-----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, Hmkg5J70anr/Nz6/gYog/prY9ut/2gzOeRRVmDZaSmG/l0ICgmAF6uwqBWEUVMan JUB/Hdr5mRt0SJxeTgzHAQ== 0000899243-03-000742.txt : 20030331 0000899243-03-000742.hdr.sgml : 20030331 20030331153459 ACCESSION NUMBER: 0000899243-03-000742 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13071 FILM NUMBER: 03630255 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 10-K 1 d10k.txt ANNUAL REPORT ON FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- Form 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 2002 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 1-13071 Hanover Compressor Company (Exact name of registrant as specified in its charter) Delaware 76-0625124 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) 12001 North Houston Rosslyn, Houston, Texas 77086 (Address of principal executive offices) (281) 447-8787 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $.001 par value Name of each exchange in which registered: New York Stock Exchange Securities registered pursuant to 12(g) of the Act: Title of class: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [_] The aggregate market value of the Common Stock of the registrant held by non-affiliates as of June 28, 2002: $642,210,000. For purposes of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares of the Common Stock of the registrant outstanding as of March 21, 2003: 80,581,181 shares. Documents Incorporated by Reference Portions of the Registrant's definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held in 2003, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2002, are incorporated by reference into Part II and Part III. The Index to Exhibits begins on page 57. ================================================================================ HANOVER COMPRESSOR COMPANY TABLE OF CONTENTS
Page ---- PART I Item 1. Business.................................................................. 3 Item 2. Properties................................................................ 18 Item 3. Legal Proceedings......................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders....................... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 21 Item 6. Selected Financial Data................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 54 Item 8. Financial Statements and Supplementary Data............................... 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................. 55 PART III Item 10. Directors and Executive Officers of Hanover............................... 56 Item 11. Executive Compensation.................................................... 56 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................................................... 56 Item 13. Certain Relationships and Related Transactions............................ 56 Item 14. Controls and Procedures................................................... 56 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 57 SIGNATURES............................................................................. 66 CERTIFICATIONS......................................................................... 67
1 PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Annual Report on Form 10-K are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can generally be identified as such because the context of the statement may include words such as the Company "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals or future revenues or other financial metrics are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated as of the date of this report. These risks and uncertainties include: . our inability to renew our short-term leases so as to fully recoup the cost of acquiring or fabricating leased equipment; . our inability to generate sufficient cash, access capital markets or to incur indebtedness to fund our business; . a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and gas production equipment; . changes in economic or political conditions in the countries in which we do business; . legislative changes in the countries in which we do business; . the loss of market share through competition; . the introduction of competing technologies by other companies; . losses due to the inherent risks associated with our operations, including equipment defects; malfunctions and failures and natural disasters; . war, terrorists attacks and/or the responses thereto; . governmental safety, health, environmental and other regulations, which could require us to make significant capital expenditures; . our high level of customer concentration which intensifies the negative effect of the loss of one or more of our customers; . our inability to comply with loan and lease covenants; . the decreased financial flexibility associated with our significant cash requirements and substantial debt and compression equipment lease commitments; . reduced profit margins resulting from increased pricing pressure in our business; . our inability to successfully integrate acquired businesses; . currency fluctuation; . our inability to execute our exit and sale strategy with respect to assets classified as discontinued operations and held for sale; . adverse results in shareholder or other litigation or regulatory proceedings; and . our inability to properly implement new enterprise resource planning systems used for integration of our businesses. Other factors besides those described in this Form 10-K could also affect our actual results. You should carefully consider the risks and uncertainties described above and those discussed in Item 1 "Business" and in 2 Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors That May Affect Our Financial Condition and Future Results," of this Form 10-K in evaluating our forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-K or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the SEC after the date of this Form 10-K. All forward-looking statements attributable to our Company are expressly qualified in their entirety by this cautionary statement. Item 1. Business General Hanover Compressor Company, ("we", "Hanover" or "the Company") Delaware corporation, together with its subsidiaries, is a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for natural gas processing and transportation applications. We sell this equipment and provide it on a rental, contract compression, maintenance and acquisition leaseback basis to natural gas production, processing and transportation companies. Founded in 1990, and a public company since 1997, our customers include both major and premier independent oil and gas producers and distributors as well as national oil and gas companies. Our maintenance business, together with our parts and service business, can provide solutions to customers that own their own compression equipment, but want to outsource their operations. We also have compressor and oil and gas production equipment fabrication operations and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. We believe that we are currently the largest natural gas compression company in the United States on the basis of aggregate rental horsepower, with 6,988 rental units having an aggregate capacity of approximately 3,514,000 horsepower at December 31, 2002. We estimate that we are one of the largest providers of compression services in the rapidly growing Latin American and Canadian markets, operating 787 units internationally with approximately 860,000 horsepower at December 31, 2002. Our products and services are essential to the production, processing, transportation and storage of natural gas and are provided primarily to energy producers and distributors of oil and natural gas. Our decentralized operating structure, technically experienced personnel and high quality compressor fleet allow us to successfully provide reliable and timely customer service. We compete primarily in the market for transportable natural gas compression units of up to 4,450 horsepower. This market for rental compression has experienced significant growth over the past decade. Although our revenues were impacted in 2002 by a slowdown in capital spending by oil and gas producers and general weakness in the overall market caused by lower drilling and new well completion activity, we believe that the gas compression market will continue to grow due to the increased consumption of natural gas, the continued aging of the natural gas reserve base and the attendant decline of wellhead pressures, the discovery of new reserves and the continuing interest in outsourcing compression by major producers. We believe that international market opportunities will drive Hanover's growth in the years to come. Our total compression horsepower at December 31, 2002 was approximately 3,514,000, including certain units from acquired companies that we have traditionally excluded from our rental utilization because these units required maintenance and upgrade to meet our standards ("unavailable units"). Historically, we have reported our horsepower utilization rate excluding unavailable units, but going forward we will report on a total horsepower basis. Hanover's compression horsepower utilization rate as of December 31, 2002, on a total horsepower basis, was 78%, compared to 84% at December 31, 2001. 3 As of June 2002, the rental portion of the domestic gas compression market was estimated by industry analysts to be at least 5.0 million horsepower, which now accounts for approximately 31% of aggregate U.S. horsepower, having doubled since 1996. Growth of the rental compression capacity in the U.S. market is primarily driven by the increasing trend toward outsourcing by energy producers and processors. We believe that outsourcing provides the customer greater financial and operating flexibility by minimizing the customer's investment in equipment and enabling the customer to more efficiently resize compression units to meet changing reservoir conditions. In addition, we also believe that outsourcing typically provides the customer with more timely and technically proficient service and maintenance, which often reduces operating costs. We believe growth opportunities for compressor rental and sales exist due to (i) increased worldwide energy consumption, (ii) implementation of international environmental and conservation laws prohibiting the flaring of natural gas, which increases the need for gathering systems, (iii) increased outsourcing by energy producers and processors, and (iv) the environmental soundness, economy and availability of natural gas as an alternative energy source. The rental compression business is capital intensive and our ability to take advantage of these growth opportunities may be limited by our ability to raise capital to fund our expansion. See Management's Discussion and Analysis for Results of Operations--Liquidity and Capital Resources in Item 7 of this Form 10-K. Substantially all of our assets and operations are owned or conducted by our wholly owned subsidiary, Hanover Compression Limited Partnership ("HCLP"). In December 2001 and 2002, HCLP and its subsidiaries completed various internal restructuring transactions pursuant to which certain of the domestic subsidiaries of HCLP were merged, directly or indirectly, with and into HCLP. Recent Events During the fourth quarter of 2002, we reviewed our business lines and the board of directors approved management's recommendation to exit and sell our non-oilfield power generation facilities and certain used equipment business lines. The results from these businesses are reflected as discontinued operations in our Consolidated Financial Statements and prior periods have been adjusted to reflect this presentation. Additionally, in the second and fourth quarter of 2002, we recorded certain write-downs, asset impairments and restructuring costs. A summary of these changes and the related impact to the Company's financial results is discussed below. See Management's Discussion and Analysis of Results of Operations in Item 7 of this Form 10-K. In January 2003, we exercised our right to put our interest in the PIGAP II joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. Hanover acquired its interest in PIGAP II as part of its purchase of Production Operators Corporation from Schlumberger in August 2001. PIGAP II is a joint venture, currently owned 70% by a subsidiary of Williams Companies Inc. and 30% by Hanover, which operates a natural gas compression facility in Venezuela that processes 1.2 billion standard cubic feet per day of natural gas. The natural gas processed by PIGAP II is re-injected into oil reservoirs for enhanced oil recovery. The consummation of the transfer of Hanover's interest in the PIGAP II joint venture back to Schlumberger is subject to certain consents. We are currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. In February 2003, we executed an amendment to our bank credit facility and certain compression equipment leases that we entered into in 1999 and 2000. The amendment, which was effective as of December 31, 2002, modifies certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment would increase the commitment fee under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in our interest cost as a result of the amendment will depend on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the 4 benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover's foreign subsidiaries. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements. We also agreed to a restriction on our capital expenditures during 2003, which under the agreement cannot exceed $200 million. In connection with the compression equipment leases entered into in August 2001, we were obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes which are registered under the Securities Act. Because of the restatement of our financial statements, the exchange offering was not completed pursuant to the time line required by the agreement and we were required to pay additional lease expense in the amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased our lease expense by approximately $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003. 2002 Acquisitions Year Ended December 31, 2002 In July 2002, we increased our ownership of Belleli Energy S.r.l. ("Belleli"), an Italian-based engineering, procurement and construction company that primarily engineers and manufactures desalinatization plants for use in Europe and the Middle East, to 40.3% from 20.3% by converting a $4.0 million loan to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9.4 million loan to the other principal owner of Belleli for additional equity ownership and began consolidating the results of Belleli's operations. In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC ("Gates") for approximately $14.4 million and had loaned approximately $6 million to Gates prior to our acquisition. Gates is a developer and owner of a forty-six megawatt cycle peaking power facility in Fresno County, California. This investment is accounted for as a consolidated subsidiary and is included in discontinued operations. See Note 3 to the Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K. In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC ("Panoche") for approximately $6.8 million and had loaned approximately $5 million to Panoche prior to the acquisition of our interest. Panoche is a developer and owner of a forty-nine megawatt cycle peaking power facility in Fresno County, California, which is under contract with California Department of Water Resources. This investment is accounted under the equity method of accounting and is included in discontinued operations. See Note 3 to the Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K. In July 2002, we acquired certain assets of Voyager Compression Services, LLC for, a natural gas compression services company located in Gaylord, Michigan, for approximately $2.5 million in cash. Business Strategy Historically, we have generated growth in excess of industry averages fueled by acquisitions and management focus on revenue growth. This has resulted in Hanover becoming a market leader in outsourced compression and has allowed us to establish sufficient critical mass to offer broad-based global solutions to our customers' surface production and processing needs and to expand our business lines. However, this dramatic growth has not been without its costs. Our growth exceeded the Company's infrastructure capabilities, strained our internal control environment, increased our leverage and hampered our ability to integrate the operations of acquired companies into our business. Further, in 2002, management's attention was diverted by the 2002 restatements of our financial statements, an investigation by the Securities and Exchange Commission and various related shareholder lawsuits. We will continue to work on the latter two items in 2003. 5 Nevertheless, Hanover's new management team is focused on the future. Our growth strategy includes the following key elements: . Core Business Focus: Our new management team has conducted a review of our business lines and has decided to exit and sell certain business lines. As a result, in the forth quarter of 2002, the board of directors approved management's recommendation to exit and sell the Company's non-oilfield power generation and certain used equipment business lines. The results from these businesses are now reflected as discontinued operations in our financial statements and prior periods have been adjusted to reflect this presentation. We anticipate completing the sale of these assets in 2003. . Improve Operating Performance: In conjunction with our core business focus, we intend to work to improve the Company's operating performance. We have begun to selectively introduce price increases for our domestic compression rental business and anticipate being able to achieve an average of a 1-2% increase in prices in 2003. We will also work to increase our domestic fleet utilization by retiring obsolete units and curtailing the addition of new units. Finally, we will be working to increase activity in our fabrication sales and parts and service divisions. . Offer Broad-Based Solutions: We believe that we are the only company in our industry that offers outsourced rental compression as well as the sale of compressors, oil and gas production and processing equipment and related services. By offering a broad range of services that complement our historic strengths, we believe that we can offer global solutions to our customers which we expect to drive growth in each of our businesses. With this focus, our employees can leverage our following strengths to pursue bottom-line growth opportunities: . Our leading position in the design and fabrication of compressors helps us meet our rental fleet growth requirements as well as the needs of our customers who resize or replace units on existing projects or obtain compression products and services for new projects. . Our compressor services business supplies parts and services and manages compression units for customers who own their units, thereby helping us develop relationships for future business. . We design and fabricate oil and gas production equipment and provide related services essential to the operation of recently completed oil and gas wells, all of which enhance our opportunity to deliver compression services and equipment to customers as the need develops over the useful life of a well. . As our customers look to us to provide an ever-widening array of outsourced services, we continue to build our core business from emerging business opportunities, such as turnkey gas treatment, gas measurement and oilfield power generation sales and services. As with compression, these emerging businesses are increasingly being outsourced by industry participants and represent an additional opportunity to gain incremental revenue from current and potential customers. . Facility Consolidation and Headcount Reductions: With our dramatic growth came certain redundancies in our operations. During 2003, we plan to reduce headcount by approximately 500 employees worldwide and consolidate our fabrication operations into 9 fabrication centers down from the 13 fabrication centers we had as of December 31, 2002. The estimated annualized savings from these actions are expected to be approximately $20 million. . Capital Discipline and Leverage Reduction: In 2003, our focus will be on the total return from our investments as opposed to revenue growth. We will work to reduce working capital and to limit our capital expenditures to less than our cash flow, while reducing debt with excess cash flow and proceeds from asset sales. In addition, we agreed in our recent amendment to our bank credit facility to limit our capital expenditures for 2003 to no more than $200 million. In 2002, capital expenditures were approximately $250.2 million. . Integrate Systems and Operations: In order to enable us to move quickly to react to our customer's needs, both domestically and internationally, much of 2003 will be devoted to integrating our systems 6 and operations. For example, we are currently implementing the Oracle Enterprise Resource Planning systems consolidating approximately 80 different accounting and reporting systems. We estimate that implementation of these systems will take 18 to 24 months and will cost approximately $24 million. We expect that our domestic and major international systems will be integrated by year-end 2003. . Exploit International Opportunities: We believe international markets represent one of the greatest growth opportunities for our business. Although our international horsepower has grown significantly over the last six years, we continue to believe that the market is drastically underserved. Of total proven worldwide reserves as of December 31, 2002, 97% are located outside the United States. We believe that the continuing worldwide development and implementation of oil and gas environmental and conservation laws prohibiting the flaring of natural gas and encouraging the use of gas-fired electric oilfield power generation, coupled with increased worldwide energy consumption, will continue to drive use of compression by international energy companies. In addition, we typically see higher pricing relative to the domestic market in international markets. At December 31, 2002, we had 860,000 horsepower in service internationally, or 24% of our total horsepower. International horsepower provided approximately 37% of the rental revenue for the year ended December 31, 2002 and approximately 33% of the rental revenue for the year ended December 31, 2001. Moreover, international oil and gas companies have traditionally purchased compression equipment, but over the past decade, the international energy producers have increasingly chosen to fulfill their compression requirements through outsourcing. We believe we are well positioned to exploit the opportunity created by these international trends. . Increase Horsepower Utilization and Continue to Expand in our Existing Domestic Markets: Since 1992, the percentage of aggregate compression horsepower outsourced by the industry has increased from nearly 20% to approximately 31% in 2002. This move to outsourcing has been driven by, among other things, the desire of producers and distributors of natural gas to: (1) maximize production revenue by improving mechanical run-time and reducing equipment maintenance and personnel costs; (2) increase capital available for other uses; and (3) improve operating flexibility by exploiting the rental company's greater asset base and extensive field service organization to efficiently resize compressor units to meet changing reservoir conditions. We believe the breadth and quality of our services and rental fleet, the depth of our customer relationships and our presence throughout the gas producing regions of the United States position us to capture additional outsourced business. . Focus on High Horsepower Units: The high horsepower compression segment, comprised of units of greater than 500 horsepower, is the fastest growing segment of the rental compression market. These units are typically installed on larger wells, gathering systems and processing and treating facilities whose size and generally more attractive unit economics largely insulate them from declining commodity prices. As a result, compressors in this segment tend to realize higher utilization rates. The greater technical requirements of these larger systems enable us to differentiate our compression products and services and to offer related products and services. Most compressors that we install internationally are high horsepower units. As of December 31, 2002, approximately 79% of our aggregate horsepower consists of high horsepower compression units. We believe the breadth of our experience, the quality of our service and of our compressor production and treatment equipment fabrication operations and our international experience will enable us to continue to capture business in this segment of the market. . Capitalize on our Decentralized Management and Operating Structure: To facilitate our broad-based approach we have adopted a geographical business unit concept and utilize a decentralized management and operating structure to provide superior customer service in a relationship-driven, service-intensive industry. We believe that our regionally based network, local presence, experience and in-depth knowledge of customers' operating needs and growth plans provide us with significant competitive advantages and drive internal growth. As our new systems are put in place, each of our geographic business unit managers will have primary profit and loss accountability for the unit which will provide greater focus on our bottom line. 7 Industry Overview Gas Compression Typically, compression is required several times during the natural gas production cycle: at the wellhead, at the gathering lines, into and out of gas processing facilities, into and out of storage and throughout the transportation systems. Over the life of an oil or gas well, natural reservoir pressure and deliverability typically decline as reserves are produced. As the natural reservoir pressure of the well declines below the line pressure of the gas gathering or pipeline system used to transport the gas to market, gas no longer flows naturally into the pipeline. It is at this time that compression equipment is applied to economically boost the well's production levels and allow gas to be brought to market. In addition to such wellhead and gas field gathering activities, natural gas compressors are utilized in a number of other applications, most of which are intended to enhance the productivity of oil and gas wells, gas transportation lines and processing plants. Compressors are used to increase the efficiency of a low capacity gas field by providing a central compression point from which the gas can be removed and injected into a pipeline for transmission to facilities for further processing. As gas is transported through a pipeline, compression equipment is applied to allow the gas to continue to flow in the pipeline to its destination. Additionally, compressors are utilized to re-inject associated gas to lift liquid hydrocarbons and thereby increase the rate of crude oil production from oil and gas wells. Furthermore, compression enables gas to be stored in underground storage reservoirs for subsequent extraction during periods of peak demand. Finally, compressors are often utilized in combination with oil and gas production equipment to process and refine oil and gas into higher value added and more marketable energy sources, as well as used in connection with compressed natural gas vehicle fueling facilities providing an alternative to gasoline. Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure or change their compressor units to optimize the well production or pipeline efficiency. Due to the technical nature of the equipment, a dedicated local parts inventory, a diversified fleet of natural gas compressors and a highly trained staff of field service personnel are necessary to perform such functions in the most economic manner. These requirements, however, have typically proven to be an extremely inefficient use of capital and manpower for independent natural gas producers and have caused such firms, as well as natural gas processors and transporters, to increasingly outsource their non-core compression activities to specialists such as Hanover. The advent of rental and contract compression roughly 40 years ago made it possible for natural gas producers, transporters and processors to improve the efficiency and financial performance of their operations. We believe compressors leased from specialists generally have a higher rate of mechanical reliability and typically generate greater productivity than those owned by oil and gas operators. Furthermore, because compression needs of a well change over time, outsourcing of compression equipment enables an oil and gas producer to better match variable compression requirements to the production needs throughout the life of the well. Also, certain major domestic oil companies are seeking to streamline their operations and reduce their capital expenditures and other costs. To this end, they have sold certain domestic energy reserves to independent energy producers and are outsourcing facets of their operations. We believe that such initiatives are likely to contribute to increased rentals of compressor equipment. Natural gas compressor fabrication involves the design, fabrication and sale of compressors to meet the unique specifications dictated by the well pressure, production characteristics and the particular applications for which compression is sought. Compressor fabrication is essentially an assembly operation in which an engine, compressor, control panel, cooler and necessary piping are attached to a frame called a "skid." A fabricator typically purchases the various compressor components from third party manufacturers, but employs its own engineers and design and labor force. 8 In order to meet customers' needs, gas compressor fabricators typically offer a variety of services to their customers, including: (1) engineering, fabrication and assembly of the compressor unit; (2) installation and testing of the unit; (3) ongoing performance review to assess the need for a change in compression; and (4) periodic maintenance and replacement parts supply. Production Equipment Oil and gas reserves are generally not commercially marketable as produced at the wellhead. Typically, such reserves must be refined before they can be transported to market. Oil and gas production equipment is utilized to separate and treat such oil and gas immediately after it is produced in order to facilitate further processing, transportation and sale of such fuels and derivative energy sources. Oil and gas production equipment is typically installed at the wellhead immediately prior to commencing the large-scale production phase of a well and remains at the site through the life of the well. Market Conditions We believe that the most fundamental force driving the demand for gas compression and production equipment is the growing consumption of natural gas. As more gas is consumed, the demand for compression and production equipment increases. In addition, we expect the demand for liquefied natural gas, compressed natural gas and liquefied petroleum gas to continue to increase and result in additional demand for our compression and production equipment and related services. Although natural gas has historically been a more significant source of energy in the United States than in the rest of the world, we believe that aggregate foreign natural gas consumption has recently grown. Despite significant growth in energy demand, most non-U.S. energy markets have historically lacked the infrastructure necessary to transport natural gas to local markets, and natural gas historically has been flared at the wellhead. Given recent environmental legislation and the construction of numerous natural gas-fueled power plants built to meet international energy demand, we believe that international compression markets are experiencing growth. Natural gas is considered to be the "fuel of the future" because it provides the best mix of environmental soundness, economy and availability of any energy source. Rising worldwide energy demand, environmental considerations, the further development of natural gas pipeline infrastructure and the increasing use of natural gas as a fuel source in oilfield power generation are the principal reasons for this growth. While gas compression and production equipment typically must be highly engineered to meet demanding and unique customer specifications, the fundamental technology of such equipment has been stable and has not been subject to significant technological change. Business Segments Our revenues and income are derived from five business segments (comprising four operating divisions): (a) domestic rentals; (b) international rentals; (c) compressor and accessory fabrication; (d) production and processing equipment fabrication; and (e) parts and service. The domestic and international compression rentals segments have operations primarily in the United States, Canada and South America. For financial data relating to our business segments and financial data relating to the amount or percentage of revenue contributed by any class of similar products or services which accounted for 10 percent or more of consolidated revenue in any of the last three fiscal years, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K and Note 25 to the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. 9 Compression Rentals, Maintenance Services and Compressor and Accessory Fabrication We provide our customers with a full range of compressor and associated equipment sales, rental, maintenance and contract compression services. As of December 31, 2002, our compressor fleet consisted of 6,988 units, ranging from 8 to 4,450 horsepower per unit. The size, type and geographic diversity of this rental fleet enable us to provide our customers with a range of compression units that can serve a wide variety of applications and to select the correct equipment for the job, rather than trying to "fit" the job to our fleet of equipment. We base our gas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, the length of the contract, and the inclusion of any other desired services, such as installation, transportation and the degree of daily operation. Recently, we began to selectively introduce price increases for our domestic compression rental business, and we anticipate being able to achieve an average 1-2% increase in prices in 2003. Substantially all of our units are operated pursuant to "contract compression" or "rental with full maintenance" contracts under which we perform all maintenance and repairs on such units while under contract. In the U.S. onshore market, compression rental fleet units are generally leased under contract with minimum terms of six months to two years, which convert to month-to-month at the end of the stipulated minimum period. Historically, the majority of our customers have extended the length of their contracts, on a month-to-month basis, well beyond the initial term. Typically, our compression rental units utilized in offshore and international applications carry substantially longer lease terms than those for onshore domestic applications. An essential element to our success is our ability to provide compression services to customers with contractually committed compressor run-times of between 95% and 98%. Historically, our incidence of failing to meet run-time commitments (the penalty for which is paid in credits to the customer's account) has been insignificant, due largely to our rigorous preventive maintenance program and extensive field service network that permits us to promptly address maintenance requirements. Our team of over 2300 experienced maintenance personnel performs our rental compression maintenance services both at our facilities and in the field. Such maintenance facilities are situated in close proximity to actual rental fleet deployment to permit superior service response times. All rental fleet units are serviced at manufacturers' recommended maintenance intervals, modified as required by the peculiar characteristics of each individual job and the actual operating experience of each compressor unit. Prior to the conclusion of any rental job, our field management evaluates the condition of the equipment and, where practical, corrects any problems before the equipment is shipped out from the job site. Although natural gas compressors generally do not suffer significant technological obsolescence, they do require routine maintenance and periodic refurbishing to prolong their useful life. Routine maintenance includes alignment, compression checks and other parametric checks that indicate a change in the condition of the equipment. In addition, oil and wear-particle analysis is performed on all units on an ongoing scheduled basis and prior to their redeployment at specific compression rental jobs. Overhauls are done on a condition-based interval instead of a time-based schedule. In our experience, these rigorous procedures maximize component life and unit availability and minimize avoidable downtime. Typically, we overhaul each rental compressor unit for general refurbishment every 36 to 48 months and anticipate performing a comprehensive overhaul of each rental compressor unit every 60 to 72 months. This maintenance program has provided us with a highly reliable fleet of compressors in excellent condition. Our field service mechanics provide all operating and maintenance services for our compression units leased on a contract compression or full maintenance basis and are on-call 24 hours a day. Those field personnel receive regular mechanical and safety training both from our staff and our vendors. Each of our field mechanics is responsible for specific compressor unit installations and has at his or her disposal a dedicated local parts inventory. Additionally, each field mechanic operates from a fully equipped service vehicle. Each mechanic's field service vehicle is radio or cellular telephone equipped which allows that individual to be our primary 10 contact with the customer's field operations staff and to be contacted at either his or her residence or mobile phone 24 hours a day. Accordingly, our field service mechanics are given the responsibility to promptly respond to customer service needs as they arise based on the mechanic's trained judgment and field expertise. We believe our competitive position has benefited from the managerial parity that our sales and field service organizations enjoy within the company, enabling these two vital organizations to work together in a highly coordinated fashion in order to deliver maximum customer service, responsiveness and reliability. The foundation for our successful field operations effort is the experience and responsiveness of our over 2300 member compressor rental field service and shop staff of compressor mechanics. Our field service mechanics are coordinated and supported by regional operations managers who have supervisory responsibility for specific geographic areas. Our compressor and accessory fabrication operations, design, engineer and assemble compression units and accessories for sale to third parties as well as for placement in our compressor rental fleet. As of December 31, 2002, we had a compressor unit fabrication backlog for sale to third parties of $29.8 million compared to $25.3 million as of December 31, 2001. Substantially all backlog is expected to be produced within a 90 to 180 day period. In general, units to be sold to third parties are assembled according to each customer's specifications and sold on a turnkey basis. We acquire major components for these compressor units from third party suppliers. We maintain parts inventories for our own use and to meet our customers needs. As of December 31, 2002, we had approximately $115 million in parts inventories. Compressor Rental Fleet The size and horsepower of our compressor rental fleet owned or operated under lease on December 31, 2002 is summarized in the following table.
Aggregate Number Horsepower % of Range of Horsepower per Unit of Units (in thousands) Horsepower ---------------------------- -------- -------------- ---------- 0-100............... 2,073 130 3.7% 101-200............. 1,390 210 6.0% 201-500............. 1,215 412 11.7% 501-800............. 765 511 14.5% 801-1,100........... 374 374 10.6% 1,101-1,500......... 900 1,268 36.1% 1,501-2,500......... 197 364 10.4% 2,501-4,450......... 74 245 7.0% ----- ----- ----- Total............ 6,988 3,514 100.0% ===== ===== =====
Oil and Gas Production and Processing Equipment Fabrication Through our production and processing equipment fabrication division, we design, engineer, fabricate and either sell or occasionally rent a broad range of oil and gas production equipment designed to heat, separate, dehydrate and measure crude oil and natural gas. Our product line includes line heaters, oil and gas separators, glycol dehydration units and skid-mounted production packages designed for both onshore and offshore production facilities. We generally maintain standard product inventories in excess of $5 million and are therefore able to meet most customers' rapid response requirements and minimize customer downtime. As of December 31, 2002, we had a production and processing equipment fabrication backlog of $56.0 million compared to $38.9 million as of December 31, 2001. Substantially all backlog is expected to be produced within a 90 to 180 day period. We also purchase and recondition used production and processing equipment which is then sold or rented. 11 Parts, Service and Used Equipment We purchase and recondition used gas compression units, oilfield power generation and treating facilities and production equipment that is then sold or rented to customers. In addition, we often provide contract operations and related services for customers that prefer to own their production, gas treating, and oilfield power generation or compression equipment. We believe that we are particularly well qualified to provide these services because our highly experienced operating personnel have access to the full range of our compression rental, production processing equipment and oilfield power generation equipment and facilities. As customers look to us to provide an ever-widening array of outsourced services, we will continue to build our core business with emerging business opportunities, such as turnkey gas treatment, gas measurement and oilfield power generation sales and services. We maintain parts inventories for our own use and to meet our customers needs. As of December 31, 2002, we had approximately $115 million in parts inventories. Sources and Availability of Raw Materials Our fabrication operations consist of fabricating compressor and production and processing equipment from components and subassemblies, most of which we acquire from a wide range of vendors. These components represent a significant portion of the cost of our compressor and production and processing equipment products. Although our products are generally shipped within 180 days following order date, increases in raw material costs cannot always be offset by increases in our products' sales prices. We believe that all materials and components are readily available from multiple suppliers at competitive prices. Market and Customers Our customer base consists of over 1,800 U.S. and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, national oil and gas companies, large and small independent producers and natural gas processors, gatherers and pipelines. Additionally, we have negotiated strategic alliances or preferred vendor relationships with key customers pursuant to which we receive preferential consideration in customer compressor and oil and gas production equipment procurement decisions in exchange for providing enhanced product availability, product support, automated procurement practices and limited pricing concessions. No individual customer accounted for more than 10% of our consolidated revenues during 2002, 2001 or 2000. Our compressor leasing activities are located throughout the continental United States, internationally and in offshore operations. International locations include Argentina, Barbados, Egypt, United Arab Emirates, Equatorial Guinea, India, Venezuela, Colombia, Trinidad, Bolivia, Brazil, Mexico, Peru, Pakistan, Indonesia, Nigeria, United Kingdom and Canada. In addition, we have representative offices in the Netherlands and the Cayman Islands and have plans to open representative offices in Nigeria and Russia. As of December 31, 2002, equipment representing approximately 24% of our compressor horsepower was being used in international applications. Sales and Marketing Our more than 120 salespeople report to our Director of Worldwide Sales, who in turn reports to our President and Chief Executive Officer. Our salespeople aggressively pursue the rental and sales market for compressors and production equipment in their respective territories. Each salesperson is assigned a customer list on the basis of the experience and personal relationships of the salesperson and the individual service requirements of the customer. This customer and relationship-focused strategy is communicated through frequent direct contact, technical presentations, print literature, print advertising and direct mail. Our advertising and promotion strategy is a "concentrated" approach, tailoring specific messages into a very focused presentation methodology. 12 Additionally, our salespeople coordinate with each other to effectively pursue customers who operate in multiple regions. The salespeople maintain intensive contact with our operations personnel in order to promptly respond to and satisfy customer needs. Our sales efforts concentrate on demonstrating our commitment to enhancing the customer's cash flow through superior product design, fabrication, installation, customer service and after-market support. Upon receipt of a request for proposal or bid by a customer, we assign a team of sales, operations and engineering personnel to analyze the application and prepare a quotation, including selection of the equipment, pricing and delivery date. The quotation is then delivered to the customer, and, if we are selected as the vendor, final terms are agreed upon and a contract or purchase order is executed. Our engineering and operations personnel also often provide assistance on complex compressor applications, field operations issues or equipment modifications. Competition We believe that we are currently the largest natural gas compression company in the United States on the basis of aggregate rental horsepower. However, the natural gas compression services and fabrication business is highly competitive. Overall, we experience considerable competition from companies who may be able to more quickly adapt to changes within our industry and changes in economic conditions as a whole, more readily take advantage of available opportunities and adopt more aggressive pricing policies. Because the business is capital intensive, our ability to take advantage of growth opportunities may be limited by our ability to raise capital. As part of the recent amendment to our bank credit facility, we agreed to limit our capital expenditures for 2003 to no more than $200 million. To the extent that any of our competitors have a lower cost of capital or have greater access to capital than we do they may be able to compete more effectively, which may allow them to more readily take advantage of available opportunities. Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As the number of rental units increases in a rental fleet, the number of sales, engineering, administrative and maintenance personnel required does not increase proportionately. One of the significant cost items in the compressor rental business is the amount of inventory required to service rental units. Each rental company must maintain a minimum amount of inventory to stay competitive. As the size of the rental fleet increases, the required amount of inventory does not increase in the same proportion. The larger rental fleet companies can generate cost savings through improved purchasing power and vendor support. We believe that we compete effectively on the basis of price, customer service, including the availability of personnel in remote locations, flexibility in meeting customer needs and quality and reliability of our compressors and related services. A few major fabricators, some of whom also compete with us in the compressor rental business, dominate the compressor fabrication business. We believe that we are one of the largest compressor fabrication companies in the United States. The production equipment business is a highly fragmented business with approximately eight substantial U.S. competitors. Although sufficient information is not available to definitively estimate our relative position in this market, we believe that we are among the top three oil and gas production equipment fabricators in the United States. 13 Government Regulation We are subject to various federal, state, local and foreign laws and regulations relating to the environment, health and safety, including regulations regarding air emissions, wastewater and storm water discharges, as well as waste handling and disposal. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks, or pipelines and other regulated units, all of which may impose additional compliance obligations. Certain states have or are considering, and the federal government has recently passed, more stringent air emission controls on off-road engines. These laws and regulations may affect the costs of our operations. As with any owner of real property, we are subject to clean-up costs and liability for hazardous materials or any other toxic or hazardous substance that may exist on or under any of our properties. We believe that we are in substantial compliance with environmental laws and regulations and that the phasing in of recent non-road engine air emission controls and other known regulatory requirements at the rate currently contemplated by such laws and regulations will not have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. Nevertheless, we may not be in compliance with certain environmental requirements for recently acquired facilities, in part because of our rapid growth through acquisitions. With respect to newly acquired facilities, it is our practice to investigate environmental compliance issues and address any issues promptly. We cannot be certain, however, that all such issues were completely resolved in accordance with applicable environmental regulations prior to our taking over operations, although it is our goal to correct any deficiencies as quickly as possible. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on persons who are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the facility or disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA, and similar state laws, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies. Furthermore, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. We are not currently under any order requiring that we undertake or pay for any cleanup activities, nor are we aware of any current environmental claims by the government or private parties against us demanding remedial costs or alleging that we are liable for such costs. However, we cannot be certain that we will not receive any such claims in the future. The Resource Conservation and Recovery Act ("RCRA"), and regulations promulgated thereunder, govern the generation, storage, transfer and disposal of hazardous wastes. We must comply with RCRA regulations for any of our operations that involve the generation, management or disposal of hazardous wastes (such as painting activities or the use of solvents). In addition, to the extent we operate underground tanks on behalf of specific customers, such operations may be regulated under RCRA. We believe we are in substantial compliance with RCRA and are not aware of any current claims against us alleging RCRA violations. We cannot be certain, however, that we will not receive such notices of potential liability in the future. Stricter standards in environmental legislation that may affect us may be imposed in the future, such as more stringent air emission requirements or proposals to make hazardous wastes subject to more stringent and costly handling, disposal and clean-up requirements. While we may be able to pass on the additional costs of complying with such laws to our customers, there can be no assurance that attempts to do so will be successful. Accordingly, new laws or regulations or amendments to existing laws or regulations might require us to undertake significant capital expenditures and otherwise have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. 14 Foreign Operations We operate in many different geographic markets, some of which are outside the United States. Changes in local economic or political conditions, particularly in Venezuela, Argentina, other parts of Latin America or Canada, could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. Additional risks inherent in our international business activities include the following: (a) difficulties in managing international operations; (b) unexpected changes in regulatory requirements; (c) tariffs and other trade barriers which may restrict our ability to enter into new markets; (d) changes in political conditions; (e) potentially adverse tax consequences; (f) restrictions on repatriation of earnings or expropriation of property; (g) the burden of complying with foreign laws; and (h) fluctuations in currency exchange rates and the value of the U.S. dollar. See the discussion of our Argentine and Venezuelan operations included in Management Discussion and Analysis of Financial Condition in Item 7 of this Form 10-K. Our future plans involve expanding our business in foreign markets where were currently do not conduct business. Our decentralized management structure and the risks inherent in new business ventures, especially in foreign markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses which could have a material adverse effect on our business, financial condition, results of operations or cash flows. In December 2002, certain opposition groups in Venezuela initiated an unofficial national strike. This has caused economic conditions in Venezuela to deteriorate, including a substantial reduction in the production of oil in Venezuela. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency which can be exchanged for foreign currency by businesses operating in Venezuela. As of December 31, 2002, we had approximately $21.5 million in receivables from customers in Venezuela, a significant portion of which were due from Petroleos de Venezuela, S.A., Venezuela's state-owned oil company. If the national strike continues, exchange controls remain in place, our receivables continue to increase and ultimately are not paid or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in Hanover's net income. As part of our acquisition of the gas compression business of Schlumberger, we acquired minority interests in three joint ventures in Venezuela. As a minority investor in these joint ventures, we will not be able to control their operations and activities, including without limitation, whether and when they distribute cash or property to their holders. In January 2003, we exercised our right to put our interest in one of these joint ventures, the PIGAP II joint venture, back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of the Company's interest in the joint venture back to Schlumberger is subject to certain consents. We are currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which we would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. For financial data relating to the Company's geographic concentrations, see Note 25 to the Notes to Consolidated Financial Statements included in Item 15 of this Form 10-K. 15 Executive Officers of the Registrant The following sets forth, as of March 14, 2002, the name, age and business experience for the last five years of each of our executive officers:
Name Age Position ---- --- -------- Chad C. Deaton.. 50 President and Chief Executive Officer; Director John E. Jackson. 44 Senior Vice President--Chief Financial Officer Mark S. Berg.... 44 Senior Vice President--General Counsel and Secretary Robert O. Pierce 43 Senior Vice President--Operations--Fabrication Peter G. Schreck 39 Vice President--Treasury and Planning Stephen P. York. 46 Vice President and Corporate Controller
The following sets forth certain information regarding executive officers of the Company: Chad C. Deaton was elected President, Chief Executive Officer and director in August 2002. From 1976 through 1984, Mr. Deaton served in a variety of positions with the Dowell Division of Dow Chemical. Following Schlumberger's acquisition of Dowell in 1984, Mr. Deaton served in management positions with Schlumberger in Europe, Russia and the United States. Mr. Deaton was executive vice president of Schlumberger Oilfield Services from 1998 to 1999. From September 1999 to September 2001, Mr. Deaton served as a Senior Advisor to Schlumberger Oilfield Services. Mr. Deaton also serves as an officer and director of certain of the Company's subsidiaries. John E. Jackson has served as Senior Vice President and Chief Financial Officer since February 2002. Prior to joining the Company, Mr. Jackson served as Vice President and Chief Financial Officer of Duke Energy Field Services, a $10 billion joint venture of Duke Energy and Phillips Petroleum that is one of the nation's largest producers and marketers of natural gas liquids. Mr. Jackson joined Duke Energy Field Services as Vice President and Controller in April 1999 and was named Chief Financial Officer in February 2001. Prior to joining Duke Energy Field Services, Mr. Jackson served in a variety of treasury, controller and accounting positions at Union Pacific Resources between June 1981 and April 1999. Mark S. Berg has served as Senior Vice President, General Counsel and Secretary since May 2002. From 1997 through 2001, Mr. Berg was an executive officer of American General Corporation, a Fortune 500 diversified financial services company, most recently serving in the position of Executive Vice President, General Counsel and Secretary. Mr. Berg began his career in 1983 as an associate with the Houston-based law firm of Vinson & Elkins, L.L.P. and served as a partner from 1990 through 1997. Robert O. Pierce has served as Senior Vice President--Manufacturing & Procurement since May 2000. Prior to being named Senior Vice President, Mr. Pierce was Vice President, serving the Company in that position since April 1995. Peter G. Schreck has served as Vice President--Treasury and Planning since September 2000. Mr. Schreck was previously employed in various financial positions by Union Pacific Corporation and affiliated subsidiaries from 1988 through August 2000. Immediately prior to joining the Company, Mr. Schreck held the position of Treasurer and Director of Financial Services for Union Pacific Resources Company. Stephen P. York has served as Vice President and Corporate Controller since April 2002. Prior to joining Hanover, Mr. York served as Director, Payroll Production of Exult, Inc., a provider of web-enabled Human Resources management services in Charlotte, NC, since 2001. From 1981 to 2000, Mr. York held various management positions with Bank of America Corporation, Charlotte, NC, including Senior Vice President--Personnel Operations, Senior Vice President--Controller/General Accounting, Senior Vice President--Corporate 16 Accounts Payable/Fixed Assets, and Vice President--Audit Director. Mr. York was an accountant with KPMG Peat Marwick in Waco, TX, from 1979 to 1981. Employees As of December 31, 2002 we had approximately 4,700 employees, approximately 85 of whom are represented by a labor union and approximately 600 contract personnel. We believe that our relations with our employees and contract personnel are satisfactory. Electronic Information We maintain a website which can be found at http://www.hanover-co.com. At this time we do not make our Form 10-Ks, quarterly reports on Form 10-Q, current reports on Form 8-K, or the amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on our website. We are currently working to improve our website to make available such materials and other information useful to investors and expect such information to be available on our website soon. However, due to resource constraints, this work has not been completed. Such information is readily available at the website of the Securities and Exchange Commission, which can be found at http://www.sec.gov. A paper copy of any of the above-described filings is also available free of charge from the Company upon request by contacting Hanover Compressor Company, 12001 North Houston Rosslyn Road, Houston, Texas 77086, Attention: Corporate Secretary (281) 405-5175. You may also read and copy any document we file with the SEC at its public reference facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Our SEC filings are also available at the offices of the New York Stock Exchange, Inc., 11 Wall Street, New York, New York 10005. 17 Item 2. Properties The following table describes the material facilities owned or leased by Hanover and our subsidiaries as of December 31, 2002:
Square Location Status Feet Uses -------- ------ ------- ---- Broken Arrow, Oklahoma....... Owned 127,505 Compressor and accessory fabrication Davis, Oklahoma.............. Owned 393,870 Compressor and accessory fabrication Houston, Texas............... Owned 256,505 Compressor and accessory fabrication Houston, Texas............... Owned 155,822 Compressor and accessory fabrication Houston, Texas............... Owned 148,925 Compressor and accessory fabrication Anaco, Venezuela............. Leased 10,000 Compressor rental and service Casper, Wyoming.............. Owned 28,390 Compressor rental and service Comodoro Rivadavia, Argentina Leased 21,000 Compressor rental and service Comodoro Rivadavia, Argentina Owned 26,000 Compressor rental and service Farmington, New Mexico....... Owned 20,361 Compressor rental and service Gillette, Wyoming............ Leased 10,200 Compressor rental and service Houston, Texas............... Leased 13,200 Compressor rental and service Kilgore, Texas............... Owned 33,039 Compressor rental and service Maturin, Venezuela........... Owned 20,000 Compressor rental and service Midland, Texas............... Owned 53,300 Compressor rental and service Neuquen, Argentina........... Owned 30,000 Compressor rental and service Pampa, Texas................. Leased 24,000 Compressor rental and service Pocola, Oklahoma............. Owned 18,705 Compressor rental and service Santa Cruz, Bolivia.......... Leased 21,500 Compressor rental and service Tulsa, Oklahoma.............. Leased 16,456 Compressor rental and service Tulsa, Oklahoma.............. Leased 13,100 Compressor rental and service Tulsa, Oklahoma.............. Leased 19,200 Compressor rental and service Victoria, Texas.............. Owned 21,840 Compressor rental and service Victoria, Texas.............. Leased 18,083 Compressor rental and service Walsall, UK-Redhouse......... Owned 15,300 Compressor rental and service Walsall, UK-Westgate......... Owned 44,700 Compressor rental and service West Monroe, Louisiana....... Owned 26,100 Compressor rental and service Yukon, Oklahoma.............. Owned 22,453 Compressor rental and service Odessa,Texas................. Owned 15,751 Parts, service and used equipment Houston, Texas............... Leased 28,750 Parts, service and used equipment Houston, Texas............... Leased 73,450 Parts, service and used equipment Odessa, Texas................ Owned 30,281 Parts, service and used equipment Broussard, Louisiana......... Owned 74,402 Production and processing equipment fabrication Calgary, Alberta, Canada..... Owned 89,000 Production and processing equipment fabrication Columbus, Texas.............. Owned 219,552 Production and processing equipment fabrication Corpus Christi, Texas........ Owned 11,000 Production and processing equipment fabrication Corpus Christi, Texas........ Owned 54,000 Production and processing equipment fabrication Dubai, UAE................... Owned 19,680 Production and processing equipment fabrication Edmonton, Alberta, Canada.... Owned 40,000 Production and processing equipment fabrication Hamriyah Free Zone, UAE...... Owned 20,664 Production and processing equipment fabrication Houston, Texas............... Leased 103,000 Production and processing equipment fabrication Mantova, Italy............... Owned 200,263 Production and processing equipment fabrication Midland, Texas............... Owned 11,500 Production and processing equipment fabrication Tulsa, Oklahoma.............. Owned 40,100 Production and processing equipment fabrication Victoria, Texas.............. Owned 50,506 Production and processing equipment fabrication
18 The Company's corporate headquarters and compressor fabrication facility in Houston, Texas and its production equipment manufacturing facility in Columbus, Texas are mortgaged to secure the repayment of approximately $3.2 million (as of December 31, 2002) in indebtedness to a commercial bank. Our executive offices are located at 12001 North Houston Rosslyn, Houston, Texas 77086 and our telephone number is (281) 447-8787. Item 3. Legal Proceedings Commencing in February 2002, approximately 15 putative securities class action lawsuits were filed against us and certain of our officers and directors in the United States District Court for the Southern District of Texas. These class actions have been consolidated into one case, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover Compressor Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A. O'Connor. The plaintiffs in these securities actions purport to represent purchasers of our common stock during various periods ranging from May 15, 2000 through January 28, 2002. The complaints assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek unspecified amounts of compensatory damages, interest and costs, including legal fees. The court entered an order appointing Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as lead counsel. A consolidated amended complaint is currently due to be filed on or before April 7, 2003. Commencing in February 2002, four derivative lawsuits were filed in the United States District Court for the Southern District of Texas, two derivative lawsuits were filed in state district court for Harris County, Texas (one of which was nonsuited and the second of which was removed to Federal District Court for the Southern District of Texas) and one derivative lawsuit was filed in the Court of Chancery for the State of Delaware in and for New Castle County. These derivative lawsuits, which were filed by certain of our shareholders purportedly on behalf of the Company, allege, among other things, that our directors breached their fiduciary duties to shareholders and seek unspecified amounts of damages, interest and costs, including legal fees. The derivative actions in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002. With that consolidation, the currently pending derivative lawsuits are:
Date Plaintiff Defendants Civil Action No. Court Instituted --------- ------------------------------------ ---------------- ---------------------------- ---------- Harbor Finance Partners, Michael J. McGhan, William S. H-02-0761 United States District Court 03/01/02 derivatively on behalf of Goldberg, Ted Collins, Jr., for the Southern District of Hanover Compressor Company Robert R. Furgason, Melvyn N. Klein, Texas Michael A. O'Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant Coffelt Family, Michael A. O'Connor, Michael J. 19410-NC Court of Chancery for the 02/15/02 LLC, derivatively on McGhan, William S. Goldberg, Ted State of Delaware State behalf of Hanover Collins, Jr., Melvyn N. Klein, Court in New Castle Compressor Company Alvin V. Shoemaker, and Robert R. County Furgason, Defendants and Hanover Compressor Company, Nominal Defendant
Motions are currently pending for appointment of lead counsel in the consolidated derivative actions in the Southern District of Texas. Currently, the Company will be required to file an answer or otherwise move with respect to the derivative action filed in Delaware by May 3, 2003. The Board of Directors has formed a Special Litigation Committee to address the issues raised by the derivative suits. Subject to the work of that Committee and its instructions, we intend to defend these cases vigorously. 19 The putative class action securities lawsuit and the derivative lawsuits are at an early stage. Consequently, it is premature at this time to predict liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with such actions. An adverse outcome in these actions could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. On November 14, 2002, the Securities and Exchange Commission issued a Formal Order of Private Investigation relating to the matters involved in the restatements of our financial statements. We are cooperating fully with the Fort Worth District Office staff of the Securities and Exchange Commission. It is too soon to determine whether the outcome of this investigation will have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. In January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and John Petti filed a putative securities class action against PricewaterhouseCoopers LLP, which is Hanover's auditor. The alleged class is all persons who purchased the equity or debt securities of Hanover Compressor Company or its affiliates from March 8, 2000 through and including October 23, 2002. On February 13, 2003, the court consolidated this action with Civil Action No. H-02-0410 described above. On March 26, 2003, Ann Angleopoulos filed a putative class action against Hanover, Michael McGhan, Michael O'Conner, Chad Deaton and other purportedly unknown defendants. The alleged class is comprised of persons who between November 8, 2000 and the present participated in or were beneficiaries of The Hanover Companies Retirement and Savings Plan, which was established by Hanover pursuant to Section 401(k) of the United States Internal Revenue Code of 1986, as amended. The purported class action seeks relief under the Employee Retirement Income Security Act based upon Hanover's and the individual defendants' alleged mishandling of the Company's 401(k) Plan. The Company has not yet been served with the complaint in this action. As of December 31, 2002, the Company has paid approximately $7.7 million in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuits and the Securities and Exchange Commission investigation. Of this amount, the Company has paid approximately $1.0 million on behalf of officers and directors in connection with the above-named proceedings. The Company intends to pay the litigation costs of its officers and directors, subject to the limitations imposed by Delaware law and the Company's certificate of incorporation and bylaws. The Company expects to be reimbursed for all or a portion of these litigation expenses from the Company's directors' and officers' insurance policies. In the ordinary course of business the Company is involved in various other pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our shareholders during the fourth quarter of our fiscal year ended December 31, 2002. 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock trades on the New York Stock Exchange under the symbol "HC." The following table sets forth the high and low sales price for our common stock for the periods indicated.
