stock entitled to vote. Under OEC's bylaws, any of OEC's directors or its entire board of directors may be removed from office at any time, with or without cause, by the holders of a majority of the outstanding shares of OEC common stock entitled to vote. Amendments to Charter and Bylaws Amendments to Charter Most of the provisions of Hanover's certificate of incorporation may be amended by the holders of a majority of the outstanding Hanover common stock as provided under the Delaware General Corporation Law, since a greater vote is not required by Hanover's certificate of incorporation. All of the provisions of OEC's certificate of incorporation may be amended by the holders of a majority of the outstanding OEC common stock as provided under the Oklahoma General Corporation Act, since a greater vote is not required by OEC's certificate of incorporation. Amendments to Bylaws The Delaware General Corporation Law provides that only the stockholders may amend the bylaws of a corporation unless this authority is conferred upon the board of directors in the certificate of incorporation. Hanover's certificate of incorporation and bylaws provide that its bylaws may be amended or new bylaws may be adopted by the stockholders or by the board of directors. The Oklahoma General Corporation Act provides that only the stockholders may amend the bylaws of a corporation unless this authority is conferred upon the board of directors in the certificate of incorporation. OEC's certificate of incorporation and bylaws provide that its bylaws may be amended or new bylaws may be adopted by the stockholders or by the board of directors. Special Meetings of Stockholders Under the Delaware General Corporation Law, a special meeting of stockholders may be called by the board of directors or by any other person authorized by the certificate of incorporation or bylaws. Hanover's bylaws provide that a special meeting of stockholders may be called by the president, the Board of Directors or by a request in writing from holders of not less than 10% of the issued and outstanding voting stock. Under the Oklahoma General Corporation Act, a special meeting of stockholders may be called by the board of directors or by any other person authorized by the certificate of incorporation or bylaws. OEC's bylaws provide that a special meeting of stockholders may be called by the president or the Board of Directors. 67 Action Without a Meeting The Delaware General Corporation Law provides that any action required or permitted to be taken at a stockholders meeting may be taken without a meeting by written consent, unless a corporation's certificate of incorporation provides otherwise. Hanover's certificate of incorporation does not provide otherwise. The Oklahoma General Corporation Act provides that any action required or permitted to be taken at a stockholders meeting may be taken without a meeting by written consent, unless a corporation's certificate of incorporation or bylaws provides otherwise, provided however, that if a corporation's stock is registered under the Securities Exchange Act of 1934, as amended, and it has 1,000 or more shareholders of record, the written consent must be signed by all of the holders of the outstanding shares entitled to vote. OEC's bylaws provides that shareholders may not act by written consent. Inspection of Stockholder List The Delaware General Corporation Law permits any stockholder of record to inspect the stockholder list for any purpose reasonably related to the person's interest as a stockholder. The Oklahoma General Corporation Act permits any stockholder of record to inspect the stockholder list for any purpose reasonably related to the person's interest as a stockholder. Limitation of Directors' Liability As permitted by the Delaware General Corporation Law, Hanover's certificate of incorporation provides that a director shall not be personally liable for monetary damages for breach of fiduciary duty as a director, except for liability for: . any breach of the director's duty of loyalty to Hanover or its stockholders; . acts and omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . liability associated with the unlawful payment of dividends or an unlawful stock purchase or redemption; or . any transaction from which the director derived an improper personal benefit. As permitted by the Oklahoma General Corporation Act, OEC's certificate of incorporation provides that a director shall not be personally liable for monetary damages for breach of fiduciary duty as a director, except for liability for: . any breach of the director's duty of loyalty to OEC or its stockholders; . acts and omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . liability associated with the unlawful payment of dividends or an unlawful stock purchase or redemption; or . any transaction from which the director derived an improper personal benefit. 68 Indemnification of Directors and Officers The Delaware General Corporation Law provides that a corporation: . may indemnify a director or officer who is a party to any action or proceeding by reason of his position with the corporation against expenses, judgments, fines and settlements actually and reasonably incurred if that person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; . may indemnify a director or officer who is a party to any action by or in the right of the corporation against expenses actually and reasonably incurred by the person in connection with the defense or settlement of the action if the person acted in good faith and in a manner the person believed to be in or not opposed to the best interests of the corporation, provided that, if such person is adjudged to be liable to the corporation, indemnification of expenses is permitted only if and to the extent determined by the court in the proceeding; . shall indemnify a director or officer against expenses actually and reasonably incurred in successfully defending, on the merits or otherwise, any claim, issue or matter in any action or proceeding referred to above; and . may advance a director or officer the expenses incurred in defending any action, if the corporation first receives a commitment from the person to repay the amounts advanced if it is ultimately determined that the person is not entitled to indemnification. Hanover's bylaws provide for indemnification of its officers and directors to the fullest extent provided by law. The Oklahoma General Corporation Act provides that a corporation: . may indemnify a director or officer who is a party to any action or proceeding by reason of his position with the corporation against expenses, judgments, fines and settlements actually and reasonably incurred if that person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; . may indemnify a director or officer who is a party to any action by or in the right of the corporation against expenses actually and reasonably incurred by the person in connection with the defense or settlement of the action if the person acted in good faith and in a manner the person believed to be in or not opposed to the best interests of the corporation, provided that, if such person is adjudged to be liable to the corporation, indemnification of expenses is permitted only if and to the extent determined by the court in the proceeding; . shall indemnify a director or officer against expenses actually and reasonably incurred in successfully defending, on the merits or otherwise, any claim, issue or matter in any action or proceeding referred to above; and . may advance a director or officer the expenses incurred in defending any action, if the corporation first receives a commitment from the person to repay the amounts advanced if it is ultimately determined that the person is not entitled to indemnification. OEC's bylaws provide for indemnification of its officers and directors to the fullest extent provided by law. 69 Dissenters' and Appraisal Rights Under the Delaware General Corporation Law, a stockholder of a corporation who does not vote in favor of certain merger or consolidation transactions and who demands appraisal of his shares in connection therewith may, under varying circumstances, be entitled to appraisal rights pursuant to which such stockholder may receive cash in the amount of the fair value of his shares together with a fair rate of interest, if any, in lieu of the consideration he would otherwise receive in the transaction. Unless the corporation's certificate of incorporation provides otherwise, appraisal rights are not available: . in connection with the merger or consolidation with another corporation the shares of which are either listed on a national securities exchange (including the New York Stock Exchange) or designated as a national market security on Nasdaq or are held of record by more than 2,000 holders unless, in connection with the transaction, the stockholders will receive for their stock anything other than shares of stock of the surviving corporation, shares of any other corporation which are either listed on a national securities exchange or designated as a national market security on Nasdaq or held of record by more that 2,000 holders, or cash in lieu of fractional shares of the surviving corporation; or . to stockholders of a corporation surviving a merger if no vote of such stockholders is required to approve the merger or consolidation. Hanover's certificate of incorporation does not provide for appraisal rights where such rights are not afforded by the Delaware General Corporation Law. Under the Oklahoma General Corporation Act, a stockholder of a corporation or other business entity who does not vote in favor of certain merger, consolidation or statutory share acquisition transactions, and each stockholder of an issuing public corporation of which an acquiring person has been accorded full voting rights for a majority of the total voting power of the corporation under the Oklahoma Control Shares Act (described below), and who demands appraisal of his shares in connection therewith may, under varying circumstances, be entitled to appraisal rights pursuant to which such stockholder may receive cash in the amount of the fair value of his shares together with a fair rate of interest, if any, in lieu of the consideration he would otherwise receive in the transaction. Unless the corporation's certificate of incorporation provides otherwise, appraisal rights are not available: . in connection with the merger or consolidation with another corporation the shares of which are either listed on a national securities exchange (including the New York Stock Exchange) or designated as a national market security on Nasdaq or are held of record by more than 2,000 holders unless, in connection with the transaction, the stockholders will receive for their stock anything other than shares of stock of the surviving corporation, shares of any other corporation which are either listed on a national securities exchange or designated as a national market security on Nasdaq or held of record by more that 2,000 holders, or cash in lieu of fractional shares of the surviving corporation; or . to stockholders of a corporation surviving a merger if no vote of such stockholders is required to approve the merger or consolidation. OEC's certificate of incorporation does not provide for appraisal rights where such rights are not afforded by the Oklahoma General Corporation Act. 70 Oklahoma Control Shares Act Not Applicable The Oklahoma General Corporation Act provides that, with certain exceptions, whenever an acquiring person acquires shares of an issuing public corporation that (if permitted to vote) would give the acquiring person, directly or indirectly and individually or in association with others, one-fifth, one-third or a majority or more of the voting power in the election of directors of the corporation (a "controlling interest"), the newly acquired control shares will obtain only such voting rights as are conferred by a resolution of the stockholders of the corporation approved at a special or annual meeting. Except as otherwise provided by the certificate of incorporation of the issuing public corporation, a resolution of the stockholders granting voting rights to the control shares acquired by an acquiring person must be approved by the holders of a majority of the voting power of the corporation and, in certain instances, by the holders of a majority of each class or series of stock, if any, whose preferences or other rights would be changed by reason of the acquisition. A corporation is an "issuing public corporation" if it is organized in the state of Oklahoma and has at least 1,000 shareholders and (i) at least 10% of the shareholders or the holders of at least 10% of its shares are Oklahoma residents, or (ii) at least 10,000 of its shareholders are Oklahoma residents. Rights Plan Hanover has not adopted a stockholders rights plan. OEC has not adopted a stockholders rights plan. Interested Stockholder Transactions The Delaware General Corporation Law provides that, subject to certain exceptions, a corporation may not engage in any business combination with any "interested stockholder" (generally defined to mean any beneficial owner of more than 15% of the corporation's voting stock) for a three-year period following the date that stockholder becomes an interested stockholder unless certain actions are taken by the corporation's board of directors or stockholders. See "Description of Hanover Capital Stock--Delaware General Corporation Law." The Oklahoma General Corporation Act provides that, subject to certain exceptions, a corporation may not engage in any business combination with any "interested stockholder" (generally defined to mean any beneficial owner of more than 15% of the corporation's voting stock) for a three-year period following the date that stockholder becomes an interested stockholder unless certain actions are taken by the corporation's board of directors or stockholders. 71 LEGAL MATTERS The legality of the Hanover common stock offered by this proxy statement/prospectus will be passed upon for Hanover by its counsel, Latham & Watkins, Chicago, Illinois. EXPERTS The financial statements incorporated in this proxy statement/prospectus by reference to the Annual Report on Form 10-K of Hanover Compressor Company for the year ended December 31, 1999 and the audited historical financial statements of the Dresser-Rand Compression Services Rental and Packaging Division included under item 7(a) of Hanover Compressor Company's Current Report on Form 8-K/A dated November 13, 2000 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 financial statements of OEC Compression Corporation included in the proxy statement/prospectus to the extent and for the periods indicated in their report have been audited by Arthur Andersen LLP, independent public accountants and are included herein in reliance upon the authority of said firm as experts in giving said report. The statements of operations, changes in stockholders' equity and cash flows of OEC Compression Corporation for the year ended December 31, 1997, included in this proxy statement/prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION Hanover and OEC file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information we file with the Securities and Exchange Commission at the following locations: Public Reference Room New York Regional Office Chicago Regional Office 450 Fifth Street, N.W. 7 World Trade Center Citicorp Center Room 1024 Suite 1300 500 West Madison Street Washington, D.C. 20549 New York, New York 10048 Suite 1400 Chicago, Illinois 60661 You may call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our Securities and Exchange Commission filings are also available to the public from commercial document retrieval services and at the web site maintained by the Securities and Exchange Commission at "http://www.sec.gov." In addition, you may inspect reports, proxy statement and other information that we file with the New York Stock Exchange at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005. The Securities and Exchange Commission allows us to "incorporate by reference" information into this proxy statement/prospectus, which means that we can disclose important information to you by referring you to another document filed separately with the Securities and Exchange Commission. This proxy statement/prospectus incorporates by reference the documents set forth below that we have previously filed with the Securities and Exchange Commission. These documents contain important information about our companies and their finances. 72 The following Hanover documents filed with the Commission are incorporated by reference in this proxy statement/prospectus: 1. Annual Report on Form 10-K for the year ended December 31, 1999; 2. Quarterly Report on From 10-Q filed with the Securities and Exchange Commission on November 14, 2000; 3. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2000; 4. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2000; 5. Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2000; 6. Current Report on Form 8-K/A filed with the Securities and Exchange Commission on November 13, 2000; 7. Two Current Reports on Form 8-K filed with the Securities and Exchange Commission on November 9, 2000; 8. Current Report on Form 8-K filed with the Securities and Exchange Commission on September 14, 2000; 9. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 19, 2000; 10. Two Current Reports on Form 8-K filed with the Securities and Exchange Commission on July 13, 2000; 11. Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2000; 12. Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2000; and 13. Two Current Reports on Form 8-K filed with the Securities and Exchange Commission on May 5, 2000. We are also incorporating by reference all additional documents that we may file with the Securities and Exchange Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between the date of this proxy statement/prospectus and the date of the OEC special meeting. Hanover filed a registration statement on Form S-4 to register with the Securities and Exchange Commission the Hanover common stock to be issued to the OEC stockholders in the merger. This proxy statement/prospectus is a part of that registration statement and constitutes a prospectus of Hanover in addition to being a proxy statement of OEC for its meeting. As allowed by Securities and Exchange Commission rules, this proxy statement/prospectus does not contain all the information you can find in the registration statement or the exhibits to the registration statement. Any statement contained in a document incorporated or deemed to be incorporated by reference into this proxy statement/prospectus will be deemed modified or superseded for purposes of this proxy statement/prospectus to the extent that a statement contained in this proxy statement/prospectus or in any subsequently filed document that also is or is deemed to be incorporated by reference in this proxy statement/prospectus modifies or supersedes that statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement/prospectus. Hanover has supplied all information contained or incorporated by reference in this proxy statement/prospectus relating to Hanover. OEC has supplied all information contained or incorporated by reference in this proxy statement/prospectus relating to OEC. 73 You can obtain any of the documents incorporated by reference through us or the Securities and Exchange Commission. Documents incorporated by reference are available from us without charge, excluding all exhibits unless we have specifically incorporated by reference an exhibit in this proxy statement/prospectus. You may obtain a copy of any document incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone at the following address: Hanover Compressor Company 12001 N. Houston Rosslyn Houston, Texas 77086 Telephone: (281) 447-8787 If you would like to request documents from us, please do so by January 19, 2001 to receive them before the OEC special meeting. You should rely only on the information contained or incorporated by reference in this proxy statement/prospectus to vote on the matters being considered at the meetings. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement/prospectus. This proxy statement/prospectus is dated December 27, 2000. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than December 27, 2000, and neither the mailing of the proxy statement/prospectus to stockholders nor the issuance of Hanover common stock in the merger shall create any implication to the contrary. 74 INDEX TO OEC CONSOLIDATED FINANCIAL STATEMENTS
Page ---- DECEMBER 31, 1999, 1998 AND 1997 Report of Independent Public Accountants................................ F-2 Report of Independent Accountants....................................... F-3 Consolidated Balance Sheets as of December 31, 1999 and 1998............ F-4 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998, and 1997................................ F-6 Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1998 and 1997.................................................... F-7 Notes to the Consolidated Financial Statements.......................... F-8 SEPTEMBER 30, 2000 AND 1999 Consolidated Balance Sheets as of September 30, 2000 and 1999........... F-24 Consolidated Statements of Operations for the Nine Months Ended September 30, 2000 and September 30, 1999.............................. F-25 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and September 30, 1999.............................. F-26 Notes to the Consolidated Financial Statements for the Nine Months Ended September 30, 2000..................................................... F-27
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of OEC Compression Corporation: We have audited the accompanying consolidated balance sheets of OEC Compression Corporation (an Oklahoma Corporation) as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OEC Compression Corporation as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Dallas, Texas March 27, 2000 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of OEC Compression Corporation We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of OEC Compression Corporation (an Oklahoma Corporation) for the year ended December 31, 1997. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of OEC Compression Corporation for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP Tulsa, Oklahoma March 30, 1998 F-3 OEC COMPRESSION CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, ------------------ 1999 1998 -------- -------- (In thousands, except share amount) Current Assets: Cash and cash equivalents................................ $ 405 $ 7 Accounts receivable, less allowance for doubtful accounts of $197 and $109 in 1999 and 1998, respectively......... 2,163 3,177 Accounts receivable-related party (Note 10).............. 255 60 Unbilled accounts receivable............................. 119 72 Prepaid Assets........................................... 151 300 Compressors and compressor parts inventory............... 6,193 6,293 Other.................................................... 84 -- -------- -------- Total Current Assets................................... 9,370 9,909 Property and equipment, less depreciation of $18,344 and $46,289 in 1999 and 1998, respectively (Note 5)........... 95,093 94,592 Interest receivable-related party (Note 10)................ 52 30 Notes receivable-related party (Note 10)................... 332 332 Goodwill and other intangibles, net of amortization of $960 in 1999 and $409 in 1998.................................. 1,544 2,057 Other assets............................................... 2 1 -------- -------- Total Assets............................................... $106,393 $106,921 ======== ======== Current Liabilities: Accounts payable and accrued liabilities................. $ 5,324 $ 5,255 Accounts payable-related party (Note 10)................. 12 35 Current portion of capital lease obligations (Note 7).... 195 319 Current portion of long-term debt (Note 6)............... 2,918 -- -------- -------- Total Current Liabilities.............................. 8,449 5,609 Long-term debt (Note 6).................................... 58,381 58,829 Capital lease obligations (Note 7)......................... 1,107 1,354 Deferred income taxes (Note 8)............................. 9,802 10,216 Other...................................................... -- 89 -------- -------- Total Liabilities.......................................... 77,739 76,097 -------- -------- Minority interest.......................................... -- 2,032 Stockholders' Equity: Preferred stock, $1.00 par value, 1,000,000 Shares authorized, none issued......................... -- -- Common stock, $.01 par value, 60,000,000 shares authorized, 29,171,211 and 29,171,211 shares issued with 28,986,711 and 29,162,044 shares outstanding in 1999 and 1998, respectively...................................... 291 291 Additional paid-in capital............................... 31,841 31,841 Accumulated deficit...................................... (3,210) (3,331) Treasury stock, at cost (184,500 and 9,167 shares in 1999 and 1998, respectively)................................. (268) (9) -------- -------- Total Stockholders' Equity................................. 28,654 28,792 -------- -------- Total Liabilities and Stockholders' Equity................. $106,393 $106,921 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 OEC COMPRESSION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------- 1999 1998 1997 ------- ------- ------- (In thousands, except for per share amounts) Revenues: Compressor rentals, service and treating fees..... $23,353 $23,125 $12,363 Compressor sales and remanufacturing.............. 405 708 979 Oil and gas sales................................. 1,399 2,409 2,685 ------- ------- ------- Total revenues.................................. 25,157 26,242 16,027 ------- ------- ------- Operating Expenses: Operating costs-rentals, service and treating fees............................................. 9,488 9,700 5,063 Cost of compressor sales and remanufacturing...... 274 672 941 Operating costs-oil and gas....................... 470 728 804 Depreciation, depletion and amortization.......... 6,346 5,970 3,687 Inventory write-down.............................. -- -- 404 Shop closing costs................................ -- -- 307 General and administrative.......................... 3,923 4,299 4,110 Asset Impairment.................................... -- 162 -- ------- ------- ------- Total expenses.................................. 20,501 21,531 15,316 ------- ------- ------- Income from operations.............................. 4,656 4,711 711 ------- ------- ------- Other income (expense): Gain (loss) on sale of assets..................... 276 (22) 10 Interest and other income......................... 91 122 52 Interest expense.................................. (5,228) (4,536) (1,884) Contingent warrant expense........................ -- -- (1,440) Minority interest in results of oil and gas operations....................................... (88) (146) (60) ------- ------- ------- (4,949) (4,582) (3,322) ------- ------- ------- Net income before income taxes and extraordinary item............................................... (293) 129 (2,611) Income tax (expense) benefit........................ 414 (75) 924 ------- ------- ------- Net income (loss) before extraordinary item......... 121 54 (1,687) Extraordinary item: Write-off of unamortized debt issue costs on debt retirement (net of $28 tax)...................... -- (42) -- ------- ------- ------- Net income.......................................... $ 121 $ 12 $(1,687) ======= ======= ======= Basic and dilutive net income before extraordinary item per common share.............................. $ .00 $ .00 $ (.07) ======= ======= ======= Extraordinary item.................................. $ .00 $ .00 $ .00 ======= ======= ======= Basic and dilutive net income per common share...... $ .00 $ .00 $ (.07) ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 OEC COMPRESSION CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands)
Deferred Additional Retained Expense-- Common Paid-In Earnings Treasury Contingent Stock Capital (Deficit) Stock Warrants Total ------ ---------- --------- -------- ---------- ------- Balance, December 31, 1996................... $210 $17,692 $(1,656) $ (9) $ (1,440) $14,797 Exercise of stock options.............. 1 73 -- -- -- 74 Issuance of shares in connection with Ouachita acquisition (7.6 million shares).............. 76 12,464 -- -- -- 12,540 Issuance of shares in connection with settlement of liability (Note 2)... 3 698 -- -- -- 701 Vesting of contingent warrants............. -- -- -- -- 1,440 1,440 Warrants issued in connection with secured senior subordinated term note................. -- 870 -- -- -- 870 Net loss.............. -- -- (1,687) -- -- (1,687) ---- ------- ------- -------- -------- ------- Balance, December 31, 1997................... 290 31,797 (3,343) (9) -- 28,735 ---- ------- ------- -------- -------- ------- Exercise of stock options.............. 1 44 -- -- -- 45 Net Income............ -- -- 12 -- -- 12 ---- ------- ------- -------- -------- ------- Balance, December 31, 1998................... 291 31,841 (3,331) (9) -- 28,792 ---- ------- ------- -------- -------- ------- Trade airplane for treasury stock....... -- -- -- (259) -- (259) Net Income............ -- -- 121 -- -- 121 ---- ------- ------- -------- -------- ------- Balance, December 31, 1999................... $291 $31,841 $(3,210) $ (268) $ -- $28,654 ==== ======= ======= ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements. F-6 OEC COMPRESSION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Cash flows from operating activities: Net income (loss).............................. $ 121 $ 12 $ (1,687) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation, and amortization...... 6,346 5,970 3,687 Deferred taxes................................. (414) 102 (709) Contingent warrant expense..................... -- -- 1,440 Minority interest oil and gas operations....... 88 146 60 Accounts and notes receivable.................. (185) (535) (1,131) Compressors and parts inventory................ 101 (2,706) (209) Accounts payable and accrued liabilities....... 906 272 720 Other.......................................... (279) 465 27 -------- -------- -------- Net cash provided by operating activities.... 6,684 3,726 2,198 -------- -------- -------- Cash flows from investing activities: Acquisitions of equipment...................... (11,965) (21,056) (11,788) Acquisition of subsidiary...................... -- -- (23,831) Proceeds from sale assets...................... 2,202 846 353 Additions to oil and gas properties............ (108) (2,241) (877) Increase in goodwill and other assets.......... (48) (1,275) (525) -------- -------- -------- Net cash used in investing activities........ (9,919) (23,726) (36,668) -------- -------- -------- Cash flows from financing activities: Payments of capital lease obligations.......... (371) (420) (144) Proceeds of long-term debt..................... 2,477 45,321 40,336 Note due to proceeds from equipment sale....... 2,000 -- -- Payments on long-term debt..................... (473) (25,040) (5,805) Proceeds of stock issuance..................... -- 45 74 Minority interest capital contributions........ -- 100 -- -------- -------- -------- Net cash provided by financing activities.... 3,633 20,006 34,461 -------- -------- -------- Net increase (decrease) in cash.................. 398 6 (9) Cash beginning of year........................... 7 1 10 -------- -------- -------- Cash end of year................................. $ 405 $ 7 $ 1 ======== ======== ======== Supplemental disclosure Interest paid.................................. $ 5,074 $ 4,062 $ 1,646 ======== ======== ======== Income taxes paid.............................. $ -- $ -- $ 35 ======== ======== ======== Non-cash investing and financing activities: Acquisition of subsidiary...................... $ -- $ -- $ -- Capital leases assumed....................... -- -- 608 Issuance of common stock..................... -- -- 12,540 Issue warrants for secured senior term note.... -- -- 870 Issuance of common stock in connection With settlement of liability (Note 2)........ -- -- 701 Contributions by minority interest owner....... -- 368 1,358 Capital leases of compressor equipment......... -- 1,629 --
The accompanying notes are an integral part of the consolidated financial statements. F-7 OEC COMPRESSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 Summary of Significant Accounting Policies Nature of Business OEC Compression Corporation (an Oklahoma Corporation), formerly Equity Compression Services Corporation, formerly Hawkins Energy Corporation (the "Company") is engaged in the leasing, remanufacturing and direct sale of gas compression equipment to operators of producing natural gas wells and gas gathering systems and in the production of natural gas and oil. Its principal geographical operating areas lie within the states of Alabama, Mississippi, Louisiana, Oklahoma, Arkansas, New Mexico, Kansas and Texas. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Ouachita Energy Corporation ("Ouachita"), Equity Leasing Corporation, Sunterra Energy Corporation ("Sunterra") and through July 2, 1999, its 82% owned oil and gas venture Sunterra Petroleum Company, L.L.C. ("Sunterra L.L.C.") which was sold. All intercompany transactions have been eliminated. Cash Equivalents The Company includes in cash equivalents all investments with original maturities of three months or less at the date of purchase, which are readily convertible into known amounts of cash. Compressors and Compressor Parts Inventory Compressors and compressor parts are carried at the lower of cost or market, using specific identification of costs and weighted average costs, respectively. At December 31, compressor and compressor parts inventory consisted of:
1999 1998 ------ ------ (In thousands) Compressor Work in Progress................................ $1,049 $2,844 Cylinders.................................................. 1,522 1,475 Engines.................................................... 770 763 Parts and Supplies......................................... 2,852 1,211 ------ ------ $6,193 $6,293 ====== ======
Oil and Gas Operations During October 1997, the Company through its wholly owned subsidiary, Sunterra, entered into a venture with Prize Petroleum, L.L.C. ("Prize") of Tulsa, Oklahoma, to form Sunterra L.L.C. Sunterra L.L.C. was capitalized with all of the Company's oil and gas properties and oil and gas properties contributed by Prize. At June 30, 1999, the Company had an approximate 82% ownership in Sunterra L.L.C. The Company had effective control over the operations of Sunterra L.L.C. and has consolidated its results since its formation, October 1, 1997 until the sale of its interest in the Sunterra L.L.C. to Prize on July 2, 1999. On July 2, 1999, Sunterra sold 100% of its interest in Sunterra L.L.C. to Prize. Sunterra received $1 million in cash and the Will-O-Mills gas treating plant located in southwest Texas. The Will-O-Mills gas treating plant is a 300 gpm amine plant, which extracts carbon dioxide, and minor amounts of hydrogen sulfide from natural gas flowed to the plant by area producers under long-term treating contracts. The Sunterra L.L.C sale effectively removed the Company from the oil and gas production business. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Prior to the sale of the Sunterra L.L.C. the Company accounted for its oil and gas exploration and development activities on the full cost method of accounting prescribed by the Securities and Exchange Commission ("SEC"). Accordingly, all productive and non-productive costs incurred in connection with the acquisition, exploration and development of oil and gas reserves are capitalized and amortized using the units-of-production method based on proved oil and gas reserves. Beginning in 1997, the Company's oil and gas reserves were estimated by a petroleum engineer who was an employee of the Company. The depreciation, depletion and amortization rates were $.62, $.51 and $.43 per equivalent mcf produced in 1999, 1998 and 1997, respectively. In the event the unamortized cost of oil and gas properties being amortized exceeds the full-cost ceiling as defined by the SEC, the excess is charged to expense in the period during which such excess occurs. Sales and abandonments of properties were accounted for as adjustments of capitalized costs with no gain or loss recognized unless a significant amount of reserves were involved. Since all of the Company's oil and gas properties were located in the United States, a single cost center was used with one amortization base. Hedging Activity As a part of its risk management program, Sunterra L.L.C. entered into non- traded natural gas price swap contracts. Gains and losses related to the contracts were deferred and recognized in income when the hedging transaction occurs. Prior to the sale of the oil and gas properties, Sunterra L.L.C. had recognized a gain of $137,000 due to hedging activity. Goodwill and Other Intangibles Goodwill is amortized using the straight-line method over the estimated benefit periods of 24 to 30 years. Non-compete agreements are amortized using the straight-line method over the life of the agreements of one to three years. Debt issue costs are amortized using the straight-line method over the life of the agreements ranging from 7 to 10 years. Cash Deficit On March 10, 1998, the Company replaced its existing senior bank credit facility with a new senior bank credit facility. The prior facility automatically funded or withdrew the balance in the Company's bank account daily. The new facility requires the Company to formally request advances to fund operations. This change has at times caused the Company to incur a cash deficit for financial reporting purposes due to outstanding checks, which will be funded through cash flow from operations or borrowings from the new facility. This cash deficit was necessary to maximize the Company's cash flow and in no way impairs the Company's ability to fund its daily operations. The cash deficit is included in the Company's Balance Sheet in the Current Liabilities section under the caption "accounts payable and accrued liabilities." At December 31, 1998, the Company had outstanding checks in excess of its cash balance of approximately $1.3 million. The aforementioned cash strategy was discontinued in 1999 when the bank facility was fully funded. At December 31, 1999, the Company had a positive cash balance. Income Taxes The Company uses Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." This standard requires the measurement of deferred tax assets for deductible temporary differences and deferred tax liabilities for taxable temporary differences. Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law; the effects of future changes in tax laws or rates are not included in the measurement. Deferred tax liabilities primarily result from the recognition of F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) depreciation, depletion and amortization in different periods for financial reporting and tax purposes. Income tax benefit or expense is the tax payable for the current year and the change during that year in deferred tax assets and liabilities. Stock-Based Compensation The Company applies Accounting Principles Board ("APB") Opinion No. 25 in accounting for its stock option plans. Under this standard, no compensation expense is recognized for grants of options which include an exercise price equal to or greater than the market price of the stock on the date of grant. Accordingly, based on the Company's grants in 1999, 1998 and 1997, no compensation expense has been recognized. As provided by SFAS No. 123 "Accounting for Stock-Based Compensation," the Company has disclosed the pro forma effects of recording compensation for such option grants based on their fair value in Note 9 to the financial statements. Concentrations of Credit Risk Financial instruments which subject the Company to concentrations of credit risk consist primarily of trade receivables with a variety of oil and gas companies. The Company generally does not require collateral related to receivables. Such credit risk is considered by management to be limited due to the large number of customers comprising the Company's customer base. Financial instruments, which are potentially subject to concentrations of credit risk, consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents are placed with high credit quality financial institutions to minimize risk. The carrying amounts of these instruments approximate fair value because of their short maturities. Fair values of the Company's financial instruments are estimated through a combination of management's estimates and by reference to quoted prices from market sources and financial institutions, if available. As of December 31, 1999, the fair market value of existing debt was equal to the carrying value of the existing debt. Capital Resources Although, the Company has generated income and cash flow from operations in 1999 and 1998, the Company has funded its fleet expansion capital expenditures through borrowings under its senior credit facility. As of December 31, 1999, the Company has no availability under its senior credit facility. The Company believes it could raise additional capital through a private or public equity or debt financing; however, the Company cannot assure that such financing would be available, or available under acceptable terms. If such financing proved unavailable, the Company believes that a significant reduction in capital expenditure related to the expansion of its compressor fleet would allow the Company to continue as a going concern through 2000. On January 4, 2000, the Company announced that the previously announced merger negotiations with Energy Transfer Company had been terminated. Further, the Company's Board of Directors had authorized certain board members to interview and engage an investment banker to explore strategic alternatives and steps to maximize shareholder value. The Company formally engaged a major investment bank in February 2000, for this purpose. All strategic alternatives are being explored including the possible sale of the Company. Shop Closing Costs In the fourth quarter of 1997, the Company recognized a $307,000 charge in connection with the closure of its Oklahoma City, Oklahoma, Kilgore, Texas and Columbia, Mississippi shop facilities. The charge was comprised of provisions for approximately $143,000 related to severance costs, approximately $130,000 for moving and relocation costs, approximately $23,000 for transfer bonuses and approximately $11,000 related to F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the loss on sale of the Columbia, Mississippi facility. Approximately $34,000 of the costs were paid in 1997. The remaining $273,000 of costs were paid during 1998. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Earnings Per Share Approximately 10,897,000 of common stock options and warrants outstanding at December 31, 1997, were excluded from the computation of dilutive earnings per share ("EPS") because their effect on EPS would have been anti-dilutive for that period. Basic EPS is computed based on weighted average number of shares of common stock outstanding during the period. Dilutive EPS is computed based on weighted average number of shares of common stock outstanding during the period adjusted for the effect of dilutive securities. The following is a reconciliation of basic and dilutive EPS computations:
Year Ended December 31, --------------------- 1999 1998 1997 ------ ------ ------- (In thousands) Basic: Net Income (loss)..................................... $ 121 $ 12 $(1,687) Weighted average shares of common stock outstanding... 29,026 29,154 24,196 ------ ------ ------- Basic EPS............................................. $ .00 $ .00 $ (.07) ====== ====== ======= Effect of dilutive securities: Warrants.............................................. 1,518 4,431 -- Common stock options.................................. 88 240 -- ------ ------ ------- 1,606 4,671 -- Dilutive: Net income (loss)..................................... $ 121 $ 12 $(1,687) Weighted average share of common stock outstanding and dilutive securities.................................. 30,632 33,825 24,196 ------ ------ ------- Dilutive EPS.......................................... $ .00 $ .00 $ (.07) ====== ====== =======
Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. Issued Accounting Pronouncements In December 1997, the Company adopted SFAS No. 129, "Disclosure of Information about Capital Structure," resulting in no material impact. In addition, in June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. These statements, were adopted in 1998 and did not have a material effect on the Company's financial position or results of operations. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In December 1998, the Company adopted Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires cost of start-up activities and organization costs to be expensed as incurred. The Company incurred a charge-off of unamortized original organizational costs upon adoption of SOP 98-5. The effect of adopting SOP 98-5 decreased the 1998 income from operations, net income and income per share (dilutive) by approximately $112,000, $69,000 and $.00, respectively. In June 1999, the FASB issued SFA No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," which is effective for all fiscal years beginning after June 15, 2000. If the Company had adopted SFAS No. 133 during 1999, there would be no effect on the Company's financial statements as the Company had no hedges outstanding at December 31, 1999. Although the future impact of adopting SFAS 133 has not been determined yet, the Company does not believe the impact will be material. NOTE 2 Acquisition of Subsidiary On August 6, 1997, the Company completed the acquisition of 100% of the common stock of Ouachita and the majority of the assets of both Ouachita Compression Group, LLC and Ouachita Energy Partners, LTD. Under the terms of the acquisition the Ouachita companies' shareholders received 7.6 million shares of the Company's common stock valued at $12,540,000, and approximately $24 million in cash and assumption of debt. The acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations of Ouachita are included in the Company's results of operations since the date of acquisition. The aggregate purchase price of $36,560,000 has been allocated as follows (in thousands): Current assets................................................... $ 3,305 Compressor equipment............................................. 41,730 Buildings and equipment.......................................... 2,210 Current liabilities.............................................. (2,507) Deferred income tax liability.................................... (8,178) ------- $36,560 =======
The following unaudited pro forma consolidated results of operations for the year ended December 31, 1997, assuming the acquisition occurred as of January 1, 1997, are as follows:
1997 ---- (In thousands, except per share amount) Revenue........................... $23,600 Net loss.......................... $(3,700) Loss per share.................... $ (.13)
A liability to the former owner of Ouachita totaling approximately $701,000 which was assumed in the acquisition was subsequently settled by the issuance of an additional 286,976 shares of the Company's common stock. NOTE 3 Sale of Common Stock and Issuance of Contingent Warrants Effective December 19, 1996, the Company sold to HACL, Ltd., a private investment group, 8,000,000 shares of its common stock and warrants which, upon satisfying certain vesting requirements, entitle the purchase of an additional 8,000,000 shares of its common stock at a price of $.91 per share, for aggregate consideration of $4,400,000. The Company reported the cash consideration received, net of related costs, of $4,400,000 as an addition to common stock and paid-in capital. The "fair value" of the warrants was estimated by an independent valuation firm to be $1,440,000, which the Company reported as an addition to paid-in capital offset by a deferred expense contra- equity account. A committee of the Board of Directors determined F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) that the warrants fully vested during the third quarter of 1997. Accordingly, the $1,440,000 was expensed in the third quarter of 1997. The warrants for the corresponding 8,000,000 shares of common stock have not been exercised as of December 31, 1999. NOTE 4 Provision to Reduce the Carrying Value of Other Equipment In December 1998 the Company as part of a Settlement Agreement (Note 10) agreed to exchange an airplane, owned by the Company, for shares of the Company's common stock and value related to a truck. It was determined during negotiations that the airplane be reduced to its estimated fair value of approximately $290,000, resulting in a provision to reduce the carrying value of the airplane of $162,000. NOTE 5 Property and Equipment
Year Ended December 31, ------------------------ 1999 1998 ------------ ----------- (In thousands) Land and building.............................. $ 1,938 $ 1,846 Oil and gas properties, full cost method....... -- 39,401 Compressor equipment........................... 109,401 95,763 Other equipment................................ 2,098 3,871 ------------ ----------- 113,437 140,881 Less accumulated depreciation, depletion and amortization.................................. 18,344 46,289 ------------ ----------- Net property and equipment..................... $ 95,093 $ 94,592 ============ ===========
Compressor equipment held by the Company for rental purposes is stated at cost and depreciated over the serviceable life of the equipment. Leased compressor equipment is depreciated on a straight-line basis over an estimated useful life of 12 to 20 years. Due to the nature of compressor equipment no depreciation is recorded for idle equipment not under contract. Depreciation is resumed when the compressor equipment is contracted. Associated with its acquisition of Ouachita, the Company changed its estimate of useful lives for certain of its compressor equipment to 15 to 20 years with capitalized overhauls on compressor rental equipment depreciated over five years. The effect of these changes decreased the 1997 loss from operations, net loss and loss per share (dilutive) by approximately $265,000, $165,000 and $.01, respectively. Buildings and other equipment are stated at cost and depreciated over their estimated useful lives of 30 years and 5 years, respectively. Repairs and maintenance are charged to expense as incurred and major overhauls and betterments are capitalized. Upon sale or retirement of equipment, the cost of the equipment disposed of and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Long-lived assets are evaluated for impairment whenever events or changes and circumstances indicate that the carrying value of an asset may not be recoverable. Assets determined to be impaired based on estimated undiscounted future net cash flows are reduced to estimated fair value. Changes in such estimates could cause the Company to reduce the carrying value of its property and equipment and goodwill. During 1999, the Company completed purchase leasebacks, where the Company bought compressors from our customers then leased the compressors back to its customers. The purchase leasebacks accounted for the expenditure of approximately $1.5 million and an increase in horsepower of over 10,000 with lease terms from six months to five years. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6 Long-Term Debt
Year Ended December 31, ----------------------- 1999 1998 ----------- ----------- (In thousands) Long-term debt consists of the following: Revolving line of credit due July 2001 (interest on loans at LIBOR and Prime) (a)(d).................. $ 40,000 $ 38,013 8.25% Revolving line of credit (a)................. -- -- 8.25% Revolving line of credit due December 1999 (b) (d)........................................... -- 1,617 Secured Senior Subordinated Term Note due July 2007 (c) (d)........................................... 14,256 14,199 Senior Floating Rate Secured Term Note due July 2004 (interest at LIBOR), (c) (d)................. 5,000 5,000 Notes payable other................................ 2,044 -- ----------- ----------- Total debt......................................... 61,300 58,829 Less current portion............................... 2,918 -- ----------- ----------- Total long-term debt............................... $ 58,382 $ 58,829 =========== ===========
- -------- (a) On March 10, 1998, the Company replaced its previously existing $20 million senior bank credit facility with a new senior bank credit facility. The initial maximum commitment was $40 million, which can be expanded to $60 million with the future addition of other participating financial institutions. The facility is a borrowing base revolver maturing in July , 2001, and due in its entirety at that time. The December 31, 1999, borrowing base of $47 million exceeds the $40 million commitment. Interest on the new facility is comprised of conforming and non-conforming borrowing bases which accrue interest at LIBOR plus 1.75% and LIBOR plus 2.25%, respectively. Initial borrowings are at Prime until converted to LIBOR loans. At December 31, 1999, the average interest rate on outstanding loans was 7.91%. The credit facility is collateralized by substantially all of the assets of the Company with the exception of the Company's gas treating plant. At December 31, 1999 the current available portion was zero. Beginning in July 2000, the $40 million commitment will decrease by $150,000 per month until due in July 2001. (b) In December 1997, Sunterra L.L.C., entered into a new $10 million bank revolving credit facility with borrowings limited to a borrowing base determined on the value of the underlying oil and gas reserves. This facility was assumed by Prize when they acquired the oil and gas properties. (c) In July 1997, the Company entered into senior subordinated term note agreements with The Prudential Insurance Company of North America ("Prudential") for $15 million and $5 million. The $15 million term note agreement contained a warrant purchase agreement authorizing Prudential to purchase up to 1 million shares of the Company's common stock at an initial exercise price of $2.80 per share until the termination date of the related term note. The fair value of the warrants, $870,000, was determined using the Black-Scholes model and was reported as an addition to paid-in capital and as a discount on the notes. The resulting term note amount of $14,130,000 will be accreted over the ten-year term using its effective interest rate of 11.14%. The Company's cash payout over the term of the notes is at the stated rate of 10.15%. The warrants were adjusted to an exercise price of $1.45 on July 2, 1999 and again on December 1, 1999 the warrants were repriced to an exercise price of $1.00 to garnish waivers of the debt covenants. The $5 million note accrues interest at LIBOR plus 2.25%. At December 31, 1999, the rate was 8.73%. (d) Covenants related to the debt agreements include the maintenance of specified levels of working capital, tangible net worth and debt service ratio, as defined by the agreements. Additionally, the agreements prohibit the payment of dividends and place limitations on the repurchase of shares of the Company's stock and the incurrence of new borrowings. During 1999, the Company was not in compliance with the interest coverage, G&A coverage, and EBITDA multiple covenants of its debt agreements, which were waived or modified by the lender. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-term debt maturities as of December 31, 1999, are $2,918,000, $39,126,000, $0, $0 and $5,000,000 in 2000, 2001, 2002, 2003 and 2004, respectively, with a remainder of $14,256,000 due in subsequent years. Based on the interest rates currently available to the Company for borrowings with similar terms and maturities, the long-term debt at December 31, 1999, approximates fair value. There was not any interest capitalized in 1999. The Company has generated income and cash flow from operations in 1999 and 1998, the Company has funded its fleet expansion capital expenditures through borrowings under its senior credit facility. As of December 31, 1999, the Company has no availability under its senior credit facility. The Company believes it could raise additional capital through a private or public equity or debt financing; however, the Company cannot assure that such financing would be available, or available under acceptable terms. If such financing proved unavailable, the Company believes that a significant reduction in capital expenditure related to the expansion of its compressor fleet would allow the Company to continue as a going concern through 2000. NOTE 7 Capital Leases The Company has compression equipment and vehicles under capital lease agreements with a cost of $1,699,000 and accumulated amortization of $394,000. Future minimum lease payments for the above assets under capital leases at December 31, 1999, are as follows (in thousands): 2000.............................................................. $ 311 2001.............................................................. 306 2002.............................................................. 516 2003.............................................................. 463 ------ Total minimum obligations......................................... 1,596 Interest.......................................................... (294) ------ Minimum obligations, net.......................................... 1,302 Current portion................................................... (195) ------ Long term portion................................................. $1,107 ======
NOTE 8 Income Taxes Consolidated income tax (benefit) expense for each of the three years in the period ended December 31, 1999, consists of the following components:
Year Ended December 31, -------------------------- 1999 1998 1997 -------- ------- -------- (In thousands) Current provision expense (benefit)............. $ -- $ -- $ (182) Deferred expense (benefit)...................... (414) 75 (742) -------- ------ -------- Total income tax expense (benefit).............. $ (414) $ 75 $ (924) ======== ====== ========
F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's effective tax rate on pre-tax income differs from the U.S. federal statutory regular tax rate as follows:
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- ------- ------- U.S. statutory regular tax rate............... (34)% 34% (34)% State taxes................................... (4)% 4% (4)% Goodwill and other............................ (9)% 20% 2 % Sale of oil and gas properties................ (94)% --% -- % -------- ------- ------- Total......................................... (141)% 58% (36)% ======== ======= =======
Deferred tax assets and liabilities are comprised of the following at December 31:
1999 1998 1997 ------ ------- ------- (In thousands) Deferred tax assets: Allowances for losses............................. $ 38 $ 41 $ 29 Net operating loss carryforward................... 8,588 6,175 3,132 Alternative minimum tax credit carryforward....... 610 602 602 Warrant expense deferred for income tax purposes.. 547 547 547 Miscellaneous gain................................ 16 -- -- Accounting method change for tax due to acquisition...................................... 137 274 411 ------ ------- ------- Gross deferred tax assets....................... 9,936 7,639 4,721 Deferred tax liabilities: Property and equipment--depreciation Depletion and amortization...................... 19,738 17,855 14,863 ------ ------- ------- Gross deferred tax liabilities.................. 19,738 17,855 14,863 ------ ------- ------- Net deferred tax liability.......................... $9,802 $10,216 $10,142 ====== ======= =======
At December 31, 1999, the Company had net operating loss carryforwards for regular tax purposes of $22,601,000, which expire in 2009 through 2019. NOTE 9 Compensation Plans Employee Stock Option Plan On August 8, 1989, the Board of Directors of the Company adopted and its stockholders approved an Employee Stock Option Plan (the "Stock Option Plan") which became effective on that date. An aggregate of 130,000 shares of common stock were initially available for sale upon exercise of options granted under the Stock Option Plan, provided that the number of shares available for options which may be granted under the Stock Option Plan will automatically be increased without action of the directors or stockholders of the Company to an amount equal to (when added to the number of shares of common stock subject to all other options granted by the Company) 8% of the issued and outstanding shares of common stock upon each issuance of shares of common stock occurring after February 28, 1990 (other than issuance of shares upon the exercise of options granted under the Stock Option Plan). The Board of Directors may make authorized but unissued common stock available for the exercise of options or it may utilize shares held in treasury. On February 4, 1999, the Board of Directors approved the issuance of 198,874 stock options under the Stock Option Plan. The Stock Option Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 and the options are not "incentive stock options," as such term is defined in Internal F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Code Section 422A. As of December 31, 1999, options to acquire 1,205,882 shares of common stock at prices ranging from $.50 to $2.25 were outstanding. Director Stock Option Plans On August 8, 1989, the Board of Directors adopted and the stockholders approved a Director Stock Option Plan (the "1989 Director Plan") which became effective on that date. An aggregate of 170,000 shares of common stock are available for sale upon exercise of options granted under the 1989 Director Plan. At December 31, 1999, options for 30,000 shares at a price of $2.50 were exercisable. As of December 31, 1999, no options had been exercised. The 1989 Director Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 and the options will not be "incentive stock options," as such term is defined in Internal Revenue Code Section 422A. On May 25, 1994, the Board of Directors adopted and the stockholders approved the 1994 Director Stock Option Plan which became effective on that date. Options to acquire an aggregate of 355,000 shares of common stock were initially granted; however, options to acquire 280,000 shares of common stock were surrendered for cancellation in 1996. At December 31, 1999, options for 75,000 shares at a price of $1.40 were exercisable. As of December 31, 1999, no options had been exercised. These options expire on May 24, 2004. On March 27, 1996, the Board of Directors adopted and on May 29, 1996, the stockholders approved the Director Stock Plan, which became effective on the date of its approval by the Company's stockholders. Under the Director Stock Plan, non-qualified stock options may be issued to non-employee directors of the Company. An aggregate of 500,000 shares of common stock are reserved for issuance upon the exercise of options granted under the Director Stock Plan. The Director Stock Plan provided for, effective upon its approval by the Company's stockholders, the automatic grant to eligible directors of an option to purchase either (i) 50,000 shares of common stock, if such eligible director had been an employee of the Company at any time, or (ii) 17,500 shares of common stock, if such eligible director had never been an employee of the Company. On each anniversary of each eligible director's election to the Board for the term as a director which he or she is currently serving, each such director will be granted an option to purchase 6,666 shares of common stock. In addition, upon an eligible director's initial election or appointment to the Board, such director will receive the grant of an option to purchase 10,000 shares of common stock. At December 31, 1999, options to acquire 302,488 shares of common stock at prices ranging from $.56 to $2.31 were outstanding. As of December 31, 1999, no options issued under the Director Stock Plan had been exercised. The Director Stock Plan is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974 and the options will not be "incentive stock options," as such term is defined in Internal Revenue Code Section 422A. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Activity pertaining to the Company's employee and director stock option plans is as follows:
Number of Weighted Average Shares Exercise Price --------- ---------------- Outstanding at December 31, 1996.................... 637,500 .81 Granted........................................... 1,404,240 1.86 Exercised......................................... (145,000) (.51) Canceled.......................................... -- -- --------- Outstanding at December 31, 1997.................... 1,896,740 1.61 Granted........................................... 163,664 1.61 Exercised......................................... (90,000) (.50) Canceled.......................................... (274,795) (1.98) --------- Outstanding at December 31, 1998.................... 1,695,609 $ 1.64 Granted........................................... 258,848 1.09 Exercised......................................... -- -- Canceled.......................................... (341,087) (1.70) --------- Outstanding at December 31, 1999.................... 1,613,370 $ 1.55 =========
OUTSTANDING OPTIONS
Weighted Average Weighted Number Remaining Average Exercise of Contractual Exercise Prices Shares Life* Price -------- ------- ----------- -------- $ .50-1.00..................................... 371,574 16.5 years $ .69 $1.00-2.00..................................... 595,994 25.6 years $1.35 $2.00-2.50..................................... 645,802 35.4 years $2.23
- -------- As of December 31, 1999, options on 1,069,532 shares were exercisable. * Upon termination of employment or board service the option term becomes four years from date of termination. The Company applies APB Opinion No. 25 in accounting for its employee and director stock option plans. Accordingly, based on the nature of the Company's grants of options, no compensation cost has been recognized in 1999, 1998, or 1997. Had compensation been determined on the basis of fair value pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation" net loss per share would have been as follows at December 31:
1999 1998 1997 ----- ----- ------- Net income (loss) (in thousands) As reported..................................... $ 121 $ 12 $(1,687) Pro forma....................................... $(151) $(294) $(1,805) Loss per share (dilutive) As reported..................................... $ .00 $ .00 $ (.07) Pro forma....................................... $(.01) $(.01) $ (.07)
The fair value of each option granted is estimated using the Black-Scholes model. The Company's estimated stock volatility was 68%, 75%, and 86% for 1999, 1998, and 1997, respectively, based on previous stock performance. Dividend yield was estimated to remain at zero with a risk-free interest rate of 6% for 1997 F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) through 1999. Expected life was estimated at four to eight years based on prior experience depending on the vesting periods involved and the make up of participating employees within each grant. The weighted average fair value of options granted during 1999, 1998, and 1997, as estimated using the Black- Scholes option pricing model, was $1.12, $1.31, and $1.06 respectively. Employee Benefit Plan Substantially all of the Company's employees are covered by a defined contribution 401(k) plan adopted in 1991. The Company matches 50% of the employee contributions up to a limit of 4% of employee annual earnings. All matching contributions are made in Company stock. Total expense related to the plan amounted to $79,000 in 1999, $87,000 in 1998, $50,000 in 1997. Other Non-qualified options for 15,000 shares at a price of $2.50 per share were granted to a former employee of the Company in 1990, all of which are currently exercisable with an expiration date of January 2030. NOTE 10 Transactions with Related Parties The Company transacts business with certain companies, which are directly controlled by members of the Company's Board of Directors and employees. The terms of these transactions are equivalent to the terms of transactions conducted with non-related parties. On December 16, 1998, the Company, Dennis Estis, the two other shareholders who granted a proxy to Mr. Estis and certain other parties entered into a Settlement Agreement. Among other things, the Settlement Agreement (i) prohibits Mr. Estis from participating in any proxy solicitation relating to certain actions, (ii) requires termination of the proxies granted to him by the two other shareholders, (iii) dismissed a lawsuit filed by Mr. Estis, (iv) released certain claims between the parties, (v) provided for a "standstill" agreement until June 30, 1999, (subject to possible extension and reinstatement as described below) prohibiting Mr. Estis from participating in enumerated actions relating to control of the Company and (vi) requires the Company to reimburse Mr. Estis for certain of his out-of-pocket expenses. The Company has agreed to use its best effort to sell or assist Mr. Estis to sell at least one- half of his shares of common Stock at $2.00 or more per share. If such a sale is not completed prior to June 30, 2000, then Mr. Estis' non-competition agreement shall be terminated except as to Mr. Estis' agreement not to solicit or hire employees of the Company. If the sale by Mr. Estis occurs prior to December 31, 2001, then the standstill agreement described above will be extended or reinstated, as the case may be, through December 31, 2001. As part of this settlement, Mr. Estis, in exchange for shares of the Company's common stock and the value of a truck, purchased an airplane from the Company. In closing this transaction the Company incurred an impairment of $162,000 on the airplane. Through its acquisition of Ouachita, the Company acquired note receivables of approximately $332,000 from the former owner of Ouachita, who is now a director of the Company and another party. Interest receivable related to these notes at December 31, 1999, 1998 and 1997, was approximately $52,000, $30,000 and $9,000, respectively. Interest on these notes accrues at the rate of 6.5% and is payable when the note matures. On December 31, 1997, the Company sold its facility located in Columbia, Mississippi to a current member of the Company's Board of Directors. The Company received $316,000 in cash resulting in a loss of $11,000. During 1999, the Company remitted payments to this related-party totaling approximately $499,000 for service work on compression component parts at this facility. The Company owed approximately $12,000 to the director related to the facility at December 31, 1999. The Company maintains a rent and expense sharing agreement with an affiliate. At December 31, 1999, 1998 and 1997, the Company was owed approximately $ 65,000, $40,000 and $11,000, respectively, from the affiliate. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company earned compressor rental revenues from affiliates totaling $809,000 in 1999, $279,000 in 1998, $341,000 in 1997. At December 31, 1999, the Company was owed approximately $ 255,000 on rental revenues earned in 1999. At December 31, 1998, the Company was owed approximately $60,000 on rental revenues earned in 1998. At December 31, 1997, the Company was owed approximately $135,000 on rental revenues earned in 1997. The Company leases the use of an airplane from an employee. As of December 31, 1999, the Company had paid approximately $16,000 under this arrangement. The Company paid its former Chairman of the Board $30,000 in total consulting fees through June 30, 1999. On February 8, 2000, the Company sold a 50% undivided interest in the Will- O-Mills gas treating plant for cash proceeds of $2,000,000 to an affiliate of HACL, LTD. NOTE 11 Commitments The Company leases compressor equipment under contracts with terms ranging from month-to-month to six years. The future revenues to be received under contracts at December 31, 1999, are $5,357,000, $2,439,000, $950,000, $679,000 and $7,000 in 2000, 2001, 2002, 2003 and 2004, respectively. The Company leases facilities for its corporate and field offices with lease terms ranging from month-to-month to three years. The Company has certain other operating leases for other facilities, office equipment and automobiles. Future minimum rental payments under these leases total $216,569 and $133,532 for 2000 and 2001, respectively. The Company's rental expenses were $ 389,000 ,$382,000, and $467,000 in 1999, 1998, and 1997, respectively. NOTE 12 Industry Segment Information Operations by Industry Segment
Year Ended December 31, ---------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Compressor and Gas Treating operations: Net revenues.................................... $23,758 $23,833 $13,342 Operating income (loss)......................... 4,192 3,938(/1/) (501) Identifiable assets (Note 5).................... 113,437 99,635 77,985 Capital expenditures............................ 11,835 21,056 11,788 Depreciation and amortization................... $ 6,017 $ 5,370 $ 3,278 Oil and gas:(/2/) Net revenues.................................... $ 1,399 $ 2,409 $ 2,685 Operating income................................ 464 773 1,212 Identifiable assets............................. 0 41,246 36,380 Capital expenditures............................ 108 2,241 877 Depreciation, depletion and amortization........ $ 329 $ 600 $ 409
- -------- (1) Includes a provision to reduce the carrying value of other equipment of $162,000 and a charge-off of the Company's unamortized original organizational costs of $112,000. (2) Oil and gas properties were sold July 2, 1999, with an effective date of June 30, 1999. F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 13 Subsequent Events On January 4, 2000, the Company announced that the previously announced merger negotiations with Energy Transfer Company had been terminated. Further, the Company's Board of Directors had authorized certain board members to interview and engage an investment banker to explore strategic alternatives and steps to maximize shareholder value. The Company formally engaged a major investment bank in February 2000, for this purpose. All strategic alternatives are being explored including the possible sale of the Company. On February 8, 2000, the Company sold a 50% undivided interest in the Will- O-Mills gas treating plant for cash proceeds of $2,000,000 to an affiliate. The Company expects to report a gain on the sale for the first quarter of 2000. NOTE 14 Oil and Gas Information (Unaudited as to Reserve Information) The Company sold all of its oil and gas producing properties on July 2, 1999 with the sale of its interest in Sunterra L.L.C. Capitalized costs for the years ended and costs incurred during the years ended were as follows:
December 31, ---------------- 1998 1997 ------- ------- (In thousands) Capitalized costs: Proved properties......................................... $39,401 $37,374 Unproved properties....................................... -- -- ------- ------- Total....................................................... 39,401 37,374 Less: Accumulated depreciation, depletion and amortization and provision to reduce carrying value....................... 32,568 31,824 ------- ------- Net capitalized costs................................... $ 6,833 $ 5,550 ======= ======= Costs incurred: Proved properties......................................... $ 2,026 $ -- Development............................................... 582 877 ------- ------- Total costs incurred........................................ $ 2,608 $ 877 ======= ======= 1998 1997 ------- ------- Results of operations for producing activities were as follows: Revenues.................................................... $ 2,409 $ 2,685 Production costs............................................ (728) (804) Depreciation, depletion and amortization.................... (600) (409) Income taxes................................................ (411) (538) ------- ------- Results of operations for producing activities activities (excluding overhead and financing costs)................... $ 670 $ 934 ======= =======
F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 1997 ------------ ----------- Oil Gas Oil Gas Bbls Mcf Bbls Mcf ---- ------ ---- ----- Proved Reserves: Beginning of year.................................. 603 9,425 930 4,989 Revision of estimates.............................. (164) 1,106 (321) 1,337 Extension and discoveries.......................... -- 268 -- 1,015 Purchase of reserves............................... 38 2,971 46 2,716 Sales of reserves.................................. (290) (36) -- -- Production......................................... (24) (1,014) (52) (632) ---- ------ ---- ----- End of Year........................................ 163 12,720 603 9,425 ==== ====== ==== ===== Proved Developed Reserves............................ 163 12,720 603 9,245 ==== ====== ==== =====
All of the Company's reserves were attributable to Sunterra L.L.C. for which there was an approximate 18% minority interest. Proved reserves are those quantities which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Oil and gas reserves cannot be measured exactly. Estimates of oil and gas reserves require extensive judgments of reservoir engineering data and are generally less precise than other estimates made in connection with financial disclosures. Assigning monetary values to such estimates does not reduce the subjectivity and changing nature of such reserve estimates. Indeed the uncertainties inherent in the disclosure are compounded by applying additional estimates of the rates and timing of production and the costs that will be incurred in developing and producing the reserves. The information set forth herein is therefore subjective and, since judgments are involved, may not be comparable to estimates submitted by other oil and gas producers. In addition, since prices and costs do not remain static and no price or cost escalation's or de- escalation's have been considered, the results are not necessarily indicative of the estimated fair market value of estimated proved reserves nor of estimated future cash flows. Standardized Measure of Discounted Future Net Cash Flows The standardized measure of discounted future net cash flows ("SMOG") was calculated using year-end prices and costs, and year-end statutory tax rates, adjusted for permanent differences, that relate to existing proved oil and gas reserves. Future net cash flows are as follows:
December 31, ------------------ 1998 1997 -------- -------- (In thousands) Future cash flows................................... $ 26,895 $ 29,730 Production costs.................................... (11,780) (11,849) Development costs................................... (147) -- Income tax expense.................................. (4,434) (6,790) -------- -------- Future net cash flows............................... 10,534 11,091 10% discount factor................................. (4,111) (4,232) -------- -------- Standardized measure of discounted future net cash flows.............................................. $ 6,423 $ 6,859 ======== ========
F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the principal factors comprising the changes in the standardized measure of discounted future net cash flows.