High Low ------ ------ 2001 First Quarter. $44.38 $29.25 Second Quarter $40.45 $29.00 Third Quarter. $34.00 $19.00 Fourth Quarter $30.40 $19.90 2002 First Quarter. $25.52 $10.50 Second Quarter $20.33 $11.56 Third Quarter. $13.50 $ 6.80 Fourth Quarter $11.98 $ 6.20
As of March 21, 2003, there were 80,581,181 shares of our common stock outstanding, held by approximately 726 stockholders of record. We have not paid any cash dividends on our common stock since our formation and do not anticipate paying such dividends in the foreseeable future. The Board of Directors anticipates that all cash flow generated from operations in the foreseeable future will be retained and used to pay down debt, develop and expand our business. Our $350 million credit facility with the JPMorgan Chase Bank, as agent (the "Bank Credit Agreement") limits the amount of dividends payable by us (without the lender's prior approval) on our common stock to no more than 25% of our net income for the period from December 3, 2001 until November 30, 2004. Any future determinations to pay cash dividends on the common stock will be at the discretion of the our Board of Directors and will be dependent upon our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by the Board of Directors. The information included or to be included in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders under the caption "Equity Compensation Plan Information" is incorporated by reference herein. 21 Item 6. Selected Financial Data SELECTED FINANCIAL DATA (HISTORICAL) In the table below we have presented certain selected financial data for Hanover for each of the five years in the period ended December 31, 2002. The historical consolidated financial data has been derived from Hanover's audited consolidated financial statements. The following information should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and the Consolidated Financial Statements of the Company in Item 15 of this Form 10-K. During the fourth quarter of 2002, we reviewed our business lines and the board of directors approved management's recommendation to exit and sell our non-oilfield power generation and certain used equipment business lines. The results from these businesses are reflected as discontinued operations and prior periods have been adjusted to reflect this presentation. Additionally, in the second and fourth quarter of 2002, we recorded certain write-downs, asset impairments and restructuring costs. A summary of these changes and charges to the Company's financial results is discussed below.
Years Ended December 31, ------------------------------------------------------ 2002 2001(2) 2000(1)(2) 1999(2) 1998 ---------- ---------- ---------- ---------- -------- (Restated) (Restated) (Restated) (in thousands, except per share data) Income Statement Data: Revenues: Domestic rentals.................................................. $ 328,600 $ 269,679 $172,517 $136,430 $107,420 International rentals............................................. 189,700 131,097 81,320 56,225 40,189 Parts, service and used equipment................................. 223,845 214,872 113,526 39,130 29,538 Compressor and accessory fabrication.............................. 114,009 223,519 90,270 52,531 67,453 Production and processing equipment fabrication................... 149,656 184,040 79,121 27,255 37,466 Equity in income of non-consolidated affiliates................... 18,811 9,350 3,518 1,188 1,369 Gain on change in interest in non-consolidated affiliate.......... -- -- 864 -- -- Other............................................................. 4,189 8,403 5,688 5,371 2,916 ---------- ---------- -------- -------- -------- Total revenues (3)............................................. 1,028,810 1,040,960 546,824 318,130 286,351 ---------- ---------- -------- -------- -------- Expenses: Domestic rentals.................................................. 120,740 95,203 60,336 46,184 36,570 International rentals............................................. 57,579 45,795 27,656 18,765 12,816 Parts, service and used equipment................................. 179,844 152,701 79,958 26,504 21,735 Compressor and accessory fabrication.............................. 99,446 188,122 76,754 43,663 58,144 Production and processing equipment fabrication................... 127,442 147,824 62,684 20,278 25,781 Selling, general and administrative............................... 153,676 92,172 51,768 33,782 26,626 Foreign currency translation...................................... 16,753 6,658 -- -- -- Change in fair value of derivative financial instruments.......... (3,245) 7,596 -- -- -- Other............................................................. 27,607 9,727 -- -- -- Depreciation and amortization (4)................................. 151,181 88,823 52,188 37,337 37,154 Goodwill impairment............................................... 52,103 -- -- -- -- Leasing expense................................................... 94,751 70,435 45,484 22,090 6,173 Interest expense.................................................. 36,978 17,531 8,679 8,786 11,716 Distributions on mandatorily redeemable convertible preferred securities....................................................... 6,374 6,373 6,369 278 -- ---------- ---------- -------- -------- -------- 1,121,229 928,960 471,876 257,667 236,715 ---------- ---------- -------- -------- -------- Income (loss) from continuing operations before income taxes............ (92,419) 112,000 74,948 60,463 49,636 Provision for (benefit from) income taxes............................... (17,576) 42,388 27,818 22,008 19,259 ---------- ---------- -------- -------- -------- Income (loss) from continuing operations................................ (74,843) 69,612 47,130 38,455 30,377 Discontinued operations, net of tax..................................... (41,225) 2,965 2,509 -- -- ---------- ---------- -------- -------- -------- Income (loss) before cumulative effect of accounting change............. (116,068) 72,577 49,639 38,455 30,377 Cumulative effect of accounting change for derivative instruments, net of tax.......................................................... -- (164) -- -- -- ---------- ---------- -------- -------- -------- Net income (loss)....................................................... $ (116,068) $ 72,413 $ 49,639 $ 38,455 $ 30,377 ========== ========== ======== ======== ========
22
Years Ended December 31, ------------------------------------------------------- 2002 2001(2) 2000(1)(2) 1999(2) 1998 ---------- ---------- ---------- ---------- -------- (Restated) (Restated) (Restated) (Dollars and shares in thousands, except per share data) Diluted net income available to common stockholders: Net income (loss)............................................ $ (116,068) $ 72,413 $ 49,639 $ 38,455 $ 30,377 (Income) loss from discontinued operations................... 41,225 (2,965) (2,509) -- -- Distributions on mandatorily redeemable convertible preferred securities, net of income tax............................... -- 4,142 -- -- -- ---------- ---------- ---------- -------- -------- Diluted net income (loss) available to common stockholders... $ (74,843) $ 73,590 $ 47,130 $ 38,455 $ 30,377 ========== ========== ========== ======== ======== Earnings (loss) per common share: Basic earnings (loss) per common share from continuing operations (5).............................................. $ (1.46) $ 1.00 $ 0.80 $ 0.67 $ 0.53 ========== ========== ========== ======== ======== Diluted earnings (loss) per common share from continuing operations (5).............................................. $ (1.46) $ 0.94 $ 0.75 $ 0.63 $ 0.50 ========== ========== ========== ======== ======== Weighted average common and common equivalent shares: Basic (5).................................................... 79,500 72,355 61,831 57,048 56,936 ========== ========== ========== ======== ======== Diluted (5).................................................. 79,500 81,175 66,366 61,054 60,182 ========== ========== ========== ======== ======== Years Ended December 31, ------------------------------------------------------- Restated Restated Restated 2002 2001(2) 2000(1)(2) 1999(2) 1998 ---------- ---------- ---------- ---------- -------- (in thousands) Cashflows provided by (used in): Operating activities...................................... $ 195,717 $ 152,774 $ 29,746 $ 71,610 $ 31,147 Investing activities...................................... (193,703) (482,277) (67,481) (95,502) (14,699) Financing activities...................................... (4,232) 307,259 77,589 18,218 (9,328) Balance Sheet Data (end of period): Working capital........................................... $ 212,085 $ 275,074 $ 282,730 $103,431 $113,264 Net property, plant and equipment......................... 1,167,675 1,151,513 574,703 498,877 392,498 Total assets.............................................. 2,154,029 2,265,776 1,246,172 753,387 614,590 Long-term debt............................................ 521,203 504,260 110,935 69,681 156,943 Mandatorily redeemable convertible preferred securities... 86,250 86,250 86,250 86,250 -- Common stockholders' equity............................... 927,626 1,039,468 628,947 365,928 315,470
- -------- (1) April 2002 Restatement--In conjunction with a review of our joint ventures and other transactions conducted by the Audit Committee, the Company determined to restate its financial statements for the year ended December 31, 2000 and each of the quarters in the nine months ended September 30, 2001. See Note 22 in Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K. (2) November 2002 Restatement--A special committee of Hanover's Board of Directors, together with the Audit Committee of the Board and our management, completed an extensive investigation of certain transactions recorded during 2001, 2000 and 1999, including those transactions restated by Hanover in April 2002. As a result of this investigation, the Company determined to restate its financial results for the years ended December 31, 2001, 2000 and 1999. See Note 23 in Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. (3) We have grown as a result of internal growth and business combinations. For a description of significant business acquisitions, see Note 2 to the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. In the fourth quarter of 2002, we decided to discontinue certain businesses. For a description of the discontinued operations, see Note 3 to the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. (4) In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, amortization of goodwill to earnings is discontinued. Instead, goodwill will be reviewed for impairment annually or whenever events indicate impairment may have occurred. SFAS 142 was effective for Hanover on January 1, 2002. Under the transition provisions of SFAS 142, goodwill acquired in a business combination for which the acquisition date is after June 30, 2001 shall not be amortized. For financial data relating to our goodwill and other intangible assets, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and Note 9 to the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. 23 (5) In June 2000, we completed a 2-for-1 stock split effected in the form of a 100% stock dividend. All weighted average and common equivalent shares and earnings per common share information have been restated for all periods presented to reflect this stock split. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of the results of operations and financial condition of Hanover Compressor Company should be read in conjunction with the Consolidated Financial Statements and related Notes thereto. GENERAL Hanover Compressor Company, through its subsidiaries, is a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for natural gas processing and transportation. We sell this equipment and provide it on a rental, contract compression, maintenance and acquisition leaseback basis to natural gas production, processing and transportation companies that are seeking outsourcing solutions. Founded in 1990 and a public company since 1997, our customers include both major and premier independent oil and gas producers and distributors as well as national oil and gas companies. Our maintenance business, together with our parts and service business, can provide solutions to customers that own their own compression equipment, but want to outsource their operations. We also have compressor and oil and gas production equipment fabrication operations and provide gas processing and treating, gas measurement and oilfield power generation services, which broaden our customer relationships both domestically and internationally. The Company has grown through internal growth and through acquisitions. For 2003, the Company plans to reduce its capital spending and focus on completing the integration of recent acquisitions. In addition, we plan to reduce our headcount by approximately 500 employees worldwide and consolidate our fabrication operations into 9 fabrication centers down from the 13 fabrication centers we had as of December 31, 2002. The estimated annualized savings from these actions are expected to be approximately $20 million. Recent Events During the fourth quarter of 2002, we reviewed our business lines and the board of directors approved management's recommendation to exit and sell our non-oilfield power generation facilities and certain used equipment business lines. The results from these businesses are reflected as discontinued operations in our Consolidated Financial Statements and prior periods have been adjusted to reflect this presentation. Additionally, in the second and fourth quarter of 2002, we recorded certain write-downs, asset impairments and restructuring costs. A summary of these changes and the related impact to the Company's financial results is discussed below. In January 2003, we exercised our right to put our interest in the PIGAP II joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. Hanover acquired its interest in PIGAP II as part of its purchase of Production Operators Corporation from Schlumberger in August 2001. PIGAP II is a joint venture, currently owned 70% by a subsidiary of Williams Companies Inc. and 30% by Hanover, which operates a natural gas compression facility in Venezuela that processes 1.2 billion standard cubic feet per day of natural gas. The natural gas processed by PIGAP II is re-injected into oil reservoirs for enhanced oil recovery. The consummation of the transfer of Hanover's interest in the joint venture back to Schlumberger is subject to certain consents. We are currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. In February 2003, we executed an amendment to our bank credit facility and certain compression equipment leases that we entered into in 1999 and 2000. The amendment, effective as of December 31, 2002, modifies 24 certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment would increase the commitment fee under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in our interest cost as a result of the amendment will depend on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover's foreign subsidiaries. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements. We also agreed to a restriction on our capital expenditures during 2003, which under the agreement cannot exceed $200 million. In connection with the compression equipment leases entered into in August 2001, we were obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes which are registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offering was not completed pursuant to the time line required by the agreement and we were required to pay additional lease expense in the amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased our lease expense by approximately $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003. Recent Material Acquisitions In August 2001, we acquired 100% of the issued and outstanding shares of Production Operators Corporation ("POI") from Schlumberger (the "POI Acquisition") for $761 million in cash, and Hanover common stock and indebtedness, subject to certain post-closing adjustments pursuant to the purchase agreement that to date have resulted in an increase in the purchase price to approximately $778 million due to an increase in net assets acquired. Under the terms of the acquisition agreement, Schlumberger received approximately $270 million in cash (excluding the amounts paid for the increase in net assets), $150 million in a long-term subordinated note and approximately 8,708,000 shares of Hanover common stock, or approximately 11% of the outstanding shares, which are required to be held by Schlumberger for at least three years following the closing date. The ultimate number of shares issued under the purchase agreement was determined based on the nominal value of $283 million divided by $32.50 per share, the 30-day average closing price of Hanover common stock as defined under the acquisition agreement and subject to a collar of $41.50 and $32.50. The estimated fair value of the stock issued was $212.5 million, based on the market value of the shares at the time the number of shares issued was determined reduced by an estimated 20% discount due to the restrictions on the stock's marketability. The POI Acquisition was accounted for as a purchase and is included in our financial statements commencing on September 1, 2001. We recorded approximately $70 million in goodwill related to the acquisition of POI which, in accordance with the transition provisions of Statement of Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets ("SFAS 142") will not be amortized. In addition, we recorded $9.8 million in estimated value of identifiable intangible assets. The purchase price was subject to certain post-closing adjustments, a contingent payment of up to $58 million by us to Schlumberger and additional contingent payments by us based on the realization of certain tax benefits by us over the next 15 years. In March 2001, we purchased OEC Compression Corporation ("OEC") in an all-stock transaction for approximately $101.8 million, including the assumption and payment of approximately $64.6 million of OEC indebtedness. We paid an aggregate of approximately 1,146,000 shares of Hanover common stock to stockholders of OEC. The acquisition was accounted for under the purchase method of accounting and is included in our financial statements commencing in April 2001. In September 2000, we acquired the compression services division of Dresser-Rand Company for $177 million in cash and common stock, subject to certain post-closing adjustments pursuant to the acquisition 25 agreement which to date have resulted in an increase in the purchase price to approximately $199 million due to increases in net assets acquired. In July 2000, we acquired PAMCO Services International for approximately $58 million in cash and notes. In June 2000, the we acquired Applied Process Solutions, Inc. for approximately 2,303,000 shares of our common stock. These acquisitions were included in the results of operations from their respective acquisition dates. The following table summarizes revenues, expenses and gross profit percentages for each of the our business segments (dollars in thousands):
Years Ended December 31, ------------------------------ 2002 2001 2000 ---------- ---------- -------- Revenues: Domestic rentals................................ $ 328,600 $ 269,679 $172,517 International rentals........................... 189,700 131,097 81,320 Parts, service and used equipment............... 223,845 214,872 113,526 Compressor and accessory fabrication............ 114,009 223,519 90,270 Production and processing equipment fabrication. 149,656 184,040 79,121 Equity in income of non-consolidated affiliate.. 18,811 9,350 3,518 Other........................................... 4,189 8,403 6,552 ---------- ---------- -------- $1,028,810 $1,040,960 $546,824 ========== ========== ======== Expenses: Domestic rentals................................ $ 120,740 $ 95,203 $ 60,336 International rentals........................... 57,579 45,795 27,656 Parts, service and used equipment............... 179,844 152,701 79,958 Compressor and accessory fabrication............ 99,446 188,122 76,754 Production and processing equipment fabrication. 127,442 147,824 62,684 ---------- ---------- -------- $ 585,051 $ 629,645 $307,388 ========== ========== ======== Gross profit percentage: Domestic rentals................................ 63% 65% 65% International rentals........................... 70% 65% 66% Parts, service and used equipment............... 20% 29% 30% Compressor and accessory fabrication............ 13% 16% 15% Production and processing equipment fabrication. 15% 20% 21%
In addition, in 2002, we determined to restate our financials for the years ended December 31, 2001, 2000 and 1999. Accordingly, revenues, expenses income before taxes, net income and earnings per share have been restated for the years ended December 31, 2001, 2000 and 1999. See Notes 22 and 23 in the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and accounting policies, including those related to bad debts, inventories, fixed assets, investments, intangible assets, income taxes, warranty obligations, sale and leaseback transactions, revenue recognition and contingencies and litigation. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances. The results of this process form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and liquidity. 26 Allowances and Reserves We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required. During 2002, 2001 and 2000, we recorded approximately $7.1 million, $4.9 million and $3.2 million in additional allowances for doubtful accounts, respectively. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those expected by management, additional inventory write-downs may be required. Long Lived Assets and Investments We review for the impairment of long-lived assets, including property, plant and equipment, goodwill, intangibles and investments in non-consolidated affiliates whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss recognized represents the excess of the asset's carrying value as compared to its estimated fair market value and is charged to the period in which the impairment occurred. In addition, goodwill is evaluated at least annually pursuant to the requirements of SFAS 142, to determine if the estimated fair value of the reporting unit exceeds the net carrying value of the reporting unit, including the applicable goodwill. The estimates of fair market value is based upon management's estimates of the present value of future cash flows. Management makes assumptions regarding the estimated cash flows and if these estimates or their related assumptions change, an impairment charge may be incurred. We capitalize major improvements that we believe extend the useful life of an asset. Repairs and maintenance are expensed as incurred. Interest is capitalized during the fabrication period of compression equipment and facilities that are fabricated for use in our rental operations. The capitalized interest is recorded as part of the basis of the asset to which it relates and is amortized over the asset's estimated useful life. We hold minority interests in companies having operations or technology in areas that relate to our business, one of which is publicly traded and may experience volatile share prices. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. Tax Assets Hanover must estimate its expected future taxable income in order to assess the realizability of its deferred income tax assets. As of December 31, 2002, Hanover reported a net deferred tax liability of $112.5 million, which included gross deferred tax assets of $205.6 million, net of a valuation allowance of $23.4 million. Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions and future financial conditions. Additionally, Hanover must consider any prudent and feasible tax planning strategies that might minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets, if management has the ability to implement these strategies and the expectation of implementing these strategies if the forecasted conditions actually occurred. The principal tax planning strategy available to Hanover relates to the permanent reinvestment of the earnings of foreign subsidiaries. Assumptions related to the permanent reinvestment of the earnings of foreign subsidiaries are reconsidered annually to give effect to changes in Hanover's businesses and in its tax profile. 27 Sale and Leaseback Transactions Since 1998, we have entered into five sale and leaseback transactions of compression equipment with special purpose entities. These sale and leaseback transactions are evaluated for lease classification in accordance with SFAS 13, Accounting for Leases, "SFAS 13". In accordance with generally accepted accounting principles, the special purpose entities are not included in our consolidated financial statements when the owners of the special purpose entities have made a substantial residual equity investment of at least three percent of the total capital of the entity that is at risk during the entire term of the lease. Generally accepted accounting principles requires us to: . estimate the remaining life of the asset at lease inception; . estimate the fair market value of the asset at lease inception; . estimate the leased equipment's residual value at the end of the lease; . estimate certain costs to be incurred by us in connection with the lease; . estimate the present value of the lease payments under the lease; and . confirm that the substantial residual equity investment of at least three percent of the total capital of the entity continues to be at risk during the entire term of the lease. If these estimates were materially incorrect, we could be required to include the special purpose entities and the related compression equipment and debt in our financial statements. We treat the leases as operating leases for financial accounting purposes, but as financing arrangements for federal income tax and certain other tax purposes. In addition, because we sold the compressors to the special purpose entities, our depreciation expense was reduced by approximately $36 million, $43 million, and $31 million for the years ended December 31, 2002, 2001 and 2000, respectively. We also believe that these transactions had the effect of decreasing interest expense. However, we believe the decreased interest expense and the increased leasing expense are not directly comparable because the duration of our compression equipment leases are longer than the maturity of our revolving line of credit. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an interpretation of ARB 51. FIN 46 will require us to include in our consolidated financial statements the special purpose entities that lease compression equipment to us beginning in July 2003. If we were required to consolidate the special purpose entities as of December 31, 2002, we would add approximately $1,031 million in compressor equipment and approximately $1,140 million in debt to our balance sheet and we would reverse $109 million of the deferred gains which were recorded on our balance sheet as a result of the sale and leaseback transactions. In addition, Hanover would record depreciation expense on the compression equipment for prior periods (net of tax) as part of the cumulative effect of the adoption of FIN 46. We are currently in the process of evaluating the impact of recording depreciation for prior periods. After we adopt FIN 46, we estimate that we will record approximately $20 million per year in additional depreciation expense on our leased compression equipment. See "--Leasing Transactions" for more information on these sale and leaseback transactions. Revenue Recognition--Percentage of Completion Accounting We recognize revenue and profit for our fabrication operations as work progresses on long-term, fixed-price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We follow this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made and since the fabrication projects usually last several months. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Examples of factors that would give rise to revisions include variances in the actual or revisions to the estimated costs of components, labor or other fabrication costs. The average duration of these projects is four to six months. As of December 31, 2002, we had recognized approximately $42.8 million in costs and estimated earnings on uncompleted contracts. 28 We estimate percentage-of-completion for compressor and processing equipment fabrication on a direct-labor-hour-to-total-labor-hour basis. This requires management to estimate the number of total labor hours required for each project and to estimate the profit expected on the project. Production equipment fabrication percentage-of-completion is estimated using the cost-to-total-cost basis. This requires us to estimate the number of total costs (labor and materials) required to complete each project. Since we have many fabrication projects in process at any given time, we do not believe that materially different results would be achieved if different estimates, assumptions, or conditions were used for each project. Contingencies and Litigation Due to the restatement of our financial statements and in the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we are required to record a loss during the period in which we, based on our experience, believe a contingency is likely to result in a financial loss to us. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Revenues Our total revenues decreased by $12.2 million, or 1%, to $1,028.8 million during the year ended December 31, 2002 from $1,041.0 million during 2001, as declining revenues in our fabrication businesses more than offset increases in revenues from our domestic and international rental revenues. Revenues from rentals increased by $117.5 million, or 29%, to $518.3 million during 2002 from $400.8 million during 2001. Domestic revenues from rentals increased by $58.9 million, or 22%, to $328.6 million during 2002 from $269.7 million during 2001. International rental revenues increased by $58.6 million, or 45%, to $189.7 million during 2002 from $131.1 million during 2001. The increase in both domestic and international rental revenues resulted from expansion of our rental fleet and business acquisitions completed in 2001. During 2001, we completed two significant acquisitions: (1) in March 2001, we acquired OEC Compression Corporation which increased our rental fleet by approximately 175,000 horsepower, and (2) in August 2001, we acquired Production Operators Corporation which increased our rental fleet by approximately 860,000 horsepower. The increase in international rental revenues was offset in part by decreased revenues from our Venezuelan operations. In December 2002, certain opposition groups in Venezuela initiated an unofficial national strike. This has caused economic conditions in Venezuela to deteriorate, including a substantial reduction in the production of oil in Venezuela. As a result, during the fourth quarter of 2002, our international rental revenues were decreased by approximately $2.7 million as a result of the disruption in our operations in Venezuela. At December 31, 2002, we had approximately $21.5 million in outstanding receivables related to our Venezuelan operations. At December 31, 2002, the compressor rental fleet consisted of approximately 3,514,000 horsepower, a 1% increase over the 3,477,000 horsepower in the rental fleet at December 31, 2001. Domestic horsepower in the rental fleet decreased by 1% to 2,654,000 horsepower at December 31, 2002 from approximately 2,696,000 horsepower at December 31, 2001 and international horsepower increased by 10% to 860,000 horsepower at December 31, 2002 from approximately 781,000 horsepower at December 31, 2001. Revenues from parts, service and used equipment increased by $8.9 million, or 4% to $223.8 million during 2002 from $214.9 million during 2001. This increase was due to a $26.5 million gas plant sale transaction and a $20.1 million compression equipment sale transaction offset by lower revenues as a result of weaker market conditions. 29 Revenues from compressor and accessory fabrication decreased by $109.5 million, or 49%, to $114.0 million during 2002 from $223.5 million during 2001. During 2002, an aggregate of approximately 150,900 horsepower of compression equipment was fabricated and sold compared to approximately 366,000 horsepower fabricated and sold during 2001. In addition, 97,900 horsepower was fabricated and placed in the rental fleet during 2002 compared to 220,000 horsepower in 2001. Revenues from production and processing equipment fabrication decreased by $34.3 million, or 19%, to $149.7 million during 2002 from $184.0 million during 2001. In July 2002, we increased our ownership of Belleli Energy S.r.l. to 40.3% from 20.3% by converting a $4.0 million loan to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9.4 million loan to the other principal owner of Belleli for additional equity ownership and began consolidating the results of Belleli's operations. Production and processing equipment revenues include $15.4 million in revenues from the consolidation of Belleli since November 21, 2002. Excluding Belleli, revenues from our fabrication businesses declined by 27% due to decreased capital spending by our customers in 2002 caused by weak economic market conditions and recent political and economic events in South America resulting in lower drilling and new well completion activity by oil and gas producers. The average North and South American rig count decreased by 27% in 2002 to 1,097 from 1,497 in 2001 and the twelve month rolling average Henry Hub natural gas price decreased to $3.22 per Mcf in December 2002 from $4.26 per Mcf in December 2001. Equity in earnings in subsidiaries increased $9.4 million, or 101%, to $18.8 million during 2002, from $9.4 million during 2001. This increase is primarily due to our acquisition of POI, which included interests in three joint venture projects in South America. These joint ventures contributed $21.2 million in equity earnings for 2002 compared to $8.1 million in 2001 and was partially offset by a decrease in equity earnings from Hanover Measurement Services Company LP which decreased to a loss of $2.2 million in 2002 from $0.8 million in income in 2001. Expenses Operating expenses from domestic rentals increased by $25.6 million or 27% to $120.8 million during 2002 from $95.2 million during 2001. Operating expenses from international rentals increased by $11.8 million, or 26%, to $57.6 million during 2002 from $45.8 million during 2001. The increase in rental expenses resulted primarily from the increased rental business and the corresponding 22% and 45% increase in domestic and international rental revenues, respectively, over revenues for the corresponding period in 2001. The gross profit percentage from domestic and international rentals was approximately 63% and 70%, respectively during 2002 and 65% and 65%, respectively in 2001. The decrease in domestic rentals gross profit percentage was primarily due to weaker domestic market conditions. The increase in international rentals gross profit percentage was due to the increase in revenues for the year without a corresponding increase in expenses. Operating expenses of our parts, service and used equipment segment increased by $27.1 million, or 18% to $179.8 million, during 2002, compared to $152.7 million in 2001, which partially relates to the 4% increase in parts, service and used equipment revenue. The gross profit margin from parts, service and used equipment was 20% during 2002 down from 29% in 2001. In 2002, parts and service revenue included $62.4 million in used equipment sales at a 13% gross margin, compared to $28.0 million in 2001, with a 31% gross margin. Approximately 4% of the decrease in gross profit margin for parts, service and used equipment was due to a low margin gas plant sale transaction and a low margin compressor sale transaction. In addition, approximately 3% of the decrease in gross margin was due to $6.8 million in inventory write downs and reserves for parts which were either obsolete, excess or carried at a price above market value. The remainder of the decrease was primarily due to the impact of weaker market conditions on sales volume and margins. Excluding the write downs and the gas plant and compression equipment transaction, the gross profit margin from parts, service and used equipment would have been 26% during 2002. Operating expenses of compressor fabrication decreased by $88.7 million, or 47%, to $99.4 million during 2002 from $188.1 million during 2001, commensurate with the decrease in compressor fabrication business and 30 revenue. The gross profit margin on compression fabrication was 13% during 2002 down from 16% in 2001. The operating expenses attributable to production equipment fabrication decreased by $20.4 million, or 14%, to $127.4 million during 2002 from $147.8 million during 2001. The gross profit margin attributable to production and processing equipment fabrication was 15% during 2002 down from 20% in 2001. The decrease in gross profit margin for compression and accessory fabrication and production and processing equipment fabrication was attributable to lower sales levels without a corresponding decrease in overhead and the impact of weaker market conditions on sales margins. Selling, general and administrative expenses increased $61.5 million, or 67%, to $153.7 million in 2002 from $92.2 million in 2001. The increase is attributable to increased personnel and other selling and administrative activity in our business segments resulting from the acquisitions completed during 2001. In addition, we recorded $3.8 million in employee separation costs relating to a reduction in our work force and management changes and approximately $11.6 million in additional legal and accounting costs, a significant portion of which was associated with our Board of Directors and Special Litigation Committee review of certain transactions, the restatement of our financial results and the Securities and Exchange Commission investigation. Depreciation and amortization increased by $62.4 million, or 70%, to $151.2 million during 2002 compared to $88.8 million during 2001. During 2002 we recorded a $34.5 million charge included in depreciation and amortization expense for reductions in the carrying value of certain idle compression equipment that is being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned. The remaining increase in depreciation was due to the additions to the rental fleet, partially offset by the change in estimated lives of certain compressors. After a review of the estimated economic lives of our compression fleet, on July 1, 2001 we changed our estimate of the useful life of certain compression equipment to range from 15 to 30 years instead of a uniform 15-year depreciable life. Our new estimated lives are based upon our experience, maintenance program and the different types of compressors presently in our rental fleet. We believe our new estimate reflects the economic useful lives of the compressors more accurately than a uniform useful life applied to all compressors regardless of their age or performance characteristics. The effect of this change in estimate on 2002 was a decrease in depreciation expense of approximately $14.4 million and an increase in net income of approximately $8.6 million ($0.11 per share). In addition, because we sold compressors in sale-leaseback transactions, depreciation expense was reduced by approximately $36 million in 2002 compared to approximately $43 million in 2001. The decrease in depreciation in 2002 from 2001 was due to the Company's change in estimate of useful lives of its compressors on July 1, 2001, which is discussed above. The increase in depreciation was also offset by the decrease in goodwill amortization due to our adoption of SFAS 142. Under SFAS 142, amortization of goodwill over an estimated useful life is discontinued. Instead, goodwill amounts will be subject to a fair-value-based annual impairment assessment. During 2001, approximately $11.6 million in goodwill amortization was recorded. We incurred leasing expense of $94.8 million during 2002 compared to $70.4 million during 2001. The increase of $24.4 million was attributable to the compression equipment leases we entered into in August 2001. In connection with these leases, we were obligated to prepare registration statements and complete an exchange offer to enable the holders of the notes issued by the lessors to exchange their notes for notes which are registered under the Securities Act of 1933, as amended. Because the exchange offer was not completed until March 13, 2003, we were required to pay additional leasing expense in the amount of approximately $105,600 per week until March 13, 2003. The additional leasing expense began accruing on January 28, 2002. In 2002, we recorded additional leasing expense of approximately $5.1 million related to the registration and exchange offering obligations. 31 Interest expense increased by $19.5 million to $37.0 million during 2002 from $17.5 million during 2001. The increase in interest expense is due to higher levels of outstanding debt partially offset by lower effective interest rates. Foreign currency translation expense increased by $10.1 million, or 152%, to $16.8 million during 2002 compared to $6.7 million during 2001. The increase was primarily due to our operations in Argentina and Venezuela. In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on funds transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts can either be made at an exchange rate negotiated by the parties or, if no such agreement is reached, a preliminary payment may be made based on a 1 dollar to 1 peso equivalent pending a final agreement. The Argentine government also required the parties to such contracts to renegotiate the price terms within 180 days of the devaluation. We have renegotiated ten of eleven of our agreements in Argentina and expect to renegotiate the remaining agreement in the near future. We do not expect that the outcome of the renegotiation of the remaining agreement will have a material impact on our financial statements. As a result of these negotiations, we received approximately $11.2 million in partial reimbursements and expect to receive approximately $0.5 million in early 2003. We recorded $1.5 million of these partial reimbursements in translation expense and $9.7 million in revenues from international rentals. During 2002, we recorded an exchange loss of approximately $9.9 million and $5.8 million for assets exposed to currency translation in Argentina and Venezuela, respectively, and recorded a translation loss of approximately $1.1 million for all other countries. The fair value of our derivative instruments (interest rate swaps) increased by $3.2 million during 2002 while the fair value decreased by $7.6 million in 2001. This was due to the recognition of an unrealized change in the fair value of our interest rate swaps which we have not designated as cash flow hedges under SFAS 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). Due to a downturn in our business and changes in the business environment in which we operate, we completed a goodwill impairment analysis as of June 30, 2002. As a result of the test performed as of June 30, 2002, we recorded an estimated $47.5 million impairment of goodwill attributable to our production and processing equipment fabrication business in the second quarter of 2002. The second step of the impairment test required us to allocate the fair value of the production and processing equipment business to its assets. We performed the second step of the goodwill impairment test in the third quarter of 2002 and determined that no adjustment to the impairment, recorded in the second quarter, was required. We estimated the fair value of our reporting units using a combination of the expected present value of future cash flows and the market approach, which uses actual market sales. In the fourth quarter of 2002, we also recorded a $4.6 million goodwill impairment related to our pump division which is expected to be sold in 2003. Other expenses increased $17.9 million, or 184%, to $27.6 million during 2002 compared to $9.7 million during 2001. Other expense in 2002 included $15.9 million of write-downs and charges related to investments in four non-consolidated affiliates which have experienced a decline in value which we believe to be other than temporary, a $0.5 million write off of a purchase option for an acquisition which we have abandoned, $2.7 million in other non-operating costs and a $8.5 million write down of notes receivable including a $6.0 million reserve established for loans to employees who are not executive officers. Other expense in 2001 included a $2.7 million bridge loan commitment fee associated with Hanover's recent acquisition of POI, a $5.0 million write down of an investment in Aurion Technologies, Inc., a $1.0 million litigation settlement and $1.0 million in other non-operating expenses. Income Taxes The provision for income taxes decreased by $60.0 million, or 141%, to a tax benefit of $17.6 million during 2002 from $42.4 million of tax expense during 2001. The decrease resulted primarily from the corresponding decrease in income before income taxes. The average effective income tax rates during 2002 and 2001 were 19.0% and 37.8%, respectively. The decrease in the effective tax rate was due primarily to a 32 nondeductible goodwill impairment charge, U.S. impact of foreign operations, and valuation allowances against certain net operating losses. The effective tax rate benefited from non-U.S. foreign exchange losses deductible for tax in excess of book losses. Discontinued operations During the fourth quarter of 2002, the Company reviewed its business lines and the board of directors approved management's recommendation to exit and sell the Company's non-oilfield power generation and certain used equipment business lines. In the fourth quarter 2002, Hanover recorded a pre-tax charge of $52.3 million ($36.4 million, net of tax) to write down its investment in discontinued operations to current estimated fair market values. In addition, these operations recorded approximately $6.0 million ($3.9 million, net of tax) in write-downs which were recorded in the second quarter of 2002. Discontinued operations include three non-oilfield power generation projects in California and related inventory, and certain of the Company's used equipment divisions. Hanover anticipates selling these assets in 2003. Income (loss) from discontinued operations decreased $3.9 million, or 130%, to a net loss of $0.9 million during 2002 from net income of $3.0 million during 2001. The decrease in net income was primarily attributable to weaker market conditions which impacted sales volume and gross margins. Net Income (loss) Net income (loss) decreased $188.5 million, or 260%, to a net loss of $116.1 million during 2002 from net income of $72.4 million during 2001 primarily due to (i) the decline in market conditions which impacted our compressor and accessory fabrication and production and processing equipment sales and gross profits, (ii) a $6.7 million pre-tax inventory write down, (iii) a $34.5 million charge included in depreciation and amortization expense for reductions in the carrying value of certain idle units of the Company's compression fleet that are being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned, (iv) an increase in selling, general and administrative expenses, depreciation expense, leasing expense, foreign currency translation expense and interest expense and (v) a $52.1 million goodwill impairment and (vi) a $40.3 million charge to write down investments in discontinued operations to their estimated fair market values. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Revenues Our total revenues increased by $494.2 million, or 90%, to $1,041.0 million during the year ended December 31, 2001 from $546.8 million during 2000. The increase in revenues resulted from growth in horsepower of our natural gas compressor rental fleet, internal growth in our fabrication business and outsourcing businesses, which includes compression, gas treating, process measurement and oilfield power generation, as well as growth due to business acquisitions completed in 2001 and 2000. Revenues from rentals increased by $147.0 million, or 58%, to $400.8 million during 2001 from $253.8 million during 2000. Domestic revenues from rentals increased by $97.2 million, or 56%, to $269.7 million during 2001 from $172.5 million during 2000. International rental revenues increased by $49.8 million, or 61%, to $131.1 million during 2001 from $81.3 million during 2000. The increase in both domestic and international rental revenue resulted from expansion of our rental fleet and business acquisitions completed in 2001 and 2000. At December 31, 2001, the compressor rental fleet consisted of approximately 3,477,000 horsepower, a 62% increase over the 2,151,000 horsepower in the rental fleet at December 31, 2000. Domestically, the rental fleet increased by 955,000 horsepower, or 55%, during 2001 and internationally by 371,000 horsepower, or 90%. Revenue from parts, service and used equipment increased by $101.4 million, or 89% to $214.9 million during 2001 from $113.5 million during 2000. This increase is due in part to an increase in our marketing focus 33 for this business segment, as well as expansion of business activities through acquisitions. Approximately 40% of the increase in parts, service and used equipment revenues resulted from business acquisitions. Revenues from compressor fabrication increased by $133.2 million, or 148%, to $223.5 million during 2001 from $90.3 million during 2000. Approximately 47% of this increase is due to the acquisition of Dresser-Rand Company's compression service division in September 2000 and POI Acquisition in August 2001. During 2001, an aggregate of approximately 366,000 horsepower of compression equipment was fabricated and sold compared to approximately 166,000 horsepower fabricated and sold during 2000. In addition, 220,000 horsepower was fabricated and placed in the rental fleet during 2001 compared to 168,000 horsepower in 2000. Revenues from production and processing equipment fabrication increased by $104.9 million, or 133%, to $184.0 million during 2001 from $79.1 million during 2000. Of this increase 48% is due to the acquisition of APSI during June 2000 and the remainder of the increase is due to an improvement in market conditions in the process equipment business compared to conditions which existed in 2000. Equity in earnings in subsidiaries increased $5.8 million, or 166%, to $9.3 million during 2001, from $3.5 million during 2000. This increase is primarily due to our acquisition of POI, which included interests in three joint venture projects in South America. These joint ventures contributed $8.1 million in equity earnings for 2001 which was partially offset by a decrease in equity earnings from Collicutt Hanover Mechanical Services which decreased to a loss of $257,000 in 2001 from $786,000 in income in 2000. Expenses Operating expenses of the rental segments increased by $53.0 million, or 60%, to $141.0 million during 2001 from $88.0 million during 2000. The increase resulted primarily from the corresponding 58% increase in revenues from rentals over the corresponding period in 2000. The gross profit percentage from rentals was approximately 65% during 2001 and 2000. Operating expenses of our parts, service and used equipment segment increased by $72.7 million, or 91% to $152.7 million, during 2001, compared to $80.0 million in 2000, which relates to the 89% increase in parts, service and used equipment revenue. The gross profit margin from parts, service and used equipment was 29% during 2001 and 30% during 2000. Operating expenses of compressor fabrication increased by $111.3 million, or 145%, to $188.1 million during 2001 from $76.8 million during 2000, commensurate with the increase in compressor fabrication business and revenue. The gross profit margin on compression fabrication was 16% during 2001 and 15% during 2000. The operating expenses attributable to production equipment fabrication increased by $85.1 million, or 136%, to $147.8 million during 2001 from $62.7 million during 2000. The gross profit margin attributable to production and processing equipment fabrication was 20% during 2001 and 21% during 2000. Selling, general and administrative expenses increased $40.4 million, or 78%, to $92.2 million during 2001 from $51.8 million during 2000. The increase is attributable to increased personnel and other administrative and selling expenses associated with business acquisitions completed during 2001 and 2000 as well as increased activity in the our business segments. Depreciation and amortization increased by $36.6 million, or 70%, to $88.8 million during 2001 compared to $52.2 million during 2000. The increase in depreciation was due to the additions to the rental fleet which were partially offset by an approximately $12 million decrease in depreciation as a result of the sale of compression equipment into the equipment leases in March, August and October 2000 and in August 2001. The increase in amortization of approximately $6.5 million was due to additional goodwill recorded from business acquisitions completed during 2001 and 2000. After a review of the estimated economic lives of our compression fleet, on July 1, 2001 we changed our estimate of the useful life of certain compression equipment to range from 15 to 30 years instead of a 15-year depreciable life. Our new estimated lives are based upon the different types of compressors presently in our rental fleet rather than a blanket life applied to all compressors, and more accurately reflects the economic lives 34 of the compressors. The effect of this change in estimate on the year ended December 31, 2001 was a decrease in depreciation expense of approximately $5 million and an increase in net income of approximately $3.1 million ($0.04 per share). We incurred leasing expense of $70.4 million during 2001 compared to $45.5 million during 2000. The increase of $24.9 million resulted from the additional equipment leases entered into in 2001 and 2000. Interest expense increased by $8.8 million to $17.5 million during 2001 from $8.7 million for the 2000. The increase in interest expense is due to higher levels of outstanding debt partially offset by lower effective interest rates. Foreign currency translation expense for the year ended December 31, 2001 was $6.7 million, primarily due to the Company's operations in Argentina and Venezuela. Due to the currency exposure in Argentina and Venezuela, the Company recorded an exchange loss during 2001 of approximately $5.2 million and $1.2 million for assets exposed to currency translation risk in these countries, respectively. Other expenses during 2001 was $9.7 million, which included a $2.7 million bridge loan commitment fee associated with Hanover's recent acquisition of POI, a $5.0 million write down of an investment in Aurion Technologies, Inc., a $1.0 million litigation settlement, and $1.0 million in other non-operating expenses. The Company incurred a $7.6 million loss from the recognition of an unrealized loss related to the change in fair value of the interest rate swaps as required under SFAS 133 (see Note 20 in the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K). Income Taxes The provision for income taxes increased by $14.6 million, or 53%, to $42.4 million during 2001 from $27.8 million during 2000. The increase resulted primarily from the corresponding increase in income before income taxes. The average effective income tax rates during 2001 and 2000 were 37.8% and 37.1%, respectively. Net Income Net income increased $22.8 million, or 46%, to $72.4 million during 2001 from $49.6 million during 2000 due to the increase in revenues and gross profits discussed above. LEASING TRANSACTIONS (Off-Balance Sheet) The Company has entered into five transactions involving the sale of equipment by Hanover and its subsidiaries to special purpose entities, which in turn lease the equipment back to us. At the time, these transactions had a number of advantages over other sources of capital then available to us. The sale and leaseback transactions (1) enabled Hanover to affordably extend the duration of its financing arrangements, (2) reduce Hanover's cost of capital and (3) provided access to a source of capital other than traditional bank financing. Prior to our first sale and leaseback transaction in 1998, we financed growth in compression assets by drawing down on our revolving line of credit with a commercial bank. While highly flexible and well priced, the line of credit represented a short term funding strategy to finance long-term assets. Sale and leaseback transactions can reduce refinancing risk by extending the duration of our capital commitments. Sale and leaseback transactions also provided capital to us at a lower cost compared to other sources then available to us. Lenders to the special purpose entities did not require as high a rate of interest because their capital risk is mitigated by a perfected, first priority security interest in the compression equipment, as well as a residual value guarantee provided by us. This had the effect of reducing our leasing expense relative to an 35 unsecured borrowing rate. Based on our periodic review of capital alternatives, we believe that the cost of our rent payments in the sale and lease-back transactions historically has been less than the cost of debt financing alternatives available to us at the time we entered into these sale and leaseback transactions. We will continue to evaluate sale-leaseback transactions as well as consider other forms of financing for cost effectiveness as future capital needs arise. We also believe that the sale and leaseback transactions represent a source of capital in addition to the commercial bank financing traditionally utilized by us. This diversification of our capital sources has broadened our access to capital and allowed us to expand operations. In August 2001 and in connection with the POI Acquisition, we completed two sale and leaseback transactions involving certain compression equipment. Concurrent with these transactions, we exercised our purchase option under our July 1998 operating lease (described below) for $200 million. Under one transaction, we received $309.3 million proceeds from the sale of compression equipment. Under the second transaction, we received $257.8 million from the sale of additional compression equipment. Both transactions are recorded as a sale and leaseback of the equipment and are recorded as operating leases. Under the first transaction, the equipment was sold and leased back by us for a seven-year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $12.8 million in addition to quarterly rental payments of approximately $215,000. Under the second transaction, the equipment was sold and leased back by us for a ten-year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10.9 million in addition to quarterly rental payments of approximately $188,000. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. Through December 31, 2002, we incurred transaction costs of approximately $18.6 million related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms. In October 2000, we completed a $172.6 million sale and leaseback of compression equipment. In March 2000, we entered into a separate $200 million sale and leaseback of compression equipment. Under the March agreement, we received proceeds of $100 million from the sale of compression equipment at the first closing in March 2000 and in August 2000, we completed the second half of the equipment lease and received an additional $100 million for the sale of additional compression equipment. In June 1999 and in July 1998, we completed two other separate $200 million sale and leaseback transactions of compression equipment. Under the lease agreements, the equipment was sold and leased back by us for a five year term and will be utilized by us in our business. We have options to repurchase the equipment under the 2000 and 1999 leases as defined under certain conditions by the lease agreement. The lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7.5 million in transactions costs for the leases entered into in 2000 and 1999, which are included in intangible and other assets on the balance sheet and are being amortized over the respective lease terms of the respective transactions. The following table summarizes the proceeds, net book value of equipment sold, deferred gain on equipment sale, the residual guarantee (maximum exposure to loss) and the lease termination date for equipment leases (in thousands of dollars):
Residual Sale Net Book Deferred Value Lease Lease Proceeds Value Gain Guarantee Termination Date ----- -------- -------- -------- --------- ---------------- June 1999............ $200,000 $166,356 $33,644 $166,000 June 2004 March and August 2000 200,000 166,922 33,078 166,000 March 2005 October 2000......... 172,589 155,692 16,897 142,299 October 2005 August 2001.......... 309,300 306,034 3,266 232,000 September 2008 August 2001.......... 257,750 235,877 21,873 175,000 September 2011
36 These transactions are recorded as a sale and leaseback of the equipment and the leases are treated as operating leases. We made residual value guarantees under the lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of our equipment purchase options under the terms of the lease agreements. The residual value guarantees and other lease terms which are based on negotiation between Hanover and third party lessors, were supported by equipment appraisals and analysis. We believe that the market value of the equipment at the end of the lease will exceed the guaranteed residual values due to our predictive and preventive maintenance programs, routine overhaul practices and the expected demand for compression equipment in the future. We review the value of the equipment whenever events or circumstances indicate that a decrease in market value may have occurred as a result of foreseeable obsolescence or a decrease in market demand. If the fair value of the equipment was less than the guaranteed residual value, we would accrue additional lease expense for the amount that would be payable upon termination of the lease. All gains on the sale of the equipment are deferred until the end of the respective lease terms. Should we not exercise our purchase options under the lease agreements, the deferred gains will be recognized to the extent they exceed any final rent payments and any other payments required under the lease agreements. As a result of the lease transactions, we incurred approximately $94.8 million, $70.4 million, and $45.5 million in lease expense for the years ended December 31, 2002, 2001 and 2000, respectively. The following future minimum lease payments are due under our compressor leasing arrangements exclusive of any final rent payments or purchase option payments (in thousands): 2003--$83,703; 2004--$76,418; 2005--$62,332; 2006--$48,987; 2007--$48,987; and $100,537 thereafter. In connection with the equipment leases entered into in August 2001, we were obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes which are registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offering was not completed pursuant to the deadline required by the agreement and we were required to pay additional lease expense in the amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased our lease expense by $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003. LIQUIDITY AND CAPITAL RESOURCES Our cash balance amounted to $19.0 million at December 31, 2002 compared to $23.2 million at December 31, 2001. Primary sources of cash during the year ended December 31, 2002 were cash flow from operations. Principal uses of cash during the year ended December 31, 2002 were capital expenditures of $250.2 million and business acquisitions of $10.4 million. Working capital decreased to $212.1 million at December 31, 2002 from $275.1 million at December 31, 2001, primarily as a result of a reduction in account receivables related to lower operating levels in the fourth quarter of 2002 compared to the fourth quarter of 2001. We invested $250.2 million in property, plant and equipment in 2002 and added approximately 37,000 net horsepower to our rental fleet. At December 31, 2002, the compressor rental fleet consisted of 2,654,000 horsepower domestically and 860,000 horsepower in the international rental fleet. Given our consistently high compressor rental fleet utilization, we carry out new customer projects through fleet additions and other related capital expenditures. We generally invest funds necessary to make these rental fleet additions when our idle equipment cannot economically fulfill a project's requirements and the new equipment expenditure is matched with long-term contracts whose expected economic terms exceed our return on capital targets. During 2003, we plan to spend approximately $175 to $200 million on rental equipment fleet additions, including $55 million on equipment overhauls and other maintenance capital. A recent amendment to our Revolving Credit Agreement restricts our capital spending to $200 million in 2003. We expect that our 2003 capital spending will be within operating cash flows. Historically, we have funded capital expenditures with a 37 combination of internally generated cash flow, borrowing under the revolving credit facility, sale and leaseback transactions, raising additional equity and issuing long-term debt. We believe that cash flow from operations and borrowing under our existing $350 million bank credit facility will provide us with adequate capital resources to fund our estimated level of capital expenditures for the short term. Since capital expenditures are largely discretionary, we believe we would be able to significantly reduce them, in a reasonably short time frame, if expected cash flows from operations are not realized. As of December 31, 2002, we had approximately $157 million in borrowings and approximately $53 million in letters of credit outstanding on our $350 million revolving bank credit facility (3.2% weighted average effective rate at December 31, 2002). The letters of credit expire between 2003 and 2004. In addition, we had approximately $4 million in letters of credit outstanding under other letters of credit facilities which expire during 2003. Our bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $350 million credit limit, plus, in addition to certain other indebtedness, an additional $300 million in subordinated unsecured indebtedness and $125 million of other unsecured indebtedness. In addition, our bank credit facility permits us to enter into future sale and leaseback transactions with respect to equipment having a value not in excess of $300 million. In addition to purchase money and similar obligations, the indentures and the participation agreements, which are part of our compression equipment leases, permit us to incur indebtedness up to the $350 million credit limit under our bank credit facility, plus (1) an additional $75 million in unsecured indebtedness and (2) any additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements), or Hanover's "coverage ratio," is greater than 2.25 to 1.0. The indentures and participation agreements define indebtedness to include the present value of our rental obligations under sale and leaseback transactions and under facilities similar to our compression equipment leases. In February 2003, we executed an amendment to our bank credit facility and certain compression equipment leases that we entered into in 1999 and 2000. The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment would increase the commitment fee under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in our interest costs as a result of the amendment will depend on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover's foreign subsidiaries. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements. During 2002, we obtained waivers and amendments to our bank credit facility and certain compression equipment leases to cure non-compliance with covenants in those agreements largely resulting from the April 2002 restatement of our consolidated financial statements. These waivers and amendments did not result in any material adverse consequences to our business. In February 2003, Moody's Investor Service announced that it had downgraded by one grade our senior implied credit rating, our 4.75% Convertible Senior Notes and our 7.25% Mandatorily Redeemable Convertible Preferred Securities to Ba3, B2 and B3, respectively, and Standard & Poor's rating service announced that it had lowered our corporate credit rating to BB-. We do not have any credit rating downgrade provisions in our debt or equipment lease agreements that would accelerate the maturity dates of our debt or rental obligations. However, a downgrade in our credit rating could materially and adversely affect our ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities. Should this occur, we might seek alternative sources of funding. 38 As of December 31, 2002, after giving effect to the amendment made in February 2003, which was effective as of December 31, 2002, we were in compliance with all covenants and other requirements set forth in our bank credit facility, compression equipment leases and indentures. Giving effect to the covenant limitations in our bank credit agreement, as amended to date, the liquidity available under our revolver at December 31, 2002 was approximately $120 million. As of December 31, 2002, our debt to capitalization ratio, including the residual value guarantees under our compression equipment leases, was 1.55 to 1 and our book debt to capitalization ratio, excluding compression equipment leases, was .60 to 1. Based upon our total debt of approximately $555 million at December 31, 2002, we expect total debt service payments for the year ending December 31, 2003 will be approximately $50 million based upon interest rates in effect as of December 31, 2002. In addition, based upon our current operating lease commitments and rates in effect at December 31, 2002, we expect that total compressor lease rent payments for the year ending December 31, 2003 will be approximately $84 million. We also expect that total distributions on our 7 1/4% mandatorily redeemable convertible preferred securities for the year ended December 31, 2003 (assuming no deferrals as permitted by the terms of such securities) to be approximately $6.4 million. As part of our business, we are a party to various financial guarantees, performance guarantees and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees and other third parties. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on our Consolidated Balance Sheet. The possibility of us having to honor our contingencies is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events. We would record a reserve for these guarantees if events occurred that required that one be established. See Note 19 in the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. The following summarizes our contractual obligations at December 31, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
TOTAL 2003 2004 2005 Thereafter ---------- -------- -------- --------- ---------- December 31, 2002 ----------------- (in thousands) CONTRACTUAL OBLIGATIONS: 4.75% convertible senior notes due 2008........ $ 192,000 $ -- $ -- $ -- $192,000 Bank credit facility........................... 156,500 -- 156,500 -- -- Other debt(1).................................. 206,444 33,741 3,694 167,734 1,275 Other contractual obligations(2)............... 60,740 60,740 -- -- -- Mandatorily redeemable convertible preferred securities................................... 86,250 -- -- -- 86,250 Compression equipment operating leases......... 420,964 83,703 76,418 62,332 198,511 Residual guarantees under compression equipment operating leases (3)......................... 881,299 -- 166,000 308,299 407,000 Facilities and other equipment operating leases 12,379 4,947 4,000 2,617 815 ---------- -------- -------- --------- -------- Total contractual cash obligations.......... $2,016,576 $183,131 $406,612 $540,982 $885,851 ========== ======== ======== ========= ========
- -------- (1) In connection with the POI Acquisition on August 31, 2001, the Company issued a $150 million subordinated acquisition note to Schlumberger, which matures December 15, 2005. Interest on the note accrues and is payable-in-kind at the rate of 8.5% annually for the first six months after issuance and periodically increases in increments of 1% to 2% per annum to a maximum interest rate 42 months after issuance of 15.5%. In the event of an event of default under note, interest will accrue at a rate of 2% above the then applicable rate. The note is subordinated to all of the Company's indebtedness other than indebtedness to fund future acquisitions. In the event that the Company completes an offering of equity securities, the Company is required to apply the proceeds of the offering to repay amounts outstanding under the note as long as no default exists or would exist under our other indebtedness as a result of such payment. 39 (2) As of December 31, 2002, we were required to pay $58.0 million plus accrued interest to Schlumberger upon obtaining financing of a South American joint venture, a minority interest of which was acquired by Hanover in the acquisition of POI. The $58.0 million obligation is included in "Accrued liabilities" in our balance sheet. Because the joint venture failed to obtain the financing on or before December 31, 2002, we had the right to put our interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by Hanover to the joint venture. In January 2003, we exercised our right to put our interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover's interest in the joint venture back to Schlumberger is subject to certain consents. Hanover is currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. (3) We are a guarantor of approximately $881 million of debt associated with the special purpose entities with which we entered into sale leaseback transactions. The amount of these guarantees are equal to the residual value guarantees under the compression equipment lease agreements. The Company utilizes derivative financial instruments to minimize the risks and/or costs associated with financial and global operating activities by managing its exposure to interest rate fluctuation on a portion of its variable rate debt and leasing obligations. The Company does not utilize derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in the Consolidated Statements of Cash Flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions. We adopted SFAS 133, as amended by SFAS 137 and SFAS 138, effective January 1, 2001. SFAS 133 requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. Prior to 2001, we entered into two interest rate swaps which were outstanding at September 30, 2002 with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the counterparty and now expire in July 2003. The difference paid or received on the swap transactions is recorded as an accrued lease liability and is recognized in leasing expense. On January 1, 2001, in accordance with the transition provisions of SFAS 133, we recorded a loss resulting from the cumulative effect of an accounting change in the statement of operations of approximately $164,000, net of tax benefit of $89,000. During the year ended December 31, 2002 and 2001, we recognized an unrealized gain of approximately $3.2 million and an additional unrealized loss of approximately $7.6 million, respectively, related to the change in the fair value of these interest rate swaps in the statement of operations because these swaps did not meet the specific hedge criteria as a result of the counterparty's option to extend the interest rate swaps. Further, management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty. At December 31, 2002, we recorded approximately $4.6 million in accrued liabilities with respect to the fair value adjustment related to these interest rate swaps. The fair value of these interest rate swaps will fluctuate with changes in interest rates over their remaining terms and the fluctuations will be recorded in the statement of operations. 40 During the second quarter of 2001, we entered into three additional interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows:
Maturity Strike Notional Lease Date Rate Amount ----- -------- ------ -------- March 2000 3/11/05 5.2550% $100,000,000 August 2000 3/11/05 5.2725% $100,000,000 October 2000 10/26/05 5.3975% $100,000,000
These three swaps, which we have designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values have been recognized in other comprehensive income. During the year ended December 31, 2002 and 2001, we recorded a loss of approximately $13.6 million and $9.3 million, respectively, related to these three swaps, ($8.9 million and $6.1 million, net of tax) in other comprehensive income. As of December 31, 2002, a total of approximately $16.1 million was recorded in accrued current liabilities and approximately $11.5 million in other long-term liabilities with respect to the fair value adjustment related to these three swaps. The counterparties to the interest rate swap agreements are major international financial institutions. We continually monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on funds transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts can either be made at an exchange rate negotiated by the parties or, if no such agreement is reached, a preliminary payment may be made based on a 1 dollar to 1 peso equivalent pending a final agreement. The Argentine government also requires that the parties to such contracts renegotiate the price terms within 180 days of the devaluation. As a result of these negotiations, we received approximately $11.2 million in partial reimbursements of which $9.7 million are recorded in revenue, and expect to receive approximately $0.5 million during 2003. We have renegotiated ten of eleven of our agreements in Argentina and expect to renegotiate the remaining agreement in the near future. We do not expect that the outcome of the renegotiation of the remaining agreement will have a material impact on our financial statements. During the year ended December 31, 2002, we recorded an exchange loss of approximately $9.9 million for assets exposed to currency translation in Argentina. For the year ended December 31, 2002, our Argentine operations represented approximately 5% of our revenue and 7% of our gross margin. The economic situation in Argentina is subject to change. To the extent that the situation in Argentina continues to deteriorate, exchange controls continue in place and the value of the peso against the dollar is reduced further, our results of operations in Argentina could be materially and adversely affected which could result in reductions in our net income. In addition, we have exposure to currency risks in Venezuela. To mitigate that risk, the majority of our existing contracts provide that we receive payment in U.S. dollars rather than Venezuelan bolivars, thus reducing our exposure to fluctuations in the bolivar's value. During the year ended December 31, 2002, we recorded an exchange loss of approximately $5.8 million for assets exposed to currency translation in Venezuela. For the year ended December 31, 2002, our Venezuelan operations represented approximately 10% of our revenue and 17% of our gross margin. In December 2002, certain opposition groups in Venezuela initiated an unofficial national strike. This has caused economic conditions in Venezuela to deteriorate, including a substantial reduction in the production of oil in Venezuela. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency which can be exchanged for foreign currency by businesses operating inside Venezuela. If the national strike continues, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, Hanover's results of operations in Venezuela could be materially and adversely affected, which could result in reductions in Hanover's net income. As a result, during the fourth quarter of 2002, our international rental revenues were decreased by approximately $2.7 million a result of the disruption in our operations in Venezuela. 41 FACTORS THAT MAY AFFECT OUR FINANCIAL CONDITION AND FUTURE RESULTS Risks Related to Our Business Substantial Capital Requirements--We require a substantial amount of capital to expand our compressor rental fleet and our complementary businesses. During 2003 we plan to spend approximately $175 to $200 million, in continued expansion and maintenance of our rental fleet and other businesses, including $55 million on equipment overhauls and other maintenance capital. We expect that our 2003 capital spending will be within our operating cash flows. The amount of these expenditures may vary depending on conditions in the natural gas industry and the timing and extent of any significant acquisitions we may make. Historically, we have funded our capital expenditures through internally generated funds, sale and leaseback transactions and debt and equity financing. While we believe that cash flow from our operations and borrowings under our existing $350 million bank credit agreement will provide us with sufficient cash to fund our planned 2003 capital expenditures in the short term, we cannot assure you that these sources will be sufficient. As of December 31, 2002, we had approximately $120 million of credit capacity remaining (after giving effect to the covenant limitations in the agreement) on our $350 million bank credit agreement (3.2% weighted average effective interest rate at December 31, 2002). Failure to generate sufficient cash flow, together with the absence of alternative sources of capital, could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. Substantial Debt and Operating Leases--We have a substantial amount of debt and compression equipment lease commitments. Our current debt level could limit our ability to fund future growth and operations and increase our exposure during adverse economic conditions. As of December 31, 2002, we had approximately $881 million in total residual value guarantees that are due upon termination of our compression equipment leases and may be satisfied by a cash payment or the exercise of our purchase options under the terms of the respective lease agreements and approximately $555 million of debt outstanding. Our substantial debt and compression equipment lease commitments could have important consequences to you. For example, these commitments could: . make it more difficult for us to satisfy our obligations; . increase our vulnerability to general adverse economic and industry conditions; . limit our ability to fund future working capital, capital expenditures, acquisitions and other general corporate requirements; . increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are at variable rates; . limit our flexibility in planning for, or reacting to, changes in our business and our industry; . place us at a disadvantage compared to our competitors that have less debt or operating lease commitments; and . limit our ability to borrow additional funds. Additionally, the indenture, the participation agreement and other documents governing our compression equipment leases contain financial and other restrictive covenants. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. Our bank credit facility and other debt facilities and the operative documents governing our compression equipment leases contain, among other things, covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities. These covenants include provisions that restrict our ability to: . incur additional indebtedness or issue guarantees; . create liens on our assets; 42 . engage in mergers, consolidations and certain dispositions of assets; . enter into additional operating leases; . pay dividends on or redeem capital stock; . enter into derivative transactions; . make certain investments or restricted payments; . make certain investments, loans or advancements to certain of our subsidiaries; . prepay or modify our debt facilities; . enter into transactions with affiliates; or . enter into sale and leaseback transactions. In addition, under the bank credit facility, we have granted the lenders a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of our foreign subsidiaries. Our bank credit facility and other debt facilities and the operative documents governing our compression equipment leases require us to maintain financial ratios and tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. Adverse conditions in the oil and gas business or in the world economy or other events related to our business may affect our ability to meet those financial ratios and tests. A breach of any of these covenants or failure to maintain such financial ratios would result in an event default under our debt facilities and our compression equipment leases. If such an event of default occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. We have approximately $194 million of indebtedness which will mature within two years from December 31, 2002. Our ability to refinance this indebtedness will be affected by the factors discussed above and those discussed under the heading "Significant Leverage" below and by the general market at the time we refinance. The factors discussed above and those discussed under the heading "Significant Leverage" below could adversely affect our ability to refinance this indebtedness at a reasonable cost. Significant Leverage--We have significant leverage relative to our total capitalization, which could result in a further downgrade in our credit rating if we do not reduce our leverage. As of December 31, 2002, our debt to capitalization ratio, including residual value guarantees under our compression equipment leases, was 1.55 to 1 and our book debt to capitalization ratio, excluding our compression equipment leases, was 0.60 to 1. We have been advised by Moody's Investor Service that our credit rating may suffer further if we are unable to materially reduce our leverage during the first half of 2003. In February 2003, Moody's Investor Service announced that it had downgraded by one grade our senior implied credit rating, our 4.75% Convertible Senior Notes and our 7.25% Mandatorily Redeemable Convertible Preferred Securities to Ba3, B2 and B3, respectively, and Standard & Poor's rating service announced that it had lowered our corporate credit rating to BB-. We do not have any rating downgrade provisions that would accelerate the maturity dates of our debt if our credit rating was downgraded. However, a downgrade in our credit rating could adversely affect our ability to renew existing, or obtain access to new, credit facilities and could increase the cost of such facilities. Our ability to reduce our leverage depends upon market and economic conditions, as well as our ability to execute liquidity enhancing transactions such as sales of non-core assets or our equity securities. Significant Cash Requirements--We will need to generate a significant amount of cash to service our indebtedness and operating lease commitments and to fund working capital. 43 Our ability to make scheduled payments under our compressor equipment leases and indebtedness, or to refinance our indebtedness, will depend on our ability to generate cash in the future. This is subject to our operational performance, as well as general economic, financial, competitive, legislative and regulatory conditions, among other factors. Based upon our total debt of $555 million at December 31, 2002, we expect total debt service payments for the year ended December 31, 2003 will be approximately $50 million based upon interest rates in effect as of December 31, 2002. In addition, based upon our current operating lease commitments and rates in effect at December 31, 2002, we expect that total compressor lease rent payments for the year ended December 31, 2003 will be approximately $84 million. We also expect that total distributions on our 7 1/4% Mandatorily Redeemable Convertible Preferred Securities for the year ended December 31, 2003 (assuming no deferrals as permitted by the terms of such securities) will be approximately $6.4 million. We are exposed to interest rate risk on borrowings under our floating rate revolving credit facility. At December 31, 2002, $157 million was outstanding under this facility bearing interest at a weighted average effective rate of 3.2% per annum. Assuming a hypothetical 10% percent increase or decrease in this rate and that the amount outstanding under this facility remains constant, annual interest expense for advances under this facility would increase or decrease by $0.5 million. In addition, we are exposed to variable rental rates on the equipment leases we entered into in June 1999 and October 2000. Assuming a hypothetical 10% percent increase or decrease in rates from those in effect at December 31, 2002, the increase or decrease in leasing expense for the next twelve months on these equipment leases would be approximately $1.3 million. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our $350 million bank credit agreement in an amount sufficient to enable us to pay our indebtedness, operating lease commitments, or to fund our other liquidity needs. We cannot be sure that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our inability to refinance our debt on commercially reasonable terms could materially adversely affect our business. Short Lease Terms--Many of our compressor leases with customers have short initial terms, and we cannot be sure that the leases for these rental compressors will be renewed after the end of the initial lease term. The length of our 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 us to fully recoup the average cost of acquiring or fabricating the equipment. We cannot be sure that a substantial number of our lessees will continue to renew their leases or that we will be able to re-lease the equipment to new customers or that any renewals or re-leases will be at comparable lease rates. The inability to renew or re-lease a substantial portion of our compressor rental fleet would have a material adverse effect upon our business, consolidated financial condition, results of operations and cash flows. Characterization of Sale Leaseback Transactions--There is a risk that the Internal Revenue Service or other taxing authority would not agree with our treatment of sale leaseback transactions which could increase our taxes. We treat our sale leaseback transactions as operating leases for financial accounting purposes but as financing arrangements for income tax and certain other tax purposes. A tax treatment inconsistent with our position could have a material adverse effect on our financial condition, results of operations and liquidity. We intend to continue to treat the leases as a secured financing arrangement for income and certain other tax purposes, which is consistent with how the leases are intended to be treated for bankruptcy law and state law purposes. If the Internal Revenue Service or another taxing authority were to successfully contend that the leases or any of our other operating leases should be treated as a sale and leaseback of equipment rather than a secured financing arrangement, we may owe significant additional taxes. This result may affect our ability to make payments on our leases or debt. 44 See discussion of FIN 46 under "New Accounting Pronouncements". See Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policies and Estimates--Sale and Leaseback Transactions. Lease Substitutions--Our ability to substitute compressor equipment under our equipment leases is limited and there are risks associated with reaching that limit prior to the expiration of the lease term. The Company has entered into five transactions involving the sale of equipment by Hanover and its subsidiaries to special purpose entities, which in turn lease the equipment back to us. We are entitled under the lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment involved in the substitutions is equal. We generally substitute equipment when a lease customer of ours exercises a contractual right or otherwise desires to buy the leased equipment or when fleet equipment owned by the special purposes entities is selected by the Company for transfer to international projects. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to a percentage of the termination value under each lease. The termination value is equal to (i) the aggregate amount of outstanding principal of the corresponding notes issued by the special purpose entity, plus accrued and unpaid interest and (ii) the aggregate amount of equity investor contributions to the special purpose entity, plus all accrued amounts due on account of the investor yield and any other amounts owed to such investors in the special purpose entity. In the table below termination value does not include amounts in excess of the aggregate outstanding principal amount of notes and the aggregate outstanding amount of the equity investor contributions, as such amounts are periodically paid as supplemental rent as required by the compression equipment leases. The aggregate amount of replacement equipment substituted to date (in dollars and percentage of termination value), the termination value, the substitution percentage limitation relating to each of our compression equipment leases to date as of February 28, 2003 is as follows:
Substitution Limitation as Value of Percentage Percentage of Substituted of Termination Termination Termination Lease Termination Lease Equipment Value(1) Value(1) Value Date ----- ----------- -------------- ----------- ------------- ----------------- (Dollars in Millions) June 1999............ $28.1 14.1% $ 200.0 25% June 2004 March and August 2000 19.1 9.6% 200.0 25% March 2005 October 2000......... 16.2 9.4% 172.6 25% October 2005 August 2001.......... 16.9 5.5% 309.3 25% September 2008 August 2001.......... 18.0 7.0% 257.7 25% September 2011 ----- -------- Total............. $98.3 $1,139.6 ===== ========