December 31, ---------------- 1998 1997 ------- ------- (In thousands) Standardized measure, beginning of year.................... $ 6,859 $10,238 Sales of oil and gas net of production costs............... (1,620) (1,822) Net changes in prices and production costs................. (2,362) (4,311) Extensions and discoveries less related costs.............. 180 687 Purchase of reserves....................................... 2,081 1,290 Sale of reserves........................................... (1,035) -- Revisions of previous estimates............................ 218 (707) Accretion of discount...................................... 602 885 Change in income tax expense............................... 1,500 599 ------- ------- Standardized measure, end of year.......................... $ 6,423 $ 6,859 ======= =======
All of the Company's reserves and standardized measure of discounted future net cash flows are attributable to Sunterra L.L.C., for which there was an approximate 18% minority interest. The Company's reserves were determined at December 31, 1998 using constant prices of approximately $9.51 per Bbl of oil and $1.99 per Mcf of gas. NOTE 15 SELECTED QUARTERLY UNAUDITED FINANCIAL DATA The table below sets forth selected unaudited financial information for each quarter of the last two years:
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 1999 Revenue............... $6,804 $6,429 $5,901 $6,023 Gross Profit.......... 1,307 1,047 998 1,304 Net Income............ 18 (175) 373 (94) Earnings per common share: Basic............... .00 (.01) .01 .00 Dilutive............ .00 (.01) .01 .00 1998 Revenue............... 6,133 6,560 6,499 7,050 Gross Profit.......... 1,441 1,587 1,223 460 Net Income............ 227 351 4 (570) Earnings per common share: Basic............... .01 .01 .00 (.02) Dilutive............ $ .01 $ .01 $ .00 $ (.02)
F-23 OEC COMPRESSION CORPORATION CONSOLIDATED BALANCE SHEETS UNAUDITED
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) Current Assets: Cash and cash equivalents........................ $ 8,689 $ 405 Accounts receivable, less allowances for doubtful accounts of $225 and $197 in 2000 and 1999, respectively.................................... 1,366 2,163 Accounts receivable--related party............... 131 255 Unbilled accounts receivable..................... 300 119 Prepaid Assets................................... 146 151 Compressors and compressor parts inventory....... 6,298 6,193 Other............................................ 75 84 -------- -------- Total current assets........................... 17,005 9,370 Property and equipment, less depreciation of $22,053 and $18,344 in 2000 and 1999, respectively...................................... 93,798 95,093 Interest receivable--related party................. 68 52 Notes receivable--related party.................... 332 332 Goodwill and other intangibles, net of amortization of $1,389 in 2000 and $960 in 1999................ 1,186 1,544 Other assets....................................... 1 2 -------- -------- Total assets................................... $112,390 $106,393 ======== ======== Current Liabilities: Accounts payable and accrued liabilities......... $ 4,086 $ 5,324 Accounts payable--related party.................. -- 12 Current portion of capital lease obligations..... 205 195 Current portion of long term debt................ 41,367 2,918 -------- -------- Total current liabilities...................... 45,658 8,449 Long-term debt..................................... 19,315 58,381 Capital lease obligations.......................... 954 1,107 Deferred income taxes.............................. 10,092 9,802 -------- -------- Total Liabilities.............................. 76,019 77,739 Stockholders' Equity: Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued.................. -- -- Common stock, $.01 par value, 60,000,000 shares authorized, 37,381,211 shares issued, and 28,986,711 shares outstanding on December 31, 1999............................................ 373 291 Additional paid-in capital....................... 39,039 31,841 Accumulated deficit.............................. (2,773) (3,210) Treasury stock, at cost (320,445 and 184,500 shares in 2000 and 1999 respectively)........... (268) (268) -------- -------- Total stockholders' equity..................... 36,371 28,654 -------- -------- Total Liabilities and Stockholders' Equity..... $112,390 $106,393 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-24 OEC COMPRESSION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, ------------- ------------- ------------- ------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- (In thousands, except per share amounts) Revenues: Compressor rentals, service and treating fees..................................... $5,275 $ 5,819 $16,473 $17,484 Compressor sales and re-manufacturing..... 97 82 198 286 Oil & gas sales........................... -- -- -- 1,399 ------ ------- ------- ------- Total revenues.......................... 5,372 5,901 16,671 19,169 ------ ------- ------- ------- Expenses: Costs--Compressor rentals, service and treating................................. 1,597 2,475 5,767 7,358 Costs-- compressor sales and re-manufacturing.... 51 59 108 180 Operating costs--oil and gas.............. -- -- -- 510 Depreciation, depletion and amortization.. 1,457 1,504 4,360 4,829 General and administrative................ 579 865 1,759 2,939 ------ ------- ------- ------- Total expenses.......................... 3,684 4,903 11,994 15,816 ------ ------- ------- ------- Income from operations...................... 1,688 998 4,677 3,353 ------ ------- ------- ------- Other income (expense): Merger related and employee retention expense.................................. (608) -- (608) -- Gain on sale of assets.................... 10 313 748 335 Interest income and other................. 135 7 173 78 Interest expense.......................... (1,426) (1,323) (4,263) (3,915) Minority interes.......................... -- -- -- (88) ------ ------- ------- ------- (1,889) (1,003) (3,950) (3,590) ------ ------- ------- ------- Income (loss) before income taxes........... (201) (5) 727 (237) Income tax benefit (expense)................ 72 378 (290) 454 ------ ------- ------- ------- Net (loss) income........................... $ (129) $ 373 $ 437 $ 217 ====== ======= ======= ======= Basic and dilutive net income (loss) per common share............................... $ .00 $ .01 $ .01 $ .01 ====== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-25 OEC COMPRESSION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
Nine Months Ended September 30, ---------------- 2000 1999 ------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 437 $ 217 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization.................. 4,360 4,784 Deferred income taxes..................................... 290 (454) Minority interest in results of oil and gas operations.... -- 88 Gain on sale of assets.................................... (748) -- Other..................................................... -- -- CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts and notes receivable............................. 724 677 Compressor and compressor parts inventory................. (105) 300 Accounts payable and accrued liabilities.................. (1,249) 6 Other..................................................... 55 1,384 ------- ------- Net cash provided (used) by operating activities........ 3,764 7,002 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of compressor and other equipment............ (3,978) (9,217) Proceeds from disposition of assets....................... 90 954 Proceeds from sale of 50% of gas treating assets.......... 2,000 -- Additions to oil and gas properties....................... -- (108) Increase in goodwill and other assets..................... (71) 20 ------- ------- Net cash provided (used) in investing activities........ (1,959) (8,351) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of long-term debt................................ 6 2,477 Sale of common stock...................................... 7,280 -- Payments on long-term debt................................ (664) (469) Payments on capital lease obligations..................... (143) (266) ------- ------- Net cash provided (used) by financing activities........ 6,479 1,742 ------- ------- Net increase in cash and cash equivalents................... 8,284 393 Cash and cash equivalents, beginning of period.............. 405 7 ------- ------- Cash and cash equivalents, end of period.................... $ 8,689 $ 400 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $ 4,263 $ 3,915 ======= ======= Income taxes paid......................................... $ -- $ -- ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-26 OEC COMPRESSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED NOTE 1 Organization and Basis of Presentation OEC Compression Corporation, formerly Equity Compression Services Corporation, formerly Hawkins Energy Corporation is engaged in the leasing, contract management, outsourcing, re-manufacturing and direct sale of gas compression equipment to operators of producing natural gas wells and gas gathering systems and in the production of natural gas and oil. Its principal geographical operating areas lie within the states of Alabama, Mississippi, Louisiana, Oklahoma, Arkansas, Kansas, New Mexico and Texas. The consolidated financial statements include the accounts of OEC, its wholly owned subsidiaries Ouachita Energy Corporation ("Ouachita"), Equity Leasing Corporation and Sunterra Energy Corporation ("Sunterra"). All intercompany transactions have been eliminated. In the opinion of OEC, the accompanying financial statements contain all adjustments necessary (all of which are of a normal recurring nature) to present fairly the financial position of OEC and its wholly owned subsidiaries as of September 30, 2000, and the results of its operations and cash flows for the periods ended September 30, 2000 and 1999. Certain prior year amounts have been reclassified to conform to the current year presentation. The financial statements should be read in conjunction with OEC's Form 10-K for the year-ended December 31, 1999. The year-end Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. NOTE 2 Property and Equipment
September 30, December 31, 2000 1999 ------------- ------------ (In thousands) Land and building................................. $ 1,939 $ 1,938 Compressor equipment and gas plant................ 111,776 109,401 Other equipment................................... 2,136 2,098 -------- -------- 115,851 113,437 Less accumulated depreciation..................... 22,053 18,344 -------- -------- Net property and equipment........................ $ 93,798 $ 95,093 ======== ========
NOTE 3 Transactions with Related Parties OEC transacts business with certain companies, which are directly controlled by members of OEC's Board of Directors and employees. The terms of these transactions are equivalent to the terms of transactions conducted with non- related parties. NOTE 4 Commitments OEC leases compressor equipment under contracts with terms ranging from month to month to six years. The future revenues to be received under contracts at September 30, 2000 are $2.1 million, $3.5 million, $1.6 million, $854,000 and $7,000 in 2000, 2001, 2002, 2003 and 2004, respectively. F-27 OEC COMPRESSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) UNAUDITED NOTE 5 Earnings per Share Earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding during the period. The following is a reconciliation of basic and dilutive EPS computations:
Three Months Nine Months Ended Ended September 30, September 30, ---------------- --------------- 2000 1999 2000 1999 ------- ------- ------- ------- (In thousands, except per share amounts.) Basic: Net income (loss)............................ $ (129) $ 373 $ 437 $ 217 Common stock................................. 37,061 28,987 32,253 29,040 ------- ------- ------- ------- Basic Earnings (loss) Per Share................ $ -- $ .01 $ .01 $ .01 ======= ======= ======= ======= Effect of dilutive securities: Warrants..................................... -- 1,135 -- 1,135 Common stock options......................... -- 97 71 97 ------- ------- ------- ------- -- 1,232 71 1,232 Dilutive: Net income (loss)............................ $ (129) $ 373 $ 437 $ 217 Common stock and dilutive securities......... 37,061 30,219 32,324 30,272 ------- ------- ------- ------- Dilutive Earnings (loss) Per Share............. $ .00 $ .01 $ .01 $ .01 ======= ======= ======= =======
NOTE 6 Merger with Hanover Compression On July 17, 2000, OEC and Hanover Compressor Company ("Hanover") announced the two companies had executed a definitive merger agreement under which Hanover will acquire OEC in an all-stock transaction. Under the terms of the merger agreement, OEC's common stock will be valued at $1.00 per share on the closing date of the merger. OEC's shares being acquired will be exchanged for newly issued Hanover common shares equal to the average of the closing price for Hanover common shares for the 20 day trading period ending two days prior to the merger. The conversion ratio is subject to a Hanover share price floor and ceiling of $30.00 and $32.50, respectively. One of the conditions to the consummation of the proposed merger between OEC and Hanover is the approval of the OEC shareholders of such merger. Under Securities and Exchange Commission rules, this approval must be done at a special meeting of the shareholders of OEC following delivery of a merger proxy and registration statement for the Hanover common stock to be issued to the OEC shareholders in the merger. In September of 2000, Hanover acquired the Dresser-Rand Compression Services Division ("DRCS") from Ingersoll-Rand Company and under SEC rules, the registration/proxy statement needed to include audited financial statements of DRCS and certain pro forma financial statements. The required DRCS audit was just recently completed. Hanover and OEC expect to file a proxy/registration statement shortly and to consummate the merger in either December of 2000 or early 2001. Due to the delay in filing the proxy/registration statement on November 14, 2000, the Company's Board of Directors and Hanover agreed to (i) extend the outside date for closing the merger from January 15, 2001 to March 1, 2001, (ii) agreed that actions and events that have occurred prior to November 14, 2000 are not material adverse changes under the Merger Agreement, (iii) change the definition of material adverse change in the merger agreement such that changes in the financial performance or condition of the Company will not be grounds for Hanover refusing to close the merger, and (iv) eliminated the requirement that the Company have in place an agreement for one of the Company's lenders to cancel certain warrants prior to the closing of the merger. F-28 OEC COMPRESSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) UNAUDITED Given the extended delay in closing the proposed merger of the Company and Hanover, on November 14, 2000 the Company's Board of Directors and Hanover agreed to enter into a management agreement whereby Hanover will assume management responsibilities for the Company's shop and field operations through completion of the merger. Hanover will receive monthly compensation under the agreement of $900,000 effective beginning in October of this year. The Company's senior management will continue to oversee all marketing, administrative, accounting and financial operations as well as oversight of OEC's shop and field management. F-29 ANNEX A AGREEMENT AND PLAN OF MERGER dated as of July 13, 2000 among Hanover Compressor Company Caddo Acquisition Corporation and OEC Compression Corporation TABLE OF CONTENTS
Page ---- ARTICLE I. THE MERGER................................................... A1 Section 1.1. Effective Time of the Merger.......................... A1 Section 1.2. Closing............................................... A1 Section 1.3. Effect of the Merger.................................. A2 Section 1.4. Certificate of Incorporation; Bylaws.................. A2 Section 1.5. Directors and Officers................................ A2 Section 1.6. Conversion of Capital Stock........................... A2 Section 1.7. Adjustment of Conversion Number....................... A2 Section 1.8. No Further Ownership Rights in Company Common Stock... A3 Section 1.9. No Fractional Shares.................................. A3 Section 1.10. Shares of Dissenting Shareholders..................... A3 Section 1.11. Company Options....................................... A3 Section 1.12. Tax Consequences...................................... A3 ARTICLE II. EXCHANGE OF CERTIFICATES.................................... A4 Section 2.1. Exchange Agent........................................ A4 Section 2.2. Exchange and Payment Procedures....................... A4 Section 2.3. Distributions with Respect to Unexchanged Shares...... A4 Section 2.4. Termination of Exchange Fund.......................... A5 Section 2.5. No Liability.......................................... A5 Section 2.6. Lost Certificates..................................... A5 Section 2.7. Withholding Rights.................................... A5 Section 2.8. Further Assurances.................................... A5 Section 2.9. Stock Transfer Books.................................. A5 Section 2.10. Affiliates............................................ A5 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF the Company.............. A6 Section 3.1. Organization of the Company and its Subsidiaries...... A6 Section 3.2. Capitalization........................................ A6 Section 3.3. Authority; No Conflict; Required Filings and Consents; Recommendation of the Board.......................... A7 Section 3.4. SEC Filings; Financial Statements..................... A8 Section 3.5. No Undisclosed Liabilities............................ A9 Section 3.6. Absence of Certain Changes or Events.................. A9 Section 3.7. Taxes................................................. A9 Section 3.8. Title to Assets....................................... A10 Section 3.9. Real Property......................................... A10 Section 3.10. Intellectual Property................................. A12 Section 3.11. Agreements, Contracts and Commitments................. A12 Section 3.12. Litigation............................................ A13 Section 3.13. Environmental Matters................................. A13 Section 3.14. Employee Benefit Plans................................ A14 Section 3.15. Compliance with Law; Authorizations................... A16 Section 3.16. Registration Statement and Proxy Statement............ A17 Section 3.17. Labor Matters......................................... A17 Section 3.18. Insurance............................................. A17 Section 3.19. Year 2000 Problem..................................... A17 Section 3.20. Opinion of Financial Advisor.......................... A17 Section 3.21. Brokers............................................... A17 Section 3.22. Transactions With Affiliates.......................... A17
i
Page ---- Section 3.23. No Excess Parachute or Nondeductible Payments......... A18 Section 3.24. State Anti-Takeover Statutes.......................... A18 Section 3.25. Accuracy of Information............................... A18 Section 3.26. Inventory............................................. A18 Section 3.27. Customers and Suppliers............................... A18 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT and Merger sub..... A18 Section 4.1. Organization.......................................... A18 Section 4.2. Authority; No Conflict; Required Filings and A19 Consents............................................. Section 4.3. Parent Common Stock................................... A19 Section 4.4. SEC Filings: Financial Statements..................... A19 Section 4.5. Proxy Statement/Registration Statement................ A20 Section 4.6. Absence of Certain Changes or Events.................. A20 Section 4.7. No Vote Required...................................... A20 Section 4.8. Merger Sub............................................ A20 Section 4.9. Brokers............................................... A21 Section 4.10. Accuracy of Information............................... A21 ARTICLE V. COVENANTS.................................................... A21 Section 5.1. Conduct of Business of the Company.................... A21 Section 5.2. Cooperation; Notice; Cure............................. A22 Section 5.3. No Solicitation....................................... A23 Section 5.4. Preparation of Proxy Statement/Registration; Company A24 Shareholder Meeting.................................. Section 5.5. Access to Information................................. A25 Section 5.6. Legal Conditions to Merger............................ A25 Section 5.7. Publicity............................................. A26 Section 5.8. Tax-Free Reorganization............................... A26 Section 5.9. Affiliate Agreements.................................. A26 Section 5.10. NYSE Listing.......................................... A26 Section 5.11. Prudential Agreement.................................. A26 Section 5.12. Indemnification....................................... A26 Section 5.13. Letter of the Company's Accountants................... A27 Section 5.14. Stockholder Litigation................................ A27 Section 5.15. Stock Exchange Listing................................ A27 Section 5.16. Employee Benefits..................................... A27 Section 5.17. Fees and Expenses..................................... A27 ARTICLE VI. CONDITIONS TO MERGER........................................ A28 Section 6.1. Conditions to Each Party's Obligation to Effect the A28 Merger............................................... Section 6.2. Additional Conditions to Obligations of the Company... A28 Section 6.3. Additional Conditions to Obligations of Parent and A28 Merger Sub........................................... ARTICLE VII. TERMINATION AND AMENDMENT.................................. A30 Section 7.1. Termination........................................... A30 Section 7.2. Effect of Termination................................. A31 Section 7.3. Fees and Expenses..................................... A31 Section 7.4. Amendment............................................. A31 Section 7.5. Extension; Waiver..................................... A31 ARTICLE VIII. MISCELLANEOUS............................................. A32 Section 8.1. Nonsurvival of Representations, Warranties and A32 Agreements........................................... Section 8.2. Notices............................................... A32 Section 8.3. Interpretation; Certain Definitions................... A32
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Page ---- Section 8.4. Counterparts............................................. A33 Section 8.5. Entire Agreement; No Third Party Beneficiaries........... A33 Section 8.6. Governing Law............................................ A33 Section 8.7. Assignment............................................... A33 Annex I Key Stockholders
iii TABLE OF EXHIBITS
Exhibit A Form of Voting and Disposition Agreement Exhibits B-1 and B-2 Estis and Smith Agreements Exhibit C Form of Non-Competition Agreement
iv Table of Defined Terms
Term Section - ---- ------- Acquisition Proposal............................................ 5.3(a) Affiliate....................................................... 8.3 and 5.9 Affiliate Agreement............................................. 5.9 Agreement....................................................... Preamble AMEX............................................................ 3.3(c) Assets.......................................................... 3.8(a) Average Parent Stock Price...................................... 1.6(b) Benefit Arrangement............................................. 3.14(a)(i) Business Day.................................................... 1.2 Certificates.................................................... 1.8 Certificate of Merger........................................... 1.1 Closing......................................................... 1.2 Closing Date.................................................... 1.2 Code............................................................ Recitals Company......................................................... Preamble Company 401 (k) Plan............................................ 5.16 Company Balance Sheet........................................... 3.4(b)(i) Company Common Stock............................................ 1.6 Company Disclosure Schedule..................................... ARTICLE III Company Intellectual Property................................... 3.10 Company Options................................................. 1.11 Company Material Adverse Effect................................. 3.1 Company Material Contracts...................................... 3.11(a) Company Preferred Stock......................................... 3.2(a) Company SEC Reports............................................. 3.4(a) Company Stock Option Plans...................................... 3.2(b) and 1.11 Company Stockholders' Meeting................................... 5.4(e) Confidentiality Agreement....................................... 5.3(a) Contracts....................................................... 3.11(a) Conversion Ratio................................................ 1.6(b) Dissenting Shares............................................... 1.10 Effective Time.................................................. 1.1 Employee Plans.................................................. 3.14(a)(iii) Encumbrance..................................................... 3.9 Environmental Condition......................................... 3.13 Environmental Laws.............................................. 3.13 Environmental Liabilities and Costs............................. 3.13 ERISA........................................................... 3.14(a)(iv) ERISA Affiliate................................................. 3.14(a)(v) Exchange Act.................................................... 3.3(c) Exchange Agent.................................................. 2.1 Exchange Fund................................................... 2.1 Expenses........................................................ 5.17 GAAP............................................................ 4.4(b)(i) Governmental Entity............................................. 3.3(c) Hazardous Substances............................................ 3.13 HSR Act......................................................... 3.3(c) Indebtedness.................................................... 3.11(a)
v
Term Section - ---- ------- Indemnified Parties............................................... 5.12(a) Intellectual Property............................................. 3.10 Key Stockholders.................................................. Recitals Knowledge......................................................... 8.3 Leases............................................................ 3.9 Liens............................................................. 3.8 Merger............................................................ Recitals Merger Consideration.............................................. 1.6(b) Merger Sub........................................................ Preamble Multiemployer Plan................................................ 3.14(a)(vi) NYSE.............................................................. 4.2(c) OGCA.............................................................. 1.1 Order............................................................. 5.6(b) Other Benefit Obligations......................................... 3.14(a)(vii) Outside Date...................................................... 7.1(b) Parent............................................................ Preamble Parent 401(k) Plan................................................ 5.16 Parent Balance Sheet.............................................. 4.4(b)(i) Parent Common Stock............................................... 1.6(b) Parent Disclosure Schedule........................................ ARTICLE IV Parent Material Adverse Effect.................................... 4.1 Parent SEC Reports................................................ 4.4 Pension Plan...................................................... 3.14(a)(viii) Permits........................................................... 3.15(b) Permitted Encumbrance............................................. 3.9 Permitted Liens................................................... 3.8 Proxy Statement................................................... 5.4(a) Prudential........................................................ 5.11 Prudential Agreement.............................................. 5.11 Registration Statement............................................ 5.4(a) Regulations....................................................... 3.15(a) Required Company Vote............................................. 3.3(a) Required Consents................................................. 5.6(c) Rule 145.......................................................... 5.9 Securities Act.................................................... 3.3(c) Subsidiary........................................................ 3.1 Superior Proposal................................................. 5.3(a) Surviving Corporation............................................. 1.3 Tax Returns....................................................... 3.7(b) Taxes............................................................. 3.7(b) Third Party....................................................... 5.3(a) to the knowledge of............................................... 8.3 Voting, Option and Disposition Agreement.......................... Recitals Voting Debt....................................................... 3.2(b) Warrants.......................................................... 1.12 Welfare Plan...................................................... 3.14(a)(ix) Year 2000 Problem................................................. 3.19
vi AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 13, 2000, by and among Hanover Compressor Company, a Delaware corporation ("Parent"), Caddo Acquisition Corporation, an Oklahoma corporation and a direct wholly owned subsidiary of Parent ("Merger Sub"), and OEC Compression Corporation, an Oklahoma corporation (the "Company"). WHEREAS, the respective Boards of Directors of Parent and Merger Sub have determined that the merger of Merger Sub with and into the Company, upon the terms and subject to the conditions set forth in this Agreement (the "Merger"), is advisable and in the best interests of each corporation and its respective stockholders; WHEREAS, the Board of Directors of the Company has determined that the Merger is fair to, and in the best interests of, the Company and its stockholders; WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have each approved and adopted this Agreement and approved the Merger and the other transactions contemplated hereby; WHEREAS, for Federal income tax purposes, it is intended that the Merger shall qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, contemporaneous with the execution of this Agreement, certain of the stockholders of the Company listed on Annex I hereto (the "Key Stockholders") have entered into an agreement in substantially the form of Exhibit A hereto (the "Voting and Disposition Agreement") to vote all of their shares of Company Common Stock in favor of the Merger, grant Parent certain rights to acquire such shares and limit their disposition of Parent Common Stock; WHEREAS, the Company and Dennis W. Estis and Don E. Smith have each entered into a non-competition and non-solicitation agreement attached as Exhibits B-1 and B-2 hereto; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows: Article I. THE MERGER Section 1.1. Effective Time of the Merger. Subject to the provisions of this Agreement, a certificate of merger (the "Certificate of Merger") in such form as is required by the relevant provisions of the Oklahoma General Corporation Act (the "OGCA") shall be duly prepared, executed and acknowledged by the Surviving Corporation and thereafter delivered to the Secretary of State of the state of Oklahoma for filing, as provided in the OGCA, as early as practicable on the Closing Date. The Merger shall become effective upon the filing of the Certificate of Merger with the Secretary of State of the state of Oklahoma or such later time as specified in the Certificate of Merger (the "Effective Time"). Section 1.2. Closing. The closing of the Merger (the "Closing") will take place on the second business day, which is any day other than a Saturday, a Sunday or a day on which U.S. banking institutions are authorized by law, regulation or executive order to remain closed (a "Business Day"), after satisfaction or waiver (as permitted by this Agreement and applicable law) of the conditions (excluding conditions that, by their terms, cannot be satisfied until the Closing Date) set forth in Article VI (the "Closing Date"), unless another time or date is agreed to in writing by the parties hereto. The Closing shall be held at the offices of Latham & Watkins, 5800 Sears Tower, Chicago, Illinois 60606, unless another place is agreed to in writing by the parties hereto. The Certificate of Merger shall be filed on or as promptly as practicable following the Closing Date. A-1 Section 1.3. Effect of the Merger. As a result of the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation"). Upon becoming effective, the Merger shall have the effects set forth in the OGCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all properties, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. Section 1.4. Certificate of Incorporation; Bylaws. At the Effective Time, (i) the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation, and (ii) the Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation, in each case until duly amended in accordance with applicable law. Section 1.5. Directors and Officers. The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. The officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. Section 1.6. Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holders of any shares of the Company's common stock, par value $.01 per share ("Company Common Stock"), or capital stock of Merger Sub: (a) Cancellation of Stock. Each share of Company Common Stock that is owned by the Company or any wholly owned subsidiary of the Company (as treasury stock or otherwise) shall automatically be canceled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (b) Consideration for Company Common Stock. Subject to Section 1.10, each issued and outstanding share of Company Common Stock (other than Dissenting Shares and shares to be canceled in accordance with Section 1.6(a)) shall be converted into the right to receive a number of fully paid and nonassessable shares of common stock, par value $.001 per share, of Parent ("Parent Common Stock") equal to the Conversion Ratio (as defined below) (the "Merger Consideration"). The "Conversion Ratio" shall be equal to $1.00 divided by the Average Parent Stock Price (as defined below). The "Average Parent Stock Price" shall mean the closing sales price per share of Parent Common Stock as reported by The New York Stock Exchange Composite Tape for the twenty consecutive trading days (on which shares of Parent Common Stock are actually traded) immediately preceding the second Business Day prior to the Effective Time; provided, however, that if the foregoing amount is calculated to be less than $30, then the Average Parent Stock Price shall be $30; and provided further, that if the foregoing amount is calculated to be greater than $32.50, then the Average Parent Stock Price shall be $32.50. As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate which, prior to the Effective Time, represented any such shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive, upon surrender of such certificate in accordance with Section 2.2, the Merger Consideration in accordance with this Section 1.6. (c) Merger Sub Capital Stock. Each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall remain outstanding and shall be unchanged as a share of capital stock of the Surviving Corporation. Section 1.7. Adjustment of Conversion Number. In the event that pursuant to a transaction announced after the date hereof and becoming effective prior to the Effective Time (i) any distribution is made in respect of Parent Common Stock other than a regular quarterly cash dividend or (ii) any stock dividend, stock split, reclassification, recapitalization, combination or mandatory exchange of shares occurs with respect to, or rights (other than non-mandatory offers to exchange) are issued in respect of, Parent Common Stock, then, the Conversion Ratio shall be adjusted accordingly. A-2 Section 1.8. No Further Ownership Rights in Company Common Stock. All shares of Parent Common Stock issued upon the surrender for exchange of certificates which immediately prior to the Effective Time represented outstanding share of Company Common Stock ("Certificates") in accordance with the terms hereof (including any cash paid pursuant to Sections 1.9 or 2.3) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock, and from and after the Effective Time there shall be no further registration of transfers of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in Article II. Section 1.9. No Fractional Shares. No certificate or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any other rights of a stockholder of Parent. Notwithstanding any other provision of this Agreement, each holder of shares of Company Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Parent Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Parent Common Stock multiplied by the Average Parent Stock Price. Section 1.10. Shares of Dissenting Shareholders. Notwithstanding anything in this Agreement to the contrary, any shares of Company Common Stock that are outstanding immediately prior to the Effective Time and have not been voted in favor of the Merger and with respect to which appraisal rights shall have been demanded and perfected in accordance with Section 1091 of the OGCA to the extent applicable (collectively, the "Dissenting Shares") and not withdrawn shall not be converted into or represent the right to receive the Merger Consideration, but such shares shall become the right to receive such consideration as may be determined to be due to holders of Dissenting Shares pursuant to the laws of the State of Oklahoma unless and until the holder of such Dissenting Shares withdraws his or her demand for such appraisal in accordance with the OGCA or becomes ineligible for appraisal. If, after the Effective Time, any such holder withdraws his or her demand for appraisal or becomes ineligible for appraisal (through failure to perfect or otherwise), such Dissenting Shares shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the Effective Time, the right to receive, without any interest thereon, the consideration provided for in Section 1.6. The Company shall give Parent prompt notice of any demands for appraisal for shares of Company Common Stock received by the Company, and Parent shall have the right to direct all proceedings, negotiations and actions taken by the Company in respect thereof. Section 1.11. Company Options. At the Effective Time, each unexpired and unexercised outstanding option, whether or not then vested or exercisable in accordance with its terms, to purchase shares of Company Common Stock (the "Company Options") previously granted by the Company or its Subsidiaries shall be canceled and converted into the right to receive from the Parent, within 10 days following the Effective Time, cash in an amount equal to the product of (a) $1.00 minus the exercise price per share of such Company Option, times (b) the number of shares of Common Stock which may be purchased upon exercise of such Company Option (whether or not then exercisable). Prior to (but effective at) the Effective Time, the Company shall (i) obtain any consents from all holders of Company Options and (ii) make any amendments to the terms of such stock option or compensation plans or arrangements that, in the case of either clause (i) or (ii), are necessary to give effect to the transactions contemplated by this Section 1.11. Immediately prior to the Effective Time, the Company shall terminate all plans and other arrangements pursuant to which such Company Options were granted (the "Company Stock Option Plans") effective as of the Effective Time with no further liability to the Company. Section 1.12. Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a "reorganization" within the meaning of Section 368(a) of the Code. The parties hereto hereby adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. A-3 Article II. EXCHANGE OF CERTIFICATES Section 2.1. Exchange Agent. As of the Effective Time, Parent shall deposit with ChaseMellon Shareholder Services or such other bank or trust company as may be designated by Parent and be reasonably acceptable to the Company (the "Exchange Agent") for the benefit of the holders of shares of Company Common Stock, for exchange or payment in accordance with this Section 2.1, through the Exchange Agent, (i) certificates evidencing such number of shares of Parent Common Stock equal to (x) the Merger Consideration multiplied by (y) the aggregate number of shares of Company Common Stock which may be converted into the right to receive Parent Common Stock in the Merger; and (ii) any cash necessary to pay amounts due pursuant to Section 1.9 (such certificates for shares of Parent Common Stock and such cash being hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions in accordance with Articles I and II, deliver the Parent Common Stock and cash contemplated to be issued pursuant to Sections 1.6(b) and 1.9 out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose. The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by Parent, on a daily basis. Any interest and other income resulting from such investments shall be paid to Parent. Section 2.2. Exchange and Payment Procedures. As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a Certificate or Certificates that were converted into the right to receive shares of Parent Common Stock and cash pursuant to Sections 1.6(b) and 1.9, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent, and which shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for shares of Parent Common Stock and cash. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Parent Common Stock and cash which such holder has the right to receive pursuant to the provisions of Article I and this Article II and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock that is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock may be issued, and cash, if any, pursuant to Sections 1.6(b) and 1.9 may be paid, to a person other than the person in whose name the Certificate so surrendered is registered if the Certificate representing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Article II, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon surrender the certificate representing shares of Parent Common Stock and cash as contemplated by Article I. Section 2.3. Distributions with Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock to which such holder is entitled hereunder and no cash payment paid to any such holder pursuant to Sections 1.6(b) and 1.9 until the holder of record of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be given to the record holder of the certificates representing whole shares of Parent Common Stock to which such holder is entitled hereunder, without interest, (i) at the time of such surrender, a certificate representing the number of whole shares of Parent Common Stock and the amount of cash, if any, pursuant to Section 1.9 to which such holder is entitled pursuant to Section 1.9 and the amount of dividends or other distributions with respect to such whole shares of Parent Common Stock with a record date after the Effective Time and a payment date prior to the date of issuance to such holder, and (ii) at the appropriate payment date, the amount of dividends or other A-4 distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Parent Common Stock. Section 2.4. Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Certificates for nine months after the Effective Time shall be delivered to Parent, upon demand, and any shareholders of the Company who have not previously complied with the provisions of this Article II shall thereafter look only to Parent for payment of their claim for Parent Common Stock and cash and any dividends or distributions with respect to Parent Common Stock. Any portion of the Exchange Fund remaining unclaimed by holders of Company Common Stock five years after the Effective Time (or such earlier date immediately prior to such time as such portion would otherwise escheat to or become property of any Governmental Entity) shall, to the extent permitted by applicable law, become the property of Parent free and clear of any claims or interest of any person previously entitled therein. Section 2.5. No Liability. To the fullest extent permitted by law, none of Parent, Merger Sub, the Company or the Surviving Corporation shall be liable to any holder of Company Common Stock or Parent Common Stock, as the case may be, for any shares (or dividends or distributions with respect thereto) and/or cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Section 2.6. Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such person of a bond in such reasonable amount as Parent may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will deliver in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock and cash in accordance with this Agreement. Section 2.7. Withholding Rights. Parent and the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Parent or the Exchange Agent, as applicable, is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign Tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by such party. Section 2.8. Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Company or Merger Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company or Merger Sub, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. Section 2.9. Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company. From and after the Effective Time, the holders of Certificates shall cease to have any rights with respect to such shares of Company Common Stock formerly represented thereby, except as otherwise provided herein or by law. On or after the Effective Time, any Certificates presented to the Exchange Agent or Parent for any reason shall be converted into the Merger Consideration with respect to the shares of Company Common Stock formerly represented thereby. Section 2.10. Affiliates. Notwithstanding anything herein to the contrary, Certificates surrendered for exchange by any Affiliate (as defined in Section 5.9) of the Company shall not be exchanged until Parent has received an Affiliate Agreement (as defined in Section 5.9) from such Affiliate. A-5 Article III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Merger Sub that the statements contained in this Article III are true and correct except as set forth herein and in the disclosure schedule delivered by the Company to Parent and Merger Sub on or before the date of this Agreement (the "Company Disclosure Schedule"). The Company Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III. Section 3.1. Organization of the Company and its Subsidiaries. Each of the Company and its Subsidiaries (as defined below) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate, partnership or limited liability company power and authority to carry on its business as now being conducted and as proposed to be conducted. Each of the Company and its Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified, licensed or in good standing, individually or in the aggregate, could not be expected to have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole (a "Company Material Adverse Effect"). The Company has delivered to Parent a true and correct copy of the Certificate of Incorporation and Bylaws of the Company and each of its Subsidiaries, in each case as amended to date and each of such documents is in full force and effect. Neither the Company nor any of its Subsidiaries is in violation of any provision of any of such documents. The respective organizational documents of the Company's Subsidiaries do not contain any provision that would limit or otherwise restrict the ability of Parent or the Surviving Corporation, following the Effective Time, from owning or operating such Subsidiaries on the same basis as the Company. A true and complete list of all of the Company's Subsidiaries, together with the jurisdiction of incorporation of each such Subsidiary and the percentage of ownership interest of the Company therein, is set forth in Section 3.1 of the Company Disclosure Schedule. Neither the Company nor any of its Subsidiaries directly or indirectly owns (other than ownership interests in the Company or in one or more of its Subsidiaries) any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any corporation, partnership, joint venture or other business association or entity. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner or member or (ii) at least twenty-five percent (25%) of the securities or other interests having by their terms ordinary voting power to elect or select a majority of the Board of Directors or other persons or entities performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. Section 3.2. Capitalization. (a) The authorized capital stock of the Company consists of 60,000,000 shares of Company Common Stock and 1,000,000 shares of the Company's Preferred Stock, $1.00 par value per share ("Company Preferred Stock"). As of the date hereof, (i) 36,885,333 shares of Company Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) 320,445 shares of Company Common Stock are held in the treasury of the Company or by Subsidiaries of the Company, and (iii) no shares of Company Preferred Stock are issued and outstanding. There are no obligations, contingent or otherwise, of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of Company Common Stock or the capital stock of any Subsidiary or to provide funds to or make any material investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity (other than to or in a wholly owned Subsidiary of the Company). All of the outstanding shares of capital stock (including shares which may be issued upon exercise of outstanding options) or other ownership interests of each of the Company's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable and all such shares are owned by A-6 the Company or another Subsidiary of the Company free and clear of all security interests, liens, claims, pledges, agreements, limitations on the Company's voting rights, charges or other encumbrances of any nature. (b) There are no bonds, debentures, notes or other indebtedness having voting rights (or convertible into securities having such rights) ("Voting Debt") of the Company or any of its Subsidiaries issued and outstanding. Section 3.2(b) of the Company Disclosure Schedule sets forth (i) the total number of shares of Company Common Stock reserved for issuance upon exercise of Company Stock Options granted and outstanding as of the date hereof and (ii) the Company Stock Option Plan, the name of each holder under the Company Stock Option Plans, the number of Company Stock Options held by such holder, and the exercise price of each such Company Stock Option. Except as reserved for future grants of options or restricted stock under the Company Stock Option Plans, (x) there are no shares of capital stock of any class of the Company, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding; (y) there are no options, warrants (other than warrants to purchase 1,000,000 shares of Company Common Stock issued to The Prudential Life Insurance Company), equity securities, calls, rights, commitments or agreements of any character to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other ownership interests (including Voting Debt) of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement; and (z) there are no voting trusts, proxies or other voting agreements or understandings with respect to the shares of capital stock of the Company, including, without limitation, any registration rights agreements (other than those registration rights agreements listed in Section 3.2(b) of the Company Disclosure Schedule) or shareholder agreements. All shares of Company Common Stock subject to issuance as specified in this Section 3.2(b) or the related Company Disclosure Schedule section are duly authorized and, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be validly issued, fully paid and nonassessable. Section 3.3. Authority; No Conflict; Required Filings and Consents; Recommendation of the Board. (a) The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by the Company have been duly authorized by all necessary corporate action on the part of the Company, subject only to the approval and adoption of this Agreement and the Merger by the holders of a majority of the Company's outstanding common stock (the "Required Company Vote"). This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditor rights and to general equity principles. (b) The execution and delivery of this Agreement by the Company does not, and the consummation of the transactions contemplated hereby will not, (i) conflict with, or result in any violation or breach of, any provision of the Certificate of Incorporation or Bylaws of the Company or the comparable charter, organizational or governing documents of any of its Subsidiaries, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound other than as disclosed in Section 3.3(b) of the Company Disclosure Schedule, or (iii) subject to the governmental filings and other matters referred to in Section 3.3(c), conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries or any of its or A-7 their properties or assets. No consent of any holder of outstanding Company Stock Options is required in connection with the conversion of such Company Stock Options in accordance with the provisions of Section 1.11. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, whether federal, state or local (or any subdivision thereof) ("Governmental Entity") is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) those required under or in relation to the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) state securities or "blue sky" laws, (iii) the Securities Act of 1933, as amended (the "Securities Act"), (iv) the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (v) the OGCA with respect to the filing and recordation of appropriate documents to effect the Merger and (vi) rules and regulations of the American Stock Exchange ("AMEX"). (d) The Board of Directors of the Company has, by a unanimous vote at a meeting of such Board (with one director absent) duly held on July 12, 2000, approved, adopted and declared advisable this Agreement, the Merger and the other transactions contemplated hereby, and determined that this Agreement, the Merger and the other transactions contemplated hereby, taken together, are in the best interests of the Company and of the stockholders of the Company, and prior to the date hereof such Board has resolved to recommend that the shareholders of the Company approve this Agreement, the Merger and the other transactions contemplated hereby. Section 3.4. SEC Filings; Financial Statements. (a) The Company has filed and made available to Parent all forms, reports and documents filed by the Company with the SEC since December 31, 1996 (collectively, the "Company SEC Reports"). The Company SEC Reports (including any financial statements filed as a part thereof or incorporated by reference therein) (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not, at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Company SEC Reports or necessary in order to make the statements in such Company SEC Reports, in the light of the circumstances under which they were made, not misleading as of such date. None of the Company's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) (i) Each of the consolidated financial statements (including, in each case, any related notes) of the Company contained in the Company SEC Reports complied as to form in all material respects with the applicable rules, regulations and practices of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q under the Exchange Act) and fairly presented the consolidated financial position of the Company and its Subsidiaries as of the dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The audited balance sheet of the Company as of December 31, 1999 is referred to herein as the "Company Balance Sheet." (ii) The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (A) its transactions and those of its Subsidiaries are executed in accordance with management's general or specific authorization, (B) its transactions and those of its Subsidiaries are recorded as necessary to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets, (C) access to its assets and those of its Subsidiaries is permitted only in accordance with management's general or specific authorization, and (D) the recorded accountability for its assets and those of its Subsidiaries is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. A-8 Section 3.5. No Undisclosed Liabilities. Except for, and to the extent of, those liabilities that are reflected or reserved against, to the extent reflected or reserved against, on the consolidated balance sheet of the Company and its Subsidiaries included in the Company's Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2000, or the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and except for obligations under contracts and commitments incurred in the ordinary course of business which are not required under GAAP to be reflected in the financial statements of the Company, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company, and except for liabilities and obligations incurred in the ordinary course of business consistent with past practice since March 31, 2000, and except and as to the extent disclosed in the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has any liabilities or obligations of any nature whatsoever (whether fixed, absolute, accrued, contingent or otherwise and whether due or to become due). Section 3.6. Absence of Certain Changes or Events. Except as disclosed in the Company's SEC Reports filed prior to the date hereof, since the date of the Company Balance Sheet, the Company and its Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and, since such date, there has not been (i) any event, change or development which, individually or in the aggregate, has had or could reasonably be expected to have a Company Material Adverse Effect; (ii) any change by the Company in its accounting methods, principles or practices; (iii) any revaluation by the Company of any asset; (iv) any modification of any Material Contract, except in the ordinary course of business or as contemplated by this Agreement; (v) any disposition of any assets of the Company or any of its Subsidiaries outside the ordinary course of business; or (vi) any other action or event that would have required the consent of Parent pursuant to Section 5.1 of this Agreement had such action or event occurred after the date of this Agreement. Section 3.7. Taxes. (a) Except as set forth in Section 3.7 of the Company Disclosure Schedule: (i) the Company and each of its Subsidiaries have duly and timely filed (taking into account any extension of time within which to file) all Tax Returns required to be filed by any of them and all such filed Tax Returns are complete and accurate in all respects; (ii) the Company and each of its Subsidiaries have timely paid to the proper taxing authorities all Tax liabilities (whether or not shown as due on such filed Tax Returns), including Taxes that the Company or any of its Subsidiaries have been obligated to withhold from amounts paid or owed to any employee, independent contractor, creditor or third party, except with respect to matters contested in good faith and which are set forth in Section 3.7 of the Company Disclosure Schedule, or for which a reserve (other than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) is provided on the Company Balance Sheet; (iii) as of the date hereof: (A) there are no pending or, to the knowledge of the Company, threatened audits, examinations, investigations or other proceedings in respect of Taxes or Tax matters relating to the Company or any of its Subsidiaries, (B) there are no deficiencies or claims for any Taxes that have been proposed, asserted or assessed against the Company or any of its Subsidiaries, (C) there are no Liens for Taxes upon the assets of the Company or any of its Subsidiaries, other than Liens for current Taxes not yet due and payable and Liens for Taxes that are being contested in good faith by appropriate proceedings and properly reserved for and (D) neither the Company nor any of its Subsidiaries has requested any extension of time within which to file any Tax Returns in respect of any taxable year which have not since been filed, and no request for waivers of the time to assess any Taxes are pending or outstanding; (iv) none of the Company or any of its Subsidiaries has made a consent under Section 341(f) of the Code; (v) as of the date hereof, the consolidated federal income Tax Returns for the Company and its Subsidiaries have never been examined by the Internal Revenue Service; (vi) neither the Company nor any of its Subsidiaries has any liability for Taxes of any person (other than the Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any comparable provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise; (vii) neither the Company nor any Subsidiary is a party to any agreement relating to the allocation or sharing of Taxes; and (viii) as of the date hereof, neither the Company nor any of its Subsidiaries knows of any facts with respect to the Company or its Subsidiaries that would reasonably be expected to prevent or materially or A-9 burdensomely impede the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code. Neither the Company nor any of its Subsidiaries will, as a result of the consummation of the transactions contemplated by this Agreement, recognize any gain under any applicable provisions of the federal consolidated return regulations (Treasury Regulation Section 1.1502 et seq.) with respect to any excess loss account or any intercompany transaction or distribution in which the taxation of gain or loss was previously deferred. None of the Company or its Subsidiaries has been a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. No written power of attorney that has been granted by the Company or its Subsidiaries currently is in force with respect to any matter relating to Taxes. The Company has not distributed the stock of a "controlled corporation" (within the meaning of Section 355(a) of the Code) in a transaction subject to Section 355 of the Code within the past two years. None of the Company or its Subsidiaries has made an election, nor is required, to treat any Assets as owned by another person or entity or as tax-exempt bond financed property or tax-exempt use property for tax purposes. (b) (i) "Taxes" shall mean all taxes, assessments, charges, duties, fees, levies, imposts or other governmental charges, including, without limitation, all federal, state, local, foreign and other income, environmental, add-on, minimum, franchise, profits, capital gains, capital stock, capital structure, transfer, sales, gross receipts, use, ad valorem, service, occupation, property, excise, severance, windfall profits, premium, stamp, license, payroll, social security, employment, unemployment, disability, value-added, withholding and other taxes, assessments, charges, duties, fees, levies, imposts or other governmental charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return), and all estimated taxes, deficiency assessments, additions to tax, additional amounts imposed by any governmental authority (domestic or foreign), penalties and interest, and shall include any liability for such amounts as a result either of being a member of a combined, consolidated, unitary or affiliated group or of a contractual obligation to indemnify any person, corporation or other organization regardless of whether disputed, and (ii) "Tax Returns" shall mean all returns and reports (including elections, claims, declarations, disclosures, schedules, estimates, computations and information returns) required to be supplied to a governmental authority in any jurisdiction (domestic or foreign) relating to Taxes, including any schedule or amendment thereto or amendment thereof. Section 3.8. Title to Assets.. The Company and each of its Subsidiaries owns and has good and valid title to, or a valid leasehold interest in, or otherwise has sufficient and legally enforceable rights to use, all of the properties and assets (real, personal or mixed, tangible or intangible), used, or held for use by, the Company and such Subsidiaries in connection with the conduct of their business (the "Assets"), including Assets reflected on the Company Balance Sheet or acquired since the date thereof, except for Assets disposed of in the ordinary course of business consistent with past practice and in accordance with this Agreement, in each case free and clear of any lien, charge, encumbrance or security interest of any kind ("Liens") except for Permitted Liens. "Permitted Liens" shall mean those Liens (i) securing debt that is reflected on the Company Balance Sheet or the notes thereto, (ii) for Taxes not yet due or payable or being contested in good faith and for which adequate reserves have been established in accordance with GAAP, (iii) that constitute mechanics', carriers', workmens' or similar liens, liens arising under original purchase price conditional sale contracts and equipment leases with third parties entered into in the ordinary course of business consistent with past practice, and for which adequate provision for payment has been made, and (iv) incurred or deposits made in the ordinary course of business consistent with past practice in connection with workers' compensation, unemployment insurance and social security, retirement and other legislation. This Section 3.8 does not relate to intellectual property (for which Section 3.10 is applicable). Section 3.8 of the Company Disclosure Schedule includes a list of all compressors and related equipment owned or leased by the Company (specifying for each compressor the horsepower and whether such compressor is owned or leased). Section 3.9. Real Property. (a) Section 3.9 (a) of the Company Disclosure Schedule sets forth a true and correct list of all facilities owned by the Company and its Subsidiaries or to be acquired by the Company or its Subsidiaries prior to the Effective Time. With respect to each parcel of owned real property, except as set forth in Section 3.9 (a) of the A-10 Company Disclosure Schedule, (i) the Company or any Subsidiary of the Company, as the case may be, has good and indefeasible fee simple title to such parcel of real property, free and clear of any and all Encumbrances other than Permitted Encumbrances, (ii) there are no leases, subleases, licenses, options, rights, concessions or other agreements, written or oral, granting to any party or parties the right of use or occupancy of any portion of such parcel of real property, (iii) there are no outstanding options or rights of first refusal in favor of any other party to purchase any such parcel of real property or any portion thereof or interest thereof or interest therein, (iv) there are no parties (other than the Company or its Subsidiary, as the case may be) who are in possession of or who are using any such parcel of real property, except in connection with a Permitted Encumbrance, and (v) there is no (A) pending or, to the knowledge of the Company, threatened condemnation or expropriation proceeding relating to such parcel of real property, (B) pending or, to the knowledge of the Company, threatened Action relating to such parcel of real property, (C) to the knowledge of the Company, other matter adversely affecting the current use or occupancy of such parcel of real property in any material respect, (D) pending, or to the knowledge of the Company, threatened special assessment relating to such real property or (E) pending, or to the Company's knowledge, proposed or threatened zoning change to any zoning affecting the property. (b) Section 3.9 (b) of the Company Disclosure Schedule sets forth all leases of real property (the "Leases"), to which the Company is a party and has delivered true and correct copies of all such Leases. The Leases are in full force and effect and are valid and binding obligations of the parties thereto enforceable against each such party in accordance with their terms. The Company is not in default or, to the Company's knowledge, alleged to be in default thereunder. To the knowledge of the Company, none of the other parties to the Leases are in default, or alleged to be in default, thereunder or have any defenses to their obligation thereunder. Except as set forth in Section 3.9(b) of the Company Disclosure Schedule, the Company has full legal power and authority to assign its rights under the Leases, and the continuation, validity and effectiveness thereof will not be affected by the occurrence of the Effective Time. The Company has not assigned, subleased, mortgaged, deeded in trust or otherwise transferred or encumbered any Lease or interest therein. With respect to each Lease and the real property demised thereby: (i) the Company or any Subsidiary of the Company, as the case may be, has good and valid leasehold interest in such property, free and clear of any and all Encumbrances other than Permitted Encumbrances, (ii) there are no subleases, licenses, options, rights, concessions or other agreements, written or oral, granting to any party or parties the right of use or occupancy of any portion of such parcel of real property, (iii) there are no outstanding options or rights of first refusal in favor of any other party to purchase, lease or sublease any such parcel of real property or any portion thereof or interest thereof or interest therein, (iv) there are no parties (other than the Company or its Subsidiary, as the case may be) who are in possession of or who are using any such parcel of real property, except in connection with a Permitted Encumbrance, and (v) there is no (A) pending or, to the knowledge of the Company, threatened condemnation or expropriation proceeding relating to such parcel of real property, (B) pending or, to the knowledge of the Company, threatened Action relating to such parcel of real property, (C) to the knowledge of the Company, other matter adversely affecting the current use or occupancy of such parcel of real property in any material respect, (D) pending, or to the knowledge of the Company, threatened special assessment relating to such real property or (E) pending, or to the Company's knowledge, proposed or threatened zoning change to any zoning affecting the property. For purposes of this Section 3.9, the following definitions shall apply: "Encumbrance" means any claim, lien, pledge, option, lease, license, occupancy agreement, charge, easement, tax assessment, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, title defect, work order, conditional sales agreement, encumbrance or other right of third parties or other restriction on use, whether voluntarily incurred or arising by operation of law, and includes any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof. A-11 "Permitted Encumbrances" means (a) statutory liens of landlords, liens of carriers, warehousepersons, mechanics and materialpersons incurred in the ordinary course of business for sums (i) not yet due and payable, or (ii) being contested in good faith, if, in either such case, an adequate reserve, shall have been made therefor in such Person's financial statements, (b) liens incurred or deposits made in connection with workers' compensation, unemployment insurance and other similar types of social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, in each case in the ordinary course of business, consistent with past practice, (c) easements, rights-of-way, restrictions and other similar non-monetary charges or encumbrances which, in each case, and in the aggregate, do not interfere with the ordinary conduct of business of the Company and its Subsidiaries and do not materially detract from the value, use or occupancy of the property upon which such encumbrance exists, and (d) liens securing taxes, assessments and governmental charges not yet delinquent or the amount or validity of which are being contested in good faith by appropriate proceedings by the Company or its Subsidiaries, as applicable. Section 3.10. Intellectual Property. The Company and its Subsidiaries own or possess adequate and enforceable rights to use the Intellectual Property used in their respective businesses as currently conducted (the "Company Intellectual Property"). There are no restrictions or conditions on the use of the Company Intellectual Property. The Company Intellectual Property is owned or licensed by the Company free from any Liens except for Permitted Liens. The conduct of the respective businesses of the Company and its Subsidiaries does not infringe or conflict with the rights of any third party in respect of any Intellectual Property. To the Company's knowledge, none of the Company Intellectual Property is being infringed by any third party. "Intellectual Property" means all trademarks, trademark applications, trade names, marketing or advertising slogans, service marks, trade secrets (including customer lists and databases), copyrights, patents, licenses, know-how and other proprietary intellectual property rights. The Company has taken and will take all actions and necessary precautions to preserve the confidentiality of its trade secrets (including customer lists and customer databases). Section 3.10 of the Company Disclosure Schedule lists (i) all trademark and service mark registrations and applications owned by the Company or any of its Subsidiaries, (ii) license Contracts concerning Intellectual Property to which the Company or any of its Subsidiaries is a party and (iii) patents, patent applications and copyrights owned by the Company or any of its Subsidiaries. Section 3.11. Agreements, Contracts and Commitments. (a) Set forth in Section 3.11 of the Company Disclosure Schedule are all of the following to which the Company or any of its Subsidiaries is a party: (i) agreements, contracts, indentures or other instruments or arrangements ("Contracts") relating to Indebtedness (as defined below) in an amount exceeding $100,000, (ii) partnership, joint venture or limited liability agreements with any person, (iii) Contracts pursuant to which the Company or any of its Subsidiaries will or may be obligated to issue after the date of this Agreement any equity securities (including Company Common Stock) or any security convertible equity securities (including Company Common Stock), (iv) Contracts which provide for the payment or receipt of consideration by the Company in excess of $100,000 in any 12-month period, (v) Contracts to be performed after the date hereof which would be material contracts (as defined in Item 601(b)(10) of Regulation S-K of the SEC), (vi) Contracts which restrict the conduct of any line of business by the Company or any of its Subsidiaries, (vii) Contracts which are not terminable by the Company within the next twelve months without the payment of any termination fee or penalty, (viii) all leases pursuant to which the Company leases compressors and related equipment that provide for lease payments of more than $100,000 on an annual basis and (ix) Contracts which include provisions relating to non-competition or non- solicitation or non-hiring of employees (collectively, the "Company Material Contracts"). "Indebtedness" means any liability in respect of (A) borrowed money, (B) capitalized lease obligations, (C) the deferred purchase price of property or services (other than trade payables in the ordinary course of business) and (D) guarantees of any of the foregoing incurred by any other person other than the Company or any of its wholly owned Subsidiaries. (b) (i) Each of the Company Material Contracts is valid and binding in accordance with its terms and is in full force and effect, (ii) there is no material breach or violation of or default by the Company or any of its A-12 Subsidiaries under any of the Company Material Contracts, whether or not such breach, violation or default has been waived, and (iii) no event has occurred which, with notice or lapse of time or both, would constitute a material breach, violation or default, or give rise to a right of termination, modification, cancellation, foreclosure, imposition of a lien, prepayment or acceleration under any of the Company Material Contracts. To the knowledge of the Company, no counterparty to any Company Material Contract has violated any provision of, or committed or failed to perform any act which, with or without notice, lapse of time, or both, could reasonably be expected to constitute a default or other breach under the provisions of, such the Company Material Contract. Section 3.12. Litigation. Except as set forth in Section 3.12 of the Company Disclosure Letter, (a) there is no action, suit or proceeding, claim, arbitration or investigation against the Company or any of its Subsidiaries pending, or as to which the Company or any of its Subsidiaries has received any written notice of assertion or, to the best knowledge of the Company, threatened against or affecting, the Company or any of its Subsidiaries or any property or asset of the Company or any of its Subsidiaries, before any Governmental Entity, domestic or foreign and (b) there is no judgment, order, injunction or decree of any Governmental Entity outstanding against the Company or any of its Subsidiaries. Section 3.13. Environmental Matters. (a) The Company is currently and has in the past been in compliance with all applicable Environmental Laws, (b) there are no existing or potential Environmental Liabilities and Costs of the Company or its Subsidiaries, (c) there are no Environmental Conditions on or related to any of the property owned or leased by the Company or its Subsidiaries, or the other assets of the Company or its Subsidiaries, (d) none of the Company or its Subsidiaries has received any notices from any governmental agency or other third party regarding the existence of any Hazardous Substance on any of the property owned or leased by the Company or its Subsidiaries alleging any violation of or noncompliance with any Environmental Law, or requiring the investigation, removal, clean-up, or remediation of any Environmental Condition whether or not on property owned or leased by the Company or its Subsidiaries, (e) the Company is not subject to any enforcement or investigatory action by any governmental agency regarding an Environmental Condition with respect to any of the property owned or leased by the Company or its Subsidiaries, or any other property related in any way to the Company or its Subsidiaries, (f) there are no underground tanks or other underground storage receptacles for Hazardous Substances located on any of the property owned or leased by the Company or its Subsidiaries, (g) the Company has no knowledge of any leaks, releases, threats of releases, spills or discharge of fluids at any property owned or leased by the Company or its Subsidiaries, (h) there are no PCBs or asbestos located at or on any property owned or leased by the Company or its Subsidiaries and (i) true and correct copies of any environmental reports, audits, analysis, summary or assessments which have been conducted, either by or on behalf of the Company or its Subsidiaries, at any of the property currently or previously owned or leased by the Company or its Subsidiaries have been made available to Parent and Merger Sub. The Company and its Subsidiaries have no obligation to indemnify any other person, corporation or other entity with respect to any Environmental Liabilities and Costs. For purposes of this Section 3.13, the following definitions shall apply: "Environmental Laws" means all applicable foreign, federal, state and local statutes or laws, common law, judgments, orders, notice requirements, regulations, agency guidelines, policies, licenses, permits, rules and ordinances relating to pollution or protection of health, safety or the environment, including, but not limited to the Federal Water Pollution Control Act (33 U.S.C. (S) 251 et seq.), Resource Conservation and Recovery Act (42 U.S.C. (S) 901 et seq.), Safe Drinking Water Act (42 U.S.C. (S) 000(f) et seq.), Toxic Substances Control Act (15 U.S.C. (S) 601 et seq.), Clean Air Act (42 U.S.C. (S) 401 et seq.), Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. (S) 601 et seq.), each as amended, and other similar state and local statutes. "Environmental Condition" means the introduction into the environment of any pollution, including without limitation any contaminant, pollutant, hazardous or toxic waste, substance or material (whether or not upon the any of the property owned or leased by the Company or its Subsidiaries and whether or not such A-13 pollution constituted at the time thereof a violation of any Environmental Law as a result of any release of any kind of any toxic or hazardous waste, substance or material) as a result of which the Company (1) has or may become liable to any person, (2) is or was in violation of any Environmental Law, or (3) by reason of which any of the property owned or leased by the Company or its Subsidiaries or other assets of the Company, may suffer or be subject to any lien. "Environmental Liabilities and Costs" means all liabilities, obligations, responsibilities, obligations to conduct cleanup, losses, damages, deficiencies, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigations and feasibility studies and responding to government requests for information or documents), fines, penalties, restitution and monetary sanctions, interest, direct or indirect, known or unknown, absolute or contingent, past, present or future, resulting from any claim or demand, by any person or entity, whether based in contract, tort, implied or express warranty, strict liability, joint and several liability, criminal or civil statute, under any Environmental Law, or arising from environmental, health or safety conditions, as a result of past or present ownership, leasing or operation of any properties, owned, leased or operated by the Company or any of its Subsidiaries. "Hazardous Substances" means all pollutants, contaminants, chemicals, wastes, and any other carcinogenic, ignitable, corrosive, reactive, toxic or otherwise hazardous substance, material or waste (whether solid, liquid or gas) subject to regulation, control or remediation under Environmental Laws. Section 3.14. Employee Benefit Plans. (a) The following terms, when used in this Section 3.14, shall have the following meanings. Any of these terms may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. (i) Benefit Arrangement. "Benefit Arrangement" shall mean any employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for insurance coverage (including without limitation any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including without limitation any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which is not a Welfare Plan, Pension Plan or Multiemployer Plan and is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or an ERISA Affiliate or under which the Company or any ERISA Affiliate may incur any liability. (ii) Code. "Code" shall have the meaning set forth in the Preamble. (iii) Employee Plans. "Employee Plans" shall mean all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. (iv) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (v) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with, or a member of an "affiliated service group" with, the Company as defined in Section 414(b), (c), (m) or (o) of the Code. (vi) Multiemployer Plan. "Multiemployer Plan" shall mean any "multiemployer plan," as defined in Section 3(37) of ERISA. (vii) Other Benefit Obligations. "Other Benefit Obligations" shall mean all obligations, arrangements or customary practices, whether or not legally enforceable, to provide benefits, other than salary or A-14 commissions, as compensation for services rendered, to present or former directors, employees or agents, other than obligations, arrangements and practices that are Employee Plans. Other Benefit Obligations include employment agreements, consulting agreements under which the compensation paid does not depend upon the amount of service rendered, sabbatical policies, severance payment policies and fringe benefits within the meaning of Code Section 132. (viii) Pension Plan. "Pension Plan" shall mean any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability. (ix) Welfare Plan. "Welfare Plan" shall mean any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability. (b) Section 3.14 of the Company Disclosure Schedule contains a complete list of the Employee Plans and Other Benefit Obligations. True and complete copies of each of the following documents have been delivered by the Company to Parent: (i) each Employee Plan (and, if applicable, related trust agreements) and all amendments thereto, all written interpretations thereof and written descriptions thereof which have been distributed to employees and all annuity contracts or other funding instruments, (ii) the most recent determination or opinion letter issued by the Internal Revenue Service with respect to each Pension Plan and, if applicable, each Welfare Plan, (iii) for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Pension Plan and Welfare Plan, (iv) all actuarial reports prepared for the last three plan years for each Employee Plan, (v) all documents that set forth the terms of each Other Benefit Obligation of the Company and its ERISA Affiliates for which a plan description or summary plan description is not required and (vi) all personnel, payroll and employment manuals and policies of the Company and its ERISA Affiliates. (c) (i ) Pension Plans. No Pension Plan is subject to Title IV of ERISA or the minimum funding requirements of Section 412 of the Code. Each Pension Plan has been maintained in compliance with its terms and, both as to form and in operation, is qualified and tax-exempt under the provisions of Code Section 401(a) and 501(a) and no fact or condition exists which would adversely affect such qualified status. (ii) Multiemployer Plans. Neither the Company nor any ERISA Affiliate has, at any time, contributed to, or been obligated to contribute to, or have any liability to any Multiemployer Plan. (iii) Welfare Plans. (A) None of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to, or with respect to any present or former employee of the Company or any ERISA Affiliate pursuant to, any retiree medical benefit plan, or other retiree Welfare Plan, except to the extent required by the Code or ERISA, and no condition exists which would prevent the Company from amending or terminating any such benefit plan or Welfare Plan. (B) Each Welfare Plan which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with provisions of Parts 6 and 7 of Title I, Subtitle B of ERISA and Sections 4980B of the Code. (iv) Benefit Arrangements. Each Benefit Arrangement has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including without limitation the Code. (v) Deductibility of Payments. There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company (with respect to its relationship with such entities) that, A-15 individually or collectively, provides for the payment by the Company of any amount that is not deductible under Section 162(a)(1) or 404 of the Code, (vi) Foreign Employees. No Employee Plan covers foreign employees, other than resident aliens. (vii) Fiduciary Duties and Prohibited Transactions. None of the Company, any ERISA Affiliate or any plan fiduciary of any Employee Plan has engaged in any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code, or has otherwise violated the provisions of Part 4 of Title I, Subtitle B of ERISA, which could result in any material liability to the Company. The Company has not been assessed any civil penalty under Section 502(l) of ERISA. (viii) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitral action, letters requesting information, governmental audit, investigation or voluntary compliance resolution or closing agreement program proceeding relating to or seeking benefits under any Employee Plan that is pending, threatened or anticipated against the Company, any ERISA Affiliate or any Employee Plan. (ix) No Acceleration or Creation of Rights. Except as provided in Section 3.14 of the Company Disclosure Schedule, neither the execution and delivery of this Agreement or other related agreements by the Company nor the consummation of the transactions contemplated hereby or the related transactions will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan (including, without limitation, the acceleration of the vesting or exercisability of any stock options, the acceleration of the vesting of any restricted stock, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). (x) Other. The Company and its ERISA Affiliates have performed all of their obligations under all the Employee Plans and Other Benefit Obligations of the Company and its ERISA Affiliates. No statement, either written or oral, has been made by the Company or any ERISA Affiliate to any person with regard to any Employee Plan or Other Benefit Obligation that was not in accordance with the Employee Plan or Other Benefit Obligation and that could have, individually or in the aggregate, a material adverse effect on the Company or such ERISA Affiliate. All tax, annual reporting and other governmental filings required by ERISA and the Code as to each Plan of the Company or its ERISA Affiliates have been timely filed with the appropriate governmental agency, and all notices and disclosures to participants of such Plans required by either ERISA or the Code have been timely provided to such participants. No amount, nor any asset of any Employee Plan of the Company and its ERISA Affiliates is subject to tax as unrelated business taxable income. Section 3.15. Compliance with Law; Authorizations. (a) The Company, each of its Subsidiaries and the conduct of their respective businesses is and has been in compliance with all applicable Regulations and judgments, decisions or orders entered by any Governmental Entity relating to the business, operations, assets or properties of the Company and each of its Subsidiaries. "Regulations" shall mean any laws, statutes, ordinances, regulations, rules, notice requirements, agency guidelines and orders of any Governmental Entity. Neither the Company nor any of its Subsidiaries has received any written or, to its knowledge, other notice to the effect that, or otherwise been advised that, it is not in or may not be in compliance with any Regulations, and neither the Company nor any of its Subsidiaries have any reason to anticipate that any currently existing circumstances are or have been likely to result in violations of any Regulations. (b) The Company and each of its Subsidiaries have all licenses, permits, authorizations and approvals issued by Governmental Entities (collectively, "Permits"), all of which are currently valid and in full force and effect, necessary to carry on their respective businesses as presently conducted and as proposed to be conducted. A-16 Section 3.16. Registration Statement and Proxy Statement. The information to be supplied by the Company for inclusion in the Registration Statement shall not at the time the Registration Statement is filed with or declared effective by the SEC or at the date of the Company Stockholders' Meeting contain any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in light of the circumstances under which they were made, not misleading. The Proxy Statement shall not, on the date the Proxy Statement is first mailed to shareholders of the Company, at the time of the Company Shareholders' Meeting, or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made in the Proxy Statement not false or misleading (excluding any statement based upon information supplied by Parent for inclusion in the Proxy Statement). Section 3.17. Labor Matters. (i) There are no controversies pending or, to the best knowledge of the Company, threatened between the Company or any of its Subsidiaries and any of their respective employees; (ii) to the knowledge of the Company, there are no activities or proceedings of any labor union to organize any non-unionized employees; and (iii) there are no unfair labor practice complaints pending against the Company or any of its Subsidiaries before the National Labor Relations Board, or any similar foreign labor relations governmental bodies, or any current union representation questions involving employees of the Company or any of its Subsidiaries. The Company and its Subsidiaries are not parties to any collective bargaining agreements. Section 3.18. Insurance. The Company and its Subsidiaries maintain policies or binders of fire, liability, title, worker's compensation and other forms of insurance in a character and in amounts at least equivalent to that carried by persons engaged in similar businesses and which are sufficient for compliance with all requirements of law and of all Material Contracts to which the Company or any of its Subsidiaries is a party. The Company is not in default under any of such policies or binders, the Company has not failed to give any notice or to present any claim under any such policy or binder in a due and timely fashion, and such policies and binders are in full force and effect on the date hereof and shall be kept in full force and effect by the Company through the Closing Date. Section 3.19. Year 2000 Problem. The "Year 2000 Problem" (that is, the risk that computer applications used by any person may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999) did not and will not have a Company Material Adverse Effect. Section 3.20. Opinion of Financial Advisor. The financial advisors of the Company, Prudential Securities, delivered to the Company an opinion dated the date of this Agreement to the effect that the Merger Consideration is fair to the holders of the Company Common Stock from a financial point of view. Section 3.21. Brokers. None of the Company, any of its Subsidiaries, or any of their respective officers, directors or employees have employed any broker, financial advisor or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement, except that the Company has retained Prudential Securities as its financial advisor, the arrangements with which have been disclosed in writing to Parent and Merger Sub prior to, and will not be modified subsequent to, the date of this Agreement. Section 3.22. Transactions With Affiliates. Other than the transactions contemplated by this Agreement and except to the extent disclosed in the Company SEC Reports filed prior to the date hereof or as disclosed in Section 3.23 of the Company Disclosure Schedule, there have been no transactions, agreements, arrangements or understandings between the Company or any of its Subsidiaries, on the one hand, and the Company's affiliates or other persons, on the other hand, that would be required to be disclosed under Item 404 of Regulation S-K under the Securities Act. A-17 Section 3.23. No Excess Parachute or Nondeductible Payments. Any amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of the Company or any of its affiliates who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Benefit Arrangement currently in effect does not constitute an "excess parachute payment" (as such term is defined in Section 280G(b)(1) of the Code and the proposed regulations thereunder). Neither the Company nor any of its Subsidiaries is a party to any agreement, contract or arrangement that could result, on account of the transactions contemplated hereunder, individually or in the aggregate, in any payment that would be nondeductible under Section 162(m) of the Code. Section 3.24. State Anti-Takeover Statutes. The Board of Directors of the Company has approved the terms of this Agreement and the Voting, Option and Disposition Agreement and the consummation of the transactions contemplated hereby and thereby, and such approvals are sufficient to render inapplicable to the Merger and the other transactions contemplated by this Agreement and the Voting, Option and Disposition Agreement the restrictions of Section 1090.3 of the OGCA. No other "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation applies or purports to apply to the Merger, this Agreement, the Voting, Option and Disposition Agreement or any of the transactions contemplated by this Agreement or the Voting, Option and Disposition Agreement. Section 3.25. Accuracy of Information. No representation or warranty by the Company contained in this Agreement or in any certificate to be furnished by or on behalf of the Company or its Subsidiaries pursuant hereto contains or will contain any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading with respect to the Company and its Subsidiaries as a whole or the transactions contemplated by this Agreement. Section 3.26. Inventory. Except as set forth in Section 3.26 of the Company Disclosure Schedule, (i) all items of the Company's inventory and related supplies reflected on the Company Balance Sheet or thereafter acquired (and not subsequently disposed of in the ordinary course of business) are merchantable, for sale in the ordinary course of business at normal mark-ups, (ii) none of such items of the Company's inventory is obsolete (except to the extent accrued from the Company Balance Sheet) and (iii) each item of such inventory reflected on the Company Balance Sheet and the books and records of the Company is so reflected on the basis of a complete physical count and is valued at the lower of cost or market in accordance with GAAP. Section 3.27. Customers and Suppliers. Except for matters that reasonably could not be expected to have a Company Material Adverse Effect, no supplier or customer of the Company has advised the Company formally or informally that such customer or supplier intends to terminate, discontinue or substantially reduce its business with the Company and the Company does not expect the occurrence of the Effective Time to adversely affect such relationship. Article IV. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to the Company that the statements contained in this Article IV are true and correct except as set forth herein and in the disclosure schedule delivered by Parent and Merger Sub to the Company on or before the date of this Agreement (the "Parent Disclosure Schedule"). The Parent Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article IV. Section 4.1. Organization. Each of Parent and Merger Sub is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate, partnership or A-18 limited liability company power and authority to carry on its business as now being conducted and as proposed to be conducted. Each of Parent and its Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified, licensed or in good standing could not be expected, individually or in the aggregate, to have a material adverse effect on the business, properties, financial condition or results of operations of Parent and its Subsidiaries, taken as a whole (a "Parent Material Adverse Effect"). Parent has delivered to the Company true and correct copies of the Certificate of Incorporation and Bylaws of each of Parent and Merger Sub, in each case as amended to the date and each of such documents is in full force and effect. Section 4.2. Authority; No Conflict; Required Filings and Consents. (a) Parent and Merger Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Parent and Merger Sub have been duly authorized by all necessary corporate action on the part of Parent and Merger Sub. This Agreement has been duly executed and delivered by Parent and Merger Sub (as applicable) and constitutes the valid and binding obligation of Parent and Merger Sub (as applicable), enforceable against each of them in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditor rights and to general equity principles. (b) The execution and delivery of this Agreement by Parent and Merger Sub (as applicable) does not, and the consummation of the transactions contemplated hereby will not, (i) conflict with, or result in any violation or breach of, any provision of the Certificate of Incorporation or Bylaws of Parent or Merger Sub (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Parent or Merger Sub is a party or by which any of them or any of their properties or assets may be bound other than as disclosed in Section 4.2(b) of the Parent Disclosure Schedule, or (iii) subject to the governmental filings and other matters referred to in Section 4.2(c), conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or Merger Sub or any of its or their properties or assets. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Parent or Merger Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) those required under or in relation to the HSR Act, (ii) state securities or "blue sky" laws, (iii) the Securities Act, (iv) the Exchange Act, (v) the OGCA with respect to the filing and recordation of appropriate documents to effect the Merger and (vi) rules and regulations of the New York Stock Exchange ("NYSE"). Section 4.3. Parent Common Stock. The shares of Parent Common Stock to be issued pursuant to Article I will, when issued, be duly authorized, validly issued, fully paid and nonassessable, and no stockholder of Parent is entitled to preemptive rights as a result of the issuance of the Parent Company Stock hereunder. The Parent Common Stock to be issued in the Merger pursuant to Article I will, when issued, be registered under the Securities Act and the Exchange Act and registered or exempt from registration under any applicable state securities laws, in each case for delivery hereunder to holders of Company Common Stock. Parent has available for issuance a sufficient number of shares of authorized Parent Common Stock necessary to satisfy the obligations of Parent under this Agreement. Section 4.4. SEC Filings: Financial Statements. Parent has made available to the Company all forms, statements and documents filed by Parent with the SEC since April 1, 1997 (collectively, the "Parent SEC Reports"). The Parent SEC Reports (including any financial statements filed as a part thereof or incorporated A-19 by reference therein) (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not, at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Parent SEC Reports or necessary in order to make the statements in such Parent SEC Reports, in the light of the circumstances under which they were made, not misleading. (a) (i) Each of the consolidated financial statements (including, in each case, any related notes) of Parent contained in the Parent SEC Reports complied as to form in all material respects with the applicable rules, regulations and practices of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q under the Exchange Act) and fairly presented the consolidated financial position of Parent and its Subsidiaries as of the dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The audited balance sheet of Parent as of December 31, 1999 is referred to herein as the "Parent Balance Sheet." (ii) Parent maintains a system of accounting controls sufficient to provide reasonable assurances that (A) its transactions and those of its Subsidiaries are executed in accordance with management's general or specific authorization, (B) its transactions and those of its Subsidiaries are recorded as necessary to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets, (C) access to its assets and those of its Subsidiaries is permitted only in accordance with management's general or specific authorization, and (D) the recorded accountability for its assets and those of its Subsidiaries is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 4.5. Proxy Statement/Registration Statement. The Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in light of the circumstances under which they were made, not misleading (excluding any statement based upon information supplied by the Company for inclusion in the Proxy Statement). The information to be supplied by Parent for inclusion in the Registration Statement shall not on the date the Proxy Statement is first mailed to shareholders of the Company, at the time of the Company Stockholders' Meeting, and at the Effective Time, contain any statement that, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made in the Proxy Statement not false or misleading. Section 4.6. Absence of Certain Changes or Events. Except as disclosed in the Parent SEC Reports filed prior to the date of this Agreement, since March 31, 2000, there has not been any event, change or development which, individually or in the aggregate, could reasonably be expected to have a Parent Material Adverse Effect. Section 4.7. No Vote Required. No vote or approval of the holders of any class of Parent shares is necessary to approve this Agreement and the transactions contemplated hereby. Section 4.8. Merger Sub. Merger Sub was formed solely for the purpose of effecting the Merger and has not engaged in any business activities or conducted any operations other than in connection with the Merger. Except for obligations or liabilities incurred in connection with its incorporation or organization and the transactions contemplated by this Agreement, and except for this Agreement and any other agreements or arrangements contemplated by this Agreement, Merger Sub has not incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or entered into any agreement or arrangements with any person. A-20 Section 4.9. Brokers. None of Parent, any of its Subsidiaries, or any of their respective officers, directors or employees have employed any broker, financial advisor or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement. Section 4.10. Accuracy of Information. No representation or warranty by Parent or Merger Sub contained in this Agreement or in any certificate to be furnished by or on behalf of Parent or its Subsidiaries pursuant hereto contains or will contain any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading with respect to Parent and its Subsidiaries as a whole or the transactions contemplated by this Agreement. Article V. COVENANTS Section 5.1. Conduct of Business of the Company. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, the Company agrees as to itself and each of its Subsidiaries (except to the extent that Parent shall otherwise consent in writing) to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and taxes when due subject to good faith disputes over such debts or taxes, to pay or perform its other obligations when due, and, to the extent consistent with such business, use all reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, and others having business dealings with it. Without limiting the generality of the foregoing and except as expressly contemplated by this Agreement, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, without the written consent of Parent, the Company shall not and shall not permit any of its Subsidiaries to: (i) adopt any amendment to its Certificate of Incorporation or Bylaws or comparable charter or organizational documents; (ii) (A) other than pursuant to the Prudential Agreement issue, pledge or sell, or authorize the issuance, pledge or sale of additional shares of capital stock of any class, or securities convertible into capital stock of any class, or any rights, warrants or options to acquire any convertible securities or capital stock, or any other securities in respect of, in lieu of, or in substitution for, shares of Company Common Stock outstanding on the date hereof or (B) amend, waive or otherwise modify any of the terms of any option, warrant or stock option plan of the Company or any of its Subsidiaries, including without limitation, the Company Stock Options or the Company Option Plans; (iii) declare, set aside or pay any dividend or other distribution (whether in cash, securities or property or any combination thereof) in respect of any class or series of its capital stock other than between any wholly owned Subsidiary of the Company and the Company or any other wholly owned Subsidiary of the Company; (iv) split, combine, subdivide, reclassify or other than pursuant to the Prudential Agreement, redeem, purchase or otherwise acquire, or propose to redeem or purchase or otherwise acquire, any shares of its capital stock, or any of its other securities; (v) (A) increase the compensation or fringe benefits payable or to become payable to its directors, officers or employees (whether from the Company or any of its Subsidiaries), or pay any benefit not required by any existing plan or arrangement (including, without limitation, the granting of stock options, stock appreciation rights, shares of restricted stock or performance units) or grant any severance or termination pay to, or (B) enter into any employment or severance agreement with, any director, officer or employee of the Company or any of its Subsidiaries or establish, adopt, enter into, or amend any collective bargaining, Employee plan or Other Benefit Obligation, to the extent required by applicable Regulations; A-21 (vi) (A) sell, pledge, lease, dispose of, grant, encumber, or otherwise authorize the sale, pledge, disposition, grant or encumbrance of any material properties or assets of the Company or any of its Subsidiaries or (B) acquire (including, without limitation, by merger, consolidation, lease or acquisition of stock or assets) any corporation, partnership, other business organization or any business thereof (or a substantial portion of the assets thereof) or any other assets; (vii) (A) incur, assume or pre-pay any Indebtedness, except that the Company and its Subsidiaries may incur or pre-pay debt in the ordinary course of business consistent with past practice under existing lines of credit, (B) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person except in the ordinary course of business consistent with past practice, or (C) make any loans, advances or capital contributions to, or investments in, any other person except in the ordinary course of business consistent with past practice and except for loans, advances, capital contributions or investments between any wholly- owned Subsidiary of the Company and the Company or another wholly-owned Subsidiary of the Company; provided, however, that in no event shall the Company or any of its Subsidiaries incur Indebtedness which is subject to any penalty, premium, "make-whole" or similar obligation in connection with pre-payment thereof; (viii) authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of the Company or any of its Subsidiaries; (ix) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, amend any Tax Return except in the ordinary course of business consistent with past practice, or, except as may be required by applicable law, make any change to any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the Company's consolidated federal income tax return for the taxable year ending December 31, 1998; (x) settle or consent to any judgment concerning any pending or threatened litigation involving the Company or any of its Subsidiaries (whether brought by a private party or a Governmental Entity); (xi) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures, unless required by GAAP or the SEC; (xii) modify, amend or terminate any of the Company Material Contracts or waive, release or assign any material rights or claims, except in the ordinary course of business consistent with past practice; (xiii) take, or agree to commit to take, any action that would make any representation or warranty of the Company contained herein inaccurate in any respect at, or as of any time prior to, the Effective Time such that the condition to Closing set forth in Section 6.3(a) would not be likely satisfied; (xiv) engage in any transaction with, or enter into any agreement, arrangement, or understanding with, directly or indirectly, any of the Company's Affiliates which involves the transfer of consideration or has a financial impact on the Company, other than pursuant to such agreements, arrangements, or understandings existing on the date of this Agreement which are set forth in the Company Disclosure Schedule or in the Company SEC Reports filed prior to the date hereof; (xv) make any capital expenditures in excess of $100,000, individually or $300,000 in the aggregate; (xvi) amend, modify or terminate any standstill or confidentiality agreement or waive, release or assign any rights of the Company under any such agreement; or (xvii) enter into an agreement, contract, commitment or arrangement to do any of the foregoing, or to authorize, recommend, propose or announce an intention to do any of the foregoing. Section 5.2. Cooperation; Notice; Cure. Subject to compliance with applicable law, from the date hereof until the Effective Time, the Company shall confer on a regular basis with one or more representatives of A-22 Parent to report on the general status of ongoing operations at the Company. Each of Parent and the Company shall promptly notify the other in writing of, and will use all commercially reasonable efforts to cure before the Closing Date, any event, transaction or circumstance, as soon as practical after it becomes known to such party, that causes or will cause any covenant or agreement of such party under this Agreement to be breached or that renders or will render untrue any representation or warranty of such party contained in this Agreement. No notice given pursuant to this paragraph shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement for purposes of determining satisfaction of any condition contained herein. Section 5.3. No Solicitation. (a) The Company shall not, directly or indirectly, through any officer, director, employee, financial advisor, representative or agent of such party (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, recapitalization, sale of substantial assets, sale or acquisition of shares of capital stock (including, without limitation, by way of a tender offer) or similar transaction involving the Company or any of its subsidiaries, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) initiate or engage in negotiations or discussions with any person (or group of persons) other than the Parent or its respective affiliates (a "Third Party") concerning, or provide any non-public information to any person or entity relating to or in contemplation of, any Acquisition Proposal, or (iii) agree to or recommend any Acquisition Proposal; provided, however, that nothing contained in this Agreement shall prevent the Company or its Board of Directors from (A) furnishing non-public information to, or entering into discussions or negotiations with, any person or entity in connection with an unsolicited bona fide written Acquisition Proposal by such person or entity or modifying or withdrawing its recommendation with respect to the transactions contemplated hereby or recommending an unsolicited bona fide written Acquisition Proposal to the stockholders of the Company, if and only to the extent that (1) a Third Party has made a written proposal to the Board of Directors of the Company to consummate an Acquisition Proposal, which proposal identifies a price to be paid for the outstanding securities or substantially all of the assets of the Company, (2) the Board of Directors of the Company believes in good faith, after consultation with its financial advisors, that such Acquisition Proposal is reasonably capable of being completed on the terms proposed and would, if consummated, result in a transaction more favorable to the stockholders of such party than the transaction contemplated by this Agreement, (3) the Board of Directors of the Company determines in good faith based on the written advice of outside legal counsel, that such action is required for such Board of Directors to comply with its fiduciary duties to stockholders under applicable law, (4) the Company is not in breach of its obligations under this Section 5.3, and (5) prior to furnishing such non-public information to, or entering into discussions or negotiations with, such Third Party, the Board of Directors of the Company receives from such Third Party an executed confidentiality and standstill agreement with terms no less favorable to such party than those contained in the Confidentiality Agreement dated July 8, 1999 between the Parent and the Company (the "Confidentiality Agreement") (an Acquisition Proposal meeting the requirements of each of clauses (1) through (5) above is referred to as a "Superior Proposal"); or (B) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. The Company agrees not to release any Third Party from, or waive any provision of, any standstill agreement to which it is a party or any confidentiality agreement between it and another person who has made, or who may reasonably be considered likely to make, an Acquisition Proposal, unless the Board of Directors of the Company determines in good faith based on the written advice of outside legal counsel, that such action is required for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law. (b) The Company shall notify the Parent immediately after receipt by the Company or any of its subsidiaries (or any of their advisors) of any Acquisition Proposal or any request for non-public information in connection with an Acquisition Proposal or for access to the properties, books or records of such party by any Third Party that informs the Company or any of its subsidiaries (or any of their advisors) that it is interested in A-23 making, considering making, or has made, an Acquisition Proposal. Such notice shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. The Company shall continue to keep the Parent informed, on a current basis, of the status of any such discussions or negotiations and the terms being discussed or negotiated. Notwithstanding the foregoing, the Company shall not accept or enter into any agreement concerning a Superior Proposal for a period of at least five business days after the Parent's receipt of the notification of the terms thereof pursuant the second preceding sentence, during which period the Parent shall be afforded the opportunity to beat or improve upon the terms and conditions contained in such Superior Proposal. (c) The Company has terminated any direct or indirect (through any officer, director, employee, financial advisor, representative or agent of such party) discussions or negotiations with, and the provision of information or data to, any person (other than the Parent) respecting an Acquisition Proposal. Section 5.4. Preparation of Proxy Statement/Registration; Company Shareholder Meeting. (a) As promptly as practicable after the execution of this Agreement, Parent shall prepare and the Company shall cooperate therewith, and the Company shall file with the SEC, a proxy statement/prospectus (the "Proxy Statement") to be sent to the shareholders of the Company in connection with the Company Stockholders' Meeting to consider the Merger and the issuance of Parent Common Stock in connection therewith, and Parent shall prepare and file with the SEC a registration statement on Form S-4 pursuant to which the shares of Parent Common Stock to be issued in the Merger will be registered under the Securities Act (the "Registration Statement") and the Company shall cooperate therewith, in which the Proxy Statement will be included as a prospectus. Parent may delay the filing of the Registration Statement until after the Proxy Statement has been declared effective. Parent and the Company shall use reasonable best efforts to cause the Registration Statement to become effective as soon after filing as practicable. The Proxy Statement shall include the unanimous recommendation of the Board of Directors of the Company (with one director absent) in favor of this Agreement and the Merger unless the Board changes such recommendation pursuant to clause (e) below. Parent and the Company shall make all other necessary filings with respect to the Merger under the Securities Act and the Exchange Act and the rules and regulations thereunder. If at any time before the Effective Time any event relating to the Company or Parent, or any of its affiliates, officers, or directors, is discovered by the Company or Parent, respectively, that should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement, such party shall promptly so inform the other. (b) The Company shall take all action necessary to cause the representation set forth in Section 3.16 to be true and correct at all applicable times with respect to each of the Proxy Statement and the Registration Statement. (c) Parent shall take all action necessary to cause the representation set forth in Section 4.5 to be true and correct at all applicable times with respect to each of the Proxy Statement and the Registration Statement. (d) As soon as reasonably practicable, the Company and Parent shall take all such actions as may be necessary to comply with state "blue sky" or securities laws in connection with the transactions contemplated by this Agreement. (e) The Company shall, as soon as practicable following the date of this Agreement, duly call, give notice of, convene and hold a meeting of its shareholders (the "Company Stockholders' Meeting") for the purpose of obtaining the Required Company Votes with respect to this Agreement. The Board of Directors of the Company shall unanimously declare advisable and recommend adoption of this Agreement by the stockholders of the Company and, upon Parent's request, reconfirm such recommendation (provided that the Board of Directors of the Company need not make or reconfirm such recommendation (1) (x) if at the time that it would otherwise be required to make or reconfirm such recommendation the Company is not then in breach of its obligations under Section 5.3 and (y) in such event, if and only to the extent that the Board of Directors of the Company concludes in good faith (after having consulted with and considered the advice of outside legal counsel) in A-24 connection with the receipt of a Superior Proposal that such action is necessary in order for its directors to comply with their respective fiduciary duties under applicable law, or (2) if no other Acquisition Proposal is pending or in Parent's reasonable judgment likely to become pending). Notwithstanding the foregoing, the Company shall use its best efforts to solicit such adoption, and the Company shall nevertheless submit this Agreement to its stockholders for consideration. Section 5.5. Access to Information. Upon reasonable notice, the Company shall (and shall cause its Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of Parent, access, during normal business hours during the period prior to the Effective Time, to all its personnel, properties, books, contracts, commitments and records and, during such period, the Company shall, and shall cause its Subsidiaries to, furnish promptly to the other (a) copies of monthly financial reports and acquisition related reports, (b) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (c) all other information concerning its business, properties and personnel as Parent may reasonably request. Parent will hold any such information furnished to it by the Company which is nonpublic in confidence in accordance with the Confidentiality Agreement. No information or knowledge obtained in any investigation pursuant to this Section 5.5 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Merger. Section 5.6. Legal Conditions to Merger. (a) The Company and Parent shall each use their best efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary and proper under applicable law to consummate and make effective the transactions contemplated hereby as promptly as practicable, (ii) obtain from any Governmental Entity or any other third party any consents, licenses, permits, waivers, approvals, authorizations, or orders required to be obtained or made by the Company or Parent or any of their Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby including, without limitation, the Merger, and (iii) as promptly as practicable, make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable federal or state securities laws, (B) the HSR Act and any related governmental request thereunder, and (C) any other applicable law; without limiting the foregoing, the parties shall undertake all reasonable efforts to cause to be filed all requisite filings under the HSR Act within 10 business days of the date of this Agreement. The Company and Parent shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the non-filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. The Company and Parent shall use their best efforts to furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law (including all information required to be included in the Proxy Statement and the Registration Statement) in connection with the transactions contemplated by this Agreement. (b) Parent and the Company agree, and shall cause each of their respective Subsidiaries, to cooperate and to use their respective best efforts to obtain any government clearances required for Closing (including through compliance with the HSR Act), to respond to any government requests for information, and to contest and resist any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) (an "Order") that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement, including, without limitation, by vigorously pursuing all available avenues of administrative and judicial appeal and all available legislative action. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any A-25 other federal or state antitrust or fair trade law. Parent shall be entitled to direct any proceedings or negotiations with any Governmental Entity relating to any of the foregoing, provided that it shall afford the Company a reasonable opportunity to participate therein. Notwithstanding anything to the contrary in this Section 5.6, neither Parent nor the Company nor any of their respective Subsidiaries shall be required to take any action that would reasonably be expected to substantially impair the overall benefits expected, as of the date hereof, to be realized from the consummation of the Merger or the divestiture or holding separate of any assets or businesses. (c) Each of the Company and Parent shall give (or shall cause their respective Subsidiaries to give) any notices to third parties, and use, and cause their respective Subsidiaries to use, their best efforts to obtain any third party consents related to or required in connection with the Merger that are set forth on Schedule 5.6(c) (collectively, the "Required Consents"). Section 5.7. Publicity. Parent and the Company shall agree on the form and content of the initial press release regarding the transactions contemplated hereby and thereafter shall consult with each other before issuing, and use all reasonable efforts to agree upon, any press release or other public statement with respect to any of the transactions contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law. Section 5.8. Tax-Free Reorganization. Parent and the Company shall each use their respective best efforts to cause the Merger to be treated as a "reorganization" within the meaning of Section 368(a) of the Code. Section 5.9. Affiliate Agreements. Upon the execution of this Agreement, the Company will provide Parent with a list of those persons who are, in the Company's reasonable judgment, "affiliates" of the Company within the meaning of Rule 145 (each such person who is an "affiliate" of the Company within the meaning of Rule 145 is referred to as an "Affiliate") promulgated under the Securities Act ("Rule 145"). The Company shall provide Parent such information and documents as Parent shall reasonably request for purposes of reviewing such list and shall notify Parent in writing regarding any change in the identity of its Affiliates prior to the Closing Date. The Company shall use its best efforts to deliver or cause to be delivered to Parent by August 15, 2000 (and in any case prior to the Effective Time) from each of its Affiliates, an executed Affiliate Agreement, in form and substance satisfactory to Parent (an "Affiliate Agreement"). Parent shall be entitled to place appropriate legends on the certificates evidencing any Parent Common Stock to be received by such Affiliates of the Company pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Stock, consistent with the terms of the Affiliate Agreements (provided that such legends or stop transfer instructions shall be removed, one year after the Effective Date, upon the request of any stockholder that is not then an Affiliate of Parent). Section 5.10. NYSE Listing. Parent shall promptly prepare and submit to the NYSE a listing application covering the shares of Parent Common Stock to be issued in the Merger, and shall use all reasonable efforts to cause such shares to be approved for listing on the NYSE, subject to official notice of issuance, prior to the Effective Time. Section 5.11. Prudential Agreement. Parent, the Company and the Prudential Insurance Company of America ("Prudential") shall enter into an agreement with respect to the repayment of certain subordinated notes, on terms and conditions satisfactory to each of the Parent, the Company and Prudential (the "Prudential Agreement"). Section 5.12. Indemnification. (a) From and after the Effective Time, Parent agrees that it will, and will cause the Surviving Corporation to, indemnify and hold harmless each present and former director and officer of the Company (the "Indemnified Parties"), against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities or amounts paid in settlement incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters A-26 existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent that the Company would have been permitted under Oklahoma law and its Certificate of Incorporation or Bylaws in effect on the date hereof to indemnify such Indemnified Party. (b) For a period of three years after the Effective Time, Parent shall maintain or shall cause the Surviving Corporation to maintain (to the extent available in the market) in effect a directors' and officers' liability insurance policy covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (copies of which have been heretofore delivered by the Company to Parent) with coverage in amount and scope at least as favorable as the Company's existing coverage; provided that in no event shall Parent or the Surviving Corporation be required to expend in the aggregate in excess of 150% of the annual premium currently paid by the Company for such coverage; and if such premium would at any time exceed 150% of the such amount, then Parent or the Surviving Corporation shall maintain insurance policies which provide the maximum and best coverage available at an annual premium equal to 150% of such amount. (c) The provisions of this Section 5.12 are intended to be an addition to the rights otherwise available to the current officers and directors of the Company by law, charter, statute, bylaw or agreement, and shall operate for the benefit of, and shall be enforceable by, each of the Indemnified Parties, their heirs and their representatives. Section 5.13. Letter of the Company's Accountants. The Company shall use reasonable efforts to cause to be delivered to Parent and the Company a letter of Arthur Andersen LLP, the Company's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to Parent, in form reasonably satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. Section 5.14. Stockholder Litigation. The Company shall give Parent the reasonable opportunity to participate in the defense of any stockholder litigation against the Company and its directors relating to the transactions contemplated hereby. Section 5.15. Stock Exchange Listing. Parent and the Company agree to continue the listing and quotation of Parent Common Stock and Company Common Stock on the NYSE and the AMEX, respectively, during the term of this Agreement though the Effective Time. Section 5.16. Employee Benefits. Parent and the Company agree that the Company and the Surviving Corporation shall pay promptly or provide when due all compensation and benefits required to be paid pursuant to the terms of any Employee Plan or Other Benefit Obligation as disclosed to Parent as of the Effective Time. The Company shall take all action necessary to terminate its 401(k) Plan (the "Company 401(k) Plan") in compliance with applicable law, no later than immediately prior to the Effective Time. On or as soon as administratively practicable following the Effective Time employees who were participants in the Company 401(k) Plan shall be eligible to participate in the 401(k) Plan sponsored by Parent or one of its Subsidiaries ("Parent 401(k) Plan"). At the election of participants, Parent 401(k) Plan shall accept rollovers from the Company 401(k) Plan. Nothing herein shall require the continued employment of any person. Years of service with the Company and its Subsidiaries prior to the Effective Time shall be treated as service with the Surviving Corporation or Parent for eligibility and vesting purposes and for purposes of vacation and severance pay accruals, except to the extent such treatment will result in the duplication of benefits. Section 5.17. Fees and Expenses. Whether or not the Merger is consummated, all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such Expenses. "Expenses" means all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby, including the preparation, printing, filing and mailing of the Proxy Statement and the solicitation of shareholder approvals and all other matters related to the transactions contemplated hereby. A-27 Article VI. CONDITIONS TO MERGER Section 6.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction or waiver by each party prior to the Effective Time of the following conditions: (a) HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (b) No Injunctions. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any order, executive order, stay, decree, judgment or injunction or statute, rule, regulation which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. (c) Registration Statement. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order. (d) NYSE Listing. The shares of Parent Common Stock to be issued in the Merger shall have been approved for listing on the NYSE. (e) Stockholder Approval. The Required Company Vote shall have been obtained. Section 6.2. Additional Conditions to Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of each of the following conditions prior to the Effective Time, any of which may be waived in writing exclusively by the Company: (a) Representations and Warranties. (i) Each of the representations and warranties of Parent and Merger Sub set forth in this Agreement that is qualified as to materiality or Parent Material Adverse Effect shall have been true and correct when made and shall be true and correct on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date), and (ii) each of the representations and warranties of each of Parent and Merger Sub that is not so qualified shall have been true and correct when made and shall be true and correct on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date), except for such inaccuracies as could not be expected, individually or in the aggregate, to have a Parent Material Adverse Effect, and the Company shall have received a certificate of the chief executive officer and the chief financial officer of Parent to such effect with respect to both (i) and (ii) above. (b) Performance of Obligations of Parent. Parent shall have performed or complied with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are qualified as to materiality or Parent Material Adverse Effect and shall have performed or complied in all material respects with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are not so qualified as to materiality, and the Company shall have received a certificate of an executive officer of Parent to such effect. Section 6.3. Additional Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to effect the Merger are subject to the satisfaction of each of the following conditions prior to the Effective Time, any of which may be waived in writing exclusively by Parent: (a) Representations and Warranties. (i) Each of the representations and warranties of the Company set forth in this Agreement that is qualified as to materiality or Company Material Adverse Effect shall have been true and correct when made and shall be true and correct on and as of the Closing Date as if made on and as of A-28 such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date), and (ii) each of the representations and warranties of the Company that is not so qualified shall have been true and correct in all material respects when made and shall be true and correct on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date), except for such inaccuracies as could not be expected, individually or in the aggregate, to have a Company Material Adverse Effect, and Parent and Merger Sub shall have received a certificate of the chief executive officer and the chief financial officer of the Company to such effect with respect to both (i) and (ii) above. (b) Performance of Obligations. The Company shall have performed or complied with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are qualified as to materiality or Company Material Adverse Effect and shall have performed or complied in all material respects with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date that are not so qualified as to materiality or Company Material Adverse Effect, and Parent and Merger Sub shall have received a certificate of the chief executive officer and the chief financial officer of the Company to such effect. (c) Regulatory Approvals. All consents, approvals, orders, authorizations of, or registrations, licenses, declarations or filings with, any Governmental Entity required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired and no such approval shall contain any conditions, limitations or restrictions which Parent reasonably determines in good faith will have or would reasonably be expected to have a Company Material Adverse Effect or a Parent Material Adverse Effect. (d) Absence of Certain Changes or Events. Since the date of this Agreement, there shall not have been any event, development or change of circumstance that constitutes, has had, or to have, individually or in the aggregate, or could be expected to have a Company Material Adverse Effect. (e) Required Consents. All Required Consents shall have been obtained, and the Company shall have provided evidence thereof to the Parent, which evidence shall be reasonably satisfactory to Parent. (f) Non-Competition Agreements. Two-year non-competition agreements, substantially in the form attached as Exhibit C hereto, shall have been executed and delivered to Parent by all officers of the Company and affiliates of the Company as requested by Parent, including, but not limited to, Ray C. Davis and Kelcy L. Warren. (g) Prudential Agreement. Parent, the Company and Prudential shall have entered into the Prudential Agreement, and the Prudential Agreement shall be in full force and effect as of the Effective Time or shall have been consummated prior to the Effective Time. (h) Affiliate Agreements. Parent shall have received an Affiliate Agreement from each Person identified as an Affiliate pursuant to Section 5.9. (i) Suits; Actions. No suit, action, investigation or other proceeding by any Governmental Entity shall have been instituted and be pending which imposes, seeks to impose or reasonably would be expected to impose any remedy, condition or restriction that would have a Company Material Adverse Effect or that would materially restrict Parent's ownership or operation of the Company (except as provided in Section 5.6(b)). (j) Dissenting Shares. The number of shares of Company Common Stock with respect to which dissenters' rights have been asserted under the OGCA shall not exceed 7.5% of the number of outstanding shares of Company Common Stock. (k) Fairness Opinion. The Company's financial advisor, Prudential Securities, shall have rendered a fairness opinion with respect to this Agreement and the transactions contemplated hereby, and such opinion shall not have been withdrawn or adversely modified. A-29 (l) Estis Promissory Notes. All principal and accrued interest thereon under the promissory notes made by Dennis W. Estis and Barbara Estis in favor of the Company having principal amounts of $217,250 and $114,507 respectively, shall have been paid in full. Article VII. TERMINATION AND AMENDMENT Section 7.1. Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 7.1(b) through 7.1(h), by written notice by the terminating party to the other party), whether before or after approval of the matters presented in connection with the Merger by the stockholders of the Company: (a) by mutual written consent of the Company and Parent; or (b) by either Parent or the Company if the Merger shall not have been consummated by six months from signing (the "Outside Date"), provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (c) by either Parent or the Company if a court of competent jurisdiction or other Governmental Entity shall have issued a nonappealable final order, decree or ruling or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; or (d) by Parent or the Company, if, at the Company Stockholders' Meeting (including any adjournment or postponement), the requisite vote of the stockholders of the Company in favor of the approval and adoption of this Agreement and the Merger shall not have been obtained; or (e) By Parent if (i) the Board of Directors of the Company shall have withdrawn, or adversely modified, or failed (upon Parent's request) to reconfirm its recommendation of the Merger or this Agreement (or determined to do so); (ii) the Board of Directors of the Company shall have determined to recommend to the shareholders of the Company that they approve an Acquisition Proposal other than that contemplated by this Agreement or shall have determined to accept a Superior Proposal; (iii) a tender offer or exchange officer that, if successful, would result in any person or "group" becoming a "beneficial owner" (such terms having the meaning in this Agreement as is ascribed under Regulation 13D under the Exchange Act) of 20% or more of the outstanding shares of Company Common Stock is commenced (other than by Parent or an Affiliate of Parent) and the Board of Directors of the Company fails to recommend that the shareholders of the Company not tender their shares in such tender or exchange offer; (iv) any person (other than Parent or an Affiliate of Parent) or "group" becomes the "beneficial owner" of 20% or more of the outstanding shares of Company Common Stock; or (v) for any reason the Company fails to call or hold the Company Shareholders Meeting by the Outside Date; or (f) by the Company, prior to the Required Company Vote if, as a result of a Superior Proposal received by such party from a Third Party, the Board of Directors of the Company determines in good faith, based on written advice of outside legal counsel, that accepting such Superior Proposal is required for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law; provided, however, that (i) no termination shall be effective pursuant to this Section 7.1(f) under circumstances in which a termination fee is payable by the Company pursuant to Section 7.3(b)(iv), unless concurrently with such termination, such termination fee is paid in full by the Company in accordance with Section 7.3(b)(iv) and (ii) the Company's right to terminate under this paragraph (f) shall not be available if the Company has breached Section 5.3; or (g) by Parent or the Company, if there has been a breach of any representation, warranty, covenant or agreement on the part of the other party set forth in this Agreement, which breach will cause the conditions set forth in Section 6.2(a) or (b) (in the case of termination by the Company) or Section 6.3(a) or (b) (in the case of termination by Parent) not to be satisfied. A-30 Section 7.2. Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of Parent, Merger Sub or the Company, or their respective officers, directors, stockholders or Affiliates, except as set forth in Section 7.3 and Article VIII and except that such termination shall not limit liability for a willful breach of this Agreement; provided that, the provisions of Section 7.3 of this Agreement and the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement. Section 7.3. Fees and Expenses. (a) (i) In addition to any payment required by Section 7.3(b), if this Agreement is terminated pursuant to Section 7.1(d), (e), (f) or by Parent pursuant to Section 7.1(b) (but only if such termination is due to the failure of the condition specified in Section 6.3(g) to be satisfied) or 7.1(g), then the Company shall pay Parent an amount equal to the sum of Parent's Expenses up to an amount equal to $750,000. (ii) If this Agreement is terminated pursuant to Section 7.1(g) by the Company, then Parent shall pay the Company an amount equal to the sum of the Company's expenses up to an amount equal to $750,000. (b) The Company shall pay Parent a termination fee of $1,665,000 upon the earliest to occur of the following events: (i) the termination of this Agreement by Parent pursuant to Section 7.1(b), if such termination is due to the failure of the condition specified in Section 6.3(g) to be satisfied; (ii) the termination of this Agreement pursuant to Section 7.1(d); (iii) the termination of this Agreement pursuant to Section 7.1(e); (iv) the termination of this Agreement pursuant to Section 7.1(f); or (v) the termination of this Agreement by Parent pursuant to Section 7.1(g). (c) The Company's or Parent's satisfaction of its obligations under this Section 7.3 shall be the sole and exclusive remedy of Parent against the Company and the Company against Parent and Merger Sub, as the case may be, and their respective directors, officers, employees, agents, advisors or other representatives with respect to the occurrences giving rise to such payment and the termination of this Agreement; provided that this limitation shall not apply in the event of a willful breach of this Agreement by the Company or Parent. (d) Fees payable pursuant to Section 7.3(b)(iv) shall be paid concurrently with the event described in Section 7.3(b)(iv). Fees pursuant to Section 7.3(b)(i), (ii), (iii) or (v) shall be paid within two business days of the first to occur of the events described in Section 7.3(b)(i), (ii), (iii) or (v). Expenses payable pursuant to Section 7.3(a) shall be paid with two business days of delivery to the Company or Parent, as the case may be, of a demand for payment and a documented itemization setting forth in reasonable detail all Expenses of Parent or the Company (which itemization may be supplemented and updated from time to time by Parent or the Company until the 60th day after Parent or the Company delivers such notice of demand for payment). All payments under this Section 7.3 shall be made by wire transfer of immediately available funds to an account designated by Parent or the Company, as the case may be. Section 7.4. Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of the Company, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 7.5. Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant A-31 hereto and (iii) waive compliance with any of the agreements or conditions contained here. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. Article VIII. MISCELLANEOUS Section 8.1. Nonsurvival of Representations, Warranties and Agreements. None of the representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the agreements contained in Sections 1.3, 5.12, 5.16 and 5.17 and Articles II and VIII, and the agreements of the Affiliates delivered pursuant to Section 5.9. The Confidentiality Agreement shall survive the execution and delivery of this Agreement. Section 8.2. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to the Company, to OEC Compression Corporation 2501 Cedar Springs Road, Suite 600 Dallas, Texas 75201 Attn: President Telecopy: (214) 954-9584 with a copy to Schlanger, Mills, Mayer & Silver, LLP 109 North Post Oak Lane, Suite 300 Houston, Texas 77024 Attn: Kyle Longhofer Telecopy: (713) 785-2091 (b) if to Parent, to Hanover Compressor Company 12001 N. Houston Rosslyn Road Houston, Texas 77086 Attn: Michael J. McGhan Telecopy: (281) 447-0821 with a copy to: Latham & Watkins 233 South Wacker Drive Suite 5800 Chicago, Illinois 60606 Attn: Richard Meller, Esq. Telecopy: (312) 993-9767 Section 8.3. Interpretation; Certain Definitions. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the A-32 meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." "Knowledge" or "to the knowledge of" of the Company or any of its Subsidiaries means the actual knowledge of Jack Brannon, Ray C. Davis, Kelcy L. Warren, Dan McCormick and Dennis W. Estis. "Person" or "person" has the meaning given to it in Section 3(a) of the Exchange Act. The term "affiliate" has the meaning given to it in Rule 12b-2 under the Exchange Act. Section 8.4. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 8.5. Entire Agreement; No Third Party Beneficiaries. This Agreement and all documents and instruments referred to herein (a) constitute the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 5.12, are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder; provided that the Confidentiality Agreements shall remain in full force and effect until the Effective Time. Each party hereto agrees that, except for the representations and warranties contained in this Agreement, none of Parent, Merger Sub or the Company makes any other representations or warranties, and each hereby disclaims any other representations and warranties made by itself or any of its officers, directors, employees, agents, financial and legal advisors or other representatives, with respect to the execution and delivery of this Agreement or the transactions contemplated hereby, notwithstanding the delivery or disclosure to any of them or their respective representatives of any documentation or other information with respect to any one or more of the foregoing. Section 8.6. Governing Law. The laws of the State of Oklahoma shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding by a party hereto with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may be brought in any state or federal court of competent jurisdiction in Houston, Texas, and each party hereto hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. Nothing herein shall in any way be deemed to limit the ability of a party hereto to serve any such writs, process or summonses in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives any objections which it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any state or federal court of competent jurisdiction in Houston, Texas, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. No suit, action or proceeding against a party hereto with respect to this Agreement may be brought in any court, domestic or foreign, or before any similar domestic or foreign authority other than in a court of competent jurisdiction in Houston, Texas, and each party hereto hereby irrevocably waives any right which it may otherwise have had to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. Section 8.7. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void, except that Merger Sub may assign, in its sole discretion, any or all of its rights, interests and obligations under this Agreement to any direct or indirect Subsidiary of Parent which is controlled (as such term is defined in Regulation S-X under the Exchange Act) by Parent without the consent of the Company. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. A-33 IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be signed by their respective duly authorized officers as of the date first written above. HANOVER COMPRESSOR COMPANY By: _________________________________ Its: ________________________________ Title: ______________________________ CADDO ACQUISITION CORPORATION By: _________________________________ Its: ________________________________ Title: ______________________________ OEC COMPRESSION CORPORATION By: _________________________________ Its: ________________________________ Title: ______________________________ A-34 Annex I Key Stockholders HACL, Ltd. Energy Investors Joint Venture A-35 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is dated as of November 14, 2000 and is by and among Hanover Compressor Company, a Delaware corporation ("Parent"), Caddo Acquisition Corporation, an Oklahoma corporation and a direct, wholly owned subsidiary of Parent ("Merger Sub"), and OEC Compression Corporation, an Oklahoma corporation (the "Company"). Terms used and not defined herein shall have the meanings assigned to them in the Agreement and Plan of Merger dated as of July 13, 2000 by and among the Parent, Merger Sub and the Company (the "Merger Agreement"). RECITALS: A. Parent, Merger Sub and the Company entered into the Merger Agreement as of July 13, 2000; and B. Parent, Merger Sub and the Company desire to amend the Merger Agreement as set forth in this Amendment. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows: 1. The second sentence of Section 3.2 of the Merger Agreement is amended to read in its entirety as follows: "As of the date hereof, (i) 37,060,776 shares of Company Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) 320,445 shares of Company Common Stock are held in the treasury of the Company or by Subsidiaries of the Company, and (iii) no shares of Company Preferred Stock are issued and outstanding." 2. Sections 5.11 and 6.3(g) of the Merger Agreement are deleted in their entirety. Parent and Merger Sub hereby waive any rights they may have as a result of the breach or non-fulfillment of the requirements of such Sections prior to the date of this Amendment. 3. Section 6.3(d) of the Merger Agreement is amended to read in its entirety as follows: (d) Absence of Certain Changes or Events. Since the date of this Agreement there shall not have been any event, development or change of circumstance that constitutes, has had, or, individually or in the aggregate, could be expected to have a Company Material Adverse Effect. Solely for purposes of this Section 6.3(d), a Company Material Adverse Effect shall have been deemed to occur only if it results from: (i) natural disasters or acts of God; (ii) war, terrorism or civil strife; (iii) criminal acts or civil fraud; or (iv) willful misconduct of the Company's officers. 4. Section 7.1(b) of the Merger Agreement is amended to read in its entirety as follows: (b) by either Parent or the Company if the Merger shall not have been consummated by March 1, 2001 (the "Outside Date"), provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or 5. The following is added as the last sentence of Section 8.3 of the Merger Agreement: "Knowledge" or "to the knowledge of" Parent or Merger Sub means the actual knowledge of Michael J. McGhan, William S. Goldberg and Charles A. Erwin. A-36 6. As of the date of this Amendment, to the knowledge of Parent and Merger Sub, there has not been any event, development or change of circumstance that constitutes, has had, or, individually or in the aggregate, could be expected to have a Company Material Adverse Effect (as such term is used in Section 6.3(d) of the Merger Agreement, as amended by this Amendment). 7. As of the date of this Amendment, to the knowledge of Parent and Merger Sub, the Company has not breached any of the representations and warranties contained in Article III of the Merger Agreement. 8. The Merger Agreement, as amended by this Amendment, and all documents and instruments referred to in the Merger Agreement (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 5.12 of the Merger Agreement, are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder; provided that the Confidentiality Agreements shall remain in full force and effect until the Effective Time. 9. The laws of the State of Oklahoma shall govern the interpretation, validity and performance of the terms of this Amendment, regardless of the law that might be applied under principles of conflicts of law. 10. This Amendment may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. [Remainder of this page intentionally left blank; Signature page follows] A-37 IN WITNESS WHEREOF, each of the parties hereto has executed this Amendment or caused this Amendment to be duly executed on its behalf by its officer thereunto duly authorized, as of the day and year first above written. HANOVER COMPRESSOR COMPANY a Delaware corporation By: _________________________________ Name: Michael J. McGhan Title: Chief Executive Officer CADDO ACQUISITION CORPORATION an Oklahoma corporation By: _________________________________ Name: Michael J. McGhan Title: Chief Executive Officer OEC COMPRESSION CORPORATION an Oklahoma corporation By: _________________________________ Name: _______________________________ Title: ______________________________ A-38 ANNEX B PRIVATE AND CONFIDENTIAL July 14, 2000 The Board of Directors OEC Compression Corporation 2501 Cedar Springs Road Suite 600 Dallas, TX 75201 Members of the Board of Directors: We understand that Hanover Compressor Company ("Hanover"), Caddo Acquisition Corporation, a wholly-owned subsidiary of Hanover ("Merger Sub") and OEC Compression Corporation (the "Company") have entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, Merger Sub shall merge with and into the Company (the "Merger"). In the Merger, each share of the Company's common stock, par value $.01 per share ("Company Common Stock") outstanding immediately prior to the effective time of the Merger will be converted into the right to receive a number of fully paid and nonassessable shares of common stock, par value $.001 per share, of Hanover ("Hanover Common Stock") equal to the quotient of (a) $1.00 divided by (b) the Hanover Price (the "Consideration"). The Hanover Price equals the average of the closing sales price per share of Hanover Common Stock for the twenty consecutive trading days immediately preceding the second business day prior to the effective date of the Merger; provided, however, that in no event will the Hanover Price be less than $30 or greater than $32.50. In addition, we understand that certain stockholders of the Company who in the aggregate own shares of Company Stock representing 43% of the currently issued and outstanding shares of Company Common Stock have entered into a Voting and Disposition Agreement (the "Voting and Disposition Agreement") with Hanover, contemporaneously with the execution of the Merger Agreement, pursuant to which each such stockholder agrees, among other things, to vote all shares of Company Common Stock owned by such stockholder in favor of the Merger. You have requested our opinion as to the fairness, from a financial point of view, of the Consideration to be received by the holders of the Company Common Stock in the Merger. In conducting our analysis and arriving at the opinion expressed herein, we have reviewed such materials and considered such financial and other factors we deemed relevant under the circumstances, including: (i) a draft, dated July 12, 2000, of the Merger Agreement; (i) a draft, dated July 11, 2000, of the Voting and Disposition Agreement; (i) certain publicly available historical financial and operating data concerning the Company including, but not limited to: (a) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999; (b) the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000; (c) and the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on July 13, 2000. (i) certain internal financial statements and other financial and operating data relating to the Company, including financial forecasts for the fiscal years ending December 31, 2000 through December 31, 2004, prepared by the management of the Company; (i) publicly available financial, operating and stock market data concerning certain companies engaged in businesses we deemed reasonably similar to that of the Company or otherwise relevant to our inquiry; (i) the financial terms of certain recent transactions we deemed relevant to our inquiry; (i) the historical stock prices and trading volumes of Company Common Stock; and B-1 (i) such other financial studies, analyses and investigations that we deemed appropriate. We have assumed, with your consent, that the drafts of the Merger Agreement and the Voting and Disposition Agreement which we reviewed will conform in all material respects to those documents when in final form. We have met with the senior management of the Company and Hanover to discuss: (i) the past and current operating and financial condition of the Company and Hanover, respectively; (ii) the prospects for the Company and Hanover, respectively; (iii) their estimates of the future financial performance of the Company and Hanover, respectively; and (iv) such other matters that we deemed relevant. In connection with our review and analysis and in arriving at our opinion, we have relied upon the accuracy and completeness of the financial and other information that is publicly available or was provided to us by the Company and we have not undertaken any independent verification of such information or any independent valuation or appraisal of any of the assets or liabilities of the Company. With respect to certain financial forecasts provided to us by senior management of the Company, we have assumed that such information (and the assumptions and bases therefor) represents senior management's best currently available estimate as to the future financial performance of the Company. Our opinion is necessarily based on economic, financial and market conditions as they exist and can only be evaluated as of the date hereof and we assume no responsibility to update or revise our opinion based upon events or circumstances occurring after the date hereof. Our opinion does not address nor should it be construed to address the relative merits of the Merger or alternative business strategies that may be available to the Company. As you know, we have been retained by the Company to render this opinion and will receive a fee upon rendering this opinion. In the ordinary course of business we may actively trade the shares of Company Common Stock for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. In addition, Prudential Insurance Company of America ("Prudential Insurance"), of which Prudential Securities Incorporated is an indirect wholly-owned subsidiary, is the holder of a subordinated note of the Company in the principal amount of $15,000,000. Prudential Insurance has agreed to surrender to the Company such note contemporaneously with the closing of the merger in exchange for a partial prepayment of $7,280,000 in cash and delivery of newly issued shares of Company Common Stock for the remaining outstanding principal amount. This letter and the opinion expressed herein are for the use of the Board of Directors of the Company. This opinion does not constitute a recommendation to the stockholders of the Company as to how such stockholders should vote regarding the Merger or as to any other action such stockholders should take regarding the Merger. This opinion may not be reproduced, summarized, excerpted from or otherwise publicly referred to or disclosed in any manner without our prior written consent; except that the Company may include this opinion in its entirety in any proxy statement or other document distributed to the Company's stockholders and filed with the Securities and Exchange Commission. Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, the Consideration to be received by the holders of the Company Common Stock in the Merger is fair to such holders from a financial point of view. Very truly yours, PRUDENTIAL SECURITIES INCORPORATED B-2 ANNEX C VOTING AND DISPOSITION AGREEMENT This VOTING AND DISPOSITION AGREEMENT, dated as of July 13, 2000 (this "Agreement"), by and among Hanover Compressor Company, a Delaware corporation ("Parent"), and the undersigned holders (collectively, the "Holders" and each a "Holder") of shares of common stock, par value $.01 per share ("Company Common Stock"), of OEC Compression Corporation, an Oklahoma corporation (the "Company"). RECITALS WHEREAS, the Company, Parent and Caddo Acquisition Corporation, an Oklahoma corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), propose to enter into an Agreement and Plan of Merger dated as of the date hereof (the "Merger Agreement"; capitalized terms used and not defined herein having the meanings given them in the Merger Agreement), pursuant to which Merger Sub would be merged with and into the Company (the "Merger"), and each outstanding share of Company Common Stock would be converted into the right to receive shares of common stock, par value $.001 per share, of Parent ("Parent Common Stock"); WHEREAS, as a condition of its entering into the Merger Agreement, Parent has requested each Holder to agree, and each Holder hereby agrees, to enter into this Agreement; WHEREAS, prior to the date hereof, Parent and the Holders had no agreement, arrangement or understanding (as such terms are used in Section 1090.3 of the Oklahoma General Corporation Law (the "OGCL")) for the purpose of acquiring, holding, voting or disposing of shares of Company Common Stock; and WHEREAS, in consideration for the agreements contained herein, prior to the execution hereof, and prior to Parent becoming an "interested stockholder" for purposes of Section 1090.3 of the OGCL, the Board of Directors of the Company has approved this Agreement, the Merger Agreement and the transactions contemplated hereby and thereby, including the agreement of the Holders to vote as provided in Section 2 of this Agreement and not to transfer shares of Company Common Stock as provided in Section 6(B) of this Agreement. AGREEMENT NOW, THEREFORE, the parties hereto agree as follows: 1. Representations and Warranties of the Holders. Each Holder represents and warrants, severally and not jointly, to Parent as follows: A. Ownership of Securities. As of the date hereof, such Holder is the record and/or beneficial owner of the number of shares of Company Common Stock (the "Existing Securities") (together with any shares of Company Common Stock or other securities, of the Company hereafter acquired by the Holder through purchase, exercise of options or warrants or otherwise, the "Subject Securities") set forth on the signature page to this Agreement. Such Holder does not beneficially or of record own any securities of the Company on the date hereof other than the Existing Securities. Such Holder has sole voting power and sole power to issue instructions with respect to the voting of the Existing Securities, sole power of disposition, sole power of exercise and the sole power to demand appraisal rights, in each case with respect to all of the Existing Securities, and, on the date of the Company Stockholders' Meeting (as defined in the Merger Agreement), will have the sole voting power and power to issue instructions with respect to the voting of all of such Holder's Subject Securities, the sole powers of disposition, exercise and the sole power to demand appraisal rights, in each case with respect to all of such Holder's Subject Securities. C-1 B. Authority; Binding Agreement. Each Holder has the legal capacity, power and authority to enter into and perform all of such Holder's obligations under this Agreement. The execution, delivery and performance of this Agreement by each Holder will not violate any other agreement relating to the Subject Securities to which the Holder is a party, including, without limitation, any voting agreement, stockholder's agreement, partnership agreement or voting trust. This Agreement has been duly and validly executed and delivered by such Holder and constitutes a valid and binding agreement of such Holder, enforceable against such Holder in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. C. No Conflicts. No filing with, and no permit, authorization, consent or approval of, any local, state or federal public body or authority is necessary for the execution of this Agreement by such Holder and the consummation by such Holder of the transactions contemplated hereby, and neither the execution and delivery of this Agreement by such Holder, nor the consummation by such Holder of the transactions contemplated hereby nor compliance by such Holder with any of the provisions hereof shall conflict with or result in any breach of any applicable corporate, partnership or other organizational documents applicable to such Holder, result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third-party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which such Holder is a party or by which such Holder's properties or assets may be bound or violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to such Holder or any of such Holder's properties or assets. D. No Encumbrances. The Subject Securities are now, and at all times during the term hereof will be, held by such Holder, or by a nominee or custodian for the benefit of such Holder, free and clear of all liens, claims, options, charges, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances or proxies whatsoever (collectively, "Encumbrances"), except for any encumbrances or proxies arising hereunder. E. No Finder's Fees. No broker, investment banker, financial advisor or other Person (as defined below) is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Holder except that the Company has employed Prudential Securities as its financial advisor, the arrangements with which have been disclosed in writing to Parent and Merger Sub prior to, and will not be modified subsequent to, the date of the Merger Agreement. "Person" shall mean any individual, corporation, partnership, limited liability company, sole proprietorship, trust, joint venture, firm, association, company or other entity. F. No Other Agreements. Except pursuant to the Merger Agreement, no Holder has a legal obligation, absolute or contingent, to any other Person to sell, dispose of or otherwise transfer all or any portion of the Subject Securities. G. Reliance by Parent. The Holders understand and acknowledge that Parent is entering into, and causing Merger Sub to enter into, the Merger Agreement in reliance upon the Holder's execution, delivery and performance of this Agreement. 2. Agreement to Vote Shares. During the period commencing on the date hereof and continuing until the first to occur of (i) the Effective Time and (ii) the termination of the Merger Agreement, at every meeting of the stockholders of the Company however called and at every adjournment thereof, and on every action or approval by written consent of the stockholders of the Company with respect to any of the following, each Holder, severally and not jointly, agrees that it shall vote (or caused to be voted), or execute a written consent with respect to, as appropriate, all of the Subject Securities as to which it has power to vote in any such vote or C-2 consent: (i) in favor of the Merger, the adoption of and execution and delivery by the Company of the Merger Agreement and the approval of the terms thereof and each of the other transactions contemplated by the Merger Agreement and (ii) against the following actions (other than the Merger and the transactions contemplated by the Merger Agreement): (1) any merger, consolidation, business combination, recapitalization, sale of substantial assets, sale or acquisition of shares of capital stock (including, without limitation, by way of a tender offer) or similar transaction involving the Company or any of its subsidiaries; (2) (a) any amendment of the Company's certificate of incorporation or bylaws or any change in the majority of the Board of Directors of the Company; (b) any material change in the present capitalization of the Company; (c) any other material change in the Company's corporate structure or business; or (d) any other action, which, in the case of each of the matters referred to in clauses (a), (b) or (c) above, is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, discourage or materially adversely affect the consummation of the Merger or the transactions contemplated by the Merger Agreement or this Agreement; and (3) any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or of a Holder under this Agreement. 3. IRREVOCABLE PROXY. EACH HOLDER HEREBY, SEVERALLY AND NOT JOINTLY, GRANTS TO, AND APPOINTS MERGER SUB AND THE PRESIDENT OF MERGER SUB AND THE TREASURER OF MERGER SUB, IN THEIR RESPECTIVE CAPACITIES AS OFFICERS OF MERGER SUB, AND ANY INDIVIDUAL WHO SHALL HEREAFTER SUCCEED TO ANY SUCH OFFICE OF MERGER SUB, AND ANY OTHER DESIGNEE OF MERGER SUB, EACH OF THEM INDIVIDUALLY, SUCH HOLDER'S PROXY WITH RESPECT TO THE SUBJECT SECURITIES AND ATTORNEY-IN-FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE OR ACT BY WRITTEN CONSENT WITH RESPECT TO SUCH HOLDER'S SUBJECT SECURITIES IN ACCORDANCE WITH SECTION 2 HEREOF. THIS PROXY IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE. EACH HOLDER WILL TAKE SUCH FURTHER ACTION OR EXECUTE SUCH OTHER INSTRUMENTS, INCLUDING, WITHOUT LIMITATION, THE FORM OF PROXY ATTACHED HERETO AS EXHIBIT A (THE "PROXY") AS MAY BE REASONABLY NECESSARY TO EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY IT WITH RESPECT TO THE SUBJECT SECURITIES. AS PROMPTLY AS PRACTICABLE, EACH HOLDER SHALL MAKE ALL FILINGS AND GIVE ALL NOTICES WITH RESPECT TO THE PROXY AS MAY BE REQUIRED BY APPLICABLE LAW. THE HOLDER SHALL NOT ENTER INTO ANY AGREEMENT OR UNDERSTANDING WITH ANY PERSON, THE EFFECT OF WHICH WOULD BE INCONSISTENT WITH, OR VIOLATIVE OF, THE PROVISIONS AND AGREEMENTS CONTAINED IN THIS SECTION 3. 4. Restrictions on Transfer of Parent Common Stock. Each of the Holders, hereby agree that such Holder shall not, directly or indirectly, during a period of 120 days from the Effective Time (the "Standstill Period"), without the prior written consent of Parent, sell, offer or agree to sell or otherwise dispose of any Parent Common Stock received by such Holder pursuant to the Merger. Each Holder further agrees that, for each succeeding 30-day period following the Standstill Period, such Holder shall not, directly or indirectly, without the written consent of Parent, sell, offer or agree to sell or otherwise dispose of, more than 15% of the shares of Parent Common Stock such Holder receives in connection with the Merger. Each Holder acknowledges and agrees that the certificates representing such Holder's Parent Common Stock will bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN VOTING AND DISPOSITION AGREEMENT DATED AS OF JULY 13, 2000 BY AND AMONG THE RESTRICTED HOLDERS (AS DEFINED THEREIN), HANOVER COMPRESSOR COMPANY AND CADDO ACQUISITION CORPORATION. 5. Representations and Warranties of Parent. A. Power; Binding Agreement. Parent has full corporate power and authority to enter into and perform all of Parent's obligations under this Agreement. This Agreement has been duly and validly C-3 executed and delivered by Parent and constitutes a valid and binding agreement of Parent, enforceable against Parent in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. B. No Conflicts. No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by Parent and the consummation by Parent of the transactions contemplated hereby and neither the execution and delivery of this Agreement by Parent nor the consummation by Parent of the transactions contemplated hereby, nor compliance by Parent with any of the provisions hereof shall conflict with or result in any breach of any organizational documents applicable to Parent, or result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default, or give rise to any third-party right of termination, cancellation, material modification or acceleration under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which Parent is a party or by which Parent's properties or assets may be bound, or violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to Parent or any of Parent's properties or assets, except for any such conflicts, breaches, defaults or violations as would not materially impair Parent's performance of its obligations hereunder. 6. Covenants of the Holders. Each Holder, severally and not jointly, hereby agrees and covenants that: A. No Solicitation. Such Holder (and Persons acting on behalf of the Holder) shall not, directly or indirectly, solicit (including by way of furnishing information), initiate, encourage or respond to, or take any other action knowingly to facilitate any inquiries or the making of any proposal by any Person with respect to the Company that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal or permit or authorize any Person acting on behalf of the Holder to do any of the foregoing. If any Holder receives any such inquiry or proposal, then it shall immediately inform Parent of all terms and conditions, if any, of such inquiry or proposal and the identity of the person making it and shall, in the case of written proposals or inquiries, furnish Parent with a copy of such proposal or inquiry (and all amendments and supplements thereto). Such Holder will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. B. Restriction on Transfer of Company Common Stock, Proxies and Noninterference. Such Holder shall not, prior to the termination of this Agreement, directly or indirectly, except pursuant to the terms of the Merger Agreement or this Agreement: (i) offer for sale, sell, transfer (whether by merger, operation of law or otherwise), tender, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, any or all of such Holder's Subject Securities; (ii) grant any proxies or powers of attorney, deposit any such Subject Securities into a voting trust or enter into a voting agreement with respect to any of such Holder's Subject Securities; or (iii) take any action that would make any representation, warranty, covenant or other provision contained herein untrue or incorrect or have the effect of, or could reasonably be expected to, impede, interfere with, delay, postpone, discourage or materially adversely affect such Holder from performing its obligations under this Agreement. The Holder's Company Common Stock certificates shall be legended to reflect the above restrictions. C. Waiver of Appraisal Rights. Such Holder hereby irrevocably waives any rights of appraisal or rights to dissent, if any, from the Merger that the Holder may now or hereafter have. D. Stop Transfer; Changes in Subject Securities. Such Holder shall not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Subject Securities, unless such transfer is made in compliance with this Agreement. In the event of C-4 a stock dividend or distribution, or any change in the Company Common Stock by reason of any stock dividend, split-up, merger, recapitalization, combination, conversion or exchange of shares or the like (in each case with a record date prior to the termination of this Agreement), the term "Subject Securities" shall be deemed to refer to and include the Subject Securities as well as all such stock dividends and distributions and any securities into which or for which any or all of the Subject Securities may be changed or exchanged and such dividends, distributions and securities, as the case may be, shall be paid to Parent at the Closing or promptly following the receipt of such dividend or distribution, if the Closing theretofor shall have occurred. E. Confidentiality. Such Holder recognizes that successful consummation of the transactions contemplated by this Agreement and the Merger Agreement may be dependent upon confidentiality with respect to the matters referred to herein. In this connection, pending public disclosure thereof in accordance with the provisions of the Merger Agreement, the Holder hereby agrees not to disclose or discuss such matters with any Person (other than Parent or Merger Sub and the respective counsel and advisors of the Holders, Parent and Merger Sub) without the prior written consent of Parent, except for filings required pursuant to the Exchange Act and the rules and regulations thereunder or disclosures necessary in order to fulfill the Holder's obligations imposed by law, in which event the Holder shall give prior written notice of such disclosure to Parent as promptly as practicable so as to enable Parent to seek a protective order from a court of competent jurisdiction with respect thereto. 7. Fiduciary Duties. Notwithstanding anything in this Agreement to the contrary, the covenants and agreements set forth herein shall not prevent any Holders serving on the Company's Board of Directors from taking any action, subject to applicable provisions of the Merger Agreement, which such director shall determine in good faith, after consultation with legal counsel, to be required by his fiduciary duties to the Company or its stockholders while acting in such person's capacity as a director of the Company. 8. Assignment; Benefits This Agreement may be assigned, in whole or in part, by Parent to Merger Sub or any other wholly-owned subsidiary of Parent, to the extent and for so long as such subsidiary remains a wholly-owned subsidiary of Parent. Other than as permitted in the preceding sentence, this Agreement may not be assigned by any party hereto without the prior written consent of the other party. This Agreement shall be binding upon, and shall inure to the benefit of, the Holder, Parent and their respective successors and permitted assigns. 9. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to a Holder, to: The corresponding address set forth on the signature pages hereto; (b) if to Parent, to: Hanover Compressor Company 12001 N. Houston Rosslyn Road Houston, Texas 77086 Attention: Michael J. McGhan Telecopy: (281) 447-0821 with a copy to: Latham & Watkins 233 South Wacker Drive Suite 5800 Chicago, Illinois 60606 Attention: Richard Meller, Esq. Telecopy: (312) 993-9767 C-5 10. Specific Performance. The parties hereto agree that irreparable harm would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 11. Amendment. This Agreement may not be amended or modified, except by an instrument in writing signed by or on behalf of each of the parties hereto. This Agreement may not be waived by either party hereto, except by an instrument in writing signed by or on behalf of the party granting such waiver. 12. Governing Law. The laws of the State of Oklahoma shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under principles of conflicts of law. Any suit, action or proceeding by a party hereto with respect to this Agreement, or any judgment entered by any court in respect of any thereof, may be brought in any state or federal court of competent jurisdiction in Houston, Texas and each party hereto hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. Each party hereto hereby irrevocably waives any objections which it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any state or federal court of competent jurisdiction in Houston, Texas and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. No suit, action or proceeding against a party hereto with respect to this Agreement may be brought in any court, domestic or foreign, or before any similar domestic or foreign authority other than in a court of competent jurisdiction Houston, Texas and each party hereto hereby irrevocably waives any right which it may otherwise have had to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. 13. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 14. Termination. This Agreement shall terminate upon the earlier of (i) the Effective Time or (ii) the date of termination of the Merger Agreement. Upon any termination of this Agreement, this Agreement shall thereupon become void and of no further force and effect, and there shall be no liability in respect of this Agreement or of any transactions contemplated hereby or by the Merger Agreement on the part of any party hereto or any of its directors, officers, partners, stockholders, employees, agents, advisors, representatives or affiliates; provided, however, that nothing herein shall relieve any party from any liability for such party's willful breach of this Agreement; and provided further that nothing herein shall limit, restrict, impair, amend or otherwise modify the rights, remedies, obligations or liabilities of any Person under any other contract or agreement, including, without limitation, the Merger Agreement. 15. Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further lawful action as may be necessary or appropriate to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. 16. Entire Agreement; No Third Party Beneficiaries. This Agreement, together with the Merger Agreement, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof. This Agreement is not intended for the benefit of or intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. C-6 17. Certain Events. Each Holder agrees that this Agreement and the obligations hereunder shall attach to the Subject Securities and shall be binding upon any Person to which legal or beneficial ownership of such Subject Securities shall pass, whether by operation of law or otherwise, including, without limitation, the Holder's heirs, guardians, administrators or successors. Notwithstanding any transfer of Subject Securities, the transferor shall remain liable for the performance of all obligations of the transferor under this Agreement. 18. Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 19. Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceabilty will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. 20. Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by either party hereto shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. 21. No Waiver. The failure of either party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by the other party hereto with its obligations hereunder, and any custom or practice of the parties hereto at variance with the terms hereof shall not constitute a waiver by such party of its or his right to exercise any such or other right, power or remedy or to demand such compliance. [SIGNATURE PAGE FOLLOWS] C-7 IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of each of the parties hereto, all as of the date first above written. HANOVER COMPRESSOR COMPANY By: _________________________________ Its: ________________________________ HOLDERS: HACL, Ltd. By: Six-Dawaco, Inc., its general partner By: _________________________________ Its: ________________________________ Address:2838 Woodside Dallas, Texas 75201 Telecopy:(214) 981-0700 Energy Investors Joint Venture By: HACL, Ltd., its managing joint venture partner By: Six-Dawaco, Inc., its general partner By: _________________________________ Its: ________________________________ Address:2838 Woodside Dallas, Texas 75201 Telecopy:(214) 981-0700 C-8 EXHIBIT A Form of Irrevocable Proxy Pursuant to Section 3 of the Voting and Disposition Agreement, dated as of July 13, 2000, as the same may be amended from time to time, (the "Voting Agreement"), between Hanover Compressor Company, a Delaware corporation ("Parent") and the undersigned stockholders (collectively, the "Holders" and each a "Holder") of shares of common stock, par value $.01 per share ("Company Common Stock"), of OEC Compression Corporation, an Oklahoma corporation (the "Company"), the undersigned hereby irrevocably appoint Caddo Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), Michael J. McGhan, and William S. Goldberg, and each of them, or any other designee of Parent or Merger Sub, their attorneys-in-fact and proxies of the undersigned, each with full power of substitution: (a) to attend any meeting (whether annual or special or both) of the stockholders of the Company, including any adjournment or postponement thereof, on behalf of the undersigned, and at such meeting, with respect to all shares of common stock of the Company owned (or beneficially owned) by the undersigned on the date hereof or acquired hereafter that are entitled to vote at such meeting or over which the undersigned has voting power (and any and all other shares of common stock of the Company or other securities issued on or after the date hereof in respect of any such shares), including, without limitation, the shares indicated in the last paragraph of this proxy: (i) to vote (in person or by proxy) in favor of the approval of the plan of merger contained in Agreement and Plan of Merger, dated as of July 13, 2000, by and among Parent, Merger Sub and the Company (as the same may be amended from time to time, the "Merger Agreement"), and in favor of any other action related to the Merger (as defined in the Merger Agreement) or in furtherance of the transactions contemplated by the Merger Agreement, and otherwise to act with respect to such shares as each such attorney and proxy or his or her substitute shall in his or her reasonable discretion deem necessary or appropriate for such purpose; and (ii) to vote (in person or by proxy) against (A) any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, liquidation, dissolution, recapitalization, reorganization, winding up or other business combination, acquisition or sale or other disposition of a material amount of assets or securities, tender offer or exchange offer or any other similar transaction involving the Company, its securities or any of its material subsidiaries or divisions, (B) any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or of any Holder under the Voting Agreement, (C) any change in the present capitalization of the Company or any amendment of Company's articles of incorporation or by-laws, (D) any other material change in the Company's corporate structure or business and (E) any other action involving the Company or its subsidiaries which is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, or otherwise adversely affect the Merger or any transaction contemplated by the Merger Agreement; and (b) to execute and deliver one or more consents in writing in lieu of such meeting or adjournment thereof. The undersigned affirms that this proxy is issued in connection with the Merger Agreement to facilitate the transactions contemplated thereunder and in consideration of Parent entering into the Merger Agreement and as such is coupled with an interest and is irrevocable. This proxy will terminate upon the termination of the Merger Agreement in accordance with its terms. For purposes of this proxy, any written consent shall be deemed delivered to such attorneys and proxies and their substitutes when delivered to Merger Sub in accordance with the Merger Agreement, and any written consent shall be deemed delivered to the Company when delivered to it in accordance with the Merger Agreement. By execution and delivery of this proxy to the designees of Merger Sub, the undersigned (a) confirms that the undersigned has received copies of the Merger Agreement and the Voting Agreement, and that all other C-9 information deemed necessary by the undersigned concerning the Merger, the Merger Agreement, the Voting Agreement and the transactions contemplated under any such agreements or any other matters considered by the undersigned to be relevant to the undersigned's decision to execute this proxy have been made available to the undersigned and (b) agrees that the undersigned win not sell, transfer or otherwise dispose of any Subject Shares (as defined in the Voting Agreement) prior to the termination of the Voting Agreement. All authority herein conferred or agreed to be conferred shall survive the death, liquidation or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. This proxy revokes any and all other proxies heretofore granted by the undersigned to vote or otherwise to act with respect to any of the shares to which this proxy relates. The undersigned will not give any subsequent proxy (and such proxy if given will be deemed not to be effective) with respect to such shares that purports to grant authority within the scope of the authority hereby conferred, except on the express condition that such proxy shall not be effective unless and until this proxy shall have terminated in accordance with its terms. This proxy shall be governed by the internal laws of the State of Delaware. As of the date hereof, the undersigned owns or possesses voting power with respect to shares of common stock, par value $.01 per share, of the Company, and such shares are entitled to vote with respect the approval by the stockholders of the Company of the plan of merger set forth in the Merger Agreement and each of the other transactions contemplated by the Merger Agreement. By: _________________________________ [HOLDER] C-10 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Section 102(b)(7) of the Delaware General Corporation Law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors' fiduciary duty of care. Although Section 102(b) does not change directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. Our certificate of incorporation limits the liability of directors (in their capacity as directors but not in their capacity as officers) to us or our stockholders to the fullest extent permitted by Section 102(b). Specifically, our directors will not be personally liable for monetary damages for breach of a director's fiduciary duty as a director, except for liability for (a) any breach of the director's duty of loyalty to Hanover or our stockholders (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or (d) any transaction from which the director derived an improper personal benefit. To the maximum extent permitted by law, our certificate of incorporation and bylaws provide for mandatory indemnification of directors and officers and permit indemnification of our officers, employees, and agents against all expense, liability, and loss to which they may become subject or which they may incur as a result of being or having been a director, officer, employee, or agent of Hanover or its subsidiaries. In addition, we must advance or reimburse directors and may advance or reimburse officers, employees , and agents for expenses incurred by them in connection with indemnifiable claims. We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (a) before that person became an interested stockholder, the corporation's board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (b) upon completion of the transaction that resulted in the interested stockholders' becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (c) following the transaction in which that person became an interested stockholder, the business combination is approved by the corporation's board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the corporation and a person who was not an interested stockholder with the approval of a majority of the corporation's directors, if that extraordinary transaction is approved or not opposed by a majority of the directors who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. "Business combination" includes mergers, assets sales, and other transactions resulting in a financial benefit to the stockholder. "Interested stockholder" is a person who, together with affiliates and associates, owns (or, within three years, did own) 15% or more of the corporation's voting stock. Item 21. Exhibits and Financial Statement Schedules (a) See Exhibit Index II-1 (b) All financial statement schedules of Hanover which are required to be included herein are included in Hanover's annual report on form 10-K for the fiscal year ended December 31, 1999, which is incorporated herein by reference. OEC's financial statement schedules are included in this proxy statement/prospectus. (c) See Exhibit Index Item 22. Undertakings The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (b) 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 the 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% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (c) 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; provided, however, that paragraphs (1)(a) and (1)(b) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference 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 that time shall be deemed to be the initial bona fide offering thereof. (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. (4) That, for the purpose of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 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 that time shall be deemed to be the initial bona fide offering thereof. (5) That, prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters in addition to the information called for by the other items of the applicable form. (6) That every prospectus: (i) that is filed pursuant to paragraph (5) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection II-2 with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such an amendment is effective, and that, for purposes 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 that time shall be deemed to be the initial bona fide offering thereof. (7) That, insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has 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 registrant of expenses incurred or paid by a director, officer or controlling person of the registrant 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 registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (8) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form S-4, 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. (9) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant 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 the 21st day of December, 2000. Hanover Compressor Company /s/ Michael J. McGhan By: _________________________________ Michael J. McGhan President and CEO Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the date indicated. Date: December 21, 2000 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. /s/ Michael J. McGhan President and Chief Executive Officer ______________________________________ (Principal Executive Officer and Director) Michael J. McGhan * Chief Financial Officer and Director ______________________________________ (Principal Financial and Accounting Officer) William S. Goldberg * Director ______________________________________ Ted Collins, Jr. * Director ______________________________________ Robert R. Furgason * Director ______________________________________ Melvyn N. Klein * Director ______________________________________ Michael A. O'Connor * Director ______________________________________ Alvin V. Shoemaker
*By_________________________ Michael J. McGhan Attorney-in-Fact II-4 INDEX TO EXHIBITS
Exhibit Number Description ------- ----------- 3.1 Certificate of Incorporation of the Hanover Compressor Holding Co. (9)[4.1] 3.2 Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co. dated December 9, 1999 (9)[4.2] 3.3 Bylaws of Hanover Compressor Company (9)[4.3] 4.1 Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, among the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other stockholders of the Company party thereto (1) [4.1] 4.10 Form of Warrant Agreement (1) [4.10] 4.11 Specimen Stock Certificate (1) [4.11] 4.12 Form of Second Amended and Restated Stockholders Agreement of Hanover Compressor Company dated as of June, 1997 (1) [4.12] 4.13 Form of Amended and Restated Stockholders Agreement (JEDI) dated as of May, 1997 (1) [4.13] 4.14 Form of Amended and Restated Stockholders Agreement (Westar Capital, Inc.) dated as of May, 1997 (1) [4.14] 4.15 Form of Amended and Restated Stockholders Agreement (HEHC) dated as of May, 1997 (1) [4.15] 10.1 Credit Agreement, dated as of December 15, 1997, as amended and restated through March 13, 2000, by and between the Company, The Chase Manhattan Bank, a New York banking corporation as Administrative Agent and several banks and other financial institutions that are parties thereto* 10.2 Subsidiaries' Guarantee, dated as of March 13, 2000, by certain of the Company's subsidiaries in favor of The Chase Manhattan Bank, as agent* 10.3 Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the Company (1) [10.3] 10.4 Hanover Compressor Company Senior Executive Stock Option Plan (1) [10.4] 10.5 1993 Hanover Compressor Company Management Stock Option Plan (1) [10.5] 10.6 Hanover Compressor Company Incentive Option Plan (1) [10.6] 10.7 Amendment and Restatement of Hanover Compressor Company Incentive Option Plan (1) [10.7] 10.8 Hanover Compressor Company 1995 Employee Stock Option Plan (1) [10.8] 10.9 Hanover Compressor Company 1995 Management Stock Option Plan (1) [10.9] 10.10 Hanover Compressor Company 1996 Employee Stock Option Plan (1) [10.10] 10.11 OEM Sales and Purchase Agreement, between Hanover Compressor Company and the Waukesha Engine Division of Dresser Industries, Inc. (1) [10.11] 10.12 Distribution Agreement, dated February 23, 1995, between Ariel Corporation and Maintech Enterprises, Inc. (1) [10.12] 10.13 Exclusive Distribution Agreement, dated as of February 23, 1995 by and between Hanover/Smith, Inc. and Uniglam Resources, Ltd. (1) [10.13] 10.14 Lease Agreement, dated December 4, 1990, between Hanover Compressor Company and Ricardo J. Guerra and Luis J. Guerra as amended (1) [10.15] 10.15 Exchange and Subordinated Loan Agreement dated as of December 23, 1996, among the Company and GKH Partners, L.P., GK December 23, 1996, among the Company and GKH Partners, L.P., GK Investments, L.P., IPP95, L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel, Ted Collins, Jr. and L.O. Ward (1) [10.20]
Exhibit Number Description ------- ----------- 10.16 1997 Stock Option Plan, as amended (1) [10.23] 10.17 1997 Stock Purchase Plan (1) [10.24] 10.18 Exchange Agreement by and between Hanover Compressor Company and JEDI, dated December 23, 1996 (1) [10.27] 10.19 Lease dated as of July 20, 1998 between Hanover Equipment Trust 1998A (the "Trust") and the Company (3) [10.1] 10.20 Guarantee dated as of July 22, 1998 and made by the Company, Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company (3) [10.2] 10.21 Lessee's and Guarantor's Consent dated as of July 20, 1998 made by the Company, Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company (3) [10.3] 10.22 Participation Agreement dated as of July 22, 1998 among the Company, the Trust, The Chase Manhattan Bank, as agent, Societe Generale & Financial Corporation, and Wilmington Trust Company (3) [10.4] 10.23 Security Agreement dated as of July 22, 1998 made by the Trust in favor of The Chase Manhattan Bank, as agent, with the Company joining by Joinder of Lessee (3) [10.5] 10.24 Lease Supplement No. 1 dated as of July 22, 1998 between the Trust and the Company (3) [10.6] 10.25 1998 Stock Option Plan (4) 10.7 10.26 December 10, 1998 Stock Option Plan (5) 10.27 1999 Stock Option Plan (5) 10.28 1998 Amendments to Credit Agreement, dated as of December 15, 1997, with the Chase Manhattan Bank, a New York banking corporation as Administrative Agent and several banks and other financial institutions that are parties thereto (7) [10.35] 10.29 Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999 and the Company (8) [10.36] 10.30 Guarantee dated as of June 15, 1999 and made by the Company, Hanover/Smith, Inc. and Hanover Maintech, Inc. and Hanover Land Company (8) [10.37] 10.31 Participation Agreement dated as of June 15, 1999 among the Company, the Trust, Societe Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and Wilmington Trust Company (8) [10.38] 10.32 Security Agreement dated as of June 15, 199 made by the Trust in favor of The Chase Manhattan Bank, as agent (8) [10.39] 10.33 Lease Supplement No. 1 dated June 15, 1999 between the Trust and the Company (8) [10.40] 10.34 Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the Company. Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Trust Company (8) [10.41] 10.35 Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of December 15, 1999, among Hanover Compressor Company, as sponsor, Wilmington Trust Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative trustees. (6) [4.5] 10.36 Indenture for the Convertible Junior Subordinated Indentures due 2029, dated as of December 15, 1999 among Hanover Compressor Company, as issuer, and Wilmington Trust Company, as trustee. (6) [4.6] 10.37 Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred Securities (6) [4.8] 10.38 Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029 (6) [4.9]
Exhibit Number Description ------- ----------- 10.39 Preferred Securities Guarantee, dated as of December 15, 1999, between Hanover Compressor Company, as guarantor, and Wilmington Trust Company, as guarantee trustee (6) [4.10] 10.40 Common Securities Guarantee dated as of December 15, 1999, by Hanover Compressor Company, as guarantor (6) [4.11] 10.41 Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A and Hanover Compression Inc. (9) [10.43] 10.42 Guarantee dated as of March 13, 2000 and made by the Company, Hanover Compression Inc. and certain of their Subsidiaries (9) [10.44] 10.43 Participation Agreement dated as of March 13, 2000 among the Company, the Hanover Equipment Trust 2000A and various banks (9) [10.45] 10.44 Security Agreement dated as of March 13, 2000 made by the Trust in favor of the Chase Manhattan Bank, as agent (9) [10.46] 10.45 Assignment of Leases, rents and Guarantees from Hanover Equipment Trust 2000A to the Chase Manhattan Bank dated as of March 13, 2000 (9) [10.47] 10.46 Agreement and Plan of Merger by and among Hanover Compressor Company, APSI Acquisition Corporation and Applied Process Solutions, Inc. dated as of May 3, 2000 (10) [10.48] 10.47 Amendment to Agreement and Plan of Merger by and among Hanover Compressor Company, APSI Acquisition Corporation and Applied Process Solutions, Inc. dated as of May 31, 2000 (10) [10.49] 10.48 Amendment No. 2 dated as of October 24, 2000, to Agreement and Plan of Merger by and among Hanover Compressor Company, APSI Acquisition Corporation and Applied Process Solutions, Inc. (12) [10.50] 10.49 Agreement and Plan of Merger dated as of July 13, 2000 by and among Hanover Compressor Company, Caddo Acquisition Corporation and OEC Compression Corporation. (13) [10.51] 10.50 Voting and Disposition Agreement dated as of July 13, 2000 by and among Hanover Compressor Company and the holders of common stock of OEC Compression Corporation named therein (13) [10.52] 10.51 Amendment No. 1 to Agreement and Plan of Merger dated as of November 14, 2000 and by and among Hanover Compressor Company, a Delaware corporation, Caddo Acquisition Corporation, an Oklahoma corporation and OEC Compression Corporation, an Oklahoma corporation (14) [10.51] 10.52 Management Agreement (14) [10.52] 10.53 Asset Purchase Agreement made on July 10, 2000 by and among Hanover Compressor Inc. and Stewart & Stevenson Services, Inc., Stewart & Stevenson Power, Inc. and PAMCO Services International, Inc.* 10.54 Lease dated as of October 27, 2000 between Hanover Equipment Trust 2000B and Hanover Compression Inc.* 10.55 Guarantee dated as of October 27, 2000 and made by Hanover Compressor Company, Hanover Compression Inc. and certain subsidiaries.* 10.56 Participation Agreement dated as of October 27, 2000 among Hanover Compression Inc., Hanover Equipment Trust 2000B, The Chase Manhattan Bank, National Westminster Bank plc, Citibank N.A., Credit Suisse First Boston, and the Industrial Bank of Japan as co-agents; Bank Hapoalim B.M. and FBTC Leasing Corp., as investors; Wilmington Trust Company and various lenders.* 10.57 Security Agreement dated as of October 27, 2000 made by Hanover Equipment Trust 2000B in favor of the Chase Manhattan Bank as agent for the lenders.* 10.58 Assignment of Leases, Rents and Guarantee dated as of October 27, 2000, made by Hanover Equipment Trust 2000B in favor of the Chase Manhattan Bank as agent for the lenders* 21.1 List of Subsidiaries (9) [21.1]
Exhibit Number Description ------- ----------- 23.1 Consent of Independent Public Accountants* 23.2 Consent of Independent Accountants* 23.3 Consent of Independent Accountants* 23.4 Consent of Independent Accountants* 24.1 Powers of Attorney (included on the signature page of this Registration Statement) 99.1 Purchase Agreement, dated as of May 23, 2000, by and among Hanover Compressor Company and Janus Aspen Series on behalf of its series Janus Aspen Aggressive Growth Fund (13) [99.1] 99.2 Purchase Agreement, dated as of May 23, 2000, by and among Hanover Compressor Company and Janus Aspen Series on behalf of its Series Janus Enterprise Fund (13) [99.2] 99.3 Purchase Agreement, dated as of July 11, 2000, as amended August 31, 2000, among Hanover Compressor Compression Inc., Dresser-Rand Company and Ingersoll-Rand Company (1) [99.2] 99.4 Form of Proxy to be mailed to OEC shareholders*
- -------- (1) Such exhibit previously filed as an exhibit to the Registration Statement (File No. 333-27953) on Form S-1, as amended, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (2) Such exhibit previously filed as an exhibit to the Company's Annual Report on Form 10-K for the Year Ended 1997 under the exhibit number indicated in brackets [ ], and is incorporated by reference. (3) Such exhibit previously filed as an exhibit to the Company's current report on Form 8-K dated July 22, 1998, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (4) Such exhibit previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the Third Quarter of 1998, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (5) Compensatory plan or arrangement required to be filed (6) Such exhibit previously filed as an exhibit to the Registration Statement (File No. 333-30344) on Form S-3, as amended, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (7) Such exhibit previously filed as an exhibit to the Company's Annual Report on Form 10-K for the Year Ended 1998 under the exhibit number indicated in brackets [ ], and is incorporated by reference. (8) Such exhibit previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the Second Quarter of 1999, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (9) Such exhibit previously filed as an exhibit to the Company's Annual Report on Form 10-K for the Year Ended 1999 under the exhibit number indicated in brackets [ ], and is incorporated by reference. (10) Such exhibit previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the Second Quarter of 2000, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (11) Such exhibit previously filed as an exhibit to the Registration Statement (File No. 333-50470) on Form S-3, as amended, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (12) Such exhibit previously filed as an exhibit to the Company's current report on Form 8-K dated September 14, 2000, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (13) Such exhibit previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the Third Quarter of 2000, under the exhibit number indicated in brackets [ ], and is incorporated by reference. (14) Such exhibit previously filed as an exhibit to the Registration Statement (File No. 333-50836) on Form S-4 under the exhibit number indicated in brackets [ ], and is incorporated by reference. * Filed herewith. EX-10.1 2 0002.txt CREDIT AGREEMENT EXHIBIT 10.1 EXECUTION COPY ================================================================================ $200,000,000 CREDIT AGREEMENT among HANOVER COMPRESSOR COMPANY, HANOVER COMPRESSION INC., THE CHASE MANHATTAN BANK as ADMINISTRATIVE AGENT, and THE SEVERAL LENDERS PARTIES HERETO Dated as of December 15, 1997 as amended and restated through March 13, 2000 ================================================================================
TABLE OF CONTENTS Page ---- " ............................Aggregate Outstanding Extensions of Credit 2 ------------------------------------------ " ...........................................................Application 3 ----------- " ...........................................Commercial Letter of Credit 4 --------------------------- " ............................................................Commitment 4 ---------- " ........................................................Issuing Lender 12 -------------- " ........................................................L/C Commitment 12 -------------- " ..................................................L/C Fee Payment Date 12 -------------------- " .......................................................L/C Obligations 12 --------------- " ......................................................L/C Participants 12 ---------------- " .....................................................Letters of Credit 12 ----------------- " ..............................................Reimbursement Obligation 15 ------------------------ " ..............................................Standby Letter of Credit 16 ------------------------
-i- Page ---- -ii- Page ---- Annexes A Pricing Grid Schedules Schedule 1.1A Lenders and Commitments Schedule 5.2 Material Changes Schedule 5.4 Required Consents Schedule 5.14 Subsidiaries Schedule 5.16 Environmental Schedule 8.2(c) Existing Indebtedness Schedule 8.3(l) Existing Liens Schedule 8.3(n) Additional Existing Liens Schedule 8.3(t) Additional Liens Schedule 8.6(i) Lease of Assets Schedule 8.12 Affiliate Transactions Schedule 8.13 Sale and Leaseback Transactions Exhibits Exhibit A Form of Revolving Credit Note Exhibit B Subsidiaries' Guarantee Exhibit C Form of Assignment and Acceptance Exhibit D Holdings Guarantee -iii- CREDIT AGREEMENT, dated as of December 15, 1997 (this "Agreement"), --------- as amended and restated through March 13, 2000, among Hanover Compressor Company, a Delaware corporation ("Holdings"), Hanover Compression Inc. ("HCC") -------- --- the several banks and other financial institutions from time to time parties to this Agreement (the "Lenders") and The Chase Manhattan Bank, a New York banking ------- corporation (formerly known as Chemical Bank), as agent for the Lenders hereunder (in such capacity, the "Administrative Agent"). -------------------- W I T N E S S E T H : - - - - - - - - - - WHEREAS, Holdings and HCC are parties to the Credit Agreement, dated as of December 15, 1997 (as heretofore amended, supplemented or otherwise modified, the "Existing Credit Agreement"), with the several banks and other ------------------------- financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent; and WHEREAS, Holdings and HCC propose to structure a lease financing (the "Financing") of certain equipment; and --------- WHEREAS, in connection with the Financing, Holdings and HCC have requested that the Existing Credit Agreement be amended and restated; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto agree that on the Closing Date, as provided in subsection 11.16, the Existing Credit Agreement shall be amended and restated in its entirety as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms ------------- shall have the following meanings: "ABR": for any day, a rate per annum (rounded upwards, if necessary, --- to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per ---------- annum publicly announced from time to time by Chase as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by Chase in connection with extensions of credit to debtors); "Base CD Rate" shall mean the sum of ------------ (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the numerator of which is one and the denominator of which is one minus the C/D Reserve Percentage and (b) the C/D Assessment Rate; "Three- ----- Month Secondary CD Rate" shall mean, for any day, the secondary market rate ----------------------- for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System (the "Board") through the public information telephone line of the Federal ----- Reserve Lender of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it; and "Federal Funds Effective Rate" ---------------------------- shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Lender of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate, or both, for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the ABR shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the ABR due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "ABR Loans": Loans the rate of interest applicable to which is based --------- upon the ABR. Adjustment Date": as defined in the Pricing Grid. --------------- "Adjusted EBITDA Companies": Holdings and each of its wholly-owned ------------------------- Subsidiaries which (i) is organized under a jurisdiction of the United States, Canada and any other country approved by Required Lenders and (ii) has at least 90% of its assets located in any such jurisdiction or which derives at least 90% of its revenues from such jurisdiction, in each case, at the time the applicable calculation is being made for purposes of subsection 8.1(c). "Affiliate": as to any Person, any other Person (other than a --------- Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 30% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Aggregate Outstanding Extensions of Credit": as to any Lender at any ------------------------------------------ time, an amount equal to the sum of (a) the aggregate principal amount of all Loans made by such Lender then outstanding and (b) such Lender's Commitment Percentage of the L/C Obligations then outstanding. "Agreement": this Credit Agreement, as amended, supplemented or --------- otherwise modified from time to time. "Amended and Restated Effective Date": the date on which all the ----------------------------------- conditions precedent specified in Section 6.2 shall have been satisfied. "Applicable Commitment Fee Rate": for each day, the rate per annum ------------------------------ determined pursuant to the Pricing Grid. "Applicable Margin": for each day, the rate per annum determined ----------------- pursuant to the Pricing Grid. "Applicable Margin Certificate": as defined in subsection 7.2(f). ----------------------------- "Application": an application, in such form as the Issuing Lender may ----------- specify from time to time, requesting the Issuing Lender to open a Letter of Credit. "Available Commitment": as to any Lender, at any time, an amount equal -------------------- to the excess, if any, of (a) such Lender's Commitment over (b) such Lender's Aggregate Outstanding Extensions of Credit. "Benefitted Lender": as defined in subsection 11.7(a). ----------------- "Borrowing Date": any Business Day specified in a notice pursuant to -------------- subsection 2.3, as a date on which HCC requests the Lenders to make Loans hereunder. "Business Day": a day other than a Saturday, Sunday or other day on ------------ which commercial banks in New York City are authorized or required by law to close. "Capital Stock": any and all shares, interests, participations or ------------- other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Cash Equivalents": (a) securities with maturities of one year or less ---------------- from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-2 by Standard and Poor's Rating Group ("S&P") or P-2 by Moody's Investors --- Services, Inc. ("Moody's"), (e) securities with maturities of one year or ------- less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any political subdivision or taxing authority of any such state, commonwealth or territory or any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's, (f) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition. "C/D Assessment Rate": for any day the net annual assessment rate ------------------- (rounded upwards, if necessary, to the next 1/100 of 1%) determined by Chase to be payable on such day to the Federal Deposit Insurance Corporation or any successor ("FDIC") for FDIC's insuring time deposits ---- made in Dollars at offices of Chase in the United States. "C/D Reserve Percentage": for any day as applied to any calculation of ---------------------- the Base CD Rate, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Chase": The Chase Manhattan Bank, a New York banking corporation. ----- "Closing Date": December 15, 1997. ------------ "Code": the Internal Revenue Code of 1986, as amended from time to ---- time. "Commercial Letter of Credit": as defined in subsection 4.1(b)(i)(2). --------------------------- "Commitment": as to any Lender, the obligation of such Lender to make ---------- Loans to and/or issue or participate in Letters of Credit issued on behalf of HCC hereunder in an aggregate principal and/or face amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1.1A, as such amount may be reduced from time to time in accordance with the terms of this Agreement; collectively, as to all of the Lenders, the "Commitments". ----------- "Commitment Percentage": as to any Lender at any time, the percentage --------------------- of the aggregate Commitments then constituted by such Lender's Commitment. "Commitment Period": the period from and including the date hereof to ----------------- but not including the Final Maturity Date or such earlier date on which the Commitments shall terminate as provided herein. "Commonly Controlled Entity": an entity, whether or not incorporated, -------------------------- which is under common control with HCC within the meaning of Section 4001(a)(14) of ERISA or is part of a group which includes HCC and which is treated as a single employer under Section 414 of the Code. "Consolidated Adjusted EBITDA": for any period, the sum of ---------------------------- Consolidated EBITDA for the Adjusted EBITDA Companies. "Consolidated Capitalization": at a particular date, as to any Person, --------------------------- the sum of (a) Consolidated Net Worth and (b) the amount of Consolidated Indebtedness at such date. "Consolidated Earnings Before Interest and Taxes": for any period, ----------------------------------------------- with respect to any Person, the sum of (a) Consolidated Net Income for such period, (b) all amounts attributable to provision for taxes measured by income (to the extent that such amounts have been deducted in determining Consolidated Net Income for such period) and (c) Consolidated Interest Expense for such period (to the extent that such amounts have been deducted in determining Consolidated Net Income for such period). "Consolidated EBITDA": for any period, with respect to any Person, the ------------------- sum of (a) Consolidated Earnings Before Interest and Taxes for such Person for such period plus, (b) all amounts attributable to depreciation and ---- amortization, determined in accordance with GAAP (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period) plus, (c) all amounts classified as ---- extraordinary charges for such period (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period) minus, (d) all amounts classified as extraordinary income for ----- such period (to the extent such amounts have been included in determining Consolidated Earnings Before Interest and Taxes for such period). "Consolidated Indebtedness": at a particular date, as to any Person, ------------------------- all Indebtedness of such Person and its Subsidiaries other than Indebtedness in respect of Financing Leases, determined on a consolidated basis in accordance with GAAP at such date. "Consolidated Indebtedness Ratio": as defined in subsection 8.1(d). ------------------------------- "Consolidated Interest Expense": for any period, with respect to any ----------------------------- Person, the amount which, in conformity with GAAP, would be set forth opposite the caption "interest expense" or any like caption (including, without limitation, imputed interest included in Financing Lease payments) on a consolidated income statement of such Person and its Subsidiaries for such period, plus, to the extent not so included, payments by such Person ---- and its Subsidiaries under the Equipment Leases attributable to (i) interest payments under the Equipment Lease Tranche A Loans and Equipment Lease Tranche B Loans and (ii) the yield to the Investors in connection with the Equipment Lease Transactions. "Consolidated Lease Expense": for any period as to any Person, the -------------------------- aggregate rental obligations of such Person and its Subsidiaries determined on a consolidated basis payable in respect of such period under leases of real and/or personal property (net of income from sub-leases thereof, but including taxes, insurance, maintenance and similar expenses which the lessee is obligated to pay under the terms of said leases), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of such Person and its Subsidiaries or in the notes thereto, and whether or not such leases constitute Financing Leases, but excluding obligations of such Person and its Subsidiaries with respect to the Equipment Leases. "Consolidated Net Income": for any period as to any Person, the ----------------------- consolidated net income (or loss) of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, provided that -------- for purposes of determining Consolidated Net Income, payments under Equipment Leases attributable to (i) Equipment Lease Tranche A Loans and Equipment Lease Tranche B Loans and (ii) the yield to the Investors in connection with the Equipment Lease Transactions shall be considered interest expense. "Consolidated Net Worth": at a particular date, as to any Person, the ---------------------- amount which would be included under stockholders' equity on a consolidated balance sheet of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "Contractual Obligation": as to any Person, any provision of any ---------------------- security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Credit Parties": the collective reference to (i) Holdings, HCC, HMI, -------------- Hanover/Smith and the Real Estate Subsidiary [other subs?] and (ii) from time to time any other Subsidiary of Holdings for so long as such Subsidiary guarantees the Loans and other obligations of HCC hereunder and under the Notes, and which guarantees shall be under documents substantially similar to the Guarantees executed on the Closing Date. "Current Ratio": at a particular date, as to any Person and its ------------- Subsidiaries, the quotient of the consolidated current assets of such Person and its Subsidiaries at such time, to the consolidated current liabilities of such Person and its Subsidiaries at such time less the current portion of long-term debt (all determined in accordance with GAAP at such time), provided that for purposes of calculating the Current Ratio, -------- current liabilities of such Person and its Subsidiaries which are then accrued but unpaid with respect to the Equipment Lease Tranche A Loans shall be included as current liabilities of such Person. "Default": any of the events specified in Section 9, whether or not ------- any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Derivatives": any swap, hedge, cap, collar, or similar arrangement ----------- providing for the exchange of risks related to price changes in any commodity, including money. "Disposition": with respect to any property, any sale, lease, sale and ----------- leaseback, assignment, conveyance, transfer or other disposition thereof. The terms "Dispose" and "Disposed of" shall have correlative meanings. ------- ----------- "Dollars" and "$": dollars in lawful currency of the United States of ------- - America. "Environmental Laws": any and all Federal, state, local or municipal ------------------ laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning environmental protection matters, including without limitation, Hazardous Materials, as now or may at any time hereafter be in effect. "Equipment Guarantees": (i) the Guarantee dated as of July 22, 1998 -------------------- (as amended, supplemented or otherwise modified from time to time), made by Holdings, HCC, and certain of their Subsidiaries listed on the signature pages thereto, in favor of Hanover Equipment Trust 1998A and The Chase Manhattan Bank, as agent, (ii) the Guarantee dated as of June 15, 1999 (as amended, supplemented or otherwise modified from time to time), made by Holdings, HCC, and certain of their Subsidiaries listed on the signature pages thereto, in favor of Hanover Equipment Trust 1999A and The Chase Manhattan Bank, as agent and (iii) the Guarantee dated as of March 8, 2000 (as amended, supplemented or otherwise modified from time to time), made by Holdings, HCC and certain of their Subsidiaries listed on the signature pages thereto, in favor of Hanover Equipment Trust 2000A and The Chase Manhattan Bank, as agent. "Equipment Lease Credit Agreements": (i) the Credit Agreement dated as --------------------------------- of July 23, 1998 (as amended, supplemented or otherwise modified from time to time), among Hanover Equipment Trust 1998A, as borrower, the several lenders from time to time parties thereto and The Chase Manhattan Bank, as agent, (ii) the Credit Agreement dated as of June 15, 1999 (as amended, supplemented or otherwise modified from time to time), among Hanover Equipment Trust 1999A, as borrower, the several lenders from time to time parties thereto, the managing agents thereto and The Chase Manhattan Bank, as agent and (iii) the Credit Agreement dated as of March 8, 2000 (as amended, supplemented or otherwise modified from time to time), among Hanover Equipment Trust 2000A, as borrower, the several lenders from time to time parties thereto, the Industrial Bank of Japan, LTD., as syndication agent, The Bank of Nova Scotia, a documentation agent and The Chase Manhattan Bank, as agent. "Equipment Lease Participation Agreements": (i) the Participation ---------------------------------------- Agreement dated July 22, 1998 ( as amended, supplemented or otherwise modified from time to time), among HCC, Hanover Equipment Trust 1998A, Societe Generale Financial Corporation, as investor, The Chase Manhattan Bank, as agent, and the lenders parties thereto, (ii) the Participation Agreement dated June 15, 1999 (as amended, supplemented or otherwise modified from time to time), among HCC, Hanover Equipment Trust 1999A, Societe Generale Financial Corporation and FBTC Leasing Corp., as investors, the managing agents thereto, The Chase Manhattan Bank, as agent, and the lenders parties thereto and (iii) the Participation Agreement dated March 8, 2000 (as amended, supplemented or otherwise modified from time to time), among HCC, Hanover Equipment Trust 2000A, First Union National Bank and Scotiabanc. Inc., as investors, Industrial Bank of Japan LTD., as syndication agent, The Bank of Nova Scotia, as documentation agent, The Chase Manhattan Bank, as agent, and the lenders parties thereto. " Equipment Lease Tranche A Loans": the loans to be made pursuant to ------------------------------- each Equipment Lease Credit Agreement and identified as the "Tranche A Loans" in Schedule 1.1 of each of the Equipment Lease Credit Agreements. " Equipment Lease Tranche B Loans": the loans to be made pursuant to ------------------------------- each Equipment Lease Credit Agreement and identified as the "Tranche B Loans" in Schedule 1.1 of each of the Equipment Lease Credit Agreements. " Equipment Lease Transactions": the transactions whereby HCC