- -------- (1) Termination value assumes all accrued rents paid before termination. In the event we reach the substitution limitation prior to a lease termination date, we will not be able to effect any additional substitutions with respect to such lease. This inability to substitute could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows. International Operations--There are many risks associated with conducting operations in international markets. We operate in many different geographic markets, some of which are outside the United States. Changes in local economic or political conditions, particularly in Latin America or Canada, could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. Additional risks inherent in our international business activities include the following: . difficulties in managing international operations; . unexpected changes in regulatory requirements; . tariffs and other trade barriers which may restrict our ability to enter into new markets; . potentially adverse tax consequences; . restrictions on repatriation of earnings or expropriation of property; 45 . difficulties in establishing new international offices and risks inherent in establishing new relationships in foreign countries; . the burden of complying with foreign laws; and . fluctuations in currency exchange rates and the value of the U.S. dollar, particularly in Argentina and Venezuela. In addition, our future plans involve expanding our business in foreign markets where were currently do not conduct business. Our decentralized management structure and the risks inherent in new business ventures, especially in foreign markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Operations in Argentina and Venezuela--Political conditions and fluctuations in currency exchange rates in Argentina and Venezuela could adversely affect our business. In December 2002, certain opposition groups in Venezuela initiated an unofficial national strike. This has caused economic conditions in Venezuela to deteriorate, including a substantial reduction in the production of oil in Venezuela. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. As of December 31, 2002, we had approximately $21.5 million in receivables from customers in Venezuela, a significant portion of which were due from Petroleos de Venezuela, S.A., Venezuela's state-owned oil company. If the national strike continues, exchange controls remain in place, our receivables continue to increase and ultimately are not paid or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in Hanover's net income. In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on funds transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts can either be made at an exchange rate negotiated by the parties or, if no such agreement is reached, a preliminary payment may be made based on a 1 dollar to 1 peso equivalent pending a final agreement. The Argentine government also requires the parties to such contracts to renegotiate the price terms within 180 days of the devaluation. We have renegotiated ten of eleven of our agreements in Argentina and expect to renegotiate the remaining agreement in the near future. We do not expect that the outcome of the renegotiation of the remaining agreement will have a material impact on our financial statements. The economic situation in Argentina is subject to change. If the situation in Argentina continues to deteriorate, exchange controls continue in place and the value of the peso against the dollar is reduced further, Hanover's results of operations in Argentina could be materially and adversely affected, which could result in reductions in Hanover's net income. As part of our acquisition of the gas compression business of Schlumberger, we acquired minority interests in three joint ventures in Venezuela. As a minority investor in these joint ventures, we will not be able to control their operations and activities, including without limitation, whether and when they distribute cash or property to their holders. Integration of Acquisitions--Integration of acquired assets into our business involves potential risks which could affect our business. Historically, we have completed selective acquisitions of other companies, assets and product lines that either complement or expand our business. Each acquisition involves potential risks, such as the diversion of management's attention away from current operations, problems in integrating acquired businesses and possible short-term adverse effects on our operations as a result of that process. We may be unable to successfully 46 integrate acquired businesses into our business, or may be able to do so only at significant expense. Our ability to make acquisitions in 2003 will be impacted by the recent amendment to our bank credit agreement which restricts our capital spending to $200 million in 2003. Industry Conditions--A prolonged, substantial reduction in oil or gas prices, or prolonged instability in domestic or global energy markets, could adversely affect our business. Our operations depend upon the levels of activity in natural gas development, production, processing and transportation. In recent years, oil and gas prices and the level of drilling and exploration activity have been extremely volatile. For example, oil and gas exploration and development activity and the number of well completions typically decline when there is a significant reduction in oil and gas prices or significant instability in energy markets. As a result, the demand for our gas compression and oil and gas production equipment would be adversely affected. Any future significant, prolonged decline in oil and gas prices could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. Erosion of the financial condition of customers could adversely affect our business. During times when the natural gas market weakens, the likelihood of the erosion of the financial condition of these customers increases. If and to the extent the financial condition of our customers declines, our customers could seek to preserve capital by canceling or delaying scheduled maintenance of their existing gas compression and oil and gas production equipment and determining not to purchase new gas compression and oil and gas production equipment. In addition, upon the financial failure of a customer, we could experience a loss associated with the unsecured portion of any of our outstanding accounts receivable. Recently, due to a deterioration in market conditions, we have experienced a decline in revenues and profits. For the year ended December 31, 2002, our business recorded a $116 million net loss. Our results for the year ended December 31, 2002 have been impacted by (i) the decline in market conditions which impacted our compressor and accessory fabrication and production and processing equipment sales and gross profits; (ii) a $6.8 million pre-tax inventory write down; (iii) a $34.5 million charge included in depreciation and amortization expense for reductions in the carrying value of certain idle units of the Company's compression fleet that are being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned; (iv) an increase in selling, general and administrative expenses, depreciation expense, leasing expense, foreign currency translation expense, interest expense; (v) a $52.1 million pre-tax goodwill impairment, primarily attributable to our production and processing equipment business and (vi) a $40.4 million charge to write down investments in discontinued operations to their estimated fair market values. Discontinued Operations--Our exit and sale strategy with respect to certain assets classified as discontinued operations is subject to market and execution risks. During the fourth quarter of 2002, we reviewed our business lines and the board of directors approved management's recommendation to exit and sell our non-oilfield power generation and certain used equipment business lines. In the fourth quarter 2002, Hanover recorded a pre-tax charge of $52.3 million ($36.4 million, net of tax) to write down its investment in discontinued operations to current estimated fair market values. In addition, these operations recorded approximately $6.0 million ($3.9 million, net of tax) in write-downs which were recorded in the second quarter of 2002. Discontinued operations include three non-oilfield power generation projects and related inventory, and certain of our used equipment divisions. We anticipate selling these assets in 2003. However, our ability to sell these assets for an amount equal to their respective estimated fair market values which they are carried on our books is subject to the availability and interest of purchasers for those assets and our ability to find potential purchasers and to take advantage of any opportunities to sell these assets that may arise. 47 Competition--We operate in a highly competitive industry. We experience competition from companies who may be able to more quickly adapt to technological and other changes within our industry and throughout the economy as a whole, more readily take advantage of acquisition and other opportunities and adopt more aggressive pricing policies. In times of weak market conditions, we may experience reduced profit margins from increased pricing pressure. We may not be able to continue to compete successfully in this market or against such competition. If we do not compete successfully, we may lose market share and our business, consolidated financial condition, results of operations or cash flows could be materially adversely affected. Potential Liability and Insurance--Natural gas operations entail inherent risks that may result in substantial liability to us. Natural gas operations entail inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could result in uncontrollable flows of gas or well fluids, fires and explosions. These risks may expose us, as an equipment operator or fabricator, to liability for personal injury, wrongful death, property damage, pollution and other environmental damage. We have obtained insurance against liability for personal injury, wrongful death and property damage, but we cannot assure you that the insurance will be adequate to cover the liability we may incur. Insurance premium pricing is highly volatile and we cannot assure you that we will be able to obtain insurance in the future at a reasonable cost or at all. Our business, consolidated financial condition, results of operations or cash flows could be materially adversely affected if we incur substantial liability and the damages are not covered by insurance or are in excess of policy limits. War, Terrorist Attacks or Responses Thereto--The outbreak of war, terrorist attacks or responses thereto could adversely affect our business, consolidated financial condition, results of operations or cash flows. The war in Iraq, unrest in the Middle East and other parts of the world may result in instability in the world energy markets, affecting both supply and demand. Our business, consolidated financial condition, results of operations or cash flows could be materially adversely affected if we incur substantial damages as a result of such instability. On September 11, 2001, terrorists carried out attacks that destroyed the World Trade Center in New York and badly damaged the Pentagon outside of Washington, D.C. As a result of these attacks, the United States securities markets were closed for several days. We believe that these events and the subsequent military actions have caused a delay in capital spending which has impacted our business. The impact that these terrorist attacks, or future events arising as a result of these terrorist attacks, including military or police activities in the United States or the outbreak of war in foreign countries, future terrorist activities or threats of such activities, political unrest and instability, riots and protests, could have on the United States and the global economy, the United States and global securities markets and our business, consolidated financial condition, results of operations or cash flows cannot be determined with any accuracy. We have not obtained insurance against terrorist attacks or responses thereto and, due to its limited availability and high cost, do not expect to obtain such insurance in the future. Our business, consolidated financial condition, results of operations or cash flows could be materially adversely affected if we incur substantial damages as a result of terrorist attacks or responses thereto. Governmental Regulation--Our business is subject to a variety of governmental regulations relating to the environment, health and safety. Our business is subject to a variety of federal, state, local and foreign laws and regulations relating to the environment, health and safety. These laws and regulations are complex, change frequently and have tended to become more stringent over time. Failure to comply with these laws and regulations may result in a variety of civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements and issuance of injunctions as to future compliance. As part of the regular overall evaluation of 48 both our current operations and newly acquired operations, we are in the process of applying for or updating certain facility permits with respect to stormwater discharges, waste handling and air emissions relating to painting and blasting. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks or pipelines and other regulated units, all of which may impose additional compliance obligations. We are evaluating the impact on our operations of recently promulgated air emission regulations relating to non-road engines. We intend to implement any equipment upgrades or permit modifications required by these air emission regulations according to the required schedule. We do not anticipate, however, that any changes or updates in response to such regulations, or any other anticipated permit modifications (for stormwater, other air emission sources or otherwise) or anticipated ongoing regulatory compliance obligations will have a material adverse effect on our operations either as a result of any enforcement measures or through increased capital costs. Based on our experience to date, we believe that the future cost of compliance with existing laws and regulations will not have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. However, future events, such as compliance with more stringent laws and regulations, a major expansion of our operations into more heavily regulated activities, more vigorous enforcement policies by regulatory agencies or stricter or different interpretations of existing laws and regulations could require us to make material expenditures. We have conducted preliminary environmental site assessments with respect to some, but not all, properties currently owned or leased by us, usually in a pre-acquisition context. Some of these assessments have revealed that soils and/or groundwater at some of our facilities are contaminated with hydrocarbons, heavy metals and various other regulated substances. With respect to newly acquired properties, we do not believe that our operations caused or contributed to any such contamination and we are not currently under any orders or directives to undertake any remedial activity. We typically will develop a baseline of site conditions so we can establish conditions at the outset of our operations on such property. However, the handling of petroleum products and other regulated substances is a normal part of our operations, and we have experienced occasional minor spills or incidental leakage in connection with our operations. Certain properties previously owned or leased by us were determined to be impacted by soil contamination. Where such contamination was identified, we have since conducted remedial activities at these previously-held properties as we believed necessary to meet regulatory standards, and either sold the owned properties to third parties or returned the leased properties to the lessors. We are not currently aware of any further remedial obligations at such previously held properties. Based on our experience to date, and the relatively minor nature of the types of contamination we have identified to date, we believe that the future cost of necessary investigation or remediation on our current properties will not have a material adverse effect on our business, consolidated financial condition, results of operations, or cash flows. We cannot be certain, however, that cleanup standards will not become more stringent, or that we will not be required to undertake any remedial activities involving any substantial costs on any of these current or previously-held properties in the future or that the discovery of unknown contamination or third-party claims made with respect to current or previously owned or leased properties may not result in substantial costs. Concentrated Ownership--A significant amount of our stock is owned by two stockholders. GKH Investments, L.P. and GKH Partners L.P., as nominee for GKH Private Limited (collectively "GKH"), owned approximately 10% of our common stock as of December 31, 2002. Schlumberger and its affiliates owned approximately 11% of our common stock as of December 31, 2002. As holders of large blocks of our stock, GKH and Schlumberger are in a position to exert substantial influence over the outcome of many corporate actions requiring stockholder approval, including the election of directors, the additional issuance of our common stock or other securities and transactions involving a change of control. The interests of GKH or Schlumberger could conflict with the interests of our other stockholders. GKH has advised us that it is in the process of dissolving and "winding up" its affairs. On November 12, 2002, GKH informed us that it had advised its limited partners that it is extending the wind-up process of the 49 partnership for an additional twelve months from January 25, 2003 until January 25, 2004. On December 3, 2002, GKH made a partial distribution of 10,000,000 shares out of a total of 18,274,795 shares held by GKH to its limited and general partners. As part of the wind-up process, GKH may liquidate or distribute substantially all of its assets, including the remaining shares of our common stock owned by GKH, to its partners. In the event the partners of GKH receive further distributions of shares of our common stock from GKH as a result of the wind-up, we cannot predict whether those partners would continue to hold those shares or whether the interests of such partners may conflict with the interests of our other stockholders and the holders of the notes. Hanover acquired its interest in PIGAP II as part of its purchase of Production Operators Corporation from Schlumberger in August 2001. PIGAP II is a joint venture, currently owned 70% by a subsidiary of Williams Companies Inc. and 30% by Hanover, which operates a natural gas compression facility in Venezuela that processes 1.2 billion standard cubic feet per day of natural gas. The natural gas processed by PIGAP II is re-injected into oil reservoirs for enhanced oil recovery. In January 2003, we exercised our right to put our interest in one of these joint ventures, the PIGAP II joint venture, back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of the Company's interest in the joint venture back to Schlumberger is subject to certain consents. We are currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which we would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. Shareholder Litigation--We and certain of our officers and directors are named as defendants in a putative class action lawsuit and in various derivative lawsuits. The putative class action securities lawsuits and the derivative lawsuits that we are currently defending are at a very early stage. Consequently, it is premature at this time to predict liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with such actions. As of December 31, 2002, the Company has paid approximately $7.7 million in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuits and the Securities and Exchange Commission investigation. Of this amount, the Company has paid approximately $1.0 on behalf of officers and directors in connection with the above-named proceedings. The Company intends to pay the litigation expenses of its officers and directors, subject to the limitations imposed by Delaware law and the Company's certificate of incorporation and bylaws. The Company expects to be reimbursed for some or all of these expenses from the Company's directors' and officers' insurance policies An adverse outcome in these actions could have a material adverse effect on our business, financial condition, results of operations or cash flows. See Item 3. Legal Proceedings. Securities and Exchange Commission Investigation--We are currently the subject of an SEC investigation. On November 14, 2002, the Securities and Exchange Commission issued a Formal Order of Private Investigation relating to the matters involved in the restatements of our financial statements. We are cooperating fully with the Fort Worth District office staff of the Securities and Exchange Commission. It is too soon to determine whether the outcome of this investigation will have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. Volatility of Our Stock Price--Our stock price may experience volatility. Our stock price, like that of other companies, can be volatile. Some of the factors that could affect our stock price are quarterly increases or decreases in revenue or earnings, changes in revenue or earnings estimates by the investment community, and speculation in the press or investment community about our financial condition or 50 results of operations. General market conditions and domestic or international economic factors unrelated to our performance may also affect our stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. In addition, following periods of volatility in a company's securities, securities class action litigation against a company is sometimes instituted and has been recently initiated against our Company. This type of litigation could result in liability, substantial costs and the diversion of management time and resources. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, amortization of goodwill over an estimated useful life is discontinued. Instead, goodwill will be reviewed for impairment annually or whenever events indicate impairment may have occurred. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. SFAS 142 was effective for Hanover on January 1, 2002. The adoption of SFAS No. 142 has had an impact on future financial statements, due to the discontinuation of goodwill amortization expense. For the year ended December 31, 2001, goodwill amortization expense was approximately $11.6 million. The transition provisions of SFAS 142 required us to identify our reporting units and perform an initial impairment assessment of the goodwill attributable to each reporting unit as of January 1, 2002. We performed our initial impairment assessment and determined that our reporting units are the same as our business segments and that no impairment existed as of January 1, 2002. However, due to a downturn in our business and changes in the business environment in which we operate, we completed an additional impairment analysis as of June 30, 2002. As a result of the test performed as of June 30, 2002, we recorded an estimated $47.5 million impairment of goodwill attributable to our production and processing equipment fabrication business unit. The second step of goodwill impairment test required us allocate the fair value of the reporting unit to the production and processing equipment businesses' assets. We performed the second step of the goodwill impairment test in the third quarter of 2002 and determined that no adjustment to the impairment, recorded in the second quarter, was required. The fair value of reporting units was estimated using a combination of the expected present value of future cash flows and the market approach, which uses actual market sales. In the fourth quarter of 2002, we recorded a $4.6 million goodwill impairment related to our pump division which we expect to sell in 2003. The table below presents the carrying amount of goodwill (in thousands):
December 31, 2002 ------------ Domestic rentals............................... $ 94,655 International rentals.......................... 34,659 Parts, service and used equipment.............. 32,691 Compressor and accessory fabrication........... 14,573 Production and processing equipment fabrication 3,941 -------- Total....................................... $180,519 ========
51 Hanover's net income and earnings per share, adjusted to exclude goodwill amortization expense, for the twelve months ended December 31, 2001 and 2000 are as follows (in thousands, except per share data):
2001 2000 Restated Restated -------- -------- Net income............................. $72,413 $49,639 Goodwill amortization, net of tax...... 8,846 4,280 ------- ------- Adjusted net income.................... $81,259 $53,919 ======= ======= Basic earnings per share, as reported.. $ 1.00 $ 0.80 Goodwill amortization, net of tax...... 0.12 0.07 ------- ------- Adjusted basic earnings per share...... $ 1.12 $ 0.87 ======= ======= Diluted earnings per share, as reported $ 0.94 $ 0.75 Goodwill amortization, net of tax...... 0.11 0.06 ------- ------- Adjusted diluted earnings per share.... $ 1.05 $ 0.81 ======= =======
In June 2001, the FASB issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets ("SFAS 143"). SFAS 143 establishes the accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. This statement is effective for Hanover on January 1, 2003. We are currently assessing the new standard and do not believe it will have a material impact on our consolidated results of operations, cash flows or financial position. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The new rules supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). The new rules retain many of the fundamental recognition and measurement provisions of SFAS 121, but significantly change the criteria for classifying an asset as held-for-sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001. We have adopted the new standard, which had no material effect on our consolidated results of operations, cash flows or financial position. In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The Statement updates, clarifies and simplifies existing accounting pronouncements. Provisions of SFAS 145 related to the rescission of Statement 4 are effective for us on January 1, 2003. The provisions of SFAS 145 related to SFAS 13 are effective for transactions occurring after May 15, 2002. We have adopted the provisions of the new standard related to SFAS 13, which had no material effect on our consolidated results of operations, cash flows or financial position. In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3. We will adopt the provision of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In November 2002, the EITF reached a consensus on Issue No. 00-21 ("EITF 00-21"), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 will be effective for interim periods beginning after June 15, 2003. We are currently evaluating the impact of adoption of EITF 00-21 on our financial position and results of operations. 52 In November 2002, the FASB issued Interpretation No. 45 ( "FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. We have adopted the disclosure provisions and are currently evaluating the impact of adoption of the recognition and measurement provisions of FIN 45 on our financial position and results of operations. In December 2002, the FASB issued Statement of SFAS 148, Accounting for Stock-Based Compensation--Transition and Disclosure ("SFAS 148"). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We have adopted the disclosure provisions and are currently evaluating the impact of adoption of SFAS 148 on our financial position and results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46" ), "Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 will require us to include in our consolidated financial statements the special purpose entities that lease compression equipment to us beginning in July 2003. If these special purpose entities had been consolidated in Hanover's financial statements as of December 31, 2002, Hanover would add approximately $1,031 million in compressor equipment and approximately $1,140 million in debt to its balance sheet and reverse $109 million of deferred gains that were recorded on its balance sheet as a result of the sale and leaseback transactions. In addition, Hanover would record depreciation expense on the compression equipment for prior periods (net of tax) as part of the cumulative effect of the adoption of FIN 46 and would record depreciation expense in future periods. We are currently evaluating the impact of recording depreciation for prior periods. After we adopt FIN 46, we estimate that we will record approximately $20 million per year in additional depreciation expense on our leased compression equipment. 53 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to interest rate and foreign currency risk. Hanover and its subsidiaries periodically enter into interest rate swaps to manage its exposure to fluctuations in interest rates. At December 31, 2002, the fair market value of these interest rate swaps, excluding the portion attributable to and included in accrued leasing, was a liability of approximately $27.6 million, of which $16.1 million was recorded in accrued liabilities and $11.5 million in other long-term liabilities. We are party to five interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows (dollars in thousands):
Fair Value of the Swap at Maturity Date Company Pays Fixed Rate Notional Amount December 31, 2002 ------------- ------------------------- ------------------------- ------------------------- 7/21/2003 5.5100% $ 75,000 $(1,714) 7/21/2003 5.5600% $125,000 $(2,892) 3/11/2005 5.2550% $100,000 $(7,163) 3/11/2005 5.2725% $100,000 $(7,243) 10/26/2005 5.3975% $100,000 $(8,577)
At December 31, 2002, we are exposed to variable rental rates, which fluctuate with market interest rate, on a portion of the equipment leases we entered into in September 1999 and October 2000. Assuming a hypothetical 10% increase in the variable rates from those in effect at year end, the increase in annual leasing expense on these equipment leases would be approximately $1.3 million. We do not currently use derivative financial instruments to mitigate foreign currency risk; however, we may consider the use of such instruments because of recent events in Argentina and Venezuela. We are also exposed to interest rate risk on borrowings under our floating rate revolving credit facility. At December 31, 2002, $156.5 million was outstanding bearing interest at a weighted average effective rate of 3.2% per annum. Assuming a hypothetical 10% increase in the weighted average interest rate from those in effect at December 31, 2002, the increase in annual interest expense for advances under this facility would be approximately $0.5 million. In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on funds transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts can either be made at an exchange rate negotiated by the parties or, if no such agreement is reached, a preliminary payment may be made based on a 1 dollar to 1 peso equivalent pending a final agreement. The Argentine government also requires that the parties to such contracts renegotiate the price terms within 180 days of the devaluation. As a result of these negotiations, we received approximately $11.2 million in partial reimbursements of which $9.7 million are recorded in revenue, and expect to receive approximately $0.5 million during 2003. We have renegotiated ten of eleven of our agreements in Argentina and expect to renegotiate the remaining agreement in the near future. We do not expect that the outcome of the renegotiation of the remaining agreement will have a material impact on our financial statements. During the year ended December 31, 2002, we recorded an exchange loss of approximately $9.9 million for assets exposed to currency translation in Argentina. For the year ended December 31, 2002, our Argentine operations represented approximately 5% of our revenue and 7% of our gross margin. The economic situation in Argentina is subject to change. To the extent that the situation in Argentina continues to deteriorate, exchange controls continue in place and the value of the peso against the dollar is reduced further, our results of operations in Argentina could be materially and adversely affected which could result in reductions in our net income. In addition, we have exposure to currency risks in Venezuela. To mitigate that risk, the majority of our existing contracts provide that we receive payment in U.S. dollars rather than Venezuelan bolivars, thus reducing our exposure to fluctuations in the bolivar's value. During the year ended December 31, 2002, we recorded an 54 exchange loss of approximately $5.8 million for assets exposed to currency translation in Venezuela. For the year ended December 31, 2002, our Venezuelan operations represented approximately 10% of our revenue and 17% of our gross margin. In December 2002, certain opposition groups in Venezuela initiated an unofficial national strike. This has caused economic conditions in Venezuela to deteriorate, including a substantial reduction in the production of oil in Venezuela. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency which can be exchanged for foreign currency by businesses operating inside Venezuela. If the national strike continues, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, Hanover's results of operations in Venezuela could be materially and adversely affected, which could result in reductions in Hanover's net income. As a result, during the fourth quarter of 2002, our international rental revenues were decreased by approximately $2.7 million as a result of the disruption in our operations in Venezuela. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary information specified by this Item are presented following Item 15 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 55 PART III Item 10. Directors and Executive Officers of the Registrant The information included or to be included in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders under the captions "Nominees for Election as Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference herein. Please see Item 1 of this Form 10-K for identification of our executive officers. Item 11. Executive Compensation The information included or to be included under the caption "Information Regarding Executive Compensation" in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information included or to be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions The information included or to be included under the caption "Certain Relationships and Transactions" in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders is incorporated by reference herein. Item 14. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. Within 90 days before the filing of this Report, the Company's principal executive officer and principal financial officer evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934). Based on the evaluation, the Company's principal executive officer and principal financial officer believe that the Company's disclosure controls and procedures were effective to ensure that material information was accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Controls. Under the direction of our new President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Senior Vice President and General Counsel, we continued the process of reviewing our internal controls and procedures for financial reporting and have changed or are in the process of changing some of those controls and procedures, including changes relating to: human resources; internal audit; reconciliation of intercompany accounts; approval of capital expenditures; preparation, approval and closing of significant agreements and transactions; review and quantification of compressor substitutions under compression equipment lease agreements; integration of acquired businesses and assets (including integration of certain financial and accounting systems related thereto); standardization of internal controls and policies across the organization; and the development, implementation and enhancements of corporate governance policies and procedures and performance management systems. As part of our review of our internal controls and procedures for financial reporting, we have made personnel changes and hired additional qualified staff in the legal, accounting/finance and human resource areas and are utilizing third parties to assist with some 56 of our integration and internal audit functions. This review is ongoing, and the review to date constitutes the evaluation referenced in paragraphs 5 and 6 of the Certifications of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer which appear immediately following the signature page of this report. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as a part of this report. 1. Financial Statements. The following financial statements are filed as a part of this report. Report of Independent Accountants.................... F-1 Consolidated Balance Sheet........................... F-2 Consolidated Statement of Operations................. F-3 Consolidated Statement of Comprehensive Income (Loss) F-4 Consolidated Statement of Cash Flows................. F-5, F-6 Consolidated Statement of Common Stockholders' Equity F-7 Notes to Consolidated Financial Statements........... F-8 Selected Quarterly Financial Data (unaudited)........ F-59
2. Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts S-1
3. Exhibits
Exhibit Number Description - ------- ----------- 3.1 Certificate of Incorporation of the Hanover Compressor Holding Co., as amended, incorporated by reference to Exhibit 3.1 to Hanover Compressor Company's (the "Company") Current Report on Form 8-K filed with the SEC on February 5, 2001. 3.2 Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated December 8, 1999, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on February 5, 2001. 3.3 Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated July 11, 2000, incorporated by reference to Exhibit 3.3 to the Company's Current Report on Form 8-K filed with the SEC on February 5, 2001. 3.4 By-laws of the Company, incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 3.5 Amended and Restated Bylaws of the Company, dated December 10, 2002.* 4.1 Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, by and between the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other stockholders of the Company party thereto, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended. 4.2 Form of Warrant Agreement, dated as of August 7, 1995, incorporated by reference to Exhibit 4.10 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended. 4.3 Specimen Stock Certificate, incorporated by reference to Exhibit 4.11 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended. 4.4 Form of Second Amended and Restated Stockholders Agreement of the Company, dated as of June 1997, incorporated by reference to Exhibit 4.12 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.
57
Exhibit Number Description - ------- ----------- 10.1 Credit Agreement, dated as of December 15, 1997, as amended and restated as of December 3, 2001, among the Company, Hanover Compression Limited Partnership, JPMorgan Chase Bank, as agent, and the several lenders parties thereto, incorporated by reference to Exhibit 10.79 to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2001. 10.2 Amendment, dated as of June 26, 2002, to (i) the Credit Agreement dated as of December 15, 1997, as amended and restated as of December 3, 2001, among the Company, certain of the Company's subsidiaries, JPMorgan Chase Bank, as administrative agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees and Credit Agreements referenced in the amendment, incorporated by reference to Exhibit 10.75 to the Company's Current Report on Form 8-K filed with the SEC on August 6, 2002. 10.3 Amendment, dated as of January 31, 2003, to the (i) the Credit Agreement dated as of December 15, 1997, as amended and restated on December 3, 2001, among the Company, certain of the Company's subsidiaries, JPMorgan Chase Bank, as administrative agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees and Credit Agreements referenced in the amendment, incorporated by reference to Exhibit 10.80 to the Company's Current Report on Form 8-K filed with the SEC on February 7, 2003. 10.4 Holdings Guarantee, dated as of December 3, 2001, made by the Company in favor of JPMorgan Chase Bank, as agent, incorporated by reference to Exhibit 10.81 to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2001. 10.5 Subsidiaries' Guarantee, dated as of December 3, 2001, made by certain of the Company's subsidiaries in favor of JPMorgan Chase Bank, as agent, incorporated by reference to Exhibit 10.82 to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2001. 10.6 Amended and Restated Guarantee and Collateral Agreement, dated January 31, 2003, made by the Company, certain of the Company's subsidiaries, JPMorgan Chase Bank, as administrative agent, and the lenders parties thereto.* 10.7 Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999 (the "1999 Trust") and the Company, incorporated by reference to Exhibit 10.36 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.8 Guarantee, dated as of June 15, 1999, made by the Company, Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company, incorporated by reference to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.9 Amended and Restated Guarantee, dated as of March 13, 2000, made by Hanover Compressor Company, Hanover Compression Inc., and certain subsidiaries.* 10.10 Participation Agreement, dated as of June 15, 1999, among the Company, the 1999 Trust, Societe Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and Wilmington Trust Company, incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.11 First Amendment and Waiver, dated as of September 30, 1999, to the Participation Agreement dated as of June 15, 1999, among Hanover Compressor Company, Hanover Equipment Trust 1999A (the "1999A Trust"), the lender parties thereto and The Chase Manhattan Bank, as agent.* 10.12 TIDES Amendment, Consent and Joinder, dated as of December 9, 1999, to (i) the Participation Agreement, dated as of June 15, 1999, among Hanover Compressor Inc., the 1999A Trust, Societe Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and Wilmington Trust Company, (ii) the Participation Agreement, dated as of July 22, 1998, among Hanover Compression Inc., Hanover Equipment Trust 1998A, Societe Generale Financial Corporation, and The Chase Manhattan Bank, as agent, and (iii) other Operative Documents and Guarantees referenced in the amendment.*
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Exhibit Number Description - ------- ----------- 10.13 Third Amendment, dated as of March 13, 2000, to (i) the Participation Agreement dated as of June 15, 1999, among Hanover Compressor, Inc., the 1999A Trust, Societe Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and (ii) the Credit Agreement referenced in the amendment.* 10.14 Security Agreement, dated as of June 15, 1999, made by the 1999 Trust in favor The Chase Manhattan Bank, as agent, incorporated by reference to Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.15 Lease Supplement No. 1 dated June 15, 1999 between the 1999 Trust and the Company, incorporated by reference to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.16 Lease, dated as of March 13, 2000, between Hanover Equipment Trust 2000A (the "2000A Trust") and Hanover Compression Inc., incorporated by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10.17 Guarantee, dated as of March 13, 2000, made by the Company, Hanover Compression Inc. and certain of their Subsidiaries, incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10.18 Participation Agreement, dated as of March 13, 2000, among Hanover Compression Inc., Hanover the 2000A Trust and the several banks parties thereto, incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10.19 Security Agreement, dated as of March 13, 2000, made by the 2000A Trust in favor of The Chase Manhattan Bank, as agent, incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10.20 Assignment of leases, rents and Guarantee from the 2000A Trust to The Chase Manhattan Bank, dated as of March 13, 2000, incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10.21 Lease, dated as of October 27, 2000, between Hanover Equipment Trust 2000B (the "2000B Trust") and Hanover Compression Inc., incorporated by reference to Exhibit 10.54 to the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22, 2000. 10.22 Guarantee, dated as of October 27, 2000 made by the Company, Hanover Compression Inc. and certain subsidiaries, incorporated by reference to Exhibit 10.55 to the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22, 2000. 10.23 Participation Agreement, dated as of October 27, 2000, among Hanover Compression Inc., the 2000B Trust, 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, incorporated by reference to Exhibit 10.56 to the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22, 2000. 10.24 Security Agreement, dated as of October 27, 2000, made by the 2000B Trust in favor of The Chase Manhattan Bank as agent for the lenders, incorporated by reference to Exhibit 10.57 to the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22, 2000. 10.25 Assignment of Leases, Rents and Guarantee, dated as of October 27, 2000, made by the 2000B Trust to The Chase Manhattan Bank as agent for the lenders, incorporated by reference to Exhibit 10.58 to the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22, 2000.
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Exhibit Number Description - ------- ----------- 10.26 Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A (the "2001A Trust") and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.64 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.27 Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.65 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.28 Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001A Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.66 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.29 Security Agreement, dated as of August 31, 2001, made by the 2001A Trust in favor Wilmington Trust FSB as agent, incorporated by reference to Exhibit 10.67 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.30 Assignment of Leases, Rents and Guarantee from the 2001A Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.68 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.31 Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among the 2001A Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.69 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.32 Hanover Equipment Trust 2001A Exchange and Registration Rights Agreement, dated August 30, 2001, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement (File No. 333-75814) on Form S-4 filed with the SEC on December 21, 2001. 10.33 Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001B (the "2001B Trust") and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.70 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.34 Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.71 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.35 Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001B Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.72 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.36 Security Agreement, dated as of August 31, 2001, made by the 2001B Trust in favor of Wilmington Trust FSB as agent, incorporated by reference to Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.37 Assignment of Leases, Rents and Guarantee from the 2001B Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.74 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.38 Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among the 2001B Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.75 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
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Exhibit Number Description - ------- ----------- 10.39 The 2001B Trust Exchange and Registration Rights Agreement, dated August 30, 2001, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement (File No. 333-75818) on Form S-4 filed with the SEC on December 21, 2001. 10.40 Amendment and Consent, dated as of June 26, 2000, to (i) the Amended and Restated Senior Credit Agreement dated March 13, 2000, among the Company, Hanover Compression Inc., the Chase Manhattan Bank, as agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees referenced in the amendment.* 10.41 Second Amendment, dated as of August 30, 2000, to (i) the Amended and Restated Senior Credit Agreement dated March 13, 2000, among the Company, Hanover Compression Inc., the Chase Manhattan Bank, as agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees referenced in the amendment.* 10.42 First Amendment, dated as of January 31, 2001, to (i) the Amended and Restated Senior Credit Agreement dated March 13, 2000, among the Company, Hanover Compression Inc., the Chase Manhattan Bank, as agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees referenced in the amendment.* 10.43 Second Amendment, dated as of July 27, 2001, to (i) the Credit Agreement, dated as of December 15, 1997, as amended and restated on March 13, 2000, among the Company, Hanover Compression Inc., the Chase Manhattan Bank, as administrative agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees referenced in the amendment.* 10.44 Third Amendment to certain Guarantees, dated as of December 3, 2001, among the Company, certain of the Company's subsidiaries, JPMorgan Chase Bank, as agent, and several banks and other financial institutions parties thereto, incorporated by reference to Exhibit 10.80 to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2001. 10.45 Waiver and Amendment, dated as of March 15, 2002, to (i) the Credit Agreement dated as of December 15, 1997, as amended and restated on December 3, 2002, among the Company, Hanover Compression Inc., the Chase Manhattan Bank, and the lenders parties thereto and (ii) certain Synthetic Guarantees referenced in the amendment.* 10.46 Indenture for the Convertible Junior Subordinated Debentures due 2029, dated as of December 15, 1999, among the Company, as issuer, and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.6 to the Company's Registration Statement (File No. 333-30344) on Form S-3 filed with the SEC on February 14, 2000. 10.47 Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred Securities, incorporated by reference to Exhibit 4.8 to the Company's Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000. 10.48 Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029, incorporated by reference to Exhibit 4.9 to the Company's Registration Statement (File No. 333- 30344) on Form S-3 as filed with the SEC on February 14, 2000. 10.49 Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee, incorporated by reference to Exhibit 4.10 to the Company's Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000. 10.50 Common Securities Guarantee Agreement, dated as of December 15, 1999, by the Company, as guarantor, for the benefit of the holders of common securities of Hanover Compressor Capital Trust, incorporated by reference to Exhibit 4.11 to the Company's Registration Statement (File No. 333- 30344) on Form S-3 as filed with the SEC on February 14, 2000.