leases ---------------------------- natural gas compressors from the Lessors as described in each of the Equipment Lease Participation Agreements and any Operative Document (as defined in such Equipment Lease Participation Agreements). " Equipment Leases": (i) the Lease dated as of July 23, 1998 (as ---------------- amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 1998A, as lessor, and HCC, as lessee, (ii) the Lease dated as of June 15, 1999 (as amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 1999A, as lessor, and HCC, as lessee, and (iii) the Lease dated as of March 8, 2000 (as amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 2000A, as lessor, and HCC, as lessee. " ERISA": the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "" " Eurocurrency Reserve Requirements": for any day as applied to a --------------------------------- Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. " Eurodollar Base Rate": with respect to each day during each Interest -------------------- Period pertaining to a Eurodollar Loan, the rate per annum equal to the rate at which Chase is offered Dollar deposits at or about 10:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. " Eurodollar Loans": Loans the rate of interest applicable to which is ---------------- based upon the Eurodollar Rate. " Eurodollar Rate": with respect to each day during each Interest --------------- Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate 1.00 - Eurocurrency Reserve Requirements " Event of Default": any of the events specified in Section 9, provided ---------------- -------- that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. " Existing Credit Agreement": as defined in the recitals hereto. ------------------------- " Final Maturity Date": December 15, 2002. ------------------- " Financing Lease": any lease of property, real or personal, the --------------- obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee, but excluding all obligations with respect to any Equipment Leases. " GAAP": generally accepted accounting principles in the United States ---- of America consistent with those utilized in preparing the audited financial statements referred to in subsection 6.1. " Governmental Authority": any nation or government, any state or other ---------------------- political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "" " Guarantee Obligation": as to any Person (the "guaranteeing person"), -------------------- any obligation of (a) the guaranteeing person or (b) another Person (including without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counter indemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person ------------------- (the "primary obligor") in any manner, whether directly or indirectly, --------------- including, without limitation, any obligation of the guaranteeing Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation -------- ------- shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by Holdings, as the case may be, in good faith. " Guarantees": collectively, the Subsidiaries' Guarantee, the Holdings ---------- Guarantee and any other guarantees of the Loans and the other obligations of HCC hereunder. " Hanover Acquisition": Hanover Acquisition Corp., a Texas corporation. ------------------- " Hazardous Materials": any hazardous materials, hazardous waste, ------------------- hazardous constituents, hazardous or toxic substances, petroleum products (including crude oil or any fraction thereof), defined or regulated as such in or under any Environmental Law, including, without limitation, polychlorinated biphenyls. " HMS": Hanover Measurement Services Company, L.P., a Delaware limited --- partnership, and it's successors and assigns. " HMS Entities": HMS, Meter Acquisition Company LP, LLLP, a Delaware ------------ limited liability partnership, Hanover Measurement, LLC, a Delaware limited liability company, HCC Holdings, Inc., a Delaware corporation and Hanover MAC, LLC, a Delaware limited liability company. "" " HMS Transactions": the transactions described in the Common Agreement, ---------------- dated as of September 30, 1999, by and among Meter Acquisition Company LP, LLLP, Hanover Measurement Services Company, L.P., HPL, Hanover MAC, LLC, HCC Holdings, Inc., Barclays Bank PLC, as agent and arranger, Credit Lyonnais New York Branch, as syndication agent and the other parties thereto. " Holdings": Hanover Compressor Company, a Delaware corporation, the -------- parent company of HCC. " Holdings Guarantee": the Holdings Guarantee made by Holdings in favor ------------------ of the Administrative Agent for the benefits of the Lenders, substantially in the form of Exhibit D, as amended, supplemented or otherwise modified from time to time. " HPL": Houston Pipe Line Company, a Delaware corporation, and its --- successors and assigns. " Indebtedness": of any Person at any date, (a) all indebtedness of ------------ such Person for borrowed money or for the deferred purchase price of property or services (other than current liabilities incurred in the ordinary course of business and payable in accordance with customary trade practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Financing Leases, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person and (d) all liabilities secured by any Lien (other than any lien of a type described in subsection 8.3(a) through (j)) on any property owned by such Person even though it has not assumed or otherwise become liable for the payment thereof, provided that all obligations of such Person with respect to Equipment Lease Tranche A Loans shall be considered Indebtedness of such Person. " indemnified liabilities": as defined in subsection 11.5. ----------------------- " Insolvency": with respect to any Multiemployer Plan, the condition ---------- that such Plan is insolvent within the meaning of Section 4245 of ERISA. " Insolvent": pertaining to a condition of Insolvency. --------- " Intellectual Property": as defined in subsection 5.9. --------------------- " Interest Payment Date": (a) as to any ABR Loan, the last day of each --------------------- March, June, September and December to occur while such Loan is outstanding, (b) as to any Eurodollar Loan having an Interest Period of three months or less the last day of such Interest Period, and (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. " Interest Period": with respect to any Eurodollar Loan: --------------- (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by HCC in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by HCC by irrevocable notice to the Administrative Agent not less than three Working Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to the -------- Interest Periods are subject to the following: (i) if an Interest Period pertaining to a Eurodollar Loan would otherwise end on a day that is not a Working Day, such Interest Period shall be extended to the next succeeding Working Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Working Day; (ii) any Interest Period that would otherwise extend beyond the Final Maturity Date shall end on the Final Maturity Date; (iii) any Interest Period pertaining to a Eurodollar Loan that begins on the last Working Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Working Day of a calendar month; and (iv) HCC shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. " Investments": as defined in subsection 8.10. ----------- " Investors": the parties that hold the beneficial interest in the --------- respective Lessors. " Issuing Lender": Chase, in its capacity as issuer of any Letter of -------------- Credit. " L/C Commitment": $25,000,000. -------------- " L/C Fee Payment Date": the last day of each March, June, September -------------------- and December. "" " L/C Obligations": at any time, an amount equal to the sum of (a) the --------------- aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to subsection 4.5(a). " L/C Participants": the collective reference to all the Lenders other ---------------- than the Issuing Lender. " Lessors": the lessors under the Equipment Leases. ------- " Letters of Credit": as defined in subsection 4.1(a). ----------------- " Lien": any mortgage, pledge, hypothecation, assignment, deposit ---- arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). " Loan": any loan made by any Lender pursuant to this Agreement. ---- " Loan Documents": this Agreement, the Notes, the Applications and the -------------- Guarantees. " MAC": Meter Acquisition Company LP, LLLP, a Delaware registered --- limited liability limited partnership, and its successors and assigns. " Majority Lenders": at any time, Lenders the Commitment Percentages of ---------------- which aggregate more than 50%. " Material Adverse Effect": a material adverse effect on (a) the ----------------------- business, operations, property or condition (financial or otherwise) of Holdings and its Subsidiaries taken as a whole, (b) the ability of Holdings or any of the Subsidiaries of Holdings to perform their respective obligations under this Agreement, the Notes, or the Guarantees, or (c) the validity or enforceability of this Agreement or any of the Notes or any Application or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. " Material Subsidiary": at any particular date, each Subsidiary of ------------------- Holdings for which the aggregate value of all assets owned by such Subsidiary is greater than $5,000,000. " Multiemployer Plan": a Plan which is a multiemployer plan as defined ------------------ in Section 4001(a)(3) of ERISA. "" " Non-Recourse Indebtedness": Indebtedness (i) as to which neither ------------------------- Holdings nor any of its Qualified Subsidiaries (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 guarantor or otherwise) and (ii) the explicit terms of which provide that there is no recourse against any of the assets of Holdings or its Qualified Subsidiaries (other than the Capital Stock of an Unqualified Subsidiary) or that recourse is limited to assets which do not include the assets of Holdings or its Qualified Subsidiaries (other than the Capital Stock of an Unqualified Subsidiary). " Note": any note made by HCC to any Lender pursuant to this Agreement; ---- collectively the "Notes". ----- " Obligations": the unpaid principal of and interest on (including ----------- interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to HCC, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of HCC to the Administrative Agent or to any Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise. " Participant": as defined in subsection 11.6(b). ----------- " PBGC": the Pension Benefit Guaranty Corporation established pursuant ---- to Subtitle A of Title IV of ERISA. "" " Permitted Business Acquisition": the formation of a new Subsidiary or ------------------------------ any acquisition of all or substantially all the assets of, or 50% or more of the shares of capital stock, partnership interests, joint venture interests, limited liability company interests or other similar equity interests in, or the acquisition of any compression and/or oil and gas production equipment assets of, a Person or division or line of business of a Person (or any subsequent investment made in a Person previously acquired in a Permitted Business Acquisition), if immediately after giving effect thereto: (a) no Default or Event of Default shall have occurred and be continuing or would result therefrom, (b) all transactions related thereto shall be consummated in accordance with applicable laws, (c) such acquired or newly formed corporation, partnership, association or other business entity shall be a Subsidiary and all actions required to be taken, if any, with respect to such acquired or newly formed Subsidiary under subsection 7.9 shall have been taken, (d)(i) Holdings shall be in compliance, on a pro --- forma basis after giving effect to such acquisition or formation, with the ----- covenants contained in subsection 8.1 recomputed as at the last day of the most recently ended fiscal quarter of Holdings as if such acquisition had occurred on the first day of each relevant period for testing such compliance, and Holdings shall have delivered to the Administrative Agent an officers' certificate to such effect, together with all relevant financial information for such Person or assets and (ii) any acquired or newly formed Subsidiary shall not be liable for any Indebtedness or Guarantee Obligations (except for Indebtedness and Guarantee Obligations permitted by subsections 8.2 and 8.4), and (e) any acquired or newly formed Subsidiary (including Subsidiaries thereof) shall not have (except for Indebtedness and Guarantee Obligations permitted by subsections 8.2 and 8.4) any material liabilities (contingent or otherwise), including, without limitation, liabilities under Environmental Laws and liabilities with respect to any Plan, and the Borrower shall have delivered to the Administrative Agent a certificate, signed by a Responsible Officer, that to the best of such officer's knowledge, no such material liabilities exist. " Person": an individual, partnership, corporation, limited liability ------ company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. " Plan": at a particular time, any employee benefit plan which is ---- covered by ERISA and in respect of which HCC, or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. " Pricing Grid": the pricing grid attached hereto as Annex A. ------------ " Properties": as defined in subsection 5.16. ---------- " Purchasing Lenders": as defined in subsection 11.6(c). ------------------ " Qualified Subsidiary": each Subsidiary of Holdings organized under a -------------------- jurisdiction of the United States and having assets located primarily in the United States. " Register": as defined in subsection 11.6(d). -------- " Regulation U": Regulation U of the Board of Governors of the Federal ------------ Reserve System. " Reimbursement Obligation": the obligation of HCC to reimburse the ------------------------ Issuing Lender pursuant to subsection 4.5(a) for amounts drawn under Letters of Credit. " Reorganization": with respect to any Multiemployer Plan, the -------------- condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "" " Reportable Event": any of the events set forth in Section 4043(b) of ---------------- ERISA, other than those events as to which the thirty day notice period is waived by the PBGC. " Required Lenders": at any time, Lenders the Commitment Percentages of ---------------- which aggregate at least 60%. " Requirement of Law": as to any Person, the Certificate of ------------------ Incorporation and By-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. " Responsible Officer": the chief executive officer, president, the ------------------- executive vice president, treasurer or secretary of the applicable Credit Party, or, with respect to financial matters, the chief financial officer or treasurer of the applicable Credit Party. " Restructuring": includes both (i) the restructuring of HCC and the ------------- creation of Holdings as the corporate parent of HCC effective on December 9, 1999, pursuant to Section 251(g) of the Delaware General Corporation Law, and (ii) the merger of HCC into a newly formed limited partnership which is a Subsidiary of Holdings (such partnership to be the surviving entity of such merger). " Revolving Credit Loans": as defined in subsection 2.1. ---------------------- " Sale and Leaseback Transaction": as defined in subsection 8.13. ------------------------------ " Shareholder Subordinated Debt": shall mean all Subordinated Debt of ----------------------------- HCC under the Shareholder Subordinated Loan Agreement. " Shareholder Subordinated Loan Agreement": shall mean the Exchange and --------------------------------------- Subordinated Loan Agreement, dated as of December 23, 1996, between Holdings and the lenders parties thereto, as amended, supplemented or otherwise modified from time to time. " Single Employer Plan": any Plan which is covered by Title IV of -------------------- ERISA, but which is not a Multiemployer Plan. " Standby Letter of Credit": as defined in paragraph 4.1(b)(i)(A). ------------------------ "" " Subordinated Debt": as to any Person, any unsecured Indebtedness ----------------- (including, with respect to HCC, the Shareholder Subordinated Debt, and, with respect to Holdings, the TIDES Debentures) the terms of which provide that such Indebtedness is subordinate and junior in right of payment to the payment of all obligations and liabilities of such Person to the Administrative Agent and the Lenders hereunder; provided, that prior to an -------- Event of Default, Holdings and any Subsidiary may make regularly scheduled interest payments in respect of such Indebtedness. " Subordinated Guarantee Obligation": as to any Person, any unsecured --------------------------------- Guarantee Obligation the terms of which provide that such Guarantee Obligation is subordinate and junior in right to the payment of all the obligations and liabilities of such Person to the Agent and the Lenders. " Subsidiaries' Guarantee": the Subsidiaries' Guarantee made by Hanover ----------------------- General Holdings, Inc., Hanover Compressor Limited Holdings, LLC, Hanover Maintech Limited Partnership, Hanover/Smith Limited Partnership, Hanover Land Limited Partnership, Hanover Maintech Limited Partnership in favor of the Administrative Agent for the benefit of the Lenders, substantially in the form of Exhibit B, as amended, supplemented or otherwise modified from time to time. " Subsidiary": as to any Person, a corporation, partnership or other ---------- entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership of other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of Holdings. " TIDES": shall mean the Term Income Deferrable Equity Securities ----- (TIDES)[_] issued pursuant to the TIDES Declaration of Trust. " TIDES Declaration of Trust": shall mean the Amended and Restated -------------------------- Declaration of Trust, dated as of December 15, 1999, by Holdings, the holders of interests in the Trust from time to time and the trustees thereof. " TIDES Debentures": the unsecured debentures junior and subordinate in ---------------- right of payment to all the obligations and liabilities of Holdings issued pursuant to the TIDES Indenture. " TIDES Guarantees": means (i) the Preferred Securities Guarantee ---------------- Agreement, dated as of December 15, 1999, between Holdings and Wilmington Trust Company, as guarantee trustee, and the Common Securities Guarantee Agreement, dated as of December 15, 1999, by Holdings. " TIDES Indenture": shall mean the Indenture, dated as of December 15, --------------- 1999, between Holdings and Wilmington Trust Company, as trustee thereunder. "" " TIDES Trust": Hanover Compressor Capital Trust, a Delaware business ----------- trust, and its successors and assigns. " Tranche": the collective reference to Eurodollar Loans the Interest ------- Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). " Transferee": as defined in subsection 11.6(f). ---------- " Type": as to any Loan, its nature as an ABR Loan or a Eurodollar ---- Loan. " Uniform Customs": the Uniform Customs and Practice for Documentary --------------- Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended, revised or replaced from time to time. " Unqualified Subsidiary": any Subsidiary of Holdings other than ---------------------- Qualified Subsidiaries. " Working Day": any Business Day on which dealings in foreign ----------- currencies and exchange between banks may be carried on in London, England. 1.2 Other Definitional Provisions. (a) Unless otherwise specified ----------------------------- therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto. (a) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to HCC and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (b) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (e) For purposes of determining compliance with the covenants contained in Subsection 7.1 and 8.1, the term "Holdings" shall be deemed a reference to HCC for any period which is prior to December 9, 1999, covered by such covenants. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Revolving Credit Commitments. (a) Subject to the terms and ---------------------------- conditions hereof, each Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to HCC from time to time during the Commitment Period ---------------------- in an aggregate principal amount at any one time outstanding which, when added to such Lender's Commitment Percentage of the then outstanding L/C Obligations, does not exceed the amount of such Lender's Commitment. During the Commitment Period, HCC may use the Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by HCC and notified to the Administrative Agent in accordance with subsections 2.2 and 3.5, provided that no Revolving Credit Loan shall be made as a -------- Eurodollar Loan after the day that is one month prior to the Final Maturity Date. (c) Revolving Credit Loans made under (and as defined in) the Existing Credit Agreement prior to the Amended and Restated Effective Date and outstanding on such date shall constitute Revolving Credit Loans hereunder. 2.2 Procedure for Revolving Credit Borrowing. HCC may borrow under ---------------------------------------- the Commitments during the Commitment Period on any Working Day, if all or any part of the requested Revolving Credit Loans are to be initially Eurodollar Loans, or on any Business Day, otherwise, provided that HCC shall give the Administrative Agent irrevocable -------- notice (which notice must be received by the Administrative Agent prior to 11:00 A.M., New York City time, (a) three Working Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans, or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of such Type of Loan and the length of the initial Interest Period therefor. Each borrowing under the Commitments shall be in an amount equal to (x) in the case of ABR Loans, $200,000 or a whole multiple of $100,000 in excess thereof (or, if the then Available Commitments are less than $200,000, such lesser amount) and (y) in the case of Eurodollar Loans, $500,000 or a whole multiple of $100,000 in excess thereof. Upon receipt of any such notice from HCC, the Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of HCC at the office of the Administrative Agent specified in subsection 11.2 prior to 12:00 noon, New York City time, on the Borrowing Date requested by HCC in funds immediately available to the Administrative Agent. Such borrowing will then be made available to HCC by the Administrative Agent crediting the account of HCC on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. SECTION 3. INTEREST RATE PROVISIONS, FEES, CONVERSIONS AND PAYMENTS 3.1 Interest Rates and Payments Dates. (a) Each Eurodollar Loan --------------------------------- shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (a) Each ABR Loan shall bear interest at a rate per annum equal to ABR plus the Applicable Margin. (b) If all or a portion of (i) the principal amount of any Loan or (ii) any interest payable thereon shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is (x) in the case of overdue principal, 2% above the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection or (y) in the case of overdue interest, to the extent permitted by law, 2% above the rate described in paragraph (b) of this subsection, in each case from the date of such non-payment until such amount is paid in full (as well after as before judgment). (c) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this subsection shall be payable on demand. 3.2 Commitment Fee; Other Fees and Compensation. (a) HCC agrees ------------------------------------------- to pay to the Administrative Agent for the account of each Lender a commitment fee for the period from and including the first day of the Commitment Period to the Final Maturity Date, computed at the rate per annum equal to the Applicable Commitment Fee Rate on the average daily amount of the Available Commitment of such Lender during the period for which payment is made. Such commitment fee shall be payable quarterly in arrears on the last day of each March, June, September and December and on the Final Maturity Date or such earlier date as the Commitments shall terminate as provided herein, commencing on December 31, 1997. (a) HCC agrees to pay to the Administrative Agent the fees and other compensation, in the amounts and on the dates specified in the fee letter separately agreed to between HCC and the Administrative Agent. 3.3 Termination or Reduction of the Commitments. HCC shall have ------------------------------------------- the right during the Commitment Period, upon not less than five Business Days' notice to the Administrative Agent by HCC to terminate the Commitments or, from time to time, to reduce the amount of the Commitments, provided that no such -------- termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the aggregate principal amount of the Revolving Credit Loans then outstanding, when added to the then outstanding L/C Obligations, would exceed the Commitments then in effect. Any such reduction shall be in an amount equal to $100,000 or a whole multiple thereof and shall reduce permanently the Commitments then in effect. 3.4 Optional Prepayments and other Repayments. (a) HCC may at any ----------------------------------------- time and from time to time, prepay the Loans, in whole or in part, without premium or penalty, upon at least three Working Days' irrevocable notice, in the case of Eurodollar Loans, and one Business Day's irrevocable notice, in the case of ABR Loans, by HCC to the Administrative Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, ABR Loans or a combination thereof, and if of a combination thereof, the amount allocable to each. If any such prepayment with respect to a Eurodollar Loan is made on a day other than the last day of an Interest Period, such prepayment shall be accompanied by any amounts required to be paid pursuant to subsection 3.13. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments shall be in an aggregate principal amount of $200,000 or a whole multiple of $100,000 in excess thereof. (a) HCC shall repay at any time, and there shall be due and payable at such time, such principal amount (together with accrued interest thereon), if any, of outstanding Revolving Credit Loans as may be necessary so that, after such repayment, the aggregate unpaid principal amount of Revolving Credit Loans does not exceed the Commitments in effect at such time after giving effect to any reduction in the Commitments pursuant to subsection 3.3. 3.5 Conversion and Continuation Options. (a) HCC may elect from ----------------------------------- time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may only be -------- made on the last day of an Interest Period with respect thereto. HCC may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent at least three Working Days' prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and ABR Rate Loans may be converted as provided herein, provided that (i) no Loan may be converted into a Eurodollar Loan when any Event - -------- of Default has occurred and is continuing and the Administrative Agent has determined that such a conversion is not appropriate, (ii) any such conversion may only be made if, after giving effect thereof, subsection 3.6 shall not have been contravened and (iii) no Loan may be converted into a Eurodollar Loan after the date that is one month prior to the Final Maturity Date. (a) Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by HCC giving notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in subsection 1.1, of the length of the next Interest Period to be applicable to such Loans, provided that -------- no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has determined that such a continuation is not appropriate, (ii) if, after giving effect thereto, subsection 3.6 would be contravened or (iii) after the date that is one month prior to the Final Maturity Date and provided, further, that if HCC shall fail -------- ------- to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. 3.6 Minimum Amounts. All borrowings, conversions and continuations --------------- of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising each Eurodollar Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof. 3.7 Computation of Interest and Fees. (a) Commitment fees and -------------------------------- interest on ABR Loans shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed, and interest on Eurodollar Loans shall be calculated on the basis of a 360 day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify HCC and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR, the Eurocurrency Reserve Requirements, the C/D Assessment Rate or the C/D Reserve Percentage shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify HCC and the Lenders of the effective date and the amount of each such change in interest rate. (a) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on HCC and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the HCC, deliver to HCC a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to subsection 3.1(a). 3.8 Inability to Determine Interest Rate. In the event that prior ------------------------------------ to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon HCC absent manifest error) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Majority Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the costs to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telex, telecopy or telephonic notice thereof to HCC and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be converted to or continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall HCC have the right to convert Loans to Eurodollar Loans. 3.9 Pro Rata Treatment and Payments. (a) Each borrowing by HCC ------------------------------- from the Lenders hereunder, each payment by HCC on account of any commitment fee hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Commitment Percentages of the Lenders. Each payment (including each prepayment) by HCC on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Lenders. All payments (including prepayments) to be made by HCC hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in subsection 11.2 in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Working Day, the maturity thereof shall be extended to the next succeeding Working Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Working Day. (a) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing Date that such Lender will not make the amount that would constitute its Commitment Percentage of the borrowing on such date available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such Borrowing Date, and the Administrative Agent may, in reliance upon such assumption, make available to HCC a corresponding amount. If such amount is made available to the Administrative Agent on a date after such Borrowing Date, such Lender shall pay to the Administrative Agent on demand an amount equal to the product of (i) the daily average Federal funds rate during such period as quoted by the Administrative Agent, times (ii) the amount of such Lender's Commitment Percentage of such borrowing, times (iii) a fraction the numerator of which is the number of days that elapse from and including such Borrowing Date to the date on which such Lender's Commitment Percentage of such borrowing shall have become immediately available to the Administrative Agent and the denominator of which is 360. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender's Commitment Percentage of such borrowing is not in fact made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall be entitled to recover such amount with interest thereon at the rate per annum applicable to such Loan, on demand, from HCC and any such payment by HCC shall not constitute a waiver of any right or remedy HCC may have with respect to any such Lender. 3.10 Illegality. Notwithstanding any other provision herein, if any ---------- change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert ABR Loans to Eurodollar Loans shall forthwith be canceled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to ABR Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, HCC shall pay to such Lender such amounts, if any, as may be required pursuant to subsection 3.13. 3.11 Requirements of Law. (a) In the event that any change in any ------------------- Requirement of Law as in existence on the date hereof or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, any Application or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for taxes covered by subsection 3.12 and changes in the rate of tax on the overall net income of such Lender or tax imposed in lieu of net income taxes); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit or to reduce any amount receivable hereunder in respect thereof, then, in any such case, HCC shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify HCC, through the Administrative Agent, by delivery of a certificate setting forth the amounts due and a description of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Lender, through the Administrative Agent, to HCC shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and all other amounts payable hereunder. (b) In the event that any Lender shall have determined that any change in any Requirement of Law as in existence on the date hereof regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder or under any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to HCC (with a copy to the Administrative Agent) of a written request therefore, HCC shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. 3.12 Taxes. (a) All payments made by HCC under this Agreement ----- shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding, in the case of the Administrative Agent and each Lender, net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or such Lender, as the case may be, as a result of a present or former connection between the jurisdiction of the government or taxing authority imposing such tax and the Administrative Agent or such Lender (excluding a connection arising solely from the Administrative Agent or such Lender having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement) or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts ----- payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement. Whenever any Taxes are payable by HCC, as promptly as possible thereafter HCC shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by HCC showing payment thereof. If HCC fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, HCC shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. Notwithstanding the foregoing, before making any demand for payment under this Section 3.12(a) each Lender agrees to use commercially reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different lender office if the making of such a designation would avoid the need for, or reduce the amount of, such payments required under this Section 3.12(a). (a) Each Lender, including, without limitation, each Purchasing Lender, that is not incorporated under the laws of the United States of America or a state thereof agrees that prior to the first Interest Payment Date or, in the case of a Purchasing Lender, the first Interest Payment Date to occur subsequent to the date it becomes a party hereto it will deliver to HCC and the Administrative Agent (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form. Each such Lender also agrees to deliver to HCC and the Administrative Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to HCC and such extensions or renewals thereof as may reasonably be requested by HCC or the Administrative Agent, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises HCC and the Administrative Agent. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Lender which fails to provide to HCC in a timely manner such forms shall reimburse HCC upon demand for any penalties paid by HCC as a result of any failure of HCC to withhold the required amounts, that are caused by such Lender's failure to provide the required forms in a timely manner. 3.13 Indemnity. HCC agrees to indemnify each Lender and to hold --------- each Lender harmless from any reasonable loss or expenses which such Lender may sustain or incur as a consequence of (a) default by HCC in payment when due of the principal amount of or interest on any Eurodollar Loan, (b) default by HCC in making a borrowing of, conversion into or continuation of Eurodollar Loans after HCC has given a notice requesting the same in accordance with the provisions of this Agreement, (c) default by HCC in making any prepayment after HCC has given a notice thereof in accordance with the provisions of this Agreement or (d) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained. This covenant shall survive the termination of this Agreement, the Loans and all other amounts payable hereunder. 3.14 Replacement of Lenders. If any Lender requests compensation ---------------------- under subsection 3.11, or if HCC is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to subsection 3.12, or if any Lender defaults in its obligation to fund Loans hereunder, then HCC may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 11.6), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) HCC shall have -------- received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in Letters of Credit, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or HCC (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under subsection 3.11 or payments required to be made pursuant to subsection 3.12, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling HCC to require such assignment and delegation cease to apply. SECTION 4. LETTERS OF CREDIT 4.1 L/C Commitment. (a) Subject to the terms and conditions -------------- hereof, the Issuing Lender, in reliance on the agreements of the other Lenders set forth in subsection 4.4(a), agrees to issue letters of credit ("Letters of ---------- Credit") for the account of HCC on any Business Day during the Commitment Period - ------ in such form as may be approved from time to time by the Issuing Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of - -------- Credit if, after giving effect to such issuance, the L/C Obligations would exceed the L/C Commitment or the Available Commitment. (a) Each Letter of Credit shall: (i) be denominated in Dollars and shall be either (A) a standby letter of credit issued to support obligations of HCC or its Subsidiaries (a "Standby Letter of Credit"), or (B) a commercial letter of credit issued ------------------------ in respect of the purchase of goods or services by HCC and its Subsidiaries in the ordinary course of business (a "Commercial Letter of Credit") and --------------------------- (ii) expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Termination Date. (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. 4.2 Procedure for Issuance of Letters of Credit. HCC may from time ------------------------------------------- to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may reasonably request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by the Issuing Lender and HCC. The Issuing Lender shall furnish a copy of such Letter of Credit to HCC promptly following the issuance thereof. 4.3 Fees, Commissions and Other Charges. (a) HCC shall pay to the ----------------------------------- Administrative Agent, for the account of the Issuing Lender and the L/C Participants, a letter of credit commission with respect to each Letter of Credit, computed for the period from the date such Letter of Credit is issued to the date upon which the next such payment is due hereunder at the rate per annum equal to the Applicable Margin in effect from time to time for Eurodollar Loans, calculated on the basis of a 365 (or 366-, as the case may be) day year, of the daily aggregate amount available to be drawn under such Letter of Credit for the period covered by such payment. In addition, HCC shall pay to the Issuer a fronting fee in the amount equal to .125% of the face amount of such Letter of Credit. Such commissions shall be payable in arrears on each L/C Fee Payment Date (and the Termination Date) and shall be nonrefundable. (a) In addition to the foregoing fees and commissions, HCC shall pay or reimburse the Issuing Lender for such reasonable, normal and customary costs and expenses as are actually incurred or charged by the Issuing Lender in issuing, effecting payment under, amending or otherwise administering any Letter of Credit. (b) The Administrative Agent shall, promptly following its receipt thereof, distribute to the Issuing Lender and the L/C Participants all fees and commissions received by the Administrative Agent for their respective accounts pursuant to this subsection. 4.4 L/C Participations. (a) The Issuing Lender irrevocably agrees ------------------ to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Commitment Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by HCC in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (a) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to paragraph 4.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (1) such amount, times (2) the daily average Federal funds rate, as quoted by the Issuing Lender, during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (3) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to paragraph 4.4(a) is not in fact made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to ABR Loans hereunder. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. (b) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with subsection 4.4(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from HCC or otherwise), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by -------- ------- the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 4.5 Reimbursement Obligation of HCC. (a) HCC agrees to reimburse ------------------------------- the Issuing Lender on each date on which the Issuing Lender notifies HCC of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender for the amount of (i) such draft so paid and (ii) any taxes, fees, charges or other costs or expenses reasonably incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender at its address for notices specified herein in Dollars and in immediately available funds. (a) Interest shall be payable on any and all amounts remaining unpaid by HCC under this subsection from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which would be payable on any outstanding ABR Loans which were then overdue. (b) Each drawing under any Letter of Credit shall constitute a request by HCC to the Administrative Agent for a borrowing pursuant to subsection 2.4 (Procedure for Revolving Credit Borrowing) of ABR Loans in the amount of such drawing. The Borrowing Date with respect to such borrowing shall be the date of such drawing. 4.6 Obligations Absolute. (a) HCC's obligations under this -------------------- Section 4 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which HCC may have or have had against the Issuing Lender or any beneficiary of a Letter of Credit. (a) HCC also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and HCC's Reimbursement Obligations under subsection 4.5(a) shall not be affected by, among other things, (i) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or (ii) any dispute between or among HCC and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (iii) any claims whatsoever of HCC against any beneficiary of such Letter of Credit or any such transferee. (b) The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Issuing Lender's gross negligence or willful misconduct. (c) HCC agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York, shall be binding on HCC and shall not result in any liability of the Issuing Lender to HCC. 4.7 Letter of Credit Payments. If any draft shall be presented for ------------------------- payment under any Letter of Credit, the Issuing Lender shall promptly notify HCC of the date and amount thereof. The responsibility of the Issuing Lender to HCC in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit. 4.8 Application. To the extent that any provision of any ----------- Application related to any Letter of Credit is inconsistent with the provisions of this Section 4, the provisions of this Section 4 shall apply. SECTION 5. REPRESENTATIONS AND WARRANTIES To induce the Agents and the Lenders to enter into this Agreement and to make Loans and issue or participate in the Letters of Credit, Holdings and HCC hereby jointly and severally represent and warrant to the Administrative Agent and each Lender that: 5.1 Financial Condition. (a) The unaudited pro forma consolidated ------------------- --- ----- balance sheet of HCC and its consolidated Subsidiaries as at September 30, 1999 (the "Pro Forma Balance Sheet"), copies of which have heretofore been furnished ----------------------- to each Lender, has been prepared giving effect (as if such events had occurred on such date) to the consummation of the TIDES issuance. The Pro Forma Balance Sheet has been prepared based on the best information available to Holdings and HCC as of the date of delivery thereof, and presents fairly in all material respects on a pro forma basis the estimated financial position of HCC and its --- ----- consolidated Subsidiaries as at September 30, 1999, assuming that the events specified in the preceding sentence had actually occurred at such date. (a) The audited consolidated balance sheets of HCC as at December 31, 1997 and December 31, 1998, and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from PricewaterhouseCoopers LLP, present fairly in all material respects the consolidated financial condition of HCC as at such date, and the consolidated results of its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of HCC as at March 31, 1999 and June 30, 1999, and the related unaudited consolidated statements of income and cash flows for the three and six-month periods ended on such date, present fairly in all material respects the consolidated financial condition of HCC as at such date, and the consolidated results of its operations and its consolidated cash flows for the three and six-month periods then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). Holdings, HCC and its Subsidiaries do not have any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. During the period from September 30, 1999 to and including the date hereof there has been no Disposition by Holdings or any of its Subsidiaries, as applicable, of any material part of their business or property (other than to Holdings or any of its Subsidiaries). 5.2 No Change. Since September 30, 1999 (a) there has been no --------- development or event nor any prospective development or event, which has had or would reasonably be expected to have a Material Adverse Effect and (b) except as disclosed on Schedule 5.2 to this Agreement, as of the date of this Agreement, no dividends or other distributions have been declared, paid or made upon the Capital Stock of Holdings or HCC nor has any of the Capital Stock of Holdings or HCC (other than in connection with the Restructuring) been redeemed, retired, purchased or otherwise acquired for value by Holdings or any of its respective Subsidiaries. 5.3 Corporate Existence; Compliance with Law. Each Credit Party ---------------------------------------- (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.4 Corporate Power; Authorization; Enforceable Obligations. Each ------------------------------------------------------- Credit Party has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party. HCC has the corporate power and authority, and the legal right, to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement, and the Applications. Each Credit Party has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person (other than consents or authorizations the failure to obtain would not, in the aggregate, reasonably be expected to have a Material Adverse Effect) is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, the Applications or any of the other Loan Documents, except consents, authorizations, filings and notices described in Schedule 5.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect. This Agreement has been, and, each Application and each other Loan Document will be, duly executed and delivered on behalf of the Credit Parties party thereto. This Agreement constitutes, and each Note, each Application and each other Loan Document when executed and delivered will constitute, a legal, valid and binding obligation of the Credit Parties party thereto enforceable against such Credit Parties in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 5.5 No Legal Bar. The execution, delivery and performance of this ------------ Agreement, the Applications, and the other Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of any Credit Party thereto and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation, except as contemplated hereby or thereby and except to the extent any such violation or creation or imposition of a Lien would not reasonably be expected to have a Material Adverse Effect. 5.6 No Material Litigation. Except as set forth in HCC's Form 10- ---------------------- Q, filed with respect to the period ending September 30, 1999, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of Holdings or HCC, threatened by or against any Credit Party or against any of their respective properties or revenues (a) with respect to this Agreement, or the other Loan Documents or any of the transactions contemplated hereby, or (b) which would reasonably be expected to have a Material Adverse Effect. 5.7 No Default. None of the Credit Parties nor any of their ---------- respective Subsidiaries is in default under or with respect to any of their respective Contractual Obligations in any respect which if not cured would reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 5.8 Ownership of Property; Liens; Leases of Equipment. Each of the ------------------------------------------------- Credit Parties has good record and marketable title in fee simple (except for exceptions to title as will not in the aggregate materially interfere with the present or contemplated use of the property affected thereby) to, or a valid leasehold interest in, all its real property, and good title to all its other property, and none of such property is subject to any Lien except as permitted by subsection 8.3. None of the Equipment or Inventory (as defined in the Uniform Commercial Code) owned by any Credit Party has been leased by such Credit Party as lessor, except pursuant to operating leases (which do not constitute Financing Leases). As used herein, Equipment or Inventory leased by a Credit Party under a Financing Lease shall be deemed "owned" by such Credit Party. 5.9 Intellectual Property. Each Credit Party owns, or is licensed --------------------- to use, all trademarks, tradenames, trade secrets, copyrights, technology, know- how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which would not reasonably be expected to have a Material Adverse Effect (the "Intellectual ------------ Property"). To the knowledge of Holdings or HCC, no claim has been asserted and - -------- is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does Holdings or HCC know of any valid basis for any such claim, which would reasonably be expected to have a Material Adverse Effect. The use of such Intellectual Property by the Credit Parties does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, would not reasonably be expected to have a Material Adverse Effect. 5.10 Taxes. Each of the Credit Parties has filed or caused to be ----- filed all tax returns which, to the knowledge of Holdings and HCC, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of any of the Credit Parties, as the case may be); no tax Lien has been filed against the property of any Credit Party, and, to the knowledge of Holdings and HCC, no claim is being asserted, with respect to any such tax, fee or other charge. 5.11 Federal Regulations. No part of the proceeds of any Loans will ------------------- be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors. If requested by any Lender or the Administrative Agent, HCC will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. 5.12 ERISA. Neither a Reportable Event nor an "accumulated funding ----- deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred and no lien in favor of the PBGC or a Plan has arisen during the five-year period prior to the date as of which this representation is deemed made. The present value of all accrued benefits under each Single Employer Plan maintained by HCC, or any Commonly Controlled Entity (based on those assumptions used to fund the Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither HCC nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither HCC nor any Commonly Controlled Entity would become subject to any liability under ERISA if HCC or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of HCC and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits. 5.13 Investment Company Act; Other Regulations. None of the Credit ----------------------------------------- Parties is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. None of the Credit Parties is subject to regulation under any Federal or State statute or regulation which limits its ability to incur Indebtedness or change rates or change tariffs. None of the Credit Parties are "holding companies" or "subsidiary companies" of a "holding company" or a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.14 Subsidiaries. As of the Closing Date, Holdings has no ------------ Subsidiaries other than as set forth on Schedule 5.14. Except if a Credit Party, other than cash or Cash Equivalents located in bank accounts at Chase, none of the assets owned by any Unqualified Subsidiary as of the date hereof are located within the United States of America or any territory thereof. 5.15 Purpose of Loans. The proceeds of the Loans shall be used for ---------------- the working capital and general corporate purposes of HCC and its Subsidiaries. 5.16 Environmental Matters. Each of the representations and --------------------- warranties set forth in paragraphs (a) through (f) of this subsection is true and correct with respect to each parcel of real property owned or operated by any of the Credit Parties (the "Properties"), except to the extent that the ---------- facts and circumstances giving rise to any such failure to be so true and correct would not reasonably be expected to have a Material Adverse Effect: (a) Except as set forth on Schedule 5.16, the Properties do not contain, and have not previously contained, in, on, or under, including, without limitation, the soil and groundwater thereunder, any Hazardous Materials in concentrations which violate Environmental Laws. (b) Except as set forth on Schedule 5.16, the Properties and all operations and facilities at the Properties are in compliance with all Environmental Laws, and there is no Hazardous Materials contamination or violation of any Environmental Law which would reasonably be expected to interfere with the continued operation of any of the Properties or impair the fair saleable value of any thereof. (c) Except as set forth on Schedule 5.16, none of the Credit Parties has received any complaint, notice of violation, alleged violation, investigation or advisory action or of potential liability or of potential responsibility regarding environmental protection matters or environmental permit compliance with regard to the Properties which has not been resolved, nor is HCC aware that any Governmental Authority is contemplating delivering to any Credit Party any such notice. (d) Hazardous Materials have not been generated, treated, stored, disposed of, at, on or under any of the Properties in concentrations that violate Environmental Laws, nor have any Hazardous Materials been transferred to any other location, in violation of any Environmental Laws from the Properties or as a result of the sale or lease of any equipment or inventory of any Credit Party. (e) There are no governmental, administrative actions or judicial proceedings pending or contemplated under any Environmental Laws to which any Credit Party is or to HCC's knowledge will be named as a party with respect to the Properties, nor to HCC's knowledge are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any of the Properties. 5.17 Accuracy and Completeness of Information. The factual ---------------------------------------- statements contained in the Loan Documents and each other agreement, instrument, certificate and document related thereto and any other certificates or documents furnished or to be furnished to the Administrative Agent or the Lenders by any Credit Party from time to time in connection with this Agreement (in any case excluding any of the financial statements referred to in Section 5.1(a) hereof), taken as a whole, and taking into consideration all corrections or substituted documents, do not and will not, as of the date when made, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which the same were made, all except as otherwise qualified herein. 5.18 Year 2000. The Year 2000 date change has not resulted in --------- disruption of Holdings' and its Subsidiaries' computer hardware, software, databases, systems and other equipment containing embedded microchips (including systems and equipment supplied by others or with which Holdings' or its Subsidiaries' systems interface), or to Holdings' or its Subsidiaries' operations or business systems, or to the best of Holdings' and its Subsidiaries' knowledge, to the operations or business systems of Holdings' major vendors, customers, suppliers and counterparties. Holdings has no reason to believe that liabilities and expenditures related to the Year 2000 date-change (including, without limitation, costs caused by reprogramming errors, the failure of others' systems or equipment, and the potential liability, if any, of Holdings or its Subsidiaries for Year 2000 related costs incurred or disruption experienced by others) will result in a Default or a Material Adverse Effect. 5.19 Senior Indebtedness. The Obligations constitute "Senior ------------------- Indebtedness" of HCC under and as defined in the Shareholder Subordinated Loan Agreement. The obligations of Holdings, HCC and their Subsidiaries under the Guarantees and Equipment Guarantees constitute "Senior Indebtedness" of such applicable Loan Party under and as defined in the Shareholder Subordinated Loan Agreement. 5.20 Representations and Warranties in Existing Credit Agreement. ----------------------------------------------------------- The representations and warranties contained in Section 5 of the Existing Credit Agreement and in any amendment, consent or waiver thereto were true and correct in all material respects on and as of the dates when made pursuant to the Existing Credit Agreement. SECTION 6. CONDITIONS PRECEDENT 6.1 Conditions to Each Extension of Credit. The agreement of each -------------------------------------- Lender to make any extension of credit requested to be made by it on any date is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and ------------------------------ warranties made by the Credit Parties in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date (unless any such representations and warranties specifically refer to another date). (b) No Default. No Default or Event of Default shall have ---------- occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date. (c) Additional Documents. The Administrative Agent shall have -------------------- received each additional document, instrument or item of information reasonably requested by it to further effect the purposes of this Agreement, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which any Credit Party may be a party. (d) Additional Matters. All corporate and other proceedings, and ------------------ all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request to further effect the purposes of this Agreement. Each borrowing by and Letter of Credit issued on behalf of HCC hereunder shall constitute a representation and warranty by HCC as of the date of such Loan that the conditions contained in this subsection 6.1 have been satisfied. 6.2 Conditions to Amended and Restated Effective Date. The Amended ------------------------------------------------- and Restated Effective Date shall be the date of satisfaction of the following conditions precedent: (a) Agreement; Consents. The Administrative Agent shall have ------------------- executed this Agreement and shall have received counterparts hereof executed by Holdings and HCC, and duly acknowledged and agreed to by each of [NEW GUARANTORS]. The Administrative Agent shall have received a Subsidiaries' Guarantee executed by each Credit Party other than Holdings and HCC. (b) Fees. The Lenders and the Administrative Agent shall have ---- received all fees required to be paid, and all expenses for which invoices have been presented (including reasonable fees, disbursements and other charges of counsel to the Agents), on or before the Amended and Restated Effective Date. (c) Resolutions. The Administrative Agent shall have received, ----------- with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of each Credit Party authorizing the execution of this Agreement and the performance of HCC's obligations hereunder and any borrowings hereunder from time to time, certified by the Secretary or an Assistant Secretary of each such Credit Party, as of the Amended and Restated Effective Date, which certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate. (d) Incumbency Certificate. The Administrative Agent shall have ---------------------- received, to the extent that it has not previously received, a certificate of the Secretary or Assistant Secretary of each Credit Party, dated the Amended and Restated Effective Date, as to the authority, incumbency and signature of each of the officers signing this Agreement, and any other instrument or document delivered by such Credit Party in connection herewith, together with evidence of the incumbency of such Secretary or Assistant Secretary. (e) Legal Opinions. The Administrative Agent shall have received -------------- such executed legal opinions of HCC and Holdings which the Administrative Agent shall reasonably request. SECTION 7. AFFIRMATIVE COVENANTS Holdings hereby agrees that, so long as the Commitments remain in effect, any Note or any Letter of Credit remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder, Holdings shall and Holdings (except in the case of delivery of financial information, reports, certificates and notices) shall cause each of its Subsidiaries to: 7.1 Financial Statements. Furnish to each Lender: -------------------- (a) as soon as available for distribution to shareholders and creditors generally, but in any event within 120 days after the end of each fiscal year of Holdings, a copy of the consolidated balance sheet of Holdings and its consolidated Subsidiaries, as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by PricewaterhouseCoopers or other independent certified public accountants of nationally recognized standing not unacceptable to the Required Lenders; (b) as soon as available for distribution to shareholders and creditors generally, but in any event within 90 days after the end of each fiscal year of Holdings, a copy of the unaudited consolidated balance sheet of Holdings and its consolidated Subsidiaries, as at the end of such year, and the related unaudited consolidated statements of income and retained earnings and of cash flows for such year, in each case setting forth in comparative form the figures for the corresponding period of the previous year and the figures for such period as shown on the budgets of Holdings for such year; and (c) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of Holdings, the unaudited consolidated balance sheet of Holdings and its consolidated Subsidiaries, as at the end of such quarter, and the related unaudited consolidated statements of income and retained earnings and of cash flows of Holdings and its consolidated Subsidiaries, for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the corresponding period of the previous year, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of Holdings and its consolidated Subsidiaries, (subject to normal year-end audit adjustments), and in each case setting forth in comparative form the figures for such periods as shown on the budgets of such Person for such year; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 7.2 Certificates; Other Information. Furnish to each Lender: ------------------------------- (a) concurrently with the delivery of the financial statements referred to in subsection 7.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and 7.1(c), a certificate of a Responsible Officer stating that, to the best of such Officer's knowledge, Holdings during such period has observed or performed all of its covenants and other agreements, and satisfied every material condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate; (c) not later than 45 days following the end of each fiscal year of Holdings, a copy of the projections by Holdings of the operating budget and cash flow budget of Holdings and its Subsidiaries for the succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer to the effect that such projections have been prepared on the basis of reasonable assumptions and that such Officer has no reason to believe they are incorrect or misleading in any material respect; (d) (i) within five days after the same are sent, copies of all financial statements and reports which Holdings, if at such time any class of such Person's securities are held by the public, sends to its stockholders generally, or, if otherwise, such financial statements and reports as are made generally available to the public, and (ii) within five days after the same are filed, copies of all financial statements and reports which HCC may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (e) concurrently with the delivery of the financial statements referred to in subsections 7.1(b) and (c), a management summary describing and analyzing the performance of Holdings and its Subsidiaries during the periods covered by such financial statements; (f) within 45 days after the end of each quarter in each fiscal year of Holdings, a certificate of the principal financial officer of Holdings showing both the Applicable Margin for the next quarter and the detailed computations necessary to calculate the Applicable Margin (an "Applicable Margin ----------------- Certificate"); and - ----------- (g) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 7.3 Payment of Obligations. Pay, discharge or otherwise satisfy at ---------------------- or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of Holdings or any Subsidiary of Holdings, as the case may be. 7.4 Conduct of Business and Maintenance of Existence. Continue to ------------------------------------------------ engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 8.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 7.5 Maintenance of Property; Insurance. (a) Keep and maintain all ---------------------------------- property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. 7.6 Inspection of Property; Books and Records; Discussions. Keep ------------------------------------------------------ proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of Holdings and Subsidiaries of Holdings with officers and employees of Holdings and Subsidiaries of Holdings and with its independent certified public accountants; provided, however, that no such visit, inspection or examination or discussion - -------- shall unreasonably disrupt or interfere with normal operations of Holdings or any of its Subsidiaries and any such representatives of the Administrative Agent and the Lenders shall be accompanied by a Responsible Officer of Holdings. No failure to comply with any request for the exercise of rights hereunder shall be cause for any Event of Default unless such request is submitted in writing to Holdings with reference to this Section 7.6. 7.7 Notices. Promptly give notice to the Administrative Agent and ------- each Lender of: (a) the occurrence of any Default or Event of Default of which Holdings has actual knowledge; (b) any (i) default or event of default by Holdings or any of its Subsidiaries under or with respect to any of their respective Contractual Obligations in any respect which, if not cured, would reasonably be expected to have a Material Adverse Effect, or to Holdings' knowledge any default or event of default by any third party under or with respect to any Contractual Obligation of said third party with Holdings or any of its Subsidiaries in a respect which, if not cured, would reasonably be expected to have a Material Adverse Effect (ii) litigation, investigation or proceeding of which Holdings has actual knowledge which may exist at any time between Holdings or any Subsidiary of Holdings and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, would reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting Holdings or any Subsidiary of Holdings of which Holdings has actual knowledge in which the amount involved is $5,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought and which if adversely determined would reasonably be expected to have a Material Adverse Effect; (d) the following events, as soon as possible and in any event within 30 days after Holdings has actual knowledge thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or Holdings, any Commonly Controlled Entity with respect to the termination of any Single Employer Plan; and (e) a development or event which has had or would reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action Holdings proposes to take with respect thereto. 7.8 Environmental Laws. ------------------ (a) Comply in all material respects with, and undertake all reasonable efforts to ensure compliance by all tenants and subtenants, if any, with, all Environmental Laws and obtain and comply in all material respects with and maintain, and undertake all reasonable efforts to ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, registrations or permits required by Environmental Laws, and upon discovery of any non-compliance or suspected non-compliance, undertake all reasonable efforts to attain full compliance; (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities respecting Environmental Laws, except to the extent that the failure to so conduct, complete or take such actions, or to comply with such orders and directives, would not in the aggregate reasonably be expected to have a Material Adverse Effect; (c) Defend, indemnify and hold harmless the Administrative Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of or noncompliance with any Environmental Laws applicable to the real property owned or operated by Holdings or any Subsidiary of Holdings, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney's and consultant's fees, investigation and laboratory fees, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor; and (d) Maintain a program to identify and promote substantial compliance with and to minimize prudently any liabilities or potential liabilities under any Environmental Law that may affect Holdings or any of its Qualified Subsidiaries. 7.9 Subsequent Guarantees. Holdings shall cause each Qualified --------------------- Subsidiary (other than HCC, the TIDES Trust, HMS and MAC) of Holdings for which the aggregate value of all assets owned by such Qualified Subsidiary is or becomes greater than $20,000,000, to execute an amendment to the Subsidiaries' Guarantee pursuant to which it will become a guarantor under the Subsidiaries' Guarantee within one year after the later of (i) the date on which such Qualified Subsidiary becomes a Subsidiary of Holdings and (ii) the date on which such Qualified Subsidiary's assets attain an aggregate value in excess of $20,000,000; provided, however, that if during such one-year period the -------- ------- aggregate value of such Qualified Subsidiary's assets is or becomes $20,000,000 or less, such Qualified Subsidiary shall not be required to become a party to the Subsidiaries' Guarantee. SECTION 8. NEGATIVE COVENANTS Holdings hereby agrees that, so long as the Commitments remain in effect, any Note or any Letter of Credit remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder, Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 8.1 Financial Condition Covenants. (a) Maintenance of ----------------------------- -------------- Consolidated Indebtedness to Consolidated Capitalization. Permit the ratio - -------------------------------------------------------- (expressed as a percentage) of Consolidated Indebtedness to Consolidated Capitalization of Holdings as at the end of any of Holdings' fiscal quarters to be greater than .65 to 1.0; provided that for purposes of calculating the -------- numerator of the foregoing ratio, Consolidated Indebtedness shall exclude seventy percent (70%) of the Indebtedness in respect of the TIDES Debentures. (a) Current Ratio. Permit the Current Ratio of Holdings at the ------------- end of any of Holdings' fiscal quarters to be less than 1.0 to 1.0. (b) Consolidated Indebtedness to Consolidated Adjusted EBITDA. --------------------------------------------------------- Permit the ratio of Consolidated Indebtedness of Holdings to Consolidated Adjusted EBITDA for the four consecutive fiscal quarters of Holdings most recently ended to be greater than 5.25 to 1.0; provided that for purposes of -------- calculating the numerator of the foregoing ratio, Consolidated Indebtedness of Holdings shall exclude seventy percent (70%) of the Indebtedness in respect of the TIDES Debentures. (d) Consolidated Indebtedness to Consolidated EBITDA. Permit the ------------------------------------------------ ratio of Consolidated Indebtedness to Consolidated EBITDA of Holdings for the four consecutive fiscal quarters of Holdings most recently ended ("Consolidated ------------ Indebtedness Ratio") to be greater than 4.0 to 1.0; provided that for purposes - ------------------ -------- of calculating the numerator of the foregoing ratio, Consolidated Indebtedness of Holdings shall exclude seventy percent (70%) of the Indebtedness in respect of the TIDES Debentures. (e) Interest Coverage Ratio. Permit the ratio of Consolidated ----------------------- EBITDA to Consolidated Interest Expense of Holdings for the period of four consecutive fiscal quarters of Holdings most recently ended to be less than 2.5 to 1.0.; provided that for purposes of calculating the foregoing ratio, -------- Consolidated Interest Expense of Holdings shall exclude any accrued but unpaid interest to the TIDES or TIDES Debentures. 8.2 Limitation on Indebtedness. Create, incur, assume or suffer to -------------------------- exist any Indebtedness, except: (a) Indebtedness in respect of the Loans, and other obligations of the Credit Parties under this Agreement and the other Loan Documents; (b) Indebtedness of HCC to any of its Subsidiaries and of any such Subsidiary which is a Credit Party to HCC or any other Subsidiary of HCC; (c) Indebtedness outstanding on the Closing Date and listed on Schedule 8.2(c) and all extensions, renewals, replacements, refinancings and modifications thereof permitted hereunder; (d) Indebtedness of Holdings and any of its Subsidiaries in an aggregate amount not to exceed $10,000,000 at any time outstanding which is recourse only to the assets of HCC or any Subsidiaries acquired or financed with the proceeds of such Indebtedness; (e) Indebtedness in respect of Financing Leases provided that, -------- after giving effect thereto, subsection 8.7 is not contravened; (f) Indebtedness in respect of Subordinated Debt, the terms and conditions of which have been approved in writing by the Required Lenders and all extensions, renewals, replacements, refinancings and modifications thereof permitted hereunder; (g) Indebtedness of Unqualified Subsidiaries of Holdings; provided that any such Indebtedness is Non-Recourse Indebtedness; (h) Indebtedness of a Person which becomes a Subsidiary after the date hereof in an aggregate principal amount not exceeding as to Holdings and its Subsidiaries $10,000,000 at any time outstanding, provided that (i) such -------- indebtedness existed at the time such Person became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such Person by Holdings or any of its Subsidiaries no Default or Event of Default shall have occurred and be continuing; (i) Indebtedness in respect of Equipment Lease Tranche A Loans; and (j) Indebtedness not contemplated by clauses (a)-(i) above not exceeding $5,000,000 in the aggregate at any time outstanding. 8.3 Limitation on Liens. Create, incur, assume or suffer to exist ------------------- any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with -------- respect thereto are maintained on the books of Holdings or any Subsidiary of Holdings, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of Holdings or any of its Subsidiaries; (f) leases or subleases granted to third Persons not interfering in any material respect with the business of Holdings or any of its Subsidiaries; (g) Liens arising from UCC financing statements regarding leases permitted by this Agreement or the Equipment Leases; (h) any interest or title of a lessor or sublessor under any lease permitted by this Agreement or the Equipment Leases; (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods so long as such Liens attach only to the imported goods; (j) Liens arising out of consignment or similar arrangements for the sale of goods entered into by Holdings or any of its Subsidiaries in the ordinary course of business; (k) Liens created pursuant to Financing Leases permitted pursuant to Section 8.2(e); (l) Liens in existence on the Closing Date listed on Schedule 8.3(l), securing Indebtedness permitted by subsection 8.2(c), provided that no -------- such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (m) Liens on (i) natural gas compressors and related equipment, and usual accessories and improvements and proceeds thereof, and (ii) oil and gas production equipment, in each case, the acquisition of which were financed with the proceeds of the Indebtedness permitted by subsection 8.2(e) and which secures only such Indebtedness, provided that any such Lien is placed upon such -------- natural gas compressor or related equipment or such oil and gas production equipment at the time of the acquisition of such natural gas compressors or related equipment or such oil and gas production equipment by Holdings or any of its Subsidiaries and the Lien extends to no other property, and provided, -------- further, that no such Lien is spread to cover - ------- any additional property after the date such Lien attaches and that the amount of Indebtedness secured thereby is not increased; (n) Liens on assets of Holdings, HMI, Hanover/Smith and the Real Estate Subsidiary listed on Schedule 8.3(n), provided that no such Lien is -------- spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (o) Liens on the assets of Unqualified Subsidiaries of Holdings securing Indebtedness of such Unqualified Subsidiaries permitted under Section 8.2(g); (p) Liens securing Derivatives entered into by Holdings and its Subsidiaries which are permitted hereunder; (q) Liens securing Indebtedness of Holdings or any Subsidiary permitted under subsection 8.2(d) so long as such Liens attach only to the assets acquired or financed pursuant to such subsection; (r) Liens on the property or assets of a Person which becomes a Subsidiary after the date hereof securing Indebtedness permitted by subsection 8.2(h), provided that (i) such Liens existed at the time such Person became a -------- Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such Person after the time such Person becomes a Subsidiary, and (iii) the amount of Indebtedness secured thereby is not increased; (s) Liens that arise in connection with the Equipment Lease Transactions; (t) Liens listed on Schedule 8.3(t); and (u) Liens not otherwise permitted in clauses (a)-(t) above securing Indebtedness not exceeding $2,500,000 in the aggregate. 8.4 Limitation on Guarantee Obligations. Create, incur, assume or ----------------------------------- suffer to exist any Guarantee Obligation except: (a) the Guarantees and the Equipment Lease Guarantees; (b) up to $5,000,000 in the aggregate of Guarantee Obligations of HCC or any of its Subsidiaries in connection with indebtedness incurred by customers of HCC or any of its Subsidiaries; provided, that the proceeds of any -------- such indebtedness shall be used by such customers to purchase natural gas compressors or oil and gas production equipment from HCC or any of its Subsidiaries; (c) Guarantee Obligations (in respect of obligations not constituting Indebtedness) arising under agreements entered into by HCC or any of its Subsidiaries in the ordinary course of business; (d) guarantees in respect of Indebtedness (other than Subordinated Debt) permitted under this Agreement; (f) Guarantee Obligations of Holdings and any of its Subsidiaries arising pursuant to the Equipment Lease Transactions; (g) the Guarantor Obligations of HCC in the nature of a guarantee or indemnification for, in each case, performance obligations (and not Indebtedness) as contemplated by the HMS Transactions; and (h) the Subordinated Guarantee Obligations of Holdings arising under the TIDES Guarantees. 8.5 Limitations on Fundamental Changes. Enter into any merger, ---------------------------------- consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Qualified Subsidiary may be merged or consolidated with or into any other Qualified Subsidiary; provided, that a Qualified Subsidiary shall -------- be the continuing or surviving corporation; (b) Holdings or any Qualified Subsidiary may be merged or consolidated with any other Person organized under a jurisdiction of the United States with assets held primarily in the United States; provided, that Holdings -------- or such Qualified Subsidiary shall be the continuing or surviving corporation; the Administrative Agent is provided with written notice, and after giving effect thereto no Default or Event of Default would exist or reasonably be expected to be caused thereby; (c) any Qualified Subsidiary may sell, lease, assign, transfer or otherwise dispose of any or all of its assets to Holdings or any Qualified Subsidiary; (d) any Unqualified Subsidiary may be merged or consolidated with or into any other Person and/or may sell, lease, assign, transfer or otherwise dispose of any of its assets (upon voluntary liquidation or otherwise) to any other Person provided that, if merged or consolidated with or into a Qualified -------- Subsidiary, the Qualified Subsidiary will remain as a 'Qualified Subsidiary' after the merger; (e) pursuant to the Equipment Lease Transactions; (f) the TIDES Trust may wind up or dissolve itself (or suffer a liquidation or dissolution), or convey, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, as contemplated by the TIDES Declaration of Trust; (g) any of the HMS Entities may wind up, dissolve (or suffer a liquidation or dissolution), or convey, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets; and (h) HCC may merge with another Subsidiary of Holdings in connection with the Restructuring. 8.6 Limitation on Sale or Lease of Assets. Convey, sell, lease, ------------------------------------- assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, except: (a) obsolete or worn out property disposed of in the ordinary course of business, provided that the aggregate value of obsolete or worn out natural gas compressors and oil and gas production equipment disposed of in the ordinary course of business does not exceed $5,000,000 during any fiscal year of Holdings; (b) the sale of inventory in the ordinary course of business, provided that if such inventory is comprised of natural gas compressors or oil and gas production equipment, such natural gas compressors or oil and gas production equipment were never part of the natural gas compressors or oil and gas production equipment leased or held for lease by HCC or any of its Subsidiaries; (c) the lease or sublease by HCC or any of its Subsidiaries as lessor of natural gas compressors and oil and gas production equipment in the ordinary course of business under operating leases (which do not constitute Financing Leases); (d) the sale or discount without recourse of defaulted accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; (e) as permitted by subsection 8.5; (f) the sale of natural gas compressors and oil and gas production equipment, other than disposals and sales covered by clauses (a) and (b) above, provided that the fair market value of natural gas compressors and oil and gas - -------- production equipment sold during the term of this Agreement does not exceed ten percent of the aggregate fair market value of all natural gas compressors and oil and gas production equipment owned by HCC and its Qualified Subsidiaries; provided further that if the proceeds are reinvested in natural gas compressors - -------- ------- or oil and gas production equipment to be owned by HCC or its Qualified Subsidiaries within nine months after the sale of the assets which produced such proceeds, such proceeds shall not be included for purposes of this covenant; (g) the lease by the Real Estate Subsidiary or any other Qualified Subsidiary as lessor of real estate properties to HCC or any Qualified Subsidiary of HCC for use by HCC or such Qualified Subsidiary as the site of its offices and facilities; (h) the sale of natural gas compressors to the Lessor in connection with the Equipment Lease Transactions; and (i) the lease of assets as listed on Schedule 8.6(i). 8.7 Limitation on Leases. Permit Consolidated Lease Expense for -------------------- any fiscal year of Holdings to exceed $10,000,000. 8.8 Limitation on Dividends. Declare or pay any dividend (other ----------------------- than dividends payable solely in common stock of such Person) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of such Person or any warrants or options to purchase any such Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Holdings or any Subsidiary of Holdings, except that if no Default or Event of Default exists or would reasonably be expected to be caused thereby (i) Subsidiaries of Holdings may declare and pay dividends to Holdings (to the extent necessary to pay interest on, or redeem, the TIDES Debentures or to cover operating expenses of Holdings) and other shareholders of such Subsidiaries and the TIDES Trust may redeem the TIDES as contemplated by the TIDES Declaration of Trust, (ii) Holdings may repurchase or redeem shares of Holdings common stock from its employees and former employees so long as the aggregate amount of all such repurchases since the Closing Date does not exceed $7,500,000, (iii) Holdings may make open market repurchases of shares of Holdings common stock so long as the aggregate amount of all such repurchases since the Closing Date does not exceed $25,000,000, (iv) Holdings may declare or pay dividends on and make mandatory stock repurchases (pursuant to the terms of the applicable certificate of designation) of its preferred stock, if any, and (v) Holdings may declare or pay dividends on shares of Holdings common stock, provided that the aggregate amount of such declarations or payments pursuant to - -------- this clause (v) above does not exceed 25% of the Consolidated Net Income of Holdings for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the Closing Date to the end of Holdings' most recently ended fiscal quarter for which financial statements have been delivered to the Administrative Agent and the Lenders pursuant to subsection 7.1 at or prior to the time of such declaration or payment. 8.9 Limitation on Derivatives. Enter into or assume any ------------------------- obligations with respect to any Derivatives except for Derivatives used by Holdings or any of its Subsidiaries in reducing the interest rate risk exposure or foreign currency risk exposure of Holdings and its Subsidiaries which have been provided by a lender under this Agreement or the Equipment Lease Transactions; provided, that the aggregate notional amounts of such Derivatives -------- shall not exceed the aggregate amount of loans outstanding under this Agreement and the Equipment Lease Transactions. 8.10 Limitation on Investments, Loans and Advances. Make any --------------------------------------------- advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in (all of the foregoing being herein collectively referred to as "Investments"), any Person, ----------- except: (a) extensions of trade credit in the ordinary course of business; (b) Investments in Cash Equivalents; (c) loans and advances to employees of such Person or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for Holdings and its Subsidiaries not to exceed $250,000 at any one time outstanding; (d) Investments by Holdings in its Subsidiaries which are or become Credit Parties and investments by such Subsidiaries which are or become Credit Parties in Holdings and in other Subsidiaries of Holdings which are or become Credit Parties; (e) Investments by Holdings in the Real Estate Subsidiary in an aggregate amount not to exceed $5,000,000 plus amounts necessary to maintain and operate the real property and improvements thereon owned by the Real Estate Subsidiary; (f) Investments in Unqualified Subsidiaries of Holdings not to exceed $20,000,000 in the aggregate; (g) Investments constituting Permitted Business Acquisitions so long as, after giving effect to the consummation of the transactions contemplated by each Permitted Business Acquisition, the Loans to be made and the Letters of Credit to be issued hereunder and the loans to be made under the Equipment Lease Credit Agreements in connection therewith, the sum of (i) the cash and Cash Equivalents then held by Holdings and (ii) an amount equal to the difference between (A) the aggregate Commitments hereunder and the aggregate Commitments and the aggregate Investor Commitments under the Equipment Lease Participation Agreements in effect at such time and (B) the Aggregate Outstanding Extensions of Credit of all the Lenders hereunder and the Available Commitments and Available Investment Commitments under the Equipment Lease Participation Agreements at such time, equals at least $20,000,000; (h) Investments or acquisitions by Holdings or its Subsidiaries in (i) up to 50% of the shares of capital stock, partnership interests, joint venture interests, limited liability company interests or other similar equity interests in, a Person (other than a Subsidiary), or (ii) loans or advances to a Person (other than a Subsidiary), provided that the aggregate amount of all such -------- loans, advances, investments or acquisitions does not exceed $25,000,000 in any fiscal year; (i) Loans to employees, officers and directors of Holdings and its Subsidiaries to acquire shares of capital stock of Holdings not to exceed $20,000,000; and (j) the purchase by the TIDES Trust of the TIDES Debentures, as contemplated under the TIDES Declaration of Trust. 8.11 Limitation on Optional Payments and Modifications of Debt --------------------------------------------------------- Instruments. (i) Make any optional payment or prepayment on or redemption, - ----------- purchase or defeasance of any portion of the Shareholder Subordinated Debt, (ii) make any optional payment or prepayment in excess of $10,000,000 during any calendar year on or redemption of any Indebtedness other than (a) redemptions of any portion of the TIDES Debentures pursuant to the TIDES Indenture or redemptions of any portion of the TIDES pursuant to the TIDES Declaration of Trust or (b) any optional payment, prepayment or redemption of any Indebtedness pursuant to the Corporate Credit Agreement, the Equipment Lease Credit Agreements or (iii) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any Indebtedness other than (a) any Indebtedness pursuant to the Corporate Credit Agreement, the Equipment Lease Credit Agreements or (b) any amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon, or any amendment or waiver which would render the terms of such Indebtedness less restrictive. 8.12 Transactions with Affiliates. Except for transactions of a ---------------------------- type set forth on Schedule 8.12, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is otherwise permitted under this Agreement, is in the ordinary course of Holdings' or such Subsidiary's business and is upon fair and reasonable terms no less favorable to Holdings or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. 8.13 Sale and Leaseback. Except for the transactions of a type set ------------------ forth on Schedule 8.13, enter into any arrangement with any Person where Holdings or any of the Subsidiaries of Holdings is the lessee of real or personal property which has been or is to be sold or transferred by Holdings or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Holdings or such Subsidiary (any of such arrangements, a "Sale ---- and Leaseback Transaction"), except that (i) HCC and its Subsidiaries may enter - ------------------------- into Financing Leases as lessee for natural gas compressors and oil and gas production equipment if after giving effect thereto subsection 8.2 is not contravened and (ii) HCC may enter into Sale and Leaseback Transactions as lessee for natural gas compressors in connection with the Equipment Lease Transactions. 8.14 Corporate Documents. Amend its Certificate of Incorporation in ------------------- any way adverse to the interests of the Administrative Agent and the Lenders. 8.15 Fiscal Year. Permit the fiscal year of Holdings to end on a ----------- day other than December 31. 8.16 Nature of Business. Engage in any business other than (a) the ------------------ leasing, maintenance, purchase, sale and operation of natural gas compressor units and oil and gas production equipment, (b) the design, engineering and fabrication of natural gas compressor units, (c) the design, engineering and fabrication of oil and gas production equipment, (d) the provision of contract compression and related services, (e) the provision of gas metering services as contemplated under the HMS Transactions, and (f) any activities related thereto which are consistent with past practice and conducted in the ordinary course of business. 8.17 Unqualified Subsidiaries. Permit any Unqualified Subsidiary to ------------------------ directly or indirectly own any assets (other than cash or Cash Equivalents located in bank accounts at Chase) which are located in the United States of America or any territory thereof. SECTION 9. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) Holdings shall fail to pay any principal of any Note or any Reimbursement Obligation when due in accordance with the terms thereof or hereof; or Holdings shall fail to pay any interest on any Note, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by any Credit Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) Holdings shall default in the observance or performance of any agreement contained in Section 8 of this Agreement; or (d) Holdings shall default in the observance or performance of any other agreement contained in this Agreement (other than as provided in paragraphs (a) through (c) of this Section 9) and such default shall continue unremedied for a period of 30 days; or (e) The Subsidiaries' Guarantee or the Holdings Guarantee shall, at any time, cease to be in full force and effect (unless released by the Administrative Agent) or shall be declared null and void, or the validity or enforceability thereof shall be contested by any Credit Party; or (f) Holdings or any of the Subsidiaries of Holdings shall (i) default in any payment of principal of or interest of any Indebtedness (including any Guarantee Obligation, but excluding the Loans) or in the payment of any Guarantee Obligation, in excess of $5,000,000 in the aggregate, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation in excess of $5,000,000 or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (g) (i) Holdings or any Material Subsidiary shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or any of Holdings or any Material Subsidiary shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any of Holdings or any Material Subsidiary any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any of Holdings or any Material Subsidiary any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any of Holdings or any Material Subsidiary shall take any action for the purpose of effecting its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any of Holdings or any Material Subsidiary shall generally not, or shall admit in writing its inability to, pay its debts as they become due; or (h) (i) Any Person shall engage in any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any lien shall arise on the assets of HCC or any Commonly Controlled Entity in favor of PBGC or a Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) HCC or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject HCC or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of HCC and its Subsidiaries taken as a whole; or (i) One or more judgments or decrees shall be entered against Holdings or any of the Subsidiaries of Holdings involving in the aggregate a liability (not paid or fully covered by insurance) of $5,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (j) If at any time, Holdings or any of the Subsidiaries of Holdings shall become liable for remediation and/or environmental compliance expenses and/or fines, penalties or other charges which, in the aggregate, are in excess of $5,000,000; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (g) above with respect to HCC or Holdings the Commitments shall immediately terminate automatically and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to HCC declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice of default to HCC declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding sentence, HCC shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. HCC hereby grants to the Administrative Agent, for the benefit of the Issuing Lender and the L/C Participants, a security interest in such cash collateral to secure all obligations of HCC under this Agreement and the other Loan Documents. Amounts held in such cash collateral account shall be applied by the Administrative Agent first to the payment of drafts drawn under such Letters of Credit. HCC shall execute and deliver to the Administrative Agent, for the account of the Issuing Lender and the L/C Participants, such further documents and instruments as the Administrative Agent may request to evidence the creation and perfection of the within security interest in such cash collateral account. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 10. THE ADMINISTRATIVE AGENT 10.1 Appointment. Each Lender hereby irrevocably designates and ----------- appoints Chase as the Administrative Agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes Chase, as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 10.2 Delegation of Duties. The Administrative Agent may execute any -------------------- of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 10.3 Exculpatory Provisions. Neither the Administrative Agent nor ---------------------- any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Credit Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Credit Party to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Credit Party. 10.4 Reliance by Administrative Agent. The Administrative Agent -------------------------------- shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to any Credit Party), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 10.5 Notice of Default. The Administrative Agent shall not be ----------------- deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or HCC referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the -------- Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 10.6 Non-Reliance on Administrative Agent and Other Lenders. Each ------------------------------------------------------ Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of any Credit Party shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of HCC and each other Credit Party and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of HCC and each other Credit Party. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Credit Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 10.7 Indemnification. The Lenders agree to indemnify the --------------- Administrative Agent in its capacity as such (to the extent not reimbursed by HCC, or the other Credit Parties and without limiting the obligation of HCC, and each other Credit Party to do so), ratably according to the respective amounts of their original Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such - -------- liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Administrative Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Loans and all other amounts payable hereunder. 10.8 Administrative Agent in Its Individual Capacity. The ----------------------------------------------- Administrative Agent and its Affiliates may make loans to, accept deposits from, hold equity securities of, and generally engage in any kind of business with any Credit Party as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to its Loans made or renewed by it and any Note issued to it and with respect to any Letter of Credit issued or participated in by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 10.9 Successor Administrative Agent. The Administrative Agent may ------------------------------ resign as Administrative Agent upon 10 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be subject to the approval of HCC. Upon receipt of such approval from HCC, such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon its appointment, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this subsection shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. SECTION 11. MISCELLANEOUS 11.1 Amendments and Waivers. Neither this Agreement, any other Loan ---------------------- Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. With the written consent of the Required Lenders, the Administrative Agent, HCC and any other Credit Party thereto, may, from time to time, enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Credit Parties party thereto hereunder or thereunder or waiving, on such terms and conditions as the Administrative Agent may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver -------- ------- and no such amendment, supplement or modification shall (a) reduce the amount or extend the maturity of any Loan or any installment thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any fee payable to any Lender hereunder, or change the amount of any Lender's Commitments, in each case without the consent of the Lender affected thereby, or (b) amend, modify or waive any provision of this subsection or reduce the percentage specified in the definition of Required Lenders or Majority Lenders, or consent to the assignment or transfer by any Credit Party of any of its rights and obligations under this Agreement and the other Loan Documents, in each case without the written consent of all the Lenders (except as contemplated by this Agreement), or (c) amend, modify or waive any provision of Section 10 without the written consent of the then Administrative Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon each of the Credit Parties, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, each of the Credit Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under any other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 11.2 Notices. All notices, requests and demands to or upon the ------- respective parties hereto to be effective shall be in writing (including by telecopy, telegraph or telex), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice or overnight courier service, when received, or, in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of telex notice, when sent, answerback received, addressed as follows in the case of Holdings, HCC and the Administrative Agent, and as set forth in Schedule 1.1A in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: Holdings and HCC: Hanover Compressor Company 12001 North Houston-Rosslyn Houston, Texas 77086 Attention: Chief Financial Officer Telecopy: (713) 447-8781 The Administrative Agent: The Chase Manhattan Bank One Chase Manhattan Plaza, Eighth Floor New York, New York 10081 Attention: Agency Services Telecopy: 212-552-5777 with a copy to: The Chase Manhattan Bank 270 Park Avenue, 21/st/ Floor New York, New York 10017 Attention: Global Oil and Gas Telecopy: 212-270-3897 provided that any notice, request or demand to or upon the Administrative Agent - -------- or the Lenders pursuant to subsection 2.4, 3.3, 3.4, 3.5 or 3.9 shall not be effective until received. A copy of any notice, request or demand to or upon any Credit Party pursuant to this Agreement or any other Loan Document (other than any such requests made in the ordinary course of administering this Agreement and the other Loan Documents) shall also be delivered to Latham & Watkins, Sears Tower, Suite 5800, 233 South Wacker Drive, Chicago, Illinois 60606, attention: Richard S. Meller, Esq. (telecopy: (312) 993-9767). 11.3 No Waiver; Cumulative Remedies. No failure to exercise and no ------------------------------ delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 11.4 Survival of Representations and Warranties. All ------------------------------------------ representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder. 11.5 Payment of Expenses and Taxes. HCC agrees (a) to pay or ----------------------------- reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, reasonable fees and disbursements of counsel to the Administrative Agent and to the several Lenders, and (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Administrative Agent and their respective directors, officers, employees and agents harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the Notes, the other Loan Documents and any such other documents or the use or the proposed use of proceeds thereof (all the foregoing, collectively, the "indemnified liabilities"), provided, that HCC shall not have any obligation ----------------------- -------- hereunder to the Administrative Agent or any Lender with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of the Administrative Agent or any such Lender, (ii) legal proceedings commenced against the Administrative Agent or any such Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such, or (iii) legal proceedings commenced against the Administrative Agent or any such Lender by any other Lender or by any Transferee (as defined in subsection 11.6). The agreements in this subsection shall survive repayment of the Loans and all other amounts payable hereunder and under the other Loan Documents. 11.6 Successors and Assigns; Participations; Purchasing Lenders. ---------------------------------------------------------- (a) This Agreement shall be binding upon and inure to the benefit of Holdings, HCC, the Lenders, the Administrative Agent, all future holders of the Loans and their respective successors and assigns, except that HCC may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (a) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan ------------ owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents, provided that each -------- such sale shall be of Loans and Commitments in an aggregate amount of at least $5,000,000, and provided, further, that no Lender may so sell its Commitments so -------- ------- that less than $5,000,000 of such Commitments are held by such Lender without participating interests therein, unless such Lender (excluding Chase) so sells 100% of its Commitments. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Credit Parties and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. HCC agrees that if amounts outstanding under this Agreement and the Loans are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that such -------- Participant shall only be entitled to such right of setoff if it shall have agreed in the agreement pursuant to which it shall have acquired its participating interest to share with the Lenders the proceeds thereof as provided in subsection 11.7. HCC also agrees that each Participant shall be entitled to the benefits of subsections 3.9, 3.11, 3.12 and 11.5 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, that no Participant shall be entitled to receive any greater -------- amount pursuant to such subsections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (b) Any Lender, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time may sell to any Lender or any Affiliate thereof and, with the consent of HCC and the Administrative Agent (which in each case shall not be unreasonably withheld), to one or more additional banks or financial institutions ("Purchasing Lenders") ------------------ all or any part of the assigning Lender's rights and obligations under this Agreement and the other Loan Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit D, executed by such Purchasing Lender, such assigning Lender (and, in the case of a Purchasing Lender that is not then a Lender or an Affiliate thereof, by HCC and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register, provided that each such sale shall be of Loans and Commitments of an -------- aggregate amount of at least $5,000,000 and provided, further, that no Lender -------- ------- party to this Agreement on the date hereof may so sell any of its initial Commitments hereunder such that such Lender holds directly less than $5,000,000 of such Commitments unless such Lender (excluding Chase) so sells 100% of its Commitments. Such Assignment and Acceptance shall specify an Effective Date which is not less than five Business Days after the date of execution thereof. Upon such execution, delivery, acceptance and recording, from and after the Effective Date determined pursuant to such Assignment and Acceptance, (x) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment and/or Loans as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Such Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such assigning Lender under this Agreement. (c) The Administrative Agent shall, on behalf of HCC, maintain at its address referred to in subsection 11.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names -------- and addresses of the Lenders and the Commitment of, and the principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and HCC, each other Credit Party, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of the Loans and any Notes evidencing the Loans recorded therein for all purposes of this Agreement. Any assignment of any Loan, whether or not evidenced by a Note, shall be effective only upon appropriate entries with respect thereto being made in the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of a Loan evidenced by a Note shall be registered on the Register only upon surrender for registration of assignment or transfer of the Note evidencing such Loan, accompanied by a duly executed Assignment and Acceptance, and thereupon one or more new Notes shall be issued to the designated Assignee. (d) Upon its receipt of an Assignment and Acceptance executed by a transferor Lender and Purchasing Lender (and, in the case of a Purchasing Lender that is not then a Lender or an affiliate thereof, by HCC and the Administrative Agent) together with payment to the Administrative Agent of a registration and processing fee of $3,500, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance (ii) on the Effective Date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and HCC. (e) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section 11.6 concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. (f) HCC, upon receipt of written notice from the relevant Lender, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type described in paragraph (f) above. (g) Holdings and HCC authorize each Lender to disclose to any Participant or Purchasing Lender (each, a "Transferee") and any prospective ---------- Transferee any and all financial information in such Lender's possession concerning any Credit Party and its affiliates which has been delivered to such Lender by or on behalf of Holdings or HCC pursuant to this Agreement or which has been delivered to such Lender by or on behalf of Holdings or HCC in connection with such Lender's credit evaluation of the Credit Parties and their affiliates prior to becoming a party to this Agreement. (h) If, pursuant to this subsection, any interest in this Agreement or any Note is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Lender (for the benefit of the transferor Lender, the Administrative Agent and HCC) that under applicable law and treaties no taxes will be required to be withheld by the Administrative Agent, HCC or the transferor Lender with respect to any payments to be made to such Transferee in respect of the Loans, (ii) to furnish to the transferor Lender (and, in the case of any Purchasing Lender registered in the Register, the Administrative Agent and HCC) either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 (wherein such Transferee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of the transferor Lender, the Administrative Agent and HCC) to provide the transferor Lender (and, in the case of any Purchasing Lender registered in the Register, the Administrative Agent and HCC) a new Form 4224 or Form 1001 upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (i) Nothing herein shall prohibit any Lender from pledging or assigning any Note to any Federal Reserve Lender in accordance with applicable law. 11.7 Adjustments; Set-off. (a) If any Lender (a "Benefitted -------------------- ---------- Lender") shall at any time receive any payment of all or part of its Loans or - ------ the Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 9(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans or Reimbursement Obligations, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders such portion of each such other Lender's Loans or the Reimbursement Obligations owing to it, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess -------- ------- payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. HCC agrees that each Lender so purchasing a portion of another Lender's Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. (a) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to HCC, any such notice being expressly waived by HCC to the extent permitted by applicable law, upon any amount becoming due and payable by HCC hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender to or for the credit or the account of HCC. Each Lender agrees promptly to notify HCC, the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice -------- shall not affect the validity of such set-off and application. 11.8 Counterparts. This Agreement may be executed by one or more of ------------ the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with HCC and the Administrative Agent. 11.9 Severability. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11.10 Integration. This Agreement represents the agreement of ----------- Holdings, HCC, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents and the fee letter referred to in subsection 3.2. 11.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND ------------- OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 11.12 Submission To Jurisdiction; Waivers. Each of Holdings and HCC ----------------------------------- hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Person at its address set forth in subsection 11.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 11.13 Acknowledgments. Each of Holdings and HCC hereby acknowledge --------------- that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship to any Credit Party, and the relationship between Administrative Agent and Lenders, on one hand, and Holdings and HCC, on the other hand, is solely that of debtor and creditor; and (c) no joint venture exists among the Lenders or among any Credit Party and the Lenders. 11.14 WAIVERS OF JURY TRIAL. EACH OF HOLDINGS, HCC, THE --------------------- ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTES OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 11.15 Usury. It is expressly stipulated and agreed to be the intent ----- of Holdings, HCC, the Administrative Agent and the Lenders at all times to comply with the applicable law governing the maximum rate or amount of interest payable on or in connection with the Loans. If the applicable law is ever judicially interpreted so as to render usurious any amount or compensation called for under this Agreement or any of the other Loan Documents, or contracted for, charged, taken, reserved or received with respect to any of the Loans, or if acceleration of the maturity of any of the Loans, any prepayment by HCC, or any other circumstance whatsoever, results in the Lenders, or any of them, having been paid any interest in excess of that permitted by applicable law, then it is the express intent of HCC, the Administrative Agent and the Lenders that all excess amounts theretofore collected by the Lenders be credited on the principal balances of the Loans (or, if the Loans have been or would thereby be paid in full, refunded to HCC), and the other applicable Loan Documents immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. The right to accelerate the maturity of any or all of the Loans does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Lenders do not intend to collect any unearned interest in the event of acceleration. All sums or other compensation paid or agreed to be paid to the Lenders for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread with respect to all of the Loans throughout the full term of such indebtedness until payment in full of all such indebtedness so that the rate or amount of interest on account of such indebtedness under all of the Loans does not exceed the Maximum Lawful Rate or maximum amount of interest permitted under applicable law. The term "Maximum Lawful Rate" as used herein as to any Lender means the maximum non-usurious rate of interest which may be lawfully contracted for, charged, taken, reserved, or received by such Lender from HCC in connection with the Loans evidenced hereby under applicable law. The provisions of this Section 11.15 shall control all agreements between HCC and the Lenders. 11.16 Effect of Amendment and Restatement of the Existing Credit ---------------------------------------------------------- Agreement. On the Closing Date, the Existing Credit Agreement shall be amended, - --------- restated and superseded in its entirety. The parties hereto acknowledge and agree that (a) this Agreement and the other Loan Documents, whether executed and delivered in connection herewith or otherwise, do not constitute a novation, payment and reborrowing, or termination of the Obligations under the Existing Credit Agreement as in effect prior to the Closing Date; (b) such Obligations are in all respects continuing (as amended and restated hereby) with only the terms thereof being modified as provided in this Agreement; and (c) upon the effectiveness of this Agreement all Loans of Lenders outstanding under the Existing Credit Agreement immediately before the effectiveness of this Agreement will be converted into Loans of such Lenders hereunder on the terms and conditions set forth in this Agreement. 11.17 Conflicts. In the event that there exists a conflict between --------- provisions in this Agreement and provisions in any other Loan Document, the provisions of this Agreement shall control. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers as of the date first written above. HANOVER COMPRESSOR COMPANY BY: ________________________ Name: Title: HANOVER COMPRESSION INC. (formerly known as Hanover Compressor Company) BY: ________________________ Name: Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender BY: ________________________ Name: Title: THE BANK OF NOVA SCOTIA BY: ________________________ Name: Title: CREDIT LYONNAIS, NEW YORK BRANCH BY: ________________________ Name: Title: WELLS FARGO BANK (TEXAS) N.A. BY: ________________________ Name: Title: PARIBAS BY: ________________________ Name: Title: BY: ________________________ Name: Title: FIRST UNION NATIONAL BANK BY: ________________________ Name: Title: BANKERS TRUST COMPANY BY: ________________________ Name: Title: Acknowledged and agreed to as of the date hereof: HANOVER COMPRESSOR LIMITED HOLDINGS, LLC, as a Guarantor by Hanover General Holdings, Inc., as sole member By: _____________________________ Name: Title: HANOVER MAINTECH LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., as general partner By: _____________________________ Name: Title: HANOVER/SMITH LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., as general partner By: _____________________________ Name: Title: HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., general partner By: _____________________________ Name: Title: ANNEX A PRICING GRID Revolving Credit Facility -------------------------