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Exhibit Number Description - ------- ----------- 10.51 Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of December 15, 1999, among the Company, as sponsor, Wilmington Trust Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative trustees, incorporated by reference to Exhibit 4.5 to the Company's Registration Statement (File No. 333-30344) on Form S-3 filed with the SEC on February 14, 2000. 10.52 Form of Indenture for the 4.75% Convertible Senior Notes due 2008, dated as of , 2001 between the Company and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.4 to the Company's Registration Statement (File No. 333-54942) on Form S-3, as filed with the SEC on February 27, 2001. 10.53 Purchase Agreement, dated as of July 11, 2000, among the Company, Hanover Compression Inc., Dresser-Rand Company and Ingersoll-Rand Company, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the SEC on September 14, 2000. 10.54 Agreement and Plan of Merger, dated as of July 13, 2000, among the Company, Caddo Acquisition Corporation, and OEC Compression Corporation, incorporated by reference to Exhibit 10.51 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 10.55 Amendment No. 1 to Agreement and Plan of Merger, dated as of November 14, 2000, by and among the Company, Caddo Acquisition Corporation and OEC Compression Corporation, incorporated by reference to Exhibit 10.51 to the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on November 28, 2000. 10.56 Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.63 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 10.57 Schedule 1.2(c) to Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Sarevco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on February 6, 2003. 10.58 Amendment No. 1, dated as of August 31, 2001, to Purchase Agreement among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed with the SEC on September 14, 2001. 10.59 Most Favored Supplier and Alliance Agreement, dated August 31, 2001, among Schlumberger Oilfield Holdings Limited, Schlumberger Technology Corporation and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K filed with the SEC on September 14, 2001. 10.60 Lock-Up, Standstill and Registration Rights Agreement, dated as of August 31, 2001, by and among Schlumberger Technology Corporation, Camco International, Inc., Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Operational Services, Inc. and the Company, incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K filed with the SEC on September 14, 2001. 10.61 Hanover Compressor Company Subordinated Promissory Note, dated August 31, 2001, in favor of Camco International, Inc.* 10.62 Agreement by and among SJMB, L.P., Charles Underbrink, John L. Thompson, Belleli Energy S.r.l. and Hanover Compressor Company and certain of its subsidiaries dated September 20, 2002.* 10.63 Hanover Compressor Company 1992 Stock Compensation Plan.*++
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Exhibit Number Description - ------- ----------- 10.64 Hanover Compressor Company Senior Executive Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.65 Hanover Compressor Company 1993 Management Stock Option Plan, incorporated by reference to Exhibit 10.5 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.66 Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.6 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended. 10.67 Amendment and Restatement of the Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.7 to the Company's Registration Statement (File No. 333- 24953) on Form S-1, as amended.++ 10.68 Hanover Compressor Company 1995 Employee Stock Option Plan, incorporated by reference to Exhibit 10.8 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.69 Hanover Compressor Company 1995 Management Stock Option Plan, incorporated by reference to Exhibit 10.9 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.70 Form of Stock Option Agreement for DeVille and McNeil.* 10.71 Form of Stock Option Agreements for Wind Bros.* 10.72 Hanover Compressor Company 1996 Employee Stock Option Plan, incorporated by reference to Exhibit 10.10 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.73 Hanover Compressor Company 1997 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.23 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.74 1997 Stock Purchase Plan, incorporated by reference to Exhibit 10.24 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.++ 10.75 Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.76 Hanover Compressor Company December 9, 1998 Stock Option Plan, incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.++ 10.77 Applied Process Solutions Incorporated Amended 1998 Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on January 9, 2001. 10.78 Amendment to Stock Option Agreement Under the Applied Process Solutions Incorporated Amended 1998 Stock Option Plan, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed with the SEC on January 9, 2001. 10.79 Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement (File No. 333-32096) on Form S-8 filed with the SEC on March 10, 2000.++ 10.80 Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement (File No. 333-73904) on Form S-8 filed with the SEC on November 21, 2001.++
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Exhibit Number Description - ------- ----------- 10.81 Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the Company, incorporated by reference to Exhibit 10.3 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended. 10.82 Employment Letter with John E. Jackson, dated February 1, 2002, incorporated by reference to Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.++ 10.83 Letter Agreement by and among Michael J. McGhan, Hanover Compressor Company and Herndon Plant Oakley Ltd., dated July 30, 2002, incorporated by reference to Exhibit 10.76 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.++ 10.84 Separation Agreement among Michael J. McGhan, the Company and Hanover Compression Limited Partnership, dated August 1, 2002, incorporated by reference to Exhibit 10.77 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.++ 10.85 Separation Agreement among Charles D. Erwin, the Company and Hanover Compression Limited Partnership, dated August 2, 2002, incorporated by reference to Exhibit 10.78 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.++ 10.86 Employment Letter with Mark S. Berg, dated April 17, 2002, incorporated by reference to Exhibit 10.74 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.++ 10.87 Employment Letter with Chad C. Deaton, dated August 19, 2002, incorporated by reference to Exhibit 10.79 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.++ 10.88 Stock Option Agreement for Mr. Berg dated May 6, 2002.*++ 10.89 Stock Option Agreement for Mr. Deaton dated August 19, 2002.*++ 10.90 Stock Option Agreement for Mr. Grijalva dated March 19, 2002.*++ 10.91 Stock Option Agreement for Mr. Jackson dated January 22, 2002.*++ 10.92 Letter Agreement by and between Robert O. Pierce and Hanover Compressor Company dated September 18, 2002.*++ 12.1 Computation of ratio of earnings to fixed charges* 21.1 List of Subsidiaries* 23.1 Consent of PricewaterhouseCoopers LLP* 99.1 Letter from GKH partners regarding wind-up of GKH Investments, L.P. and GKH Private Limited, dated October 15, 2001, incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on October 18, 2001. 99.2 Letter from GKH Partners, L.P. to Mark S. Berg, Senior Vice President and General Counsel of the Company, dated November 12, 2002, incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on November 15, 2002. 99.3 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 99.4 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
- -------- * Filed herewith. ++ Management contract or compensatory plan or arrangement 64 (b) Reports submitted on Form 8-K. 1. A report on Form 8-K was filed on December 31, 2002, which reported under the caption "Item 5--Other Events" the completion by the Company of a review of business operations to address staffing needs. The date of such report (the date of the earliest event reported) was December 30, 2002. 2. A report on Form 8-K was filed on December 4, 2002, which reported the notification from GKH Investments L.P. and affiliated entities of their decision to distribute shares of Hanover common stock to partners. The date of such report (the date of the earliest event reported) was December 3, 2002. 3. A report on Form 8-K was filed on November 15, 2002, which reported the Company's update on the status of the SEC inquiry. The date of such report (the date of the earliest event reported) was November 14, 2002. 4. A report on Form 8-K was filed on November 15, 2002, which reported a notification from GKH Investments L.P. relating to the extension of the winding-up process of the partnership. The date of such report (the date of the earliest event reported) was November 12, 2002. 5. A report on Form 8-K was filed on November 1, 2002, which reported under the caption "Item 5--Other Events" the Company's financial results for the third quarter ended September 30, 2002. This report also included a Consolidated Statement of Income (Loss) for the quarter ended September 30, 2002. The date of such report (the date of the earliest event reported) was October 31, 2002. 6. A report on Form 8-K was filed on October 24, 2002, which reported the restatement of 1999 financial results. The date of such report (the date of the earliest event reported) was October 23, 2002. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HANOVER COMPRESSOR COMPANY By: /s/ CHAD C. DEATON ----------------------------- Chad C. Deaton President and Chief Executive Officer Date: March 31, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ CHAD C. DEATON President and Chief Executive March 31, 2003 - ----------------------------- Officer (Principal Chad C. Deaton Executive Officer and Director) /s/ JOHN E. JACKSON Chief Financial Officer March 31, 2003 - ----------------------------- (Principal Financial and John E. Jackson Accounting Officer) /s/ VICTOR E. GRIJALVA Director March 31, 2003 - ----------------------------- Victor E. Grijalva /s/ TED COLLINS, JR. Director March 31, 2003 - ----------------------------- Ted Collins, Jr. /s/ ROBERT R. FURGASON Director March 31, 2003 - ----------------------------- Robert R. Furgason /s/ MELVYN N. KLEIN Director March 31, 2003 - ----------------------------- Melvyn N. Klein /s/ MICHAEL A. O'CONNOR Director March 31, 2003 - ----------------------------- Michael A. O'Connor /s/ ALVIN V. SHOEMAKER Director March 31, 2003 - ----------------------------- Alvin V. Shoemaker /s/ I. JON BRUMLEY Director March 31, 2003 - ----------------------------- I. Jon Brumley /s/ GORDON HALL Director March 31, 2003 - ----------------------------- Gordon Hall /s/ RENE HUCK Director March 31, 2003 - ----------------------------- Rene Huck 66 Certifications I, Chad C. Deaton, certify that: 1. I have reviewed this annual report on Form 10-K of Hanover Compressor Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ CHAD C. DEATON ------------------------- Name: Chad C. Deaton Title: President and Chief Executive Officer (Principal Executive Officer) 67 I, John E. Jackson, certify that: 1. I have reviewed this annual report on Form 10-K of Hanover Compressor Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ JOHN E. JACKSON -------------------------- Name: John E. Jackson Title: Senior President and Chief Financial Officer (Principal Financial and Accounting Officer) 68 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Hanover Compressor Company In our opinion, the accompanying consolidated financial statements listed on the index appearing under Item15(a)(1) on page 57, present fairly, in all material respects, the financial position of Hanover Compressor Company and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 57 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 9 and 20 to the financial statements, the Company changed its method of accounting for goodwill and other intangibles in 2002 and derivatives in 2001, respectively. As discussed in Notes 22 and 23, the December 31, 2001 and 2000 consolidated financial statements have been restated for certain revenue recognition matters. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 26, 2003 F-1 HANOVER COMPRESSOR COMPANY CONSOLIDATED BALANCE SHEET
December 31, ------------------------ 2002 2001 ---------- ---------- Restated (See Notes 22 and 23) (in thousands, except par ASSETS value and share amounts) Current assets: Cash and cash equivalents.................................................... $ 19,011 $ 23,191 Accounts receivable, net..................................................... 211,722 272,450 Inventory, net............................................................... 166,004 215,655 Costs and estimated earnings in excess of billings on uncompleted contracts.. 57,346 59,099 Prepaid taxes................................................................ 7,664 19,990 Assets held for sale......................................................... 69,408 -- Other current assets......................................................... 49,933 24,719 ---------- ---------- Total current assets..................................................... 581,088 615,104 Property, plant and equipment, net.............................................. 1,167,675 1,151,513 Goodwill, net................................................................... 180,519 242,178 Intangible and other assets..................................................... 74,058 78,653 Investments in non-consolidated affiliates...................................... 150,689 178,328 ---------- ---------- Total assets............................................................. $2,154,029 $2,265,776 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt......................................... $ 33,741 $ 5,553 Accounts payable, trade...................................................... 72,637 119,077 Accrued liabilities.......................................................... 189,639 155,108 Advance billings............................................................. 36,156 53,140 Liabilities held for sale.................................................... 22,259 -- Billings on uncompleted contracts in excess of costs and estimated earnings.. 14,571 7,152 ---------- ---------- Total current liabilities................................................ 369,003 340,030 Long-term debt.................................................................. 521,203 504,260 Other liabilities............................................................... 137,332 130,276 Deferred income taxes........................................................... 112,472 165,492 ---------- ---------- Total liabilities........................................................ 1,140,010 1,140,058 ---------- ---------- Commitments and contingencies (Note 19) Minority interest............................................................... 143 -- Mandatorily redeemable convertible preferred securities......................... 86,250 86,250 Common stockholders' equity: Common stock, $.001 par value; 200,000,000 shares authorized; 80,815,209 and 79,228,179 shares issued, respectively..................................... 81 79 Additional paid-in capital................................................... 841,657 828,939 Notes receivable--employee stockholders...................................... -- (2,538) Deferred employee compensation - restricted stock grants..................... (2,285) -- Accumulated other comprehensive loss......................................... (13,696) (6,557) Retained earnings............................................................ 104,194 220,262 Treasury stock--253,115 and 75,739 common shares, at cost, respectively...... (2,325) (717) ---------- ---------- Total common stockholders' equity............................................ 927,626 1,039,468 ---------- ---------- Total liabilities and common stockholders' equity........................ $2,154,029 $2,265,776 ========== ==========
The accompanying notes are an integral part of these financial statements. F-2 HANOVER COMPRESSOR COMPANY CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, --------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Restated Restated (See Notes 22 and 23) (in thousands, except per share amounts) Revenues: Domestic rentals................................................................ $ 328,600 $ 269,679 $ 172,517 International rentals........................................................... 189,700 131,097 81,320 Parts, service and used equipment............................................... 223,845 214,872 113,526 Compressor and accessory fabrication............................................ 114,009 223,519 90,270 Production and processing equipment fabrication................................. 149,656 184,040 79,121 Equity in income of non-consolidated affiliates................................. 18,811 9,350 3,518 Gain on change in interest in non-consolidated affiliate........................ -- -- 864 Other........................................................................... 4,189 8,403 5,688 ---------- ---------- ---------- 1,028,810 1,040,960 546,824 ---------- ---------- ---------- Expenses: Domestic rentals................................................................ 120,740 95,203 60,336 International rentals........................................................... 57,579 45,795 27,656 Parts, service and used equipment............................................... 179,844 152,701 79,958 Compressor and accessory fabrication............................................ 99,446 188,122 76,754 Production and processing equipment fabrication................................. 127,442 147,824 62,684 Selling, general and administrative............................................. 153,676 92,172 51,768 Foreign currency translation.................................................... 16,753 6,658 -- Change in fair value of derivative financial instruments........................ (3,245) 7,596 -- Other........................................................................... 27,607 9,727 -- Depreciation and amortization................................................... 151,181 88,823 52,188 Goodwill impairment............................................................. 52,103 -- -- Leasing expense................................................................. 94,751 70,435 45,484 Interest expense................................................................ 36,978 17,531 8,679 Distributions on mandatorily redeemable convertible preferred securities........ 6,374 6,373 6,369 ---------- ---------- ---------- 1,121,229 928,960 471,876 ---------- ---------- ---------- Income (loss) from continuing operations before income taxes........................ (92,419) 112,000 74,948 Provision for (benefit from) income taxes........................................... (17,576) 42,388 27,818 ---------- ---------- ---------- Income (loss) from continuing operations............................................ (74,843) 69,612 47,130 Income (loss) from discontinued operations, net of tax.............................. (875) 2,965 2,509 Loss from write down of discontinued operations, net of tax......................... (40,350) -- -- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting change......................... (116,068) 72,577 49,639 Cumulative effect of accounting change for derivative instruments, net of tax....... -- (164) -- ---------- ---------- ---------- Net income (loss)................................................................... $ (116,068) $ 72,413 $ 49,639 ========== ========== ========== Diluted net income (loss) per share: Net income (loss)............................................................... $ (116,068) $ 72,413 $ 49,639 (Income) loss from discontinued operations, net of tax.......................... 41,225 (2,965) (2,509) Distributions on mandatorily redeemable convertible preferred securities, net of tax......................................................................... -- 4,142 -- ---------- ---------- ---------- Net income (loss) for purposes of computing diluted net income (loss) per share from continuing operations......................................................... $ (74,843) $ 73,590 $ 47,130 ========== ========== ========== Basic earnings (loss) per common share: Income (loss) from continuing operations........................................ $ (0.94) $ 0.96 $ 0.76 Income (loss) from discontinued operations...................................... (0.52) 0.04 0.04 ---------- ---------- ---------- Net income (loss)................................................................... $ (1.46) $ 1.00 $ 0.80 ========== ========== ========== Diluted earnings (loss) per common share: Income (loss) from continuing operations........................................ $ (0.94) $ 0.91 $ 0.71 Income (loss) from discontinued operations...................................... (0.52) 0.03 0.04 ========== ========== ========== Net income (loss)................................................................... $ (1.46) $ 0.94 $ 0.75 ========== ========== ========== Weighted average common and equivalent shares outstanding: Basic........................................................................... 79,500 72,355 61,831 ========== ========== ========== Diluted......................................................................... 79,500 81,175 66,366 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-3 HANOVER COMPRESSOR COMPANY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, -------------------------------- 2002 2001 2000 ---------- -------- -------- Restated Restated (See Notes 22 and 23) (in thousands) Net income (loss)....................................................... $ (116,068) $ 72,413 $ 49,639 Other comprehensive income (loss): Change in fair value of derivative financial instruments, net of tax. (8,866) (6,073) -- Foreign currency translation adjustment.............................. 1,727 (27) (146) ---------- -------- -------- Comprehensive income (loss)............................................. $ (123,207) $ 66,313 $ 49,493 ========== ======== ========
The accompanying notes are an integral part of these financial statements. F-4 HANOVER COMPRESSOR COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, -------------------------------- 2002 2001 2000 ---------- --------- --------- Restated Restated (See Notes 22 and 23) (in thousands) Cash flows from operating activities: Net income (loss)............................................................... $ (116,068) $ 72,413 $ 49,639 Adjustments: Depreciation and amortization................................................ 151,181 88,823 52,188 Amortization of debt issuance costs and debt discount........................ 121 831 1,050 (Income) loss from discontinued operations, net of tax....................... 41,225 (2,965) (2,509) Bad debt expense............................................................. 7,091 4,860 3,198 Gain on sale of property, plant and equipment................................ (7,769) (3,492) (10,421) Equity in income of non-consolidated affiliates, net of dividends received.................................................................... (2,223) (9,350) (3,518) Loss (gain) on investments and charges for non-consolidated affiliates....... 15,950 4,629 (864) (Gain) loss on derivative instruments........................................ (3,245) 7,849 -- Provision for inventory impairment and reserves.............................. 13,853 2,336 -- Write down of notes receivable............................................... 8,454 -- -- Goodwill impairment.......................................................... 52,103 -- -- Restricted stock compensation expense........................................ 423 -- -- Pay-in-kind interest on Schlumberger note.................................... 17,163 4,285 -- Deferred income taxes........................................................ (19,041) 30,218 27,882 Changes in assets and liabilities, excluding business combinations: Accounts receivable and notes............................................. 89,457 (20,671) (82,767) Inventory................................................................. 4,699 (41,186) (36,376) Costs and estimated earnings versus billings on uncompleted contracts................................................................ 33,129 (32,640) (7,964) Accounts payable and other liabilities.................................... (67,132) 14,745 42,657 Advance billings.......................................................... (8,394) 20,647 (4,156) Other..................................................................... (16,101) 4,565 13,420 ---------- --------- --------- Net cash provided by continuing operations............................. 194,876 145,897 41,459 Net cash provided by (used in) discontinued operations................. 841 6,877 (11,713) ---------- --------- --------- Net cash provided by operating activities.............................. 195,717 152,774 29,746 ---------- --------- --------- Cash flows from investing activities: Capital expenditures............................................................ (250,170) (639,883) (274,858) Payments for deferred lease transaction costs................................... (1,568) (18,177) (4,547) Proceeds from sale of property, plant and equipment............................. 69,685 590,763 410,915 Proceeds from sale of investment in non-consolidated affiliates................. -- 3,143 -- Cash used for business acquisitions, net........................................ (10,440) (386,056) (162,355) Cash returned from non-consolidated affiliates.................................. 17,429 -- -- Cash used to acquire investments in and advances to unconsolidated affiliates... -- (11,865) (4,071) ---------- --------- --------- Net cash used in continuing operations................................. (175,064) (462,075) (34,916) Net cash used in discontinued operations............................... (18,639) (20,202) (32,565) ---------- --------- --------- Net cash used in investing activities.................................. (193,703) (482,277) (67,481) ---------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) on revolving credit facility........................ (500) 54,500 40,400 Payments for debt issue costs................................................... (644) (3,390) -- Issuance of common stock, net................................................... -- 83,850 59,400 Purchase of treasury stock...................................................... (1,608) -- -- Proceeds from warrant conversions and stock options exercised................... 6,661 2,280 3,608 Proceeds from employee stock purchase........................................... 277 -- -- Issuance of convertible senior notes, net....................................... -- 185,537 -- Repayment of other debt......................................................... (7,654) (15,571) (27,641) Proceeds from employee stockholder notes........................................ 120 62 1,876 ---------- --------- --------- Net cash provided by (used in) continuing operations................... (3,348) 307,268 77,643 Net cash used in discontinued operations............................... (884) (9) (54) ---------- --------- --------- Net cash provided by (used in) financing activities.................... (4,232) 307,259 77,589 ---------- --------- --------- Effect of exchange rate changes on cash and equivalents............................. (1,962) (49) (126) ---------- --------- --------- Net increase (decrease) in cash and cash equivalents................................ (4,180) (22,293) 39,728 Cash and cash equivalents at beginning of year...................................... 23,191 45,484 5,756 ---------- --------- --------- Cash and cash equivalents at end of year............................................ $ 19,011 $ 23,191 $ 45,484 ========== ========= =========
F-5 HANOVER COMPRESSOR COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, ------------------------------ 2002 2001 2000 -------- --------- --------- Restated Restated (See Notes 22 and 23) (in thousands) Supplemental disclosure of cash flow information: Interest paid, net of capitalized amounts.............. $ 16,817 $ 5,707 $ 7,051 ======== ========= ========= Income taxes paid (refunded), net...................... $ (4,212) $ 1,723 $ 1,639 ======== ========= ========= Supplemental disclosure of noncash transactions: Debt (paid) issued for property, plant and equipment... $ (4,352) -- $ 12,922 ======== ========= Assets (received) sold in exchange for note receivable. $ 258 $ (1,601) $ 2,783 ======== ========= ========= Common stock issued in exchange for notes receivable... $ 274 $ 1,069 -- ======== ========= Conversion of deferred stock option liability.......... $ 253 $ 1,529 -- ======== ========= Acquisitions of businesses: Property, plant and equipment acquired................. $ 11,716 $ 606,271 $ 202,358 ======== ========= ========= Other assets acquired, net of cash acquired............ $102,204 $ 87,865 $ 77,097 ======== ========= ========= Investments in non-consolidated affiliates............. -- $ 140,081 -- ========= Goodwill............................................... $ 5,162 $ 115,131 $ 91,560 ======== ========= ========= Liabilities assumed.................................... $(72,209) $(118,388) $ (63,057) ======== ========= ========= Debt issued or assumed................................. $(36,433) $(155,462) -- ======== ========= Deferred taxes......................................... -- $ (35,212) $ (9,029) ========= ========= Treasury and common stock issued....................... -- $(254,230) $(136,574) ========= =========
The accompanying notes are an integral part of these financial statements. F-6 HANOVER COMPRESSOR COMPANY CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000
Accumulated Notes Deferred Common stock Additional other receivable- compensation- ----------------- paid-in comprehensive Treasury employee restricted stock Shares Amount capital income (loss) stock stockholders grants ---------- ------ ---------- ------------- -------- ------------ ---------------- (in thousands, except share data) Balance at December 31, 1999 (Restated See Notes 22 and 23)....... 57,505,874 $58 $272,944 $ (311) $(1,586) $(3,387) $ -- Conversion of warrants................ 684,770 Exercise of stock options............. 994,572 1 3,607 -- -- -- -- Cumulative translation adjustment..... -- -- -- (146) -- -- -- Issuance of common stock, net......... 2,000,000 2 59,398 -- -- -- -- Issuance of common stock for acquisitions......................... 5,269,487 5 136,569 -- -- -- -- Issuance of 91,727 treasury shares at $35.98 per share..................... -- -- 2,431 -- 869 -- -- Repayment of employee stockholder notes................................ -- -- -- -- -- 1,876 -- Income tax benefit from stock options exercised............................ -- -- 8,813 -- -- -- -- Other................................. -- -- (25) -- -- (20) -- Net income............................ -- -- -- -- -- -- -- ---------- --- -------- -------- ------- ------- ------- Balance at December 31, 2000 (Restated See Notes 22 and 23)....... 66,454,703 $66 $483,737 $ (457) $ (717) $(1,531) $ -- Exercise of stock options............. 250,161 1 3,808 -- -- -- -- Cumulative translation adjustment..... -- -- -- (27) -- -- -- Change in fair value of derivative financial instrument, net of tax..... -- -- -- (6,073) -- -- -- Issuance of common stock, net......... 2,500,000 2 83,848 -- -- -- -- Issuance of common stock for acquisitions......................... 9,980,540 10 254,220 -- -- -- -- Issuance of common stock to employees............................ 42,775 -- 1,069 -- -- (1,069) -- Repayment of employee stockholder notes................................ -- -- -- -- -- 62 -- Income tax benefit from stock options exercised............................ -- -- 1,618 -- -- -- -- Other................................. -- -- 639 -- -- -- -- Net income............................ -- -- -- -- -- -- -- ---------- --- -------- -------- ------- ------- ------- Balance at December 31, 2001 (Restated see Note 23)............... 79,228,179 $79 $828,939 $ (6,557) $ (717) $(2,538) $ -- Exercise of stock options............. 1,422,850 2 6,912 -- -- -- -- Cumulative translation adjustment..... -- -- -- 1,727 -- -- -- Change in fair value of derivative financial instrument, net of tax..... -- -- -- (8,866) -- -- -- Issuance of restricted stock grants... 142,630 -- 2,708 -- -- -- (2,285) Issuance of common stock to employees............................ 21,550 -- 551 -- -- (274) -- Purchase of 147,322 treasury shares at $8.96 per share...................... -- -- -- -- (1,320) -- -- Purchase of 30,054 treasury shares at $9.60 per share...................... -- -- -- -- (288) -- -- Repayment of employee stockholder notes................................ -- -- -- -- -- 120 -- Income tax benefit from stock options exercised............................ -- -- 2,547 -- -- -- -- Reserve for collectibility............ -- -- -- -- -- 2,692 -- Net loss.............................. -- -- -- -- -- -- -- ---------- --- -------- -------- ------- ------- ------- Balance at December 31, 2002.......... 80,815,209 $81 $841,657 $(13,696) $(2,325) $ -- $(2,285) ========== === ======== ======== ======= ======= =======
Retained earnings --------- Balance at December 31, 1999 (Restated See Notes 22 and 23)....... $ 98,210 Conversion of warrants................ Exercise of stock options............. -- Cumulative translation adjustment..... -- Issuance of common stock, net......... -- Issuance of common stock for acquisitions......................... -- Issuance of 91,727 treasury shares at $35.98 per share..................... -- Repayment of employee stockholder notes................................ -- Income tax benefit from stock options exercised............................ -- Other................................. -- Net income............................ 49,639 --------- Balance at December 31, 2000 (Restated See Notes 22 and 23)....... $ 147,849 Exercise of stock options............. -- Cumulative translation adjustment..... -- Change in fair value of derivative financial instrument, net of tax..... -- Issuance of common stock, net......... -- Issuance of common stock for acquisitions......................... -- Issuance of common stock to employees............................ -- Repayment of employee stockholder notes................................ -- Income tax benefit from stock options exercised............................ -- Other................................. -- Net income............................ 72,413 --------- Balance at December 31, 2001 (Restated see Note 23)............... $ 220,262 Exercise of stock options............. -- Cumulative translation adjustment..... -- Change in fair value of derivative financial instrument, net of tax..... -- Issuance of restricted stock grants... -- Issuance of common stock to employees............................ -- Purchase of 147,322 treasury shares at $8.96 per share...................... -- Purchase of 30,054 treasury shares at $9.60 per share...................... -- Repayment of employee stockholder notes................................ -- Income tax benefit from stock options exercised............................ -- Reserve for collectibility............ -- Net loss.............................. (116,068) --------- Balance at December 31, 2002.......... $ 104,194 =========
The accompanying notes are an integral part of these financial statements. F-7 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 1. The Company, Business and Significant Accounting Policies Hanover Compressor Company, through its indirect wholly owned subsidiary Hanover Compression Limited Partnership and its subsidiaries, ("Hanover", "the Company", or "We") is a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for contract natural gas handling applications. We sell this equipment, and provide it on a rental, contract compression, maintenance and acquisition leaseback basis to natural gas production, processing and transportation companies. In conjunction with our maintenance business, we have developed a parts and service business that together can provide solutions to customers that own their own compression equipment, but want to outsource their operations. We also have compressor and oil and gas production equipment fabrication and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. Founded in 1990, and a public company since 1997, our customers include both major and premier independent oil and gas producers and distributors, as well as national oil and gas companies. Principles of Consolidation The accompanying consolidated financial statements include Hanover and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated entities in which the Company owns more than a 20% interest and does not have a controlling interest are accounted for using the equity method. Investments in entities in which the company owns less than 20% are held at cost. Prior year amounts have been reclassified to present certain of our businesses as discontinued operations. (See Note 3.) Use of Estimates in the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. Management believes that the estimates are reasonable. The Company's operations are influenced by many factors, including the global economy, international laws and currency exchange rates. Contractions in the more significant economies of the world could have a substantial negative impact on the rate of the Company's growth and its profitability. Acts of war or terrorism could influence these areas of risk and the Company's operations. Doing business in foreign locations subjects the Company to various risks and considerations typical to foreign enterprises including, but not limited to, economic and political conditions in the United States and abroad, currency exchange rates, tax laws and other laws and trade restrictions. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Revenue Recognition Revenue from equipment rentals is recorded when earned over the period of rental and maintenance contracts which generally range from one month to five years. Parts, service and used equipment revenue is recorded as products are delivered and title is transferred or services are performed for the customer. F-8 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Compressor, production and processing equipment fabrication revenue is recognized using the percentage-of-completion method. The Company estimates percentage-of-completion for compressor and processing equipment fabrication on a direct labor hour-to-total- labor-hour basis. Production equipment fabrication percentage-of-completion is estimated using the cost-to-total cost basis. The average duration of these projects is typically between four to six months. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, advances to non-consolidated affiliates and notes receivable. The Company believes that the credit risk in temporary cash investments that the Company has with financial institutions is minimal. Trade accounts and notes receivable are due from companies of varying size engaged principally in oil and gas activities throughout the world. The Company reviews the financial condition of customers prior to extending credit and generally does not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry standards. The Company considers this credit risk to be limited due to these companies' financial resources, the nature of products and the services it provides them and the terms of its rental contracts. Trade accounts receivable is recorded net of estimated doubtful accounts of approximately $5,162,000 and $6,300,000 at December 31, 2002 and 2001, respectively. Inventory Inventory consists of parts used for fabrication or maintenance of natural gas compression equipment and facilities, processing and production equipment, and also includes compression units and production equipment that are held for sale. Inventory is stated at the lower of cost or market using the average-cost method. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives as follows: Compression equipment and facilities.... 4 to 30 years Buildings............................... 30 years Transportation, shop equipment and other 3 to 12 years
Major improvements that extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred. When property, plant and equipment is sold, retired or otherwise disposed of, the cost, net of accumulated depreciation is recorded in parts, service and used equipment expenses. Sales proceeds are recorded in parts, service and used equipment revenues. Interest is capitalized in connection with the compression equipment and facilities that are constructed for the Company's use in its rental operations until such equipment is complete. The capitalized interest is recorded as part of the assets to which it relates and is amortized over the asset's estimated useful life. After a review of the estimated economic lives of our compression fleet, on July 1, 2001 we changed our estimate of the useful life of certain compression equipment to range from 15 to 30 years instead of a uniform 15-year depreciable life. Our new estimated lives are based upon our experience, maintenance program and the different types of compressors presently in our rental fleet. The Company believes its new estimate reflects the economic useful lives of the compressors more accurately than a uniform useful life applied to all compressors regardless of their age or performance characteristics. The effect of this change in estimate on 2002 and 2001 F-9 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 was a decrease in depreciation expense of approximately $14,387,000 and $5,000,000 and an increase in net income of approximately $8,632,000 ($0.11 per share) and $3,100,000 ($0.04 per share), respectively. Computer software Certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated useful life of the software. Costs related to the preliminary project stage, data conversion and the post-implementation/operation stage of an internal-use computer software development project are expensed as incurred. Long-Lived Assets The Company reviews for the impairment of long-lived assets, including property, plant and equipment, intangibles and investments in non-consolidated affiliates whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss recognized represents the excess of the assets carrying value as compared to its estimated fair market value. Goodwill and Intangibles The excess of cost over net assets of acquired businesses is recorded as goodwill. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, amortization of goodwill over an estimated useful life is discontinued. Instead, goodwill will be reviewed for impairment annually or whenever events indicate impairment may have occurred. Prior to adoption of SFAS 142 on January 1, 2002, the Company amortized goodwill on a straight-line basis over 15 or 20 years commencing on the dates of the respective acquisitions except for goodwill related to business acquisitions after June 30, 2001. Accumulated amortization was $14,312,000 and $18,365,000 at December 31, 2002 and 2001, respectively. Amortization of goodwill totaled $ -0-, $10,101,000 and $4,442,000 in 2002, 2001 and 2000, respectively. (See Note 9.) Identifiable intangibles are amortized over the assets' estimated useful lives. Sale and Leaseback Transactions The Company from time to time enters into sale and leaseback transactions of compression equipment with special purpose entities. Sale and leaseback transactions of compression equipment are evaluated for lease classification in accordance with SFAS No. 13 "Accounting for Leases." The special purpose entities are not consolidated by the Company when the owners of the special purposes entities have made a substantial residual equity investment of at least three percent that is at risk during the entire term of the lease. Income Taxes The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than enactments that would change the tax law or rates. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. F-10 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Foreign Currency Translation The financial statements of subsidiaries outside the U.S., except those located in Latin America and highly inflationary economies, are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting gains and losses from the translation of accounts are included in accumulated other comprehensive income. For subsidiaries located in Latin America and highly inflationary economies, translation gains and losses are included in net income (loss). Earnings Per Common Share Basic earnings (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding for the period. Diluted earnings (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, warrants to purchase common stock, convertible senior notes and mandatorily redeemable convertible preferred securities, unless their effect would be anti-dilutive. The table below indicates the potential common shares issuable which were included in computing the dilutive potential common shares used in dilutive earnings (loss) per common share:
Years Ended December 31, -------------------- 2002 2001 2000 ------ ------ ------ (in thousands) Weighted average common shares outstanding--used in basic earnings (loss) per common share............................................ 79,500 72,355 61,831 Net dilutive potential common shares issuable: On exercise of options............................................ ** 3,991 4,258 On exercise of warrants........................................... ** 4 277 On conversion of mandatorily redeemable preferred securities...... ** 4,825 ** On conversion of convertible senior notes......................... ** ** ** ------ ------ ------ Weighted average common shares and dilutive potential common shares-- used in dilutive earnings (loss) per common share.................. 79,500 81,175 66,366 ====== ====== ======
- -------- ** Excluded from diluted earnings per common share as the effect would have been antidilutive. The table below indicates the potential common shares issuable which were excluded from diluted potential common shares as their effect would be anti-dilutive.
Years Ended December 31, ----------------- 2002 2001 2000 ----- ----- ----- (in thousands) Net dilutive potential common shares issuable: On exercise of options and restricted stock................... 2,442 -- -- On exercise of warrants....................................... 4 -- -- On conversion of mandatorily redeemable convertible preferred securities.................................................. 4,825 -- 4,825 On conversion of convertible senior notes..................... 4,370 3,399 --
F-11 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Stock-Based Compensation In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") the Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in APB Opinion No. 25 ("APB" 25), "Accounting for Stock Issued to Employees." The following proforma net income and earnings (loss) per share data illustrates the effect on net income (loss) and net income per share if the fair value method had been applied to all outstanding and unvested stock options in each period.