Applicable Consolidated Applicable Margin- Applicable Margin- Commitment Indebtedness Ratio Eurocurrency Loans Base Rate Loans Fee Rate ------------------ ------------------ --------------- -------- *4.0 to 1.0 1.50% .500% .375% **4.0 to 1.0 and 1.25% .250% .300% *3.0 to 1.0 **3.0 to 1.0 and 1.00% .250% .250% *2.0 to 1.0 **2.0 to 1.0 and .750% 0% .250% *1.0 to 1.0 **1.0 to 1.0 .500% 0% .1875%
Changes in the Applicable Margin or in the Applicable Commitment Fee Rate resulting from changes in the Consolidated Indebtedness Ratio shall become effective on each date which is the start of the succeeding fiscal quarter (each, an "Adjustment Date") for which an Applicable Margin Certificate of --------------- Holdings is delivered to the Lenders pursuant to Section 7.2(f) (but in any event not later than the 45th day after the end of each of each quarter of each fiscal year) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any Applicable Margin Certificate referred to above is not delivered within the time periods specified above, then the Consolidated Indebtedness Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 4.0 to 1.0. In addition, at all times while an Event of Default shall have occurred and be continuing, the highest rate set forth in each column of the Pricing Grid shall apply. Each determination of the Consolidated Indebtedness Ratio pursuant to this Pricing Grid shall be made for the periods and in the manner contemplated by Section 8.1(d). * Greater than ** Less than or equal to HANOVER COMPRESSOR COMPANY CREDIT AGREEMENT DISCLOSURE SCHEDULES ------------------------------------- General Comments with respect to HCC Disclosure Schedule: - --------------------------------------------------------- While HCC has endeavored to identify under each Schedule and (by way of enumeration or cross reference) the particular items relevant thereto, items listed under one Schedule may be relevant to another Schedule. Accordingly, items listed under each Schedule are hereby incorporated by reference in each other Schedule, but only to the extent relevant to such other Schedule. Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Agreement. SCHEDULE 1.1A LENDERS AND COMMITMENTS -----------------------
Name and Address Commitment of Lender Percentage Commitment - -------------- ----------- -------------- The Chase Manhattan Bank 20.0% $40,000,000.00 270 Park Avenue New York, New York 10017 Attention: Peter Ling Telecopy: (212) 270-4676 with a copy to: Credit Lyonnais 17.5% 35,000,000.00 1000 Louisiana, Suite 5360 Houston, Texas 77002 Attention: Richard Kaufman Telecopy: (713) 751-0307 Wells Fargo Bank (Texas), 17.5% 35,000,000.00 National Association 1000 Louisiana, 3/rd/ Floor Energy Group Houston, Texas 77002 Attention: Joe Maxwell Telecopy: (713) 319-1369 The Bank of Nova Scotia 15.0% 30,000,000.00 600 Peachtree Street Northeast, Suite 2700 Atlanta, Georgia 30308 Attention: Claude Ashby Telecopy: (404) 888-8998 Paribas 12.5% 25,000,000.00 1200 Smith, Suite 3100 Houston, Texas 77002 Attention: Marian Livingston Telecopy: (713) 982-1151 First Union National Bank 1001 Fannin, Suite 2255 Houston, Texas 77002 Attention: Debbie Blank Telecopy: (713) 346-2727 12.5% 25,000,000.00 Bankers Trust Company
c/o Deutsche Bank 130 Liberty Street, 34/th/ Floor New York, New York 10006 Attention: Marcus Tarkington Telecopy: (212) 250-7684 5.0% 10,000,000.00 - ----------- ------ ----------------- Total 100% $200,000,000.00
SCHEDULE 5.2 MATERIAL CHANGES - ------------ ---------------- SCHEDULE 5.4 REQUIRED CONSENTS - ------------ ----------------- SCHEDULE 5.16 ENVIRONMENTAL - ------------- ------------- SCHEDULE 8.2(c) EXISTING INDEBTEDNESS - --------------- --------------------- SCHEDULE 8.3(l) EXISTING LIENS - --------------- -------------- SCHEDULE 8.3(n) ADDITIONAL EXISTING LIENS - --------------- ------------------------- SCHEDULE 8.3(t) ADDITIONAL LIENS - --------------------------------- ADDITIONAL LIENS SCHEDULE 8.6(i) LEASE OF ASSETS - -------------------------------- LEASE OF ASSETS SCHEDULE 8.12 AFFILIATE TRANSACTIONS - ------------- ---------------------- SCHEDULE 8.13 SALE AND LEASEBACK TRANSACTIONS - ------------- ------------------------------- EXHIBIT A FORM OF REVOLVING CREDIT NOTE $______ New York, New York _________ ___, ___ FOR VALUE RECEIVED, the undersigned, Hanover Compression Inc., a Delaware corporation ("HCC"), hereby unconditionally promises to pay to the order of --- _________________ (the "Lender") at the office of The Chase Manhattan Bank, ------ located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in immediately available funds, on the Final Maturity Date the principal amount of (a) ______________________ DOLLARS ($_____________), or, if less, (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by the Lender to HCC pursuant to subsection 2.1(a) of the Credit Agreement, as hereinafter defined. HCC further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in subsections 3.1 and 3.5 of such Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of each Revolving Credit Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of Eurodollar Loans, the length of each Interest Period with respect thereto. Each such endorsement shall constitute prima facie evidence of the ----- ----- accuracy of the information endorsed. The failure to make any such endorsement shall not affect the obligations of HCC in respect of such Revolving Credit Loan. This Note (a) is one of the Notes referred to in the Amended and Restated Credit Agreement dated as of March 13, 2000 (as further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Holdings, ---------------- HCC, the Lender, the other lenders and financial institutions from time to time parties thereto and The Chase Manhattan Lender, as administrative agent, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. This Note is guaranteed as provided in the Loan Documents. Reference is hereby made to the Loan Documents for a description of the nature and extent of the guarantees, the terms and conditions upon which each guarantee was granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE CREDIT AGREEMENT, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AND IN ACCORDANCE WITH THE REGISTRATION AND OTHER PROVISIONS OF SECTION 11.6 OF THE CREDIT AGREEMENT. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. HANOVER COMPRESSION INC. By: ________________________________ Name: ______________________________ Title: _____________________________ Schedule A to Revolving Credit Note ------------------------ LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS ----------------------------------------------
Amount Amount of Amount of ABR Unpaid Principal Amount of ABR Converted to Principal of ABR Loans Converted to Balance of ABR Notation Date Loans ABR Loans Loans Repaid Eurodollar Loans Loans Made By - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
Schedule B to Revolving Credit Note ------------------------ LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS --------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- Interest Period Amount of Amount of Unpaid Amount of Amount and Eurodollar Principal of Eurodollar Principal Date Eurodollar Converted to Rate with Eurodollar Loans Balance of Loans Eurodollar Respect Thereto Loans Repaid Converted to Eurodollar Notation Loans ABR Loans Loans Made By - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
EX-10.2 3 0003.txt SUBSIDIARIES' GUARANTEE EXHIBIT 10.2 FORM OF SUBSIDIARIES' GUARANTEE SUBSIDIARIES' GUARANTEE, dated as of March 13, 2000, made by each of the corporations that are signatories hereto (the "Guarantors"), in favor of THE ---------- CHASE MANHATTAN BANK, as agent (in such capacity, the "Administrative Agent") -------------------- for the lenders (the "Lenders") parties to the Credit Agreement, dated as of ------- December 15, 1997 as amended and restated through March 8, 2000, (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), ---------------- among Hanover Compressor Company, a Delaware corporation (the "Borrower"), the -------- Lenders and the Administrative Agent. W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes issued by the Borrower under the Credit Agreement; WHEREAS, each Guarantor is a Qualified Subsidiary of the Borrower; WHEREAS, the proceeds of the Loans will be used in part to enable the Borrower to make valuable transfers (as determined as provided herein) to some of the Guarantors in connection with the operation of their respective businesses; WHEREAS, it is a condition precedent to the obligation of the Lenders to amend and restate the Credit Agreement and to make their respective Loans to the Borrower under the Credit Agreement that the Guarantors shall have executed and delivered this Guarantee to the Administrative Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to amend and restate the Credit Agreement and to induce the Lenders to make their respective loans to the Borrower under the Credit Agreement, the Guarantors hereby agree with the Administrative Agent, for the ratable benefit of the Lenders, as follows: 1 Defined Terms. (a) Unless otherwise defined herein, terms defined in ------------- the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. (a) As used herein, "Obligations" means the collective reference to the ----------- unpaid principal of and interest on any outstanding Loans and all other obligations and liabilities of the Borrower to the Administrative Agent or the Lenders (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Notes, the Letters of Credit, the other Loan Documents or any other document made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by the Borrower or the Guarantor pursuant to the terms of the Credit Agreement or this Agreement or any other Loan Document). (b) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and section and paragraph references are to this Guarantee unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2 Guarantee (a) Subject to the provisions of paragraph 2(b), each of the --------- Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Administrative Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. (a) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors. (b) Each Guarantor further agrees to pay any and all expenses (including, without limitation, all fees and disbursements of counsel) which may be paid or incurred by the Administrative Agent or any Lender in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, such Guarantor under this Guarantee. This Guarantee shall remain in full force and effect until the Obligations are paid in full and the Commitments are terminated, notwithstanding that from time to time prior thereto the Borrower may be free from any Obligations. (c) Each Guarantor agrees that the Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing this Guarantee or affecting the rights and remedies of the Administrative Agent or any Lender hereunder. (d) No payment or payments made by the Borrower, any of the Guarantors, any other guarantor or any other Person or received or collected by the Administrative Agent or any Lender from the Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments made by such Guarantor in respect of the Obligations or payments received or collected from such Guarantor in respect of the Obligations, remain liable for the Obligations up to the maximum liability of such Guarantor hereunder until the Obligations are paid in full and the Commitments are terminated. 3 Right of Contribution. Each Guarantor hereby agrees that to the extent --------------------- that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder who has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 5 hereof. The provisions of this Section shall in no respect limit the obligations and liabilities of any Guarantor to the Administrative Agent and the Lenders, and each Guarantor shall remain liable to the Administrative Agent and the Lenders for the full amount guaranteed by such Guarantor hereunder. 4 Right of Set-off. Upon the occurrence of any Event of Default, each ---------------- Guarantor hereby irrevocably authorizes each Lender at any time and from time to time without notice to such Guarantor or any other Guarantor, any such notice being expressly waived by each Guarantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender to or for the credit or the account of such Guarantor, or any part thereof in such amounts as such Lender may elect, against and on account of the obligations and liabilities of such Guarantor to such Lender hereunder and claims of every nature and description of such Lender against such Guarantor, in any currency, whether arising hereunder, under the Credit Agreement, any Note, any Letter of Credit or any Loan Document, as such Lender may elect, whether or not the Administrative Agent or any Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Administrative Agent and each Lender shall notify such Guarantor promptly of any such set-off and the application made by the Administrative Agent or such Lender, provided that the failure to -------- give such notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent and each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent or such Lender may have. 5 No Subrogation. Notwithstanding any payment or payments made by any of -------------- the Guarantors hereunder or any set-off or application of funds of any of the Guarantors by any Lender, no Guarantor shall be entitled to be subrogated to any of the rights of the Administrative Agent or any Lender against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by any Lender for the payment of the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Administrative Agent and the Lenders by the Borrower on account of the Obligations are paid in full and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Administrative Agent and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Administrative Agent may determine. 6 Amendments, etc. with respect to the Obligations; Waiver of Rights. ------------------------------------------------------------------ Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by such party and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any Lender, and the Credit Agreement, the Notes and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Required Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against any of the Guarantors, the Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand on the Borrower or any other Guarantor or guarantor, and any failure by the Administrative Agent or any Lender to make any such demand or to collect any payments from the Borrower or any such other Guarantor or guarantor or any release of the Borrower or such other Guarantor or guarantor shall not relieve any of the Guarantors in respect of which a demand or collection is not made or any of the Guarantors not so released of their several obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Administrative Agent or any Lender against any of the Guarantors. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 7 Guarantee Absolute and Unconditional. Each Guarantor waives any and ------------------------------------ all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Guarantee or acceptance of this Guarantee, the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Administrative Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Obligations. Each Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of the Credit Agreement, any Note or any other Loan Document, any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Administrative Agent or any Lender (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower against the Administrative Agent or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of such Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Administrative Agent and any Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve such Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent and the Lenders against such Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Administrative Agent and the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of each Guarantor under this Guarantee shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Obligations. 8 Reinstatement. This Guarantee shall continue to be effective, or be ------------- reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 9 Payments. Each Guarantor hereby guarantees that payments hereunder -------- will be paid to the Administrative Agent without set-off or counterclaim in U.S. Dollars at the office of the Administrative Agent located at 270 Park Avenue, New York, New York 10017. 10 Representations and Warranties. Each Guarantor hereby represents and ------------------------------ warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged; (b) it has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guarantee, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Guarantee; (c) this Guarantee constitutes a legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles and an implied covenant of good faith and fair dealing; (d) the execution, delivery and performance of this Guarantee will not violate any provision of any Requirement of Law or Contractual Obligation of such Guarantor and will not result in or require the creation or imposition of any Lien on any of the properties or revenues of such Guarantor pursuant to any Requirement of Law or Contractual Obligation of the Guarantor; (e) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of such Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guarantee; (f) no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of such Guarantor, threatened by or against such Guarantor or against any of its properties or revenues with respect to this Guarantee or any of the transactions contemplated hereby, which would reasonably be expected to have a material adverse effect on the business, operations, property or financial or other condition of such Guarantor. 11 Authority of Administrative Agent. Each Guarantor acknowledges that --------------------------------- the rights and responsibilities of the Administrative Agent under this Guarantee with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and such Guarantor, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Guarantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 12 Notices. All notices, requests and demands to or upon the ------- Administrative Agent, any Lender or any Guarantor to be effective shall be in writing (or by telex, fax or similar electronic transfer confirmed in writing) and shall be deemed to have been duly given or made when delivered by hand or if by overnight courier service, when received or if given by mail, when deposited in the mails by certified mail, return receipt requested, or if by telex, fax or similar electronic transfer, when sent and receipt has been confirmed, addressed as follows: (a) if to the Administrative Agent or any Lender, at its address or transmission number for notices provided in subsection 11.2 of the Credit Agreement; and (b) if to any Guarantor, at its address or transmission number for notices set forth under its signature below. The Administrative Agent, each Lender and each Guarantor may change its address and transmission numbers for notices by notice in the manner provided in this Section. 13 Counterparts. This Guarantee may be executed by one or more of the ------------ Guarantors on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the counterparts of this Guarantee signed by all the Guarantors shall be lodged with the Administrative Agent. 14 Severability. Any provision of this Guarantee which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15 Integration. This Guarantee represents the agreement of each Guarantor ----------- with respect to the subject matter hereof and there are no promises or representations by the Administrative Agent or any Lender relative to the subject matter hereof not reflected herein. 16 Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of the ----------------------------------------------------- terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except by a written instrument executed by each Guarantor and the Administrative Agent, provided that any provision of this Guarantee may be -------- waived by the Administrative Agent and the Lenders in a letter or agreement executed by the Administrative Agent or by telex or facsimile transmission from the Administrative Agent. (a) Neither the Administrative Agent nor any Lender shall by any act (except by a written instrument pursuant to paragraph 16.(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. (b) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 17 Section Headings. The section headings used in this Guarantee are for ---------------- convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 18 Successors and Assigns. This Guarantee shall be binding upon the ---------------------- successors and assigns of each Guarantor and shall inure to the benefit of the Administrative Agent and the Lenders and their successors and assigns. 19 Governing Law. This Guarantee shall be governed by, and construed and ------------- interpreted in accordance with, the law of the State of New York. IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. HANOVER GENERAL HOLDINGS, INC. By: _________________________________ Name: Title: HANOVER COMPRESSOR LIMITED HOLDINGS, LLC by Hanover General Holdings, Inc., as sole member By: _____________________________ Name: Title: HANOVER MAINTECH LIMITED PARTNERSHIP by Hanover General Holdings, Inc., as general partner By: _____________________________ Name: Title: HANOVER/SMITH LIMITED PARTNERSHIP by Hanover General Holdings, Inc., as general partner By: _____________________________ Name: Title: HANOVER LAND LIMITED PARTNERSHIP by Hanover General Holdings, Inc., general partner By: _____________________________ Name: Title: EXHIBIT C --------- FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Amended and Restated Credit Agreement, dated as of March 13, 2000 (as further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Hanover Compressor Company, a ---------------- Delaware corporation ("Holdings"), Hanover Compression Inc., a Delaware -------- corporation ("HCC"), the several lenders and other financial institutions from --- time to time parties thereto (the "Lenders") and The Chase Manhattan Bank, a New ------- York banking corporation, as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). Unless otherwise defined herein, terms -------------------- defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. The Assignor identified on Schedule l hereto (the "Assignor") and the -------- Assignee identified on Schedule l hereto (the "Assignee") agree as follows: -------- 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date (as defined below), the interest described in Schedule 1 hereto (the "Assigned Interest") in and to the Assignor's rights and obligations under ----------------- the Credit Agreement with respect to those credit facilities contained in the Credit Agreement as are set forth on Schedule 1 hereto (individually, an "Assigned Facility"; collectively, the "Assigned Facilities"), in a principal - ------------------ ------------------- amount for each Assigned Facility as set forth on Schedule 1 hereto. 2. The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or with respect to the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto, other than that the Assignor has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of HCC, any of its Subsidiaries or any other obligor or the performance or observance by HCC, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; and (c) attaches any Notes held by it evidencing the Assigned Facilities and (i) requests that the Administrative Agent, upon request by the Assignee, exchange the attached Notes for a new Note or Notes payable to the Assignee and (ii) if the Assignor has retained any interest in the Assigned Facility, requests that the Administrative Agent exchange the attached Notes for a new Note or Notes payable to the Assignor, in each case in amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements delivered pursuant to subsection 5.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (c) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender including, if it is organized under the laws of a jurisdiction outside the United States, its obligation pursuant to subsection 3.12(b) of the Credit Agreement. 4. The effective date of this Assignment and Acceptance shall be the Effective Date of Assignment described in Schedule 1 hereto (the "Effective --------- Date"). Following the execution of this Assignment and Acceptance, it will be - ---- delivered to the Administrative Agent for acceptance by it and recording by the Administrative Agent pursuant to the Credit Agreement, effective as of the Effective Date (which shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance and recording by the Administrative Agent). 5. Upon such acceptance and recording, from and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to the Effective Date and to the Assignee for amounts which have accrued subsequent to the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. 6. From and after the Effective Date, (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the other Loan Documents and shall be bound by the provisions thereof and (b) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 7. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. Schedule 1 to Assignment and Acceptance Name of Assignor: _______________________ Name of Assignee: _______________________ Effective Date of Assignment: _________________ ____________________ __________________ __________________________________ Credit Principal Commitment Percentage Assigned/1/ Facility Assigned Amount Assigned $_______ __._______% ________________________________________ __________________________________ [Name of Assignee] [Name of Assignor] By: By: Title: Title: ___________________________________ __________________________________ Accepted: Consented To: THE CHASE MANHATTAN BANK, as HANOVER COMPRESSOR COMPANY Administrative Agent By: By: Title: Title: ________________ /1/ Calculate the Commitment Percentage that is assigned to at least 15 decimal - places and show as a percentage of the aggregate commitments of all Lenders. EXHIBIT D --------- FORM OF HOLDINGS GUARANTEE HOLDINGS GUARANTEE, dated as of December 9, 1999, made by HANOVER COMPRESSOR COMPANY (the "Guarantor"), in favor of THE CHASE MANHATTAN BANK, as --------- agent (in such capacity, the "Administrative Agent") for the lenders (the -------------------- "Lenders") parties to the Credit Agreement, dated as of December 15, 1997, (as - -------- amended, supplemented or otherwise modified from time to time, the "Credit ------ Agreement"), among the Guarantor, Hanover Compression Inc. (formerly known as - --------- Hanover Compressor Company), a Delaware corporation (the "Borrower"), the -------- Lenders and the Administrative Agent. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes issued by the Borrower under the Credit Agreement; WHEREAS, upon the effectiveness of the TIDES Amendment, the Guarantor, a newly formed subsidiary of the Borrower, will become the parent company of the Borrower; WHEREAS, it is a condition precedent to the obligation of the Lenders to continue to make their respective Loans to the Borrower under the Credit Agreement that the Guarantor shall have executed and delivered this Guarantee to the Administrative Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective loans to the Borrower under the Credit Agreement, the Guarantor hereby agrees with the Administrative Agent, for the ratable benefit of the Lenders, as follows: 1. Defined Terms. (a) Unless otherwise defined herein, terms defined ------------- in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. (a) As used herein, "Obligations" means the collective reference to the ----------- unpaid principal of and interest on the Notes and all other obligations and liabilities of the Borrower to the Administrative Agent or the Lenders (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Notes, the Letters of Credit, the other Loan Documents or any other document made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by the Borrower or the Guarantor pursuant to the terms of the Credit Agreement or this Agreement or any other Loan Document). (b) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Guarantee shall refer to this Guarantee as a whole and not to any particular provision of this Guarantee, and section and paragraph references are to this Guarantee unless otherwise specified. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Guarantee. (a) Subject to the provisions of paragraph 2(b), the --------- Guarantor hereby, unconditionally and irrevocably, guarantees to the Administrative Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. (a) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of the Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by the Guarantor under applicable federal and state laws relating to the insolvency of debtors. (b) The Guarantor further agrees to pay any and all expenses (including, without limitation, all fees and disbursements of counsel) which may be paid or incurred by the Administrative Agent or any Lender in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, the Guarantor under this Guarantee. This Guarantee shall remain in full force and effect until the Obligations are paid in full and the Commitments are terminated, notwithstanding that from time to time prior thereto the Borrower may be free from any Obligations. (c) The Guarantor agrees that the Obligations may at any time and from time to time exceed the amount of the liability of the Guarantor hereunder without impairing this Guarantee or affecting the rights and remedies of the Administrative Agent or any Lender hereunder. (d) No payment or payments made by the Borrower, the Guarantor, any other guarantor or any other Person or received or collected by the Administrative Agent or any Lender from the Borrower, the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of the Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments made by the Guarantor in respect of the Obligations or payments received or collected from the Guarantor in respect of the Obligations, remain liable for the Obligations up to the maximum liability of the Guarantor hereunder until the Obligations are paid in full and the Commitments are terminated. 3. Right of Set-off. Upon the occurrence of any Event of Default, the ---------------- Guarantor hereby irrevocably authorizes each Lender at any time and from time to time without notice to such Guarantor, any such notice being expressly waived by the Guarantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender to or for the credit or the account of such Guarantor, or any part thereof in such amounts as such Lender may elect, against and on account of the obligations and liabilities of such Guarantor to such Lender hereunder and claims of every nature and description of such Lender against such Guarantor, in any currency, whether arising hereunder, under the Credit Agreement, any Note, any Letter of Credit or any Loan Document, as such Lender may elect, whether or not the Administrative Agent or any Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Administrative Agent and each Lender shall notify such Guarantor promptly of any such set-off and the application made by the Administrative Agent or such Lender, provided that the failure to give such -------- notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent and each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent or such Lender may have. 4. No Subrogation. Notwithstanding any payment or payments made by the -------------- Guarantor hereunder or any set-off or application of funds of the Guarantor by any Lender, the Guarantor shall not be entitled to be subrogated to any of the rights of the Administrative Agent or any Lender against the Borrower or any collateral security or guarantee or right of offset held by any Lender for the payment of the Obligations, nor shall the Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Administrative Agent and the Lenders by the Borrower on account of the Obligations are paid in full and the Commitments are terminated. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Administrative Agent and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Administrative Agent may determine. 5. Amendments, etc. with respect to the Obligations; Waiver of Rights. ------------------------------------------------------------------ The Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by such party and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any Lender, and the Credit Agreement, the Notes and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Required Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against the Guarantor, the Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand on the Borrower or the Guarantor or guarantor, and any failure by the Administrative Agent or any Lender to make any such demand or to collect any payments from the Borrower or any such other guarantor or any release of the Borrower or such other guarantor shall not relieve the Guarantor in respect of which a demand or collection is not made or the Guarantor not so released of its several obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Administrative Agent or any Lender against the Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 6. Guarantee Absolute and Unconditional. The Guarantor waives any and ------------------------------------ all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Guarantee or acceptance of this Guarantee, the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Borrower and the Guarantor, on the one hand, and the Administrative Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or the Guarantor with respect to the Obligations. The Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of the Credit Agreement, any Note or any other Loan Document, any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Administrative Agent or any Lender (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower against the Administrative Agent or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of such Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against the Guarantor, the Administrative Agent and any Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve such Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent and the Lenders against such Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantor and its successors and assigns, and shall inure to the benefit of the Administrative Agent and the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of the Guarantor under this Guarantee shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Obligations. 7. Reinstatement. This Guarantee shall continue to be effective, or be ------------- reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or the Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or the Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments. The Guarantor hereby guarantees that payments hereunder -------- will be paid to the Administrative Agent without set-off or counterclaim in U.S. Dollars at the office of the Administrative Agent located at 270 Park Avenue, New York, New York 10017. 9. Representations and Warranties. The Guarantor hereby represents and ------------------------------ warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged; (b) it has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guarantee, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Guarantee; (c) this Guarantee constitutes a legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles and an implied covenant of good faith and fair dealing; (d) the execution, delivery and performance of this Guarantee will not violate any provision of any Requirement of Law or Contractual Obligation of such Guarantor and will not result in or require the creation or imposition of any Lien on any of the properties or revenues of such Guarantor pursuant to any Requirement of Law or Contractual Obligation of the Guarantor; (e) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of such Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guarantee; (f) no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of such Guarantor, threatened by or against such Guarantor or against any of its properties or revenues with respect to this Guarantee or any of the transactions contemplated hereby, which would reasonably be expected to have a material adverse effect on the business, operations, property or financial or other condition of such Guarantor. 10. Authority of Administrative Agent. The Guarantor acknowledges that --------------------------------- the rights and responsibilities of the Administrative Agent under this Guarantee with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and such Guarantor, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and the Guarantor shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 11. Notices. All notices, requests and demands to or upon the ------- Administrative Agent, any Lender or the Guarantor to be effective shall be in writing (or by telex, fax or similar electronic transfer confirmed in writing) and shall be deemed to have been duly given or made when delivered by hand or if by overnight courier service, when received or if given by mail, when deposited in the mails by certified mail, return receipt requested, or if by telex, fax or similar electronic transfer, when sent and receipt has been confirmed, addressed as follows: (a) if to the Administrative Agent or any Lender, at its address or transmission number for notices provided in subsection 11.2 of the Credit Agreement; and (b) if to the Guarantor, at its address or transmission number for notices set forth under its signature below. The Administrative Agent, each Lender and the Guarantor may change its address and transmission numbers for notices by notice in the manner provided in this Section. 12. Counterparts. This Guarantee may be executed by the Guarantor on any ------------ number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the counterparts of this Guarantee signed by the Guarantor shall be lodged with the Administrative Agent. 13. Severability. Any provision of this Guarantee which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Integration. This Guarantee represents the agreement of the Guarantor ----------- with respect to the subject matter hereof and there are no promises or representations by the Administrative Agent or any Lender relative to the subject matter hereof not reflected herein. 15. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of ----------------------------------------------------- the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Guarantor and the Administrative Agent, provided that any provision of this Guarantee may -------- be waived by the Administrative Agent and the Lenders in a letter or agreement executed by the Administrative Agent or by telex or facsimile transmission from the Administrative Agent. (a) Neither the Administrative Agent nor any Lender shall by any act (except by a written instrument pursuant to paragraph 15(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. (b) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 16. Section Headings. The section headings used in this Guarantee are ---------------- for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Successors and Assigns. This Guarantee shall be binding upon the ---------------------- successors and assigns of the Guarantor and shall inure to the benefit of the Administrative Agent and the Lenders and their successors and assigns. 18. Governing Law. This Guarantee shall be governed by, and construed ------------- and interpreted in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. HANOVER COMPRESSOR COMPANY By:___________________________ Name: Title: Address for Notices: 12001 North Houston Rosslyn Suite 350 Houston, Texas 77086 Attn: Chief Financial Officer Fax: 281-447-8781 EX-10.53 4 0004.txt ASSET PURCHASE AGREEMENT EXHIBIT 10.53 ASSET PURCHASE AGREEMENT ------------------------ THIS ASSET PURCHASE AGREEMENT (herein designated "Agreement") is made on --------- July 10, 2000 by and among Hanover Compression Inc., a Delaware corporation ("Purchaser"), and Stewart & Stevenson Services, Inc., a Texas corporation --------- ("S&S"), Stewart & Stevenson Power, Inc., a Delaware corporation ("Power") and --- PAMCO Services International, Inc., a Delaware corporation ("PSI"). S&S, Power --- and PSI together are referred to as Sellers, BUT SHALL BE EFFECTIVE July 1, 2000 (the "Effective Date") WHEREAS, Purchaser desires to acquire, and Sellers desire to transfer to Purchaser, certain assets relating to the natural gas compression leasing business of Sellers upon the terms of this Agreement. NOW, THEREFORE, the terms of this Agreement are as follows: ARTICLE 1 GENERAL Section 1.1 Definitions. Unless otherwise stated in this Agreement, ----------- the following capitalized terms have the following meanings: "Assets": is defined in Section 2.1. "Assumed Liabilities": is defined in Section 2.7. "Atel Lease": is defined in Section 2.1(k). "Business": means the natural gas compression leasing business of Sellers. "Cash Consideration": is defined in Section 2.2(a). "Casper Facility": is defined in Section 2.1(d). "Closing": is defined in Section 2.4. "COBRA": means the requirements of Part 6 of Subtitle B of Title I of ERISA and Code Section 4980B. "Code": means the Internal Revenue Code of 1986, as amended. "Contracts": is defined in Section 3.15. "Employee Benefit Plan": means any (a) deferred compensation or retirement bonus, stock option or similar plan or arrangement, (b) defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan, (d) Multiemployer Plan, (e) Employee Welfare Benefit Plan or (f) fringe benefit plan or program. "Employee Pension Benefit Plan": has the meaning set forth in ERISA Sec. 3(2), but excludes a Multiemployer Plan. "Employee Welfare Benefit Plan": has the meaning set forth in ERISA Sec. 3(1). "Environmental, Health And Safety Requirements": shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now in effect. "ERISA": means the Employee Retirement Income Security Act of 1974, as amended. "Excluded Assets": is defined in Section 2.6. -2- "ERISA Affiliate": means each entity which is treated as a single employer with a Person for purposes of Code Section 414. "Fixed Assets": is defined in Section 2.1(e). "Governmental Body": means any court or any federal, state, municipal or other governmental department commission board, bureau, agency or instrumentality, domestic or foreign. "Gruner Agreement": means the Employment Agreement dated March 30, 1998, between PSI and Richard Gruner. "Inventory and Equipment": is defined in Section 2.1(g). "IRS": means the Internal Revenue Service. "Known" or "Knowledge": Whenever a statement regarding the existence or absence of facts in this Agreement is qualified such as "to the Knowledge of" or "Known by", it is intended by the parties hereto that the only information to be attributed to such party is information (i) in the case of Sellers, actually known to (a) any current executive officer of PSI including Jim Ingram, John Doster, and Lawrence Wilson, or (b) Frank Pool, Doug Queen or Richard Gruner or (ii) in the case of Purchaser, actually known to any current executive officer of Purchaser, and unless otherwise specifically provided in this Agreement, no party hereto is represented to have made a separate or special investigation or inquiry in connection with this Agreement to determine the existence or absence of facts in any statement qualified by phrases such as "Known by" or "to the Knowledge of." "Lien": collectively means all mortgages, deeds of trust, liens, security interests, pledges, leases, conditional sale contracts, claims, rights of first refusal, options, charges, liabilities, obligations, agreements, privileges, reservations, restrictions and other encumbrances of any kind or nature. -3- "Material Adverse Effect": means a material adverse effect on the Business or on the Sellers' ability to consummate the transactions contemplated by this Agreement. "Multiemployer Plan" has the meaning set forth in Section 3(37) of ERISA. "Non-Competition Agreement": means the Non-Competition Agreement to be delivered by PSI and S&S to Purchaser at the Closing in the form attached as Exhibit 2.12. "Order": means any order, writ, injunction, decree, judgment, or a determination of any court or other Governmental Body. "Packaging Commitment": means the Packaging Commitment to be delivered by Purchaser to S&S at Closing in the form attached hereto as Exhibit 2.10. "Parts Alliance": means the Parts Alliance to be delivered by Purchaser to S&S at the Closing in the form attached hereto as Exhibit 2.11. "PBGC": means the Pension Benefit Guaranty Corporation. "Permits": means all permits, authorizations, certificates, approvals, registrations, variances, exemptions, franchises, privileges, immunities, grants, ordinances, licenses, concessions, and other rights of every kind and character (i) under any (1) federal, state or foreign statute, ordinance or regulation, (2) Order or (3) contract with any Governmental Body or (ii) granted by any Governmental Body. "Person": means any individual, partnership, joint venture, corporation, limited liability company, bank, trust, unincorporated organization, or Governmental Body. "Promissory Note": is defined in Section 2.2(a). "PSI-Owned Fleet": is defined in Section 2.1(a). -4- "Receivables": is defined in Section 2.1(l). "Records": means all of the books, records, papers and instruments of whatever nature and wherever located that relate to the Assets or the Business (excluding minute books, accounting books and records and corporate records of PSI), including, but not limited to, all records and files relating to notes and accounts receivable that are included in the Assets, contracts, maintenance records, inventory records, environmental records and reports and copies of sales and property Tax records and copies of rental records. "S&S Owned Fleet": is defined in Section 2.1(c). "Taxes": means any federal, state, local or foreign income, sales, excise, real or personal property or other taxes, assessments, fees, levies, imposts, duties, or other charges of any nature whatsoever, including, but not limited to, interest, additions to tax and penalties thereon imposed by any law, rule or regulation. "Units In-Production": is defined in Section 2.1(b). ARTICLE 2 PURCHASE AND SALE Section 2.1 Purchase and Sale. Sellers agree to sell, transfer, convey ----------------- and deliver to Purchaser at the Closing (as defined in Section 2.4 hereof) except as otherwise provided herein, the following assets (collectively referred to as "Assets"), free and clear of all Liens: ------ (a) PSI Owned Fleet - PSI's owned compressor rental fleet (the "PSI- --- Owned Fleet") consisting of those 160 particular natural gas ----------- compressor units listed and described in Exhibit 2.1(a) together with all forms of written information relating to the operation, performance, maintenance, repair and/or upkeep of such compressors; (b) Units In-Production - those compressor packages scheduled for or in production carried on the books of S&S or PSI as of the Closing Date as the case may be (the "Units In-Production") ------------------- consisting of those 11 particular natural gas compressor packages listed and described in Exhibit 2.1(b) together with all forms of written information relating to the operation, performance, maintenance, repair and/or upkeep of such compressors; -5- (c) S&S Owned Fleet - those compressor packages owned and operated by S&S business units other than PSI (the "S&S-Owned Fleet") --------------- consisting of those 6 particular natural gas compressor packages listed and described in Exhibit 2.1(c) together with all forms of written information relating to the operation, performance, maintenance, repair and/or upkeep of such compressors; (d) Casper Facility - the PSI facility in Casper, Wyoming ("Casper ------ Facility") consisting of real property and all improvements -------- thereon located at 1010 Falcon Street, Mills, Wyoming 82644 and described in Exhibit 2.1(d); (e) Fixed Assets - all furniture, fixtures, displays, equipment, leasehold improvements, signage, and all other tangible personal property of Sellers located at the Casper Facility (including all supplies), all of which are itemized on Exhibit 2.1(e) (herein collectively designated "Fixed Assets"); ------------ (f) Trade Name - all of Sellers' rights and titles in and to the following trade name: "PSI" (g) Inventory and Equipment - all of Sellers' service and spare parts inventory and equipment relating to the Business or the Assets, all of which are itemized on Exhibit 2.1(g) (herein collectively designated ("Inventory and Equipment"); ----------------------- (h) Contracts - all equipment leases and other contracts relating to the Business and the Gruner Agreement all of which are included in the "Contracts" as defined in Section 3.15 and all of which --------- are described on Exhibit 2.1(h) attached hereto; (i) Records and Files - all original Records; (j) Vehicles - the rolling stock of PSI which is identified on Exhibit 2.1(j) attached hereto; (k) Atel Lease - that certain lease (the "Atel Lease") with Atel ---------- Finance Corporation ("Atel"), subject to the provisions of ---- Section 2.13; and (l) Notes and Accounts Receivable - all original promissory notes and accounts receivable on the books of Sellers relating to the Business or the Assets on the Closing Date (the "Receivables") as ----------- described on Exhibit 2.1(i). Section 2.2 Cash Consideration. ------------------ (a) Purchaser agrees to pay and deliver to Sellers Sixty Million Dollars ($60,000,000), subject to adjustment as provided herein, payable (a) $45,000,000 by wire transfer -6- of immediately available federal funds at the Closing, and (b) $15,000,000.00 evidenced by a non-interest bearing promissory note, payable to Sellers in the form attached hereto as Exhibit 2.2 (the "Promissory Note") (the "Cash Consideration"). Sellers --------------- ------------------ shall provide Purchaser with an allocation of the Cash Consideration prior to Closing. (b) The parties agree that the Cash Consideration excludes any and all Transfer Taxes required to be collected by Sellers arising from the sale of the Assets. For this purpose, "Transfer Taxes" -------------- means any sales, use, excise, docket, filing, recording and similar Taxes, but excludes Property Taxes (defined below). Purchaser shall be responsible for the payment of any and all Transfer Taxes arising from the contemplated transaction. To the extent permitted by applicable laws, Purchaser shall remit such taxes directly to the appropriate taxing authority and shall provide S&S with evidence of such payment. (c) The liability ad valorem Taxes, or real or personal property Taxes and similar obligations attributable to the Assets ("Property Taxes") with respect to the year in which Closing -------------- occurs shall be apportioned as of the date of Closing between Sellers and Purchaser. Purchaser shall be responsible for payment to the appropriate Tax authorities of all Property Taxes relating to the year in which Closing occurs which are due and payable after the Closing. At the Closing, Sellers shall pay Purchaser (or reduce Purchaser's obligation to pay the Cash Consideration by) an amount equal to the estimate, based on current assessed value and estimated tax rates, of Sellers' liability for Property Taxes. Within a reasonable time after payment by Purchaser of such Property Taxes, Purchaser shall deliver to Sellers a final accounting for such Property Taxes and Purchaser shall pay to Sellers, or Sellers shall pay to Purchaser, as the case may be, the difference between the actual and estimated Property Taxes. (d) The Promissory Note will be paid without set off monthly on a pro rata basis by horsepower as the compressor packages comprising the PSI-Owned Fleet and/or Units In-Production, as the case may be, that are not under lease on the Closing Date are placed into service or sold after the Closing Date, with one-half of the principal amount of the Promissory Note due no later than six (6) months after the Closing and the other one-half of the principal amount of the Promissory Note due no later than nine (9) months after the Closing. Section 2.3 Adjustments to Cash Consideration. --------------------------------- (a) To the extent the total rated horsepower at Closing (based on mutually agreed upon horsepower ratings) of the PSI-Owned Fleet, the Units In-Production and the S&S-Owned Fleet is more or less than 103,422 horsepower, the Promissory Note shall be increased or decreased by an aggregate amount of $550.00 per horsepower. -7- (b) The portion of the Cash Consideration paid in cash at Closing will also be adjusted on a dollar-for-dollar basis to the extent that the value of the Receivables at Closing is greater or less than $1,000,000.00. (c) Sellers and Purchaser acknowledge and agree that the total rated horsepower of the PSI-Owned Fleet, the Units In-Productions and the S&S Owned-Fleet may not be readily determinable because of sales and pending sales by Sellers of units a part of the PSI-Owned Fleet, the Units In-Production and the S&S Owned-Fleet prior to Closing. Sellers and Purchaser acknowledge and agree that within forty-five (45) days after Closing they will mutually agree as to the total number of units and the aggregate total rated horsepower of the PSI Owned-Fleet, the Units In-Productions and S&S Owned-Fleet as of the Closing and, if necessary, adjust the Promissory Note as per the provisions of Section 2.3(a) to reflect the correct Cash Consideration. Section 2.4 Closing. The closing ("Closing") of the purchase and sale of ------- ------- the Assets shall take place at the offices of Sellers at 10:00 a.m. on the later of (a) July 10, 2000, or (b) the second business day following fulfillment of all conditions precedent to Closing in Article 5 hereof (herein designated "Closing Date"), or at such other place, time and date as the parties hereto ------------ mutually agree. Section 2.5 Instruments of Transfer and Assumption. At the Closing, -------------------------------------- Sellers shall deliver to Purchaser good and sufficient instruments of transfer, assignment and conveyance transferring complete, good and marketable title to the Assets to Purchaser. Such instruments shall be substantially in the form of Exhibit 2.5 or such other form as is reasonably satisfactory to Purchaser. Sellers shall assign to Purchaser any existing manufacturers' warranties relating to the Assets at the Closing including, without limitation, any relating to the Atel Lease. Section 2.6 Excluded Assets. Purchaser shall not buy and does not agree --------------- to pay for any asset of Sellers other than those included in the Assets, such assets being the "Excluded Assets." It is specifically acknowledged that the --------------- Assets do not include (i) Sellers' cash on hand or in bank accounts on the Closing Date, (ii) any asset of Sellers unrelated to the Business, (iii) the PAMCO trade name or any name that includes "PAMCO", (iv) minute books, accounting books and records and other corporate records of PSI which do not constitute Records, and (v) the network server, router, server back-up tapes, emergency repair disks or nontransferable licensed software. Section 2.7 Assumption of Certain Specific Liabilities. At the Closing, ------------------------------------------ Purchaser shall assume and agree to pay or discharge when due the following obligations and liabilities of Sellers: (a) all Sellers' obligations and liabilities arising or accruing on or after the Closing Date under the Contracts and under the Atel Lease (subject to the provisions of Sections 2.8 and 2.12); and -8- (b) ad valorem taxes for the calendar year in which Closing occurs for the real and personal property of Sellers included in the Assets (subject to the proration of such ad valorem taxes at Closing). Purchaser shall not assume and does not agree to pay or discharge any other debt, obligation or liability of Sellers. The parties expressly agree that Sellers shall remain liable for (i) all of the contracts, agreements, commitments and undertakings of Sellers not included in the Contracts or otherwise expressly assumed by Purchaser pursuant to this Agreement (ii) all obligations under the Contracts to the extent such obligations arose or accrued before Closing, (iii) accounts payable, (iv) notes or other debt instruments, (v) obligations for goods purchased that have not been paid for, or any other fixed or contingent obligations. Sellers expressly agree to pay all of their trade accounts payable, accrued expenses, debt and any other liabilities in the due course of the Business through the Closing Date. The debts, liabilities and obligations to be assumed by Purchaser under this Section 2.7 are herein designated the "Assumed Liabilities." The assumption ------------------- by Purchaser of the Assumed Liabilities shall not enlarge any rights or remedies of any third parties under any contracts or arrangements with Sellers, except to the extent the other parties to such contracts become able to enforce such contracts against Purchaser. Section 2.8 Employees. Purchaser will hire any or all employees of PSI --------- who pass Purchaser's pre-employment test and screening on the Closing Date. Sellers will pay and, jointly and severally, will remain liable for any severance benefits and other accrued benefits or obligations owing to any employee or independent contractor of either Seller including without limitation, obligations under the Workers Adjustment and Retraining Notification Act, all payroll obligations, and all unused vacation or sick leave benefits. Notwithstanding anything herein to the contrary Purchaser shall have no obligation with respect to the incentive compensation provisions of the agreement between PSI and Richard Gruner relating to the acquisition of Compression Specialties, Inc. Sellers shall be responsible for providing continuation coverage as required by COBRA under a group health plan maintained by Sellers or an affiliates of Sellers, to employees and other qualified beneficiaries under COBRA with respect to such employees, who have a COBRA qualifying event (due to termination of employment with Seller or otherwise) prior to or in connection with the transactions contemplated by this Agreement (the "Continuees"). ---------- Section 2.9 Packaging Commitment. At the Closing, Purchaser shall -------------------- execute and deliver to S&S the Packaging Commitment. Section 2.10 Parts Alliance. At the Closing, Purchaser shall execute and -------------- deliver to S&S the Parts Alliance. Section 2.11 Non-Competition Agreement. At the Closing PSI and S&S shall ------------------------- execute and deliver the Non-Competition Agreement. -9- Section 2.12 Atel Lease Assignment. If the consent of Atel to Purchaser's --------------------- assumption of the Atel Lease is required and cannot be obtained on terms acceptable to S&S and Purchaser prior to Closing, then in such event Purchaser shall enter into a written sublease of the equipment subject to the Atel Lease at the Closing on terms and conditions identical in all respects to the terms of the Atel Lease. Furthermore, if S&S cannot obtain Atel's consent to the assignment at Closing of the Atel Lease to Purchaser on terms reasonably acceptable to S&S and Purchaser prior to Closing, then Purchaser will execute instruments and documents necessary to sublease the Atel Compressors from S&S for the remainder of the Atel Lease term on terms identical to the terms of the Atel Lease, including any rights to purchase the Atel Compressors at the end of the Atel Lease. In no event shall Purchaser be obligated to pay any fee, premium, extraordinary charge or expense attributable to assignment to or sublease by Purchaser of the Atel Lease. Section 2.13 Casper Facility. --------------- (a) Prior to Closing, Sellers shall deliver to Purchaser a commitment for title insurance ("Title Commitment") for the Casper Facility. At the ---------------- Closing, Sellers shall provide Purchaser an Owner's Policy of Title Insurance, subject to the standard printed exceptions and all matters shown of record as of the date hereof. Sellers shall use their good faith efforts to cure any defects in title identified by Purchaser from the Title Commitment. Sellers shall provide Purchaser an updated survey of the Casper Facility, reasonably satisfactory to Purchaser and the title company providing the Owner's Policy of Title Insurance, if required by the title company. (b) At the Closing, Sellers shall (i) deliver to Purchaser a Special Warranty Deed relating to the Casper Facility executed and acknowledged by Sellers conveying the Casper Facility to Purchaser, subject to the terms and provisions therein; (ii) deliver to Purchaser a FIRPTA Affidavit duly executed by S&S in the form attached hereto as Exhibit 2.13(b); (iii) deliver to Purchaser such evidence as Purchaser's counsel may reasonably require authorizing the execution and delivery of all documents required to be executed by Sellers, and the consummation of the transactions contemplated herein; (iv) join with Purchaser in the execution of a Closing Statement relating to the sale of the Casper Facility; and (v) execute such other necessary documents to effectuate the sale and transfer of the Casper Facility. Section 2.14 Bulk Sales Law. The parties acknowledge that this Agreement -------------- does not require them to comply with or avail themselves of any safe harbor provided in any bulk transfer provisions of the Uniform Commercial Code (or any similar law) of any state in which the Assets are located or the Business is conducted. Sellers jointly and severally agree to and do hereby indemnify and hold Purchaser harmless from and against all claims, losses, demands, damages, liabilities, costs and expenses resulting from or relating to non-compliance by Purchaser or Seller with the bulk transfer provisions of any applicable Uniform Commercial Code (or any similar law) in connection with the sale and transfer of the Assets to Purchaser. -10- Section 2.15 Operation of Assets During Interim Period. Purchaser and ----------------------------------------- Sellers acknowledge and agree that from the Effective Date of this Agreement through Closing ("Interim Period"), all revenues generated by or associated with the Assets shall accrue for the benefit of Purchaser less any reasonable, ordinary and necessary costs associated with the maintenance, operation or repair of the Assets. Sellers agrees that they will, within forty-five (45) days of Closing, provide Purchaser with an accounting of all revenues and expenses associated with the Assets during the Interim Period. To the extent that any amounts are due and owing to either Sellers or Purchaser as a result of operations of the Assets during the Interim Period, an appropriate adjustment will be made to the Promissory Note. ARTICLE 3 REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS Sellers, jointly and severally, hereby represent, warrant and covenant to Purchaser as follows, all of which covenants, representations and warranties shall be true and correct as of the date hereof and as of the Closing Date: Section 3.1 Incorporation and Good Standing. Each of Sellers is a ------------------------------- corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has the corporate power and authority to own, use and operate its properties and to carry on its business and to own and operate the Assets. Section 3.2 Ownership. PSI is a wholly-owned subsidiary of S&S. --------- Section 3.3 Authorization and Capacity to Enter Agreement. Each of --------------------------------------------- Sellers has all requisite power, authority and capacity to enter into and perform this Agreement and the other contracts or documents contemplated herein, including without limitation the Non-Competition Agreement, the Packaging Commitment and the Parts Alliance, (hereinafter designated "Ancillary --------- Documents"), and this Agreement and the Ancillary Documents will constitute - --------- valid and binding legal obligations of Sellers enforceable against each in accordance with the respective terms thereof, subject to (i) the fact that equitable remedies, including the remedies of specific performance and injunction, may only be granted in the discretion of a court, and (ii) bankruptcy, insolvency, moratorium, reorganization or other laws relating to or affecting the enforcement of creditors' rights generally. Section 3.4 Litigation. There are no actions, suits, proceedings, ---------- arbitrations or investigations pending or, to the Knowledge of Sellers, threatened, which could have a material adverse effect on the Assets or the transactions contemplated by this Agreement at law or in equity, before or by any arbitrator or any Governmental Body nor, to the Knowledge of Sellers, do any facts exist which might result in any such action, suit, proceeding, arbitration or investigation. -11- Section 3.5 Compliance with Instruments. Entering into and performing --------------------------- this Agreement and/or the Ancillary Documents, and the transfer of the Assets: (a) does not or will not constitute or result in the violation, breach or default of or under, or is not or will not be contrary to, (1) the terms or provisions of the certificates of incorporation or bylaws (as amended) of Sellers, or any currently effective resolution passed by the directors or stockholders of Sellers, or (2) the terms of any indenture, agreement (written or oral), instrument, license, Permit, understanding or other obligation or restriction to which S&S or PSI is a party or by which S&S or PSI or the Assets is or may be bound; (b) does not or will not trigger, cause or result in the termination or revocation of any indenture, agreement (written or oral), instrument, license, Permit or understanding to which S&S or PSI is a party or by which S&S or PSI is bound; (c) does not or will not release, discharge, limit or lessen any right of S&S or PSI; or (d) does not or will not result in the creation of any Lien on any of the Assets. Section 3.6 Other Obligations. Except as described on Exhibit 3.6, ----------------- neither Seller is under obligation, contractual, legal or otherwise, which has not been satisfied prior to the date hereof (a) to notify any Person of (i) the transfer of the Assets, or (ii) the making or performance of this Agreement or the Ancillary Documents; (b) to observe any waiting period or similar delay prior to (i) transferring the Assets, or (ii) making or performing this Agreement or the Ancillary Documents; or (c) to request or obtain the consent of any Person to (i) transfer the Assets, or (ii) make or perform this Agreement or the Ancillary Documents. Section 3.7 No Other Agreements. No Person has any agreement, option, ------------------- understanding or commitment, or any right or privilege (whether by law or contractual) capable of becoming an agreement, option or commitment for the purchase, assignment, license or exercise of any of the rights, benefits or use of any of the Assets. Neither Seller has granted any special or general power of attorney to any Person that will or could continue in effect after the Closing Date that might affect the ownership, operation or other aspect of any of the Assets. Section 3.8 Taxes. To the Knowledge of the Sellers, there are no ----- federal, state or local Tax Liens filed against Sellers and encumbering any of the Assets, and none of the Sellers is aware of any facts which might result in the filing of any such Tax Lien. Section 3.9 Disclosure. To the Knowledge of Sellers, no representation ---------- or information of Sellers contained in this Agreement, the Ancillary Documents, the various Exhibits attached hereto or any other information or statements previously furnished by Sellers pursuant hereto contains or shall contain any untrue statement of a material fact or omits or shall omit any material fact necessary to make the information contained therein and herein not misleading. There is no fact Known to Sellers which has specific application to the Assets (other than general economic or industry conditions) and which could have a material adverse effect or, so far as Sellers can reasonably foresee, materially threaten, the Assets that has not been set forth in this Agreement. Section 3.10 Broker's or Finder's Fees. All negotiations relative to this ------------------------- Agreement, the Ancillary Documents and the transactions contemplated herein have been carried on by Sellers and -12- their counsel directly with Purchaser and its counsel, without the intervention of any other Person in such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder's fee or similar payment other than Simmons & Company International. Sellers shall be fully and solely responsible for payment of any amounts due to Simmons & Company International in connection with this Agreement and the transactions contemplated hereby. Section 3.11 Title to Properties; Absence of Liens. Sellers have ------------------------------------- complete, good and marketable title to all of the Assets, free and clear of all Liens. Sellers have a right to use all the Assets without payment to, or interference from, any other party, and have not received any notice of conflict with the asserted rights of others and, except with respect to the Atel Lease and that certain lease from Stewart & Stevenson de las Americas-Colombia, Ltda to Hocal, such right to so use the Assets is freely transferable to Purchaser. Section 3.12 Bankruptcy or Insolvency. Neither Seller has committed an ------------------------ act of bankruptcy, is insolvent, has proposed a compromise or arrangement to its creditors generally, has had any petition or receiving order in bankruptcy filed against it, has made a voluntary assignment in bankruptcy, has taken any proceeding with respect to a compromise or arrangement with creditors, has taken any proceeding to have itself declared bankrupt or to be wound up, has taken any proceeding to have a receiver appointed for any part of its assets, has had any creditor take possession of its assets, nor has had any execution, charging order, levy or distress warrant become enforceable or become levied upon any of its assets. Section 3.13 Health, Safety or Environmental Matters. Except as set forth --------------------------------------- on Exhibit 3.13: (a) Each of the Sellers has complied and is in compliance in all material respects with all Environmental, Health, and Safety Requirements in connection with the Assets and the Business. (b) Without limiting the generality of the foregoing, each of the Sellers has obtained and complied with, and is in compliance with, all material permits, licenses and other authorizations that are required pursuant to Environmental, Health, and Safety Requirements for the occupation of its facilities used in connection with the Assets or the Business and the operation of the Business. (c) None of the Sellers has received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental, Health, and Safety Requirements, or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to any of them in connection with the Business and the Assets or facilities used -13- or useful in connection with the Business arising under Environmental, Health, and Safety Requirements. (d) None of the following exists at the Casper Facility (1) underground storage tanks, (2) asbestos-containing material in any form or condition, (3) materials or equipment containing polychlorinated biphenyls, or (4) landfills, surface impoundments, or disposal areas. (e) None of the Sellers has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility used or useful in connection with the Business in a manner that has given or would give rise to liabilities, including any liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the Solid Waste Disposal Act, as amended ("SWDA") or any other Environmental, Health, and Safety Requirements. (f) None of the Sellers has, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or remedial action, of any other Person relating to Environmental, Health, and Safety Requirements in connection with the Business or the Assets. Section 3.14 Employees. Attached hereto as Exhibit 3.14 is a list of the --------- names and annual or hourly rates of compensation of each full or part time employee of PSI and any employee of S&S whose work relates primarily to the Business as of ________________, 2000, and all bonuses paid or payable to such employees for the calendar year ended December 31, 1999, and for the period from January 1, 2000, to the date hereof. Sellers are in compliance with all applicable Federal and state laws relating to employment and wages and hours with respect to such employees and are not engaged in any unfair labor practice with respect to any such employees. Sellers are not a party to or bound by any collective bargaining agreement with respect to such employees, and have not experienced any strikes, grievances, claims of unfair labor practices, or other collective bargaining disputes. Sellers have not committed any unfair labor practices. Sellers have no Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of Sellers whose work relates to the Business. Section 3.15 Contracts. Exhibit 2.1(h) includes all material or --------- significant contracts to which S&S or PSI is a party which relate to the Assets, including, without limitation, compressor leases and the Atel Lease (herein designated "Contracts"). There are no Liens which might affect --------- -14- title to, or exclusive possession and use of, or any other right of Sellers to the benefit of, any or all of Sellers' contractual rights or benefits with regard to the Contracts. Neither S&S nor PSI is in default or breach of any obligation under the Contracts, and neither Seller has any Knowledge of any facts which, after notice or lapse of time, or both, would constitute such a default or breach. Each of the Contracts is valid, enforceable and in good standing and in full force and effect without amendment thereto (except for written amendments referenced in Exhibit 2.1(h) attached hereto), and Sellers are, and Purchaser will be, after the Closing, entitled to all benefits thereunder. None of the Sellers has any Knowledge of any party to any of the Contracts having an intention to terminate, whether by notice or breach, any of the Contracts. None of the Sellers has any Knowledge that any party to any of the Contracts is in default or breach of any of such party's obligations thereunder. Section 3.16 Compliance with Laws. The Business is not in violation of -------------------- or in default with respect to, or in alleged violation of or alleged default with respect to, any applicable law or any applicable rule, regulation, permit or order of any governmental body, or any ordinances in any material respect. Sellers are in full legal compliance in all material respects with any and all legal requirements pertinent to the Assets or operation of the Business. Sellers are not delinquent with respect to any report required to be filed with any Governmental Body relating to the Business or the Assets. Sellers hold all material licenses and permits as are necessary to carry on the Business as currently conducted, and such licenses and permits are in full force and effect and have been and are being fully complied with by Sellers in all material respects. Section 3.17 Assets Comprise Entire Business. The Assets comprise all of ------------------------------- the material assets used in the Business, except the Excluded Assets. Section 3.18 Material Adverse Change. Since May 22, 2000, there has been ----------------------- no Material Adverse Change in the Business. Since May 22, 2000, Sellers have: (a) conducted the operations of the Business in the ordinary course; (b) not entered into any material transaction or contract relating to the Business, or amended or terminated any material transaction or contract, except normal transactions or contracts consistent in nature and scope with prior practices and entered into in the ordinary course of business of the Business; (c) not mortgaged, sold, transferred, distributed or otherwise disposed of any of the Assets, except in the ordinary course of business; (d) not experienced any damage, destruction or loss to any of the Assets except in the ordinary course of business and except to the extent that any such Assets damaged, destroyed or losses have been repaired or replaced; -15- (e) not made or agreed to make any capital expenditures for additions to property or equipment relating to the Business; and (f) not granted credit to any customer relating to the Business on terms materially more favorable than terms on which credit has been extended to such customer in the past nor materially changed the terms of any credit previously extended relating to the Business. Section 3.19 Condition of Assets. S&S and PSI do not make and hereby ------------------- expressly disclaim any and all express or implied warranties as to the condition of the Assets or regarding whether the Assets are fit for a particular purpose or free from defects. Section 3.20 Employee Benefits. ----------------- (a) Exhibit 3.20 lists each Employee Benefit Plan that PSI or an ERISA Affiliate maintains, participates in, or contributes to for the benefit of any of the employees who are listed on Exhibit 3.14. (i) Each such Employee Benefit Plan (and each related trust, insurance contract, other employee benefit provider contract or fund) complies in form and in operation in all respects with the applicable requirements of ERISA, the Code, other applicable laws (including regulations and rulings thereunder) and with its terms. (ii) All required reports and notices or descriptions required by ERISA, the Code or any other applicable laws, have been timely filed or timely distributed to plan participants with respect to each such Employee Benefit Plan. (iii) Except as set forth on Exhibit 3.20 all contributions (including all employer contributions, employee contributions and employee salary reduction contributions) which are due have been timely paid to each such Employee Benefit Plan which is an Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each such Employee Pension Benefit Plan or they are disclosed on Exhibit 3.20. All premiums or other payments for all periods ending on or before the Closing Date have been timely paid with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan, or they are disclosed on Exhibit 3.20. (iv) Each such Employee Benefit Plan which is an Employee Pension Benefit Plan and intended to be qualified under the Code has received a determination letter from the IRS to the effect that it meets the requirements -16- of Code Section 401(a) as amended by the Tax Reform Act of 1986 and subsequent legislation for which the remedial amendment period (as defined by regulations and rulings of the IRS) has expired. (b) With respect to each Employee Benefit Plan that PSI or an ERISA Affiliate maintains or has ever maintained or to which it contributes or has ever contributed or has ever been required to contribute: (i) PSI or an ERISA Affiliate has no liability (known or unknown, asserted or unasserted) for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Employee Benefit Plan. No action, suit, proceeding, hearing, or investigation with respect to the administration or the investment of the assets of any such Employee Benefit Plan (other than routine claims for benefits) is pending or threatened. Sellers have no knowledge of any basis for any such action, suit, proceeding, hearing or investigation. (ii) PSI or an ERISA Affiliate has not contributed or nor has it been required to contribute to any Multiemployer Plan and it has no direct or indirect liability under any Multiemployer Plan nor has it incurred or reasonably expects to incur any direct or indirect liability under or by operation of Title IV of ERISA. Neither PSI nor any ERISA Affiliate has ever maintained, contributed to or been required to contribute to any Employee Pension Benefit Plan which is or was subject to Title IV of ERISA or Section 412 of the Code. (iii) PSI or an ERISA Affiliate does not provide or have an obligation to provide post-employment medical, life or other welfare benefits to any employees or former employees, exclusive of any obligations imposed by COBRA. Section 3.21 Receivables. Except to the extent and in the amounts ----------- specifically set forth on Exhibit 3.21 the Receivables, whether current or noncurrent, are derived from bona fide sales or leases of products or provision of services. Section 3.22 Labor Matters. With respect to the Business, Sellers are ------------- in compliance in all respects with all applicable foreign, federal, state, provincial and local laws, rules or regulations relating to the employment of labor, including those relating to salaries, wages, hours, collective bargaining, affirmative action and the payment and withholding of Taxes. With respect to the Business, Sellers have no common law employees (as defined by the Code and its related regulations) who have been treated or labeled as "independent contractors." Section 3.23 Insurance. Exhibit 3.23 attached hereto contains a list of --------- all policies of insurance maintained as of the date of this Agreement by Sellers with respect to any of the Assets. -17- The insurance policies described in Exhibit 3.23 provide adequate coverage (less deductibles) against the risk involved in the operation of the Businesses. The Sellers have received no notice from any insurance carrier of the intention of such carrier to discontinue any such insurance coverage. Section 3.24 Customers. Exhibit 3.24 attached hereto sets forth a correct --------- list of the names and last known addresses, and most telephone numbers of all the Persons who rented natural gas compressors from a Seller during the fiscal year ended December 31, 1999 and during the period from January 1, 2000 through the date hereof, and also shows the number of units and horsepower of the equipment rented to each such customer as of the Closing Date. Except to the extent set forth in Exhibit 3.24, since May 22, 2000 there has not been any Material Adverse Change in the business relationship of the Sellers with any Person named in Exhibit 3.24. Section 3.25 Intellectual Property. No Seller has any Knowledge of any --------------------- claim or has any reason to believe that any Seller is or may be infringing upon or otherwise acting adversely to the rights of any Person under or in respect of any patents, copyright, trade name, trademark or similar intangible right used or useful in connection with the Business or the Assets. None of the Sellers is obligated or under any liability whatever to make any payments by way of royalties, fees or otherwise to any owner or licensee of, or any other claimant to, any such patent, copyright, trade name, trademark or similar intangible right. All copyrights, patents, trade names and trademarks of the Sellers relating to the Business or the Assets are listed on Exhibit 3.25. Section 3.26 Casper Facility --------------- With respect to the Casper Facility: (a) S&S is not a "foreign person" as defined in Section 1445(f)(3) of the Internal Revenue Code. (b) S&S is the sole legal and equitable owner of good, marketable, and insurable fee simple title to the Casper Facility and will convey such fee simple title to Purchaser at Closing free and clear of all options, rights, covenants, easements, liens, encumbrances, and other rights in favor of third parties. (c) S&S or PSI is the sole owner of good title to all fixtures and personalty associated with the Casper Facility, free and clear of all liens, security interests, financing statements, encumbrances, and rights in favor of third parties. (d) The Casper Facility is not subject to any outstanding agreements of sale, or any options, liens, or other rights of third parties to acquire any interest therein. The Casper Facility is not subject to any ground lease or other lease. (e) To the Knowledge of the Sellers, there are no public plans or proposals for changes in road grade, access, or other governmental or private improvements which would -18- affect the Casper Facility or result in any assessment against the Casper Facility; to the Knowledge of the Sellers, no ordinance authorizing improvements, the cost of which might be assessed against Purchaser or the Casper Facility, is in effect or under consideration; to the Knowledge of Sellers, there is no tax proceeding pending for the reduction or increase of the assessed tax valuation of the Casper Facility or any portion thereof. (f) There are no unpaid assessments for public improvements against the Casper Facility; the Casper Facility is not subject to assessments for any street paving or curbing heretofore installed; sewer, water, gas, telephone and electric lines adequate to service the Casper Facility are located on, or in dedicated easements immediately adjacent to, the Casper Facility; and there are no unpaid assessments or charges for the installation of such utilities or for making connection thereto. (g) There are no unpaid claims against any portion of the Casper Facility for or on account of work done, materials furnished, or utilities supplied to the Casper Facility. There are no contracts or agreements for the performance of work or the furnishing of materials to any portion of the Casper Facility which have not been fully performed and paid for, and releases of all liens therefor recorded. There are no unpaid pay-back agreements, utility debt service expenses, or other charges or expenses applicable to the Casper Facility. (h) No condemnation proceedings, eminent domain proceedings, or similar actions or proceedings are now pending or, to the Knowledge of the Sellers, threatened against the Casper Facility. (i) To the Knowledge of the Sellers, the Casper Facility was built in conformity with all applicable building and zoning laws, rules, codes, and regulations and none of such laws, rules, codes, or regulations are violated by the current condition, use, or operation of the Casper Facility. The certificate of occupancy of the Casper Facility is not violated by the current structure or use of the Casper Facility. (j) To its Knowledge, PSI has obtained all permits, certificates, authorizations, approvals, consents, waivers, and variances that are required to use, own, occupy, maintain, and operate the Casper Facility. Sellers have not received any notice, nor are Sellers aware, of the violation of any applicable building, zoning, or other government or governmental agency, or any private restrictions, with respect to the use, ownership, occupancy, maintenance, operation, or condition of the Casper Facility or any portion thereof, or requiring any repairs or alterations to the Property or any portion thereof. -19- (k) Except as set forth in Exhibit 3.26, no underground improvements, including, but not limited to, treatment or storage tanks, sumps, or water, gas, or oil wells located on the Casper Facility. (l) To the Knowledge of the Sellers, there is not constructed, place, deposited, stored, disposed of, nor located on the Casper Facility any polychlorinated biphenyls (PCBs) nor transformers, capacitors, ballasts, or other equipment which contains dielectric fluid containing PCBs. (m) To the Knowledge of the Sellers, there is not constructed, place, deposited, stored, disposed of, nor located on the Casper Facility any insulating material containing urea formaldehyde. ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER Purchaser hereby represents, warrants and covenants to Sellers as follows, all of which covenants, representations and warranties shall be true and correct as of the date hereof and as of the Closing Date: Section 4.1 Authorization and Capacity to Enter Agreement. Purchaser has --------------------------------------------- all requisite power, authority and capacity to enter into and perform this Agreement and the Ancillary Documents, and this Agreement and Ancillary Documents will constitute valid and binding legal obligations of Purchaser enforceable against Purchaser in accordance with the respective terms thereof, subject to (a) the fact that equitable remedies, including the remedies of specific performance and injunction, may only be granted in the discretion of a court, and (b) bankruptcy, insolvency, moratorium, reorganization or other laws relating to or affecting the enforcement of creditors' rights generally. Section 4.2 Litigation. There are no actions, suits, proceedings, ---------- arbitrations or investigations pending or, to the Knowledge of Purchaser, threatened which could have a material adverse effect on the transactions contemplated by this Agreement or on Purchaser such that they may cause Purchaser to be unable to consummate the transactions contemplated herein, at law or in equity, before any arbitrator or any Governmental Body nor, to the Knowledge of Purchaser, do any facts exist which might result in any such action, suit, proceeding, arbitration or investigation. Section 4.3 Compliance with Instruments. Entering into and performing --------------------------- this Agreement and the Ancillary Documents, and the purchase of the Assets does not or will not constitute or result in the violation, breach or default of or under, or is not or will not be contrary to, (a) the terms or provisions of the certificate of incorporation or bylaws of Purchaser or any currently effective resolution passed by the directors or stockholders of Purchaser, or (b) the terms -20- of any indenture, agreement (written or oral), instrument, license, Permit, understanding or other obligation or restriction to which Purchaser is a party by which Purchaser is bound. Section 4.4 Other Obligations. Other than as described on Exhibit 4.4, ----------------- Purchaser is not under any obligation, contractual or otherwise, which has not been satisfied prior to the date hereof, (a) to notify any Person of (i) Purchaser's purchase of the Assets, or (ii) Purchaser making or performing this Agreement or the Ancillary Documents; (b) to observe any waiting period or similar delay prior to (i) the transfer of the Assets to Purchaser, or (ii) making or performing this Agreement or the Ancillary Documents; or (c) to request or obtain the consent of any Person to (i) the transfer of the Assets to Purchaser, or (ii) the making or performing this Agreement or the Ancillary Documents. Section 4.5 Broker's or Finder's Fees. All negotiations relative to ------------------------- this Agreement, the Ancillary Documents and transactions contemplated hereby have been carried on by Purchaser and its counsel directly with Sellers and their counsel, without the intervention of any Person in any such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder's fee or similar payment. ARTICLE 5 ACTIONS AND MATTERS IN CONTEMPLATION OF CLOSING Section 5.1 Conditions Precedent to Obligations of Sellers. Unless ---------------------------------------------- waived (in whole or in part) in writing by Sellers, the obligations of Sellers hereunder are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions precedent by Purchaser: Section 5.1.1 No Errors. The representations and warranties of --------- Purchaser in Article 4 hereof shall be deemed to have been made again on the Closing Date and must be then true and correct in all material respects; provided that those representation and warranties that are qualified by materiality shall be true and correct in all respects. Section 5.1.2 Compliance With Agreement. All of the terms and conditions ------------------------- of this Agreement to be complied with and performed by Purchaser on or before the Closing Date shall have been complied with and performed. Section 5.1.3 Litigation. There shall not have been instituted or ---------- threatened any legal proceeding by any third party seeking to prohibit the consummation of the transactions contemplated hereby or to obtain damages from Sellers with respect thereto, or to otherwise void this Agreement or any of the Ancillary Documents or any of such transactions. None of the parties hereto shall be prohibited by any Order from consummating the transactions contemplated hereby, and no action or proceeding shall then be pending which questions the validity of this Agreement, any of the Ancillary Documents, the transactions contemplated hereby, or any action which has been taken by -21- any of the parties in connection herewith or in connection with the transactions contemplated hereby. Section 5.1.4 Delivery of Documents. Purchaser shall have made, executed --------------------- and delivered any and all documents or instruments as Sellers may reasonably request in form and substance satisfactory to Sellers and their legal counsel (including, but not limited to, certificate of resolutions and incumbency, etc.). Section 5.1.5 Approval of Legal Matters by Sellers' Counsel. The validity --------------------------------------------- or legality of all actions, proceedings, instruments and documents required to carry out this Agreement or which are incidental thereto, and all other related legal matters, shall have been approved by Sellers' legal counsel, and there shall have been furnished to such counsel by Purchaser resolutions of the directors of Purchaser approving the transaction contemplated by this Agreement. Section 5.1.6 Hart-Scott Rodino. The Closing is conditioned upon expiration ----------------- of the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), without any action by any ------- Governmental Body to prevent the consummation of the Closing, and other governmental approval, as required. Section 5.1.7 Delivery of Ancillary Agreements. Purchaser shall have -------------------------------- executed and delivered the Parts Alliance and the Packaging Commitment. Section 5.1.8 Approvals. S&S's board of directors shall have approved the --------- consummation of the transactions contemplated hereby. Section 5.2 Conditions Precedent to Obligations of Purchaser. Unless ------------------------------------------------ waived, in whole or in part, in writing by Purchaser, the obligations of Purchaser hereunder are subject to the fulfillment, prior to or at the Closing of each of the following conditions precedent by Sellers: Section 5.2.1 No Material Errors or Breach of Covenants. The ----------------------------------------- representations and warranties of Sellers in Article 3 hereof shall be deemed to have been made again on the Closing Date and must then be true and correct in all material respects, subject to any changes contemplated by this Agreement; provided that those representation and warranties that are qualified by materiality shall be true and correct in all respects. Section 5.2.2 Compliance With Agreement. All of the terms and conditions of ------------------------- this Agreement to be complied with and performed by Sellers on or before the Closing Date shall have been complied with and performed. Section 5.2.3 Approval of Legal Matters by Purchaser's Counsel. The ------------------------------------------------ validity or legality of all actions, proceedings, instruments and documents required to carry out this Agreement or which are incidental thereto, and all other related legal matters, shall have -22- been approved by Purchaser's legal counsel, and there shall have been furnished to such counsel by Sellers a certified copy of Sellers' certificates of incorporation and bylaws, each as amended; resolutions of the directors of Sellers approving the transaction contemplated by this Agreement; and resolutions of the shareholder of PSI approving the transaction contemplated by this Agreement. Section 5.2.4 Delivery of Documents. Sellers shall have made, executed and --------------------- delivered the following documents in form and substance satisfactory to Purchaser and Purchaser's legal counsel: instruments of transfer in accordance with Section 2.5, attached hereto, certificates of incumbency for officers of Sellers and of the directors of Sellers and estoppel certificates from Sellers' lessees, landlords or others as requested by Purchaser, and any other documents or instruments as Purchaser may reasonably request. Section 5.2.5 Litigation. There shall not have been instituted or ---------- threatened by any third party any legal proceeding seeking to prohibit the consummation of the transactions contemplated hereby or to obtain damages from Purchaser with respect to such transactions or to otherwise void this Agreement or any of the Ancillary Documents or any of such transactions. Purchaser shall not be prohibited by any Order from consummating the transactions contemplated hereby, and no action or proceeding shall then be pending against Purchaser which questions the validity of this Agreement, any of the Ancillary Documents, the transactions contemplated hereby, or any action which has been taken by any of the parties in connection herewith or in connection with the transactions contemplated hereby. Section 5.2.6 Lien Searches. On or before June 15, 2000 Purchaser shall ------------- have obtained copies of searches of the Secretary of State offices and each county where the Assets are located with respect to UCC financing statements, deeds of trust or any other liens or encumbrances on file. All such liens and encumbrances shall have been released prior to Closing. Section 5.2.7 Hart-Scott Rodino. The Closing is conditioned upon expiration ----------------- of the waiting period pursuant to the HSR Act without any action by any governmental Body to prevent the consummation of the Closing, and other governmental approval, as required. Section 5.2.8 Delivery of Ancillary Agreements. Sellers shall have executed -------------------------------- and delivered the NonCompetition Agreement. Section 5.2.9 Approvals. The approvals described on Exhibit 5.2.9 shall --------- have been obtained. Section 5.3 Best Efforts to Satisfy Conditions. Sellers shall use its ---------------------------------- best efforts to cause the conditions precedent to the obligations of Purchaser contained in Section 5.2 to be satisfied to the extent that satisfaction of such conditions is in the control of Sellers and Purchaser shall use -23- its best efforts to cause the conditions precedent to the obligations of Sellers contained in Section 5.1 to be satisfied to the extent that the satisfaction of such conditions is in the control of Purchaser. ARTICLE 6 CLOSING AND POST-CLOSING MATTERS Section 6.1 Nature and Survival of Representations and Warranties. All ----------------------------------------------------- representations and warranties made in this Agreement shall be deemed to be material, and shall be deemed to have been relied upon by the party to whom such warranties or representations are given or made, as a material inducement to enter into and close this Agreement and to consummate the transfer of the Assets, notwithstanding any inspection made by such party. All representations and warranties of the parties made in this Agreement shall survive the Closing and all inspections, examinations or audits on behalf of the parties. Section 6.2 Indemnification. (a) Purchaser, on the one hand, and Sellers, --------------- jointly and severally, on the other hand, (herein designated "Indemnifying ------------ Party") each hereby agrees to indemnify, defend and hold harmless the other - ----- (hereinafter severally designated "Indemnified Party") against and in respect of ----------------- any and all Indemnified Damages that result to Indemnified Party from (i) any breach of any representation or warranty made by or on behalf of the Indemnifying Party in or pursuant to this Agreement or any of the Ancillary Documents, and/or (ii) any breach or default in the performance by the Indemnifying Party of any of the obligations to be performed by the Indemnifying Party hereunder, with respect to Purchaser, any liabilities or obligations relating to the Assets and arising out of or relating to the time after the Closing. The term "Indemnified Damages" means any and all claims, actions, ------------------- demands, losses, costs, expenses, liabilities, penalties, and other damages, including without limitation, reasonable attorneys' fees and other costs and expenses reasonably incurred in investigating or attempting to avoid same, in opposing the imposition of the same, and/or in enforcing the indemnities hereunder. The Indemnifying Party shall obtain the prior written consent of the Indemnified Party, which shall not be unreasonably withheld, conditioned or delayed before ceasing to defend against such claim or entering into any settlement, adjustment, or compromise of such claim unless such settlement, adjustment, or compromise involves only the payment of monetary consideration by the Indemnifying Party and does not involve any admission of fact or require any agreement that might have an adverse effect on the future business or operations of the Indemnified Party or which might reasonably prejudice the Indemnified Party in subsequent or other litigation. The Indemnifying Party shall reimburse the Indemnified Party on demand for any payment made or damages sustained by the Indemnified Party at any time after the Closing Date, whether based upon the judgment of any court of competent jurisdiction, pursuant to a bona fide compromise or settlement of claims, demands or actions, or otherwise in respect of any Indemnified Damages. The Indemnified Party agrees that promptly upon receipt by the Indemnified Party of notice of any demand, assertion, claim, action, or proceeding, judicial or otherwise, with respect to any matter as to which the Indemnifying Party has agreed to indemnify the Indemnified Party, the Indemnified Party will give prompt written notice thereof to the Indemnifying Party, together, in each instance, -24- with a statement of such information respecting such demand, assertion, claim, action, or proceeding as the Indemnified Party shall then possess. (b) Sellers will have no liability for indemnification or otherwise hereunder unless on or before the date one (1) year following the Closing Date, Purchaser notifies Sellers of a claim specifying the factual basis of such claim in reasonable detail to the extent then known by Purchaser. (c) Sellers will have no liability for indemnification or otherwise hereunder until the total amount of all Indemnified Damages with respect to such matters exceeds $300,000, subsequent to which Purchaser shall be entitled to full indemnification for all Indemnified Damages in excess of the first $300,000 incurred. Notwithstanding anything to the contrary herein, the maximum liability of Sellers hereunder shall not exceed $15,000,000, except (i) to the extent of any Indemnified Damages arising out of the breach of Section 3.13 or the breach of any other covenant, representation or warranty in this Agreement relating to health, safety, or environmental matters, the maximum liability of the Sellers hereunder shall be increased to $25,000,000, and (ii) to the extent of any Indemnified Damages arising out of the breach of Section 3.11, the maximum liability of the Sellers shall be increased to $56,882,100. Section 6.3 Termination of Agreement. This Agreement may, by written notice ------------------------ given at or prior to Closing in the manner hereinafter provided, be terminated or abandoned: (a) by either party if the Closing does not occur on or before September 30, 2000; (b) by Purchaser if a material default or breach (which remains uncured for 30 days after receipt of written notice thereof) is made by Sellers with respect to the due and timely performance of Sellers' covenants, representations, warranties, and agreements contained herein; or (c) by Sellers if a material default or breach (which remains uncured for 30 days after receipt of written notice thereof) is made by Purchaser with respect to the due and timely performance of any of Purchaser's covenants, representations, warranties and agreements contained herein; or (d) by mutual consent of the parties. In the event this Agreement is terminated pursuant to Section 6.3(b) or (c), after such termination the non-breaching party shall continue to have any and all rights to which it would otherwise be entitled in law or equity with respect to the default or breach of the other party giving rise to such termination. Section 6.4 Environmental Matters. Sellers shall provide to Purchaser a --------------------- title commitment and a Phase II environmental survey on the Casper Facility. If the title commitment -25- reveals a defect which would prohibit Sellers from transferring good and marketable title to the Casper Facility to Purchaser, Sellers shall have a right until Closing Date to cure said defect, or agree to an amendment to this Agreement to reduce the Cash Consideration. With respect to the Phase II environmental inspection, Sellers shall employ a regionally known third party firm and shall reasonably instruct such firm upon the method of such inspection for the Casper Facility. If required by law, Sellers shall promptly remediate each such matter of environmental concern. Sellers, jointly and severally, shall each indemnify and do hereby hold harmless Purchaser, its shareholders, officers, directors, employees and agents from and against any Indemnified Damages arising out of or relating to such matters of environmental concern. Such indemnity shall not relate to any damage to the environment caused by the Assets after the Closing Date. This indemnity shall be governed by Section 6.2 hereof. Section 6.5 Obligations After Closing. ------------------------- (a) Purchaser shall use its good faith efforts as soon as practicable after Closing to obtain leases for any compressors in the PSI-Owned Fleet or Units In-Production that are not under lease on the Closing Date. (b) For the purposes of the adjustment of the Cash Consideration in Section 2.3, S&S or its affiliates shall be obligated to complete and deliver to Purchaser the Units In-Production in the normal course of business as soon as reasonably practicable after the Closing Date without additional consideration except for the cost of any changes directed by Purchaser. (c) After the Closing, without further consideration, Sellers and Purchaser shall each execute and deliver such further instruments and documents as either party shall reasonably request to consummate the transactions contemplated by this Agreement and the Ancillary Agreements and to perfect Purchaser's title to the Assets. Section 6.7 Collection of Receivables. Purchaser shall use reasonable ------------------------- efforts to collect the Receivables after Closing. Purchaser may in its discretion by written notice to Sellers given at least 120 and not more than 180 days following Closing assign to Sellers any Receivables and related Records which remain uncollected at such time. The next payment on the Promissory Note due after such notice shall be reduced by the uncollected amount so assigned. Purchaser agrees to cooperate with Sellers' efforts to collect such assigned Receivables. ARTICLE 7 INTERIM OPERATIONS Section 7.1 Interim Operations of the Business. During the period from the ---------------------------------- date of this Agreement to the Closing Date or the earlier termination of this Agreement, Sellers will conduct the Business only in the ordinary and normal course consistent with past practice, will make no material changes in the operations of the Business and will not, unless Purchaser gives its prior written approval: (a) sell, pledge, dispose of, hypothecate or encumber, or agree to sell, -26- pledge, dispose of, hypothecate or encumber, any of the Assets of the Business, or negotiate with or solicit any interest from any third party with respect to same, except in the ordinary course of business, or authorize or make any capital expenditures relating to the Business; (b) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof which is engaged in the Business; (c) permit to lapse or expire without renewal any present policies of insurance relating to the Assets; (d) enter into any contract or agreement relating to the Assets, without Purchaser's prior consent, such consent not to be unreasonably withheld, maintain or cause or permit to be maintained any of the Assets in a manner below industry standards or permit any of the Assets to remain in a state of repair that is below industry standards, (f) agree or commit to any of the foregoing; or (g) take any action which would cause any of the representations and warranties of Sellers contained herein not to be true and correct at any time. Furthermore, during the period from the date of this Agreement to the Closing Date or the earlier termination of this Agreement, PSI shall conduct its business in the ordinary and usual course, and will not (a) acquire any material additional assets other than parts and components necessary to complete the Units In-Production, without Purchaser's prior consent, or (b) increase the compensation of any employee or hire additional employees except in the ordinary course of business in accordance with past practice. Further, S&S and PSI will use reasonable efforts in the ordinary course the Business to preserve and keep intact the employee work force relating to the Business, and to preserve for Purchaser the goodwill of the customers having business relations with PSI. Section 7.2 Confidentiality and Non-Solicitation. No public disclosure ------------------------------------ or publicity concerning the transactions contemplated hereby will be made without the prior approval of Purchaser and S&S, except that a party, after prior consultation with the other, may make any public disclosure that it in good faith believes is required by law. Furthermore, PSI and S&S acknowledge that Purchaser will expend a significant amount of time and money in its pursuit of this transaction. In consideration thereof, PSI and S&S hereby agree that from the date of the execution of this Agreement through the Closing or any termination of this Agreement, PSI, S&S and their respective affiliates, employees and representatives will deal exclusively with Purchaser in connection with the sale of PSI, such that neither PSI, S&S nor their respective affiliates, employees and representatives will, directly or indirectly, without Purchaser's prior written consent, solicit, encourage or initiate any offer or proposal from, or engage in any discussions with, or provide any information to, any corporation, partnership, person or other entity or group, other than Purchaser and its affiliates, employees and representatives, concerning any transaction involving the sale of any stock, debt or assets of PSI (other than sales of product in the ordinary course of business) or a merger, consolidation, liquidation, recapitalization, refinancing, investment or similar transaction involving PSI (all such transactions being referred to herein as "Acquisition Transactions"), nor shall PSI or S&S accept any proposal with respect to any Acquisition Transaction. If PSI or S&S receive any proposal with respect to any Acquisition Transaction, it shall immediately communicate to Purchaser the terms of such proposal (including a copy thereof). The Confidentiality Agreement dated on or about December 3, 1999 between S&S and Purchaser shall continue to be in full force and effect. -27- Section 7.3 Appropriate Action; Consents; Filings. ------------------------------------- (a) The parties hereto shall use all reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable laws or otherwise to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable, (ii) obtain from any Governmental Body any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions, contemplated herein, and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement required under (A) the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and any other applicable U.S. federal, provincial or state securities laws, (B) the HSR Act and shall share equally all filing fees required in connection with the HSR Act filing, and (C) any other applicable law; provided, however, that the parties shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the non-filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. The parties shall furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law in connection with the transactions contemplated by this Agreement. Purchaser and S&S agree diligently to prepare and file all information requested or required. (b) The parties shall give (or shall cause their respective affiliates to give) any notices to third parties, and use, all reasonable efforts to obtain any third party consents, (i) necessary to consummate the transactions contemplated in this Agreement, or (ii) required under agreements to which the parties are a party or to which they are bound. Section 7.4 Update Disclosure; Breaches. From and after the date of this --------------------------- Agreement until the Closing, the Sellers on the one hand, and Purchaser on the other hand, shall promptly notify the other by written update to the Exhibits of (i) the occurrence or non-occurrence of any event the occurrence or non- occurrence of which would be likely to cause any condition to the obligations of any party to effect the transactions contemplated by this Agreement not to be satisfied, or (ii) the failure of a party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it pursuant to this Agreement which would be likely to result in any condition to the obligations of any party to effect the transactions contemplated by this Agreement not to be satisfied; provided, however, that the delivery of any notice pursuant to this Section 7.4 shall not be deemed to cure any breach of any representation or warranty requiring disclosure of such matter prior to the date of this Agreement, or otherwise limit or affect the remedies available hereunder to the party receiving such notice. -28- ARTICLE 8 MISCELLANEOUS Section 8.1 Amendment. This Agreement may not be amended or modified --------- orally. This Agreement may be amended or modified at any time and in all respects by an instrument in writing executed by the parties hereto. Section 8.2 Assignment. Neither this Agreement nor any right created ---------- hereby shall be assignable, nor shall any or all of the obligations created hereby be delegable, provided, however, that Purchaser may assign any or al of its rights hereunder to a wholly-owned subsidiary. Section 8.3 Notices. Whenever any notice ("Notice") is required or ------- ------ provided to be given pursuant to the provisions of this Agreement, such Notice must be in writing. If the Notice is sent by telecopier, it must be properly addressed, reflecting the telecopier telephone number of the addressee(s), and must be transmitted by a telecopier which produces a dated message completed confirmation. If the Notice is sent by other than telecopier, the Notice must be enclosed in a sealed wrapper, properly addressed, and either (i) delivered to and receipted for by a messenger service, with instructions for delivery on the same day or the next day which is not a Saturday, Sunday, or legal holiday, or (ii) deposited with the domestic mail service of the United States Postal Service at a post office or official depository under the care and custody of the United States Postal Service with sufficient postage prepaid, sent by United States registered or certified first class mail, return receipt requested. The addresses and telecopier telephone numbers to which any Notice is to be sent are as follows: if to Sellers to: Mr. Frank Pool, Jr. Stewart & Stevenson Services, Inc. 4516 Harrisburg Houston, Texas 77011 Telephone number: 713.923.0301 Telecopier number: 713.923.0319 with a copy to: Legal Department Stewart & Stevenson Services, Inc. 2707 North Loop West Houston, Texas 77008 Telephone number: 713.868.7700 Telecopier number: 713.868.7692 -29- if to Purchaser, to: Hanover Compressor Company 12001 N. Houston Rosslyn Houston, Texas 77086 Telephone number: 713.447.8787 Telecopier number: 713.447.8781 Attention: Michael J. McGhan with a copy to: James F. Stephenson, Jr. Stephenson & Snokhous 4544 Post Oak Place, Suite 378 Houston, Texas 77027 Telephone number: 713.629.9494 Telecopier number: 713.629.9606 or to such other telecopier telephone number or address within the continental United States as any addressee(s) shall specify in writing, which change of telecopier telephone number or address, in order to be effective, must actually have been received not fewer than ten (10) days prior to the giving of any such Notice. Any Notice sent by telecopier shall be timely given if transmitted by telecopier on or before 11:59 p.m. of the date the Notice is to be given; any Notice sent by messenger service shall be timely given if receipted for by such messenger service on or before 11:59 p.m., on the date the Notice is to be given; any Notice sent by mail shall be timely given if deposited with the domestic mail service of the United States Postal Service on or before 11:59 p.m., two (2) days prior to the date the Notice is to be given. Any Notice sent in accordance with the preceding sentence shall be deemed to have been received on the next day after the sending of the Notice by telecopier; on the next day after the receipt for the Notice by a messenger service; or on the date of the first attempted delivery of the mailed Notice, as shown on the United States Postal Service's return receipt. Notwithstanding any other provision of this Section 8.3 to the contrary, any Notice shall be effective from and after the date actually received by an addressee, however addressed or delivered. Section 8.4 Headings. Headings contained in this Agreement are for -------- reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 8.5 Counterpart Execution. This Agreement may be executed in two --------------------- or more counterparts or originals, each of which shall be deemed an original of one and the same document, but all of which together shall constitute but one and the same instrument. Section 8.6 Parties in Interest. All the terms and provisions of this ------------------- Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto as well as their respective successors and permitted assigns. -30- Section 8.7 Integrated Agreement. This Agreement constitutes the entire -------------------- agreement between the parties hereto, and there are no agreements, understandings, restrictions, warranties or representations between the parties other than those set forth herein or herein provided for. Section 8.8 Choice of Law. It is the intention of the parties that the ------------- laws of Texas (other than the choice of law provisions thereof) should govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties of the parties. Section 8.9 Attorneys' Fees to Prevailing Party. If any action at law or ----------------------------------- in equity is necessary to enforce the provisions of this Agreement, the prevailing party shall be reimbursed by the other party for all reasonable attorneys' fees, costs, and necessary disbursements incurred by the prevailing party in enforcing this Agreement, in addition to any and all other relief to which such prevailing party may be entitled. Section 8.10 Exhibits. Each of the Exhibits referenced in this Agreement -------- have been attached to this Agreement and are hereby incorporated herein for all purposes as though fully set forth. Section 8.11 Expenses of Transaction. Sellers and Purchaser, each having ----------------------- been represented by their own respective legal counsel, shall pay the fees and expenses of the legal counsel and any broker who represented them or it in negotiating and preparing this Agreement and the Ancillary Documents and in closing the transaction contemplated hereby. Section 8.12 Risk of Loss. Pending the Closing, Sellers shall bear all ------------ risk of loss, theft, damage, destruction of, or any other harm whatsoever that may occur to the Assets. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first written above. PAMCO SERVICES INTERNATIONAL, INC. By:_________________________________ Name: ______________________________ Title: _____________________________ STEWART & STEVENSON POWER, INC. By: ________________________________ Name: ______________________________ Title: _____________________________ -31- STEWART & STEVENSON SERVICES, INC. By:_________________________________ Name: ______________________________ Title: _____________________________ HANOVER COMPRESSION INC. By:_________________________________ Name: ______________________________ Title: _____________________________ -32- Index to Exhibits Exhibit - ------- 2.1(a) PSI owned Fleet 2.1(b) Units-in-Production 2.1(c) S&S Owned Fleet 2.1(d) Casper Facility 2.1(e) Fixed Assets (Casper Facility) 2.1(g) Inventory and Equipment 2.1(h) Contracts 2.1(j) Vehicles 2.1(i) Notes and Accounts Receivable 2.2 Form of Promissory Note 2.5 Form of Instruments of Transfer and Assumption and Assignment of Warranties 2.10 Form of Packaging Commitment 2.11 Form of Parts Alliance 2.12 Form of Non-Competition Agreement 2.13(b) FIRPTA Affidavit 3.6 Sellers' Other Obligations 3.13 Health, Safety or Environmental Matters 3.14 Employees and Compensation 3.20 Employee Benefits 3.21 Exceptions to Receivables Representation 3.23 Insurance 3.24 Customers 3.25 Intellectual Property 3.26 Disclosures - Casper Facility 4.4 Purchaser's Other Obligations 5.2.9 Approvals EX-10.54 5 0005.txt LEASE EXHIBIT 10.54 EXECUTION COPY - -------------------------------------------------------------------------------- LEASE between HANOVER EQUIPMENT TRUST 2000B as Lessor, and HANOVER COMPRESSION INC, as Lessee ---------------------------------- Dated as of October 27, 2000 ---------------------------------- - -------------------------------------------------------------------------------- THIS LEASE IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF THE CHASE MANHATTAN BANK, AS AGENT (THE "AGENT"), UNDER A CREDIT AGREEMENT, DATED AS OF OCTOBER 27, 2000 AMONG HANOVER EQUIPMENT TRUST 2000B, THE LENDERS, AND THE AGENT, AS AMENDED OR SUPPLEMENTED. THIS LEASE HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. TO THE EXTENT, IF ANY, THAT THIS LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE OF THE STATES OF ALABAMA, LOUISIANA, NEW MEXICO, OKLAHOMA, WYOMING OR TEXAS), NO SECURITY INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL COUNTERPART CONTAINING THE RECEIPT THEREFOR EXECUTED BY THE AGENT ON THE SIGNATURE PAGE HEREOF. TABLE OF CONTENTS