Years ended December 31, --------------------------- 2002 2001 2000 --------- ------- ------- (in thousands) Net income (loss) as reported........................... $(116,068) $72,413 $49,639 Add back: Restricted stock grant expense, net of tax. 275 -- -- Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax. (2,753) (3,804) (4,598) --------- ------- ------- Proforma net income (loss).............................. $(118,546) $68,609 $45,041 ========= ======= ======= Earnings (loss) per share: Basic as reported.................................... $ (1.46) $ 1.00 $ 0.80 Basic proforma....................................... $ (1.49) $ 0.95 $ 0.73 Diluted as reported.................................. $ (1.46) $ 0.94 $ 0.75 Diluted proforma..................................... $ (1.49) $ 0.90 $ 0.68
Comprehensive Income Components of comprehensive income (loss) are net income and all changes in equity during a period except those resulting from transactions with owners. Accumulated other comprehensive income consists of the foreign currency translation adjustment and changes in the fair value of derivative financial instruments, net of tax. At December 31, 2002, the Company's accumulated other comprehensive loss included $1,243,000 foreign currency translation gain and $14,939,000 loss on fair value of derivative instruments, net of tax. At December 31, 2001, the Company's accumulated other comprehensive loss included $484,000 foreign currency translation loss and $6,073,000 loss on fair value of derivative instruments, net of tax. Financial Instruments The Company utilizes derivative financial instruments to minimize the risks and/or costs associated with financial and global operating activities by managing its exposure to interest rate fluctuation on a portion of its leasing obligations. The Company does not utilize derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in the Consolidated Statements of Cash Flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137 and SFAS 138, requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. The Company adopted SFAS 133 beginning January 1, 2001. (See Note 20.) F-12 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Reclassifications Certain amounts in the prior years' financial statements have been reclassified to conform to the 2002 financial statement classification. These reclassifications have no impact on net income. 2. Business Combinations Acquisitions were accounted for under the purchase method of accounting. Results of operations of companies acquired are included from the date of acquisition. The Company allocates the cost of the acquired business to the assets acquired and the liabilities assumed based upon fair value estimates thereof. These estimates are revised during the allocation period as necessary when information regarding contingencies becomes available to redefine and requantify assets acquired and liabilities assumed. The allocation period varies for each acquisition but does not exceed one year. To the extent contingencies are resolved or settled during the allocation period, such items are included in the revised purchase price allocation. After the allocation period, the effect of changes in such contingencies is included in results of operations in the periods the adjustments are determined. Year Ended December 31, 2002 In July 2002, we increased our ownership of Belleli Energy S.r.l. ("Belleli") to 40.3% from 20.3% by converting a $4,000,000 loan, together with the accrued interest thereon, to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9,410,000 loan, together with the accrued interest thereon, to the other principal owner for additional equity ownership and began consolidating the results of Belleli's operations. The following table summarizes the estimated values of the assets acquired and liabilities assumed as of the acquisition date for the Belleli acquisition (in thousands):
Belleli November 2002 ------------- Current assets............... $ 86,799 Property, plant and equipment 11,836 Intangible assets............ 22,930 Goodwill..................... 3,641 --------- Total assets acquired........ 125,206 --------- Short-term debt.............. (36,433) Current liabilities.......... (58,367) Other liabilities............ (11,428) --------- Total liabilities assumed.... (106,228) --------- Net assets acquired.......... $ 18,978 =========
The Company is in the process of completing its valuation of Belleli's intangible assets. In connection with its increase in ownership in November 2002, the Company agreed to give the other principal owner the right to buy the Company's interest in Belleli. This right to buy the Company's interest expires on June 30, 2003. On July 1, 2003, the Company will have the right to purchase the other principal owner's interest. During 2002, the Company also purchased certain operating assets of Belleli for approximately $22,400,000 from a bankruptcy estate and leased these assets to Belleli for approximately $1,200,000 per year, for seven years, for use in its operations. F-13 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC ("Gates") for approximately $14,400,000 and had loaned approximately $6,000,000 to Gates prior to our acquisition. Gates is a developer and owner of a forty-six megawatt cycle peaking power facility in Fresno County, California. This investment is accounted for as a consolidated subsidiary. This investment has been classified as an asset held for sale and its operating results are reported in income (loss) from discontinued operations. (See Note 3.) In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC ("Panoche") for approximately $6,800,000 and had loaned approximately $5,000,000 to Panoche prior to the acquisition of our interest. Panoche is a developer and owner of a forty-nine megawatt cycle peaking power facility in Fresno County, California which is under contract with California Department of Water Resources. This investment is accounted under the equity method of accounting. This investment has been classified as an asset held for sale and the equity income from this non-consolidated subsidiary is reported in income (loss) from discontinued operations. (See Note 3.) In July 2002, we acquired certain assets of Voyager Compression Services, LLC for approximately $2,500,000 in cash. Year Ended December 31, 2001 In August 2001, we acquired 100% of the issued and outstanding shares of the Production Operators Corporation's natural gas compression business, ownership interests in certain joint venture projects in South America, and related assets ("POI") from Schlumberger for $761,000,000 in cash, Hanover common stock and indebtedness, subject to certain post-closing adjustments pursuant to the purchase agreement (the "POI Acquisition") which have resulted in an increase in the purchase price to approximately $778,000,000 due to an increase in net assets acquired. Under the terms of the definitive agreement, Schlumberger received approximately $270,000,000 in cash (excluding the amounts paid for the increase in net assets), $150,000,000 in a long-term subordinated note and approximately 8,708,000 Hanover common shares, or approximately 11% of the outstanding shares of Hanover common stock, which are required to be held by Schlumberger for at least three years following the closing date. The ultimate number of shares issued under the purchase agreement was determined based on the nominal value of $283,000,000 divided by the 30-day average closing price of Hanover common stock as defined under the agreement and subject to a collar of $41.50 and $32.50. The estimated fair value of the stock issued was $212,468,000, based on the market value of the shares at the time the number of shares issued was determined reduced by an estimated 20% discount due to the restrictions on the stock's marketability. Additionally, as part of the purchase agreement, the Company is required to make a payment of up to $58,000,000 due upon the completion of a financing of the PIGAP II South American joint venture ("PIGAP", see Note 19) acquired by the Company. Because the joint venture failed to execute the financing on or before December 31, 2002, Hanover had the right to put our interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by Hanover to the joint venture. In January 2003, we exercised our right to put our interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover's interest in the PIGAP II joint venture is subject to certain consents. We are currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. F-14 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The purchase price was a negotiated amount between the Company and Schlumberger and the Company expects the acquisition to be accretive to earnings in future periods. The Company believes the purchase price represents the fair market value of the POI business based on its assets, customer base, reputation, market position (domestic and international) and potential for long-term growth. The Company incurred approximately $14,975,000 in expenses in connection with the acquisition. The POI Acquisition was accounted for as a purchase and is included in our financial statements commencing on September 1, 2001. As of December 31, 2002 the Company has recorded approximately $70,592,000 in goodwill, of which none will be deductible for tax purposes, related to the POI acquisition which will not be amortized in accordance with the transition provisions of SFAS 142 (See Note 9). In addition, as of December 31, 2002, the Company recorded $9,810,000 in estimated value of identifiable intangible assets which $8,200,000 will be amortized over a 24 month weighted average life and $1,600,000 is included in our basis of the PIGAP joint venture and relates to the option to put the joint venture back to Schlumberger. The purchase price is subject to a contingent payment by Hanover to Schlumberger based on the realization of certain tax benefits by the Company over the next 15 years. In June 2001, we acquired the assets of J&R International for approximately $3,700,000 in cash and 17,598 shares of the Company's common stock valued at approximately $654,000. In April 2001, we acquired certain assets of Power Machinery, Inc. for approximately $2,569,000 in cash and 108,625 shares of the Company's common stock valued at approximately $3,853,000. In March 2001, we purchased OEC Compression Corporation ("OEC") in an all-stock transaction for approximately $101,849,000, including the assumption and payment of approximately $64,594,000 of OEC indebtedness. We paid an aggregate of approximately 1,145,706 shares of Hanover common stock to stockholders of OEC. The acquisition was accounted for under the purchase method of accounting and is included in our financial statements commencing in April 2001. During 2002 and 2001, the Company completed other acquisitions which were not significant either individually or in the aggregate. The following table summarizes the estimated values of the assets acquired and liabilities assumed as of the acquisition dates for the OEC and POI acquisitions (in thousands):
POI OEC August 2001 March 2001 ----------- ---------- Current assets............................ $ 80,091 $ 4,451 Property, plant and equipment............. 487,880 114,841 Intangible assets......................... 8,210 -- Goodwill.................................. 67,476 -- Investments in non-consolidated affiliates 140,081 -- -------- -------- Total assets acquired..................... 783,738 119,292 Current liabilities....................... (47,667) (3,114) Other liabilities......................... (20,978) (15,531) Long-term debt............................ -- (62,057) -------- -------- Total liabilities assumed................. (68,645) (80,702) -------- -------- Net assets acquired....................... $715,093 $ 38,590 ======== ========
F-15 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Year Ended December 31, 2000 In October 2000, the Company purchased the common stock of Servicios TIPSA S.A. for approximately $7,750,000 in cash and a $7,750,000 note payable. The note payable was repaid in January 2001. In September 2000, the Company purchased the Dresser-Rand Company's compression services division ("DR") for $177,000,000 including approximately $1,200,000 of acquisition costs. Under the terms of the agreement, $95,000,000 of the purchase price was paid in cash with the balance being paid through the issuance to Ingersoll-Rand of 2,919,681 shares of the Company's newly issued restricted common stock. The estimated value of the stock issued was approximately $80,539,000, based upon quoted market price for the Company's common stock reduced by a discount due to the restriction on the stock's marketability. The purchase price is subject to certain post-closing adjustments pursuant to the acquisition agreement which have resulted in approximately a $21,400,000 increase in the purchase price due to increases in the net assets acquired. In connection with the acquisition, the Company has agreed to purchase under normal business terms $25,000,000 worth of products, goods and services from Dresser-Rand Company over a three-year period beginning December 2001. In September 2000, the Company acquired the common stock of Gulf Coast Dismantling, Inc. for approximately $2,947,000 in cash and 9,512 shares of the Company's treasury stock valued at $300,000. In July 2000, the Company completed its acquisition of PAMCO Services International's natural gas compressor assets for approximately $45,210,000 in cash and a $12,922,000 note payable due on April 10, 2001. The note is payable periodically as idle horsepower is contracted. Approximately $10,599,000 of the note payable was repaid in 2000. In connection with the acquisition, the Company agreed to purchase under normal business terms specified levels of equipment over a three-year period beginning October 2000. In June 2000, the Company purchased common stock of Applied Process Solutions, Inc. ("APSI") for 2,303,294 shares of the Company's common stock and assumption of $16,030,000 of APSI's outstanding debt. The estimated value of the stock issued was approximately $54,816,000, based upon quoted market price for the Company's common stock reduced by a discount due to the restriction on the stock's marketability. The assumed debt has been repaid. In July 2000, the Company purchased the assets of Rino Equipment, Inc. and K&K Compression, Ltd. for approximately $15,679,000 in cash and 54,810 shares of the Company's treasury stock valued at $2,000,000. In July 2000, the Company purchased the common stock of Compression Components Corporation for approximately $7,972,000 in cash and 27,405 shares of the Company's treasury stock valued at $1,000,000. In March 2000, the Company purchased the common stock of Southern Maintenance Services, Inc. ("SMS") for approximately $1,500,000 in cash, 46,512 shares of the Company's common stock valued at $1,000,000 and $1,000,000 in notes payable that mature on March 1, 2003. F-16 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Pro Forma Information The pro forma information set forth below assumes the Belleli, POI, and OEC acquisitions are accounted for had the purchases occurred at the beginning of 2001. The remaining acquisitions were not considered material for pro forma purposes. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated at that time (in thousands, except per share amounts):
Years Ended December 31, ----------------------- 2002 2001 ----------- ----------- (unaudited) (unaudited) Revenue.................................. $1,108,990 $1,242,216 Net income (loss)........................ (116,262) 69,260 Earnings (loss) per common share--basic.. (1.46) 0.88 Earnings (loss) per common share--diluted (1.46) 0.84
3. Discontinued Operations During the fourth quarter of 2002, Hanover's Board of Directors approved management's plan to dispose of the Company's non-oilfield power generation projects, which were part of its domestic rental business, and certain used equipment businesses, which were part of the Company's parts and service business. These disposals meet the criteria established for recognition as discontinued operations under SFAS 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144 specifically requires that such amounts must represent a component of a business comprised of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. These businesses have been reflected as discontinued operations in the Company's Consolidated Statement of Operations for the year ended December 31, 2002 and prior period financial statements have been adjusted to reflect the impact of these discontinued operations. These assets are expected to be sold within one year of December 31, 2002 and the assets and liabilities are reflected as held-for-sale on the Company's Consolidated Balance Sheet. During the fourth quarter of 2002, Hanover recognized a pre-tax charge to discontinued operations of approximately $52,282,000 ($36,467,000 after tax) for the estimated loss in fair-value from carrying value expected to be realized at the time of disposal. This amount includes a $19,010,000 pre-tax impairment of goodwill. During the second quarter of 2002, Hanover recognized a pre-tax write-down of $6,000,000 ($3,883,000 after tax) for certain turbines related to the non-oilfield power generation business which has also been reflected as discontinued operations. F-17 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Summary of operating results of the discontinued operations (in thousands):
Years Ended December 31, ------------------------------ 2002 2001 2000 ------- -------- -------- Restated Restated (See Notes 22 and 23) Revenues and other: Domestic rentals........................................... $ 2,870 $ -- $ -- Parts, service and used equipment.......................... 20,197 29,168 15,840 Equity in income of non-consolidated affiliates............ 405 -- -- Other...................................................... 52 569 122 ------- ------- ------- 23,524 29,737 15,962 ------- ------- ------- Expenses: Domestic rentals........................................... 363 -- -- Parts, service and used equipment.......................... 13,485 14,136 8,336 Selling, general and administrative........................ 8,346 8,808 2,864 Depreciation and amortization.............................. 1,672 1,737 694 Interest expense........................................... 481 9 6 Other...................................................... 1,309 -- -- ------- ------- ------- 25,656 24,690 11,900 ------- ------- ------- Income (loss) from discontinued operations before income taxes (2,132) 5,047 4,062 Provision for (benefit from) income taxes..................... (1,257) 2,082 1,553 ------- ------- ------- Income (loss) from discontinued operations.................... $ (875) $ 2,965 $ 2,509 ======= ======= =======
Summary balance sheet data for discontinued operations as of December 31, 2002 (in thousands):
Non-Oilfield Used Power Equipment Generation Total --------- ------------ ------- Current assets...................... $20,099 $13,666 $33,765 Property plant and equipment........ 858 28,103 28,961 Non-current assets.................. -- 6,682 6,682 ------- ------- ------- Assets held for sale............. 20,957 48,451 69,408 ------- ------- ------- Current liabilities................. -- 3,257 3,257 Non-current liabilities............. -- 19,002 19,002 ------- ------- ------- Liabilities held for sale........ -- 22,259 22,259 ------- ------- ------- Net assets held for sale..... $20,957 $26,192 $47,149 ======= ======= =======
Goodwill associated with discontinued operations was $21,173,000 at December 31, 2001 net of accumulated amortization of $2,163,000. The goodwill was written off in connection with the write down of these operations to market value during the fourth quarter of 2002. (See Note 9.) F-18 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 4. Inventory Inventory consisted of the following amounts (in thousands):
December 31, ----------------- 2002 2001 -------- -------- Restated Parts and supplies $114,833 $146,877 Work in progress.. 37,790 46,091 Finished goods.... 13,381 22,687 -------- -------- $166,004 $215,655 ======== ========
During the year ended December 31, 2002, we recorded approximately $13,853,000 in inventory write downs and reserves for parts inventory which was either obsolete, excess or carried at a price above market value. As of December 31, 2002 and 2001, we had inventory reserves of $14,211,000 and $2,101,000, respectively. 5. Compressor and Production Equipment Fabrication Contracts Costs, estimated earnings and billings on uncompleted contracts consisted of the following (in thousands):
December 31, -------------------- 2002 2001 --------- --------- Costs incurred on uncompleted contracts $ 234,670 $ 129,952 Estimated earnings..................... 21,073 25,654 --------- --------- 255,743 155,606 Less--billings to date................. (212,968) (103,659) --------- --------- $ 42,775 $ 51,947 ========= =========
The increase in the costs and billings on uncompleted contracts was due to the consolidation of Belleli, when the Company increased its ownership to 51%. (See Note 2.) Presented in the accompanying financial statements as follows (in thousands):
December 31, --------------------- 2002 2001 --------- ---------- Costs and estimated earnings in excess of billings on uncompleted contracts....................................................... $ 57,346 $ 59,099 Billings on uncompleted contracts in excess of costs and estimated earnings........................................................ (14,571) (7,152) --------- ---------- $ 42,775 $ 51,947 ========= ==========
F-19 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 6. Property, plant and equipment Property, plant and equipment consisted of the following (in thousands):
December 31, ---------------------- 2002 2001 ---------- ---------- Restated Compression equipment, facilities and other rental assets $1,261,241 $1,171,282 Land and buildings....................................... 86,732 55,570 Transportation and shop equipment........................ 75,443 61,848 Other.................................................... 31,888 23,848 ---------- ---------- 1,455,304 1,312,548 Accumulated depreciation................................. (287,629) (161,035) ---------- ---------- $1,167,675 $1,151,513 ========== ==========
Depreciation expense was $139,427,000, $73,609,000 and $46,155,000 in 2002, 2001 and 2000, respectively. Depreciation expense for 2002 includes $34,485,000 for the impairment of certain idle units of the Company's compression fleet that are being retired and the acceleration of depreciation of certain plants and facilities expected to be sold or abandoned. Assets under construction of $116,427,000 and $98,538,000 are included in compression equipment, facilities and other rental assets at December 31, 2002 and 2001, respectively. The Company capitalized $2,470,000, $2,750,000 and $1,823,000 of interest related to construction in process during 2002, 2001, and 2000, respectively. In August 2001, the Company exercised its purchase option under the 1998 operating lease (see Note 12) for $200,000,000. The depreciable basis of the compressors purchased has been reduced by the deferred gain of approximately $41,993,000 which was recorded at inception of the lease and previously included as an other liability on the Company's Consolidated Balance Sheet. 7. Intangible and Other Assets Intangible and other assets consisted of the following (in thousands):
December 31, ----------------- 2002 2001 -------- -------- Restated Deferred debt issuance and leasing transactions costs $ 44,396 $42,183 Notes receivable..................................... 12,769 25,562 Intangibles.......................................... 25,642 7,210 Other................................................ 12,943 13,619 -------- ------- 95,750 88,574 Accumulated amortization............................. (21,692) (9,921) -------- ------- $ 74,058 $78,653 ======== =======
Amortization of intangible and other assets totaled $11,754,000, $5,113,000 and $1,591,000 in 2002, 2001 and 2000, respectively. F-20 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Certain notes receivable result from an agreement entered into in 2001 to advance funds to a third party in connection with various power generation development projects. Under the agreement, the Company agreed to advance working capital of up to $12,500,000. At December 31, 2001, $7,500,000 was funded under the agreement. The notes bear interest at the prime lending rate that ranged from 5.5% to 8%, are secured by equipment and mature on April 30, 2002. The remaining notes receivable result primarily from customers for sales of equipment or advances to other parties in the ordinary course of business. During 2002, the Company converted certain of the notes into equity ownership positions in the non-oilfield power generation projects and reclassified certain of these notes to assets held for sale (See Notes 2 and 3) and also recorded a charge in other expense to reserve for certain employee notes. (See Note 26.) See Note 18 for related party notes receivable. 8. Investments in Non-Consolidated Affiliates Investments in affiliates that are not controlled by the Company but where the Company has the ability to exercise significant influence over the operations are accounted for using the equity method. The Company's share of net income or losses of these affiliates is reflected in the Consolidated Statement of Operations as Equity in income of non-consolidated affiliates. The Company's primary equity method investments are comprised of entities that own, fabricate, operate, service and maintain compression and other related facilities. The Company's equity method investments totaled approximately $148,824,000 and $169,222,000 at December 31, 2002 and 2001, respectively. The Company's ownership interest and location of each equity investee at December 31, 2002 is as follows:
Ownership Interest Location Type of Business --------- ------------- ---------------------------- Pigap II............................ 30.0% Venezuela Gas Compression Plant El Furrial.......................... 33.3% Venezuela Gas Compression Plant Simco/Harwat Consortium............. 35.5% Venezuela Gas Compression Plant Hanover Measurement Services Company LP................................ 50.2% United States Monitoring Services Servi Compressores, CA.............. 50.0% Venezuela Compression Service Provider Collicutt Mechanical Services Ltd... 24.1% Canada Compression Service Provider
Summarized balance sheet information for investees accounted for by the equity method follows (on a 100% basis, in thousands):
December 31, ----------------- 2002 2001 -------- -------- Current assets..... $165,193 $330,542 Non-current assets. 591,283 620,951 Current liabilities 98,697 113,255 Debt payable....... 173,108 620,884 Owners' equity..... 484,671 217,354
F-21 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Summarized earnings information for these entities for the years ended December 31, 2002, 2001 and 2000 follows (on a 100% basis, in thousands):
Years ended December 31, ------------------------- 2002 2001(1) 2000 -------- -------- ------- Revenues........ $333,150 $201,581 $86,059 Operating income 87,231 46,097 17,290 Pretax income... 77,121 25,417 10,500
- -------- (1) Amounts for the joint ventures acquired in connection with the POI business acquisition are included from September 1, 2001. The most significant investments are the joint ventures (Pigap II, El Furrial and Simco/Harwat) acquired in connection with the POI acquisition completed in August 2001. At December 31, 2002 and 2001, these ventures account for approximately $141,008,000 and $152,443,000 of the equity investments, respectively, and generated equity in earnings for 2002 and 2001 of approximately $21,680,000 and $8,053,000. See Note 24 for subsequent event regarding the Company's interest in the PIGAP II joint venture. In connection with its investment in El Furrial and Simco/Harwat, the Company guaranteed its portion of the debt in the joint venture related to these projects. At December 31, 2002 the Company has guaranteed approximately $43,512,000 and $13,188,000, respectively, of the debt which is on these joint venture books. These amounts are not recorded on the Company's books. The financial data for 2000 includes the Company's 20% interest in Meter Acquisition Company LP and its 60% interest in Hanover/Enron Venezuela Ltd. The Company sold Meter Acquisition Company LP in 2001 for cash of approximately $3,143,000. The Company purchased the remaining 40% interest in Hanover/Enron Venezuela Ltd. during 2001 for $3,050,000. The financial data for 2001 includes Belleli, a fabrication company based in Italy. Effective January 2001, the Company agreed to provide certain facilitation services to Belleli and provide Belleli with project financing including necessary guarantees, bonding capacity and other collateral on an individual project basis. Under the arrangement, Belleli was required to present each project to the Company which could be approved at the Company's sole discretion. The Company received $1,723,000 from Belleli in 2001 for its facilitation services. Under a separate agreement with Belleli, the Company has issued letters of credit on Belleli's behalf totaling approximately $16,736,000 at December 31, 2002. In November 2002, the Company acquired an additional interest in Belleli bringing the total ownership to 51%. The increase in ownership requires that the Company record its investment in Belleli using the consolidation method of accounting rather than equity method accounting. The results of Belleli's operations subsequent to the acquisition of the controlling interest, and the assets and liabilities of Belleli as of December 31, 2002, have been consolidated in the financial statements of the Company. (See Note 2.) During 2000, Collicutt Hanover Services Ltd. ("Collicutt") sold additional shares that reduced the Company's ownership percentage to approximately 24%, accordingly, a change in interest gain of $864,000 was recorded in the Consolidated Statement of Operations. In 2002, due to permanent decline in the market value of its investment in Collicut, the Company recorded to Other expense an impairment of $5,000,000. In the normal course of business, Hanover engages in purchase and sale transactions with Collicut Hanover Services Ltd., which is owned 24% by Hanover. During the period ended December 31, 2002 and 2001, Hanover F-22 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 had sales to this related party of $943,000 and $2,579,000, respectively; and purchases of $19,633,000 and $19,197,000, respectively. At December 31, 2002, Hanover had a net payable to this related party of $111,700. In the normal course of business, Hanover engages in purchase and sale transactions with Servi-Compressores, which is owned 50% by Hanover. During the period ended December 31, 2002 and 2001, Hanover had sales to this related party of $406,000 and $849,000, respectively and made purchases of $1,859,000 during 2001. At December 31, 2001, Hanover had a net receivable from this related party of $464,000. The Company also holds interests in companies in which it does not exercise significant influence over the operations. These investments are accounted for using the cost method. Cost method investments totaled approximately $1,865,000 and $9,106,000 at December 31, 2002 and 2001, respectively. During 2002, the Company determined that certain of its cost method investments were permanently impaired and therefore recorded in Other expense impairment charges amounting to $7,100,000. In May 2000, the Company acquired common stock of Aurion Technologies, Inc. ("Aurion"), a technology company formed to develop remote monitoring and data collection services for the compression industry, for $2,511,000 in cash. In 2001, the Company purchased additional shares for approximately $1,250,000, advanced $2,700,000 to Aurion and had an accounts receivable of $1,103,000. Aurion filed for bankruptcy protection in March 2002, and accordingly, the Company recorded in Other expense approximately $5,013,000 during the year ended December 31, 2001 to impair its investment and the unrecoverable amount of the advances. During 2002, the Company recorded an additional charge related to Aurion of $3,850,000. 9. Goodwill In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets. Under SFAS 142, amortization of goodwill over an estimated useful life is discontinued. Instead, goodwill will be reviewed for impairment annually or whenever events indicate impairment may have occurred. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. SFAS 142 was effective for Hanover on January 1, 2002. The adoption of SFAS 142 has had an impact on future financial statements, due to the discontinuation of goodwill amortization expense. The transition provisions of SFAS 142 required the Company to identify its reporting units and perform an initial impairment assessment of the goodwill attributable to each reporting unit as of January 1, 2002. The Company performed its initial impairment assessment and determined that the Company's reporting units are the same as its business segments and that no impairment existed as of January 1, 2002. However, due to a downturn in its business and changes in the business environment in which the Company operates, the Company completed an additional impairment analysis as of June 30, 2002. As a result of the test performed as of June 30, 2002, the Company recorded an estimated $47,500,000 impairment of goodwill attributable to our production and processing equipment fabrication business unit. The second step of goodwill impairment test required the Company allocate the fair value of the reporting unit to the production and processing equipment businesses' assets. The Company performed the second step of the goodwill impairment test in the third quarter of 2002 and determined that no adjustment to the impairment, recorded in the second quarter, was required. The fair value of reporting units was estimated using a combination of the expected present value of future cash flows and the market approach. In the fourth quarter of 2002, the Company recorded a $4,603,000 goodwill impairment related to our pump division which we expect to sell in 2003. F-23 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The table below presents the change in the net carrying amount of goodwill for the year ended December 31, 2002 (in thousands):
Goodwill Purchase Written Off Adjustment Related to December 31, and Other Discontinued Goodwill December 31, 2001 Acquisitions Adjustments Operations Impairment 2002 ------------ ------------ ----------- ------------ ---------- ------------ Domestic rentals......... $ 89,696 $ -- $4,959 $ -- $ -- $ 94,655 International rentals.... 33,984 -- 675 -- -- 34,659 Parts, service and used equipment.............. 51,822 -- (121) (19,010) -- 32,691 Compressor and accessory fabrication............ 19,176 -- -- -- (4,603) 14,573 Production and processing equipment.............. 47,500 3,941 -- -- (47,500) 3,941 -------- ------ ------ -------- -------- -------- Total................. $242,178 $3,941 $5,513 $(19,010) $(52,103) $180,519 ======== ====== ====== ======== ======== ========
Hanover's adjusted net income and earnings per share, adjusted to exclude goodwill amortization expense, for the twelve months ended December 31, 2001 and 2000 are as follows (in thousands, except per share data):
2001 2000 -------- -------- Restated Restated Net income............................. $72,413 $49,639 Goodwill amortization, net of tax...... 8,846 4,280 ------- ------- Adjusted net income.................... $81,259 $53,919 ======= ======= Basic earnings per share, as reported.. $ 1.00 $ 0.80 Goodwill amortization, net of tax...... 0.12 0.07 ------- ------- Adjusted basic earnings per share...... $ 1.12 $ 0.87 ======= ======= Diluted earnings per share, as reported $ 0.94 $ 0.75 Goodwill amortization, net of tax...... 0.11 0.06 ------- ------- Adjusted diluted earnings per share.... $ 1.05 $ 0.81 ======= =======
10. Accrued Liabilities Accrued liabilities are comprised of the following (in thousands):
December 31, ----------------- 2002 2001 -------- -------- Accrued salaries, bonuses and other employee benefits $ 21,024 $ 14,843 Accrued income and other taxes....................... 24,095 15,536 Accrued leasing expense.............................. 23,465 21,990 Additional purchase price for DR (Note 2)............ -- 1,798 Additional purchase price for POI (Note 2)........... 60,740 58,000 Accrued other........................................ 60,315 42,941 -------- -------- $189,639 $155,108 ======== ========
F-24 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 In December 2002, the Company announced a plan to consolidate certain of its manufacturing facilities and to terminate approximately 500 employees worldwide during 2003. In connection with the planned severance, the Company recorded an expense to selling, general and administrative expenses for $2,720,000 for estimated termination benefits and the amount is included in accrued other liabilities. As of December 31, 2002, no amounts had been paid out for the planned severance. 11. Debt Debt consisted of the following (in thousands):
December 31, ------------------ 2002 2001 -------- -------- Bank credit facility............................................................... $156,500 $157,000 4.75% convertible senior notes due 2008............................................ 192,000 192,000 Schlumberger note, interest at 12.5%............................................... 167,096 150,000 Real estate mortgage, interest at 3.7%, collateralized by certain land and buildings, payable through September 2004........................................ 3,250 3,583 Belleli--factored receivables...................................................... 15,970 -- Belleli--revolving credit facility................................................. 11,964 -- Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount.......................................................... 8,164 7,230 -------- -------- 554,944 509,813 Less--current maturities........................................................... (33,741) (5,553) -------- -------- Long-term debt..................................................................... $521,203 $504,260 ======== ========
The Company's bank credit facility as amended and restated to date provides for a $350,000,000 revolving credit facility that matures on November 30, 2004. Advances bear interest at (a) the greater of the administrative agent's prime rate, the federal funds effective rate, or the base CD rate, or (b) a eurodollar rate, plus, in each case, a specified margin (3.2% and 3.9% weighted average interest rate at December 31, 2002 and 2001, respectively). A commitment fee based upon a percentage of the average available commitment is payable quarterly to the lenders participating in the facility. The fee ranges from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage ratio. In addition to the drawn balance on the bank credit facility, as of December 31, 2002, we had $52,895,000 in letters of credit outstanding under the Company's bank credit facility. The credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets. Giving effect to the covenant limitations in the Company's bank credit agreement, as amended to date, the availability under the bank credit facility at December 31, 2002 was approximately $120,000,000. The credit facility also limits the payment of cash dividends on the Company's common stock to 25% of net income for the period from December 2001 through November 30, 2004. In addition, the Company had $3,775,000 in letters of credit outstanding under other letters of credit facilities. In February 2003, the Company executed an amendment to its bank credit facility and the compression equipment leases that we entered into in 1999 and 2000. The amendment, which was effective December 31, 2002, modifies certain financial covenants to allow the Company greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment would increase the commitment fee under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in the Company's interest cost as a result of the amendment will depend on our consolidated leverage ratio at the end of each quarter, the F-25 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover's foreign subsidiaries. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million to the lenders under these agreements. We also agreed to a restriction on our capital expenditures during 2003, which under the agreement cannot exceed $200,000,000. In March 2001, the Company issued $192,000,000 principal amount of 4.75% convertible senior notes due 2008 (see Note 15). In connection with the POI Acquisition on August 31, 2001, the Company issued a $150,000,000 subordinated acquisition note to Schlumberger, which matures December 15, 2005. Interest on the note accrues and is payable-in-kind at the rate of 8.5% annually for the first six months after issuance and periodically increases in increments of 1% to 2% per annum to a maximum interest rate 42 months after issuance of 15.5%. In the event of an event of default under the note, interest will accrue at a rate of 2% above the then applicable rate. The note is subordinated to all of the Company's indebtedness other than indebtedness to fund future acquisitions. In the event that the Company completes an offering of equity securities, the Company is required to apply the proceeds of the offering to repay amounts outstanding under the note as long as no default exists or would exist under our other indebtedness as a result of such payment. In November 2002, the Company increased its ownership in Bellel to 51%. (See Note 2). Belleli has financed its growth through the factoring of its receivables. Such factoring is typically short term in nature and at December 31, 2002 bore interest at a weighted average rate of 3.3%. In addition, Belleli has revolving credit facilities of $11,964,000 at December 31, 2002 at a weighted average rate of 3.0% which expire in 2003 and are secured by letters of credit issued by Hanover of $6,717,000. Maturities of long-term debt at December 31, 2002 are (in thousands): 2003--$33,741; 2004--$160,194; 2005--$167,734; 2006--$549; 2007--$186; and $192,540 thereafter. 12. Leasing Transactions The Company has entered into five transactions involving the sale of equipment by Hanover and its subsidiaries to special purpose entities, which in turn lease the equipment back to us. At the time, these transactions had a number of advantages over other sources of capital then available to the Company. The sale and leaseback transactions (1) enabled Hanover to affordably extend the duration of its financing arrangements, (2) reduced Hanover's cost of capital and (3) provided access to a source of capital other than traditional bank financing. Prior to the first sale and leaseback transaction in 1998, the Company financed growth in compression assets by drawing down on our bank credit facility with a commercial bank. While highly flexible and well priced, the line of credit represented a short term funding strategy to finance long-term assets. Sale and leaseback transactions can reduce refinancing risk by extending the duration of our capital commitments. Sale and leaseback transactions also provided capital to the Company at a lower cost compared to other sources then available to us. Lenders to the special purpose entities do not require as high a rate of interest because their capital risk is mitigated by a perfected, first priority security interest in the compression equipment, as well as a residual value guarantee provided by us. This had the effect of reducing our leasing expense relative F-26 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 to an unsecured borrowing rate. The Company will continue to evaluate sale-leaseback transactions as well as consider other forms of financing for cost effectiveness as future capital needs arise. The Company believes that the sale and leaseback transactions represent a source of capital in addition to the commercial bank financing traditionally utilized by the Company. This diversification of the Company's capital sources has broadened its access to capital to allow it to expand operations. In August 2001 and in connection with the POI Acquisition, we completed two sale and leaseback transactions involving certain compression equipment. Concurrent with these transactions, we exercised our purchase option under our July 1998 operating lease for $200,000,000. Under one transaction, we received $309,300,000 proceeds from the sale of compression equipment. Under the second transaction, we received $257,750,000 from the sale of additional compression equipment. Both transactions are recorded as a sale and leaseback of the equipment and are recorded as operating leases. Under the first transaction, the equipment was sold and leased back by us for a seven year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $12,750,000 in addition to quarterly rental payments of approximately $215,000. Under the second transaction, the equipment was sold and leased back by us for a ten year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10,938,000 in addition to quarterly rental payments of approximately $188,000. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. Through December 31, 2002, we incurred transaction costs of approximately $18,607,000 related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms. In October 2000, we completed a $172,589,000 sale and leaseback of compression equipment. In March 2000, we entered into a separate $200,000,000 sale and leaseback of compression equipment. Under the March agreement, we received proceeds of $100,000,000 from the sale of compression equipment at the first closing in March 2000 and in August 2000, we completed the second half of the equipment lease and received an additional $100,000,000 for the sale of additional compression equipment. In June 1999 and in July 1998, we completed two other separate $200,000,000 sale and leaseback transactions of compression equipment. Under the lease agreements, the equipment was sold and leased back by us for a five year term and will be utilized by us in the normal course of our business. We have options to repurchase the equipment under the 2000 and 1999 leases as defined under certain conditions by the lease agreements. The lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7,470,000 in transactions costs for the leases entered into in 2000 and 1999 which are included in intangible and other assets on the balance sheet and are being amortized over the respective lease terms of the respective transactions. F-27 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The following table summarizes the proceeds, net book value of equipment sold, deferred gain on equipment sale, the residual guarantee (maximum exposure to loss) and the lease termination date for equipment leases (in thousands of dollars):
Residual Sale Net Book Deferred Value Lease Termination Lease Proceeds Value Gain Guarantee Date ----- -------- -------- -------- --------- ----------------- June 1999............ $200,000 $166,356 $33,644 $166,000 June 2004 March and August 2000 200,000 166,922 33,078 166,000 March 2005 October 2000......... 172,589 155,692 16,897 142,299 October 2005 August 2001.......... 309,300 306,034 3,266 232,000 September 2008 August 2001.......... 257,750 235,877 21,873 175,000 September 2011
These transactions are recorded as a sale and leaseback of the equipment and the leases are treated as operating leases. We made guarantees under the lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of our equipment purchase options under the terms of the lease agreements. The residual value guarantees and other lease terms which are based on negotiation between Hanover and third party lessors, were supported by equipment appraisals and analysis. We believe that the market value of the equipment at the end of the lease will exceed the guaranteed residual values due to our predictive and preventive maintenance programs, routine overhaul practices and the expected demand for compression equipment in the future. We review the value of the equipment whenever events or circumstances indicate that a decrease in market value may have occurred as a result of foreseeable obsolescence or a decrease in market demand. If the fair value of the equipment was less than the guaranteed residual value, we would accrue additional lease expense for the amount that would be payable upon termination of the lease. All gains on the sale of the equipment are deferred until the end of the respective lease terms. Should we not exercise our purchase options under the lease agreements, the deferred gains will be recognized to the extent they exceed any final rent payments and any other payments required under the lease agreements. As a result of the lease transactions, we incurred approximately $94,751,000, $70,435,000, and $45,484,000 in lease expense for the years ended December 31, 2002, 2001 and 2000, respectively. The following future minimum lease payments are due under the leasing arrangements exclusive of any final rent payments or purchase option payments (in thousands): 2003--$83,703; 2004--$76,418; 2005--$62,332; 2006--$48,987; 2007--$48,987; and $100,537 thereafter. In connection with the compression equipment leases entered into in August 2001, the Company was obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes which are registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offering was not completed pursuant to the time line required by the agreements, the Company was required to pay additional lease expense in the amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased the Company's lease expense by $5,067,000 during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003. In February 2003, we executed an amendment to our bank credit facility and the compression equipment leases entered into in 1999 and 2000. (See Note 11.) F-28 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 13. Income Taxes The components of income (loss) from continuing operations before income taxes were as follows (in thousands):
Years ended December 31, ---------------------------- 2002 2001 2000 --------- -------- -------- Restated Restated Domestic $(115,733) $ 62,128 $54,684 Foreign. 23,314 49,872 20,264 --------- -------- ------- $ (92,419) $112,000 $74,948 ========= ======== =======
The provision for (benefit from) income taxes from continuing operations consisted of the following (in thousands):
Years ended December 31, -------------------------- 2002 2001 2000 -------- -------- -------- Restated Restated Current tax provision (benefit): Federal..................................... $ (9,551) $ 1,136 $ 2,048 State....................................... (227) 560 449 Foreign..................................... 11,243 10,474 (2,561) -------- ------- ------- Total current........................... 1,465 12,170 (64) -------- ------- ------- Deferred tax provision (benefit): Federal..................................... (10,738) 25,085 16,284 State....................................... Foreign..................................... (8,303) 5,133 11,598 -------- ------- ------- Total deferred.......................... (19,041) 30,218 27,882 -------- ------- ------- Total provision for (benefit from) income taxes $(17,576) $42,388 $27,818 ======== ======= =======
The provision for (benefit from) income taxes for 2002, 2001 and 2000 resulted in effective tax rates of 19.0%, 37.8% and 37.1%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% are as follows (in thousands):
Years ended December 31, -------------------------- 2002 2001 2000 -------- -------- -------- Restated Restated Federal income tax at statutory rate............................ $(32,347) $39,200 $26,231 State income taxes, net of federal benefit...................... (148) 364 291 Foreign effective rate/U.S. rate differential (including foreign valuation allowances)......................................... (8,020) (2,775) (64) U.S. impact of foreign operations, net of federal benefit....... 7,894 3,458 1,305 Nondeductible goodwill.......................................... 10,117 1,118 875 U.S. valuation allowance........................................ 2,609 -- -- Other, net...................................................... 2,319 1,023 (820) -------- ------- ------- $(17,576) $42,388 $27,818 ======== ======= =======
F-29 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Deferred tax assets (liabilities) are comprised of the following (in thousands):
December 31, -------------------- 2002 2001 --------- --------- Restated Deferred tax assets: Net operating losses........................ $ 157,928 $ 64,787 Investment in joint ventures................ 11,208 -- Inventory................................... 7,097 3,039 Alternative minimum tax credit carryforward. 5,351 15,152 Derivative instruments...................... 9,656 6,452 Accrued liabilities......................... 13,478 3,980 Intangibles................................. 15,297 316 Other....................................... 9,003 9,387 --------- --------- Gross deferred tax assets...................... 229,018 103,113 Valuation allowance......................... (23,371) -- --------- --------- 205,647 103,113 --------- --------- Deferred tax liabilities: Property, plant and equipment............... (313,483) (263,108) Other....................................... (4,636) (5,497) --------- --------- Gross deferred tax liabilities................. (318,119) (268,605) --------- --------- $(112,472) $(165,492) ========= =========
The Company has U.S. net operating loss carryforwards at December 31, 2002 of approximately $381,000,000 expiring in 2006 to 2022. At December 2002, the Company has an alternative minimum tax credit carryforward of approximately $5,351,000 that does not expire. At December 31, 2002, the Company has approximately $70,200,000 of net operating loss carryforwards in certain non-U.S. jurisdictions. Of these, approximately $1,400,000 have no expiration date, and the remaining $68,800,000 will expire in future years through 2011. A valuation allowance has been provided, primarily for net operating loss carryforwards that are not expected to be utilized. The valuation allowance increased by $20,762,000 due to current year losses in non-U.S. tax jurisdictions with short net operating loss carryforward periods, including Argentina and Venezuela. In 2001, the Company recorded approximately $35,212,000 of additional deferred income tax liability resulting from the 2001 acquisition transactions. (See Note 2.) The Company has not recorded a deferred income tax liability for additional income taxes that would result from the distribution of earnings of its foreign subsidiaries if they were actually repatriated. The Company intends to reinvest the undistributed earnings of its foreign subsidiaries indefinitely. 14. Mandatorily Redeemable Convertible Preferred Securities In December 1999, the Company issued $86,250,000 of unsecured Mandatorily Redeemable Convertible Preferred Securities (the "Convertible Preferred Securities") through Hanover Compressor Capital Trust, a Delaware business trust and wholly-owned finance subsidiary of the Company. The Convertible Preferred Securities have a liquidation amount of $50 per unit. The Convertible Preferred Securities mature in 30 years but F-30 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 the Company may redeem them partially or in total any time on or after December 20, 2002. The Convertible Preferred Securities also provide for annual cash distributions at the rate of 7.25%, payable quarterly in arrears; however, payments may be deferred up to 20 quarters subject to certain restrictions. The Company recorded approximately $6,253,000, during 2002, 2001 and 2000, for distributions related to Convertible Preferred Securities. Each Convertible Preferred Security is convertible into 2.7972 shares of Hanover common stock, subject to certain conditions. The Company has fully and unconditionally guaranteed the Convertible Preferred Securities. The Company incurred approximately $3,587,000 in transaction costs that are included in other assets, and recorded $121,000, $120,000 and $116,000 of amortization for December 31, 2002, 2001 and 2000, respectively. The transaction costs are being amortized over the term of the Convertible Preferred Securities. The fair value of the Convertible Preferred Securities is approximately $62,963,000 at December 31, 2002. 15. Common Stockholders' Equity Convertible Senior Notes Offering In March 2001, the Company issued $192,000,000 principal amount of 4.75% convertible senior notes due 2008. The notes mature on March 15, 2008 and are subject to call beginning on March 15, 2004. The notes are convertible into shares of the Company's common stock at a conversion price of approximately $43.94 per share. In addition, the Company may decrease the conversion price by any amount for any period of time, subject to approval by the Board of Directors and within the terms of the indenture. The Company received approximately $185,537,000 of proceeds from the sale, net of underwriting and offering costs. The fair value of the convertible senior notes is approximately $153,696,000 at December 31, 2002. Stock Offerings In March 2001, the Company completed a public offering of 2,500,000 newly issued shares of the Company's common stock. The Company realized approximately $83,850,000 of proceeds from the offering, net of underwriting and offering costs. In May 2000, the Company completed a private placement of 2,000,000 newly issued shares of common stock to an institutional investor for cash of $59,400,000, net of offering costs. Stock Split In June 2000, the Company completed a 2-for-1 stock split effected in the form of a 100% stock dividend. All common stock, additional paid-in capital and earnings per common share information have been restated for all periods presented to reflect this stock split. In addition, the Board of Directors approved an increase of authorized shares of common stock to 200,000,000. Notes Receivable-Employee Stockholders Under various stock purchase plans, the Company's employees were eligible to purchase shares of Hanover stock at fair market value in exchange for cash and/or notes receivable. The notes are collateralized by the common stock and the general credit of the employee, bear interest at a prime rate, and are generally payable on demand or at the end of a four-year period. The notes were recorded as a reduction of common stockholders' equity. Due to the decline in the price of the Company's stock which secured a portion of the notes, during 2002, the Company recorded a reserve for these notes receivable. F-31 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Other As of December 31, 2002, warrants to purchase approximately 4,000 shares of common stock at $.005 per share were outstanding. The warrants expire in August 2005. See Note 2 for a description of other common stock transactions. 16. Stock Options The Company has employee stock option plans that provide for the granting of options to purchase common shares. The options are generally issued with an exercise price equal to the fair market value on the date of grant and are exercisable over a ten-year period. Options granted typically vest over a three to four year period. No compensation expense related to stock options was recorded in 2002, 2001 and 2000. On December 31, 2002, there were 264,400 shares available for future grants under the Company's stockholder approved stock option plans. In April 2002, the Company granted 151,048 restricted shares of our common stock to certain employees as part of an incentive compensation plan. The restricted stock grants vest equally over four years. As of December 31, 2002, 142,630 restricted shares were outstanding under the plan. We will recognize compensation expense equal to the fair value of the stock at the date of grant over the vesting period related to these grants. During 2002, we recognized $423,000 in compensation expense related to these grants. In June 2000, the Company purchased APSI, which had existing stock option programs in place. The Company converted the outstanding APSI stock options into the Company's stock options as of the purchase date at a conversion ratio equal to the exchange ratio under the merger agreement. As a result, 127,813 options were converted at a weighted-average per share exercise price of approximately $12.88. Approximately 60,307 of the options vested on the date of closing of the APSI acquisition with the remaining options vesting at varying dates through 2003. The following is a summary of stock option activity for the years ended December 31, 2002, 2001 and 2000:
Weighted average Shares price per share ---------- ---------------- Options outstanding, December 31, 1999. 8,797,004 $ 6.24 Options granted..................... -- -- APSI acquisition.................... 127,813 12.88 Options canceled.................... (11,562) 9.78 Options exercised................... (994,572) 3.68 ---------- Options outstanding, December 31, 2000. 7,918,683 6.63 Options granted..................... 43,575 25.00 Options canceled.................... (47,622) 12.48 Options exercised................... (250,161) 9.12 ---------- Options outstanding, December 31, 2001. 7,664,475 6.62 Options granted..................... 1,497,706 13.35 Options canceled.................... (261,323) 10.29 Options exercised................... (1,422,850) 4.69 ---------- Options outstanding, December 31, 2002. 7,478,008 8.21 ==========
F-32 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The following table summarizes significant ranges of outstanding and exercisable options at December 31, 2002:
Options outstanding Options exercisable ---------------------------- ------------------ Weighted average Weighted Weighted remaining average average life in exercise exercise Range of exercise prices Shares years price Shares price ------------------------ --------- --------- -------- --------- -------- $0.00-2.50........ 2,086,918 2.4 $ 2.25 2,086,918 $ 2.25 $2.51-5.00........ 506,387 .8 2.94 506,387 2.94 $5.01-7.50........ 142,724 3.2 5.84 142,724 5.84 $7.51-10.00....... 3,192,051 5.0 9.77 2,741,051 9.75 $10.01-12.50...... 296,213 6.5 12.17 250,713 12.50 $12.51-15.00...... 970,005 8.6 14.51 118,723 14.50 $15.01-17.50...... 175,000 9.3 17.29 -- -- $17.51-20.00...... 14,000 9.3 18.43 -- -- $20.01-22.50...... 30,145 2.2 20.09 -- -- $22.51-25.00...... 64,565 8.6 25.00 6,911 25.00 --------- --------- 7,478,008 5,853,427 ========= =========
The weighted-average fair value at date of grant for options where the exercise price equals the market price of the stock on the grant date was $13.35 and $25.00 per option during 2002 and 2001, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company did not grant any stock options in 2000. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
2002 2001 2000 ------- ------- ---- Expected life. 6 years 6 years N/A Interest rate. 4.4% 4.0% N/A Volatility.... 39.3% 35.4% N/A Dividend yield 0% 0% N/A
See Note 1 for stock based compensation proforma impact on net income. 17. Benefit Plans The Company's 401(k) retirement plan provides for optional employee contributions up to the IRS limitation and discretionary employer matching contributions. The Company recorded matching contributions of $1,472,000, $1,062,000, and $594,000 during the years ended December 31, 2002, 2001 and 2000, respectively. F-33 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 18. Related Party and Certain Other Transactions Transactions with GKH Entities The Company and GKH Partners, L.P. ("GKH") are parties to a stockholders agreement that provides, among other things, for GKH Investments, L.P.'s rights of visitation and inspection and the Company's obligation to provide Rule 144A information to prospective transferees of the Common Stock. GKH and other stockholders (collectively, the "Holders") who, as of December 31, 2002, together beneficially own approximately 11% of the outstanding Common Stock, are, together with the Company, parties to a Third Amended Registration Rights Agreement dated December 5, 1995 (the "GKH Rights Agreement"). The GKH Rights Agreement generally provides that if the Company proposes to register shares of its capital stock or any other securities under the Securities Act of 1933, then upon the request of those Holders owning in the aggregate at least 2.5% of the Common Stock (the "Registrable Securities") then held by all of the Holders, the Company will use its reasonable best efforts to cause the Registrable Securities so requested by the Holders to be included in the applicable registration statement, subject to underwriters' cutbacks. The Company is required to pay all registration expenses in connection with registrations of Registrable Securities effected pursuant to the GKH Rights Agreement. William S. Goldberg, who was at the time a Managing Director of GKH Partners, acted as Chief Financial Officer of the Company during 2001 and into 2002 and served as Vice Chairman of the Board beginning in February 2002. Mr. Goldberg resigned as Chief Financial Officer in February 2002 and resigned as Vice Chairman of the Board and as a member of the Board in August 2002. Mr. Goldberg did not receive cash remuneration from the Company. The Company did reimburse GKH Partners for certain travel and related expenses incurred by Mr. Goldberg in connection with his efforts on the Company's behalf. GKH has advised the Company that it is in the process of dissolving and "winding up" its affairs. On November 12, 2002, GKH informed the Company that GKH has advised its limited partners that it is extending the wind-up process of the partnership for an additional twelve months from January 25, 2003 until January 25, 2004. On December 3, 2002, GKH, as nominee for GKH Private Limited, and GKH Investments, L.P. made a partial distribution of 10,000,000 shares out of a total of 18,274,795 shares held by GKH to its limited and general partners. As part of the wind-up process, GKH may liquidate or distribute substantially all of its assets, including the remaining shares of the Common Stock owned by GKH, to its partners. In August 2001, Hanover paid a $4,650,000 fee to GKH as payment for services rendered in connection with Hanover's acquisition of POI and related assets. Pursuant to an agreement with GKH which provides for compensation to GKH for services, Hanover paid a management fee of $45,000 per month from November 2001 until terminated February 2002. Hanover leases certain compression equipment to an affiliate of Cockrell Oil and Gas, LP, which was owned 50% by GKH until January 2001. The lease is on a month-to-month basis. For the years ended 2001 and 2000, approximately $76,000 and $228,540 respectively, was billed under the lease. Transactions with Schlumberger Entities In August 2001, the Company purchased Production Operators Corporation and related assets (the "POI Acquisition") from the Schlumberger Companies (as defined below). Schlumberger Limited (Schlumberger Limited and the Schlumberger Companies, collectively are referred to as "Schlumberger") owns, directly or F-34 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 indirectly, all of the equity of the Schlumberger Companies. Pursuant to the Lock-Up, Standstill and Registration Rights Agreement, dated as of August 31, 2001 (the "Schlumberger Rights Agreement"), between Schlumberger Technology Company, Camco International Inc., Schlumberger Surenco, S.A., Schlumberger Oilfield Holdings Limited, Operational Services, Inc. (collectively, the "Schlumberger Companies") and Hanover, Hanover granted to each of the Schlumberger Companies certain registration rights in connection with shares of the Common Stock received by the Schlumberger Companies as consideration in the POI acquisition (the "Hanover Stock"). The registration rights granted to the Schlumberger Companies include (i) the right, subject to certain restrictions, to register the Hanover Stock in any registration of securities initiated by Hanover within the period of time beginning on the third anniversary of the date of the Schlumberger Rights Agreement and ending on the tenth anniversary of the date of the Schlumberger Rights Agreement (such period of time, the "Registration Period"), and (ii) the right, subject to certain restrictions, to demand up to five registrations of the Hanover Stock within the Registration Period. Hanover is required to pay all registration expenses in connection with registrations of Hanover Stock pursuant to the Schlumberger Rights Agreement. For a period of three years from the date of the Schlumberger Rights Agreement, the Schlumberger Companies are prohibited from, directly or indirectly, selling or contracting to sell any of the Hanover Stock. The Schlumberger Rights Agreement also provides that none of the Schlumberger Companies shall, without Hanover's written consent, (i) acquire or propose to acquire, directly or indirectly, greater than twenty-five percent (25%) of the shares of Hanover common stock, (ii) make any public announcement with respect to, or submit a proposal for, any extraordinary transaction involving Hanover, (iii) form or join in any group with respect to the matters set forth in (i) above, or (iv) enter into discussions or arrangements with any third party with respect to the matters set forth in (i) above. Schlumberger has the right under the POI purchase agreement, so long as Schlumberger owns at least 5% of the Common Stock and subject to certain restrictions, to nominate one representative to sit on our Board of Directors. In August 2001, Schlumberger designated Mr. Rene Huck, a Vice President of Schlumberger Ltd., as a nominee to serve on our Board of Directors. Schlumberger has advised the Company that it will not designate a nominee for 2003 and thus Mr. Huck will not stand for re-election. For the years ended December 31, 2002, 2001 and 2000, Hanover generated revenues of approximately $6,034,000, $1,379,000 and $918,000 in business dealings with Schlumberger. In addition, Hanover made purchases of equipment and services of approximately $7,599,000 from Schlumberger during 2002. As part of the purchase agreement entered into with respect to the POI Acquisition, the Company was required to make a payment of up to $58,000,000 plus interest from the proceeds of and due upon the completion of a financing of PIGAP II, a South American joint venture acquired by Hanover from Schlumberger. (See Note 8.) Because the joint venture failed to execute the financing on or before December 31, 2002, the Company had the right to put its interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by the Company to the joint venture. In January 2003, the Company exercised its right to put its interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of the Company's interest in the joint venture back to Schlumberger is subject to receipt of necessary consents. Hanover is currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties agreed to postpone the closing date of the transfer to no later than May 31, 2003. In connection with the POI Acquisition, the Company issued a $150,000,000 subordinated acquisition note to Schlumberger, which matures December 15, 2005. Interest on the subordinated acquisition note accrues and is payable-in-kind at the rate of 8.5% annually for the first six months after issuance and periodically increases in F-35 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 increments of 1% to 2% per annum to a maximum interest rate 42 months after issuance of 15.5%. In the event of an event of default under the subordinated acquisition note, interest will accrue at a rate of 2% above the then applicable rate. The subordinated acquisition note is subordinated to all of the Company's indebtedness other than certain indebtedness to fund future acquisitions. In the event that the Company completes an offering of equity securities, the Company is required to apply the proceeds of the offering to repay amounts outstanding under the subordinated acquisition note as long as no default exists or would exist under the Company's other indebtedness as a result of such payment. In August 2001, the Company entered into a five-year strategic alliance with Schlumberger intended to result in the active support of Schlumberger in fulfilling certain of our business objectives. The principal components of the strategic alliance include (1) establishing the Company as Schlumberger's most favored supplier of compression, natural gas treatment and gas processing equipment worldwide, (2) Schlumberger's coordination and cooperation in further developing the Company's international business by placing Hanover personnel in Schlumberger's offices in six top international markets and (3) providing the Company with access to consulting advice and technical assistance in enhancing its field automation capabilities. Other Related Party Transactions In January 2002, Hanover advanced cash of $100,000 to Robert O. Pierce, Senior Vice President - Manufacturing and Procurement, in return for a promissory note. The note bore interest at 4.0%, matured on September 30, 2002, and was unsecured. On September 18, 2002, the Board of Directors approved the purchase of 30,054 shares of Hanover common stock from Mr. Pierce at $9.60 per share for a total of $288,500. The price per share was determined by reference to the closing price quoted on the New York Stock Exchange on September 18, 2002. The Board of Directors determined to purchase the shares from Mr. Pierce because it was necessary for him to sell shares to repay his loan with the Company as well as another outstanding loan. The loans matured during a blackout period under our insider trading policy and therefore Mr. Pierce could not sell shares of Hanover stock in the open market to repay the loans. Mr. Pierce's loan from the Company was repaid in full in September 2002. During 2001, the Company sold equipment totaling approximately $12,004,000 to an affiliate of Enron Capital and Trade Resources Corp. During 2001, the Company learned that Enron had sold its investment in the Company's stock and thus is no longer a related party to the Company. In exchange for notes, Hanover has loaned approximately $8,922,000 to employees, some of who were subject to margin calls, which together with accrued interest were outstanding as of December 31, 2002. In December 2002, Hanover's Board of Directors eliminated the practice of extending loans to employees and executive officers and there are no loans outstanding with any current executive officer of the Company. Due to the decline in Hanover's stock price and other collectibility concerns, the Company has recorded a charge in other expense to reserve $6,021,000 for non-executive officer loans. Ted Collins, Jr., a Director of the Company owns 100% of Azalea Partners, which in turn owns 13% of Energy Transfer Group, LLC ("ETG"). The Company owns a 10% interest in ETG and ETG owns a 1% interest in Energy Transfer Hanover Ventures, LP, ("Energy Ventures") a subsidiary of the Company. The Company advanced working capital to ETG in 2002, for certain costs incurred by ETG for the performance of services relating to Energy Ventures' power generation business. During the fiscal year ended December 31, 2002, the largest aggregate amount advanced under this arrangement was $400,000. The advances do not bear interest. At December 31, 2002, the Company had $400,000 in advances outstanding to ETG. In 2002, ETG billed the Company $1,899,000 for services rendered to reimburse ETG for expenses incurred on behalf of Energy Ventures during the year. In 2002, the Company recorded sales of approximately $470,000 related to equipment leases and parts sales to ETG. F-36 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 In connection with the restatements announced by the Company in 2002, certain officers and directors have been named as defendants in putative stockholder class actions, stockholder derivative actions and have been involved with the investigation being conducted by the Staff of the Securities and Exchange Commission. Pursuant to the indemnification provisions of the Company's articles of incorporation and bylaws, the Company has advanced legal fees to certain employees, officers and directors involved in these proceedings. In this connection, expenses incurred on behalf of indemnified officers and directors during 2002 total $999,000. Of this amount $392,000 was incurred on behalf of a former officer and director, William S. Goldberg; $375,000 was incurred on behalf of former officers Michael J. McGhan, Charles D. Erwin and Joe C. Bradford; $149,000 was incurred on behalf of directors Ted Collins, Jr., Robert R. Furgason, Rene Huck, Melvyn N. Klein, Michael A. O'Connor, and Alvin V. Shoemaker, who were serving during 2001; and $83,000 was incurred on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon T. Hall. Transactions with Former Executive Officers Michael J. McGhan. Mr. McGhan served as Chief Executive Officer and President of the Company since October 1991 and served as a director of the Company since March 1992. Mr. McGhan also served as an officer and director of certain Hanover subsidiaries during his tenure. Mr. McGhan resigned from all positions held with the Company on August 1, 2002. In 2001, the Company advanced cash of $2,200,000 to Mr. McGhan, in return for promissory notes. The notes bear interest at 4.88%, mature on April 11, 2006, and are collateralized by personal real estate and Hanover common stock with full recourse. 411,914 shares of Hanover Common Stock owned by Mr. McGhan are held secured as collateral for this $2,200,000 loan. In January 2002, the Company advanced additional cash of $400,000 to Mr. McGhan in return for a promissory note. The note bore interest at 4.0% and was repaid in full in September 2002. Set forth below is information concerning the indebtedness of Mr. McGhan to Hanover as of December 31, 2002, 2001, and 2000.
Largest Weighted Aggregate Note Principal Average Note Principal Amount Rate of Amount Outstanding Interest Outstanding during each at Period Year at Period End Period End ---- -------------- -------------- --------- 2002 $2,200,000 $2,600,000 4.88% 2001 $2,200,000 $2,200,000 4.88% 2000 $ -- $ -- --
On July 29, 2002, the Company purchased 147,322 shares of the Common Stock from Mr. McGhan for $8.96 per share for a total of $1,320,000. The price per share was determined by reference to the closing price quoted on the New York Stock Exchange on July 29, 2002. The Board of Directors determined to purchase the shares from Mr. McGhan because he was subject to a margin call during a blackout period under the Hanover insider trading policy, and therefore, could not sell such shares to the public to cover the margin call without being in violation of the policy. On August 1, 2002, the Company entered into a Separation Agreement with Mr. McGhan. The agreement sets forth a mutual agreement to sever the relationships between Mr. McGhan and Hanover, including the employment relationships of Mr. McGhan with Hanover and its affiliates. In the agreement, the parties also documented their understandings with respect to: (i) the posting of additional collateral by Mr. McGhan to secure repayment of loans owed by Mr. McGhan to Hanover; and (ii) certain waivers and releases by Mr. McGhan. In the agreement, Mr. McGhan made certain representations as to the status of the outstanding loans payable by Mr. McGhan to Hanover, the documentation for the loans and the enforceability of his obligations under the loan documents. The loans were not modified and must be repaid in accordance with their original terms. In addition, the agreement provided that Mr. McGhan may exercise his vested stock options pursuant to the post-termination F-37 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 exercise periods set forth in the applicable plan. Since the date of the agreement, Mr. McGhan has exercised all such vested stock options and the net shares from such exercise have been posted as collateral for his outstanding indebtedness to the Company. In addition, Mr. McGhan agreed, among other things, not to compete with Hanover and not to solicit Hanover employees or customers under terms described in the agreement for a period of twenty-four months after the effective date of the agreement. In consideration for this non-compete/non-solicitation agreement, Hanover agreed to pay Mr. McGhan $33,333 per month for a period of eighteen months after the effective date of the agreement. Charles D. Erwin. Mr. Erwin served as Chief Operating Officer of the Company since April 2001 and served as Senior Vice President--Sales and Marketing since May 2000. Mr. Erwin resigned from these positions on August 2, 2002. In 2000, the Company advanced $824,087 to Mr. Erwin in return for a promissory note. In 2002 and 2001, according to the terms of the original note, the Company recorded compensation expense and forgave $207,382 and $145,118 of such indebtedness (which included $42,565 and $62,709 of accrued interest), respectively. The balance of the loan was repaid in full by Mr. Erwin in December 2002. Set forth below is information concerning the indebtedness of Mr. Erwin to Hanover as of December 31, 2001, 2001 and 2000:
Aggregate Largest Note Note Weighted Principal Principal Average Amount Amount Rate of Outstanding Outstanding Interest at Period during each at Period Year End Period End ---- ----------- ----------- --------- 2002 $ -- $631,800 4.3% 2001 $631,800 $769,148 4.8% 2000 $769,148 $824,087 9.5%
On August 2, 2002, the Company entered into a Separation Agreement with Mr. Erwin. The agreement sets forth a mutual agreement to sever the relationships between Mr. Erwin and Hanover, including the employment relationships of Mr. Erwin with Hanover and its affiliates. In the agreement, the parties also documented their understandings with respect to: (i) the posting of additional collateral by Mr. Erwin to secure repayment of an outstanding loan owed by Mr. Erwin to Hanover; (ii) certain waivers and releases by Mr. Erwin; and (iii) the payment of a reasonable and customary finders fee for certain proposals brought to Hanover's attention by Mr. Erwin during the twenty-four month period after the effective date of the agreement. In the agreement, Mr. Erwin has made certain representations as to the status of an outstanding loan payable by Mr. Erwin to Hanover, the documentation for the loan and the enforceability of the his obligations under the loan documents. The loan was not modified and as noted above this note was repaid in full in December 2002. In addition, the agreement provides that Mr. Erwin may exercise his vested stock options pursuant to the post-termination exercise periods set forth in the applicable plan. Since the date of the agreement, Mr. Erwin has exercised all such vested stock options. Mr. Erwin's non-vested stock options were forfeited as of August 2, 2002. In addition, Mr. Erwin agreed, among other things, not to compete with Hanover and not to solicit Hanover employees or customers under terms described in the agreement for a period of twenty-four months after the effective date of the agreement. In consideration for this non-compete/non-solicitation agreement, Hanover agreed to pay Mr. Erwin $20,611 per month for a period of eighteen months after the effective date of the agreement. Joe C. Bradford. In August 2002, our Board of Directors did not reappoint Mr. Bradford to the position of Senior Vice President--Worldwide Operations Development, which he held since May 2000. On September 27, 2002, Mr. Bradford resigned his employment with Hanover. In 2000, the Company advanced $764,961 to Mr. Bradford in return for a promissory note that matures in June 2004. In 2002 and 2001, according to the F-38 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 terms of the note, the Company recorded compensation expense and forgave $192,504 and $134,706 of such indebtedness (which included $39,512 and $58,210 of accrued interest), respectively. Set forth below is information concerning the indebtedness of Mr. Bradford to Hanover as of December 31, 2002, 2001 and 2000:
Aggregate Largest Note Note Weighted Principal Principal Average Amount Amount Rate of Outstanding Outstanding Interest at Period during each at Period Year End Period End ---- ----------- ----------- --------- 2002 $535,473 $579,845 4.3% 2001 $579,845 $706,022 4.8% 2000 $706,022 $764,961 9.5%
19. Commitments and Contingencies Rent expense, excluding lease payments for the leasing transactions described in Note 12, for 2002, 2001 and 2000 was approximately $4,142,000, $4,008,000, and $2,159,000 respectively. Commitments for future minimum rental payments exclusive of those disclosed in Note 12 under noncancelable operating leases with terms in excess of one year at December 31, 2002 are (in thousands): 2003--$4,947; 2004--$4,000; 2005--$2,617; 2006--$590; 2007--$94 and $131 thereafter. Hanover has issued the following guarantees which are not recorded on the Company's Consolidated Balance Sheet:
Maximum Potential Undiscounted Payments as of Term December 31, 2002 - --------- ----------------- (in thousands) Indebtedness of non-consolidated affiliates: Simco/Harwat Consortium (1)...................... 2003 $ 13,188 El Furrial (1)................................... 2013 43,512 Other: Leased compression equipment residual value......... 2004-2011 881,299 Performance guarantees through letters of credit (2) 2003-2007 14,635 Standby letters of credit........................... 2003-2004 42,035 Bid bonds and performance bonds (2)................. 2003-2007 72,341 ---------- $1,067,010 ==========
- -------- (1) The Company has guaranteed the debt within this non-consolidated affiliate up to the Company's ownership percentage in such affiliate. (See Note 8). (2) The Company has issued guarantees to third parties to ensure performance of its obligations some of which may be fulfilled by third parties. As part of the POI acquisition, as of December 31, 2002 we were required to pay up to $58.0 million to Schlumberger from the proceeds of the financing of PIGAP II, a South American joint venture, a minority interest of which was acquired by Hanover in the acquisition of POI. Because the joint venture failed to execute F-39 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 the financing on or before December 31, 2002, we had the right to put our interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by Hanover to the joint venture. In January 2003, we exercised our right to put our interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover's interest in the joint venture back to Schlumberger is subject to certain consents. Hanover is currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. At December 31, 2002, the Company expected the $58,000,000 obligation together with accrued interest to be paid in 2003, this obligation is recorded in accrued liabilities in the accompanying balance sheet. The purchase price is also subject to a contingent payment by Hanover to Schlumberger based on the realization of certain tax benefits by Hanover over the next 15 years. Commencing in February 2002, approximately 15 putative securities class action lawsuits were filed against us and certain of our officers and directors in the United States District Court for the Southern District of Texas. These class actions have been consolidated into one case, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover Compressor Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A. O'Connor. The plaintiffs in these securities actions purport to represent purchasers of our common stock during various periods ranging from May 15, 2000 through January 28, 2002. The complaints assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek unspecified amounts of compensatory damages, interest and costs, including legal fees. The court entered an order appointing Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as lead counsel. A consolidated amended complaint is currently due to be filed on or before April 7, 2003. F-40 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Commencing in February 2002, four derivative lawsuits were filed in the United States District Court for the Southern District of Texas, two derivative lawsuits were filed in state district court for Harris County, Texas (one of which was nonsuited and the second of which was removed to Federal District Court for the Southern District of Texas) and one derivative lawsuit was filed in the Court of Chancery for the State of Delaware in and for New Castle County. These derivative lawsuits, which were filed by certain of our shareholders purportedly on behalf of the Company, allege, among other things, that our directors breached their fiduciary duties to shareholders and seek unspecified amounts of damages, interest and costs, including legal fees. The derivative actions in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002. With that consolidation, the currently pending derivative lawsuits are:
Date Plaintiff Defendants Civil Action No. Court Instituted --------- ------------------------------------ ---------------- ---------------------------- ---------- Harbor Finance Partners, Michael J. McGhan, William S. H-02-0761 United States District Court 03/01/02 derivatively on behalf of Goldberg, Ted Collins, Jr., for the Southern District of Hanover Compressor Company Robert R. Furgason, Melvyn N. Klein, Texas Michael A. O'Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant Coffelt Family, Michael A. O'Connor, Michael J. 19410-NC Court of Chancery for the 02/15/02 LLC, derivatively on McGhan, William S. Goldberg, Ted State of Delaware State behalf of Hanover Collins, Jr., Melvyn N. Klein, Court in New Castle Compressor Company Alvin V. Shoemaker, and Robert R. County Furgason, Defendants and Hanover Compressor Company, Nominal Defendant
Motions are currently pending for appointment of lead counsel in the consolidated derivative actions in the Southern District of Texas. Currently, the Company will be required to file an answer or otherwise move with respect to the derivative action filed in Delaware by May 3, 2003. The Board of Directors has formed a Special Litigation Committee to address the issues raised by the derivative suits. Subject to the work of that Committee and its instructions, we intend to defend these cases vigorously. The putative class action securities lawsuit and the derivative lawsuits are at an early stage. Consequently, it is premature at this time to predict liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with such actions. An adverse outcome in these actions could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. On November 14, 2002, the Securities and Exchange Commission issued a Formal Order of Private Investigation relating to the matters involved in the restatements of our financial statements. We are cooperating fully with the Fort Worth District Office staff of the Securities and Exchange Commission. It is too soon to determine whether the outcome of this investigation will have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows. In January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and John Petti filed a putative securities class action against PricewaterhouseCoopers LLP, which is Hanover's auditor. The alleged class is all persons who purchased the equity or debt securities of Hanover Compressor Company or its affiliates from March 8, 2000 through and including October 23, 2002. On February 13, 2003, the court consolidated this action with Civil Action No. H-02-0410. F-41 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 On March 26, 2003, Ann Angleopoulos filed a putative class action against Hanover, Michael McGhan, Michael O'Conner, Chad Deaton and other purportedly unknown defendants. The alleged class is comprised of persons who between November 8, 2000 and the present participated in or were beneficiaries of The Hanover Companies Retirement and Savings Plan, which was established by Hanover pursuant to Section 401(k) of the United States Internal Revenue Code of 1986, as amended. The purported class action seeks relief under the Employee Retirement Income Security Act based upon Hanover's and the individual defendants' alleged mishandling of the Company's 401(k) Plan. The Company has not yet been served with the complaint in this action. As of December 31, 2002, the Company has paid approximately $7,734,000 in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuits and the Securities and Exchange Commission investigation. Of this amount, the Company has paid approximately $999,000 on behalf of officers and directors in connection with the above-named proceedings. The Company intends to pay the litigation costs of its officers and directors, subject to the limitations imposed by Delaware law and the Company's certificate of incorporation and bylaws. The Company expects to be reimbursed for all or a portion of these litigation expenses from the Company's directors' and officers' insurance policies. In the ordinary course of business the Company is involved in various other pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. (See Note 26.) 20. Accounting for Derivatives We adopted SFAS 133, as amended by SFAS 137 and SFAS 138, effective January 1, 2001. SFAS 133 requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. Prior to 2001, we entered into two interest rate swaps which were outstanding at December 31, 2002 with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the counterparty and now expire in July 2003. The difference paid or received on the swap transactions is recorded as an accrued lease liability and is recognized in leasing expense. On January 1, 2001, in accordance with the transition provisions of SFAS 133, we recorded a loss resulting from the cumulative effect of an accounting change in the statement of operations of approximately $164,000, net of tax benefit of $89,000. During the year ended December 31, 2002 and 2001, we recognized an unrealized gain of approximately $3,245,000 and an additional unrealized loss of approximately $7,596,000, respectively, related to the change in the fair value of these interest rate swaps in the statement of operations because these swaps did not meet the specific hedge criteria as a result of the counterparty's option to extend the interest rate swaps. Further, management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty. At December 31, 2002, we recorded approximately $4,606,000 in accrued liabilities with respect to the fair value adjustment related to these interest rate swaps. The fair value of these interest rate swaps will fluctuate with changes in interest rates over their remaining terms and the fluctuations will be recorded in the statement of income. F-42 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 During the second quarter of 2001, we entered into three additional interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows:
Lease Maturity Date Strike Rate Notional Amount ----- ------------- ----------- --------------- March 2000 3/11/05 5.2550% $100,000,000 August 2000 3/11/05 5.2725% $100,000,000 October 2000 10/26/05 5.3975% $100,000,000
These three swaps, which we have designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values have been recognized in other comprehensive income. During the year ended December 31, 2002 and 2001, we recorded a loss of approximately $13,640,000 and $9,343,000 million, respectively, net of tax of $4,774,000 and $3,270,000 with respect to these three swaps, in other comprehensive income. As of December 31, 2002, a total of approximately $11,476,000 was recorded in accrued current liabilities and approximately $11,507,000 in other long-term liabilities with respect to the fair value adjustment related to these three swaps. The counterparties to the interest rate swap agreements are major international financial institutions. We continually monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. 21. New Accounting Pronouncements In June 2001, the FASB issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets ("SFAS 143"). SFAS 143 establishes the accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. This statement is effective for Hanover on January 1, 2003. The Company is currently assessing the new standard and does not believe it will have a material impact on its consolidated results of operations, cash flows or financial position. In August 2001, the FASB issued SFAS 144. The new rules supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). The new rules retain many of the fundamental recognition and measurement provisions of SFAS 121, but significantly change the criteria for classifying an asset as held-for-sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company has adopted the new standard, which had no material effect on its consolidated results of operations, cash flows or financial position. In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The Statement updates, clarifies and simplifies existing accounting pronouncements. Provisions of SFAS 145 related to the rescission of Statement 4 are effective for us on January 1, 2003. The provisions of SFAS 145 related to SFAS 13 are effective for transactions occurring after May 15, 2002. The Company has adopted the provisions of the new standard related to SFAS 13, which had no material effect on its consolidated results of operations, cash flows or financial position. In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3. We will adopt the provision of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the F-43 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 will be effective for interim periods beginning after June 15, 2003. The Company is currently evaluating the impact of adoption of EITF 00-21 on its financial position and results of operations. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure provisions which are included within these financials and is currently evaluating the impact of adoption of the recognition and measurement provisions of FIN 45 on its financial position and results of operations. In December 2002, the FASB issued Statement of SFAS 148, Accounting for Stock-Based Compensation--Transition and Disclosure ("SFAS 148"). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions which are included within these financials and is currently evaluating the impact of adoption of SFAS 148 on its financial position and results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 will require us to include in our consolidated financial statements the special purpose entities that lease compression equipment to us beginning in July 2003. If these special purpose entities had been consolidated in Hanover's financial statements as of December 31, 2002, Hanover would add approximately $1,031,000,000 in compressor equipment and approximately $1,140,000,000 in debt to its balance sheet and reverse $109,000,000 of deferred gains that were recorded on its balance sheet as a result of the sale and leaseback transactions. In addition, Hanover would record depreciation expense on the compression equipment for prior periods (net of tax) as part of the cumulative effect F-44 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 of the adoption of FIN 46 and would record depreciation expense in future periods. The Company is currently evaluating the impact of recording depreciation for prior periods. After the adoption of FIN 46, the Company estimates that it will record approximately $20,000,000 per year in additional depreciation expense on its leased compression equipment. 22. April 2002 Restatement In conjunction with a review of our joint ventures and other transactions conducted by counsel under the direction of the Audit Committee in early 2002, the Company determined to restate its financial statements for the year ended December 31, 2000. See Note 23 for information regarding the further restatement of the 2000 consolidated financial statements. F-45 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The transactions involved in the April 2002 restatement, which are detailed further below are: (i) the Cawthorne Channel project in Nigeria initially conducted through the Hampton Roads Shipping Investors II, L.L.C. joint venture; (ii) the acquisition of two compressors in a non-monetary exchange transaction; (iii) a compressor sale transaction; and (iv) the sale of a turbine engine. The impact of the restatement for the year ended December 31, 2000 is summarized below:
Cawthorne Channel Project in Acquisitions of Nigeria/Hampton Compressors Compressor Sale of Roads Joint In Non-Monetary Sale Turbine As Filed (1) Venture Exchange Transaction Engine Restated (1) ------------ ------------------ --------------- ----------- ------- ------------ (in thousands except per share amounts) Revenues: Rentals.............................. $254,515 $ -- $ -- $ -- $ -- $254,515 Parts, service and used equipment.... 133,340 -- -- (12,004) (7,500) 113,836 Compressor fabrication............... 96,838 (6,568) -- -- -- 90,270 Production and processing equipment fabrication......................... 88,572 (9,451) -- -- -- 79,121 Gain on sale of other assets......... 5,743 -- (2,225) -- -- 3,518 Gain on change in interest in non- consolidated affiliate.............. 864 -- -- -- -- 864 Other................................ 4,768 -- -- -- -- 4,768 -------- -------- ------- -------- ------- -------- Total revenues.................... 584,640 (16,019) (2,225) (12,004) (7,500) 546,892 -------- -------- ------- -------- ------- -------- Expenses: Rentals.............................. 87,992 -- -- -- -- 87,992 Parts, service and used equipment.... 94,106 -- -- (7,954) (6,194) 79,958 Compressor fabrication............... 81,996 (5,242) -- -- -- 76,754 Production and processing equipment fabrication......................... 69,281 (6,597) -- -- -- 62,684 Selling, general and administrative.. 51,742 26 -- -- -- 51,768 Depreciation and amortization........ 52,188 -- -- -- -- 52,188 Lease expense........................ 45,484 -- -- -- -- 45,484 Interest expense..................... 8,467 212 -- -- -- 8,679 Distributions on mandatorily redeemable convertible preferred Securities.......................... 6,369 -- -- -- -- 6,369 -------- -------- ------- -------- ------- -------- Total expenses.................... 497,625 (11,601) (7,954) (6,194) 471,876 -------- -------- ------- -------- ------- -------- Income (loss) from continuing operations before income taxes...... 87,015 (4,418) (2,225) (4,050) (1,306) 75,016 Provision for (benefit from) income taxes............................... 32,309 (1,644) (827) (1,507) (486) 27,845 -------- -------- ------- -------- ------- -------- Income (loss) from continuing operations............................. 54,706 (2,774) (1,398) (2,543) (820) 47,171 Income (loss) from discontinued operations.......................... 3,993 -- -- -- -- 3,993 -------- -------- ------- -------- ------- -------- Net income (loss)....................... $ 58,699 $ (2,774) $(1,398) $ (2,543) $ (820) $ 51,164 ======== ======== ======= ======== ======= ======== Basic earnings per common share: Income from continuing operations.......................... $ 0.89 $ 0.77 Income from discontinued operations.......................... 0.06 0.06 -------- -------- Net income........................ $ 0.95 $ 0.83 ======== ======== Diluted earnings per common share: Income from continuing operations.......................... $ 0.82 $ 0.71 Income from discontinued operations.......................... 0.06 0.06 -------- -------- Net income........................ $ 0.88 $ 0.77 ======== ========
- -------- (1) As reclassified for 2002 presentation, see Note 3 for a discussion of discontinued operations. F-46 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Cawthorne Channel Project in Nigeria/Hampton Roads Joint Venture Cawthorne Channel is a project to build, own and operate barge-mounted gas compression and gas processing facilities to be stationed in a Nigerian coastal waterway as part of the performance of a contract between Global Energy and Refining Ltd. ("Global") and Shell Petroleum Development Company of Nigeria Limited, the Nigerian operating unit of The Royal/Dutch Shell Group ("Shell"). The Company entered into a contract with Global in June 1999 to fabricate and lease facilities to Global to assist Global in fulfilling its obligations under its contract with Shell. Subsequently, the Company acquired 1,000,000 shares of preferred stock in Global in settlement of a $1.1 million debt owed by Global to the Company. In September 2000, the Company and an unrelated third party formed a joint venture known as Hampton Roads Shipping Investors II, L.L.C. ("Hampton Roads") which was to own the gas processing facilities and lease them to Global. The Company held a 25% interest in Hampton Roads, and the third party held the remaining 75% interest. The Company's initial capital contribution to Hampton Roads was $1,250,000 and the third party's initial capital contribution was $3,750,000. The Company entered into a turnkey construction contract with Hampton Roads to fabricate the barges for the Cawthorne Channel project for $51,000,000. The barges were to be used pursuant to a 10-year contract with Shell to commence September 30, 2001. During the first quarter of 2001, the scope of the project was reduced requiring less costly gas processing facilities of approximately $43,000,000 and the contract term was extended to 15 years with a projected start date of September 2003. Since the lease had not started yet, the Company recorded no income attributable to its equity ownership in the venture. The Company accounted for the work performed under the turnkey construction contract using the percentage of completion method of accounting, and recorded 75% of the revenue and net income, based on the third party's ownership share of Hampton Roads. Based upon the discovery of a commitment by the Company to loan Hampton Roads up to $43,500,000 for the purpose of paying the balance of the turnkey construction contract and a guarantee by the Company to refund the capital contributed by the third party should certain conditions not be met, the Company concluded that it had retained substantial risk of ownership with respect to the third party's interest. Accordingly, the Company determined to treat the project as if the Company had owned 100% of the project from its inception and reversed the revenue and net income previously recognized. In February 2002, the Company purchased the 75% interest in Hampton Roads that it did not own. The Company now owns 100% of the venture and will recognize the rental revenues pursuant to its contract with Global once startup begins. Acquisition of Compressors In Non-Monetary Exchange In the third quarter of 2000, the Company acquired two compressors in a non-monetary exchange transaction with an independent oil and gas producer. In the transaction, the Company acquired the two compressors in exchange for certain gas reservoir rights that the Company had obtained in settlement of a payment default by one of its customers. The Company accounted for the transaction as an exchange of non-monetary assets and recorded $2,225,000 in revenue and pre-tax income in 2000. In 2002, the Company discovered that it had made certain guarantees with respect to the performance of the oil and gas reservoir rights. Therefore, the Company concluded that the earnings process was not complete in the third quarter of 2000 and that the Company retained an ongoing risk of not recovering the fair value of the compressors received in exchange for the oil and gas properties. Based on this analysis, the Company restated its financial results for the third quarter of 2000 to reverse the $2,225,000 in revenue it had originally recognized on the transaction. F-47 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 Compressor Sale Transaction The Company sold 33 gas compressors to a gas pipeline system then controlled by Enron for $12,004,000 pursuant to invoices issued in December 2000. The Company recorded $4,050,000 of pre-tax income from the transaction in the fourth quarter of 2000. In January 2001, the Company entered into an agreement with its customer to provide transition services and settle claims between the parties arising from the operation of the compressors prior to their sale. The agreement also provided for the issuance of a bill of sale. Upon further evaluation of the transaction, the Company determined to recognize revenue and net income in January 2001 when the bill of sale was issued. Sale of Turbine Engine In the fourth quarter of 2000, the Company entered the non-oil field power generation market to take advantage of rising electricity demand and purchased used turbines to carry out this effort. In connection with this effort, the Company agreed to sell a turbine to a third party on extended credit and recognized revenues of $7,500,000 and $1,306,000 of pre-tax income in the fourth quarter of 2000. In early 2001, the third party assigned their interest in the turbine to another unrelated third party. The Company was ultimately paid for the turbine in December 2001. Based on the information provided to the Company at the time of the April 2002 restatement, the Company determined that revenue should have been recognized for this transaction in the fourth quarter of 2001 when payment was received and collectability was assured. As a result of the discovery of new information, the Company determined to restate the sale of the turbine engine recorded in the fourth quarter of 2001. See Sale and Purchase of Turbine Engine in Note 23. Reclassification The Company determined that the deferred gain related to the 1999 and 2000 leases was calculated in error. A reclassification between property, plant and equipment and other liabilities has been made to correct this matter. This reclassification had no impact on net income. 23. November 2002 Restatement In October 2002, a special committee of the Board of Directors together with the Audit Committee of the Board and company management, aided by outside legal counsel, completed an extensive investigation of transactions recorded during 2001, 2000 and 1999, including those transactions restated by the Company in April 2002 (see Note 22). As a result of this investigation, the Company determined, to restate its financial results further for the years ended 2001 and 2000 and 1999. The transactions involved in the November 2002 restatement, which are detailed below, are: (i) sale of compression and production equipment; (ii) a delay penalty; (iii) a turbine sale and purchase; (iv) an agreement to provide technical assistance to an Indonesian company; (v) a scrap sale transaction; (vi) the sale of certain used compression equipment; and (vii) the recording of pre-acquisition revenues associated with a business acquired by Hanover. In addition, the Company restated the following transactions by reversing their impact from the quarter originally recorded in 2000 and recording them in a subsequent quarter of 2000: (i) the sale of an interest in a power plant in Venezuela; (ii) an agreement to provide services to a company ultimately acquired by Hanover; and (iii) the sale of four used compressors. These three transactions are not reflected in the tables below because they had no impact on the overall financial results for 2001 or 2000. F-48 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The impact of the November 2002 restatement for the year ended December 31, 2000 is summarized below:
Sale Of Indonesia Compression As Filed Technical Sale of Used Pre- And April Assistance Scrap Sale Compression Acquisition Production Delay 2002(1) Revenue Transaction Equipment Revenue Equipment Penalty -------- ---------- ----------- ------------ ----------- ----------- -------- (in thousands, except per share amounts) Revenues: Rentals.................................. $254,515 $ (678) $ -- $ -- $ -- $ -- $ -- Parts, service and used equipment........ 113,836 -- -- -- -- (310) -- Compressor fabrication................... 90,270 -- -- -- -- -- -- Production and processing equipment fabrication............................. 79,121 -- -- -- -- -- -- Equity in income of non-consolidated affiliates.............................. 3,518 -- -- -- -- -- -- Gain on change in interest in non- consolidated affiliate.................. 864 -- -- -- -- -- -- Other.................................... 4,768 -- -- -- -- -- 920 -------- -------- -------- -------- -------- -------- -------- Total revenues.......................... 546,892 (678) -- -- -- (310) 920 -------- -------- -------- -------- -------- -------- -------- Expenses: Rentals.................................. 87,992 -- -- -- -- -- -- Parts, service and used equipment........ 79,958 -- -- -- -- -- -- Compressor fabrication................... 76,754 -- -- -- -- -- -- Production and processing equipment fabrication............................. 62,684 -- -- -- -- -- -- Selling, general and administrative...... 51,768 -- -- -- -- -- -- Depreciation and amortization............ 52,188 -- -- -- -- -- -- Lease expense............................ 45,484 -- -- -- -- -- -- Interest expense......................... 8,679 -- -- -- -- -- -- Distributions on mandatorily redeemable convertible preferred Securities........ 6,369 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total expenses.......................... 471,876 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes..................... 75,016 (678) -- -- -- (310) 920 Provision for (benefit from) income taxes................................... 27,845 (258) -- -- -- (118) 349 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations.............................. 47,171 (420) -- -- -- (192) 571 -------- -------- -------- -------- -------- -------- -------- Income (loss) from discontinued operations, net of tax.................. 3,993 -- (434) (372) (678) -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)........................ $ 51,164 $ (420) $ (434) $ (372) $ (678) $ (192) $ 571 ======== ======== ======== ======== ======== ======== ======== Basic earnings per common share: Income from continuing operations........ $ 0.77 Income from discontinued operations...... 0.06 -------- Net income.............................. $ 0.83 ======== Diluted earnings per common share: Income from continuing operations........ $ 0.71 Income from discontinued operations...... 0.06 -------- Net income............................... $ 0.77 ========
Restated(1) ----------- Revenues: Rentals.................................. $253,837 Parts, service and used equipment........ 113,526 Compressor fabrication................... 90,270 Production and processing equipment fabrication............................. 79,121 Equity in income of non-consolidated affiliates.............................. 3,518 Gain on change in interest in non- consolidated affiliate.................. 864 Other.................................... 5,688 -------- Total revenues.......................... 546,824 -------- Expenses: Rentals.................................. 87,992 Parts, service and used equipment........ 79,958 Compressor fabrication................... 76,754 Production and processing equipment fabrication............................. 62,684 Selling, general and administrative...... 51,768 Depreciation and amortization............ 52,188 Lease expense............................ 45,484 Interest expense......................... 8,679 Distributions on mandatorily redeemable convertible preferred Securities........ 6,369 -------- Total expenses.......................... 471,876 -------- Income (loss) from continuing operations before income taxes..................... 74,948 Provision for (benefit from) income taxes................................... 27,818 -------- Income (loss) from continuing operations.............................. 47,130 -------- Income (loss) from discontinued operations, net of tax.................. 2,509 -------- Net income (loss)........................ $ 49,639 ======== Basic earnings per common share: Income from continuing operations........ $ 0.76 Income from discontinued operations...... 0.04 -------- Net income.............................. $ 0.80 ======== Diluted earnings per common share: Income from continuing operations........ $ 0.71 Income from discontinued operations...... 0.04 -------- Net income............................... $ 0.75 ========
- -------- (1) As reclassified for 2002 presentation, see Note 3 for a discussion of discontinued operations. F-49 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The impact of the November 2002 restatement for the year ended December 31, 2001 is summarized below:
Indonesia Overstatement Sale Of Turbine Technical of Mark to Compression And As Filed Sale and Assistance Market Scrap Sale Production April 2002 (1) Purchase Revenue Expense Transaction Equipment -------------- --------- ---------- ------------- ----------- --------------- (in thousands, except per share amounts) Revenues: Rentals.................................. $ 400,776 $ -- $ -- $ -- $ -- $ -- Parts, service and used equipment........ 222,648 (7,500) (276) -- -- -- Compressor fabrication................... 223,519 -- -- -- -- -- Production and processing equipment fabrication............................. 184,040 -- -- -- -- -- Equity in income of non-consolidated affiliates.............................. 9,350 -- -- -- -- -- Other.................................... 8,403 -- -- -- -- -- ---------- --------- --------- --------- ---------- ---------- Total................................... 1,048,736 (7,500) (276) -- ---------- --------- --------- --------- ---------- ---------- Expenses: Rentals.................................. 140,998 -- -- -- -- -- Parts, service and used equipment........ 158,607 (6,194) (428) -- -- 716 Compressor fabrication................... 188,122 -- -- -- -- -- Production and processing equipment fabrication............................. 147,824 -- -- -- -- -- Selling, general and administrative...... 92,172 -- -- -- -- -- Depreciation and amortization............ 88,823 -- -- -- -- -- Lease expense............................ 70,435 -- -- -- -- -- Interest expense......................... 17,531 -- -- -- -- -- Foreign currency translation............. 6,658 -- -- -- -- -- Distributions on mandatorily redeemable convertible preferred securities........ 6,373 -- -- -- -- -- Other.................................... 18,566 -- -- (1,243) -- -- ---------- --------- --------- --------- ---------- ---------- Total expenses.......................... 936,109 (6,194) (428) (1,243) 716 ---------- --------- --------- --------- ---------- ---------- Income (loss) from continuing operations before income taxes..................... 112,627 (1,306) 152 1,243 -- (716) Provision for (benefit from) income taxes................................... 42,627 (496) 58 472 -- (273) ---------- --------- --------- --------- ---------- ---------- Income (loss) from continuing operations................................ 70,000 (810) 94 771 (443) Income from discontinued operations net of taxes................................ 2,801 -- -- -- 164 -- ---------- --------- --------- --------- ---------- ---------- Net income (loss) before cumulative effect of accounting change...................... 72,801 (810) 94 771 164 (443) Cumulative effect of accounting change for derivative instruments, net of income tax.............................. (164) -- -- -- -- -- ---------- --------- --------- --------- ---------- ---------- Net income (loss).......................... $ 72,637 $ (810) $ 94 $ 771 $ 164 $ (443) ========== ========= ========= ========= ========== ========== Basic earnings per common share:........... Income from continuing operations........ $ 0.96 Income from discontinued operations...... 0.04 ---------- Net income.............................. $ 1.00 ========== Diluted earnings per common share:......... Income from continuing operations........ $ 0.92 Income from discontinued operations...... 0.03 ---------- Net income.............................. $ 0.95 ==========
Restated (1) ------------ Revenues: Rentals.................................. $ 400,776 Parts, service and used equipment........ 214,872 Compressor fabrication................... 223,519 Production and processing equipment fabrication............................. 184,040 Equity in income of non-consolidated affiliates.............................. 9,350 Other.................................... 8,403 ---------- Total................................... 1,040,960 ---------- Expenses: Rentals.................................. 140,998 Parts, service and used equipment........ 152,701 Compressor fabrication................... 188,122 Production and processing equipment fabrication............................. 147,824 Selling, general and administrative...... 92,172 Depreciation and amortization............ 88,823 Lease expense............................ 70,435 Interest expense......................... 17,531 Foreign currency translation............. 6,658 Distributions on mandatorily redeemable convertible preferred securities........ 6,373 Other.................................... 17,323 ---------- Total expenses.......................... 928,960 ---------- Income (loss) from continuing operations before income taxes..................... 112,000 Provision for (benefit from) income taxes................................... 42,388 ---------- Income (loss) from continuing operations................................ 69,612 Income from discontinued operations net of taxes................................ 2,965 ---------- Net income (loss) before cumulative effect of accounting change...................... 72,577 Cumulative effect of accounting change for derivative instruments, net of income tax.............................. (164) ---------- Net income (loss).......................... $ 72,413 ========== Basic earnings per common share:........... Income from continuing operations........ $ 0.96 Income from discontinued operations...... 0.04 ---------- Net income.............................. $ 1.00 ========== Diluted earnings per common share:......... Income from continuing operations........ $ 0.91 Income from discontinued operations...... 0.03 ---------- Net income.............................. $ 0.94 ==========
(1) As reclassified for 2002 presentation, see note 3 for a discussion of discontinued operations. F-50 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000
Restatement As filed Items Restated ---------- ----------- ---------- (in thousands) Inventory........................................ $ 216,405 $ (750) $ 215,655 Property, plant and equipment, net............... 1,153,691 (2,178) 1,151,513 Goodwill, net.................................... 245,478 (3,300) 242,178 Intangible and other assets...................... 79,615 (962) 78,653 Total assets..................................... 2,272,966 (7,190) 2,265,776 Other liabilities................................ 131,519 (1,243) 130,276 Deferred income taxes............................ 167,704 (2,212) 165,492 Total liabilities................................ 1,143,513 (3,455) 1,140,058 Retained earnings................................ 223,997 (3,735) 220,262 Total liabilities and common stockholders' equity 2,272,966 (7,190) 2,265,776