Page Section 1. DEFINITIONS 1.1 Defined Terms........................................................................................... 1 Section 2. EQUIPMENT AND TERM 2.1 Equipment............................................................................................... 1 2.2 Lease Term.............................................................................................. 1 2.3 Title................................................................................................... 1 2.4 Lease Supplements....................................................................................... 1 Section 3. RENT 3.1 Rent.................................................................................................... 2 3.2 Supplemental Rent....................................................................................... 2 3.3 Performance on a Non-Business Day....................................................................... 2 Section 4. WARRANTIES 4.1 Warranties.............................................................................................. 2 Section 5. QUIET ENJOYMENT 5.1 Quiet Enjoyment......................................................................................... 3 Section 6. NET LEASE 6.1 Net Lease; No Setoff; Etc............................................................................... 3 6.2 No Termination or Abatement............................................................................. 4 Section 7. OWNERSHIP OF EQUIPMENT 7.1 Ownership of the Equipment.............................................................................. 4 Section 8. CONDITION AND LOCATION OF EQUIPMENT 8.1 Disclaimer of Warranties................................................................................ 6 8.2 Possession and Use of the Equipment..................................................................... 7 8.3 Location of the Equipment............................................................................... 7 Section 9. COMPLIANCE 9.1 Compliance with Legal Requirements and Insurance Requirements........................................... 7 9.2 Environmental Matters................................................................................... 7
i Section 10. MAINTENANCE, REPAIR AND RETURN REQUIREMENTS 10.1 Maintenance and Repair.................................................................................. 8 10.2 Return Requirements..................................................................................... 9 10.3 Right of Inspection and Location........................................................................ 9 10.4 Environmental Inspection................................................................................ 10 Section 11. MODIFICATIONS 11.1 Modifications........................................................................................... 10 Section 12. TITLE 12.1 Warranty of Title....................................................................................... 11 12.2 Identification.......................................................................................... 11 Section 13. PERMITTED CONTESTS 13.1 Permitted Contests Other Than in Respect of Impositions................................................. 11 Section 14. INSURANCE 14.1 Public Liability and Workers' Compensation Insurance.................................................... 12 14.2 Hazard and Other Insurance.............................................................................. 12 14.3 Coverage................................................................................................ 12 Section 15. CONDEMNATION AND CASUALTY 15.1 Casualty and Condemnation............................................................................... 13 Section 16. LEASE TERMINATION 16.1 Termination upon Certain Events......................................................................... 14 16.2 Procedures.............................................................................................. 15 Section 17. DEFAULT 17.1 Lease Events of Default................................................................................. 15 17.2 Final Liquidated Damages................................................................................ 16 17.3 Remedies................................................................................................ 16 17.4 Additional Remedies..................................................................................... 17 17.5 Proceeds of Sale; Deficiency............................................................................ 17 17.6 Waiver of Certain Rights................................................................................ 17 17.7 Assignment of Rights Under Contracts.................................................................... 17 Section 18. LESSOR'S RIGHT TO CURE 18.1 Lessor's Right to Cure Lessee's Lease Defaults.......................................................... 18
ii Section 19. LEASE TERMINATION 19.1 Provisions Relating to Lessee's Termination of this Lease or Exercise of Purchase Option................ 18 19.2 Aggregate Tranche A Percentage.......................................................................... 18 Section 20. PURCHASE OPTION 20.1 Purchase Option......................................................................................... 19 20.2 Maturity Date Purchase Option........................................................................... 19 20.3 Obligation to Purchase All Equipment.................................................................... 19 Section 21. SALE OF EQUIPMENT 21.1 Sale Procedure.......................................................................................... 19 21.2 Application of Proceeds of Sale......................................................................... 20 21.3 Indemnity for Excessive Wear............................................................................ 20 21.4 Appraisal Procedure..................................................................................... 21 21.5 Certain Obligations Continue............................................................................ 21 Section 22. HOLDING OVER 22.1 Holding Over............................................................................................ 21 Section 23. RISK OF LOSS 23.1 Risk of Loss............................................................................................ 22 Section 24. SUBLETTING AND ASSIGNMENT 24.1 Subletting and Assignment............................................................................... 22 24.2 Subleases or Licenses................................................................................... 22 Section 25. ESTOPPEL CERTIFICATES 25.1 Estoppel Certificates................................................................................... 23 Section 26. NO WAIVER 26.1 No Waiver............................................................................................... 23 Section 27. ACCEPTANCE OF SURRENDER 27.1 Acceptance of Surrender................................................................................. 23 Section 28. OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES 28.1 Grant of Security Interest.............................................................................. 24
iii 28.2 UCC Remedies............................................................................................ 24 28.3 Waiver; Deficiency...................................................................................... 25 28.4 Agent's Appointment as Attorney-in-Fact; Agent's Performance of Lessee's Obligations.................... 25 Section 29. NOTICES 29.1 Notices................................................................................................. 26 Section 30. SUBSTITUTION 30.1 Substitution............................................................................................ 27 Section 31. MISCELLANEOUS 31.1 Miscellaneous........................................................................................... 28 31.2 Amendments and Modifications............................................................................ 28 31.3 Successors and Assigns.................................................................................. 28 31.4 Headings and Table of Contents.......................................................................... 28 31.5 Counterparts............................................................................................ 29 31.6 GOVERNING LAW........................................................................................... 29 31.7 Limitations on Recourse................................................................................. 29 31.8 Priority................................................................................................ 29
iv 1 LEASE (this "Lease"), dated as of October 27, 2000, between HANOVER ----- EQUIPMENT TRUST 2000B, a Delaware business trust, having its principal office at c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, as lessor (the "Lessor"), and HANOVER COMPRESSION ------ INC., a Delaware corporation, having its principal office at 12001 North Houston Rosslyn, Houston, Texas 77806, as lessee (the "Lessee"). ------ In consideration of the mutual agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS 1.1 Defined Terms. Capitalized terms used herein but not otherwise ------------- defined in this Lease shall have the respective meanings specified in Annex A to the Participation Agreement dated as of the date hereof among Lessee, Lessor, Agent, the Investor and the Lenders named therein, as such Participation Agreement may be amended, supplemented or otherwise modified from time to time. Section 2. EQUIPMENT AND TERM 2.1 Equipment. Subject to the terms and conditions hereinafter set --------- forth and contained in the respective Lease Supplement relating to each piece of Equipment, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, each piece of Equipment. 2.2 Lease Term. The Equipment is leased for the Term, unless extended ---------- or earlier terminated in accordance with the provisions of this Lease. 2.3 Title. Except as otherwise expressly set forth in the Operative ----- Agreements, the Equipment is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession, the existing state of title (including, without limitation, the Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in title to the Equipment unless such defect was the result of an act or omission of Lessor or its Affiliates. Lessor and Lessee hereby declare that it is their mutual intent that the Equipment is to be considered movable (personal) property, severable from the improvements in which it may be located, and not immovables or components of immovables, for all purposes of this Lease. 2.4 Lease Supplements. On each Equipment Closing Date, Lessee and ----------------- Lessor shall each execute and deliver a Lease Supplement for the Equipment to be leased on such date in substantially the form of Exhibit A hereto and thereafter --------- such Equipment shall be subject to the terms of this Lease. 2 Section 3. RENT 3.1 Rent. (a) On each applicable Payment Date after the Equipment ---- Closing Date with respect to a piece of Equipment, Lessee shall pay the Basic Rent attributable to such Equipment. (b) Basic Rent shall be due and payable in Dollars and shall be paid by wire transfer of immediately available funds on the due date therefor to such account or accounts at such bank or banks or to such other Person or in such other manner as Lessor shall from time to time direct. (c) Lessee's inability or failure to take possession of all, or any piece, of the Equipment when delivered by Lessor shall not delay or otherwise affect Lessee's obligation to pay Rent in accordance with the terms of this Lease. 3.2 Supplemental Rent. Lessee shall pay to Lessor or the Person ----------------- entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Legal Requirements, interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease or any other Operative Agreement, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.3 Performance on a Non-Business Day. If any payment is required --------------------------------- hereunder on a day that is not a Business Day, then such payment shall be due on the next succeeding Business Day, unless, in the case of payments based on the Eurodollar Rate, the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. Section 4. WARRANTIES 4.1 Warranties. Lessor agrees to take all such actions as may be ---------- reasonably necessary to insure that Lessee is the beneficiary of any and all warranties with respect to the Equipment, provided, however, the reasonable costs of any such actions shall be borne by Lessee. 3 Section 5. QUIET ENJOYMENT 5.1 Quiet Enjoyment. So long as no Lease Event of Default shall have --------------- occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy the Equipment for the Term, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor. Section 6. NET LEASE 6.1 Net Lease; No Setoff; Etc. This Lease shall constitute a net ------------------------- lease and, except as otherwise provided herein or in the other Operative Agreements, it is intended that Basic Rent and Supplemental Rent shall be paid without counterclaim, setoff, deduction or defense of any kind and without abatement, suspension, deferment, diminution or reduction of any kind, and Lessee's obligation to pay all such amounts is absolute and unconditional, provided, that if at any time the Lessee is required to make a payment of (i) Termination Value or (ii) an indemnity payment pursuant to Section 12 of the Participation Agreement to the Investor, and there shall exist any Lessor Liens attributable to the Investor (and the Lessee shall have previously incurred a charge to discharge any Lessor Liens attributable to the Investor), then the Lessee shall be entitled to deduct from the portion required to be paid to the Investor of Termination Value or payment of indemnity, as the case may be, an amount sufficient to so reimburse the Lessee for the cost of discharging such Lessor Liens, as the case may be. The obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including, without limitation, to the maximum extent permitted by law: (a) any defect in the condition, merchantability, design, quality or fitness for use of any portion of any Equipment, or any failure of any Equipment to comply with all Legal Requirements, including any inability to use any Equipment by reason of such non-compliance; (b) any damage to, abandonment, loss, contamination of or Release from or destruction of or any requisition or taking of any Equipment or any part thereof; (c) any restriction, prevention or curtailment of or interference with any use of any Equipment or any part thereof; (d) any defect in title to or rights to any Equipment or any Lien on such title or rights or on any Equipment; (e) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by Lessor, Investor, Agent or any Lender; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Lessee, Lessor, Investor, Agent, any Lender or any other Person, or any action taken with respect to this Lease by any trustee or receiver of Lessee, Lessor, Investor, Agent, any Lender or any other Person, or by any court, in any such proceeding; (g) any claim that Lessee has or might have against any Person, including, without limitation, Lessor, Investor, Agent or any Lender; (h) any failure on the part of Lessor to perform or comply with any of the terms of this Lease, any other Operative Agreement or of any other agreement; (i) any invalidity or unenforceability or disaffirmance against or by Lessee of this Lease or any provision hereof or any of the other Operative Agreements or any provision of any thereof; (j) the impossibility of performance by Lessee, Lessor or both; (k) any action by any court, administrative agency or other Governmental Authority; any restriction, prevention or curtailment of or any interference with the construction on or any use of any Equipment or any part thereof; or (m) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Lessee shall have notice or 4 knowledge of any of the foregoing. This Lease shall be noncancellable by Lessee for any reason whatsoever except as expressly provided herein or in the other Operative Agreements, and Lessee, to the extent permitted by Legal Requirements, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution, abatement or reduction of Rent payable by Lessee hereunder. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise, except as otherwise expressly provided herein or in the other Operative Agreements, Lessee shall, unless prohibited by Legal Requirements, nonetheless pay to Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part, and in such case, so long as such payments are made and no Lease Event of Default shall have occurred and be continuing, Lessor will deem this Lease to have remained in effect. Each payment of Rent made by Lessee hereunder shall be final and, absent manifest error in the computation of the amount thereof, Lessee shall not seek or have any right to recover all or any part of such payment from Lessor, Investor, Agent or any party to any agreements related thereto for any reason whatsoever. Lessee assumes the sole responsibility for the condition, use, operation, maintenance, and management of the Equipment and Lessor shall have no responsibility in respect thereof and shall have no liability for damage to the property of Lessee or any subtenant of Lessee on any account or for any reason whatsoever other than resulting from Lessor's gross negligence or wilful misconduct. 6.2 No Termination or Abatement. Lessee shall remain obligated under --------------------------- this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting Lessor, or any action with respect to this Lease which may be taken by any trustee, receiver or liquidator of Lessor or by any court with respect to Lessor, except as otherwise expressly provided herein. Lessee hereby waives all right (i) to terminate or surrender this Lease, except as otherwise expressly provided herein or in the other Operative Agreements, or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and, to the extent permitted by law, Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, to the extent permitted by law, Lessee shall be bound by all of the terms and conditions contained in this Lease. Section 7. OWNERSHIP OF EQUIPMENT 7.1 Ownership of the Equipment. (a) Lessor and Lessee intend that (i) -------------------------- for financial accounting purposes with respect to Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, as amended, (B) Lessor will be treated as the owner and lessor of the Equipment and (C) Lessee will be treated as the lessee of the Equipment, but (ii) for federal, state and local income tax and state law purposes (A) this Lease will be treated as a financing arrangement, (B) the Lenders will 5 be treated as senior lenders making loans to Lessee in an amount equal to the Loans, which Loans will be secured by the Equipment, (C) Lessor will be treated as a subordinated lender making a loan to Lessee in an amount equal to the Investor Contribution, which loan is secured by the Equipment, and (D) Lessee will be treated as the owner of the Equipment and will be entitled to all tax benefits ordinarily available to an owner of property like the Equipment for such tax purposes. (b) Lessor and Lessee further intend and agree that, for the purpose of securing Lessee's obligations for the repayment of the above-described loans, (i) this Lease shall also be a security agreement (as defined in Section 1- 201(37) of the Uniform Commercial Code) and financing statement within the meaning of Article 9 of the Uniform Commercial Code; (ii) the conveyance provided for in Section 2 shall be deemed a grant of a security interest in Lessee's right, title and interest in the Equipment (including the right to exercise all remedies as are contained herein upon the occurrence of a Lease Event of Default) and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property, for the benefit of the Lessor to secure the Lessee's payment of all amounts owed by the Lessee under this Lease and the other Operative Agreements and Lessor holds title to the Equipment so as to create and grant a first lien and prior security interest in the Equipment (A) pursuant to this Lease for the benefit of the Agent under the Assignment of Lease, to secure to the Agent the obligations of the Lessee under the Lease and (B) pursuant to the Security Agreement to secure to the Agent the obligations of the Lessor under the Credit Agreement and the Notes; (iii) the possession by Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. Lessor and Lessee shall take such actions as may be necessary to ensure that such security interest is a perfected security interest of first priority under applicable law and will be maintained as such throughout the Term. Nevertheless, Lessee acknowledges and agrees that none of Lessor, Investor, the Trust Company, Agent, or any Lender has provided or will provide tax, accounting or legal advice to Lessee regarding this Lease, the Operative Agreements or the transactions contemplated hereby and thereby, or made any representations or warranties concerning the tax, accounting or legal characteristics of the Operative Agreements, and that Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Agreements as it deems appropriate. (c) Lessor and Lessee further intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting Lessee or Lessor, the transactions evidenced by this Lease shall be regarded as loans made by an unrelated third party lender to Lessee. 6 Section 8. CONDITION AND LOCATION OF EQUIPMENT 8.1 Disclaimer of Warranties. WITHOUT LIMITING ANY CLAIM LESSEE MAY ------------------------ HAVE AGAINST ANY CONTRACTOR, SUBCONTRACTOR, SUPPLIER OR MANUFACTURER, LESSEE EXPRESSLY ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT ANY ASSISTANCE FROM THE LESSOR, THE AGENT OR THE INVESTOR OR THEIR RESPECTIVE AGENTS OR EMPLOYEES, AND LESSEE AGREES THAT (I) EACH PIECE OF EQUIPMENT IS OF A SIZE, DESIGN, AND CAPACITY SELECTED BY AND ACCEPTABLE TO LESSEE, (II) LESSEE IS SATISFIED THAT EACH ITEM OF EQUIPMENT IS SUITABLE FOR ITS PURPOSES, (III) THE EQUIPMENT IS LEASED HEREUNDER SUBJECT TO ALL APPLICABLE LAWS AND GOVERNMENTAL REGULATIONS NOW IN EFFECT OR HEREAFTER ADOPTED, (IV) IT IS LEASING THE EQUIPMENT FROM LESSOR IN AN "AS IS", "WHERE IS" AND "WITH ALL FAULTS" CONDITION AND (V) NEITHER LESSOR NOR THE INVESTOR IS A MANUFACTURER OR DEALER IN EQUIPMENT OF SUCH KIND. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THE OPERATIVE AGREEMENTS, NEITHER LESSOR NOR THE INVESTOR SHALL BE DEEMED TO HAVE MADE, AND LESSEE HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE EQUIPMENT, ANY PART THEREOF, OR ANY RECORDS OR ANY OTHER MATTER WHATSOEVER WITH RESPECT THERETO, INCLUDING, WITHOUT LIMITATION, THE DESIGN, CONDITION OR CAPACITY OF THE EQUIPMENT, THEIR MERCHANTABILITY OR THEIR FITNESS FOR ANY PARTICULAR PURPOSE, THE QUALITY OF THE MATERIALS OR WORKMANSHIP OF THE EQUIPMENT, THEIR VALUE, TITLE OR SAFETY, THE ABSENCE OF ANY PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR LATENT DEFECT (WHETHER OR NOT DISCOVERABLE BY LESSEE), COMPLIANCE OF THE EQUIPMENT WITH THE REQUIREMENTS OF ANY APPLICABLE LAWS (INCLUDING ENVIRONMENTAL LAWS) PERTAINING THERETO, OR THE CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS AND SPECIFICATIONS OF ANY CONSTRUCTION OR PURCHASE DOCUMENT RELATING THERETO OR ANY COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, NOR SHALL LESSOR NOR THE INVESTOR BE LIABLE TO LESSEE, FOR ANY DEFECTS, EITHER PATENT OR LATENT (WHETHER OR NOT DISCOVERABLE BY LESSEE), IN THE EQUIPMENT OR ANY PART THEREOF OR ANY DIRECT OR INDIRECT DAMAGE TO PERSONS OR PROPERTY RESULTING THEREFROM OR FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR FOR STRICT OR ABSOLUTE LIABILITY IN TORT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, LESSEE HEREBY WAIVES, ANY CLAIM (INCLUDING ANY CLAIM BASED ON STRICT OR ABSOLUTE LIABILITY IN TORT OR INFRINGEMENT) IT MIGHT HAVE AGAINST LESSOR, OR THE INVESTOR FOR ANY LOSS, DAMAGE (INCLUDING, WITHOUT LIMITATION, DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGE) OR EXPENSE CAUSED BY THE EQUIPMENT OR BY LESSEE'S LOSS OF USE THEREOF FOR ANY REASON WHATSOEVER OTHER THAN WITH RESPECT TO THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF LESSOR OR INVESTOR. LESSEE AND ANYONE CLAIMING BY, THROUGH OR UNDER LESSEE HEREBY FULLY AND IRREVOCABLY RELEASES LESSOR, THE INVESTOR AND EACH OTHER PERSON PARTY TO THE OPERATIVE AGREEMENTS, 7 AND EACH OF THEIR EMPLOYEES, OFFICERS, DIRECTORS, REPRESENTATIVES, AGENTS, SERVANTS, ATTORNEYS, AFFILIATES, PARENT COMPANIES, SUBSIDIARIES, SUCCESSORS AND ASSIGNS, AND ALL PERSONS ACTING ON THEIR BEHALF, FROM ANY AND ALL CLAIMS THAT IT MAY NOW HAVE OR HEREAFTER ACQUIRE AGAINST THE INVESTOR, LESSOR OR ANY OTHER SUCH PERSON, FOR ANY COSTS, LOSS, LIABILITY, DAMAGE, EXPENSES, DEMAND, ACTION OR CAUSE OF ACTION ARISING FROM OR RELATED TO THE RELEASE OR DISCHARGE FROM THE EQUIPMENT AT ANY TIME OF ANY HAZARDOUS MATERIALS OTHER THAN A RELEASE OR DISCHARGE OCCURRING AFTER LESSEE IS NO LONGER IN POSSESSION OF THE EQUIPMENT AND RESULTING SOLELY FROM ACTS OR OMISSIONS OF LESSOR, THE INVESTOR OR ANY OTHER SUCH PERSON. THIS RELEASE INCLUDES CLAIMS OF WHICH LESSEE IS PRESENTLY UNAWARE OR WHICH LESSEE DOES NOT PRESENTLY SUSPECT TO EXIST WHICH, IF KNOWN BY LESSEE, WOULD MATERIALLY AFFECT LESSEE'S RELEASE OF LESSOR AND THE OTHER PERSONS RELEASED HEREBY. 8.2 Possession and Use of the Equipment. Each piece of Equipment ----------------------------------- shall be used by Lessee in a manner consistent with its intended purpose and in accordance with its specification. Subject to the terms of Section 13 relating to permitted contests, Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Equipment. Lessee shall not commit or permit any waste of any Equipment or any part thereof. 8.3 Location of the Equipment. Lessee shall at all times keep, and ------------------------- cause to be kept, each piece of Equipment within the United States or on lands covered by leases under the exclusive jurisdiction of the United States of America pursuant to the Outer Continental Shelf Lands Act, as amended, 43 U.S.C. ? ? 1331, et seq. (1986). Section 9. COMPLIANCE 9.1 Compliance with Legal Requirements and Insurance Requirements. ------------------------------------------------------------- Subject to the terms of Section 13 relating to permitted contests, Lessee, at its sole cost and expense, shall, in all material respects, (a) comply with all Legal Requirements (including all Environmental Laws) and Insurance Requirements relating to each piece of Equipment, including the use, construction, operation, maintenance, repair and restoration thereof, whether or not compliance therewith shall require extraordinary changes in the Equipment or interfere with the use and enjoyment of the Equipment, and (b) procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the construction, renovation, use, repair, maintenance and operation of each piece of Equipment. 9.2 Environmental Matters. (a) Promptly upon Lessee's actual --------------------- knowledge of the presence of Hazardous Substances with respect to any piece of Equipment in concentrations and conditions that constitute an Environmental Violation, Lessee shall notify Lessor in writing of such condition. In the event of such Environmental Violation, Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor and the Agent an Officer's Certificate and a Termination Notice with respect to such 8 piece of Equipment pursuant to Section 16.1, if applicable, or, at Lessee's sole cost and expense, promptly and diligently undertake any response, clean up, remedial or other action necessary to remove, cleanup or remediate the Environmental Violation in accordance with the terms of Section 9.1. If Lessee does not deliver a Termination Notice with respect to such Equipment pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, so inform Lessor in writing and upon Lessor's written request therefor cause to be prepared by an environmental consultant reasonably acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that such Environmental Violation has been remedied in full compliance with applicable Environmental Laws. The foregoing provisions of this Section 9.2(a) notwithstanding, Lessee shall not be required to deliver a Termination Notice if such Environmental Violation would not reasonably be expected to have a material adverse affect on the Equipment. (b) In addition, Lessee shall provide to Lessor, within five (5) Business Days of receipt, copies of all significant written communications with any Governmental Authority relating to any Environmental Claim in connection with any piece of Equipment. Lessee shall also promptly provide such detailed reports of any such Environmental Claims as reasonably may be requested by Lessor and the Agent. Section 10. MAINTENANCE, REPAIR AND RETURN REQUIREMENTS 10.1 Maintenance and Repair. (a) Lessee shall, at its sole cost and ---------------------- expense, (i) take good care of the Equipment and keep the same and all parts thereof in good and safe order and condition, with all mechanical devices, electronic systems and component parts in good working order, normal wear and tear excepted, consistent with maintenance practices used by Lessee with respect to equipment similar in type owned or leased by Lessee and consistent with customary industry standards, and (ii) promptly make all needed repairs, restorations and replacements of parts in and to the Equipment or any part thereof, including, without limitation, overhaul of any piece of Equipment requiring overhaul in Lessee's commercially prudent judgment. All such repairs, restorations and replacements of parts shall be of a standard and quality consistent with customary industry standards and sufficient for the proper maintenance and operation of the Equipment and shall be constructed and installed in a good and workmanlike manner in compliance with Legal Requirements and Insurance Requirements. In carrying out its obligations under this Section 10.1, Lessee shall not discriminate in any way in the maintenance of the Equipment as compared with other similar equipment owned or leased by Lessee and shall use the Equipment in a manner consistent with sound operating practices thereof. (b) Lessor shall under no circumstances be required to furnish any services or facilities with respect to the Equipment or make any repairs, replacements, alterations or renewals of any nature or description to any Equipment, make any expenditure whatsoever in connection with this Lease or maintain any Equipment in any way except as otherwise provided in the Operative Agreements. Lessor shall not be required to maintain, repair or rebuild all or any part of any Equipment, and Lessee waives the right to (i) require Lessor to maintain, repair, 9 or rebuild all or any part of any Equipment, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenants, condition or restriction at any time in effect. 10.2 Return Requirements. (a) Unless Lessee shall have exercised its ------------------- Purchase Option or Maturity Date Purchase Option, Lessee shall, upon the expiration or earlier termination of the Term with respect to each piece of Equipment, surrender and transfer such Equipment to Lessor, at Lessee's own expense, free and clear of all Liens other than (A) the following items set forth under the definition of Permitted Liens: (i), (ii), (vii) and (viii) and (B) Lessor Liens, in as good condition as they were on the Equipment Closing Date with respect to each piece of Equipment, ordinary wear and tear excepted, and in compliance with all Legal Requirements and the other requirements of this Lease, including, without limitation, Section 10.1 (and in any event without (x) any asbestos installed or maintained in any part of such Equipment, (y) any polychlorinated byphenyls (PCBs) in, on or used with respect to such Equipment, and (z) any other Hazardous Substances). Unless Lessee has exercised the Purchase Option or the Maturity Date Purchase Option, Lessee shall provide, or cause to be provided or accomplished, at the sole cost and expense of Lessee, to or for the benefit of Lessor or a purchaser, at least thirty Business Days prior to the expiration or earlier termination of the Term with respect to each piece of Equipment, each of the following: (i) a Lien search showing (A) no Liens other than the type set forth as clauses (A) and (B) in the first sentence of this Section 10.2(a) and (B) the Security Agreement as creating a valid and perfected first security interest in the Equipment; (ii) an environmental assessment for the Equipment satisfying the requirements set forth in Section 10.4 below; (iii) an assignment of all of the Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the renovation, development, use, maintenance or operation of the Equipment (including all warranty, performance, service and indemnity provisions); (iv) an assignment of all permits, licenses, approvals and other authorizations from all Governmental Authorities in connection with the operation and use of the Equipment; and (v) copies of all books and records, with respect to the renovation, maintenance, repair, operation or use of the Equipment. Lessee shall cooperate with any independent purchaser of the Equipment in order to facilitate the ownership and operation by such purchaser of the Equipment after such expiration or earlier termination of the Term, including providing all books, reports and records regarding the maintenance, repair and ownership of the Equipment and all data and technical information relating thereto, granting or assigning all licenses necessary for the operation and maintenance of the Equipment and cooperating in seeking and obtaining all necessary licenses, permits and approvals of Governmental Authorities. Lessee shall have also paid the total cost for the completion of all Modifications commenced prior to such expiration or earlier termination of the Term. The obligation of Lessee under this Section 10.2(a) shall survive the expiration or termination of this Lease. (b) Lessee, on the expiration or earlier termination of the Term, if requested by Lessor, shall, at Lessee's sole cost and expense dismantle and crate each piece of Equipment that Lessor shall designate and, at Lessee's sole cost and expense transport such Equipment to a location designated by Lessor. 10.3 Right of Inspection and Location. (a) Lessor may, at reasonable -------------------------------- times and with reasonable prior notice and without interfering with the operations of Lessee's customers, inspect and examine at its own cost and expense (unless a Lease Event of Default exists, in 10 which case the reasonable out-of-pocket costs and expenses of Lessor shall be paid by Lessee), any piece of Equipment. Lessee may accompany Lessor on any such inspections. (b) Lessee shall furnish to Lessor not less than once every six months during the Term, an Officer's Certificate, accurate in all material respects, stating the location of each piece of Equipment, noting whether any Equipment has been relocated and if so the correct address of the relocated Equipment. Lessor shall have no duty to make any such inspection or inquiry and shall not incur any liability or obligation by reason of not making any such inspection or inquiry. 10.4 Environmental Inspection. Not less than six months prior to the ------------------------ Maturity Date (unless Lessee has previously irrevocably exercised the Maturity Date Purchase Option), and not more than thirty Business Days prior to surrender of possession of a piece of Equipment, Lessor shall, at Lessee's sole cost and expense, obtain a report by an environmental consultant selected by Lessor certifying that each piece of Equipment (i) does not contain Hazardous Substances under circumstances or in concentrations that would reasonably be expected to result in a violation of or liability under any Environmental Law and (ii) is in compliance with all Environmental Laws. If such is not the case on either such date, then Lessee shall be deemed to have irrevocably exercised the Maturity Date Purchase Option pursuant to Section 20.2. Section 11. MODIFICATIONS 11.1 Modifications. (a) Lessee, at its sole cost and expense, may at ------------- any time and from time to time make alterations, renovations, improvements and additions to a piece of Equipment or any part thereof (collectively, "Modifications"); provided, that: (i) except for any Modification required to be made pursuant to a Legal Requirement or an Insurance Requirement, no Modification, individually, or when aggregated with any other Modification shall impair the value of such Equipment or the utility or useful life of such Equipment from that which existed immediately prior to such Modification; (ii) the Modification shall be performed in a timely manner and in a good and workmanlike manner; (iii) Lessee shall comply with all Legal Requirements (including all Environmental Laws) and Insurance Requirements applicable to the Modification, including the obtaining of all permits, and the structural integrity of such Equipment shall not be adversely affected; (iv) subject to the terms of Section 13 relating to permitted contests, Lessee shall pay all costs and expenses and discharge any Liens arising with respect to the Modification; and (v) such Modifications shall comply with Section 10.1 and shall not change the primary character of such Equipment or intended use of such Equipment. All Modifications shall remain part of the Equipment and shall be subject to this Lease, and title thereto shall immediately vest in Lessor. (b) Lessee shall notify Lessor of the undertaking of any Modifications the cost of which is anticipated to exceed $500,000. (c) Lessee shall not without the consent of Lessor (which consent will not be unreasonably withheld or delayed) undertake any Modifications to any piece of Equipment if such Modifications cannot, in the reasonable judgement of Lessee, be completed on or prior to the date that is one month prior to the Expiration Date. 11 (d) Lessee, at its sole cost and expense, shall overhaul substantially all of the Equipment during the Term, consistent with Lessee's normal business practices. Section 12. TITLE 12.1 Warranty of Title. (a) Lessee agrees that, except as otherwise ----------------- provided herein (i.e. with respect to Lessor Liens) and subject to the terms of Section 13 relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon any piece of Equipment or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Agent pursuant to the Credit Agreement, other than Permitted Liens and/or Lessor Liens. Lessee shall promptly notify Lessor in the event it has actual knowledge that a Lien (other than a Permitted Lien and/or a Lessor Lien) exists with respect to the Equipment. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any alteration, addition, repair or demolition of or to any piece of Equipment or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING ANY EQUIPMENT OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY EQUIPMENT. 12.2 Identification. Lessee shall not allow the name of any Person to be placed upon any portion of any piece of Equipment as a designation that might be interpreted as indicating a claim of ownership thereof or security interest therein by any Person other than Lessee. Section 13. PERMITTED CONTESTS 13.1 Permitted Contests Other Than in Respect of Impositions. Except ------------------------------------------------------- to the extent otherwise provided for in Section 12.2(g) of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement, or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such proceedings shall suspend the collection from, and suspend the enforcement against the applicable Equipment, Lessor, the Agent, the Investor and the Lenders; (b) there shall be no risk of the imposition of a Lien (other than a Permitted Lien) on any piece of Equipment and no part of any piece of Equipment nor any Rent would be in any danger of being sold, forfeited, lost or 12 deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or civil liability on Lessor, the Agent or any Lender for failure to comply therewith; and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the earlier of the Maturity Date and the Expiration Date for the applicable Equipment, then Lessee shall deliver to Lessor an Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. Section 14. INSURANCE 14.1 Public Liability and Workers' Compensation Insurance. During the ---------------------------------------------------- Term, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability insurance for claims for injuries or death sustained by persons or damage with respect to the use or operation of the Equipment. Such insurance shall be on terms and in amounts that are no less favorable than insurance maintained by owners of similar equipment which are in Lessee's line of business, that are in accordance with normal industry practice. The policy shall be endorsed to name Lessor, the Trust Company, the Investors, the Agent and the Lenders as additional insureds. The policy shall also specifically provide that the policy shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor, the Trust Company, the Agent or the Lenders may have in force. Lessee shall, in the operation of the Equipment, comply with the applicable workers' compensation laws and protect Lessor against any liability under such laws. 14.2 Hazard and Other Insurance. During the Term, Lessee shall keep -------------------------- each piece 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. So long as no Lease Event of Default exists, any loss payable under the insurance policy required by this Section will be paid to and adjusted solely by Lessee, subject to Section 15. 14.3 Coverage. (a) Lessee shall furnish Lessor with certificates -------- showing the insurance required under Sections 14.1 and 14.2 to be in effect and naming Agent, the Lenders, the Lessor, the Investors and the Trust Company as an additional insured with respect to liability insurance and showing the endorsement required by Section 14.3(c). All such insurance shall be at the cost and expense of Lessee. Such certificates shall include a provision in which the insurer agrees to provide thirty (30) days' advance written notice by the insurer to Lessor and the Agent in the event of cancellation or modification of such insurance that would reasonably be expected to be adverse to the interests of Lessor, the Trust Company or the Agent. If a Lease Event of Default has occurred and is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of all insurance policies required by this Lease. 13 (b) Lessee agrees that the insurance policy or policies required by this Lease shall include an appropriate clause pursuant to which such policy shall provide that it will not be invalidated should Lessee waive, in writing, prior to a loss, any or all rights of recovery against any party for losses covered by such policy. Lessee hereby waives any and all such rights against Lessor, the Trust Company, the Investor, the Agent and the Lenders to the extent of payments made under such policies. (c) All insurance policies required by Section 14.2 shall include a loss payee endorsement in favor of the Agent. (d) Neither Lessor nor Lessee shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Lease except that Lessor may carry separate liability insurance so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance Lessor may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy will not cause Lessee's insurance required under this Lease to be subject to a coinsurance exception of any kind. (e) Lessee shall pay as they become due all premiums for the insurance required by this Lease, shall renew or replace each policy prior to the expiration date thereof and shall promptly deliver to Lessor and the Agent certificates for renewal and replacement policies. Section 15. CONDEMNATION AND CASUALTY 15.1 Casualty and Condemnation. (a) Subject to the provisions of this ------------------------- Section 15 and Section 16 (in the event Lessee delivers, or is obligated to deliver, a Termination Notice), and prior to the occurrence and continuation of a Lease Event of Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest in) any award, compensation or insurance proceeds to which Lessee or Lessor may become entitled by reason of their respective interests in the Equipment (i) if all or a portion of such Equipment is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, easement rights or title to such Equipment or any part thereof is the subject of a Condemnation; provided, however, if a -------- ------- Lease Event of Default shall have occurred and be continuing such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor. (b) So long as no Lease Event of Default has occurred and is continuing, Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. 14 (c) If Lessor or Lessee shall receive notice of a Casualty or a possible Condemnation of a piece of Equipment or any interest therein, Lessor or Lessee, as the case may be, shall give notice thereof to the other and to the Agent promptly after the receipt of such notice. (d) In the event of a Casualty or receipt of notice by Lessee or Lessor of a Condemnation, Lessee shall, not later than thirty (30) days after such occurrence, deliver to Lessor and the Agent an Officer's Certificate stating that either (i) (x) such Casualty is not a Significant Casualty or (y) such Condemnation is neither a Total Condemnation nor a Significant Condemnation and that this Lease shall remain in full force and effect with respect to the applicable piece of Equipment and, at Lessee's sole cost and expense, Lessee shall promptly and diligently restore the applicable piece of Equipment in accordance with the terms of Section 15.1(e) or (ii) this Lease shall terminate with respect to the applicable Equipment in accordance with Section 16.1. (e) If pursuant to this Section 15.1, this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the affected piece of Equipment, Lessee shall, at its sole cost and expense, promptly and diligently repair any damage to the applicable piece of Equipment caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1 so as to restore the applicable piece of Equipment to the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. In such event, title to the applicable piece of Equipment shall remain with Lessor. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term a Casualty occurs with respect to a piece of Equipment or Lessee receives notice of a Condemnation with respect to a piece of Equipment, and following such Casualty or Condemnation, such piece of Equipment cannot reasonably be restored on or before the date which is six months prior to the Maturity Date to substantially the same condition as existed immediately prior to such Casualty or Condemnation or before such day such piece of Equipment is not in fact so restored, then Lessee shall exercise its Purchase Option with respect to such piece of Equipment, on the next Payment Date or irrevocably agree in writing to exercise the Maturity Date Purchase Option with respect to such piece of Equipment and in either such event such remaining Casualty or Condemnation proceeds shall be paid to the Agent, which shall pay such funds to Lessee upon the closing of the purchase of such piece of Equipment. Section 16. LEASE TERMINATION 16.1 Termination upon Certain Events. (a) If Lessor or Lessee shall ------------------------------- have received notice of a Total Condemnation, then Lessee shall be obligated, within thirty (30) days after Lessee receives notice thereof, to deliver a written notice in the form described in Section 15 16.2(a) (a "Termination Notice") of the termination of this Lease with respect ------------------ to the applicable piece of Equipment. (b) If either: (i) Lessee or Lessor shall have received notice of a Condemnation, and Lessee shall have delivered to Lessor an Officer's Certificate that such Condemnation is a Significant Condemnation; or (ii) a Casualty occurs, and Lessee shall have delivered to Lessor an Officer's Certificate that such Casualty is a Significant Casualty; or (iii) an Environmental Violation occurs or is discovered and Lessee shall have delivered to Lessor an Officer's Certificate stating that, in the reasonable, good-faith judgment of Lessee, the cost to remediate the same will exceed 10% of the Equipment Cost of such piece of Equipment; then, Lessee shall, simultaneously with the delivery of the Officer's Certificate pursuant to the preceding clause (i), (ii) or (iii), deliver a Termination Notice with respect to the affected piece of Equipment. 16.2 Procedures. (a) A Termination Notice shall contain: (i) notice of ---------- termination of this Lease with respect to the affected piece of Equipment on a date not more than thirty (30) days after Lessor's receipt of such Termination Notice (the "Termination Date"); (ii) a binding and irrevocable agreement of ---------------- Lessee to pay the Termination Value and purchase such piece of Equipment or substitute such piece of Equipment in accordance with Section 30 on such Termination Date and (iii) the Officer's Certificate described in Section 16.1(b). (b) On the Termination Date, Lessee shall (i) pay to Lessor the Termination Value for the applicable piece of Equipment, plus all amounts owing in respect of Rent for such piece of Equipment (including Supplemental Rent) theretofore accruing and Lessor shall convey such piece of Equipment to Lessee (or Lessee's designee) all in accordance with Section 19.1 or (ii) substitute such piece of Equipment in accordance with Section 30. Section 17. DEFAULT 17.1 Lease Events of Default. If any one or more of the following ----------------------- events (each a "Lease Event of Default") shall occur: ---------------------- (a) Lessee shall fail to make payment of (i) any Basic Rent within five (5) Business Days after the same has become due and payable or (ii) any Maximum Residual Guarantee Amount, Purchase Option Price or Termination Value after the same has become due and payable; or (b) Lessee shall fail to make payment of any Supplemental Rent due and payable within five (5) Business Days after receipt of notice thereof; or (c) Lessee shall fail to maintain insurance as required by Section 14; or (d) Guarantors shall default in the observance or performance of any agreement contained in Sections 10 and 11 of the Guarantee; or (e) Lessee or any Guarantor shall default in the observance or performance of any term, covenant or condition of Lessee or of such Guarantor, respectively, under this Lease, the 16 Participation Agreement, the Guarantee or any other Operative Agreement to which it is a party (other than those set forth in Section 17.1(a), (b), (c) or (d) hereof) and such default shall continue unremedied for a period of 30 days or any representation or warranty by Lessee or any Guarantor, respectively, set forth in this Lease, the Guarantee or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material respect; or (f) a Credit Agreement Event of Default (other than (1) those set forth in Sections 6.1 (a), (b), (d), (f), (g) and (i) of the Credit Agreement and (2) those set forth in Sections 6.1(h) and (p) of the Credit Agreement which do not arise, whether in whole or in material part, from any action or failure to act by the Lessee) shall have occurred and be continuing; or (g) an event of default under the Corporate Credit Agreement or any Equipment Lease (other than this Lease) shall have occurred and be continuing; then, in any such event, Lessor may, in addition to the other rights and remedies provided for in this Section 17 and in Section 18.1, terminate this Lease by giving Lessee five (5) days notice of such termination, and this Lease shall terminate. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor, including fees and expenses of counsel, as a result of any Lease Event of Default hereunder. 17.2 Final Liquidated Damages. If a Lease Event of Default shall have ------------------------ occurred and be continuing, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 13 of the Participation Agreement (to the extent any such liabilities do not constitute Supplemental Rent), and in lieu of all damages beyond the date of such demand the sum of (a) the Termination Value, plus (b) all other amounts owing in respect of Rent and Supplemental Rent theretofore accruing under this Lease. Upon payment of the amount specified pursuant to the first sentence of this Section 17.2, Lessee shall be entitled to receive from Lessor, at Lessee's request and cost, an assignment of Lessor's right, title and interest in the Equipment, in each case in conformity with local custom and free and clear of the Lien of the Security Agreement and any Lessor Liens. The Equipment shall be quitclaimed to Lessee (or Lessee's designee) "AS IS" and in its then present physical condition. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law. 17.3 Remedies. If any Lease Event of Default shall have occurred and -------- be continuing, Lessor may exercise in any order one or more or all of the remedies set forth in this Section 17.3 (it being understood that no remedy herein conferred is intended to be exclusive of any other remedy or remedies, but each and every remedy shall be cumulative and shall be in addition to every other remedy given herein or now or hereafter existing at law or in equity or by statute). 17 (a) Lessor may proceed by appropriate court action or actions, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof; (b) Lessor may by notice in writing to Lessee terminate this Lease but Lessee shall remain liable as hereinafter provided; and Lessor may, at its option, do any one or more of the following: (i) declare the Termination Value, plus all other amounts owing in respect of Rent or Supplemental Rent theretofore accruing under the Lease, all other amounts then payable by Lessee under this Lease and the other Operative Agreements to be immediately due and payable, and recover any other damages and expenses in addition thereto which Lessor shall have sustained by reason of such Event of Default; (ii) enforce the security interest given hereunder pursuant to the Uniform Commercial Code as provided in Section 28 or any other law; (iii) enter upon the premises where the Equipment is located and take possession of it; and (iv) require Lessee to return the Equipment as provided in Section 10.2; or (c) Lessor may require Lessee immediately to purchase the Equipment for a purchase price equal to the sum of the Termination Value, plus all other amounts owing in respect of Rent or Supplemental Rent theretofore accruing under the Lease and all other amounts then due and payable under the Operative Agreements. 17.4 Additional Remedies. In addition to the remedies set forth in ------------------- Sections 17.2 and 17.3, if any Lease Event of Default shall have occurred and be continuing, Lessor may, but is not required to, sell the Equipment in one or more sales, and Lessor may purchase all or any part of the Equipment at such sale. Lessee acknowledges that sales for cash or on credit to a wholesaler, retailer or user of such Equipment, at a public or private auction, are all commercially reasonable. Any notice required by law of intended disposition by Lessor shall be deemed reasonable and properly given if given at least ten (10) Business Days before such disposition. 17.5 Proceeds of Sale; Deficiency. All payments received and amounts ---------------------------- held or realized by the Lessor at any time when a Lease Event of Default shall have occurred and be continuing and after the Termination Value shall have been accelerated pursuant to Section 17.2 or 17.3 as well as all payments or amounts then held or thereafter received by Lessor shall be conveyed to the Agent as required by the Assignment of Lease and distributed pursuant to Section 8.2 of the Credit Agreement. 17.6 Waiver of Certain Rights. If this Lease shall be terminated ------------------------ pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re- entry or possession; (b) any right of redemption, re-entry or repossession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Section 17. 17.7 Assignment of Rights Under Contracts. If a Lease Event of Default ------------------------------------ shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1 and provided that Lessee shall not have purchased the Equipment pursuant to Section 20, Lessee shall upon Lessor's demand immediately assign, transfer and set 18 over to Lessor, to the extent transferable, all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the use or operation of the Equipment (including all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the use, maintenance or operation of the Equipment. Section 18. LESSOR'S RIGHT TO CURE 18.1 Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without ---------------------------------------------- waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including the failure by Lessee to maintain any insurance required by Section 14, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon the premises where the Equipment is located for such purpose and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All reasonable out-of-pocket costs and expenses so incurred (including the reasonable fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand as Supplemental Rent. Section 19. LEASE TERMINATION 19.1 Provisions Relating to Lessee's Termination of this Lease or ------------------------------------------------------------ Exercise of Purchase Option. In connection with any termination of this Lease - --------------------------- with respect to any Equipment pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option or Maturity Date Purchase Option, upon the date on which this Lease is to terminate with respect to the applicable piece of Equipment or upon the Expiration Date with respect to the applicable piece of Equipment, and upon tender by Lessee of the amounts set forth in Section 16.2(b), 20.1 or 20.2, as applicable: (a) Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense an assignment of Lessor's entire interest in the applicable Equipment, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of the Security Agreement and any Lessor Liens; and (b) The applicable Equipment shall be conveyed to Lessee "AS IS" and in then present physical condition. 19.2 Aggregate Tranche A Percentage. Notwithstanding any other ------------------------------ provision of this Lease or the other Operative Agreements, the Lessee shall not be permitted to terminate this Lease with respect to a piece of Equipment pursuant to Section 16 or exercise its Purchase Option with respect to a piece of Equipment pursuant to Section 20.1 if the Aggregate Tranche A Percentage, after giving effect to the termination of this Lease with respect to such piece of Equipment would be less than 85%. 19 Section 20. PURCHASE OPTION 20.1 Purchase Option. Lessee shall have the option (exercisable by --------------- giving Lessor irrevocable written notice (the "Purchase Notice") of Lessee's --------------- election, to exercise such option not less than ten (10) days prior to the date of purchase pursuant to such option) to purchase one or more of the pieces of Equipment on the date specified in such Purchase Notice, which date must occur prior to the date which is six months prior to the Maturity Date, at a price equal to the Termination Value (the "Purchase Option Price") (which the parties -------------------- do not intend to be a "bargain" purchase price) of such piece of Equipment; provided, however, that Lessee shall only have such option with respect to less than all of the Equipment if no Lease Default or Lease Event of Default shall have occurred and be continuing. If Lessee exercises its option to purchase one or more of the pieces of Equipment pursuant to this Section 20.1 (the "Purchase -------- Option"), Lessor shall transfer to Lessee or Lessee's designee all of Lessor's - ------ right, title and interest in and to such piece of Equipment as of the date specified in the Purchase Notice upon receipt of the Purchase Option Price and all Rent and other amounts then due and payable under this Lease and any other Operative Agreement, in accordance with Section 19.1. Notwithstanding the foregoing, (A) Lessee on not less than three (3) days prior notice may exercise the Purchase Option to purchase one or more pieces of Equipment if the purchase of such Equipment will cure an Event of Default and (B) if a purchase option held by a sublessee or licensee of a piece of Equipment has been exercised, then Lessee may exercise the Purchase Option with respect to such piece of Equipment even if a Lease Default or Lease Event of Default has occurred. 20.2 Maturity Date Purchase Option. Not less than six months prior to ----------------------------- the Maturity Date, Lessee may give Lessor and Agent irrevocable written notice (the "Maturity Date Election Notice") that Lessee is electing to exercise the ----------------------------- Maturity Date Purchase Option. If Lessee does not give a Maturity Date Election Notice on or before the date six months prior to the Maturity Date or if Lessee has not exercised the Purchase Option with respect to all of the Equipment, then Lessee shall be obligated to remarket the Equipment pursuant to Section 21. If Lessee has elected to exercise the Maturity Date Purchase Option, then on the Maturity Date Lessee shall pay to Lessor an amount equal to the Termination Value for all the Equipment (which the parties do not intend to be a "bargain" purchase price) and, upon receipt of such amount plus all Rent and other amounts then due and payable under this Lease and any other Operative Agreement, Lessor shall transfer to Lessee or Lessee's designee all of Lessor's right, title and interest in and to the Equipment in accordance with Section 19.1. 20.3 Obligation to Purchase All Equipment. If six months prior to the ------------------------------------ Maturity Date, the then Termination Value of all the Equipment is less than the Maximum Purchase Option Amount, then on the Maturity Date Lessee shall be required to exercise its Maturity Date Purchase Option on the Maturity Date with respect to all remaining Equipment. Section 21. SALE OF EQUIPMENT 21.1 Sale Procedure. (a) With respect to each piece of Equipment -------------- (unless Lessee shall have elected to (x) substitute such Equipment pursuant to Section 30, (y) purchase 20 such Equipment and has paid the relevant purchase price pursuant to Section 20.1 or 20.2 with respect thereto, or (z) otherwise terminated this Lease and paid the Termination Value with respect thereto) Lessee shall (i) pay to Lessor the Maximum Residual Guarantee Amount for such piece of Equipment as provided for in Section 21.1(c), and (ii) sell such piece of Equipment, to one or more third parties for cash in accordance with Section 21.1(b). (b) During the Marketing Period, Lessee, as nonexclusive broker for Lessor, shall use its best efforts to obtain bids for the cash purchase of each piece of Equipment, being sold for the highest price available in the relevant market, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for such piece of Equipment and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may reasonably request from time to time. Lessor may reject any and all bids and may assume sole responsibility for obtaining bids by giving Lessee written notice to that effect; provided, however, that notwithstanding the foregoing, Lessor may -------- ------- not reject a bid if such bid, together with any amounts to be paid pursuant to Section 21.3, is greater than or equal to the sum of the Limited Deficiency Amount and all costs and expenses referred to in Section 21.2(i) and is a bona fide offer by a third party purchaser who is not an Affiliate of Lessee. If the price which a prospective purchaser shall have offered to pay for all or any of the Equipment is less than the sum of the Limited Deficiency Amount and all costs and expenses referred to in Section 21.2(i), Lessor may elect to retain the Equipment by giving Lessee at least two Business Days' prior written notice of Lessor's election to retain the Equipment, and upon receipt of such notice, Lessee shall surrender the Equipment to Lessor pursuant to Section 10.2. Unless Lessor shall have elected to retain the Equipment pursuant to the preceding sentence, following the Maturity Date Lessor shall sell the Equipment free of any Lessor Liens attributable to it, without recourse or warranty, for cash to the purchaser or purchasers identified by Lessee or Lessor, as the case may be. Lessee shall surrender the Equipment so sold to each purchaser in the condition specified in Section 10.2. (c) On each date during the Marketing Period on which a piece of Equipment is sold pursuant to Section 21.1(b), and on the Maturity Date with respect to any Equipment remaining unsold, Lessee shall pay to Lessor the Maximum Residual Guarantee Amount for such Equipment. 21.2 Application of Proceeds of Sale. Lessor shall apply the proceeds ------------------------------- of sale of each piece of Equipment in the following order of priority: (i) FIRST, to pay or to reimburse Lessor and Lessee for the ----- payment of all reasonable costs and expenses incurred by Lessor and Lessee in connection with the sale; and (ii) SECOND, the balance shall be paid to the Agent to be ------ applied pursuant to the provisions of Section 8 of the Credit Agreement. 21.3 Indemnity for Excessive Wear. If the proceeds of the sale ---------------------------- described in Section 21.1(b) with respect to any piece of Equipment, less all expenses incurred by Lessor or Lessee in connection with such sale, shall be less than the Limited Deficiency Amount for such 21 piece of Equipment at the time of such sale and if it shall have been determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of such piece of Equipment shall have been impaired by greater than expected wear and tear during the Term, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure or (ii) the amount of the Net Sale Proceeds Shortfall, whichever amount is less; provided that such Wear and Tear Payments are not intended to prevent Lessee from accounting for this Lease as an operating lease under SFAS NO. 13. 21.4 Appraisal Procedure. For determining the Fair Market Sales Value ------------------- of a piece of Equipment or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure but with respect to which no appraisal or valuation method is specified, Lessor and Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor and ------------------- Lessee shall endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure, and if they cannot agree within ten (10) days, then two qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser from a nationally recognized independent appraisal firm (with at least 15 years of experience appraising equipment similar to and used in the same industry as the Equipment) shall be selected by the two appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two shall be discarded and such average shall be binding on Lessor and Lessee; provided -------- that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of all of the appraisers shall be paid by the Lessee. 21.5 Certain Obligations Continue. During the Marketing Period, the ---------------------------- obligation of Lessee to pay Rent with respect to each piece of Equipment (including the installment of Basic Rent due on the Maturity Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, the Maximum Residual Guarantee Amount, if any, the amount due under Section 21.3, if any, and all other amounts due to Lessor with respect to the piece of Equipment. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Section 21. Section 22. HOLDING OVER 22.1 Holding Over. If Lessee shall for any reason remain in possession ------------ of a piece of Equipment after the expiration or earlier termination of this Lease (unless the piece of Equipment is conveyed to Lessee), such possession shall be as a tenancy at sufferance during 22 which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to such piece of Equipment and Lessee shall continue to pay Basic Rent at an annual rate equal to the rate payable hereunder immediately preceding such expiration or earlier termination; provided, however, that from and after the sixtieth -------- ------- (60th) day Lessee shall remain in possession of such piece of Equipment after such expiration or earlier termination, Lessee shall pay Basic Rent at an annual rate equal to two hundred percent (200%) of the Basic Rent payable hereunder immediately preceding such expiration or earlier termination. Such Basic Rent shall be payable from time to time upon demand by Lessor. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of the piece of Equipment. Nothing contained in this Section 22 shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any piece of Equipment and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of any piece of Equipment or exercising any other remedy available to Lessor at law or in equity. Section 23. RISK OF LOSS 23.1 Risk of Loss. The risk of loss of or decrease in the enjoyment ------------ and beneficial use of the Equipment as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor (except specifically with respect to its gross negligence or wilful misconduct). Section 24. SUBLETTING AND ASSIGNMENT 24.1 Subletting and Assignment. Lessee may not assign this Lease or ------------------------- any of its rights or obligations hereunder in whole or in part other than as permitted by the Operative Agreements. Lessee may, without the consent of Lessor, sublease or license the Equipment or any piece of Equipment to any Person; provided that as of the Expiration Date unless Lessee has exercised its -------- Purchase Option or Maturity Date Purchase Option with respect to the Equipment subject to a sublease or license, no sublease or license shall provide for a purchase option on behalf of the sublessee or licensee nor have a remaining term of more than six months. No sublease, license or other relinquishment of possession of the Equipment shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to the Equipment so sublet or licensed. 24.2 Subleases or Licenses. Promptly following the execution and --------------------- delivery of any sublease or license permitted by this Section 24, Lessee shall deliver an executed copy thereof to Lessor and the Agent if requested by either. 23 Section 25. ESTOPPEL CERTIFICATES 25.1 Estoppel Certificates. At any time and from time to time upon --------------------- not less than twenty (20) days' prior request by Lessor, the Lessee shall furnish to the Lessor a certificate signed by an individual having the office of vice president or higher with Lessee certifying, to the extent accurate, that this Lease is in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; to the best knowledge of the signer of such certificate, whether or not the Lessor is in default under any of its obligations hereunder (and, if so, the nature of such alleged default); and such other matters under this Lease as the Lessor may reasonably request. Any such certificate furnished pursuant to this Section 25 may be relied upon by the Lessor, and any existing or prospective purchaser or lender, and any accountant or auditor, of, from or to the Lessor (or any Affiliate thereof). Section 26. NO WAIVER 26.1 No Waiver. No failure by Lessor or Lessee to insist upon the --------- strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. Section 27. ACCEPTANCE OF SURRENDER 27.1 Acceptance of Surrender. (a) As of the Expiration Date, if any ----------------------- Lease Default shall have occurred and be continuing under the Lease or the representations and warranties set forth in Section 7.5(h)-(m) of the Participation Agreement shall not be true and correct in any material respects, then Lessee shall be deemed to have irrevocably exercised the Maturity Date Purchase Option pursuant to Section 20.2. (b) Except as otherwise expressly provided in this Lease, no surrender to Lessor of this Lease or of all or any portion of the Equipment or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and, prior to the payment or performance of all obligations under the Credit Documents, the Agent, and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. 24 Section 28. OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES 28.1 Grant of Security Interest. Other than Equipment purchased by -------------------------- Lessee pursuant to Section 20 and subject to Section 7.1, title to the equipment shall remain in Lessor as security for the obligations of the Guarantors under the Guarantee and the obligations of Lessee hereunder and under each of the other Operative Agreements to which it is a party, until such time as Lessee and the Guarantors have fulfilled all of their obligations hereunder and under such other Operative Agreements. Lessee hereby assigns, grants and pledges to Lessor for the benefit of Lessor a security interest in all of Lessee's right, title and interest, whether now or hereafter existing or acquired, in the Equipment (other than Equipment purchased by Lessee pursuant to Section 20), to secure the payment and performance of all obligations of Lessee now or hereafter existing under this Lease or any other Operative Agreement and of the Guarantors under the Guarantee (the "Lease Secured Obligations"). Lessee shall, at its expense, ------------------------- do any further act and execute, acknowledge, deliver, file, register and record any further documents which Lessor may reasonably request in order to protect Lessor's title to and perfected security interest in the Equipment, subject to no Liens other than Permitted Liens, and Lessor's rights and benefits under this Lease. Subject to the provisions of Section 10.3(b) of the Lease, Lessee shall promptly and duly execute and deliver to Lessor such documents and assurances and take such further action as Lessor may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Lease and the other Operative Agreements, to establish and protect the rights and remedies created or intended to be created in favor of Lessor hereunder and thereunder, and to establish, perfect and maintain the right, title and interest of Lessor, in and to the Equipment, subject to no Lien other than Permitted Liens and Lessor Liens, or of such financing statements or fixture filings or other documents with respect hereto as Lessor may from time to time reasonably request, and Lessee agrees to execute and deliver promptly such of the foregoing financing statements and fixture filings or other documents as may require execution by Lessee. To the extent permitted by applicable laws, Lessee hereby authorizes any such financing statements and fixture filings to be filed without the necessity of the signature of Lessee, if Lessee has failed to sign any such instrument within 10 Business Days after written request therefor by Lessor. 28.2 UCC Remedies. If a Lease Event of Default shall occur and be ------------ continuing, Lessor may exercise, in addition to all other rights and remedies granted to it in this Lease and in any other Operative Agreement, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, Lessor, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon Lessee or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Equipment, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Equipment or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of Lessor or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lessor shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Equipment 25 so sold, free of any right or equity of redemption in which right or equity is hereby waived or released. Lessee further agrees, at Lessor's request, to assemble the Equipment and make it available to the Lessor at places which the Lessor shall reasonably select, whether at Lessee's premises or elsewhere. Lessor shall apply the net proceeds of any action taken by it pursuant to this subsection, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Equipment or in any way relating to the Equipment or the rights of Lessor, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Lease Secured Obligations, in such order as Lessor may elect, and only after such application and after the payment by Lessor of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the UCC, need Lessor account for the surplus, if any, to Lessee. If any notice of a proposed sale or other disposition of the Equipment shall be required by law, such notice shall be deemed reasonable and proper if given at lease 10 Business Days before such sale or other disposition. 28.3 Waiver; Deficiency. Lessee waives and agrees not to assert any ------------------ rights or privileges which it may acquire under Section 9-112 of the UCC. Lessee shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Equipment are insufficient to pay the Lease Secured Obligations and the reasonable fees and disbursements of any attorneys employed by Lessor to collect such deficiency. 28.4 Agent's Appointment as Attorney-in-Fact; Agent's Performance of --------------------------------------------------------------- Lessee's Obligations. Lessee hereby irrevocably constitutes and appoints the - -------------------- Agent and any officer or agent thereof, as assignee of all of Lessor's right under this Lease pursuant to the Assignment of Lease, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Lessee and in the name of Lessee or in its own name, from time to time in the Agent's discretion, for the purpose of carrying out the terms of this Lease, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Lease, and, without limiting the generality of the foregoing, Lessee hereby gives the Agent the power and right, on behalf of Lessee, without notice to or assent by Lessee, to do any or all of the following: (a) in the name of Lessee or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under or with respect to the Equipment and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Agent for the purpose of collecting any and all such moneys due under or with respect to the Equipment whenever payable; (b) pay or discharge taxes and Liens levied or placed on or threatened against the Equipment, effect any repairs or any insurance called for by the terms of this Lease and to pay all or any part of the premiums therefor and the costs thereof; (c) execute, in connection with the sale provided for in Section 28.2 hereof, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Equipment; and 26 (d) (1) direct any party liable for any payment under any of the Equipment to make payment of any and all moneys due or to become due thereunder directly to the Agent or as the Agent shall direct; (2) ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Equipment; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Equipment; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to enforce any other right in respect of any Equipment; (5) defend any suit, action or proceeding brought against Lessee with respect to any Equipment; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; and (7) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Equipment as fully and completely as thought the Agent were the absolute owner thereof for all purposes, and do, at the Agent's option and the Lessee's expense, at any time, or from time to time, all acts and things which the Agent reasonably deems necessary to protect, preserve or realize upon the Equipment and the Agent's security interests therein and to effect the intent of this Lease, all as fully and effectively as the Lease might do. Anything in this subsection to the contrary notwithstanding, the Agent agrees that it will not exercise any rights under the power of attorney provided for in this subsection unless a Lease Event of Default shall have occurred and be continuing. Section 29. NOTICES 29.1 Notices. Unless otherwise specifically provided herein, all ------- notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person to be effective shall be in writing (including by facsimile transmission) and shall be deemed to have been duly given or made (a) when delivered by hand, (b) one Business Day after delivery to such nationally recognized courier service specifying overnight delivery, (c) three Business Days after being deposited in the mail, certified or registered, postage prepaid or (d) in the case of facsimile notice, when received, addressed to such Person as indicated: If to Lessee: Hanover Compression Inc. 12001 North Houston Rosslyn Houston, Texas 77806 Attention: Chief Financial Officer Telecopy: (281) 447-0821 With a copy to: Latham & Watkins Sears Tower, Suite 5800 233 South Wacker Drive Chicago, Illinois 60606 27 Attention: Richard S. Meller and Michael A. Pucker Telecopy: (312) 993-9767 If to Lessor: Hanover Equipment Trust 2000B C/O Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telecopy: (302) 651-8882 with a copy to the Agent: The Chase Manhattan Bank Loan and Agency Services Group One Chase Manhattan Plaza New York, New York 10081 Attention: Agency Services Telecopy: (212) 552-5777 and Credit and Lending The Chase Manhattan Bank 270 Park Avenue 32nd Floor New York, NY 10017 Attention: Steve Wood Telecopy: (212) 270-3897 or such additional parties and/or other address as such party may hereafter designate. Section 30. SUBSTITUTION 30.1 Substitution. Lessee shall be entitled to convey to Lessor one ------------ or more pieces of Equipment ("Replacement Equipment") to be leased to Lessee --------------------- hereunder as substitution for Equipment which is (i) the subject of a Significant Casualty or Significant Condemnation, (ii) purchased by the sublessee of such Equipment or (iii) purchased by or on behalf of Lessee as permitted by Section 20.1(A) hereof; provided, such Replacement Equipment to be -------- free and clear of all Liens (other than Permitted Liens) and to have a value, utility and remaining economic useful life at least equal to the Equipment being replaced (assuming the 28 Equipment being replaced was in the condition required to be maintained by the terms of this Lease) as of the Replacement Equipment Closing Date; provided, further, that no Equipment shall be replaced unless the following conditions are met as of the Replacement Equipment Closing Date: (a) no Event of Default shall have occurred and be continuing; (b) no more than 5% of the Equipment (including the Replacement Equipment) will be located in an Unperfected Jurisdiction; (c) the aggregate amount of Replacement Equipment since the Initial Closing Date shall not exceed 25% of the Termination Value; (d) the representations and warranties of the Lessee contained in Subsection 7.5 of the Participation Agreement and in Section 9 of the Guarantee shall be true and correct in all material respects as of the date such substitution occurs; (e) Subsections 6.2(a)-(f) to the Participation Agreement shall have been satisfied or waived with respect to such Replacement Equipment; and (f) the Lessee shall have delivered an Officer's Certificate to the Lessor, Agent and the Investor at least five (5) days prior to the date such substitution shall occur, setting forth the location of the Replacement Equipment and certifying that the conditions set forth in paragraphs (a) through (e) above have been satisfied. Section 31. MISCELLANEOUS 31.1 Miscellaneous. Anything contained in this Lease to the contrary ------------- notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any term or provision of this Lease or any application thereof shall be declared invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby. 31.2 Amendments and Modifications. Neither this Lease nor any ---------------------------- provision hereof may be amended, waived, discharged or terminated except by an instrument in writing signed by Lessor and Lessee. 31.3 Successors and Assigns. All the terms and provisions of this ---------------------- Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 31.4 Headings and Table of Contents. The headings and table of ------------------------------ contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 29 31.5 Counterparts. This Lease may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 31.6 GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ------------- ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. 31.7 Limitations on Recourse. Except as expressly set forth in the ----------------------- Operative Agreements, Lessee agrees to look solely to Lessor's estate and interest in the Equipment, the proceeds of sale thereof, any insurance proceeds or any other award or any third party proceeds received by Lessor in connection with the Equipment for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor, the Trust Company member, partner or other owner of an interest, direct or indirect, in Lessor, or any director, officer, shareholder, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of Lessee's remedies under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Equipment or any other liability of Lessor to Lessee. Nothing in this Section shall be interpreted so as to limit the terms of Section 6.1 or 6.2. 31.8 Priority. On and prior to the Maturity Date, the Security -------- Agreement shall be subject and subordinate to this Lease and following the Maturity Date, the Security Agreement, at the sole election of the Agent, shall be senior to this Lease without any further act by any Person. 30 IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and delivered as of the date first above written. HANOVER COMPRESSION INC. By: ____________________________________ Name: Title: HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not individually but solely as Trustee By: ____________________________________ Name: Title: The undersigned agrees to the provisions of Section 28.4 and acknowledges receipt of this original counterpart of the foregoing Lease on this __th day of October, 2000. THE CHASE MANHATTAN BANK, as the Agent for the Lenders By: ____________________________________ Name: Title: 31 EXHIBIT A LEASE SUPPLEMENT NO. __ THIS LEASE SUPPLEMENT NO. __ (this "Lease Supplement") dated as of ---------------- _______________, between HANOVER EQUIPMENT TRUST 2000B, a Delaware business trust, as lessor (the "Lessor"), and HANOVER COMPRESSION INC., a Delaware ------ corporation, as lessee (the "Lessee"). ------ WHEREAS, the Lessor is the owner of the Equipment described on Schedule I hereto (the "Leased Equipment") and wishes to lease the same to the ---------------- Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions; Rules of Usage. For purposes of this Lease --------------------------- Supplement, capitalized terms used herein and not otherwise herein shall have the meanings assigned to them in Annex A to the Participation Agreement, dated as of October 27, 2000, among the Lessee, the Lessor, the Investors, the Agent, and the Lenders, as it may be amended, supplemented or otherwise modified from time to time. 2. The Equipment. Attached hereto as Schedule I is the description ------------- of the Leased Equipment. Effective upon the execution and delivery of this Lease Supplement by the Lessor and the Lessee, the Leased Equipment shall be subject to the terms and provisions of the Lease. 3. Ratification. Except as specifically modified hereby, the terms ------------ and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. 4. Original Lease Supplement. The single executed original of this ------------------------- Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the Original Executed Counterpart of this Lease Supplement (the "Original Executed Counterpart"). To ----------------------------- the extent that this Lease Supplement constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. 5. GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ------------- ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. 32 6. Counterpart Execution. This Lease Supplement may be executed in --------------------- any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. 7. Recordation. The Lessor and the Lessee agree that a memorandum ----------- of this Lease Supplement No. __ shall be recorded at the Lessee's sole cost and expense as required by the Lease. 33 IN WITNESS WHEREOF, the parties have caused this Lease Supplement No. __ be duly executed and delivered as of the date first above written. HANOVER COMPRESSION INC. By: ___________________________________ Name: Title: HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not in its individual capacity but solely as Trustee By: _____________________________ Name: Title: 34 Receipt of this original counterpart of the foregoing Lease Supplement is hereby acknowledged on this ___ day of ______, _____. THE CHASE MANHATTAN BANK, as the Agent for the Lenders By: ___________________________________ Name: Title: 1 Exhibits Exhibit A Lease Supplement EX-10.55 6 0006.txt GUARANTEE EXHIBIT 10.55 EXECUTION COPY GUARANTEE made by HANOVER COMPRESSOR COMPANY HANOVER COMPRESSION INC. and certain of their Subsidiaries Dated as of October 27, 2000 TABLE OF CONTENTS 1. Defined Terms......................................................................................... 1 - -- ------------- 2. Guaranty.............................................................................................. 2 - -- -------- 3. Right of Set-off...................................................................................... 3 - -- ---------------- 4. No Subrogation........................................................................................ 3 - -- -------------- 5. Amendments, etc. with respect to the Guaranteed Obligations; Waiver of Rights......................... 3 - -- ----------------------------------------------------------------------------- 6. Guarantee Absolute and Unconditional.................................................................. 4 - -- ------------------------------------ 7. Reinstatement......................................................................................... 5 - -- ------------- 8. Payments.............................................................................................. 5 - -- -------- 9. Representations, Warranties........................................................................... 5 - -- --------------------------- 9.1 Financial Condition.......................................................................... 5 --- ------------------- 9.2 No Change.................................................................................... 6 --- --------- 9.3 Corporate Existence; Compliance with Law..................................................... 6 --- ---------------------------------------- 9.4 Corporate Power; Authorization; Enforceable Obligations...................................... 6 --- ------------------------------------------------------- 9.5 No Legal Bar................................................................................. 7 --- ------------ 9.6 No Material Litigation....................................................................... 7 --- ---------------------- 9.7 No Default................................................................................... 7 --- ---------- 9.8 Ownership of Property; Liens; Leases of Equipment............................................ 7 --- ------------------------------------------------- 9.9 Intellectual Property........................................................................ 8 --- --------------------- 9.10 Taxes........................................................................................ 8 ---- ----- 9.11 Federal Regulations.......................................................................... 8 ---- ------------------- 9.12 ERISA........................................................................................ 8 ---- ----- 9.13 Investment Company Act; Other Regulations.................................................... 9 ---- ----------------------------------------- 9.14 Subsidiaries................................................................................. 9 ---- ------------ 9.15 Environmental Matters........................................................................ 9 ---- --------------------- 9.16 Accuracy and Completeness of Information..................................................... 10 ---- ---------------------------------------- 9.17 Senior Indebtedness.......................................................................... 10 ---- ------------------- 9.18 Representations and Warranties in Equipment Guarantees....................................... 10 ---- ------------------------------------------------------ 10. Affirmative Covenants of the Guarantor................................................................ 10 - --- -------------------------------------- 10.1 Financial Statements......................................................................... 10 ---- -------------------- 10.2 Certificates; Other Information.............................................................. 11 ---- ------------------------------- 10.3 Payment of Obligations....................................................................... 12 ---- ---------------------- 10.4 Conduct of Business and Maintenance of Existence............................................. 12 ---- ------------------------------------------------ 10.5 Maintenance of Property; Insurance........................................................... 13 ---- ----------------------------------
Page ---- 10.6 Inspection of Property; Books and Records; Discussions....................................... 13 ---- ------------------------------------------------------ 10.7 Notices...................................................................................... 13 ---- ------- 10.8 Environmental Laws........................................................................... 14 ---- ------------------ 10.9 Subsequent Guarantees........................................................................ 15 ---- --------------------- 11. Negative Covenants.................................................................................... 15 - --- ------------------ 11.1 Financial Condition Covenants................................................................ 15 ---- ----------------------------- 11.2 Limitation on Indebtedness................................................................... 16 ---- -------------------------- 11.3 Limitation on Liens.......................................................................... 17 ---- ------------------- 11.4 Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any ---- ---------------------------------------------------------------------------------- Guarantee Obligation except:................................................................. 19 ---------------------------- 11.5 Limitations on Fundamental Changes........................................................... 19 ---- ---------------------------------- 11.6 Limitation on Sale or Lease of Assets........................................................ 20 ---- ------------------------------------- 11.7 Limitation on Leases......................................................................... 21 ---- -------------------- 11.8 Limitation on Dividends...................................................................... 21 ---- ----------------------- 11.9 Limitation on Derivatives.................................................................... 22 ---- ------------------------- 11.10 Limitation on Investments, Loans and Advances................................................ 22 ----- --------------------------------------------- 11.11 Limitation on Optional Payments and Modifications of Debt Instruments........................ 23 ----- --------------------------------------------------------------------- 11.12 Transactions with Affiliates................................................................. 23 ----- ---------------------------- 11.13 Sale and Leaseback........................................................................... 23 ----- ------------------ 11.14 Corporate Documents.......................................................................... 24 ----- ------------------- 11.15 Fiscal Year.................................................................................. 24 ----- ----------- 11.16 Nature of Business........................................................................... 24 ----- ------------------ 11.17 Unqualified Subsidiaries..................................................................... 24 ----- ------------------------ 12. Miscellaneous......................................................................................... 24 - --- ------------- 12.1 Notices...................................................................................... 24 ---- ------- 12.2 Severability................................................................................. 25 ---- ------------ 12.3 Integration.................................................................................. 25 ---- ----------- 12.4 Amendments in Writing; No Waiver; Cumulative Remedies........................................ 25 ---- ----------------------------------------------------- 12.5 Section Headings............................................................................. 25 ---- ---------------- 12.6 Successors and Assigns....................................................................... 25 ---- ---------------------- 12.7 SUBMISSION TO JURISDICTION; WAIVERS.......................................................... 26 ---- ----------------------------------- 12.8 GOVERNING LAW................................................................................ 26 ---- ------------- 12.9 Survival of Representations, Warranties, etc................................................. 26 ---- -------------------------------------------- 12.10 Authority of Agent........................................................................... 27 ----- ------------------ 12.11 Third Party Beneficiaries.................................................................... 27 ----- ------------------------- 12.12 Right of Contribution........................................................................ 27 ----- --------------------- 12.13 WAIVER OF JURY TRIAL......................................................................... 27 ----- --------------------
ii Page ---- Schedules Schedule 9.2 Material Changes Schedule 9.4 Required Consents Schedule 9.14 Subsidiaries Schedule 9.15 Environmental Schedule 11.2 Existing Indebtedness Schedule 11.3(1) Existing Liens Schedule 11.3(n) Additional Existing Liens Schedule 11.3(t) Additional Liens Schedule 11.6(i) Lease of Assets Schedule 11.12 Affiliate Transactions Schedule 11.13 Sale and Leaseback Transactions iii 1 GUARANTEE GUARANTEE dated as of October 27, 2000, made by HANOVER COMPRESSOR COMPANY, a Delaware corporation, HANOVER COMPRESSION INC., a Delaware corporation, and each of their Subsidiaries that are signatories hereto (individually, a "Guarantor", collectively, the "Guarantors"), in favor of the --------- ---------- Beneficiaries (as hereinafter defined). Preliminary Statement --------------------- The Guarantors wish to induce (i) Hanover Equipment Trust 2000B (the "Lessor") to enter into the Lease and the other Operative Agreements to which it ------ is a party; (ii) the Lenders to enter into the Credit Agreement and the other Operative Agreements to which they are party; and (iii)Bank Hapoalim B.M. and FBTC Leasing Corp. (the "Investors") to enter into the Participation Agreement --------- (as hereinafter defined) and the other Operative Agreements to which they are a party. NOW, THEREFORE, in consideration of the premises contained herein and to induce (i) the Lessor to enter into the Lease and the other Operative Agreements to which it is a party; (ii) the Lenders to enter into the Credit Agreement and the other Operative Agreements to which it is a party; and (iii) the Investors to enter into the Participation Agreement and the other Operative Agreements to which it is a party, the Guarantors hereby agree for the benefit of the Lessor, the Agent, for the ratable benefit of the Lenders and the Investors and their respective successors and assigns (individually a "Beneficiary", collectively, the "Beneficiaries"), as follows: ----------- ------------- 1. Defined Terms. (a) Capitalized terms not otherwise defined herein ------------------ (including in the Preliminary Statement) shall have the meanings ascribed to them in Annex A to the Participation Agreement dated as of the date hereof among ------- Hanover Compression Inc. ("HCC"), the Lessor, the Investors, The Chase Manhattan --- Bank, as agent (the "Agent") and the several banks and financial institutions ----- from time to time party thereto (the "Lenders"), as the same may from time to ------- time be amended, supplemented or otherwise modified (the "Participation ------------- Agreement"). - --------- (b) As used herein, the following terms shall have the following meanings: "Agreement" means this Guarantee, as the same may be amended, --------- supplemented or otherwise modified from time to time. "Contribution Obligations" means the collective reference to the ------------------------ outstanding amount of the Investor Contributions and the Investor Yield with respect thereto and all rights of the Investors to receive distributions under the Trust Agreement and any of the other Operative Agreements. "Guaranteed Obligations" means the collective reference to (i) ---------------------- the Note Obligations, (ii) the Contribution Obligations and (iii) the Lease Obligations and, with respect to each such obligation, interest accruing thereon at the applicable rate provided in the Operative Agreements after maturity and interest accruing at the then applicable rate provided in the 2 Operative Agreements after the filing of any petition in bankruptcy, or the commencement of an insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding and whether such obligations are direct or indirect, absolute or contingent, due or to become due, or now existing or hereinafter incurred, which may arise, under, out of or in connection with any of the Operative Agreements, any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, Investor Contributions or Investor Yield, reimbursement obligations, fees, indemnities, costs, expenses, or payment obligations (including, without limitation, all fees and disbursements of counsel to any of the Beneficiaries that are required to be paid by HCC pursuant to the terms of the Operative Agreements). "Lease Obligations" means the collective reference to the payment ----------------- obligations and undertakings applicable to HCC contained in or arising under the Lease or any of the other Operative Agreements to which HCC is a party, including, but not limited to, the full and punctual payment by HCC, when due, of any and all Rent, the payments required pursuant to Section 17.2 and 17.3 of the Lease, the Purchase Option Price and the Maximum Residual Guarantee Amount. "Note Obligations" means the collective reference to the unpaid ---------------- principal of and interest on the Notes and all other payment obligations and liabilities of the Lessor to the Agent and the Lenders under the Notes, the Credit Agreement and any of the other Operative Agreements. 2. Guaranty. (a) Subject to the provisions of paragraph 2(b) and ------------- (c), the Guarantors hereby, jointly and severally, unconditionally and irrevocably guaranty to the Beneficiaries and their respective successors, endorsees, transferees and assigns the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Guaranteed Obligations. (b) Anything to the contrary notwithstanding, the Guarantors shall not at anytime be required to make any payment with regard to the Tranche B Loans or with respect to the Contribution Obligations unless at such time a Lease Event of Default has occurred and is continuing. (c) Anything herein or in any other Operative Agreement to the contrary notwithstanding, the maximum liability of each Guarantor (other than Holdings and HCC) hereunder and under the other Operative Agreement shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors. (d) The Guarantors further agree, jointly and severally, to pay any and all costs, expenses (including all fees and disbursements of counsel) and damages which may be paid or incurred in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting from the Guarantors, any or all of the Guaranteed Obligations and/or enforcing any rights with respect to, or collecting against, the Guarantors under this Guarantee. 3 3. Right of Set-off. In addition to any rights now or hereafter --------------------- granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default, each of the Investors, Agent and each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower, the Guarantors or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Investor, Agent or such Lender (including, without limitation, by branches and agencies of such Investor, Agent or such Lender wherever located) to or for the credit or the account of the Guarantors against and on account of the obligations and liabilities of the Guarantors hereunder or under any of the other Operative Agreements, and all other claims of any nature or description arising out of or connected with this Guarantee or any other Operative Agreement, irrespective of whether such Investor, Agent or such Lender shall have made any demand hereunder and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. Each of the Investors, Agent and each Lender shall notify such Guarantor promptly of any such set-off and the application made by such Investor, Agent or such Lender; provided, that the failure to give such notice shall not affect the -------- validity of such set-off and application. 4. No Subrogation. Notwithstanding any payment or payments made by ------------------- the Guarantors hereunder or any set-off or application of funds of the Guarantors by any Lender, the Guarantors shall not be entitled to exercise or enforce any subrogation rights of the Investors, Agent or any Lender against the Borrower or any other Person or any collateral security or guarantee or right of offset held by the Investors, Agent or any Lender for the payment of the Guaranteed Obligations, nor shall the Guarantors seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Person in respect of payments made by the Guarantors hereunder, until all amounts owing to the Investors, Agent and the Lenders by the Borrower on account of the Guaranteed Obligations and all amounts owing hereunder are paid in full and the Commitments are terminated. If any amount shall be paid to the Guarantors on account of such subrogation rights at any time when all of the Guaranteed Obligations and all amounts owing hereunder shall not have been paid in full or the Commitments shall not have been terminated, such amount shall be held by the Guarantors in trust for the Investors, Agent and the Lenders, segregated from other funds of the Guarantors, and shall, forthwith upon receipt by the Guarantors, be turned over to the Agent in the exact form received by the Guarantors (duly indorsed by the Guarantors to the Agent, if required), to be applied against the Guaranteed Obligations, whether matured or unmatured, in such order as the Agent may determine. 5. Amendments, etc. with respect to the Guaranteed Obligations; ---------------------------------------------------------------- Waiver of Rights. The Guarantors shall remain obligated hereunder - ---------------- notwithstanding that, without any reservation of rights against the Guarantors and without notice to or further assent by the Guarantors, any demand for payment of any of the Guaranteed Obligations made by the Investors, Agent or any Lender may be rescinded by such party and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Investors, Agent or any 4 Lender, and the Credit Agreement, the Participation Agreement and the other Operative Agreements may be amended, modified, supplemented or terminated, in whole or in part, as the Agent (or the Required Lenders, as the case may be) may deem advisable from time to time in accordance with the terms thereof, and any collateral security, guarantee or right of offset at any time held by the Investors, Agent or any Lender for the payment of the Guaranteed Obligations may be sold, exchanged, waived, surrendered or released. Neither the Investors, Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Guaranteed Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against the Guarantors, the Investors, Agent or any Lender may, but shall be under no obligation to, make a similar demand on the Borrower or any other guarantor, and any failure by the Investors, Agent or any Lender to make any such demand or to collect any payments from the Borrower or any other guarantor or any release of the Borrower or such other guarantor shall not relieve the Guarantors from their obligations under this Guarantee, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Investors, Agent or any Lender against the Guarantors. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 6. Guarantee Absolute and Unconditional. Each Guarantor waives any ----------------------------------------- and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Investors, Agent or any Lender upon this Guarantee or acceptance of this Guarantee, the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Borrower and such Guarantor, on the one hand, and the Agent and the Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or such Guarantor with respect to the Guaranteed Obligations. Each Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee and surety of payment without regard to (a) the validity, regularity or enforceability of the Credit Agreement or any other Operative Agreement, any of the Guaranteed Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Investors, Agent or any Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or such Guarantor against the Investors, Agent or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Guaranteed Obligations, or of such Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Investors, the Agent and any Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guarantee for the Guaranteed Obligations or any right of offset with respect thereto, and any failure by the Investors, Agent or any Lender to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral 5 security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve such Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Investors, the Agent and the Lenders against such Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon such Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Investors, the Lessor, the Agent and the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Guaranteed Obligations and the obligations of such Guarantor under this Guarantee shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Guaranteed Obligations. 7. Reinstatement. This Guarantee shall continue to be effective, ------------------ or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the Investors, Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or the Guarantors, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or the Guarantors or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments. The Guarantors hereby guarantee that payments ------------- hereunder will be paid to the Agent without set-off or counterclaim in Dollars at the office of the Agent located at 270 Park Avenue, New York, New York 10017. 9. Representations, Warranties. In order to induce the Lenders to -------------------------------- enter into the Credit Agreement and to make the Loans, the Investors to enter into the Participation Agreement and make the Investor Contribution and the Lessor to enter into the Lease, Holdings and HCC hereby jointly and severally represent and warrant to the Beneficiaries as follows, all of which shall survive the execution and delivery of this Guarantee and the Credit Agreement and the making of the Loans: 9.1 Financial Condition. (a) The unaudited pro forma consolidated ------------------------ --- ----- balance sheet of HCC and its consolidated Subsidiaries as at June 30, 2000 (including the notes thereto) (the "Pro Forma Balance Sheet"), copies of which ----------------------- have heretofore been furnished to each Lender, has been prepared giving effect (as if such events had occurred on such date) to the consummation of the TIDES issuance. The Pro Forma Balance Sheet has been prepared based on the best information available to Holdings and HCC as of the date of delivery thereof, and presents fairly in all material respects on a pro forma basis the estimated --- ----- financial position of HCC and its consolidated Subsidiaries as at June 30, 2000, assuming that the events specified in the preceding sentence had actually occurred at such date. (b) The audited consolidated balance sheets of HCC as at December 31, 1998 and December 31, 1999, and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from PricewaterhouseCoopers LLP, present fairly in all material 6 respects the consolidated financial condition of HCC as at such date, and the consolidated results of its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of HCC as at March 31, 2000 and June 30, 2000, and the related unaudited consolidated statements of income and cash flows for the three and six-month periods ended on such date, present fairly in all material respects the consolidated financial condition of HCC as at such date, and the consolidated results of its operations and its consolidated cash flows for the three and six-month periods then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). Holdings, HCC and its Subsidiaries do not have any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. During the period from June 30, 2000 to and including the date hereof there has been no Disposition by Holdings or any of its Subsidiairies, as applicable, of any material part of their business or property (other than to Holdings or any of its Subsiciaries). 9.2 No Change. Since June 30, 2000 (a) there has been no -------------- development or event nor any prospective development or event, which has had or would reasonably be expected to have a Material Adverse Effect and (b) except as disclosed on Schedule 9.2 to this Agreement, as of the date of this Agreement, no dividends or other distributions have been declared, paid or made upon the Capital Stock of Holdings or HCC nor has any of the Capital Stock of Holdings or HCC (other than in connection with the Restructuring) been redeemed, retired, purchased or otherwise acquired for value by Holdings or any of its respective Subsidiaries. 9.3 Corporate Existence; Compliance with Law. Each Guarantor (a) is --------------------------------------------- duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.4 Corporate Power; Authorization; Enforceable Obligations. Each ------------------------------------------------------------ Guarantor has the corporate power and authority, and the legal right, to make, deliver and perform the Operative Agreements to which it is a party. HCC has the corporate power and authority, and the legal right, to perform the Operative Agreements and has taken all necessary corporate action to authorize the performing under the Operative Agreements on the terms and conditions of the Operative Agreements. Each Guarantor has taken all necessary corporate 6 action to authorize the execution, delivery and performance of this Guarantee. No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person (other than consents that have been obtained and consents or authorizations the failure to obtain would not, in the aggregate, reasonably be expected to have a Material Adverse Effect) is required in connection with the Loans or with the execution, delivery, performance, validity or enforceability of this Guarantee or any of the other Operative Agreements, except consents, authorizations, filings and notices described in Schedule 9.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect. This Guarantee has been duly executed and delivered on behalf of the Guarantors party hereto. This Guarantee constitutes, each Operative Agreement when executed and delivered will constitute, a legal, valid and binding obligation of the Guarantors party thereto enforceable against such Guarantors in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 9.5 No Legal Bar. The execution, delivery and performance of this ----------------- Guarantee and the other Operative Agreements, the Loans and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of any Guarantor party thereto and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation, except as contemplated hereby or thereby and except to the extent any such violation or creation or imposition of a Lien would not reasonably be expected to have a Material Adverse Effect. 9.6 No Material Litigation. Except as set forth in HCC's Form 10-Q, --------------------------- filed with respect to the period ending June 30, 2000, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of HCC, threatened by or against any Guarantor or against any of their respective properties or revenues (a) with respect to this Guarantee or the other Operative Agreements or any of the transactions contemplated hereby, or (b) which would reasonably be expected to have a Material Adverse Effect. 9.7 No Default. None of the Guarantors nor any of their respective --------------- Subsidiaries is in default under or with respect to any of their respective Contractual Obligations in any respect which if not cured would reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 9.8 Ownership of Property; Liens; Leases of Equipment. Each of the ------------------------------------------------------ Guarantors has good record and marketable title in fee simple (except for exceptions to title as will not in the aggregate materially interfere with the present or contemplated use of the property affected thereby) to, or a valid leasehold interest in, all its real property, and good title to all its other property, and none of such property is subject to any Lien except as permitted by Section 11.3. None of the Equipment or Inventory (as defined in the Uniform Commercial Code) owned by any Guarantor has been leased by such Guarantor as lessor, except pursuant to operating leases (which do not constitute Financing Leases). As used herein, Equipment or Inventory leased by a Guarantor under a Financing Lease shall be deemed "owned" by such Guarantor. 8 9.9 Intellectual Property. Each Guarantor owns, or is licensed to -------------------------- use, all trademarks, tradenames, trade secrets, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which would not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). To --------------------- the knowledge of each Guarantor, no claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does each Guarantor know of any valid basis for any such claim, which would reasonably be expected to have a Material Adverse Effect. The use of such Intellectual Property by the Guarantors does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, would not reasonably be expected to have a Material Adverse Effect. 9.10 Taxes. Each of the Guarantors has filed or caused to be filed ---------- all tax returns which, to the knowledge of each Guarantor, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of any of the Guarantors, as the case may be); no tax Lien has been filed against the property of any Guarantor, and, to the knowledge of each Guarantor, no claim is being asserted, with respect to any such tax, fee or other charge. 9.11 Federal Regulations. No part of the proceeds of any Loans will ------------------------ be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors. If requested by any Lender or the Agent, HCC will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. 9.12 ERISA. Neither a Reportable Event nor an "accumulated funding ---------- deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred and no lien in favor of the PBGC or a Plan has arisen during the five-year period prior to the date as of which this representation is deemed made. The present value of all accrued benefits under each Single Employer Plan maintained by HCC, or any Commonly Controlled Entity (based on those assumptions used to fund the Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither HCC nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither HCC nor any Commonly Controlled Entity would become subject to any liability under ERISA if HCC or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this 9 representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of HCC and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits. 9.13 Investment Company Act; Other Regulations. None of the ---------------------------------------------- Guarantors is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. None of the Guarantors is subject to regulation under any Federal or State statute or regulation which limits its ability to incur Indebtedness or change rates or change tariffs. None of the Guarantors are "holding companies" or "subsidiary companies" of a "holding company" or a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 9.14 Subsidiaries. As of the Initial Closing Date, Holdings has no ----------------- Subsidiaries other than as set forth on Schedule 9.14. Except if a Guarantor, ------------- other than cash or Cash Equivalents located in bank accounts at the Agent, none of the assets owned by any Unqualified Subsidiary as of the date hereof are located within the United States of America or any territory thereof. 9.15 Environmental Matters. Each of the representations and -------------------------- warranties set forth in paragraphs (a) through (e) of this subsection is true and correct with respect to each parcel of real property owned or operated by any of the Guarantors (the "Properties"), except to the extent that the facts ---------- and circumstances giving rise to any such failure to be so true and correct would not reasonably be expected to have a Material Adverse Effect: (a) Except as set forth on Schedule 9.15, the Properties do not ------------- contain, and have not previously contained, in, on, or under, including, without limitation, the soil and groundwater thereunder, any Hazardous Substances in concentrations which violate Environmental Laws. (b) Except as set forth on Schedule 9.15, the Properties and all ------------- operations and facilities at the Properties are in compliance with all Environmental Laws, and there is no Hazardous Substances contamination or violation of any Environmental Law which would reasonably be expected to interfere with the continued operation of any of the Properties or impair the fair saleable value of any thereof. (c) Except as set forth on Schedule 9.15, none of the Guarantors has ------------- received any complaint, notice of violation, alleged violation, investigation or advisory action or of potential liability or of potential responsibility regarding environmental protection matters or environmental permit compliance with regard to the Properties which have not been resolved, nor is HCC aware that any Governmental Authority is contemplating delivering to any Guarantor any such notice. 10 (d) Hazardous Substances have not been generated, treated, stored, disposed of, at, on or under any of the Properties in concentrations that violate Environmental Laws, nor have any Hazardous Substances been transferred to any other location, in violation of any Environmental Laws from the Properties or as a result of the sale or lease of any equipment or inventory of any Guarantor. (e) There are no governmental, administrative actions or judicial proceedings pending or contemplated under any Environmental Laws to which any Guarantor is or to HCC's knowledge will be named as a party with respect to the Properties, nor to HCC's knowledge are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any of the Properties. 9.16 Accuracy and Completeness of Information. The factual statements --------------------------------------------- contained in the Operative Agreements and each other agreement, instrument, certificate and document related thereto and any other certificates or documents furnished or to be furnished to the Investors, the Agent or the Lenders by any Guarantor from time to time in connection with this Guarantee (in any case excluding any of the financial statements referred to in Section 9.1(a) and 10.1 hereof), taken as a whole, and taking into consideration all corrections or substituted documents, do not and will not, as of the date when made, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which the same were made, all except as otherwise qualified herein or therein. 9.17 Senior Indebtedness. The Guaranteed Obligations constitute ------------------------ "Senior Indebtedness" of HCC under and as defined in the Shareholder Subordinated Loan Agreement. The obligations of the Guarantors under the Agreement constitute "Senior Indebtedness" of such applicable Guarantors under and as defined in the Shareholder Subordinated Loan Agreement. 9.18 Representations and Warranties in Equipment Guarantees. The ----------------------------------------------------------- representations and warranties contained in Section 9 of the Equipment Guarantees and in any amendment, consent or waiver thereto were true and correct in all material respects on and as of the dates when made pursuant to the Equipment Guarantees. 10. Affirmative Covenants of the Guarantor. Each Guarantor hereby ------------------------------------------- covenants and agrees that so long as this Guarantee is in effect and until the Commitments have terminated and the Guaranteed Obligations and all amounts owing hereunder are paid in full such Guarantor will: 10.1 Financial Statements. Furnish to each Lender and each of the ------------------------- Investors: (a) as soon as available for distribution to shareholders and creditors generally, but in any event within 120 days after the end of each fiscal year of Holdings, a copy of the consolidated balance sheet of Holdings and its consolidated Subsidiaries, as at the end of such year and the related consolidated statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form 11 the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by PricewaterhouseCoopers LLP or other independent certified public accountants of nationally recognized standing not unacceptable to the Required Lenders; (b) as soon as available for distribution to shareholders and creditors generally, but in any event within 90 days after the end of each fiscal year of Holdings, a copy of the unaudited consolidated balance sheet of Holdings and its consolidated Subsidiaries, as at the end of such year, and the related unaudited consolidated statements of income and retained earnings and of cash flows for such year, in each case setting forth in comparative form the figures for the corresponding period of the previous year and the figures for such period as shown on the budgets of Holdings for such year; and (c) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of Holdings, the unaudited consolidated balance sheet of Holdings and its consolidated Subsidiaries, as at the end of such quarter, and the related unaudited consolidated statements of income and retained earnings and of cash flows of Holdings and its consolidated Subsidiaries, for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the corresponding period of the previous year, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of Holdings and its consolidated Subsidiaries, (subject to normal year-end audit adjustments), and in each case setting forth in comparative form the figures for such periods as shown on the budgets of such Person for such year; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 10.2 Certificates; Other Information. Furnish to each Lender and ------------------------------------ each of the Investors: (a) concurrently with the delivery of the financial statements referred to in subsection 10.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 10.1(a) and 10.1(c), a certificate of a Responsible Officer stating that, to the best of such Responsible Officer's knowledge, Holdings during such period has observed or performed all of its covenants and other agreements, and satisfied every material condition, contained in this Guarantee and the other Operative Agreements to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has 12 obtained no knowledge of any Default or Event of Default except as specified in such certificate, such certificate to include the original total dollar amount of any Equipment True Leases; (c) not later than 45 days following the end of each fiscal year of Holdings, a copy of the projections by Holdings of the operating budget and cash flow budget of Holdings and its Subsidiaries for the succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer to the effect that such projections have been prepared on the basis of reasonable assumptions and that such Officer has no reason to believe they are incorrect or misleading in any material respect; (d) (i) within five days after the same are sent, copies of all financial statements and reports which Holdings, if at such time any class of Holding's securities are held by the public, sends to its stockholders generally, or, if otherwise, such financial statements and reports as are made generally available to the public, and (ii) within five days after the same are filed, copies of all financial statements and reports which Holdings may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (e) concurrently with the delivery of the financial statements referred to in subsections 10.1(a) and (c), a management summary describing and analyzing the performance of Holdings and its Subsidiaries during the periods covered by such financial statements; (f) within 45 days after the end of each quarter in each fiscal year of Holdings, a certificate of the principal financial officer of Holdings showing both the Applicable Margin for the next quarter and the detailed computations necessary to calculate the Applicable Margin (an "Applicable ---------- Margin Certificate"); and ------------------ (g) promptly, such additional financial and other information as any Lender or either of the Investors may from time to time reasonably request. 10.3 Payment of Obligations. Pay, discharge or otherwise satisfy at ----------------------------- or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of Holdings or any Subsidiary of Holdings, as the case may be. 10.4 Conduct of Business and Maintenance of Existence. Continue to ------------------------------------------------------- engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to Section 11.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 13 10.5 Maintenance of Property; Insurance. (a) Keep and maintain all ----------------------------------------- property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. 10.6 Inspection of Property; Books and Records; Discussions. Keep ------------------------------------------------------------- proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of either of the Investors or any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of Holdings and Subsidiaries of Holdings with officers and employees of Holdings and Subsidiaries of Holdings and with its independent certified public accountants; provided, however, that no such visit, inspection or examination or -------- discussion shall unreasonably disrupt or interfere with normal operations of Holdings or any of its Subsidiaries and any such representatives of such Investor, Agent and the Lenders shall be accompanied by a Responsible Officer of Holdings. No failure to comply with any request for the exercise of rights hereunder shall be cause for any Event of Default unless such request is submitted in writing to Holdings with reference to this Section 10.6. 10.7 Notices. Promptly give notice to the Investors, Agent and each -------------- Lender of: (a) the occurrence of any Default or Event of Default of which any Guarantor has actual knowledge; (b) any (i) default or event of default by any Guarantor or any of its Subsidiaries under or with respect to any of their respective Contractual Obligations in any respect which, if not cured, would reasonably be expected to have a Material Adverse Effect, or to Guarantor's knowledge any default or event of default by any third party under or with respect to any Contractual Obligation of said third party with any Guarantor or any of its Subsidiaries in a respect which, if not cured, would reasonably be expected to have a Material Adverse Effect or (ii) litigation, investigation or proceeding of which any Guarantor has actual knowledge which may exist at any time between any Guarantor or any Subsidiary of such Guarantor and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, would reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting any Guarantor or any Subsidiary of such Guarantor of which such Guarantor has actual knowledge in which the amount involved is $5,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought and which if adversely determined would reasonably be expected to have a Material Adverse Effect; (d) the following events, as soon as possible and in any event within 30 days after any Guarantor has actual knowledge thereof: (i) the occurrence or expected 14 occurrence of any Reportable Event with respect to any Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or such Guarantor, any Commonly Controlled Entity with respect to the termination of any Single Employer Plan; and (e) a development or event which has had or would reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the applicable Guarantor proposes to take with respect thereto. 10.8 Environmental Laws. ------------------- (a) Comply in all material respects with, and undertake all reasonable efforts to ensure compliance by all tenants and subtenants, if any, with, all Environmental Laws and obtain and comply in all material respects with and maintain, and undertake all reasonable efforts to ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, registrations or permits required by Environmental Laws, and upon discovery of any non-compliance or suspected non-compliance, undertake all reasonable efforts to attain full compliance; (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities respecting Environmental Laws, except to the extent that the failure to so conduct, complete or take such actions, or to comply with such orders and directives, would not in the aggregate reasonably be expected to have a Material Adverse Effect; and (c) Defend, indemnify and hold harmless the Investors, the Lessor, the Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of or noncompliance with any Environmental Laws applicable to the real property owned or operated by any Guarantor or any Subsidiary of such Gurantor, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney's and consultant's fees, investigation and laboratory fees, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. (d) Maintain a program to identify and promote substantial compliance with and to minimize prudently any liabilities or potential liabilities under any Environmental Law that may affect any Guarantor or any of its Qualified Subsidiaries. 15 10.9 Subsequent Guarantees. Each Guarantor shall cause each ---------------------------- Qualified Subsidiary (other than the TIDES Trust, HMS, MAC and Collicut) of such Guarantor for which the aggregate value of all assets owned by such Qualified Subsidiary is or becomes greater than $20,000,000, to execute an amendment to this Guarantee, substantially in the form of Exhibit A hereto within one-year --------- after the later of (i) the date on which such Qualified Subsidiary becomes a Subsidiary of such Guarantor and (ii) the date on which such Qualified Subsidiary's assets attain an aggregate value in excess of $20,000,000; provided, however, that if during such one-year period the aggregate value of - -------- ------- such Qualified Subsidiary's assets is or becomes $20,000,000 or less, such Qualified Subsidiary shall not be required to become a party to this Guarantee. 11. Negative Covenants. Each Guarantor hereby agrees that so long ------------------------- as this Guarantee is in effect and until the Commitments have terminated and the Guaranteed Obligations and all amounts owing hereunder are paid in full, the Guarantor shall not, directly or indirectly: 11.1 Financial Condition Covenants. (a) Maintenance of Consolidated ------------------------------------- --------------------------- Indebtedness to Consolidated Capitalization. Permit the ratio (expressed as a - ------------------------------------------- percentage) of Consolidated Indebtedness to Consolidated Capitalization of Holdings as at the end of any of Holdings' fiscal quarters to be greater than .65 to 1.0; provided that for purposes of calculating the numerator of the -------- foregoing ratio, Consolidated Indebtedness shall exclude seventy percent (70%) of the Indebtedness in respect of the TIDES Debentures. (b) Current Ratio. Permit the Current Ratio of Holdings at the end ------------- of any of Holdings' fiscal quarters to be less than 1.0 to 1.0. (c) Consolidated Indebtedness to Consolidated Adjusted EBITDA. --------------------------------------------------------- Permit the ratio of Consolidated Indebtedness of Holdings to Consolidated Adjusted EBITDA for the four consecutive fiscal quarters of Holdings most recently ended to be greater than 5.25 to 1.0; provided that for purposes -------- of calculating the numerator of the foregoing ratio, Consolidated Indebtedness of Holdings shall exclude seventy percent (70%) of the Indebtedness in respect of the TIDES Debentures. (d) Consolidated Indebtedness to Consolidated EBITDA. Permit the ------------------------------------------------ ratio of Consolidated Indebtedness to Consolidated EBITDA of Holdings for the four consecutive fiscal quarters of Holdings most recently ended ("Consolidated Indebtedness Ratio") to be greater than 4.0 to 1.0; provided ------------------------------- -------- that for purposes of calculating the numerator of the foregoing ratio, Consolidated Indebtedness of Holdings shall exclude seventy percent (70%) of the Indebtedness in respect of the TIDES Debentures. (e) Interest Coverage Ratio. Permit the ratio of Consolidated ----------------------- EBITDA to Consolidated Interest Expense of Holdings for the period of four consecutive fiscal quarters of Holdings most recently ended to be less than 2.5 to 1.0.; provided that for purposes of calculating the foregoing ratio, -------- Consolidated Interest Expense of Holdings shall exclude any accrued but unpaid interest to the TIDES or TIDES Debentures. 16 11.2 Limitation on Indebtedness. Create, incur, assume or suffer to --------------------------------- exist any Indebtedness, except: (a) Indebtedness in respect of the loans, and other obligations of the Gurantors under the Corporate Credit Agreement and the other Loan Documents as defined in the Corporate Credit Agreement; (b) Indebtedness of HCC to any of its Subsidiaries and of any such Subsidiary which is a Guarantor to HCC or any other Subsidiary of HCC; (c) Indebtedness outstanding on the Initial Closing Date and listed on, Schedule 11.2 and all extensions, renewals, replacements, refinancings ------------- and modifications thereof permitted hereunder; (d) Indebtedness of Holdings and any of its Subsidiaries in an aggregate amount not to exceed $50,000,000 at any time outstanding which is recourse only to the assets of HCC or any Subsidiaries acquired or financed with the proceeds of such Indebtedness; provided, that immediately after -------- giving effect to the incurrence of such Indebtedness, Holdings shall be in compliance, on a pro forma basis after giving effect to such Indebtedness, --- ----- with the covenants in subsection 11.1 recomputed as at the last day of the most recently ended fiscal quarter of Holdings as if such Indebtedness had been incurred on the first day of each relevant period for testing such compliance, and Holdings shall have delivered to the Agent an officers' certificate to such effect, together with all relevant financial information; (e) Indebtedness in respect of Financing Leases provided that, -------- after giving effect thereto, subsection 11.7 is not contravened; (f) Indebtedness in respect of Subordinated Debt, the terms and conditions of which have been approved in writing by the Required Lenders and Investors and all extensions, renewals, replacements, refinancings and modifications thereof permitted hereunder; (g) Indebtedness of Unqualified Subsidiaries of Holdings; provided that any such Indebtedness is Non-Recourse Indebtedness; (h) Indebtedness of a Person which becomes a Subsidiary after the date hereof in an aggregate principal amount not exceeding as to Holdings and its Subsidiaries $10,000,000 at any time outstanding, provided that (i) -------- such indebtedness existed at the time such Person became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such Person by Holdings or any of its Subsidiaries no Default or Event of Default shall have occurred and be continuing; (i) Indebtedness in respect of Equipment Lease Tranche A Loans; and 17 (j) Indebtedness not contemplated by clauses (a)-(i) above not exceeding $20,000,000 in the aggregate at any time outstanding. 11.3 Limitation on Liens. Create, incur, assume or suffer to exist -------------------------- any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with -------- respect thereto are maintained on the books of Holdings or any Subsidiary of Holdings, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of Holdings or any of its Subsidiaries; (f) leases or subleases granted to third Persons not interfering in any material respect with the business of Holdings or any of its Subsidiaries; (g) Liens arising from UCC financing statements regarding leases permitted by this Agreement or the Equipment Leases; (h) any interest or title of a lessor or sublessor under any lease permitted by the Corporate Credit Agreement or the Equipment Leases; (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods so long as such Liens attach only to the imported goods; (j) Liens arising out of consignment or similar arrangements for the sale of goods entered into by Holdings or any of its Subsidiaries in the ordinary course of business; 18 (k) Liens created pursuant to Financing Leases permitted pursuant to Section 11.2(e); (l) Liens in existence on the Initial Closing Date listed on, Schedule 11.3(l), securing Indebtedness permitted by subsection 11.2(C), --------------- provided that no such Lien is spread to cover any additional property after -------- the Initial Closing Date and that the amount of Indebtedness secured thereby is not increased; (m) Liens on (i) natural gas compressors and related equipment, and usual accessories and improvements and proceeds thereof (other than the Equipment), and (ii) oil and gas production equipment, in each case, the acquisition of which were financed with the proceeds of the Indebtedness permitted by subsection 11.2(e) and which secures only such Indebtedness, provided that any such Lien is placed upon such natural gas compressor or -------- related equipment or such oil and gas production equipment at the time of the acquisition of such natural gas compressors or related equipment or such oil and gas production equipment by Holdings or any of its Subsidiaries and the Lien extends to no other property, and provided, -------- further, that no such Lien is spread to cover any additional property after ------- the date such Lien attaches and that the amount of Indebtedness secured thereby is not increased; (n) Liens on assets of the Guarantors listed on Schedule 11.3(n), provided that no such Lien is spread to cover any additional property after -------- the Initial Closing Date and that the amount of Indebtedness secured thereby is not increased; (o) Liens on the assets of Unqualified Subsidiaries of Holdings securing Indebtedness of such Unqualified Subsidiaries permitted under Section 11.2(g); (p) Liens securing Derivatives entered into by Holdings and its Subsidiaries which are permitted hereunder; (q) Liens securing Indebtedness of Holdings or any Subsidiary permitted under subsection 11.2(d) so long as such Liens attach only to the assets acquired or financed pursuant to such subsection; (r) Liens on the property or assets of a Person which becomes a Subsidiary after the date hereof securing Indebtedness permitted by subsection 11.2(h), provided that (i) such Liens existed at the time such -------- Person became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such Person after the time such Person becomes a Subsidiary, and (iii) the amount of Indebtedness secured thereby is not increased; (s) Liens that arise in connection with the Equipment Lease Transactions; (t) Liens listed on Schedule 11.3(t); and ---------------- 19 (u) Liens not otherwise permitted in clauses (a)-(t) above securing Indebtedness not exceeding $2,500,000 in the aggregate. 11.4 Limitation on Guarantee Obligations. Create, incur, assume or ----------------------------------- suffer to exist any Guarantee Obligation except: (a) the Corporate Guarantees and the Equipment Lease Guarantees; (b) up to $5,000,000 in the aggregate of Guarantee Obligations of HCC or any of its Subsidiaries in connection with indebtedness incurred by customers of HCC or any of its Subsidiaries; provided, that the proceeds of -------- any such indebtedness shall be used by such customers to purchase natural gas compressors or oil and gas production equipment from HCC or any of its Subsidiaries; (c) Guarantee Obligations (in respect of obligations not constituting Indebtedness) arising under agreements entered into by HCC or any of its Subsidiaries in the ordinary course of business; (d) guarantees in respect of Indebtedness (other than Subordinated Debt) permitted under the Corporate Credit Agreement; (e) Guarantee Obligations of Holdings and any of its Subsidiaries arising pursuant to the Equipment Lease Transactions; (f) the Guarantee Obligations of HCC in the nature of a guarantee or indemnification for, in each case, performance obligations (and not Indebtedness) as contemplated by the HMS Transactions; and (g) the Subordinated Guarantee Obligations of Holdings arising under the TIDES Guarantees. 11.5 Limitations on Fundamental Changes. Enter into any merger, ----------------------------------------- consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Qualified Subsidiary may be merged or consolidated with or into any other Qualified Subsidiary; provided, that a Qualified Subsidiary -------- shall be the continuing or surviving corporation; (b) Holdings or any Qualified Subsidiary may be merged or consolidated with any other Person organized under a jurisdiction of the United States with assets held primarily in the United States; provided, -------- that Holdings or such Qualified Subsidiary shall be the continuing or surviving corporation; the Agent is provided with written notice, and after giving effect thereto no Default or Event of Default would exist or reasonably be expected to be caused thereby; 20 (c) any Qualified Subsidiary may sell, lease, assign, transfer or otherwise dispose of any or all of its assets to Holdings or any Qualified Subsidiary; (d) any Unqualified Subsidiary may be merged or consolidated with or into any other Person and/or may sell, lease, assign, transfer or otherwise dispose of any of its assets (upon voluntary liquidation or otherwise) to any other Person provided that, if merged or consolidated -------- with or into a Qualified Subsidiary, the Qualified Subsidiary will remain as a "Qualified Subsidiary" after the merger; (e) pursuant to the Equipment Lease Transactions; (f) the TIDES Trust may wind up or dissolve itself (or suffer a liquidation or dissolution), or convey, assign, transfer or otherwise dispose of, all or substantially all of its property, business or a assets, as contemplated by the TIDES Declaration of Trust; (g) any of the HMS Entities may wind up, dissolve (or suffer a liquidation or dissolution), or convey, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets; and (h) HCC may merge with another Subsidiary of Holdings in connection with the Restructuring. 11.6 Limitation on Sale or Lease of Assets. Convey, sell, lease, -------------------------------------------- assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, except: (a) obsolete or worn out property disposed of in the ordinary course of business, provided that the aggregate value of obsolete or worn out natural gas compressors and oil and gas production equipment disposed of in the ordinary course of business does not exceed $5,000,000 during any fiscal year of Holdings; (b) the sale of inventory in the ordinary course of business, provided that if such inventory is comprised of natural gas compressors or oil and gas production equipment, such natural gas compressors or oil and gas production equipment were never part of the natural gas compressors or oil and gas production equipment leased or held for lease by HCC or any of its Subsidiaries; (c) the lease or sublease by HCC or any of its Subsidiaries as lessor of natural gas compressors and oil and gas production equipment in the ordinary course of business under operating leases (which do not constitute Financing Leases); (d) the sale or discount without recourse of defaulted accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; (e) as permitted by subsection 11.5; 21 (f) the sale of natural gas compressors and oil and gas production equipment, other than disposals and sales covered by clauses (a) and (b) above, provided that the fair market value of natural gas compressors and -------- oil and gas production equipment sold during the term of this Agreement does not exceed ten percent of the aggregate fair market value of all natural gas compressors and oil and gas production equipment owned by HCC and its Qualified Subsidiaries; provided further that if the proceeds are -------- ------- reinvested in natural gas compressors or oil and gas production equipment to be owned by HCC or its Qualified Subsidiaries within nine months after the sale of the assets which produced such proceeds, such proceeds shall not be included for purposes of this covenant; (g) the lease by the Real Estate Subsidiary or any other Qualified Subsidiary as lessor of real estate properties to HCC or any Qualified Subsidiary of HCC for use by HCC or such Qualified Subsidiary as the site of its offices and facilities; (h) the sale of natural gas compressors to the Lessor in connection with the Equipment Lease Transactions; and (i) the lease of assets as listed on Schedule 11.6(i). 11.7 Limitation on Leases. Permit Consolidated Lease Expense for any --------------------------- fiscal year of Holdings to exceed $10,000,000, except to the extent any such excess results from expenses relating to any Equipment True Leases. 11.8 Limitation on Dividends. Declare or pay any dividend (other ------------------------------ than dividends payable solely in common stock of such Person) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of such Person or any warrants or options to purchase any such Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Holdings or any Subsidiary of Holdings, except that if no Default or Event of Default exists or would reasonably be expected to be caused thereby (i) Subsidiaries of Holdings may declare and pay dividends to Holdings (to the extent necessary to pay interest on, or redeem, the TIDES Debentures or to cover operating expenses of Holdings) and other shareholders of such Subsidiaries and the TIDES Trust may redeem the TIDES as contemplated by the TIDES Declaration of Trust, (ii) Holdings may repurchase or redeem shares of Holdings common stock from its employees and former employees so long as the aggregate amount of all such repurchases since the Closing Date does not exceed $7,500,000, (iii) Holdings may make open market repurchases of shares of Holdings common stock so long as the aggregate amount of all such repurchases since the Closing Date does not exceed $25,000,000, (iv) Holdings may declare or pay dividends on and make mandatory stock repurchases (pursuant to the terms of the applicable certificate of designation) of its preferred stock, if any, (v) Holdings may declare or pay dividends on shares of Holdings common stock, provided that the aggregate amount of such declarations -------- or payments pursuant to this clause (v) above does not exceed 25% of the Consolidated Net Income of Holdings for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the 22 Closing Date to the end of Holdings' most recently ended fiscal quarter for which financial statements have been delivered to the Agent and the Lenders pursuant to subsection 10.1 at or prior to the time of such declaration or payment and (vi) HCC may declare and pay dividends or make distributions to Holdings to the extent necessary to allow Holdings to make payments on its promissory notes to be issued in favor of the sellers of the KCC Group Limited so long as (A) the aggregate amount of such declarations, payments or distributions pursuant to this clause (vi) does not exceed (Pounds)6,000,000 (UK) plus accrued interest thereon and (B) no such dividend may be paid more than three Business Days prior to the date the equivalent payment is made on such notes. 11.9 Limitation on Derivatives. Enter into or assume any obligations -------------------------------- with respect to any Derivatives except for Derivatives used by Holdings or any of its Subsidiaries in reducing the interest rate risk exposure or foreign currency risk exposure of Holdings and its Subsidiaries which have been provided by a lender under the Corporate Credit Agreement or the Equipment Lease Transactions; provided, that the aggregate notional amounts of such Derivatives -------- shall not exceed the aggregate amount of loans outstanding under the Corporate Credit Agreement and the Equipment Lease Transactions. 11.10 Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in (all of the foregoing being herein collectively referred to as "Investments"), any Person, ----------- except: (a) extensions of trade credit in the ordinary course of business; (b) Investments in Cash Equivalents; (c) loans and advances to employees of such Person or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for Holdings and its Subsidiaries not to exceed $250,000 at any one time outstanding; (d) Investments by Holdings in its Subsidiaries which are or become Guarantors and investments by such Subsidiaries which are or become Guarantors in Holdings and in other Subsidiaries of Holdings which are or become Guarantors; (e) Investments by Holdings in the Real Estate Subsidiary in an aggregate amount not to exceed $5,000,000 plus amounts necessary to maintain and operate the real property and improvements thereon owned by the Real Estate Subsidiary; (f) Investments in Unqualified Subsidiaries of Holdings not to exceed $20,000,000 in the aggregate; (g) Investments constituting Permitted Business Acquisitions so long as, after giving effect to the consummation of the transactions contemplated by each Permitted 23 Business Acquisition, the Loans to be made and the Letters of Credit to be issued under the Corporate Credit Agreement and the loans to be made under the Equipment Lease Credit Agreements in connection therewith, the sum of (i) the cash and Cash Equivalents then held by Holdings, (ii) the Available Commitments of all the Lenders under the Corporate Credit Agreement, and (iii) the Available Commitments and Available Investor Commitments under the Equipment Lease Participation Agreements at such time, equals at least $20,000,000; (h) Investments or acquisitions by Holdings or its Subsidiaries in (i) up to 50% of the shares of capital stock, partnership interests, joint venture interests, limited liability company interests or other similar equity interests in, a Person (other than a Subsidiary), or (ii) loans or advances to a Person (other than a Subsidiary), provided that the aggregate -------- amount of all such loans, advances, investments or acquisitions does not exceed $25,000,000 in any fiscal year; (i) Loans to employees, officers and directors of Holdings and its Subsidiaries to acquire shares of capital stock of Holdings not to exceed $20,000,000; and (j) the purchase by the TIDES Trust of the TIDES Debentures, as contemplated under the TIDES Declaration of Trust. 11.11 Limitation on Optional Payments and Modifications of Debt ---------------------------------------------------------------- Instruments. (i) Make any optional payment or prepayment on or redemption, - ----------- purchase or defeasance of any portion of the Shareholder Subordinated Debt, (ii) make any optional payment or prepayment in excess of $10,000,000 during any calendar year on or redemption of any Indebtedness other than (a) redemptions of any portion of the TIDES Debentures pursuant to the TIDES Indenture or redemptions of any portion of the TIDES pursuant to the TIDES Declaration of Trust or (b) any optional payment, prepayment or redemption of any Indebtedness pursuant to the Corporate Credit Agreement, the Equipment Lease Credit Agreements or (iii) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any Indebtedness other than (a) any Indebtedness pursuant to the Corporate Credit Agreement, the Equipment Lease Credit Agreements or (b) any amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon, or any amendment or waiver which would render the terms of such Indebtedness less restrictive. 11.12 Transactions with Affiliates. Except for transactions of a ----------------------------------- type set forth on Schedule 11.12, enter into any transaction, including, without -------------- limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is otherwise permitted under this Agreement, is in the ordinary course of Holdings' or such Subsidiary's business and is upon fair and reasonable terms no less favorable to Holdings or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. 24 11.13 Sale and Leaseback. Except for the transactions of a type set ------------------------- forth on Schedule 11.13, enter into any arrangement with any Person where Holdings or any of the Subsidiaries of Holdings is the lessee of real or personal property which has been or is to be sold or transferred by Holdings or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Holdings or such Subsidiary (any of such arrangements, a "Sale ---- and Leaseback Transaction"), except that (i) HCC and its Subsidiaries may enter - ------------------------- into Financing Leases as lessee for natural gas compressors and oil and gas production equipment if after giving effect thereto subsection 11.2 is not contravened and (ii) HCC may enter into Sale and Leaseback Transactions as lessee for natural gas compressors in connection with the Equipment Lease Transactions. 11.14 Corporate Documents. Amend its Certificate of Incorporation in -------------------------- any way adverse to the interests of the Agent and the Lenders. 11.15 Fiscal Year. Permit the fiscal year of Holdings to end on a day ------------------ other than December 31. 11.16 Nature of Business. Engage in any business other than (a) the ------------------------- leasing, maintenance, purchase, sale and operation of natural gas compressor units and oil and gas production equipment, (b) the design, engineering and fabrication of natural gas compressor units, (c) the design, engineering and fabrication of oil and gas production equipment, (d) the provision of contract compression and related services, (e) the provision of gas metering services as contemplated under the HMS Transactions, and (f) any activities related thereto which are consistent with past practice and conducted in the ordinary course of business. 11.17 Unqualified Subsidiaries. Permit any Unqualified Subsidiary to ------------------------------- directly or indirectly own any assets (other than cash or Cash Equivalents located in bank accounts at Chase) which are located in the United States of America or any territory thereof. 12. Miscellaneous. ------------- 12.1 Notices. All notices, requests and demands to or upon the ------- respective parties hereto to be effective shall be in writing (including by facsimile transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) when delivered by hand, (b) one Business Day after delivery to a nationally recognized courier service specifying overnight delivery, (c) three Business Days after being deposited in the mail, certified or registered, postage prepaid, or (d) in the case of facsimile notice, when sent and receipt has been confirmed, addressed as follows: (a) if to the Agent or any Lender, at its address or transmission number for notices provided in Section 9.2 of the Credit Agreement; and (b) if to any Guarantor, at its address or transmission number for notices set forth on the signature page below. 25 (c) if to the Investors, at their address or transmission number for notices provided in Section 13.3 of the Participation Agreement. The Investors, Agent, each Lender and each Guarantor may change its address and transmission numbers for notices by notice in the manner provided in this Section 12. 12.2 Severability. Any provision of this Guarantee which is ------------------- prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.3 Integration. This Guarantee and the other Operative Agreements ------------------ represents the agreement of the Guarantors with respect to the subject matter hereof and there are no promises or representations by the Investors, Agent, any Lender or any Guarantor relative to the subject matter hereof not reflected herein or in the other Operative Agreements. 12.4 Amendments in Writing; No Waiver; Cumulative Remedies (a) None ------------------------------------------------------------ of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except as provided in Section 9.1 of the Credit Agreement. (b) Neither the Investors, Agent nor any Lender shall not by any act (except by a written instrument pursuant to Section 15(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Investors, Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by both Investors, Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Investors, Agent or such Lender would otherwise have on any future occasion. (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 12.5 Section Headings. The section headings used in this Guarantee ----------------------- are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 12.6 Successors and Assigns. This Guarantee shall be binding upon ----------------------------- the successors and assigns of the Guarantors and shall inure to the benefit of the Investors, Agent and the Lenders and their successors and assigns. 26 12.7 SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH GUARANTOR HEREBY ------------------------------------------ IRREVOCABLY AND UNCONDITIONALLY: (b) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE AND THE OTHER OPERATIVE AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGEMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (c) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (d) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO SUCH PERSON AT ITS ADDRESS SET FORTH IN SECTION 12 OR AT SUCH OTHER ADDRESS OF WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (e) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (f) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES. 12.8 GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND -------------------- CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 12.9 Survival of Representations, Warranties, etc. All --------------------------------------------------- representations, warranties, covenants and agreements made herein and in statements or certificates delivered pursuant hereto shall survive any investigation or inspection made by or on behalf of the Lessor and shall continue in full force and effect until all of the obligations of the Guarantors under this Guaranty shall be fully performed in accordance with the terms hereof, and until the payment in 27 full of all the Guaranteed Obligations, and until performance in full of all obligations of HCC in accordance with the terms and provisions of such agreements. 12.10 Authority of Agent. Each Guarantor acknowledges that the rights ------------------------- and responsibilities of the Agent under this Guarantee with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Investors, Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and each Guarantor, the Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Guarantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 12.11 Third Party Beneficiaries. Each Guarantor expressly -------------------------------- acknowledges and agrees that each Indemnified Person shall be a third party beneficiary of this Guarantee. 12.12 Right of Contribution. Each Guarantor hereby agrees that to the ---------------------------- extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder who has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 4 hereof. The provisions of this Section shall in no respect limit the obligations and liabilities of any Guarantor to Beneficiaries and each Guarantor shall remain liable to the Beneficiaries for the full amount guaranteed by such Guarantor hereunder. 12.13 WAIVER OF JURY TRIAL. THE GUARANTORS EACH HEREBY IRREVOCABLY --------------------------- AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY AND FOR ANY COUNTERCLAIM THEREIN. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. HANOVER COMPRESSOR COMPANY By: ______________________________ Name: Title: HANOVER COMPRESSION INC. By: ______________________________ Name: Title: HANOVER COMPRESSOR LIMITED HOLDINGS, LLC by Hanover General Holdings, Inc., as sole member By: ______________________________ Name: Title: HANOVER MAINTECH LIMITED PARTNERSHIP by Hanover General Holdings, Inc., As general partner By: ______________________________ Name: Title: HANOVER/SMITH LIMITED PARTNERSHIP by Hanover General Holdings, Inc., as general partner By: ______________________________ Name: Title: HANOVER LAND LIMITED PARTNERSHIP by Hanover General Holdings, Inc., general partner By: ______________________________ Name: Title: Address for Notices for all Guarantors: 12001 North Houston Rosslyn Houston, Texas 77806 Attention: Chief Financial Officer Telecopy: 281-477-0821 with a copy to: Latham & Watkins Sears Tower, Suite 5800 233 South Wacker Drive Chicago, Illinois 60606 Attention: Richard S. Meller and Michael A. Pucker Telecopy: 312-993-9767 EX-10.56 7 0007.txt PARTICIPATION AGREEMENT EXHIBIT 10.56 EXECUTION COPY ================================================================================ PARTICIPATION AGREEMENT among HANOVER COMPRESSION INC., as Lessee, HANOVER EQUIPMENT TRUST 2000B, a Delaware business trust, as Lessor, BANK HAPOALIM B.M. and FBTC LEASING CORP., as Investors, NATIONAL WESTMINSTER BANK PLC, as Managing Agent, CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON and THE INDUSTRIAL BANK OF JAPAN, LTD., as Co-Agents, THE CHASE MANHATTAN BANK, as Agent and THE LENDERS PARTIES HERETO _______________________ Dated as of October 27, 2000 _______________________ TABLE OF CONTENTS -----------------
Page ---- SECTION 1. THE LOANS.................................................................................. 1 - ---------- -------- 1.1 Loans...................................................................................... 1 --- ----- 1.2 Credit Agreement........................................................................... 1 --- ---------------- 1.3 Collateral For Loans....................................................................... 1 --- -------------------- 1.4 Guarantee.................................................................................. 1 --- --------- SECTION 2. INVESTOR CONTRIBUTION...................................................................... 1 - ---------- --------------------- 2.1 Investor Contribution...................................................................... 1 --- --------------------- SECTION 3. SUMMARY OF THE TRANSACTIONS................................................................ 2 - ---------- --------------------------- 3.1 Operative Agreements....................................................................... 2 --- -------------------- 3.2 Equipment Purchase and Lease............................................................... 2 --- ---------------------------- 3.3 Aggregate Tranche A Percentage; Tranche A Percentage....................................... 2 --- ---------------------------------------------------- SECTION 4. THE CLOSINGS............................................................................... 2 - ---------- ------------ 4.1 Initial Closing Date....................................................................... 2 --- -------------------- 4.2 Subsequent Closing Dates................................................................... 2 --- ------------------------ SECTION 5. FUNDING OF ADVANCES........................................................................ 3 - ---------- ------------------- 5.1 General.................................................................................... 3 --- ------- 5.2 Procedures for Funding..................................................................... 3 --- ---------------------- SECTION 6. CONDITIONS OF THE CLOSINGS AND ADVANCES.................................................... 3 - ---------- --------------------------------------- 6.1 General Conditions to the Investors' and the Lenders' Obligations to Make Loans and --- ----------------------------------------------------------------------------------- Investor Contributions..................................................................... 3 ---------------------- 6.2 Conditions to the Investors' and the Lenders' Obligations to Make Advances to pay --- --------------------------------------------------------------------------------- Equipment Acquisition Costs................................................................ 6 --------------------------- SECTION 7. REPRESENTATIONS AND WARRANTIES............................................................. 8 - ---------- ------------------------------ 7.1 Representations and Warranties of the Investors on the Initial Closing Date................ 8 --- --------------------------------------------------------------------------- 7.2 Representations and Warranties of Lessor on the Initial Closing Date....................... 9 --- -------------------------------------------------------------------- 7.3 Representations and Warranties of the Lessee on the Initial Closing Date................... 11 --- ------------------------------------------------------------------------ 7.4 Representations and Warranties of the Trust Company on the Initial Closing Date............ 11 --- ------------------------------------------------------------------------------- 7.5 Representations and Warranties of the Lessee on Equipment Closing Dates.................... 12 --- ----------------------------------------------------------------------- 7.6 Representations and Warranties of the Lessor on Equipment Closing Dates.................... 15 --- ----------------------------------------------------------------------- SECTION 8. PAYMENT OF CERTAIN EXPENSES................................................................ 15 - ---------- --------------------------- 8.1 Transaction Expenses....................................................................... 15 --- -------------------- 8.2 Brokers' Fees and Stamp Taxes.............................................................. 16 --- ----------------------------- 8.3 Certain Fees and Expenses.................................................................. 16 --- --------------------------
8.4 Credit Agreement and Related Obligations................................................... 16 --- ---------------------------------------- 8.5 Commitment Fees............................................................................ 17 --- --------------- 8.6 Overdue Rate............................................................................... 17 --- ------------ 8.7 Continuous Perfection of Security Interests................................................ 17 --- ------------------------------------------- 8.8 Oklahoma Equipment Subleases............................................................... 17 --- ---------------------------- SECTION 9. OTHER COVENANTS AND AGREEMENTS............................................................. 17 - ---------- ------------------------------ 9.1 Covenants of the Trust and the Investors and the Trust Company............................. 17 --- -------------------------------------------------------------- 9.2 Repayment of Certain Amounts on Maturity Date.............................................. 19 --- --------------------------------------------- 9.3 Amendment of Certain Documents............................................................. 19 --- ------------------------------ 9.4 Proceeds of Casualty....................................................................... 20 --- -------------------- 9.5 Intercreditor Agreement.................................................................... 20 --- ----------------------- 9.6 Appraisal.................................................................................. 20 --- --------- SECTION 10. CREDIT AGREEMENT........................................................................... 20 - ----------- ---------------- 10.1 Lessee's Credit Agreement Rights........................................................... 20 ---- -------------------------------- SECTION 11. TRANSFER OF INTEREST....................................................................... 21 - ----------- -------------------- 11.1 Restrictions on Transfer................................................................... 21 ---- ----------------------- 11.2 Effect of Transfer......................................................................... 22 ---- ------------------ SECTION 12. INDEMNIFICATION............................................................................ 22 - ----------- --------------- 12.1 General Indemnity.......................................................................... 22 ---- ----------------- 12.2 General Tax Indemnity...................................................................... 23 ---- --------------------- SECTION 13. MISCELLANEOUS.............................................................................. 26 - ----------- ------------- 13.1 Survival of Agreements..................................................................... 26 ---- ---------------------- 13.2 No Broker, etc............................................................................. 27 ---- -------------- 13.3 Notices.................................................................................... 27 ---- ------- 13.4 Counterparts............................................................................... 28 ---- ------------ 13.5 Amendments and Termination................................................................. 28 ---- -------------------------- 13.6 Headings, etc.............................................................................. 29 ---- ------------- 13.7 Parties in Interest........................................................................ 29 ---- ------------------- 13.8 GOVERNING LAW.............................................................................. 29 ---- ------------- 13.9 Severability............................................................................... 29 ---- ------------ 13.10 Liability Limited.......................................................................... 29 ----- ----------------- 13.11 Rights of Lessee........................................................................... 29 ----- ---------------- 13.12 Further Assurances......................................................................... 29 ----- ------------------ 13.13 Successors and Assigns..................................................................... 30 ----- ---------------------- 13.14 No Representation or Warranty.............................................................. 30 ----- ----------------------------- 13.15 Highest Lawful Rate........................................................................ 30 ----- ------------------- 13.16 Waiver..................................................................................... 31 ----- ------
-ii- Annex A Rules of Usage and Definitions Annex B Pricing Grid Exhibits - -------- Exhibit A Form of Assignment of Leases and Consent to Assignment Exhibit B Form of Security Agreement Exhibit C Form of Guarantee Exhibit D Form of Requisition Exhibit E Equipment Closing Certificate -iii- 1 PARTICIPATION AGREEMENT dated as of October 27, 2000 (this "Agreement"), among HANOVER COMPRESSION INC., a Delaware corporation (the "Lessee"); HANOVER EQUIPMENT TRUST 2000B, a Delaware business trust (the "Trust" ------ ----- or the "Lessor"); THE CHASE MANHATTAN BANK, a New York banking corporation, as ------ agent (in such capacity, the "Agent"); NATIONAL WESTMINSTER BANK PLC, as ----- managing agent (the "Managing Agent"), CITIBANK, N.A., CREDIT SUISSE FIRST -------------- BOSTON and THE INDUSTRIAL BANK OF JAPAN, LTD., as Co-Agents (the "Co-Agents"); --------- BANK HAPOALIM B.M. and FBTC LEASING CORP., as Investors (the "Investors"); --------- WILMINGTON TRUST COMPANY, in its individual capacity, and each of the financial institutions listed on the signature pages hereof (each, a "Lender"; ------ collectively, the "Lenders"). Capitalized terms used but not otherwise defined ------- in this Agreement shall have the meanings set forth in Annex A hereto. Preliminary Statement --------------------- In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. THE LOANS 1.1 Loans. The Lenders have agreed to make loans to the Lessor in an ---------- aggregate principal amount of up to $167,411,167 in order for the Lessor to acquire the Equipment and to pay other Equipment Acquisition Costs. 1.2 Credit Agreement. The Loans shall be made pursuant to the Credit --------------------- Agreement. Pursuant to this Agreement and the Credit Agreement, the Loans will be made to the Lessor from time to time at the request of the Lessee. 1.3 Collateral For Loans. The Loans and the obligations of the Lessor ------------------------- under the Credit Agreement shall be secured by, inter alia, (i) a first priority ----- ---- assignment of the Lease, granted pursuant to the Assignment of Lease and consented to by the Lessee pursuant to the Consent to Assignment (in each case in the respective forms set forth on Exhibit A hereto), and (ii) a first --------- priority security interest in each piece of Equipment pursuant to a Security Agreement in the form set forth on Exhibit B hereto. --------- 1.4 Guarantee. The obligations of the Lessor under the Credit -------------- Agreement shall be guaranteed by the Guarantors to the extent provided in the Guarantee (in the form attached hereto as Exhibit C). --------- SECTION 2. INVESTOR CONTRIBUTION 2.1 Investor Contribution. Subject to the terms and conditions of -------------------------- this Agreement, and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, on the first Equipment Closing Date, the Investors shall make an investment in the Lessor (an "Investor Contribution") in an amount equal to the Investor Commitment. The --------------------- Lessor shall use the Investor Contributions to pay a portion of the Equipment Acquisition Costs simultaneously and pro rata with the Loans advanced by the Lenders. The Lessee shall have the right to prepay the Investor Contribution, in connection with the exercise 2 by the Lessee of its right to direct the Lessor to prepay the Loans in accordance with Section 10.1(e). SECTION 3. SUMMARY OF THE TRANSACTIONS 3.1 Operative Agreements. On the Initial Closing Date, each of the ------------------------- respective parties thereto shall execute and deliver this Agreement, the Lease, the Security Agreement, the Notes, the Guarantee, the Credit Agreement, the Assignment of Lease, the Consent to Assignment, and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. 3.2 Equipment Purchase and Lease. (a) On each Equipment Closing Date --------------------------------- and subject to the terms and conditions of this Agreement and the Credit Agreement (i) the Lenders will make Loans in accordance with Section 5 hereof and the terms and provisions of the Credit Agreement, which Loans will be secured by the Security Agreement executed and delivered by the Lessor and joined in by the Lessee, (ii) the Lessor will purchase all right, title and interest of Lessee in and to each piece of Equipment to be purchased on such Equipment Closing Date and (iii) the Lessor will simultaneously lease all of its right, title and interest in such Equipment to the Lessee by executing and delivering a Lease Supplement. (b) On each Equipment Closing Date, the Lessee shall certify to the Agent on the Equipment Closing Certificate the Tranche A Percentage for each piece of Equipment being acquired on such Equipment Closing Date. The Tranche A Percentage so certified shall be the Tranche A Percentage for such piece of Equipment for the duration of the Term. 3.3 Aggregate Tranche A Percentage; Tranche A Percentage. (a) --------------------------------------------------------- Notwithstanding any other provision of this Agreement or the other Operative Agreements, the Lessee agrees that in no event shall the Lessee specify a piece of Equipment for the Lessor to acquire and lease pursuant to the execution and delivery of a Lease Supplement if the Aggregate Tranche A Percentage after giving effect to the acquisition and lease pursuant to the execution and delivery of a Lease Supplement of such Equipment would be less than 85%. (b) Notwithstanding any other provision of this Agreement or the other Operative Agreements, the Lessee agrees that in no event shall the Lessee specify a piece of Equipment for the Lessor to acquire and lease pursuant to the execution and delivery of a Lease Supplement if the Tranche A Percentage with respect to such Equipment would be less than 85%. SECTION 4. THE CLOSINGS 4.1 Initial Closing Date. All documents and instruments required to ------------------------- be delivered on the Initial Closing Date shall be delivered at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at such other location as may be determined by the Agent and the Lessee. 4.2 Subsequent Closing Dates. The Lessee shall deliver to the Lessor, ----------------------------- the Investors and the Agent a Requisition appropriately completed, in connection with each Closing Date. 3 SECTION 5. FUNDING OF ADVANCES 5.1 General. To the extent funds have been made available to the ------------ Lessor as Loans and Investor Contributions, the Lessor will: (i) acquire the Equipment in accordance with the terms of this Agreement and the other Operative Agreements; (ii) on behalf of the Lessee, pay Transaction Expenses; and (iii) pay all other Equipment Acquisition Costs. 5.2 Procedures for Funding. (a) Not less than three Business Days --------------------------- prior to each proposed Closing Date (other than the Initial Closing Date), the Lessee shall deliver to the Investors and the Agent, a requisition (a "Requisition"), appropriately completed, in the form of Exhibit D hereto. ----------- --------- (b) Each Requisition shall: (i) be irrevocable; and (ii) request funds in an amount of at least $200,000 (or such lesser amounts as shall be equal to the total aggregate of the Available Commitments plus the Available Investor Commitment at such time) for the payment of Equipment Acquisition Costs or other Equipment Acquisition Costs which have previously been incurred and were not the subject of and funded pursuant to a prior Requisition, in each case as specified in the Requisition. (c) So long as no Default or Event of Default has occurred and is continuing and subject to the Lessor and the Agent having each received the materials required by Section 6.1 and/or 6.2, as applicable, on each Equipment Closing Date (i) the Lenders shall make Loans to the Lessor in an aggregate amount not to exceed 97% of the aggregate funds specified in any Requisition, up to an aggregate principal amount equal to the Available Commitments; (ii) with respect to the first Equipment Closing Date, the Investors shall have made an Investor Contribution in an amount equal to the Investor Commitment; and (iii) the total amount of such Loans made on such date and Investor Contribution made on the first Equipment Closing Date shall be used to fully cover the aggregate Equipment Cost (after giving effect to amounts to be paid in connection with the Equipment Acquisition Cost for such Equipment Closing Date). (d) Notwithstanding anything to the contrary in this Agreement, (i) the Lenders shall not be required to make Loans in an aggregate amount with respect to all the Equipment in excess of 97% of the amount allocated to all such Equipment (after giving effect to the Equipment purchased in connection with the Requisition). SECTION 6. CONDITIONS OF THE CLOSINGS AND ADVANCES 6.1 General Conditions to the Investors' and the Lenders' ---------------------------------------------------------- Obligations to Make Loans and Investor Contributions. The agreement of each - ---------------------------------------------------- Lender to make Loans, and the Investors to make Investor Contributions, is subject to the satisfaction or waiver, immediately prior to or concurrently with the making of such Loans and Investor Contribution, of the following conditions precedent: (a) Operative Agreements. Each of the Operative Agreements entered -------------------- into on the Initial Closing Date or subsequently on an Equipment Closing Date shall have been duly authorized, executed, acknowledged and delivered by the parties thereto and shall be in full force and effect, and no event of default thereunder or default under Section 17.1(a) 4 or (b) of the Lease shall exist (both before and after giving effect to the transactions contemplated by the Operative Agreements), and the Agent and the Investors shall have received a fully executed copy of each of the Operative Agreements (other than the Notes of which the Agent shall have received the originals thereof); (b) Taxes. All taxes, fees and other charges in connection with the ----- execution, delivery, and, where applicable, recording, filing and registration of the Operative Agreements shall have been paid or provisions for such payment shall have been made to the reasonable satisfaction of the Agent and both Investors; (c) Governmental Approvals. All necessary (or, in the reasonable ---------------------- opinion of the Agent, the Investors and their respective counsel, advisable) Governmental Actions, in each case required by any law or regulation enacted, imposed or adopted on or after the date hereof or by any change in fact or circumstances since the date hereof, shall have been obtained or made and be in full force and effect; (d) Insurance. The Agent and the Investors shall have received --------- evidence in form and substance reasonably satisfactory to them that all of the requirements of Section 14 of the Lease shall have been satisfied (which evidence shall include a report from a reputable insurance broker certifying that all such requirements have been satisfied and otherwise in form and substance satisfactory to Agent and both Investors); (e) Legal Requirements. The transactions contemplated by the ------------------ Operative Agreements do not and will not violate in any respect any Legal Requirements that would reasonably be expected to have a Material Adverse Effect and do not and will not subject the Agent, any Lender or the Investors to any adverse regulatory prohibitions or constraints; (f) Corporate Proceedings of the Lessee and Each Guarantor. On the ------------------------------------------------------ Initial Closing Date, the Agent and the Investors shall have received a copy of the resolutions or minutes, in form and substance satisfactory to the Agent and both Investors, of the Board of Directors of the Lessee and each Guarantor authorizing the execution, delivery and performance of this Agreement, the Guarantee and the other Operative Agreements to which it is a party, certified by the Secretary or an Assistant Secretary of the Lessee or of such Guarantor as of the Initial Closing Date, which certificate shall be in form and substance reasonably satisfactory to the Agent and both Investors and shall state that the resolutions or minutes thereby certified have not been amended, modified, revoked or rescinded; (g) Lessee and Guarantor Incumbency Certificate. On the Initial ------------------------------------------- Closing Date, the Agent and the Investors shall have received a certificate of the Lessee and each Guarantor, dated the Initial Closing Date, as to the incumbency and signature of the officers of the Lessee and each Guarantor executing any Operative Agreement reasonably satisfactory in form and substance to the Agent and both Investors, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Lessee or of such Guarantor; 5 (h) [Reserved] (i) Corporate Proceedings of the Trust Company. On the Initial ------------------------------------------ Closing Date, the Agent, the Investors and the Lessee shall have received a copy of the resolutions, in form and substance reasonably satisfactory to the Agent, both Investors and the Lessee, of the Board of Directors of the Trust Company authorizing the execution, delivery and performance of the Operative Agreements to which it is a party, certified by the Secretary or an Assistant Secretary of the Trust Company as of the Initial Closing Date, which certificate shall be in form and substance satisfactory to the Agent, both Investors and the Lessee and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded; (j) Trust Company Incumbency Certificate. On the Initial Closing Date ------------------------------------ the Agent, both Investors and the Lessee shall have received a certificate of the Trust Company, dated the Initial Closing Date, as to the incumbency and signature of the officers of the Trust Company executing any Operative Agreement, satisfactory in form and substance to the Agent, both Investors and the Lessee, executed by the President or any Vice President, Assistant Vice President, or a duly authorized Trust Officer and the Secretary or any Assistant Secretary of the Trust Company; (k) Corporate Documents. (i) The Agent and both Investors shall have ------------------- received true and complete copies of the certificate of incorporation and by-laws of the Lessee, certified as of the Initial Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Lessee; (ii) The Agent and the Lessee shall have received true and complete copies of the articles of incorporation and by-laws of each of the Investors, certified as of the Initial Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of each of the Investors; (l) Consents, Licenses and Approvals. All consents, authorizations -------------------------------- and filings required in order to allow Lessee to consummate the transaction contemplated by this Agreement shall have been obtained and be in full force and effect, except to the extent the failure to obtain or maintain any such consent, authorization or filing would not individually or in the aggregate have a Material Adverse Effect; (m) Fees. The Agent and the Arranger shall have received the fees to ---- be paid on the Initial Closing Date pursuant to the Fee Letter which fees shall not be paid using the proceeds of the Loans or Investor Contributions; (n) Legal Opinions. (i) On the Initial Closing Date, the Agent and -------------- the Investors shall have received the executed legal opinion of Latham & Watkins, in form and substance reasonably acceptable to the Agent; (ii) On the Initial Closing Date, the Agent, the Lessee and the Investors shall have received the executed legal opinion of Morris, James, Hitchens & 6 Williams LLP, special Delaware counsel to the Lessor and the Trust Company, in form and substance reasonably acceptable to the Agent; and (iii) By the first Equipment Closing Date Agent, the Lessee, and the Investors shall have received the executed legal opinions of (a) Jackson Walker L.L.P., local counsel to the Lessee and the Guarantors in Texas and Louisiana, (b) Holland & Hart, local counsel to the Lessee and the Guarantors in Colorado and Wyoming, (c) Hinkle, Hensley, Shanor & Martin, L.L.P., local counsel to the Lessee and the Guarantors in New Mexico, (d) Mock, Schwabe, Waldo, Elder, Reeves & Bryant, local counsel to the Lessee and the Guarantors in Oklahoma, (e) Bryan Cave LLP, local counsel to the Lessee and the Guarantors in Kansas, (f) Balch & Bingham LLP, local counsel to the Lessee and the Guarantors in Alabama and (g) [ ], local counsel to the Lessee and the Guarantors in Arkansas, in form and substance reasonably acceptable to the Agent; (o) Actions to Perfect Liens. The Agent shall have received evidence ------------------------ in form and substance satisfactory to it that all filings, recordings, registrations and other actions, including the filing of duly executed Lender Financing Statements and Lessor Financing Statements, necessary or, in the opinion of the Agent or the Investors, desirable to perfect the Liens created by the Security Documents shall have been completed; (p) Lien Searches. By the first Equipment Closing Date the Agent and ------------- the Investors shall have received the results of recent search by a Person reasonably satisfactory to the Agent, of the Uniform Commercial Code, judgement and tax lien filings which may have been filed in each State in which any Equipment is located with respect to personal property of the Lessee, and the results of such search shall be satisfactory to the Agent and [both] Investors; (q) Representations and Warranties. The representations and ------------------------------ warranties of the Lessor, the Lessee, the Investors and the Guarantor contained herein and in each of the other Operative Agreements shall be true and correct in all material respects on and as of each Closing Date as if made on and as of each Closing Date (unless such representations and warranties specifically refer to another date); (r) Performance of Operative Agreements. The parties hereto (other ----------------------------------- than the Investors or the Lenders) shall have performed in all material respects their respective agreements contained herein and in the other Operative Agreements on or prior to each such Closing Date; and (s) Default. There shall not have occurred and be continuing any ------- Default or Event of Default and no Default or Event of Default will have occurred after giving effect to the Advance requested by such Requisition. 6.2 Conditions to the Investors' and the Lenders' Obligations to ----------------------------------------------------------------- Make Advances to pay Equipment Acquisition Costs. - ------------------------------------------------ The obligations of the Investors to make the Investor Contribution, on the first Equipment Closing Date, and of the Lenders to make Loans to the Lessor, on an Equipment 7 Closing Date, for the purpose of providing funds to the Lessor necessary to acquire a piece of Equipment are subject to the satisfaction or waiver of the following conditions precedent: (a) Requisition. The Agent and the Investors shall have received a ----------- fully executed counterpart of the Requisition dated as of the Equipment Closing Date (but delivered at least three Business Days prior to the Equipment Closing Date other than on the Initial Closing Date), appropriately completed; (b) Bill of Sale. There shall have been delivered to the Lessor, a ------------ bill of sale (the "Bill of Sale"), in form and substance reasonably acceptable ------------ to the Agent, with respect to each piece of Equipment being purchased on such Equipment Closing Date, conveying title to such piece of Equipment to the Lessor, subject only to the Permitted Exceptions; (c) Title. The Lessor shall have good and valid title to the ----- Equipment being acquired on such Equipment Closing Date subject only to the Permitted Exceptions, and the Lessor shall have granted the security interest pursuant to the Security Agreement with respect to the Equipment. (d) Lease Supplement. The Lessee shall have delivered a Lease ---------------- Supplement executed by the Lessee and the Lessor with respect to all Equipment being acquired on such Equipment Closing Date to the Agent; (e) Security Agreement Supplement. The Lessee shall have delivered a ----------------------------- supplement to the Security Agreement executed by the Lessor with respect to each piece of Equipment being acquired on such Equipment Closing Date to the Agent that is not already subject to the Security Agreement. The Lien of the Security Agreement, as supplemented, shall conform to the representations and warranties set forth in Section 7.5(f); (f) Supplement to Assignment of Lease. The Lessor shall have --------------------------------- delivered an original Supplement to Assignment of Lease executed by the Lessor with respect to each piece of Equipment being acquired on such Equipment Closing Date that is not already subject to the Assignment of Lease; (g) Appraisal. The Agent and the Investors shall have received an --------- Appraisal of the Equipment being acquired on such Equipment Closing Date and such Appraisal shall be in form and substance acceptable to the Agent, both Investors and the Lessor; (h) Default. There shall not have occurred and be continuing any ------- Default or Event of Default and no Default or Event of Default will have occurred after giving effect to the Advance requested by such Requisition; (i) Local Opinions. With respect to each piece of Equipment being -------------- acquired on such Equipment Closing Date: (i) the Agent and the Investors shall have received the executed legal opinion of local counsel to the Lessee and the Guarantors in the state in which such Equipment is located, in form and substance reasonably acceptable to the Agent; 8 (ii) the Agent, the Lessee and the Investors shall have received the executed legal opinion of special Delaware counsel to Lessor and the Trust Company, in form and substance reasonably acceptable to the Agent; and (iii) the Agent and the Investors shall have received the executed legal opinion of counsel to Lessee and the Guarantors, substantially in form and substance reasonably acceptable to the Agent. SECTION 7. REPRESENTATIONS AND WARRANTIES 7.1 Representations and Warranties of the Investors on the Initial ------------------------------------------------------------------- Closing Date. Each of the Investors represents and warrants to each of the other - ------------ parties hereto as of the Initial Closing Date as follows: (a) Due Organization, etc. It is a duly organized and validly --------------------- existing corporation in good standing under the laws of its state of incorporation and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under this Agreement, each Operative Agreement to which it is a party and each other agreement, instrument and document executed and delivered by it on the Closing Date in connection with or as contemplated by each such Operative Agreement to which it is or will be a party. (b) Authorization; No Conflict. The execution, delivery and -------------------------- performance of each Operative Agreement to which it is a party has been duly authorized by all necessary action on its part and neither the execution and delivery thereof by the Investor, nor the consummation of the transactions contemplated thereby by the Investor, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of (which approval has not been obtained) the shareholders of, or approval or consent of any Person, (ii) contravenes or will contravene any Legal Requirement applicable to or binding on it as of the date hereof, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lessor Lien upon the Equipment, its articles of incorporation or by-laws, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it or its properties may be bound or (iv) does or will require any Governmental Action by any Governmental Authority other than any Governmental Action required solely due to the nature of the Equipment. (c) Enforceability, etc. Each Operative Agreement to which it is a -------------------- party has been duly executed and delivered by it and constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against it in accordance with the terms thereof except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 9 (d) ERISA. The Investor is making the Investor Contribution ----- contemplated to be made by it hereunder for its own account and with its general corporate assets in the ordinary course of its business, and no part of such amount constitutes (i) "plan assets" under 29 CFR 2510.3-101 or (ii) assets of a "governmental plan" as defined under Section 3(32) of ERISA. (e) Litigation. To its knowledge, no litigation, investigation or ---------- proceeding of or before any arbitrator or Governmental Authority is pending or threatened by or against the Investor (a) with respect to any of the Operative Agreements or any of the transactions contemplated hereby or thereby, or (b) which would reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Investor. (f) Lessor Liens. The Equipment is free and clear of Lessor Liens ------------ attributable to the Investors. 7.2 Representations and Warranties of Lessor on the Initial Closing -------------------------------------------------------------------- Date. Lessor represents and warrants to each of the other parties hereto as of - ---- the Initial Closing Date as follows: (a) Due Organization, etc. Lessor is a duly organized and validly ---------------------- existing business trust in good standing under the laws of the State of Delaware and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under this Agreement, each Operative Agreement to which it is a party and each other agreement, instrument and document executed and delivered by it on the Closing Date in connection with or as contemplated by each such Operative Agreement. (b) Authorization; No Conflict. The execution, delivery and -------------------------- performance of each Operative Agreement to which it is a party has been duly authorized by all necessary action on its part and neither the execution and delivery thereof by the Lessor, nor the consummation of the transactions contemplated thereby by the Lessor, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of (which approval has not been obtained) any party or approval or consent of any Person, (ii) contravenes or will contravene any Legal Requirement applicable to or binding on it as of the date hereof, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lessor Lien upon the Equipment or the Trust Agreement, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it or its properties may be bound or (iv) does or will require any Governmental Action by any Governmental Authority. (c) Enforceability, etc. Each Operative Agreement to which it is a -------------------- party has been duly executed and delivered by it and constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against it in accordance with the terms thereof except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of 10 creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) Litigation. No litigation, investigation or proceeding of or ---------- before any arbitrator or Governmental Authority is pending or threatened by or against the Lessor (a) with respect to any of the Operative Agreements or any of the transactions contemplated hereby or thereby, or (b) which would reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. (e) Assignment. Lessor has not assigned or transferred any of its ---------- right, title or interest in or under the Lease, any other Operative Agreement or any Equipment, except in accordance with the other Operative Agreements. (f) No Default. The Lessor is not in default under or with respect to ---------- any of its Contractual Obligations in any respect which would reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. No Default or Event of Default attributable to it has occurred and is continuing. (g) Use of Proceeds. The proceeds of the Loans and the Investor --------------- Contribution shall be applied by the Lessor solely in accordance with the provisions of the Operative Agreements. (h) Chief Place of Business. The Lessor's chief place of business, ----------------------- chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. (i) Federal Reserve Regulations. The Lessor is not engaged --------------------------- principally in, and does not have as one of its most important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board), and no part of the proceeds of the Loans will be used by it, directly or indirectly, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations of the Board, including but not limited to, T, U or X of the Board. (j) Investment and Holding Company Status. The Lessor is not (i) an ------------------------------------- "investment company" as defined in, or subject to regulation under the Investment Company Act of 1940 or (ii) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. (k) Securities Act. Neither the Lessor nor any Person authorized by -------------- the Lessor to act on its behalf has offered or sold any interest in the Equipment or the Notes, or in any similar security or interest relating to the Equipment, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same 11 offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than, in the case of the Notes, the Agent, and neither the Lessor nor any Person authorized by the Lessor to act on its behalf will take any action which would subject the issuance or sale of any interest in the Equipment or the Notes to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Agreement under the Trust Indenture Act of 1939, as amended. (l) ERISA. The Lessor is making the Lessor Contribution contemplated ----- to be made by it hereunder in the ordinary course of its business, and no part of such amount constitutes (i) "plan assets" under 29 CFR 2510.3-101 or (ii) assets of a "governmental plan" as defined under Section 3(32) of ERISA. (m) Lessor Liens. The Equipment is free and clear of all Lessor ------------ Liens. 7.3 Representations and Warranties of the Lessee on the Initial ----------------------------------------------------------------- Closing Date. Each of the representations and warranties of the Lessee set forth - ------------ in Section 9 of the Guaranty are hereby incorporated by reference as if made by Lessee pursuant to the terms of this Agreement and shall for all purposes be deemed to have been made by Lessee hereunder on the Initial Closing Date. 7.4 Representations and Warranties of the Trust Company on the --------------------------------------------------------------- Initial Closing Date. The Trust Company represents and warrants to each of the - -------------------- other parties hereto that: (a) Due Organization, etc. It is a banking corporation duly organized ---------------------- and validly existing and in good standing under the laws of the State of Delaware and has the power and authority to enter into and perform its obligations under the Trust Agreement and has the corporate power and authority to act as the trustee under the Trust Agreement and to enter into and perform the obligations under each of the other Operative Agreements to which Trust Company or the Trust, as the case may be, is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before the Initial Closing Date in connection with or as contemplated by each such Operative Agreement to which the Trust Company or the Trust, as the case may be, is or will be a party. (b) Authorization; No Conflict. The execution, delivery and -------------------------- performance of each Operative Agreement to which it is a party, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by both Investors) as the Trust, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any Person (ii) does or will contravene any current United States federal law, governmental rule or regulation relating to its banking or trust powers, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, its charter or by-laws, or any indenture, mortgage, chattel mortgage, deed of trust, 12 conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected or (iv) does or will require any Governmental Action by any Governmental Authority of the State of Delaware or the United States governing its banking or trust powers. (c) Trust Agreement Enforceability, etc. The Trust Agreement and, ------------------------------------ assuming the Trust Agreement is the legal, valid and binding obligation of both Investors, each other Operative Agreement to which Trust Company or the Trust, as the case may be, is a party have been, or on or before the Closing Date will be, duly executed and delivered by Trust Company or the Trust, as the case may be, and the Trust Agreement and each such other Operative Agreement to the extent entered into by the Trust Company constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against Trust Company in accordance with the terms thereof except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) Litigation. No litigation, investigation or proceeding of or ---------- before any arbitrator or Governmental Authority is pending or threatened by or against the Trust Company with respect to any of the Operative Agreements or any of the transactions contemplated hereby or thereby. (e) Liens. The Trust Estate is free and clear of Lessor Liens ----- attributable to the Trust Company, and there are no Liens affecting the title of the Trust to the Equipment or resulting from any act or claim against the Trust Company arising out of any event or condition not related to the ownership, leasing use or operation of the Equipment or any other transaction contemplated by this Agreement or any of the other Operative Agreements, including any Lien resulting from the nonpayment by the Trust Company of any Taxes imposed or measured by its net income. 7.5 Representations and Warranties of the Lessee on Equipment -------------------------------------------------------------- Closing Dates. The Lessee hereby represents and warrants as of each Equipment - ------------- Closing Date as follows: (a) Representations and Warranties. The representations and ------------------------------ warranties of the Lessee and the Guarantors set forth herein and in each of the other Operative Agreements are true and correct in all material respects on and as of such Equipment Closing Date as if made on and as of such Equipment Closing Date (unless such representations and warranties specifically refer to another date). The Lessee and each Guarantor are in compliance in all material respects with their respective obligations under the Operative Agreements and there exists no Lease Default or Lease Event of Default. (b) No Default. No Default or Event of Default attributable to Lessee ---------- will occur as a result of, or after giving effect to, the Advance requested by the Requisition on such Equipment Closing Date. 13 (c) Authorization by the Lessee. The execution and delivery of each --------------------------- Lease Supplement and other Operative Agreement delivered by the Lessee on such Equipment Closing Date and the performance of the obligations of the Lessee under each such Lease Supplement and other Operative Agreements have been duly authorized by all requisite corporate action of the Lessee. (d) Execution and Delivery by the Lessee. Each Lease Supplement and ------------------------------------ other Operative Agreement delivered on such Equipment Closing Date by the Lessee have been duly executed and delivered by the Lessee. (e) Valid and Binding Obligations. Each Lease Supplement and other ----------------------------- Operative Agreement delivered by the Lessee on such Equipment Closing Date is a legal, valid and binding obligation of the Lessee, enforceable against the Lessee in accordance with its respective terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (f) Filing of UCC Financing Statements and Priority of Liens. The UCC -------------------------------------------------------- Financing Statements with respect to the Equipment being acquired on such Equipment Closing Date have been fully executed and delivered to the Agent on the Equipment Closing Date or have been filed with the appropriate Governmental Authorities so that the liens created pursuant to each of the Operative Agreements constitutes a valid and perfected security interest on each applicable piece of Equipment located thereon in an amount not less than the Equipment Cost with respect to such Equipment subject, in all cases, to the Lessee's right to relocate the Equipment. On such Equipment Closing Date, there are no security interests on the applicable Equipment other than the liens created pursuant to each of the Operative Agreements and other than Permitted Liens. (g) Insurance Coverage. The Lessee maintains insurance coverage for ------------------ each piece of Equipment being acquired by the Lessor on such Equipment Closing Date which meets the requirements of Section 14.1 of the Lease and all of such coverage is in full force and effect. (h) Legal Requirements. Each piece of Equipment being acquired by the ------------------ Lessor on such Equipment Closing Date complies in all material respects with all Legal Requirements (including all zoning and land use laws and Environmental Laws). (i) Consents, etc. All material consents, licenses and permits ------------- required by all Legal Requirements for operation of each piece of Equipment being acquired on such Equipment Closing Date have been obtained and are in full force and effect. (j) Environmental Matters. --------------------- (i) The Equipment being acquired on such Equipment Closing Date does not contain any Hazardous Substances in amounts or concentrations which (i) constitute a material violation of, or (ii) would reasonably be expected to give rise to material liability under, any Environmental Law. 14 (ii) The Equipment being acquired on such Equipment Closing Date is in compliance in all material respects with all applicable Environmental Laws. (iii) Neither the Lessee nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding any material non-compliance with Environmental Laws with regard to the Equipment being acquired on such Equipment Closing Date, nor does the Lessee have knowledge that any such notice will be received or is being threatened. (iv) Hazardous Substances have not been transported or discharged from the Equipment being acquired on such Equipment Closing Date so as to create a material violation of any Environmental Law, nor have any Hazardous Substances been generated, treated, or used with respect to the Equipment being acquired on such Equipment Closing Date so as to create a material violation of any applicable Environmental Law. (v) No judicial proceeding or governmental or administrative action is pending or, to the best knowledge of the Lessee, threatened, under any Environmental Law to which the Lessee or any Subsidiary is or, to Lessee's knowledge, will be named as a party with respect to the Equipment being acquired on such Equipment Closing Date, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Equipment being acquired on such Equipment Closing Date. (vi) There has been no release or threat of release of Hazardous Substances at or from the Equipment being acquired on such Equipment Closing Date, or arising from or related to the operations of the Lessee or any Subsidiary in connection with the Equipment being acquired on such Equipment Closing Date, in violation of or in amounts or in a manner that would reasonably be expected to give rise to any material liability under any Environmental Laws. (k) Location of the Equipment. Each piece of Equipment being acquired ------------------------- on such Equipment Closing Date is located within the United States or on lands covered by leases under the exclusive jurisdiction of the United States of America pursuant to the Outer Continental Shelf Lands Act, as amended, 43 U.S.C. (S) (S) 1331, et seq. (1986). -- --- (l) Conditions Precedent in Operative Agreements. All conditions -------------------------------------------- precedent contained in this Agreement and in the other Operative Agreements required to be satisfied by Lessee relating to the acquisition of a piece of Equipment by the Lessor have been satisfied in full or waived by the Agent and the Lessee. (m) Hart-Scott-Rodino. The acquisition of the Equipment being ----------------- acquired on such Equipment Closing Date does not conflict with, violate or require the consent of, any Governmental Authority under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 15 7.6 Representations and Warranties of the Lessor on Equipment --------------------------------------------------------- Closing Dates. The Lessor hereby represents and warrants as of each Equipment - ------------- Closing Date as follows: (a) Representations and Warranties; No Default. The representations ------------------------------------------ and warranties of the Lessor set forth herein and in each of the other Operative Agreements are true and correct in all material respects on and as of such Equipment Closing Date as if made on and as of such Equipment Closing Date (unless such representations and warranties specifically refer to another date). The Lessor is in compliance with its respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements. No Default or Event of Default attributable to the Lessor will occur as a result of, or after giving effect to, the Advance requested by the Requisition on such Equipment Closing Date. (b) Authorization by the Lessor. The execution and delivery of each --------------------------- Lease Supplement, Security Agreement Supplement, Supplement to Assignment of Lease and other Operative Agreement delivered by the Lessor on such Equipment Closing Date and the performance of the obligations of the Lessor under each such Lease Supplement, Security Agreement Supplement, Supplement to the Assignment of Lease and other Operative Agreement have been duly authorized by all requisite action of the Lessor. (c) Execution and Delivery by the Lessor. Each Lease Supplement, ------------------------------------ Security Agreement Supplement, Supplement to the Assignment of Lease and other Operative Agreement delivered by the Lessor on such Equipment Closing Date have been duly executed and delivered by the Lessor. (d) Valid and Binding Obligations. Each Lease Supplement, Security ----------------------------- Agreement Supplement, Supplement to the Assignment of Lease and other Operative Agreement delivered by the Lessor on such Equipment Closing Date is a legal, valid and binding obligation of the Lessor, enforceable against the Lessor in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (e) Conditions Precedent in Operative Agreements. All conditions -------------------------------------------- precedent contained in this Agreement and in the other Operative Agreements to be satisfied by the Lessor relating to the acquisition of a piece of Equipment by the Lessor have been satisfied in full. SECTION 8. PAYMENT OF CERTAIN EXPENSES Lessee agrees, for the benefit of the Investors, the Trust Company, the Lessor, the Agent and each of the Lenders, to: 8.1 Transaction Expenses. (a) On the Initial Closing Date, pay, or -------------------- cause to be paid, all reasonable fees, expenses and disbursements of one counsel to each of the Lessor, the Trust Company, the Agent, and the Investors in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Initial Closing Date, including all Transaction Expenses, and all other reasonable expenses in connection with such 16 Initial Closing Date, including all expenses relating to all fees, taxes and expenses for the recording, registration and filing of documents. (b) On each Equipment Closing Date, pay, or cause to be paid, all reasonable fees, expenses and disbursements of each of the Lessor's, the Trust Company's, the Agent's and the Investors' counsel in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Equipment Closing Date, including all Transaction Expenses arising from such Equipment Closing Date, and all other reasonable expenses in connection with such Equipment Closing Date, including all expenses relating to each Appraisal, and all fees, taxes and expenses for the recording, registration and filing of documents. 8.2 Brokers' Fees and Stamp Taxes. Pay or cause to be paid brokers' ----------------------------- fees with respect to brokers retained by or with the prior written consent of Lessee and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Agreement and the other Operative Agreements. 8.3 Certain Fees and Expenses. Pay or cause to be paid (i) the ------------------------- initial and annual Trust Company's fee and all expenses of the Trust Company and any necessary co-trustees (including reasonable counsel fees and expenses) or any successor owner trustee, for acting as trustee under the Trust Agreement, (ii) all costs and expenses incurred by the Lessee, the Agent, the Investors, the Trust Company or the Lessor in entering into any future amendments or supplements with respect to any of the Operative Agreements, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by the Lessee, and (iii) all costs and expenses incurred by the Lessor, the Lessee, the Investors, the Trust Company or the Agent in connection with any purchase of any Equipment by the Lessee pursuant to Section 20 of the Lease. 8.4 Credit Agreement and Related Obligations. (a) Pay, on or prior ---------------------------------------- to the due date thereof, all costs, fees, indemnities, expenses and other amounts (other than principal and interest on the Loans, but including breakage costs and interest on overdue amounts pursuant to Section 2.14 of the Credit Agreement or otherwise) required to be paid by the Lessor under any Operative Agreement. (b) Pay to the Agent all fees specified in the Fee Letter at the time and in the manner required by the Fee Letter, which fees may not be paid by using the proceeds of the Loans or the Investor Contribution. (c) Pay to the Lessor promptly after receipt of notice therefor any additional amounts payable to the Investors in respect of the Investor Contribution under Sections 2.13, 2.14 and 2.15 of the Credit Agreement (it being agreed that the Investors are, for purposes of this Agreement, beneficiaries of the provisions of Sections 2.13, 2.14 and 2.15 of the Credit Agreement). 17 8.5 Commitment Fees. (a) Pay to the Agent for the account of each --------------- Lender the Commitment Fee on each Commitment Fee Payment Date. (b) Pay to the Investors the Investor Commitment Fee on each Commitment Fee Payment Date in accordance with each investor's pro rata portion of the Available Investor Commitment. (c) The Commitment Fee and the Investor Commitment Fee shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. If all or a portion of the Commitment Fee or the Investor Commitment Fee shall not be paid when due, such overdue amount shall bear interest, payable by the Lessee on demand, at a rate per annum equal to the applicable Overdue Rate, from the date of such non-payment until such amount is paid in full (as well after as before judgment). 8.6 Overdue Rate. If all or a portion of the Investor Yield, the ------------ Investor Contribution or any other amount owed to the Investors shall not be paid when due, such overdue amount shall bear interest, payable on demand, at a rate per annum equal to the applicable Overdue Rate, from the date of such non- payment until such amount is paid in full (as well after as before judgment). 8.7 Continuous Perfection of Security Interests. If the Officer's ------------------------------------------- Certificate required to be delivered by Lessee pursuant to Section 10.3(b) of the Lease shall indicate that any of the Equipment has been relocated, then Lessee will provide to the Agent, together with the Officer's Certificate, evidence in form and substance satisfactory to Agent that all filings, recordings, registrations and other actions, including the filing of duly executed Lender Financing Statements and Lessor Financing Statements, necessary or, in the reasonable opinion of the Agent, desirable to perfect the Liens granted by the Security Documents shall have been completed. 8.8 Oklahoma Equipment Subleases. With respect to any leases or ---------------------------- other agreements entered into by Lessee with respect to Equipment located in the State of Oklahoma ("Oklahoma Subleases"), Lessee shall, by February 1, 2001 (or ------------------ within 90 days of the date any Oklahoma Sublease is subsequently entered into), undertake to file, in accordance with 60 Okla. Stat. 1991 (S) 319, et. seq., the original Oklahoma Sublease instrument or a true copy thereof in the chattel mortgage records of the office of the county clerk in the county where the Equipment is located and provide Agent with reasonably satisfactory evidence of Lessee's compliance with this Section 8.8. SECTION 9. OTHER COVENANTS AND AGREEMENTS 9.1 Covenants of the Trust and the Investors and the Trust Company. -------------------------------------------------------------- Each of the parties hereby agrees that so long as this Agreement is in effect: (a) Discharge of Liens. Each of the Investors, the Trust and the ------------------ Trust Company, in its individual capacity, will not create or permit to exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Equipment attributable to it or any of its Affiliates; provided, -------- 18 however, that the Investor, the Trust and the Trust Company shall not be - ------- required to so discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not cause Lessee or any other party hereto to be in default under any of the Operative Documents and shall not involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, and shall not materially interfere with the use or disposition of, the Equipment or title thereto or any interest therein or the payment of Rent. (b) Trust Agreement. Without prejudice to any right under the Trust --------------- Agreement of the Trust Company to resign, or the Investors' right under the Trust Agreement to remove the institution acting as Trustee, each of the Investors and the Trust Company hereby agrees with the Lessee and the Agent (i) not to terminate or revoke the trust created by the Trust Agreement except as permitted by the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement without the prior written consent of any party adversely affected by such amendment and in any event with prior notice to the Lessee and (iii) to comply with all of the terms of the Trust Agreement, the nonperformance of which would adversely affect such party. The Trust Company will provide each party hereto with a copy of any amendment to the Trust Agreement within thirty (30) days after such amendment is effective. (c) Successor Trust Company. The Trust Company or any successor may ----------------------- resign or be removed by both Investors as owner trustee, a successor owner trustee may be appointed, and a corporation may become the owner trustee under the Trust Agreement, only in accordance with the provisions of Section 8 of the Trust Agreement and with the consent of the Lessee, which consent shall not be unreasonably withheld or delayed. (d) Indebtedness; Other Business. The Trust shall not contract for, ---------------------------- create, incur or assume any indebtedness, or enter into any business or other activity, or hold title to any assets other than pursuant to or under the Operative Agreements. (e) No Violation. Neither the Investors nor the Trust Company will ------------ instruct the Trust to take any action in violation of the terms of any Operative Agreement. (f) No Voluntary Bankruptcy. Neither the Investors nor the Trust ----------------------- shall (i) commence, consent to, approve of or acquiesce to any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or make a general assignment for the benefit of its creditors; and neither the Investors nor the Trust shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph. (g) Change of Chief Place of Business. The Trust shall give prompt --------------------------------- prior notice to the Lessee and the Agent if the Trust's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to the Equipment are 19 kept, shall cease to be located at the address set forth in Section 7.2(h) or if it shall change its name. (h) Loan Documents. Provided that no Lease Event of Default is -------------- continuing, none of the Lenders, the Lessor, the Agent and the Investors shall consent to or permit any material amendment, supplement, waiver or other modification of the terms and provisions of the Credit Agreement, the Notes or the Security Documents which would reasonably be expected to adversely impact the Lessee, in each case without the prior written consent of the Lessee. (i) Disposition of Assets. The Trust shall not convey, sell, lease, --------------------- assign, transfer or otherwise dispose of any of its property, business or assets, whether now owned or hereafter acquired, except to the extent expressly authorized by the Operative Agreements. (j) Compliance with Operative Agreements. It shall at all times ------------------------------------ observe and perform all of the covenants, conditions and obligations required to be performed by it under each Operative Agreement to which it is a party. (k) Tax Reporting. No party hereto other than the Lessee will file ------------- (or permit to be filed) any tax return taking the position that such party (or its affiliates) is the owner of the Equipment for federal, state or local tax purposes. 9.2 Repayment of Certain Amounts on Maturity Date. The Investors, --------------------------------------------- the Lessor and the Agent hereby agree that if (i) on the Maturity Date (after giving effect to all payments made by the Lessee under the Lease and the application of all sales proceeds pursuant to Section 8 of the Credit Agreement) there remains any outstanding principal or accrued and unpaid interest under the Tranche B Notes (the aggregate amount of such outstanding principal, the "Tranche B Deficit") and (ii) during the Marketing Period the Lessor or the ----------------- Investors have received any Marketing Period Equity Return, then on the Maturity Date the Investors shall ratably pay to the Agent an amount up to the amount of the Tranche B Deficit to be applied pursuant to Section 8 of the Credit Agreement, but in no event greater than the Marketing Period Equity Return received by both Investors. 9.3 Amendment of Certain Documents. The Agent, for itself and on ------------------------------ behalf of the Lenders, hereby agrees for the benefit of the Trust and the Investors that it will not amend, alter or otherwise modify, or consent to any amendment, alteration or modification of, the Lease (including the definitions of any terms used in such document) without the prior written consent of the Trust and both Investors, as the case may be, if such amendment, alteration or modification would adversely affect the interests of the Trust or the Investors. Provisions requiring consent, include any amendment, alteration or modification that would release the Lessee from any of its obligations in respect of the payment of Basic Rent, Supplemental Rent, Termination Value, Maximum Residual Guarantee Amount or the Purchase Option Price or any other payments in respect of the Equipment as set forth in the Lease, or amend the provisions of Section 8 of the Credit Agreement, or reduce the amount of, or change the time or manner of payment of, obligations of the Lessee as set forth in the Lease, or create or impose any obligation on the part of the Trust or the Investors under the Lease, or extend or shorten the duration of the Term, or modify the provisions of this Section 9.3. 20 9.4 Proceeds of Casualty. Subject to Section 15 of the Lease, the -------------------- Lessor and the Investors agree, for the benefit of the Agent and the Lenders, that if at any time either the Lessor or the either of the Investors receives any proceeds as a result, directly or indirectly, of any Casualty or Condemnation with respect to the Equipment which the Lessor is entitled to retain and hold in accordance with the terms of the Lease, the Lessor and both Investors agree that they will promptly deposit such amounts in an account with the Agent. The Lessor and the Investors also agree that they will execute and deliver such documents and instruments as the Agent may request in order to grant the Agent, for the benefit of the Lenders, a valid and perfected, first priority security interest in such proceeds. 9.5 Intercreditor Agreement. The Lessee, the Agent, the Lenders, the ----------------------- Investors and the Lessor hereby agree and confirm that the provisions of Section 8 of the Credit Agreement are intended to constitute an intercreditor agreement and a subordination agreement under Section 510 of the Bankruptcy Code or any similar provision therein. 9.6 Appraisal. The Lessee agrees that prior to any Replacement --------- Equipment Closing Date, and upon the written request of the Required Lenders or both Investors, the Lessee shall provide to the Agent and the Investors an Appraisal of the Replacement Equipment, such Appraisal in form and substance satisfactory to the Agent, both Investors and the Required Lenders; provided, -------- the Lessee is not required to provide more than one such Appraisal in any twelve-month period; provided further, that notwithstanding anything in this -------- ------- Section 9.6 to the contrary, if the aggregate value of (i) the Replacement Equipment relating to a prospective Replacement Equipment Closing Date and (ii) any Replacement Equipment acquired subsequent to the latest Replacement Equipment Closing Date relating to which the Lessee delivered an Appraisal, is equal to or greater than 10% of the aggregate value of the Equipment, then the Lessee shall provide to the Agent, the Investors and the Lenders an Appraisal of all Replacement Equipment acquired or to be acquired since the latest Appraisal, such Appraisal in form and substance satisfactory to the Agent, the Investors and the Required Lenders and including valuations of the Equipment replaced or being replaced by the Replacement Equipment that is the subject of such Appraisal. For purposes of this Section 9.6, the satisfaction of any Lender will be implied if such Lender does not inform the Agent, within ten Business Days after receiving any Replacement Equipment Appraisal, that it is not satisfied with such Appraisal. SECTION 10. CREDIT AGREEMENT 10.1 Lessee's Credit Agreement Rights. Notwithstanding anything to -------------------------------- the contrary contained in the Credit Agreement, the Agent, the Lenders, the Lessee, the Investors and the Trust hereby agree that: (a) the Lessee shall have the right to give the notices referred to in Section 2.2 of the Credit Agreement; (b) the Lessee shall have the right to convert or continue Loans in accordance with Section 2.5 of the Credit Agreement; 21 (c) the Lessee shall receive copies of all notices delivered to the Lessor under the Credit Agreement and the other Operative Agreements and such notices shall not be effective until received by Lessee; (d) the Lessee shall have the right to select Interest Periods in accordance with the terms of the Credit Agreement; (e) the Lessee shall have the right to give notice of prepayment of the Loans in accordance with the Credit Agreement, provided that if the Lessee shall give notice of prepayment of the Loans, the Lessee shall prepay a pro rata portion of the Investor Contribution; (f) the Lessee shall have the right to cure, to the extent susceptible to a cure, any Credit Agreement Default or Credit Agreement Event of Default of the Lessor; (g) the Lessee shall have the right to approve any successor Agent pursuant to Section 7.9 of the Credit Agreement; (h) the Lessee shall have the right, on behalf of the Lessor, to select any Person or Persons (including the Lessee) to whom funds may be paid at the discretion of the Lessor in accordance with Sections 8.1 and 8.2 of the Credit Agreement; (i) the Lessee shall have the right to consent to any assignment by a Lender, if required pursuant to Section 9.5 of the Credit Agreement; (j) the Lessee shall have the right to request that another lending office be designated pursuant to Section 2.14(a) of the Credit Agreement; (k) Lessee shall have the right to cause a Lender to assign its rights and delegate its obligation under the Credit Agreement pursuant to Section 2.15 of the Credit Agreement; (l) the Lessee shall have the obligation to notify the Agent of the amounts or information specified in Section 5.8 of the Credit Agreement; and (m) without limiting the foregoing clauses (a) through (l), and in addition thereto, (x) the Trust shall not exercise any right under the Credit Agreement without giving the Lessee at least fifteen (15) Business Days' prior written notice (or such shorter period as may be required but in no case less than five (5) Business Days) and, following such notice, the Trust shall take such action, or forbear from taking such action, as the Lessee shall direct and (y) the Lessee shall have the right to exercise any other right of the Trust under the Credit Agreement upon not less than two (2) Business Days' prior written notice from the Lessee to the Trust. Notwithstanding the foregoing, both Investors shall retain the exclusive right to direct the Trust with respect to the exercise of the Excepted Rights. SECTION 11. TRANSFER OF INTEREST 11.1 Restrictions on Transfer. Neither of the Investors may, directly ------------------------ or indirectly, assign, convey or otherwise transfer any of its right, title or interest in or to the Trust 22 Estate or the Trust Agreement nor shall there be any change in control of either of the Investors without the consent of the Agent and the Lessee, which consent shall not be unreasonably withheld or delayed. Any transfer by either of the Investors as above provided, shall be effected pursuant to an agreement in form and substance reasonably satisfactory to the Agent, the Investors, the Trust Company, the Lessee and their respective counsel. 11.2 Effect of Transfer. From and after any transfer effected in ------------------------- accordance with this Section 11, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer; provided, however, that any transferor Investor shall -------- ------- remain liable under the Trust Agreement to the extent that the transferee Investor shall not have assumed the obligations of the transferor Investor thereunder. Upon any transfer by either of the Investors as above provided, any such transferee shall assume the obligations of the same entity, and the Lessor or Investor, as the case may be, and shall be deemed the "same entity", as the case may be, for all purposes of such documents and each reference herein to the transferor shall thereafter be deemed a reference to such transferee for all purposes, except as provided in the preceding sentence. Notwithstanding any transfer of all or a portion of the transferor's interest as provided in this Section 11, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer including rights to indemnification under any such document. SECTION 12. INDEMNIFICATION 12.1 General Indemnity. The Lessee hereby assumes liability for and ----------------------- agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims which may be imposed on, incurred by or asserted against an Indemnified Person in any way relating to or arising out of (a) the financing, refinancing, purchase, acceptance, rejection, ownership, design, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, operation, repair, modification, transportation, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of the Equipment or any part thereof(b) any latent or other defects in any piece of Equipment whether or not discoverable by an Indemnified Person or the Lessee; (c) a violation of Environmental Laws, Environmental Claims or other loss of or damage relating to the Equipment; (d) the Operative Agreements, or any transaction contemplated thereby; (e) any breach by the Lessee of any of its representations or warranties under the Operative Agreements or failure by the Lessee to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreements; and (f) personal injury, death or property damage relating to the Equipment, including Claims based on strict liability in tort; but in any event excluding (v) Claims to the extent such Claims arise solely out of the gross negligence or willful misconduct of such Indemnified Person, (w) Claims to the extent such Claims arise solely out of events occurring after Lessee's discharge of all its obligations under the Lease or (x) any Taxes including any Claim (or any portion of a Claim) made upon an Indemnified Person by a third party that at its origin is based upon a Tax (other than amounts necessary to make any payments hereunder on an After Tax Basis, where the Lessee is otherwise specifically required to make such payments on an After Tax Basis), (y) legal proceedings commenced against an Indemnified Person by any security holder or creditor solely in its capacity as such, or (z) legal proceedings 23 commenced against an Indemnified Person by any other Indemnified Person or by any transferee of an Indemnified Person. The Lessee shall be entitled to control, and shall assume full responsibility for the defense of any Claim; provided, however, that the Trust, the Trust Company, the Agent and the - -------- ------- Investors named in such Claim, may each retain separate counsel at the expense of the Lessee in the event of and to the extent of an actual conflict or a potential conflict. The Lessee and each Indemnified Person agree to give each other prompt written notice of any Claim hereby indemnified against but the giving of any such notice by an Indemnified Person shall not be a condition to the Lessee's obligations under this Section 12.1, except to the extent failure to give such notice materially prejudices Lessee's rights hereunder or with respect to the defense or settlement of such Claim. After an Indemnified Person has been fully indemnified for a Claim pursuant to this Section 12.1, and so long as no Lease Event of Default shall have occurred and be continuing, the Lessee shall be subrogated to any right of such Indemnified Person with respect to such Claim. None of the Indemnified Persons shall settle a Claim without the prior written consent of the Lessee, which consent shall not be unreasonably withheld or delayed. 12.2 General Tax Indemnity. (a) The Lessee shall pay and assume ---------------------------- liability for, and does hereby agree to indemnify, protect and defend the Equipment and all Tax Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis. (b) Provided that no Default or Event of Default has occurred and is continuing, if any Tax Indemnitee obtains a refund or a reduction in a liability (but only if such reduction relates to a Tax not otherwise indemnifiable hereunder and has not been taken into account in determining the amount of a payment on an After Tax Basis) as a result of any Imposition paid or reimbursed by the Lessee (in whole or in part), such Tax Indemnitee shall promptly pay to the Lessee the lesser of (x) the amount of such refund or reduction in liability and (y) the amount previously so paid or advanced by the Lessee, in each case net of reasonable expenses not already paid or reimbursed by the Lessee. (c) (i) Subject to the terms of Section 12.2(g), the Lessee shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Tax Indemnitee, as appropriate, and the Lessee shall at its own expense, upon such Tax Indemnitee's reasonable request, furnish to such Tax Indemnitee copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 12.2(g) and which the Lessee pays directly to the taxing authorities, the Lessee shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Lessee reimburses a Tax Indemnitee, the Lessee shall do so within twenty (20) days after receipt by the Lessee of demand by such Tax Indemnitee describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable), but in no event shall the Lessee be required to pay such reimbursement prior to 15 days before the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which a contest is conducted pursuant to Section 12.2(g), the Lessee shall pay such Impositions or reimburse such Tax Indemnitee for such Impositions, to the extent not previously paid or 24 reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 12.2(g). (iii) Impositions imposed with respect to a piece of Equipment for a billing period during which the Lease expires or terminates with respect to such Equipment (unless the Lessee has exercised the Purchase Option with respect to the Equipment) shall be adjusted and prorated on a daily basis between the Lessee and the Lessor, whether or not such Imposition is imposed before or after such expiration or termination and each party shall pay or reimburse the other for each party's pro rata share thereof. (iv) At the Lessee's request, the amount of any indemnification payment by the Lessee pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Lessee and the Tax Indemnitee. The fees and expenses of such independent public accounting firm shall be paid by the Lessee unless such verification shall result in an adjustment in the Lessee's favor of 10% or more of the payment as computed by such Tax Indemnitee, in which case such fee shall be paid by such Tax Indemnitee. (d) (i) The Lessee shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of the Equipment. In case any other report or tax return shall be required to be made with respect to any obligations of the Lessee under or arising out of subsection (a) and of which the Lessee has knowledge, the Lessee, at its sole cost and expense, shall notify the relevant Tax Indemnitee of such requirement and (except if such Tax Indemnitee notifies the Lessee that such Person intends to file such report or return) (A) to the extent required or permitted by and consistent with Legal Requirements, make and file in its own name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Tax Indemnitee, advise such Tax Indemnitee of such fact and prepare such return, statement or report for filing by such Tax Indemnitee or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Lessee under or arising out of subsection (a), provide such Tax Indemnitee at the Lessee's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Lessee under or arising out of subsection (a). Such Tax Indemnitee shall, upon the Lessee's request and at the Lessee's expense, provide any data maintained by such Tax Indemnitee (and not otherwise within the control of the Lessee) with respect to the Equipment which the Lessee may reasonably require to prepare any required tax returns or reports; (e) If as a result of the payment or reimbursement by the Lessee of any expenses of a Tax Indemnitee or the payment of any Transaction Expenses incurred in connection with the transactions contemplated by the Operative Agreements, any Tax Indemnitee, shall suffer a net increase in any federal, state or local income tax liability, the Lessee shall indemnify such Tax Indemnitees (without duplication of any indemnification required by subsection (a)) on an After Tax Basis for the amount of such increase. The calculation of any such net increase shall take into account any current or future tax savings realized or reasonably expected to be realized by such Tax Indemnitees, in respect thereof, as well as any interest, penalties and additions to tax payable by such Tax Indemnitees, in respect thereof; 25 (f) As between the Lessee and the Lessor, the Lessee shall be responsible for, and the Lessee shall indemnify and hold harmless the Trust Company in its individual capacity and as the Lessor (without duplication of any indemnification required by subsection (a)) on an After Tax Basis against, any obligation for United States withholding taxes imposed in respect of the interest payable on the Notes or the Certificates to the extent, but only to the extent, Lessor has actually paid funds to a taxing authority with respect to such withholding taxes (and, if the Lessor receives a demand for such payment from any taxing authority, the Lessee shall discharge such demand on behalf of the Lessor); (g) (i) If a written claim is made against any Tax Indemnitee or if any proceeding shall be commenced against such Tax Indemnitee (including a written notice of such proceeding), for any Impositions, such Tax Indemnitee shall promptly notify Lessee in writing and shall not take action with respect to such claim or proceeding without the consent of Lessee for thirty (30) days after the receipt of such notice by Lessee; provided, that, in the case of any such claim -------- or proceeding, if action shall be required by law or regulation to be taken prior to the end of such 30-day period, such Tax Indemnitee shall, in such notice to Lessee, inform Lessee, and no action shall be taken with respect to such claim or proceeding without the consent of Lessee before the end of such shorter period; provided, further, that the failure of such Tax Indemnitee to -------- ------- give the notices referred to this sentence shall not diminish Lessee's obligation hereunder except to the extent such failure materially adversely affects Lessee in contesting all or part of such claim. (ii) If, within thirty (30) days of receipt of such notice from the Tax Indemnitee (or such shorter period as the Tax Indemnitee has noticed Lessee is required by law or regulation for the Tax Indemnitee to commence such contest), Lessee shall request in writing that such Tax Indemnitee contest such Imposition, the Tax Indemnitee shall, at the expense of Lessee, in good faith conduct and control such contest (including, without limitation, by pursuit of appeals) relating to the validity, applicability or amount of such Impositions (provided, however, that (A) if such contest can be pursued independently from any other proceeding involving a tax liability of such Tax Indemnitee, the Tax Indemnitee, at Lessee's request, shall allow Lessee to conduct and control such contest and (B) in the case of any contest that Lessee is not entitled to control, the Tax Indemnitee may request Lessee to conduct and control such contest if possible or permissible under applicable law or regulation) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by Lessee from time to time. (iii) The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of such contest; provided that all -------- decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that an Tax Indemnitee may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Tax Indemnitee shall waive its rights to any indemnity from Lessee that otherwise would be payable in respect of such claim (and any future claim by any taxing authority with 26 respect to other taxable periods that are based, in whole or in part, upon the resolution of such claim) and shall pay to Lessee any amount previously paid or advanced by Lessee pursuant to this Section 12.2 by way of indemnification or advance for the payment of an Imposition, and no other then future liability of the Lessee is likely with respect to such Imposition. (iv) Notwithstanding the foregoing provisions of this Section 12.2, a Tax Indemnitee shall not be required to take any action and Lessee shall not be permitted to contest any Impositions in its own name or that of the Tax Indemnitee unless (A) Lessee shall have agreed to pay and shall pay to such Tax Indemnitee on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Tax Indemnitee actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) in the case of a claim that must be pursued in the name of an Tax Indemnitee (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related claims that have been or could be raised in any audit involving such Tax Indemnitee for which Lessee may be liable to pay an indemnity under this Section 12.2) is more than $25,000, unless the pursuit of such contest is in a manner mutually satisfactory to the Tax Indemnitee and the Lessee, but in no event shall such right prevent the Lessee from prosecuting or continuing such contest, (C) the Tax Indemnitee shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any piece of Equipment, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such contest shall involve the payment of the Imposition prior to the contest, Lessee shall provide to the Tax Indemnitee an interest-free advance in an amount equal to the Imposition that the Tax Indemnitee is required to pay (with no additional net after-tax cost to such Tax Indemnitee), (E) in the case of a claim that must be pursued in the name of an Tax Indemnitee (or an Affiliate thereof), Lessee shall have provided to such Tax Indemnitee an opinion of independent tax counsel selected by the Lessee and reasonably satisfactory to such Tax Indemnitee stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that there is substantial authority for the position asserted in such appeal) and (F) no Event of Default shall have occurred and be continuing. In no event shall a Tax Indemnitee be required to appeal an adverse judicial determination to the United State Supreme Court. In addition, a Tax Indemnitee shall not be required to contest any claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 12.2, unless there shall have been a change in law (or interpretation thereof) and the shall Tax Indemnitee have received, at the Lessee's expense, an opinion of independent tax counsel selected by the Lessee and reasonably acceptable to the Tax Indemnitee stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Tax Indemnitee will prevail in such contest. SECTION 13. MISCELLANEOUS 13.1 Survival of Agreements. The representations, warranties, covenants, ---------------------------- indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this 27 Agreement, the transfer of the Equipment to the Trust, any disposition of any interest of the Trust in the Equipment or any interest of the Investors in the Trust, the payment of the Notes and any disposition thereof and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. 13.2 No Broker, etc. Each of the parties hereto represents to the --------------------- others that it has not retained or employed any broker, finder or financial adviser to act on its behalf in connection with this Agreement, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act, except for the Arranger, the fees of which shall be paid by the Lessee in accordance with the Fee Letter. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. 13.3 Notices. All notices, requests and demands to or upon the -------------- respective parties hereto to be effective shall be in writing (including by facsimile transmission), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) when delivered by hand, (b) one Business Day after delivery to a nationally recognized courier service specifying overnight delivery, (c) three Business Days after being deposited in the mail, certified or registered, postage prepaid, or (d) in the case of facsimile notice, when sent and receipt has been confirmed, addressed as follows in the case of the Lessee, the Trust, the Trust Company and the Agent, and as set forth in Schedule 1.1 of the Credit Agreement in the case of the Lenders: ------------ If to the Lessee, to it at: Hanover Compression Inc. 12001 North Houston Rosslyn Houston, Texas 77806 Attention: Chief Financial Officer Telecopy No.: 281-447-8781 With a copy to: Latham & Watkins Sears Tower, Suite 5800 233 South Wacker Drive Chicago, Illinois 60606 Attention: Richard S. Meller and Michael A. Pucker Telecopy No.: 312-993-9767 If to the Trust, to it at: Hanover Equipment Trust 2000B c/o Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telecopy No.: 302-651-8882 28 If to the Investors, to them at: Bank Hapoalim B.M. 250 Montgomery Street, Suite 700 San Francisco, CA 94104 FBTC Leasing Corp. Two World Trade Center New York, NY 10048 If to the Trust Company, to it at: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Telecopy No.: 302-651-8882 If to the Agent, to it at: The Chase Manhattan Bank Loan and Agency Services Group One Chase Manhattan Plaza New York, New York 10081 Attention: Agency Service Telecopy No.: 212-552-5777 and Credit and Lending The Chase Manhattan Bank 270 Park Avenue 21st Floor New York, NY 10017 Attention: Steve Wood Telecopy No.: 212-270-3897 From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. 13.4 Counterparts. This Agreement may be executed by the parties ------------------ hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 13.5 Amendments and Termination. Neither this Agreement nor any of -------------------------------- the terms hereof may be terminated, amended, supplemented, waived or modified except by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification shall be sought. This Agreement may be terminated by an agreement signed in writing by the Trust, both Investors, the Lessee, the Agent 29 and the Lenders. Notwithstanding the foregoing provisions to the contrary, in the case of the Lenders, the action of the Required Lenders shall control, except as otherwise provided in Section 9.1 of the Credit Agreement. 13.6 Headings, etc.. The Table of Contents and headings of the various -------------------- Sections and Subsections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. 13.7 Parties in Interest. Except as expressly provided herein, none of -------------------------- the provisions of this Agreement are intended for the benefit of any Person except the parties hereto. 13.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED ----------------------- AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 13.9 Severability. Any provision of this Agreement that is prohibited or ------------------- unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13.10 Liability Limited. The Lessee, the Agent, the Lenders and the ------------------------ Investors each acknowledge and agree that the Trust Company is (except as otherwise expressly provided herein or therein) entering into this Agreement and the other Operative Agreements to which it is a party (other than the Trust Agreement), solely in its capacity as trustee under the Trust Agreement on behalf of the Trust and not in its individual capacity and that Trust Company shall not be liable or accountable under any circumstances whatsoever in its individual capacity for or on account of any statements, representations, warranties, covenants or obligations stated to be those of the Trust, except for its own gross negligence or willful misconduct and as otherwise expressly provided herein or in the other Operative Agreements. 13.11 Rights of Lessee. Notwithstanding any provision of the Operative ----------------------- Agreements, if at any time all obligations (i) of the Trust under the Credit Agreement and the Security Documents and (ii) of the Lessee under the Operative Agreements have in each case been satisfied or discharged in full, then the Lessee shall be entitled to (a) terminate the Lease (to the extent not previously terminated) and (b) receive all amounts then held under the Operative Agreements and all proceeds with respect to the Equipment. Upon the fulfillment of the obligations contained in clauses (i) and (ii) above, the Lessor shall transfer to the Lessee all of its right, title and interest in and to the Equipment (to the extent not previously transferred to the Lessee in accordance with the Lease) and any amounts or proceeds referred to in the foregoing clause (b) shall be paid over to the Lessee. 13.12 Further Assurances. The parties hereto shall promptly cause to be ------------------------- taken, executed, acknowledged or delivered, at the sole expense of the Lessee (other than with respect to the removal of Lessor Liens), all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate 30 the intent and purposes of this Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense, shall take such action as may be reasonably requested in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. 13.13 Successors and Assigns. This Agreement shall be binding upon and ----------------------------- inure to the benefit of the parties hereto and their respective successors and assigns. 13.14 No Representation or Warranty. Nothing contained herein, in any ------------------------------------ other Operative Agreement or in any other materials delivered to the Lessee in connection with the transactions contemplated hereby or thereby shall be deemed a representation or warranty by the Agent or the Arranger or any of their Affiliates as to the proper accounting treatment or tax treatment that should be afforded to the Lease and the Lessor's ownership of the Equipment and the Agent expressly disclaims any representation or warranty with respect to such matters. 13.15 Highest Lawful Rate. It is the intention of the parties hereto -------------------------- conform strictly to applicable usury laws and, anything herein to the contrary notwithstanding, the obligations of the Lessee, the Lessor or the Investors or any other party under any Operative Agreement, shall be subject to the limitation that payments of interest or of other amounts constituting interest shall not be required to the extent that receipt thereof would be in excess of the Highest Lawful Rate, or otherwise contrary to provisions of law applicable to the recipient limiting rates of interest which may be charged or collected by the recipient. Accordingly, if the transactions or the amount paid or otherwise agreed to be paid for the use, forbearance or detention of money under this Agreement, the Lease and any other Operative Agreement would exceed the Highest Lawful Rate or otherwise be usurious with respect to the recipient of any such amount, then, in that event, notwithstanding anything to the contrary in this Agreement, the Lease or any other Operative Agreement, it is agreed as follows as to the recipient of any such amount: (a) the provisions of this Section 13.15 shall govern and control over any other provision in this Agreement, the Lease and any other Operative Agreement and each provision set forth therein is hereby so limited; (b) the aggregate of all consideration which constitutes interest that is contracted for, charged or received under this Agreement, the Lease, or any other Operative Agreement shall under no circumstances exceed the maximum amount of interest allowed by any Requirement of Law (such maximum lawful interest rate, if any, with respect to such Lender herein called the "Highest Lawful -------------- Rate"), and all amounts owed under this Agreement, the Lease and any other - ---- Operative Agreement shall be held subject to reduction and ((i) the amount of interest which would otherwise be payable to the recipient hereunder and under the Lease, the Loan Documents and any other Operative Agreement, shall be automatically reduced to the amount allowed under any Requirement of Law and (ii) any unearned interest paid in excess of 31 the Highest Lawful Rate shall be credited to the payor by the recipient (or, if such consideration shall have been paid in full, refunded to the payee); (c) all sums paid, or agreed to be paid for the use, forbearance and detention of the money under this Agreement, the Lease, or any other Operative Agreement shall, to the extent permitted by any Requirement of Law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the actual rate of interest is uniform throughout the full term thereof; and (d) if at any time the interest, together with any other fees, late charges and other sums payable pursuant to or in connection with this Agreement, the Lease, and any other Operative Agreement executed in connection herewith or therewith, and deemed interest under any Requirement of Law exceeds that amount which would have accrued at the Highest Lawful Rate, the amount of interest and any such fees, charges and sums to accrue to the recipient of such interest, fees, charges and sums pursuant to the Operative Agreement shall be limited, notwithstanding anything to the contrary in the Operative Agreement to that amount which would have accrued at the Highest Lawful Rate for the recipient, but any subsequent reductions, as applicable, shall not reduce the interest to accrue pursuant to the Operative Agreement below the recipient's Highest Lawful Rate until the total amount of interest payable to the recipient (including all consideration which constitutes interest) equals the amount of interest which would have been payable to the recipient (including all consideration which constitutes interest), plus the amount of fees which would have been received ---- but for the effect of this Section 13.15. 13.16 Waiver. EACH PARTY HERETO FOR THE BENEFIT OF THE PARTIES HERETO AND ------------- THE GUARANTORS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING PURSUANT TO THE OPERATIVE AGREEMENTS ANY SPECIAL, EXEMPLARY, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSION INC., as Lessee By: ________________________________________ Name: Title: HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not individually but solely as Trustee ________________________________________ Name: Title: THE CHASE MANHATTAN BANK, as Agent and as a Lender By: ________________________________________ Name: Title: WILMINGTON TRUST COMPANY, in its individual capacity, only to the extent expressly set forth herein By: ________________________________________ Name: Title: FBTC LEASING CORP., as an Investor By: ________________________________________ Name: Title: ARAB BANKING CORPORATION (B.S.C.), as a Lender By: ________________________________________ Name: Title: BANK HAPOALIM B.M., as an Investor and as a Lender By: _____________________________________ Name: Title: By: _____________________________________ Name: Title: THE BANK OF TOKYO MITSUBISHI LIMITED, as a Lender By: ______________________________ Name: Title: CITIBANK, N.A., as a Co-Agent and as a Lender By: _______________________________ Name: Title: COMERICA BANK, as a Lender By: _______________________________ Name: Title: CREDIT SUISSE FIRST BOSTON, as a Co-Agent and as a Lender By: ______________________________ Name: Title: THE FUJI BANK, LIMITED, as a Lender By: ____________________________ Name: Title: GUARANTY FEDERAL BANK, F.S.B., as a Lender By: ___________________________ Name: Title: THE INDUSTRIAL BANK OF JAPAN, LTD., as a Co-Agent and as a Lender By: _____________________________ Name: Title: NATIONAL WESTMINSTER BANK plc, NEW YORK BRANCH, as Managing Agent and as a Lender By: ____________________________ Name: Title: NATIONAL WESTMINSTER BANK plc, NASSAU BRANCH, as Managing Agent and as a Lender By: ______________________________ Name: Title: SUNTRUST BANK, as a Lender By: ______________________________ Name: Title: ANNEX B PRICING GRID Participation Agreement -----------------------
Applicable Consolidated Applicable Margin- Applicable Margin- Commitment Indebtedness Ratio Eurocurrency Loans Base Rate Loans Fee Rate - ------------------- ------------------ --------------- -------- *4.0 to 1.0 1.75% .750% .375% **4.0 to 1.0 and 1.75% .750% .375% *3.0 to 1.0 **3.0 to 1.0 and 1.50% .500% .300% *2.0 to 1.0 **2.0 to 1.0 and 1.25% .500% .300% *1.0 to 1.0 **1.0 to 1.0 1.00% 0% .250%
* denotes greater than ** denotes less than or equal to Changes in the Applicable Margin or in the Applicable Commitment Fee Rate resulting from changes in the Consolidated Indebtedness Ratio shall become effective on each date which is the start of the succeeding fiscal quarter (each, an "Adjustment Date") for which an Applicable Margin Certificate of --------------- Holdings is delivered to the Lenders pursuant to Section 10.2(f) of the Guarantee (but in any event not later than the 45th day after the end of each of each quarter of each fiscal year) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any Applicable Margin Certificate referred to above is not delivered within the time periods specified above, then the Consolidated Indebtedness Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 4.0 to 1.0. In addition, at all times while an Event of Default shall have occurred and be continuing, the highest rate set forth in each column of the Pricing Grid shall apply. Each determination of the Consolidated Indebtedness Ratio pursuant to this Pricing Grid shall be made for the periods and in the manner contemplated by Section 11.1(d) of the Guarantee. EXHIBIT D TO THE PARTICIPATION AGREEMENT ----------------------- FORM REQUISITION HANOVER COMPRESSION INC. (the "Lessee"), submits this Requisition and ------ certifies, represents and warrants to each of the Lessor, Investors, The Chase Manhattan Bank, as agent (in such capacity, the "Agent"), and each of the ----- financial institutions from time to time parties to the Credit Agreement (the "Lenders") dated as of October 27, 2000, as follows (capitalized terms used in ------- this Requisition and not otherwise defined herein shall have the meaning assigned to such terms in Annex A to the Participation Agreement dated as of ------- October 27, 2000 , among the Lessee, the Lessor, the Investor, the Agent and the Lenders) in each case as of the date hereof: (a) Amount. (a) The total amount of the Advance requested by this Requisition is $[ ]. The Advance will be comprised of Loans totalling $[ $[ ] (not to exceed 97% of the aggregate amount requested). (b) The total amounts of the Available Commitments and the Available Investor Commitment (after giving effect to the amount requested by this Requisition) are $[ ] and $[ ], respectively. (c) With respect to aggregate Equipment Cost, the aggregate amount of the Loans outstanding represent [___]% of such Equipment Cost and the aggregate amount of the Investment Contribution represents [__]% of such Equipment Cost. (d) Date of Advance. The Lessee requests that the Advance be made on [ ]. (e) Type of Loan and Contribution. The Lessee requests that the Loans be made as [Eurodollar Rate] [ABR Rate] Loans. (f) Interest Period for Eurodollar Loans. [ ] months. (g) Proceeds. The Lessee represents and warrants that the proceeds of the Advance shall be used solely to pay the Equipment Acquisition Costs and Transaction Expenses with respect to the Equipment identified in this Requisition. (h) Representations and Warranties. The Lessee hereby represents and warrants as follows in each case as of the date hereof: (i) The representations and warranties of the Lessee and the Guarantors set forth in the Operative Agreements are true and correct in all material respects on and as of the date hereof. The Lessee and the Guarantors are in compliance with their respective obligations under the Operative 16 Agreements and there exists no Default or Event of Default (other than a Borrower Default) under any of the Operative Agreements. No Default or Event of Default (other than a Borrower Default) will occur under any of the Operative Agreements as a result of the Advance requested by this Requisition. (ii) Attached to this Requisition is a schedule identifying the Equipment which is the subject of this Requisition. (iii) All conditions precedent contained in the Participation Agreement and in the other Operative Agreements relating to the acquisition of the Equipment by the Lessor have been satisfied in full. (i) Indemnity. The Lessee agrees to indemnify and hold harmless each of the Trust, the Trust Company, the Investors, the Agent and the Lenders and each director, officer, employee, agent, shareholder, partner or holder of beneficial interest thereof (each, an "indemnified person") against, and to reimburse each indemnified person, upon its demand, for, any losses, claims, damages, liabilities or other expenses ("Losses") to which such indemnified person may become subject insofar as such Losses arise out of or in any way relate to the breach by the Lessee of any representation or warranty contained in this Requisition or any untrue statement made in this Requisition, including, without limitation, Losses consisting of reasonable legal or other expenses incurred in connection with investigating, defending or participating in any legal proceeding relating to any of the foregoing (whether or not such indemnified person is a party thereto); provided, however, that no such indemnification will be required for any losses to the extent such losses arise solely out of the gross negligence or willful misconduct of such indemnified person. (j) Survival. The agreements, statements, representation and warranties contained in this Requisition shall survive and remain effective until the Loans and all other obligations under the Credit Agreement and the other Operative Agreements are paid or otherwise satisfied in full by the Lessee and the Lessee, as applicable. HANOVER COMPRESSION INC. Date: By: ____________________________ Name: Title: EXHIBIT E TO PARTICIPATION AGREEMENT ----------------------- FORM OF EQUIPMENT CLOSING CERTIFICATE Pursuant to that certain Participation Agreement, dated as of October 27, 2000, among Hanover Compression Inc., as Lessee (the "Lessee"), Hanover Equipment Trust 2000B, as Lessor, The Chase Manhattan Bank, as Agent, the Investors, the Trust Company and the Lenders named therein, the undersigned, a [ ] of Lessee, does hereby certify on behalf of Lessee as follows (capitalized terms used herein shall have the meanings ascribed thereto in the Participation Agreement): (a) The Tranche A Percentage for the Equipment being acquired on the date hereof is [ ]%. (b) The Aggregate Tranche A Percentage for all Equipment after giving effect to the acquisition of the Equipment being acquired on the date hereof is [ ]%. IN WITNESS WHEREOF, I have signed my name this ____ day of ________, 2000. HANOVER COMPRESSION INC. By: ______________________________ Name: Title: EX-10.57 8 0008.txt SECURITIES AGREEMENT EXHIBIT 10.57 EXECUTION COPY SECURITY AGREEMENT SECURITY AGREEMENT, dated as of October 27, 2000, made by HANOVER EQUIPMENT TRUST 2000B, a Delaware business trust (the "Borrower"), in favor of -------- THE CHASE MANHATTAN BANK, as Agent (in such capacity, the "Agent") for the ----- Lenders parties to the Credit Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit ------ Agreement"), among the Borrower, the Agent and such Lenders. - --------- Preliminary Statement --------------------- A. Pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein; and B. It is a condition precedent to the obligation of the Lenders to make their respective Loans to the Borrower under the Credit Agreement that the Borrower shall have executed and delivered this Security Agreement to the Agent for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Loans to the Borrower, the Borrower hereby agrees with the Agent, for the ratable benefit of the Lenders, as follows: 1. Defined Terms. ------------- 1.1. Definitions. Unless otherwise defined herein, capitalized ----------- terms used herein shall have the respective meanings, and this Agreement shall be interpreted in accordance with the rules of usage, set forth in Annex A ------- attached to the Participation Agreement dated as of the date hereof among the Lessee, the Borrower, the Investors, the Trust Company, the Agent and the Lenders, and the following terms shall have the following meanings: "Agreement": this Security Agreement, as the same may be amended, --------- supplemented or otherwise modified from time to time. "Code": the Uniform Commercial Code as from time to time in effect in ---- the State of New York. "Collateral": as defined in Section 2. ---------- "Equipment": the equipment set forth on Schedule 1 annexed hereto, --------- ---------- and all other tangible personal property now or hereafter acquired by the Borrower, together with any and all accessions, additions, improvements, substitutions and replacements thereto and therefor. 2 "Obligations": shall mean the Guaranteed Obligations. ----------- "Proceeds": as defined in the Code. -------- 2. Grant of Security Interest. As collateral security for the prompt -------------------------- and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Borrower hereby grants to the Agent for the ratable benefit of the Lenders a security interest in all of its respective right, title and interest, whether the same be goods, fixtures, equipment, general intangibles, accounts or chattel paper, in and to (a) the Equipment, (b) rights and interests of Borrower as Lessor pursuant to the Lease, (c) all books and records pertaining to the foregoing, (d) all warranties and guarantees given by any Person with respect to any of the foregoing, as well as all choses in action, claims, and causes of action arising from any breach thereof, and (e) to the extent not otherwise included, all Proceeds and products of the foregoing, in each case whether now existing or hereafter acquired (collectively, the "Collateral"), subject to the rights of the Lessee, as Lessee under the Lease, so long as no Lease Event of Default has occurred and is continuing. 3. Representations and Warranties. ------------------------------ 3.1. Equipment. The Borrower hereby represents and warrants that, the --------- Equipment will be kept at the locations listed on Schedule 1 subject only to ---------- the Lessee's rights to relocate the Equipment as provided for in the Operative Agreements. 3.2. Chief Executive Office. The Borrower hereby represents and warrants ---------------------- that the Borrower's chief place of business, chief executive office and office where the documents, accounts and records related to the Collateral are kept is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration. 3.3. Farm Products. The Borrower hereby represents and warrants that none ------------- of the Collateral constitutes, or is the Proceeds of, Farm Products. 4. Covenants. From and after the date of this Agreement until the --------- Obligations shall have been paid in full and the Commitments shall have expired or otherwise been terminated: 4.1. Further Documentation. At any time and from time to time, upon the --------------------- written request of the Agent, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests created hereby. 4.2. Changes in Locations. (a) Except with respect to the rights of the -------------------- Lessee under the Operative Agreements, the Borrower will not permit any of the Equipment to be kept at a location other than those listed on Schedule 1; ---------- and (b) The Borrower will not change the location of its chief executive offices from that specified in Section 3.2. 3 4.3. Change in Name. The Borrower will not change its name, identity or -------------- structure to such an extent that any financing statement filed by the Agent in connection with this Agreement would become seriously misleading, unless they shall have given the Agent at least 30 days' prior written notice of such change. 4.4. Further Identification of Collateral. The Borrower will cause the ------------------------------------ Lessee to furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and its location and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. 5. Remedies. --------- 5.1. Code Remedies. If a Credit Agreement Event of Default shall occur and ------------- be continuing, the Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law or as referred to below) to or upon the Borrower, the Lessee or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived to the extent permitted by law), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give an option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, but subject to the rights of the Lessee under the Lease so long as no Lease Event of Default shall have occurred and be continuing. The Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby waived or released to the extent permitted by law. The Borrower further agrees, at the Agent's request, to assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select. The Agent shall apply the net proceeds of any action taken by it pursuant to this subsection, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in accordance with Section 8.2 of the Credit Agreement, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Agent account for the surplus, if any, to the Borrower. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands it may acquire against the Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Agent agrees that if it shall proceed to foreclose the 4 Lien of this Agreement, it shall, to the extent that it is entitled to do so hereunder and under the other Operative Agreements, and is not then stayed or prevented from doing so by law or otherwise, proceed (to the extent it has not already done so) to exercise one or more of the significant possessory remedies referred to in the Lease (as it shall determine in its sole good faith discretion). 6. Agent's Appointment as Attorney-in-Fact; Agent's Performance of --------------------------------------------------------------- Obligations. - ------------ 6.1. Powers. The Borrower hereby irrevocably constitutes and appoints the ------ Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Borrower hereby gives the Agent the power and right, on behalf of the Borrower, without notice to or assent by the Borrower, to do any or all of the following: (a) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of the Lease and pay all or any part of the premiums therefor and the costs thereof; (b) execute, in connection with any sale provided for in Section 5.1, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (c) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (2) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (3) defend any suit, action or proceeding brought against the Borrower with respect to any Collateral; (4) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; and (5) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Agent were the absolute owner thereof for all purposes, and do, at the Agent's option and the Borrower's expense, at any time, or from time to time, all acts and things which the Agent deems necessary to protect, preserve or realize upon the Collateral and the Agent's and the Lenders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as the Borrower might do. Anything in this subsection to the contrary notwithstanding, the Agent agrees that it will not exercise any rights under the power of attorney provided for in this subsection unless a Credit Agreement Event of Default shall have occurred and be continuing. 6.2. Performance by Agent of Borrower's Obligations. If the Borrower ---------------------------------------------- fails to perform or comply with any of its agreements contained herein, the Agent, at its option, but without any 5 obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. 6.3. Borrower's Reimbursement Obligation. The expenses of the Agent ----------------------------------- incurred in connection with actions undertaken as provided in this Section, together with interest thereon after a Credit Agreement Event of Default at the Overdue Rate from the date of payment by the Agent to the date reimbursed by the Borrower, shall be payable by the Borrower to the Agent on demand. 6.4. Ratification; Power Coupled With An Interest. All powers, -------------------------------------------- authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 7. Duty of Agent. The Agent's sole duty with respect to the ------------- custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise to the extent permitted by law, shall be to deal with it in the same manner as the Agent deals with similar property for its own account. Neither the Agent, any Lender nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Borrower or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Agent and the Lenders hereunder are solely to protect the Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon the Agent or any Lender to exercise any such powers. Neither the Agent, the Lenders nor any of their officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act hereunder, except for the negligence or willful misconduct of the Agent, any Lender or any of their officers, directors, employees or agents. 8. Execution of Financing Statements. Pursuant to and to the extent --------------------------------- permitted by Section 9-402 of the Code, the Borrower authorizes the Agent to file financing statements with respect to the Collateral without the signature of the Borrower in such form and in such filing offices as the Agent reasonably determines appropriate to perfect the security interests of the Agent under this Agreement. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 9. Authority of Agent. The Borrower acknowledges that the rights and ------------------ responsibilities of the Agent under this Agreement with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and the Borrower, the Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and the Borrower shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 10. Notices. Unless otherwise specifically provided herein, all notices, ------- requests and demands required or permitted by the terms hereof to be given to any person shall be given pursuant to and in accordance with Section 13.3 of the Participation Agreement. 6 11. Severability. Any provision of this Agreement which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12. Amendments in Writing; Cumulative Remedies. ------------------------------------------- 12.1. Amendments in Writing. None of the terms or provisions of this --------------------- Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Borrower and the Agent, provided that -------- any provision of this Agreement imposing obligations on the Borrower may be waived by the Agent in a written instrument executed by the Agent. 12.2. Remedies Cumulative. The rights and remedies herein provided are ------------------- cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 13. Section Headings. The Section headings used in this Agreement are ---------------- for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. Successors and Assigns. This Agreement shall be binding upon the ---------------------- successors and assigns the Borrower and shall inure to the benefit of the Agent and the Lenders and their successors and permitted assigns. 15. Governing Law. This Agreement shall be governed by and construed ------------- and interpreted in accordance with the law of the State of New York. 16. Obligations Are Without Recourse. Anything in this Agreement to -------------------------------- the contrary notwithstanding, the Borrower's liability hereunder shall be limited as provided in Section 9.14 of the Credit Agreement. 17. Counterparts. This Agreement may be executed in any number of ------------ separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned has caused this Security Agreement to be duly executed and delivered as of the date first above written. HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not individually but solely as Trustee By: ____________________________ Name: Title: Schedule 1 ---------- EQUIPMENT EXHIBIT A SECURITY AGREEMENT SUPPLEMENT NO. __ THIS SECURITY AGREEMENT SUPPLEMENT NO. __ (the "Security Agreement ------------------ Supplement") dated as of _________, __, ____, to the Security Agreement, dated - ---------- as of October 27, 2000 (as the same may be further amended, supplemented or otherwise modified from time to time, the "Security Agreement") made by HANOVER ------------------ EQUIPMENT TRUST 2000B, a Delaware business trust, (the "Borrower"), in favor of -------- THE CHASE MANHATTAN BANK, as Agent (in such capacity, the "Agent") for the ----- Lenders party to the Credit Agreement, dated as of October 27, 2000 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), ---------------- among the Borrower, the Agent and such Lenders. WHEREAS, the Borrower has previously executed and delivered the Security Agreement to grant to the Agent, for the ratable benefit of the Lenders, a security interest in the collateral described therein; WHEREAS, pursuant to the Credit Agreement and the Participation Agreement, the Lenders have severally agreed to make additional Loans to the Borrower upon the terms and subject to the conditions set forth therein; and WHEREAS, it is a condition precedent, under the Participation Agreement, to the obligation of the Lenders to make their respective additional Loans that the Borrower shall have executed and delivered this Security Agreement Supplement No. __ for the ratable benefit of the Lenders. NOW, THEREFORE, in consideration of the premises and to induce the Lenders to make their respective Loans to the Borrower, the Borrower hereby agrees with the Agent, for the ratable benefit of the Lenders, as follows: 18. Definitions; Rules of Usage. For purposes of this Security Agreement --------------------------- Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Security Agreement. 19. Grant of Security Interest in the Additional Equipment. As collateral ------------------------------------------------------ security, in addition to that referred to in the Security Agreement, for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Borrower hereby grants to the Agent for the ratable benefit of the Lenders a security interest in all of its respective right, title and interest, whether the same be goods, fixtures, equipment, general intangibles, accounts or chattel paper in and to (a) the additional Equipment listed on Schedule I hereto (the "Additional ---------- Equipment"), (b) rights and interests of Borrower as Lessor pursuant to Lease - --------- Supplement No. __, (c) all books and records pertaining to the foregoing, (d) all warranties and guarantees given by any Person with respect to any of the foregoing, as well as all choses in action, claims, and causes of action arising from any breach thereof, and (e) to the extent not otherwise included, all Proceeds and products of the foregoing, in each case whether now existing or hereafter acquired (collectively, the "Collateral"), subject to the rights of the Lessee, as Lessee under the Lease, so long as no Lease Event of Default has occurred and is continuing. Effective upon the execution and delivery of this Security Agreement Supplement by the Borrower, the Additional Equipment shall be subject to the terms and provisions of the Security Agreement and shall be deemed to constitute Equipment for all purposes with respect to the Security Agreement. 20. Ratification. Except as specifically modified hereby, the terms and ------------ provisions of the Security Agreement are hereby ratified and confirmed and remain in full force and effect. 21. GOVERNING LAW. THIS SECURITY AGREEMENT SUPPLEMENT HAS BEEN DELIVERED ------------- IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THIS STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. 22. Counterpart Execution. This Security Agreement Supplement may be --------------------- executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. IN WITNESS WHEREOF, the undersigned has caused this Security Agreement Supplement No. __ be duly executed and delivered as of the date first above written. HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not in its individual capacity but solely as Trustee By: _____________________________________ Name: Title: JOINDER OF LESSEE ----------------- HANOVER COMPRESSION INC., a Delaware corporation ("Lessee") hereby joins in the Security Agreement dated as of October 27, 2000 made by HANOVER EQUIPMENT TRUST 2000B, as the Borrower in favor of The Chase Manhattan Bank, as the Agent for the Lenders (the "Security Agreement") in order to, and HEREBY ------------------ GRANTS TO THE AGENT FOR THE RATABLE BENEFIT OF THE LENDERS A SECURITY INTEREST IN all of its right, title and interest, if any, in and to the Collateral for the purpose of securing the Obligations. Lessee acknowledges and agrees that, upon the occurrence of a Credit Agreement Event of Default and subject to the terms of the Lease, the Agent on behalf of the Lenders shall have the right to exercise any and all of its remedies hereunder as against the Collateral. Lessee expressly agrees that the rights of the Agent and the Lenders, under the Security Agreement, shall in no way be affected or impaired by reason of the occurrence of any of the following events: (i) the waiver by the Agent or the Lenders of the performance or observance by the Borrower, Lessee or any other party of any terms of the Operative Agreements; (ii) the extension, in whole or in part, of the time for payment by the Borrower of any sums owing or payable under the Operative Agreements; (iii) any failure, delay or inability of the Agent or the Lenders in enforcing any remedies or any other provisions under the Operative Agreements; (iv) the occurrence of any event described in Section 6.1(1) of the Credit Agreement; or (v) the inability of the Borrower to perform (or the release of the Borrower's performance) under the Operative Agreements due to any Legal Requirement. Notwithstanding the foregoing, Lessee shall not have any personal liability under this Security Agreement and Joinder in excess of its personal liability under the Guaranty and the other Operative Agreements. This Joinder shall be considered part of the Security Agreement to which it is attached, and all references in the Operative Agreements to the Security Agreement shall mean the Security Agreement together with this Joinder. All capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms in the Security Agreement. This Joinder has been duly executed by Lessee as of October 27, 2000. HANOVER COMPRESSION INC. By: ____________________________ Name: Title: EX-10.58 9 0009.txt ASSIGNMENT OF LEASES EXHIBIT 10.58 EXECUTION COPY ASSIGNMENT OF LEASES, RENTS AND GUARANTEE from HANOVER EQUIPMENT TRUST 2000B to THE CHASE MANHATTAN BANK, as Agent, Assignee October 27, 2000 1 ASSIGNMENT OF LEASES, RENTS AND GUARANTEE THIS ASSIGNMENT OF LEASES, RENTS AND GUARANTEE dated as of October 27, 2000 (this "Assignment"), made by HANOVER EQUIPMENT TRUST 2000B, a Delaware ---------- business trust (the "Assignor"), to THE CHASE MANHATTAN BANK, a New York banking -------- corporation, in its capacity as Agent (in such capacity, the "Assignee"), under -------- the Credit Agreement dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among the ---------------- Assignor, the Assignee and the financial institutions from time to time parties thereto (the "Lenders"). ------- Preliminary Statement --------------------- A. On date hereof, the Assignor and Hanover Compression Inc. (the "Lessee") entered in a Lease whereby the Assignor agreed to lease certain ------ Equipment to the Lessee. Pursuant to the Lease, on the date that any Equipment is acquired by the Assignor, the Assignor and the Lessee shall execute and deliver a Lease Supplement to subject such Equipment to the Lease. Simultaneously with the execution of the Lease, the Guarantor entered into a Guarantee which, among other obligations, guarantees all of the Lessee's obligations under the Lease. B. Pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Assignor in an aggregate amount not to exceed $167,411,167 upon the terms and subject to the conditions set forth therein, to be evidenced by the Notes issued by the Assignor under the Credit Agreement. C. It is a condition, among others, to the obligation of the Lenders to make their respective Loans to the Assignor under the Credit Agreement that the Assignor shall have executed and delivered, and the Lessee and the Guarantor shall have consented to, this Assignment to the Assignee for the ratable benefit of the Lenders and the Investors, as provided for in the Credit Agreement. NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree as follows: 1. Defined Terms. Capitalized terms used but not otherwise defined ------------------ in this Assignment shall have the respective meanings specified in Annex A to ------- the Participation Agreement dated as of the date hereof among the Lessor, the Lessee, the Investors, the Trust Company, the Agent and the Lenders named therein, as such Participation Agreement may be amended, supplemented or otherwise modified from time to time. A copy of the Participation Agreement or of the other agreements referenced herein or therein may be obtained from any of the parties hereto at the addresses set forth herein. 2. Assignment. The Assignor hereby irrevocably assigns, transfers, --------------- sets over and conveys to the Assignee, all the following-described property relating to or arising in connection with the Equipment, whether now owned or held or hereafter acquired, exclusively and without any reservation thereof unto the Assignor: 2 (a) All of the estate, right, title, interest, benefits, powers and privileges of the Assignor, as lessor, under the Lease, as the Lease is supplemented from time to time pursuant to one or more Lease Supplements, including, without limitation, (i) the immediate and continuing right to make claim for, receive, collect and receipt for all rents, income, revenues, issues, profits, insurance proceeds, sales proceeds and other sums payable to or receivable by the Assignor under the Lease, or pursuant to any provisions thereof, whether as rent or as the purchase price or termination payment for any interest in the Equipment or otherwise (including, without limitation, the Maximum Residual Guarantee Amount, the Purchase Option Price, Termination Value, Basic Rent, Supplemental Rent, Investor Yield and any sales proceeds payable to the Assignor pursuant to the Lease) (collectively, the "Lease Rents"), including ----------- all cash, securities or letters of credit, if any, delivered or deposited pursuant thereto to secure performance by the Lessee of its obligations thereunder, (ii) the right and power (which right and power are coupled with an interest) upon the purchase by the Lessee of the interest of the Assignor in the Equipment in accordance with the Lease to execute and deliver as irrevocable agent and attorney-in-fact of the Assignor an appropriate instrument necessary to convey the interest of the Assignor therein, or to pay over or assign to the Assignee those sums to which it is entitled if the Lessee becomes obligated to purchase the interest of the Assignor in the Equipment and to perform all other necessary or appropriate acts as said agent and attorney-in-fact with respect to any such purchase and conveyance, (iii) the right to perform all other necessary or appropriate acts as said agent and attorney-in-fact with respect to any purchase or conveyance referred to in clause (ii) above, (iv) the right to declare the Lease to be in default under Section 17.1 thereof, (v) the right to exercise remedies under or with respect to the Lease, (vi) the right to make all waivers and agreements on behalf of the Assignor under the Lease provided for or permitted under the Lease, (vii) the right to give all notices, consents, releases and other instruments provided under the Lease, (viii) the right to give all notices of default and to take all action upon the happening of a Lease Default or a Lease Event of Default, including the commencement, conduct and consummation of proceedings as shall be permitted under any provision of the Lease, or by law or in equity, (ix) the right to receive all notices sent to the Assignor under the Lease, (x) the Assignor's interest under the Lease in the Lessee's tangible and intangible property used or arising in connection with the Equipment, including, but not limited to, permits, licenses, contract rights and prepaid expenses, (xi) the grant of lien and security interest by the Lessee pursuant to the Lease; and (xii) the right to do any and all other things whatsoever which the Assignor is or any lessor or mortgagor or secured party is, or may be entitled to do under the Lease; provided that the Assignor shall -------- retain, and the Lease Rents shall not include, the Excepted Payments and the Lessor shall retain, and the rights and powers assigned herein shall in no event include, the Excepted Rights and shall be subject to the Shared Rights. (b) All of the estate, right, title, interest, benefits, powers and privileges of the Assignor, to and under all other leases, subleases or licenses of the Equipment, any license, concession, management or other agreements of a similar kind that permit the use or occupancy of the Equipment or any part thereof for any purpose in return for any payment, now or hereafter entered into by the Assignor (collectively, the "Other Leases" and, together with the Lease, ------------ the "Leases"), together with all estate, rights, title, interest, benefits, ------ powers and privileges of the Assignor, as lessor, under the Other Leases including the immediate and continuing right to make claim for, receive, collect and receipt for all charges, fees, income, issues, profits, receipts, 3 rents, revenues or royalties payable under any of the Other Leases (collectively, the "Other Lease Rents") and all estate, right, title and ----------------- interest of the Assignor thereunder, including all cash, securities or letters of credit, if any, delivered or deposited thereunder to secure performance by the lessees under Other Leases of their obligations thereunder; provided that -------- the Assignor shall retain, and the Lease Rents shall not include, the Excepted Payments and the Lessor shall retain and the rights and powers assigned herein shall in no event include the Excepted Rights and shall be subject to the Shared Rights. (c) All of the estate, right, title, interest, benefits, powers and privileges of the Assignor, to and under all agreements or contracts for the sale or other disposition of all or any part of the Equipment, now or hereafter entered into by the Assignor (collectively, the "Contracts"), together with all --------- estate, rights, title, interest, benefits, powers and privileges of the Assignor under the Contracts including, without limitation, the immediate and continuing right to make claim for, receive, collect and receipt for all charges, fees, income, issues, profits, receipts, rents, revenues or royalties payable under any of the Contracts (collectively, the "Contract Rents" and, together with the -------------- Lease Rents and the Other Lease Rents, the "Rents" ) and all right, title and ----- interest of the Assignor thereunder, including all cash, securities or letters of credit, if any, deposited thereunder to secure performance by the obligors of their obligations thereunder; provided that the Assignor shall retain, and the -------- Lease Rents shall not include, the Excepted Payments and the Lessor shall retain and the rights and powers assigned herein shall in no event include the Excepted Rights and shall be subject to the Shared Rights. (d) All of the estate, right, title, interest, benefits, powers and privileges of the Assignor under the Guarantee including, without limitation, (i) the immediate and continuing right to make claim for, receive, collect and receipt for all Guaranteed Obligations and other sums payable to or receivable by the Assignor under the Guarantee, or pursuant to any provisions thereof, (ii) the right to exercise remedies under or with respect to the Guarantee, (iii) the right to make all waivers and agreements on behalf of the Assignor under the Guarantee provided for or permitted under the Guarantee, (iv) the right to give all notices, consents, releases and other instruments provided under the Guarantee, and (v) the right to give all notices of default and to take all action as shall be permitted under any provision of the Guarantee or by law or in equity; provided that the Assignor shall retain the Excepted Payments and the -------- Lessor shall retain, and the rights and powers assigned herein shall in no event include, the Excepted Rights and shall be subject to the Shared Rights. (e) All of the right, title and interest of the Assignor in and to all claims and rights to the payment of money at any time arising in connection with any repudiation, rejection or breach of the Lease by the Lessee or a trustee or receiver of the Lessee (whether pursuant to the Lease, the Guarantee or any Other Lease by any lessee thereunder, trustee or receiver of any such lessee) under any insolvency statute, law or regulation, including all rights to recover damages arising out of such breach or rejection, all rights to charges payable by the Lessee or such trustee or receiver (or by such lessee, trustee or receiver) in respect of the Equipment or any portions thereof following rejection, repudiation or disaffirmance of the Lease or following the entry of an order for relief under any insolvency statute, law or regulation in respect of the Lessee (or such lessee) and all rentals and other charges outstanding under the Lease (or Other Lease) as of the date of entry of such order for relief; provided that the Assignor shall retain and -------- 4 the Lease Rents shall not include, the Excepted Payments and the Lessor shall retain and the rights and powers assigned herein shall in no event include, the Excepted Rights and shall be subject to the Shared Rights. The Assignor hereby agrees that any action taken by Assignee (or its designee) pursuant to this Assignment shall be exclusive, and no party relying on such action of the Assignee (or such designee) pursuant hereto shall be required to obtain the concurrence or consent of the Assignor to such action or to a request for such action. The Assignor further agrees that this Agreement shall not relieve Assignor from any obligations it may have as lessor under the Lease. 3. Receipt of Payments. The Assignor hereby irrevocably designates ------------------------ the Assignee (or its designee) to receive all payments of (i) the Lease Rents, the Other Lease Rents and the Contract Rents and any other sums payable to the Assignor under the Lease, any Other Lease or any Contract and (ii) all Guaranteed Obligations and any other sums payable to the Assignor under the Guarantee. The Assignor agrees to direct (and hereby directs) the Lessee, any other lessees and any contracting parties to deliver to the Assignee (or its designee), at its address provided herein or at such other address or to such other Person as the Assignee shall designate, all such payments and sums on account of the Rents, and no delivery thereof by the Lessee, such other lessee or such contracting party shall be of any force or effect unless made to the Assignee (or its designee), as herein provided. The Rents shall for all purposes be considered the property of the Assignee and not of the Assignor, whether before or after the occurrence of an Event of Default. 4. Receipt of Notices. The Assignor hereby designates the Assignee ----------------------- (or its designee) to receive (in addition to, and not to the exclusion of, the Assignor) duplicate originals or copies of all notices, undertakings, demands, statements, documents, financial statements and other communications which the Lessee, the Guarantor, any other lessee or any contracting party is required or permitted to give, make, deliver to or serve pursuant to the Lease, the Guarantee, any Other Lease or any Contract. The Assignor agrees to direct (and hereby directs) the Lessee, the Guarantor, and such other lessees and contracting parties to deliver to the Assignee (or its designee), at its address provided herein or at such other address or to such other Person as the Assignee shall designate, duplicate originals or copies of all such notices, undertakings, demands, statements, documents, financial statements and other communications, and no delivery thereof by the Lessee, the Guarantor, such other lessee or such contracting party shall be of any force or effect unless made to the Assignor and also made to the Assignee (or its designee), as herein provided. The Assignor further agrees that upon receipt by the Assignor of any such notices, undertakings, demands, statements, documents, financial statements and other communications, the Assignor shall promptly deliver copies thereof to the Assignee unless the Assignor shall reasonably believe that the Assignee has already received such copies. 5. Irrevocability; Supplemental Instruments. The Assignor agrees --------------------------------------------- that this Assignment and the designation and direction to the Lessee set forth in Sections 3 and 4 of this Assignment are irrevocable and that it will not take any action as lessor under the Lease, or under the Guarantee, or otherwise which is inconsistent with this Assignment and that any action, assignment, designation or direction inconsistent herewith shall be void. The Assignor will from time to time execute and deliver all instruments of further assurance and do such further acts as may be necessary or proper to carry out more effectively the purpose of this Assignment. 5 6. Validity. The Assignor represents and warrants and covenants to ------------- the Assignee that (i) the Assignor has not assigned or executed any assignment of, and will not assign or execute any assignment of its interest in the Lease, of the Guarantee, of any Other Lease, of any Contract or of any Rents or of any other subject matter of this Assignment to anyone other than the Assignee and any assignment, designation or direction by the Assignor inconsistent herewith shall be void, (ii) no Lease Event of Default has occurred and is continuing and (iii) the Assignor has not done any act or executed any document that impairs the rights of the Assignee to the Lease or the Lease Rents or to the Guarantee under this Assignment. 7. The Assignor Remains Liable. While the assignment made hereby is -------------------------------- present, direct, absolute and continuing, it has been made for the purpose of providing the Assignee with security for the performance of the Assignor's obligations under the Credit Agreement and the Notes and the execution and delivery hereof shall not impair or diminish in any way the obligations of the Assignor under the Lease or impose any of such obligations on the Assignee. Neither the Assignee nor its designee shall be responsible or liable for performing any of the obligations of the Assignor under the Lease, any Other Lease or any Contract, for any waste by the Lessee or others, for any dangerous or defective conditions of the Equipment, for negligence in the management, upkeep, repair or control of the Equipment or any other act or omission by any other Person. Nothing contained herein shall operate or be construed to (i) obligate the Assignee (or its designee) to assume the obligations of the Assignor under the Lease, any Other Lease or any Contract, to perform any of the terms and conditions contained in the Lease, any Other Lease or any Contract or otherwise to impose any obligation upon the Assignee with respect to the Lease, any Other Lease or any Contract or (ii) place upon the Assignee (or its designee) any responsibility for the operation, control, care, management or repair of any of the Equipment or any part thereof. Subject at all times to the terms and conditions of this Assignment, the Assignor will at all times promptly and faithfully perform in all respects, or cause to be performed in all respects, all of its covenants, conditions and agreements contained in the Lease, any Other Lease or any Contract now or hereafter existing on the part of the Assignor to be kept and performed. 8. Amendments; Lessee's Consent. The Assignor will not enter into --------------------------------- any agreement subordinating, amending, extending or terminating the Lease or the Guarantee without the prior written consent thereto of the Assignee, which consent may be withheld in Assignee's sole discretion, and any such attempted subordination, amendment, modification, extension or termination without such consent shall be void. If the Lease, the Guarantee, any Other Lease or any Contract shall be amended, it shall continue to be subject to the provisions hereof without the necessity of any further act by any of the parties hereto. The Assignor and the Assignee hereby consent to the provisions of Lessee's and Guarantor's Consent attached to this Assignment and agree to be bound thereby. 9. Absolute Assignment. The Assignor has, subject to and in ------------------------ accordance with the terms and conditions of this Assignment, assigned and transferred unto the Assignee all of the Assignor's right, title and interest in and to Rents now or hereafter arising from (i) the Lease, any Other Lease or any Contract heretofore or hereafter made or agreed to by the Assignor and (ii) the Guarantee, it being intended to establish an absolute transfer and assignment, subject to and in accordance with the terms and conditions of this Assignment, of all 6 such Rents, Guaranteed Obligations, the Lease, the Guarantee, the Other Leases and the Contracts to the Assignee and not merely to grant a security interest therein. Subject to the terms of the Lease and Lessee's rights thereunder, the Assignee (or its designee) may in the Assignor's name and stead operate the Equipment and rent, lease or let all or any portion of the Equipment to any party or parties at such rental and upon such terms as the Assignee (or its designee) shall, in its discretion, determine. 10. Ongoing Right to Collect Rents; Receivers. If notwithstanding the ---------------------------------------------- terms of this Assignment, a petition or order for sequestration of rents, or the appointment of a receiver or some similar judicial action or order is deemed required under applicable state law to allow the Assignee to continue to collect the moneys described in paragraphs 2 (a), (b), (c), (d) and (e) of this Assignment, then it is agreed by the Assignor that any proof of claim or similar document filed by the Assignee in connection with the breach or rejection of the Lease by the Lessee thereunder or the trustee of any lessee under any federal or state insolvency statute shall for the purpose of perfecting the Assignee' s rights conferred in said paragraph 2(e) and to the extent permitted under applicable law be deemed to constitute action required under such state law. Upon the occurrence and during the continuance of an Event of Default, the Assignor hereby consents to the appointment of a receiver for any or all of the Equipment as a matter of right and without any requirement for notice to the Assignor and without regard to the solvency of the Assignor or to the collateral that may be available for the satisfaction of the Notes and all other obligations under the Credit Agreement and the other Operative Agreements. 11. Amendment. This Assignment may not be amended or otherwise -------------- modified except by a writing signed by the Assignor and the Assignee in accordance with the terms of the Credit Agreement. 12. Notices. All notices, demands, requests, consents, approvals and ------------ other instruments under this Assignment shall be made in accordance with the notice provisions of the Participation Agreement. 13. Successors and Assigns. All covenants, agreements, --------------------------- representations and warranties in this Assignment by the Assignor and the Assignee shall bind, and shall inure to the benefit of and be enforceable by, their respective successors and permitted assigns. 14. Severability. If any provision or provisions, or if any portion ----------------- of any provision or provisions, in this Assignment is found by a court of law of competent jurisdiction to be in violation of any local, state or Federal ordinance, statute, law, administrative or judicial decision, or public policy, and if such court should declare such portion, provision or provisions to be illegal, invalid, unlawful, void or unenforceable as written, then it is the intent of the parties hereto that such portion, provision or provisions shall be given force to the fullest possible extent that they are legal, valid and enforceable, that the remainder of this Assignment shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion, provision or provisions were not contained therein, and that the obligations of the Assignor under the remainder of this Assignment shall continue in full force and effect. 15. Governing Law. THIS ASSIGNMENT SHALL BE GOVERNED BY, AND ------------------ CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE 7 STATE OF NEW YORK, EXCEPT AS TO MATTERS RELATING TO THE CREATION OF LIENS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE EQUIPMENT IS LOCATED. 16. Obligations Are Without Recourse. Anything to the contrary herein ------------------------------------- notwithstanding, the Assignor's liability for any sums due hereunder shall be limited in accordance with Section 9.14 of the Credit Agreement. 17. Counterparts. This Assignment may be executed in any number of ----------------- counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the Assignor has caused this Assignment to be duly executed as of the day and year first above written. HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not in its individual capacity but solely as Trustee By: _______________________________ Name: Title: 9 By execution of this Assignment the Investors hereby irrevocably assign, transfer, set over and convey to the Assignee all of the estate, right, title, interest, benefits, powers and privileges of the Investors under the Guarantee which transfer shall be in accordance with all of the terms and provisions of this Assignment. BANK HAPOALIM B.M., as an Investor By:____________________________________ Name: Title: 10 FBTC LEASING CORP., as an Investor By:____________________________________ Name: Title: 1 LESSEE'S AND GUARANTOR'S CONSENT As of this 27th day of October, 2000, HANOVER COMPRESSOR COMPANY, a Delaware corporation, HANOVER COMPRESSION INC., a Delaware corporation ("Lessee"), and certain of their Subsidiaries listed on the signature pages ------ hereto (collectively the "Guarantors", individually a "Guarantor"), hereby ---------- --------- consent and agree to all of the terms of the Assignment of Leases, Rents and Guarantee dated as of the date hereof (the "Assignment") made by HANOVER ---------- EQUIPMENT TRUST 2000B, a Delaware business trust ("Assignor"), and joined in by -------- Bank Hapoalim B.M. and FBTC Leasing Corp., in favor of The Chase Manhattan Bank, as Agent under the Credit Agreement dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") ---------------- among the Assignor, the Agent and the financial institutions from time to time parties thereto (the "Lenders"), and further agree as follows: ------- 1. Definitions. Each capitalized term used herein and not otherwise --------------- defined herein shall have the respective meanings ascribed thereto in the Assignment, as such Assignment may be amended, supplemented or otherwise modified from time to time. 2. Acknowledgments, Confirmations and Agreements. (a) The Lessee ------------------------------------------------- acknowledges, confirms and agrees that: (i) the Lessee has the right, power and authority to enter into this consent (this "Consent"); (ii) the Lease is in full force and effect and enforceable in accordance with its terms; (iii) neither the Lessee nor, to the Lessee's knowledge, the Assignor is in default in the observance or performance of any condition or agreement to be observed or performed by the Lessee or the Assignor, respectively, thereunder; (iv) no Lease Rents have been paid by the Lessee except as provided in the Lease; (v) no Rent has been waived, released, reduced, discounted or otherwise discharged or compromised by the Assignor; and (vi) the Lessee has not received notice of any other assignment of the Lessor's interest in the Lease. (b) The Guarantors acknowledge, confirm and agree that: (i) the Guarantors have the right, power and authority to enter into this Consent; and (ii) the Guarantee is in full force and effect and enforceable in accordance with its terms. 3. Consent. (a) The Lessee, as lessee under the Lease, consents to ----------- the Assignment and each of the terms thereof, and agrees to pay and deliver to the Assignee (or its designee) all Lease Rents and other sums payable under the Lease without any offset, deduction, defense, abatement, deferment, diminution or counterclaim, and the Lessee will not assert any offset, deduction, defense (other than the defense of payment to the Assignee (or its designee)), abatement, deferment, diminution or counterclaim in any proceeding brought under the Assignment or with respect to the transactions contemplated therein or herein. The Lessee will not, for any reason whatsoever, seek to recover from the Assignee (or its designee) any moneys paid to the Assignee (or its designee) by virtue of the Assignment. Lessee agrees (i) to deliver to the Assignee (or its designee) and the Assignor, at their addresses provided in the Participation Agreement or at such other addresses as the Assignee or the Assignor, as the case may be, may designate, duplicate original or copies of all notices, undertakings, demands, statements, documents and other communications which the Lessee is required or permitted to 2 deliver pursuant to the Lease or the Assignment; (ii) that, subject to the Excepted Rights, any notice delivered or declaration made to the Lessee by the Assignee (or its designee) pursuant to the Lease shall be effective as a notice given or declaration made to the Lessee by the Assignor as lessor under the Lease; (iii) that the Assignee (and its designee) shall not by reason of the Assignment be subject to any liability or obligation under the Lease; and (iv) that, subject to the Excepted Rights, any waiver, consent or approval by the Assignor under the Lease shall not be valid unless approved in writing by the Assignee (or its designee). (b) The Guarantors consent to the Assignment and each of the terms thereof, and agrees to pay and deliver to the Assignee (or its designee) the Guaranteed Obligations, subject to the Excepted Rights, and other sums payable under the Guarantee without any offset, deduction, defense, abatement, deferment, diminution or counterclaim, and the Guarantors will not assert any offset, deduction, defense (other than the defense of payment to the Assignee (or its designee)), abatement, deferment, diminution or counterclaim in any proceeding brought under the Assignment or with respect to the transactions contemplated therein or herein. The Guarantors will not, for any reason whatsoever, seek to recover from the Assignee (or its designee) any moneys paid to the Assignee (or its designee) by virtue of the Assignment. (c) Subject to the Excepted Rights, the Lessee shall cause the Lease Rents and other sums payable to the Assignor under the Lease to be delivered to the Assignee (or its designee), as agent under the Credit Agreement, as an absolute net sum, in such manner that the Assignee (or its designee) shall have "collected funds" on the date and at the time payments are due under the Lease. (d) The Guarantors shall cause the Guaranteed Obligations, subject to the Excepted Rights, and other sums payable to the Assignor under the Guarantee to be delivered to the Assignee (or its designee), as agent under the Credit Agreement, at its address set forth in Section 13.3 of the Participation Agreement. (e) The Lessee hereby agrees to remain obligated under the Lease and this Consent in accordance with their respective terms, and to take no action to terminate (except in accordance with the express terms of the Lease), annul, rescind or avoid the Lease or this Consent or to abate, reduce, offset, suspend or defer or make any counterclaim or raise any defense (other than the defense of payment to the Assignee (or its designee)) with respect to the Lease Rents payable thereunder or to cease paying such Lease Rents to the Assignee (or its designee) as provided herein. (f) The Guarantors hereby agree to remain obligated under the Guarantee and this Consent in accordance with their respective terms, and to take no action to terminate (except in accordance with the express terms of the Guarantee), annul, rescind or avoid the Guarantee or this Consent or to abate, reduce, offset, suspend or defer or make any counterclaim or raise any defense (other than the defense of payment to the Assignee (or its designee)) with respect to the Guaranteed Obligations payable thereunder. 3 (g) The Lessee and the Guarantors hereby agree that upon the occurrence of a Default or an Event of Default, the Assignee (or its designee) shall have the right to deliver a notice of such default and make demand for payment under the Guarantee, which shall be effective for all purposes as if sent by the Assignor. (h) The Lessee shall notify the Assignee (or its designee) at its address specified in the Participation Agreement, or such other address as the Assignee may designate, of any Lease Event of Default and agrees that no such default shall entitle the Lessee to terminate, annul, rescind or avoid the Lease or reduce or abate the Lease Rents or other sums payable thereunder. 4. Amendment or Termination; Assignee's Designation. (a) The Lessee ----------------------------------------------------- agrees that it will not, unilaterally or by agreement, subordinate, amend, supplement, modify, extend (except in accordance with the express terms of the Lease), discharge, waive or terminate (except in accordance with the express terms of the Lease) the Lease or this Consent or any provision of any thereof without the Assignee' s prior written consent, which consent may be withheld in the Assignee's sole discretion, and that any attempted subordination, amendment, supplement, modification, extension, discharge, waiver or termination without such consent shall be null and void. In the event that the Lease shall be amended or supplemented as herein permitted, the Lease, as so amended or supplemented, shall continue to be subject to the provisions of the Assignment and this Consent without the necessity of any further act by any of the parties hereto. Nothing in this Section 4 shall be construed as limiting or otherwise affecting in any way the Assignor's Excepted Rights or Shared Rights. (b) The Guarantors agree that they will not, unilaterally or by agreement, subordinate, amend, supplement, modify, extend (except in accordance with the express terms of the Guarantee), discharge, waive or terminate (except in accordance with the express terms of the Guarantee) the Guarantee or this Consent or any provision of any thereof without the Assignee's prior written consent, which consent may be withheld in the Assignee's sole discretion, and that any attempted subordination, amendment, supplement, modification, extension, discharge, waiver or termination without such consent shall be null and void. In the event that the Guarantee shall be amended or supplemented as herein permitted, the Guarantee, as so amended or supplemented, shall continue to be subject to the provisions of the Assignment and this Consent without the necessity of any further act by any of the parties hereto. Nothing in this Section 4 shall be construed as limiting or otherwise affecting in any way the Assignor's Excepted Rights or Shared Rights. 5. Continuing Obligations of the Assignor and the Lessee. Neither ---------------------------------------------------------- the execution and delivery of the Assignment, nor any action or inaction on the part of the Assignee shall impair or diminish any obligations of the Assignor or the Lessee under the Lease or the Guarantors under the Guarantee, and shall not impose on the Assignee (or its designee) any such obligations, nor shall it impose on the Assignee (or its designee) a duty to produce Rents or cause the Assignee to be a mortgagee in possession for any purpose. 4 6. Severability. If any provision or provisions, or if any portion ----------------- of any provision or provisions, in this Consent is found by a court of law of competent jurisdiction to be in violation of any local, state or Federal ordinance, statute, law, administrative or judicial decision, or public policy, and if such court should declare such portion, provision or provisions to be illegal, invalid, unlawful, void or unenforceable as written, then it is the intent of the Lessee that such portion, provision or provisions shall be given force to the fullest possible extent that they are legal, valid and enforceable, that the remainder of this Consent shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion, provision or provisions were not contained herein, and that the obligations of the Lessee under the remainder of this Consent shall continue in full force and effect. 7. Governing Law. THIS CONSENT SHALL BE GOVERNED BY, AND CONSTRUED ------------------ AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT AS TO MATTERS RELATING TO THE CREATION OF LIENS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE EQUIPMENT IS LOCATED. 5 IN WITNESS WHEREOF, the Lessee and the Guarantors have caused this Consent to be duly executed as of the date first written above. HANOVER COMPRESSOR COMPANY, as a Guarantor By:______________________________________ Name: Title: HANOVER COMPRESSION INC., as Lessee and Guarantor By:______________________________________ Name: Title: HANOVER COMPRESSOR LIMITED HOLDINGS, LLC, as a Guarantor by Hanover General Holdings, Inc., as sole member By:______________________________________ Name: Title: HANOVER MAINTECH LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., as general partner By:______________________________________ Name: Title: 6 HANOVER/SMITH LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., as general partner By:______________________________________ Name: Title: HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., general partner By:______________________________________ Name: Title: For purposes of Section 5 hereof: HANOVER EQUIPMENT TRUST 2000B By: Wilmington Trust Company, not in its individual capacity but solely as Trustee By:______________________________________ Name: Title: EX-23.1 10 0010.txt ARTHUR ANDERSEN CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated March 27, 2000, related to the financial statements of OEC Compression Corporation for the years ended December 31, 1999 and 1998 (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Dallas, Texas December 21, 2000 EX-23.2 11 0011.txt PRICEWATERHOUSECOOPERS CONSENT (HANOVER) Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Amendment No. 1 to the Registration Statement on Form S-4 of our report dated March 8, 2000, relating to the consolidated financial statements, which appears in Hanover Compressor Company's Annual Report on Form 10-K for the year ended December 31, 1999. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Houston, Texas December 21, 2000 EX-23.3 12 0012.txt PRICEWATERHOUSECOOPERS CONSENT (DRESSER-RAND) Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Amendment No. 1 to the Registration Statement on Form S-4 of our report dated November 3, 2000, relating to the combined financial statements of the Dresser-Rand Compression Services Rental and Packaging Division, a division of Dresser-Rand Company, which appears in the Current Report on Form 8-K/A of Hanover Compressor Company dated November 13, 2000. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Tulsa, Oklahoma December 21, 2000 EX-23.4 13 0013.txt PRICEWATERHOUSECOOPERS CONSENT (OEC) Exhibit 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Amendment No. 1 to the Registration Statement on Form S-4 of our report dated March 30, 1998 relating to the financial statements of OEC Compression Corporation, which appears in such Registration Statement. We also consent to the reference to us under the headings "Experts" and "Selected Historical Financial Data--OEC" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Tulsa, Oklahoma December 21, 2000 EX-99.4 14 0014.txt FORM OF PROXY OEC COMPRESSION CORPORATION PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF OEC COMPRESSION CORPORATION FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 30, 2000 The undersigned, revoking previous proxies relating to these shares, hereby acknowledges receipt of the notice and the proxy statement dated December __, 2000 in connection with the Special Meeting of Stockholders of OEC Compression Corporation, and hereby appoints Ray C. Davis and Kelcy L. Warren, and each of them, as its true and lawful agents and proxies, each with the power to appoint his substitute, and hereby authorizes either of them to act and to vote at the Special Meeting of Stockholders of OEC Compression Corporation to be held on December __, 2000, and at any adjournments thereof, as indicated, upon all matters referred to on this proxy card and described in the proxy statement for the Special Meeting, and, in their discretion, upon any other matters which may properly come before the meeting. Shares represented by all properly executed proxies will be voted in accordance with instructions appearing on this proxy card and in the discretion of the proxy holders as to any other matter that may properly come before the meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE VOTED FOR THE PROPOSAL - ----------------------------------------------------------------------------- FOLD AND DETACH HERE Please mark [X] your votes as in this example 1. To approve the Agreement and Plan of Merger FOR AGAINST ABSTAIN dated as of July 13, 2000 by and among Hanover [ ] [ ] [ ] Compressor Company, Caddo Acqusition Corporation and OEC Compression Corporation pursuant to which Caddo Acquisition Corporation will merge with and into OEC Compression Corporation, as a result of which OEC Compression Corporation will become a wholly owned subsidary of Hanover Compressor Company. 2. In the discretion of the persons acting as proxies, on such other matters as may properly come before the Special Meeting or any adjournment(s) thereof. Signature_____________________ Signature_____________________ Date______________ Please sign as name(s) appears on this proxy card, and date this proxy card. If a joint account, each joint owner must sign. If signing for a corporation or partnership as agent, attorney or fiduciary, indicate the capacity in which you are signing. - ----------------------------------------------------------------------------- FOLD AND DETACH HERE -----END PRIVACY-ENHANCED MESSAGE-----