Sale of Compression and Production Equipment In the fourth quarter of 1999, the Company recorded three transactions totaling $4,170,000 in revenue from the sale of used compression and production equipment. An additional $310,000 in revenue was recorded on one of the transactions in the second quarter of 2000. Based on further evaluation of the terms of the three transactions, the Company determined that the sales were consignment sales and should not have recognized revenue or income on these transactions. The receivables recorded by the Company in 1999 in two of the transactions were cleared in 2000 when the Company purchased the buyer of the compression and production equipment in business acquisition transactions. The Company ultimately repurchased the equipment sold in the third transaction back from the buyer. In the second quarter of 2001, the Company resold a portion of the compression equipment originally recorded as sold in 1999 and should have recorded an additional $716,000 pre-tax expense on the sale. Delay Penalty In July 1999, the Company entered into a Contract Gas Processing Master Equipment and Operating Agreement (the "Agreement") with a customer. The customer failed to satisfy certain conditions of the Agreement for which it later agreed to pay up to $1,100,000 as a delay penalty. The Company and the customer executed an addendum to the original Agreement effective February 25, 2000 whereby the customer acknowledged the amount of penalty that would be paid. In 1999, the Company recognized and recorded $920,000 of this penalty as revenue. The Company determined that the penalty should not have been recognized until it had executed the addendum to the Agreement in February 2000. Later in 2000, the Company entered into a Stock Issuance Agreement with the customer whereby the Company purchased an equity interest in the customer in exchange for the amount the customer owed to the Company for the delay payment. Turbine Engine Sale and Purchase As described in Note 22 under the heading "Sale of Turbine Engine" above, in the fourth quarter of 2000, the Company entered into an agreement to sell a turbine to a third party. In the April 2002 restatement, based on information provided to the Company at that time, the Company restated the transaction to recognize the $7,500,000 in revenue in the fourth quarter of 2001, when full payment was received. Through the Company's subsequent investigation, it discovered that in the fourth quarter of 2001, the Company purchased an interest in a F-51 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 turbine engine package from a third party for $8,000,000. The third party was the same entity that had ultimately purchased the Company's turbine engine. Based upon an evaluation of this new information, the Company has determined to account for these transactions as a non-monetary exchange, rather than a sale and purchase transaction. Accordingly, the revenue and related expense which was recorded in the fourth quarter of 2001 was reversed. Indonesian Technical Assistance Revenue In the second quarter of 2000, the Company entered into an agreement to provide technical assistance services to an independent oil and gas producer in Indonesia. Under the agreement, the Company purchased for $1.1 million an option to acquire a controlling interest in the Indonesian company as well as certain inventory. Based on the agreement, the Company recognized revenue of $378,000 in the first quarter of 2000, $300,000 in the second quarter of 2000, $138,000 in the second quarter of 2001, and $138,000 in the third quarter of 2001. The Company has determined, following a review of the transaction, that the payments made to the Company are more properly characterized as a return of the Company's investment in the option rather than as payments for the provision of services. Accordingly, the Company determined that the payments received from the Indonesian company should be recorded as a return of investment in the option instead of revenue. Overstatement of Mark to Market Expense In the fourth quarter of 2001, the Company overstated by $1,243,000 the mark to market expense related to its interest rate swaps that are recorded in other expense. Scrap Sale Transaction In the third quarter of 2000, the Company recorded $700,000 of revenue from the sale of scrap inventory to an independent salvage metal company, pursuant to invoices issued in September 2000. Based upon the evaluation of when the scrap inventory was delivered and paid for in connection with this transaction, the Company has determined that no revenue should have been recorded in 2000 and that it should have recognized $264,000 in revenue on this transaction in the fourth quarter of 2001. Accordingly, the $700,000 of revenue was reversed in 2000. Sale of Used Compression Equipment In the fourth quarter of 2000, the Company recognized $1,500,000 in revenue and $1,200,000 in pre-tax income from the sale of used compression equipment by a Company subsidiary. The compression equipment was acquired as a result of the acquisition of a subsidiary by the Company less than six months prior to the sale of the equipment. Upon further evaluation of the transaction, the Company determined that the compression equipment should have been valued at $900,000 (instead of $300,000) in the allocation of the purchase price and the gain on the sale should be reduced by $600,000 with a corresponding adjustment made to reduce goodwill. Pre-Closing Revenue In the second quarter of 2000, the Company completed negotiations for the acquisition of used equipment companies. The Company entered into acquisition agreements with effective dates of June 1, 2000 which were not completed until July 2000. The Company recorded $2,085,000 in revenue and $965,000 in pre-tax income in the second quarter of 2000 and $442,000 in revenue and $128,000 in pre-tax income in the third quarter of 2000, F-52 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 reflecting the results of the acquired entities for the period between the effective date of the acquisitions and the closing of the acquisitions. Upon further evaluation of this matter, the Company determined that these pre-closing results should not have been recorded. Power Plant Sale In the second quarter of 2000, the Company sold a 25% interest in a Venezuelan power plant to Energy Transfer Group, LLC ("ETG") in an exchange of non similar assets. The Company accounted for the transaction as a sale and recorded a gain on sale of other assets of $1,250,000 in the second quarter of 2000. In 2000, the Company and ETG also discussed the possible purchase by the Company of an interest in a power generation facility in Florida with the Company making a payment toward that purchase in the second quarter of 2000. In the fourth quarter of 2000, these discussions resulted in the purchase by Hanover of a 10% interest in ETG. Upon further evaluation of this transaction, the Company determined that the revenue and pre-tax income from the exchange of the interest in the Venezuelan power plant should be moved from the second quarter of 2000 to the fourth quarter of 2000 to align with the completion of the exchange. Management Fee Transaction In the second quarter of 2000 the Company recorded $450,000 in revenue for management services provided to Ouachita Energy Corporation, a compression services company, pursuant to an invoice dated June 30, 2000. In the third quarter of 2000, the Company reversed the revenue, because the management fee was not agreed to by both parties until the fourth quarter of 2000. Upon further evaluation of the transaction, the Company determined that the reversal of revenue should have occurred in the second quarter of 2000. Compressor Sale Transaction In connection with the sale of four compressors, the Company recorded revenue of $1,486,000 and pre-tax income of $1,081,000 in the first quarter of 2000, and revenue of $750,000 and pre-tax income of $468,000 in the third quarter of 2000. Based upon further examination of the transaction, the Company has determined that it should have recognized the income from this transaction in the fourth quarter of 2000, when title to the equipment was transferred, rather than in the first and third quarters of 2000. 24. Subsequent Events In January 2003, we exercised our right to put our interest in the PIGAP II joint venture (See Note 8) back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover's interest in PIGAP II back to Schlumberger is subject to certain consents. Hanover is currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest PIGAP II. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. In February 2003, the Company executed an amendment to its bank credit facility and certain compression equipment leases that we entered into in 1999 and 2000. (See Note 11.) The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow the Company greater flexibility in accessing the capacity under the bank credit facility to support its short-term liquidity needs. In addition, at the higher end of the Company's permitted consolidated leverage ratio, the amendment would increase the commitment fee F-53 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in the Company's interest costs as a result of the amendment will depend on the Company's consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by the Company. As part of the amendment, the Company granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and the Company's domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover's foreign subsidiaries. In consideration for obtaining the amendment, the Company agreed to pay approximately $1.8 million in fees to the lenders under these agreements. 25. Industry Segments and Geographic Information The Company manages its business segments primarily on the type of product or service provided. The Company has five principal industry segments: Rentals--Domestic, Rentals--International, Parts, Service and Used Equipment, Compressor Fabrication and Production and Processing Equipment Fabrication. The Rentals segments provide natural gas compression rental and maintenance services to meet specific customer requirements. The Compressor Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet unique customer specifications. The Production and Processing Equipment Fabrication Segment designs, fabricates and sells equipment utilized in the production of crude oil and natural gas. The Company evaluates the performance of its segments based on segment gross profit. Segment gross profit for each segment includes direct operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, leasing, interest, foreign currency translation distributions on mandatorily redeemable convertible preferred securities, change in value of derivative instruments, goodwill impairment, other expenses and income taxes. Amounts defined as "Other" include equity in income of nonconsolidated affiliates, results of other insignificant operations and corporate related items primarily related to cash management activities. Revenues include sales to external customers and intersegment sales. Intersegment sales are accounted for at cost, except for compressor fabrication sales which are accounted for on an arms length basis. Intersegment sales and any resulting profits are eliminated in consolidation. Identifiable assets are tangible and intangible assets that are identified with the operations of a particular segment or geographic region, or which are allocated when used jointly. Capital expenditures include fixed asset purchases. No single customer accounts for 10% or more of the Company's revenues for during any of the periods presented. One vendor accounted for approximately $41,200,000 of the Company's purchases in 2000. F-54 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 The following tables present sales and other financial information by industry segment and geographic region for the years ended December 31, 2002, 2001 and 2000. Industry Segments
Parts, service Production Domestic International and used Compressor equipment rentals rentals equipment fabrication fabrication Other Eliminations Consolidated -------- ------------- --------- ----------- ----------- -------- ------------ ------------ (in thousands of dollars) 2002: Revenues from external customers.. $328,600 $189,700 $223,845 $114,009 $149,656 $ 23,000 $ -- $1,028,810 Intersegment sales................ -- 6,718 54,249 60,790 12,848 5,057 (139,662) -- -------- -------- -------- -------- -------- -------- --------- ---------- Total revenues................. 328,600 196,418 278,094 174,799 162,504 28,057 (139,662) 1,028,810 Gross profit...................... 207,860 132,121 44,001 14,563 22,214 23,000 -- 443,759 Identifiable assets............... 763,161 792,554 92,609 90,639 245,366 169,700 -- 2,154,029 Capital expenditures.............. 120,581 101,349 1,093 441 26,706 -- -- 250,170 Depreciation and amortization..... 90,160 54,249 1,233 1,282 4,257 -- -- 151,181 2001: (Restated) Revenues from external customers.. $269,679 $131,097 $214,872 $223,519 $184,040 $ 17,753 $ -- $1,040,960 Intersegment sales................ -- 2,858 72,930 112,748 7,110 4,600 (200,246) -- -------- -------- -------- -------- -------- -------- --------- ---------- Total revenues................. 269,679 133,955 287,802 336,267 191,150 22,353 (200,246) 1,040,960 Gross profit...................... 174,476 85,302 62,171 35,397 36,216 17,753 -- 411,315 Identifiable assets............... 867,544 683,829 145,010 153,198 194,081 222,114 -- 2,265,776 Capital expenditures.............. 450,172 137,805 6,763 399 24,626 20,118 -- 639,883 Depreciation and amortization..... 45,743 33,685 1,259 4,774 3,362 -- -- 88,823 2000: (Restated) Revenues from external customers.. $172,517 $ 81,320 $113,526 $ 90,270 $ 79,121 $ 10,070 $ -- $ 546,824 Intersegment sales................ -- 1,200 31,086 89,963 3,653 7,413 (133,315) -- -------- -------- -------- -------- -------- -------- --------- ---------- Total revenues................. 172,517 82,520 144,612 180,233 82,774 17,483 (133,315) 546,824 Gross profit...................... 112,181 53,664 33,568 13,516 16,437 10,070 -- 239,436 Identifiable assets............... 428,332 431,362 13,226 202,390 125,377 45,485 -- 1,246,172 Capital expenditures.............. 214,460 58,801 -- 874 723 -- -- 274,858 Depreciation and amortization..... 29,568 15,117 -- 4,381 3,122 -- -- 52,188
Geographic Data
United States International(1) Consolidated ---------- ---------------- ------------ (in thousands of dollars) 2002: Revenues from external customers. $ 692,823 $ 335,987 $1,028,810 Identifiable assets.............. $1,068,003 $1,086,026 $2,154,029 2001: (Restated) Revenues from external customers. $ 730,702 $ 310,258 $1,040,960 Identifiable assets.............. $1,319,084 $ 946,692 $2,265,776 2000: (Restated) Revenues from external customers. $ 424,837 $ 121,987 $ 546,824 Identifiable assets.............. $ 760,105 $ 486,067 $1,246,172
- -------- (1) International operations include approximately $104,043,000 and $77,171,000 of revenues and $430,989,000 and $467,801,000 of identifiable assets for 2002 and 2001, respectively, related to operations and investments in Venezuela. Approximately $141,008,000 and $152,443,000 of the identifiable assets in 2002 and 2001, respectively, relates to the joint ventures acquired in connection with the POI acquisition completed in August 2001. (See Note 8). F-55 HANOVER COMPRESSOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2002, 2001 and 2000 26. Other Expense Other expense during 2002 included $15,950,000 in charges for investments in four non-consolidated affiliates which have experienced a decline in value which we believe to be other than temporary, a $500,000 write off of a purchase option for an acquisition which was abandoned, a $8,454,000 write down of notes receivable and $2,703,000 in other non-operating costs. Included in the $8,454,000 write down of notes receivable is a $6,021,000 reserve established for loans to employees who are not executive officers. Other expenses during 2001 were $9,727,000 which included a $2,750,000 bridge loan commitment fee associated with Hanover's acquisition of POI, a $5,013,000 write down of an investment in Aurion, a $965,000 litigation settlement and $999,000 in other non-operating expenses. 27. Restructuring, Impairment and Other Charges During 2002, the Company recorded restructuring, impairment and other charges. Below is a summary of these pre-tax charges and the line on the Company's Consolidated Statement of Operations which was impacted by the charges (in thousands): Inventory reserves--(in Parts and service and used equipment expense).............. $ 6,800 Severance and other charges (in Selling, general and administrative)............... 6,160 Write off of idle equipment and assets to be sold or abandoned (in Depreciation and amortization..................................................................... 34,485 Goodwill impairments............................................................... 52,103 Non-consolidated affiliate write downs/charges (in Other expense).................. 15,950 Write down of discontinued operations.............................................. 58,282 Note receivable reserves (in Other expense)........................................ 8,454 Write-off of abandoned purchase option (in Other expense).......................... 500 -------- $182,734 ========
For a further description of these charges see Notes 3, 4, 6, 7, 8, 9 and 26. F-56 HANOVER COMPRESSOR COMPANY SELECTED QUARTERLY UNAUDITED FINANCIAL DATA The table below sets forth selected unaudited financial information for each quarter of the two years:
1st 2nd 3rd 4th quarter quarter(1) quarter quarter (2)(3) -------- ---------- -------- -------------- (in thousands, except per share amounts) 2002: Revenue(4)....................................... $255,526 $262,220 $249,367 $261,697 Gross profit(4).................................. 108,756 110,108 117,993 106,902 Net income....................................... 5,034 (55,241) 9,059 (74,920) Earnings per common and common equivalent share: Basic........................................ $ 0.06 $ (0.70) $ 0.11 $ (0.93) Diluted...................................... $ 0.06 $ (0.70) $ 0.11 $ (0.93) 2001: (Restated) Revenue(4)....................................... $222,786 $235,203 $274,720 $308,251 Gross profit(4).................................. 89,132 92,549 109,251 120,383 Net income....................................... 19,809 20,752 19,848 12,004 Earnings per common and common equivalent share: Basic........................................ $ 0.30 $ 0.30 $ 0.27 $ 0.15 Diluted...................................... $ 0.27 $ 0.28 $ 0.26 $ 0.14
- -------- (1) During the second quarter of 2002, the Company recorded a $47,500,000 goodwill impairment, $6,000,000 write down of assets held for sale, a $6,100,000 inventory reserve, a $500,000 write off of a purchase option for an acquisition which was abandoned and $14,100,000 write down related to investments in certain non-consolidated affiliates. (2) The Company incurred other expenses during the fourth quarter of 2001 which included a $5,013,000 write down of an investment in Aurion, a $965,000 litigation settlement, and $999,000 in other non-operating expenses. In addition, the Company incurred a $5,511,000 translation loss related to its foreign operations, primarily in Argentina and Venezuela. (3) The Company incurred other expenses during the fourth quarter of 2002 which included a $8,454,000 write down of notes receivable and a $1,850,000 write off related to Aurion. In addition, during the fourth quarter of 2002, the Company recorded i) $52,282,000 pre-tax charge for the estimated loss in fair-value from the carrying value expected to be realized at the time of disposal of its discontinued operations; ii) $34,485,000 in additional impairment to reduce the carrying value of certain idle compression equipment that are being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned; iii) $4,603,000 goodwill impairment related to the Company's pump division which is expected to be sold in 2003; and iv) $2,720,000 in employee separation costs. (4) Amounts reflect reclassifications for discontinued operations. (See Note 3). F-57 SCHEDULE II HANOVER COMPRESSOR COMPANY VALUATION AND QUALIFYING ACCOUNTS
Additions Balance Charged at to Costs Balance Beginning and at End of Description of Period Expenses Deductions Period ----------- --------- --------- ---------- --------- (in thousands) Allowance for doubtful accounts deducted from accounts receivable in the balance sheet 2002....................................................... $6,300 $ 7,091 $8,229(1) $ 5,162 2001....................................................... 2,659 4,860 1,219(1) 6,300 2000....................................................... 1,730 3,198 2,269(1) 2,659 Allowance for obsolete and slow moving inventory deducted from inventories in the balance sheet(3) 2002....................................................... $2,101 $13,853 $1,743(2) $14,211 2001....................................................... 560 2,336 795(2) 2,101 Allowance for deferred tax assets not expected to be realized 2002....................................................... $ -- $23,371 $ -- $23,371 Allowance for employee loans 2002....................................................... $ -- $ 6,021 $ -- $ 6,021
- -------- (1) Uncollectible accounts written off, net of recoveries. (2) Obsolete inventory written off at cost, net of value received. (3) Amounts for 2000 were not material. S-1 EX-3.5 3 dex35.txt AMENDED AND RESTATED BYLAWS Exhibit 3.5 AMENDED AND RESTATED BYLAWS (as of December 10, 2002) of Hanover Compressor Company Houston, Texas AMENDED AND RESTATED BYLAWS OF HANOVER COMPRESSOR COMPANY (a Delaware Corporation) ARTICLE I Offices Section 1.1 The corporation shall maintain a registered office in the State of Delaware as required by law. The corporation may also have such other offices, either within or without the State of Delaware, as the business of the corporation may require. ARTICLE II Stockholders Section 2.1 ANNUAL MEETING. An annual meeting of the stockholders shall be held commencing in 2000 on the third Thursday of May of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day, for the election of directors and for the transaction of such other business as may come before the meeting. Section 2.2 SPECIAL MEETINGS. Special meetings of the stockholders may be called by the President, the board of directors, or by a request in writing from the holders of not less than 10% of the issued and outstanding voting stock of the corporation. Within ten days after the receipt of such a written request, the President or another officer designated by the President must send a notice of meeting in accordance with section 2.4 hereof. Section 2.3 PLACE OF MEETING. The board of directors may designate any place, either within or without the State of Delaware, as the place of meeting for any annual meeting or for any special meeting called by the board of directors. If a special meeting be called otherwise than by the board of directors, the place of meeting must be in the county of New Castle, State of Delaware. Section 2.4 NOTICE OF MEETING. Written notice stating the place, date and hour of the meeting, the place where the stockholder list may be examined prior to the meeting, if different from the place of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given in person or sent by mail or overnight express service not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger or consolidation of the corporation requiring stockholder approval or a sale, lease or exchange of all or substantially all of the corporation's assets, not less than twenty nor more than sixty days before the date of meeting, to each stockholder of record entitled to vote at such meeting. If mailed, notice shall be deemed given when deposited in the United States mail, 2 postage prepaid, directed to the stockholder at his or her address as it appears on the records of the corporation. If notice is given by overnight express service, such notice shall be deemed given one day after delivery to such express service. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than thirty days, or unless, after adjournment, a new record date is fixed for the adjourned meeting, in either of which cases notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by such stockholder either before or after any meeting. Attendance by a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting need be specified in any waiver of notice of such meeting. Section 2.5 FIXING OF RECORD DATE. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the Delaware General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. 3 (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. Section 2.6 VOTING LISTS. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and number of shares registered in his name, which list, for a period of ten days prior to such meeting, shall be kept on file either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, and shall be open to the examination of any stockholder, for any purpose germane to the meeting, at any time during ordinary business hours. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.7 STOCK LEDGER. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. Section 2.8 QUORUM. A majority of the outstanding shares of voting stock of the corporation, represented in person or by proxy, shall constitute a quorum at any meeting of stockholders; provided, however, that if less than a majority of the outstanding shares of voting stock are represented at said meeting, a majority of the shares of voting stock so represented may adjourn the meeting. If a quorum is present, the affirmative vote of a majority of the shares of voting stock represented at the meeting shall be the act of the stockholders in all matters other than the election of directors, who shall be elected by a plurality of the votes of the shares present in person or by proxy and entitled to vote on the election of directors, unless the vote of a greater number or voting by classes is required by the Delaware General Corporation Law, the certificate of incorporation or these bylaws. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the original meeting. Requirements of notice at any adjourned meeting are governed by Section 2.4 hereof. Withdrawal of stockholders from any meeting shall not cause failure of a duly constituted quorum at that meeting. Section 2.9 PROXIES. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Every proxy must be signed by the stockholder or his attorney-in-fact. A duly executed proxy shall be irrevocable if it states that it is irrevocable, and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the 4 interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. Section 2.10 VOTING OF STOCK. Subject to the provisions of the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of the voting stock held by such stockholder. Section 2.11 VOTING OF STOCK BY CERTAIN HOLDERS. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such stock and vote thereon. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor counted for quorum purposes, but shares of its stock held by the corporation in a fiduciary capacity may be voted by it and counted for quorum purposes. Section 2.12 CONSENT OF STOCKHOLDERS. (a) Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office in Delaware shall be by hand or by certified or registered mail, return receipt requested. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this section to the corporation, written consents signed by a sufficient number of holders to take such action are delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office in Delaware shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of any corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented thereto in writing. Section 2.13 VOTING BY BALLOT. Voting in any election of directors may, if permitted by the certificate of incorporation, be by voice vote, and voting on any other question 5 shall be by voice vote unless, in each case, the presiding officer shall order or any stockholder shall demand that voting be by ballot. Section 2.14 INSPECTORS. The board of directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, or upon the request of any stockholder shall, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him, her or them and execute a certificate of any fact found by him, her or them. ARTICLE III Directors Section 3.1 GENERAL POWERS. The business of the corporation shall be managed by or under the direction of its board of directors, except as otherwise provided in the certificate of incorporation. Section 3.2 NUMBER AND QUALIFICATIONS. The number of directors of the corporation shall be seven or such other number as may be determined from time to time by the board of directors of the corporation at a duly held meeting thereof. Directors need not be stockholders of the corporation, citizens of the United States or residents of the State of Delaware. Section 3.3 ELECTION AND TERM. The board of directors shall be elected at the annual meeting of the stockholders of the corporation and shall hold office until their successors are elected and qualified or until their earlier death, resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier death, resignation or removal. In the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any 6 vacancies in the board of directors, including vacancies resulting from the removal of directors, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. Section 3.4 REGULAR MEETINGS. A regular meeting of the board of directors shall be held without other notice than this bylaw, immediately after, and at the same place as, the annual meeting of stockholders. Meetings of the board of directors may be held either within or without the State of Delaware. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Section 3.5 SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the President or any director. The person or persons calling such special meeting of the board of directors shall fix a place, either within or without the State of Delaware, as the place for holding such special meeting of the board of directors. Section 3.6 NOTICE. Notice of any special meeting stating the time and place of such meeting shall be given at least three days previous thereto by written notice delivered personally or sent by mail or overnight express service to each director at his business address. Such notice shall be deemed to be delivered when deposited in the United States mail or given to such overnight express service so addressed, with postage thereon prepaid. Notice need not be given to any director who submits a written waiver of notice signed by him either before or after any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of such meeting. Section 3.7 QUORUM. A majority of the number of directors fixed by or determined in accordance with these bylaws (or of the members of any committee in the case of a meeting of a committee of the board of directors) shall constitute a quorum for the transaction of business at any meeting of the board of directors or of such committee, provided, however, that if less than a majority of such number of directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee thereof Section 3.8 MANNER OF ACTING. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors or of a committee of the board, as the case may be. Section 3.9 ACTION WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all the members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. 7 Section 3.10 COMPENSATION. The board of directors shall have authority to establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise. Section 3.11 LIABILITY FOR UNLAWFUL PAYMENT OF DIVIDEND. In case of any willful or negligent violation of the provisions of sections 160 or 173 of the Delaware General Corporation Law regarding the payment of dividends, any director who may have been absent when the same was done, or who may have dissented from the act or resolution by which the same was done, may exonerate himself from such liability by causing his dissent to be entered on the books containing the minutes of the proceedings of the directors at the time the same was done, or immediately after he has notice of the same. Section 3.12 TELEPHONE MEETINGS. Members of the board of directors or of any committee thereof may participate in a meeting of the board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting. Section 3.13 REMOVAL. Any director or the entire board of directors may be removed with or without cause by the holders of a majority of the shares then entitled to vote at an election of directors. Section 3.14 COMMITTEES. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, to the extent permitted under the Delaware General Corporation Law. Section 3.15 RETIREMENT AGE. No person shall be nominated for election to the board of directors after his seventieth birthday. ARTICLE IV Officers Section 4.1 NUMBER. The officers of the corporation shall be a President, a Treasurer, a Secretary, and such Vice Presidents, Assistant Treasurers, Assistant Secretaries or other officers as may be elected by the board of directors. Any two or more offices may be held by the same person. Section 4.2 ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. New offices may be created and filled at any meeting of the board of directors. Each officer shall hold office until his 8 successor is elected and has qualified or until his earlier death, resignation or removal. Any officer may resign at any time upon written notice to the corporation. Election of an officer shall not of itself create contract rights. Section 4.3 REMOVAL. Any officer elected by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4.4 VACANCIES. A vacancy in any office occurring because of death, resignation, removal or otherwise, may be filled by the board of directors. Section 4.5 THE PRESIDENT. The President shall be the chief executive officer of the corporation and, subject only to the board of directors, shall have general authority over, and general management and control of, the property, business and affairs of the corporation. The President shall preside at all meetings of the stockholders and of the board of directors. The President shall have authority to vote all shares of stock of any other corporation standing in the name of the corporation, at any meeting of the stockholders of such other corporation or by written consent of the stockholders of such other corporation, and may, on behalf of the corporation, waive any notice of the calling of any such meeting, and may give a written proxy in the name of the corporation to vote any or all shares of stock of such other corporation owned by the corporation at any such meeting. The President shall perform such other duties as may be prescribed by the board of directors from time to time. Section 4.6 THE VICE PRESIDENTS. Each of the Vice Presidents, if any, shall report to the President or such other officer as may be determined by the board of directors. Each Vice President shall have such duties and responsibilities as from time to time may be assigned to him by the President or the board of directors. Section 4.7 THE TREASURER. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article V of these bylaws; (b) in general, perform all the duties incident to the office of the treasurer and such other duties as may from time to time be assigned to him by the President or the board of directors. In the absence of the Treasurer, or in the event of his incapacity or refusal to act, or at the direction of the Treasurer, any Assistant Treasurer may perform the duties of the Treasurer. Section 4.8 THE SECRETARY. The Secretary shall: (a) record all the proceedings of the meetings of the stockholders and board of directors in one or more books kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all certificates for shares of stock, instruments and all other documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) keep a register 9 of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (e) have general charge of the stock transfer books of the corporation and (f) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the President or the board of directors. In the absence of the Secretary, or in the event of his incapacity or refusal to act, or at the direction of the Secretary, any Assistant Secretary may perform the duties of Secretary. ARTICLE V Contracts, Loans, Checks and Deposits Section 5.1 CONTRACTS. Except as otherwise determined by the board of directors or provided in these bylaws, all deeds and mortgages made by the corporation and all other written contracts and agreements to which the corporation shall be a party shall be executed in its name by the President or any Vice President. Section 5.2 LOANS. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. Section 5.3 CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors. Section 5.4 DEPOSITS. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the board of directors may select. ARTICLE VI Certificates for Shares of Stock and Their Transfer Section 6.1 CERTIFICATES FOR SHARES OF STOCK. Certificates representing shares of stock of the corporation shall be in such form as may be determined by the board of directors. Such certificates shall be signed by the President or any Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. If any such certificate is manually countersigned by a transfer agent other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it my be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The name of the person to whom the shares 10 represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificates shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms, indemnity and surety to the corporation as the board of directors may prescribe. Section 6.2 TRANSFER OF SHARES OF STOCK. Transfers of shares of stock of the corporation shall be made on the books of the corporation by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation. Section 6.3 TRANSFER AGENTS AND REGISTRARS. The board of directors may appoint one or more transfer agents or assistant transfer agents and one or more registrars of transfers, and may require all certificates for shares of stock of the corporation to bear the signature of a transfer agent or assistant transfer agent and a registrar of transfers. The board of directors may at any time terminate the appointment of any transfer agent or any assistant transfer agent or any registrar of transfers. ARTICLE VII Indemnification Section 7.1 DIRECTORS AND OFFICERS. (a) The corporation shall indemnify any person who was or is a party or is threatened to be made party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director, manager or officer of another corporation, partnership, joint venture, trust, limited liability company or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. 11 (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director, manager or officer of another corporation, partnership, joint venture, trust, limited liability company or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. (c) To the extent that any person referred to in paragraphs (a) and (b) of this Section 7.1 has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to therein or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (d) Any indemnification under paragraphs (a) and (b) of this section 7.1 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he or she has met the applicable standard of conduct set forth in paragraphs (a) and (b) of this Section 7.1. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (ii) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation as provided in this section 7.1. (f) The indemnification and advancement of expenses provided by or granted pursuant to this section 7.1 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. (g) The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, manager, officer, employee or agent of 12 another corporation, partnership, joint venture, trust, limited liability company or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this section 7.1. (h) For purposes of this section 7.1, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (j) Unless otherwise determined by the board of directors, references in this section to "the corporation" shall include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, manager, officer, employee or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Section 7.2 EMPLOYEES AND AGENTS. The board of directors may, by resolution, extend the indemnification provisions of the foregoing section 7.1 to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was an employee or agent of the corporation, or is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise. ARTICLE VIII Fiscal Year Section 8.1 The fiscal year of the corporation shall end on December 31 or on such other date as the board of directors may from time to time determine by resolution. 13 ARTICLE IX Dividends Section 9.1 The board of directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares of stock in the manner and upon the terms and conditions provided by law and its certificate of incorporation. ARTICLE X Seal Section 10.1 The corporate seal of the corporation shall be in the form of a circle and shall have the name of the corporation and the words "Corporate Seal, Delaware" written therein or inscribed thereon. ARTICLE XI Waiver of Notice Section 11.1 Whenever any notice whatever is required to be given under any provision of these bylaws or of the certificate of incorporation or of the Delaware General Corporation Law, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transactions of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or directors or of a committee of the board of directors need be specified in any written waiver of notice. ARTICLE XII Amendments Section 12.1 These bylaws may be altered, amended or repealed and new bylaws may be adopted at any meeting of the board of directors of the corporation by a majority of the whole board of directors then in office, or by the stockholders. 14 CERTIFICATION I HEREBY CERTIFY that the foregoing is a true and full copy of the bylaws of HANOVER COMPRESSOR COMPANY as the same are now in effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of HANOVER COMPRESSOR COMPANY, this the 23rd day of January, 2003. /s/ Susan G. Miller --------------------------------------- Susan G. Miller Assistant Secretary EX-10.6 4 dex106.txt GUARANTEE & COLLATERAL AGREEMENT Exhibit 10.6 AMENDED AND RESTATED GUARANTEE AND COLLATERAL AGREEMENT made by HANOVER COMPRESSOR COMPANY HANOVER COMPRESSION LIMITED PARTNERSHIP and certain of their Subsidiaries in favor of JPMORGAN CHASE BANK, as Collateral Agent Dated as of January 31, 2003, as amended and restated as of February 14, 2003 Table of Contents
Page ---- SECTION 1. DEFINED TERMS 2 1.1 Definitions 2 1.2 Other Definitional Provisions 6 SECTION 2. GUARANTEE 6 2.1 Guarantee 6 2.2 Right of Contribution 7 2.3 No Subrogation 7 2.4 Amendments, etc. with respect to HCC Obligations 7 2.5 Guarantee Absolute and Unconditional 8 2.6 Reinstatement 9 2.7 Payments 9 SECTION 3. GRANT OF SECURITY INTEREST 9 SECTION 4. REPRESENTATIONS AND WARRANTIES 10 4.1 Title; No Other Liens 10 4.2 Perfected First Priority Liens 10 4.3 Jurisdiction of Organization; Chief Executive Office 10 4.4 [Intentionally Reserved] 10 4.5 Farm Products 11 4.6 Investment Property 11 4.7 Receivables 11 4.8 Intellectual Property 11 SECTION 5. COVENANTS 11 5.1 Delivery of Instruments, Certificated Securities and Chattel Paper 11 5.2 Maintenance of Insurance 12 5.3 [Intentionally Reserved] 12 5.4 Maintenance of Perfected Security Interest; Further Documentation 12 5.5 Changes in Locations, Name, etc 12 5.6 Notices 13 5.7 Investment Property 13 5.8 Receivables 14 5.9 Intellectual Property 14 5.10 Vehicles 15 SECTION 6. REMEDIAL PROVISIONS 15 6.1 Certain Matters Relating to Receivables 15 6.2 Communications with Obligors; Grantors Remain Liable 15 6.3 Pledged Stock 16 6.4 Proceeds to be Turned Over To Collateral Agent 17 6.5 Application of Proceeds 17 6.6 Code and Other Remedies 17 6.7 Private Sales 18 6.8 Deficiency 18
i SECTION 7. THE COLLATERAL AGENT 18 7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc 18 7.2 Duty of Collateral Agent 20 7.3 Execution of Financing Statements 20 7.4 Authority of Collateral Agent 20 7.5 Appointment of Collateral Agent 20 SECTION 8. MISCELLANEOUS 22 8.1 Amendments in Writing 22 8.2 Notices 22 8.3 No Waiver by Course of Conduct; Cumulative Remedies 23 8.4 Enforcement Expenses; Indemnification 23 8.5 Successors and Assigns 23 8.6 Set-Off 23 8.7 Counterparts 24 8.8 Severability 24 8.9 Section Headings 24 8.10 Integration 24 8.11 GOVERNING LAW 24 8.12 Submission To Jurisdiction; Waivers 24 8.13 Acknowledgements 25 8.14 Additional Grantors 25 8.15 Releases 25 8.16 WAIVER OF JURY TRIAL 25 SCHEDULES Schedule 1 Notice Addresses Schedule 2 Perfection Matters Schedule 3 Jurisdictions of Organization and Chief Executive Offices ii GUARANTEE AND COLLATERAL AGREEMENT GUARANTEE AND COLLATERAL AGREEMENT, dated as of January 31, 2003, as amended and restated as of February 14, 2003, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the "Grantors"), in favor of JPMorgan Chase Bank, as Collateral Agent (in such capacity, the "Collateral Agent") for the Secured Parties (as hereinafter defined) W I T N E S S E T H: WHEREAS, certain of the Grantors and JPMorgan Chase Bank, as administrative agent, are parties to the Guarantee and Collateral Agreement dated as of January 31, 2003 (the "Original Guarantee and Collateral Agreement"); WHEREAS, the parties to the Original Guarantee and Collateral Agreement desire to amend and restate the Original Guarantee and Collateral Agreement pursuant to this Agreement in order to, among other things (i) include the Synthetic Guarantee Obligations (as hereinafter defined) as obligations which are secured and guaranteed hereunder and (ii) cause JPMorgan Chase Bank to agree to act as collateral agent for the benefit of the Secured Parties (as hereinafter defined); WHEREAS, pursuant to the Amendment dated as of January 31, 2003 the Guarantors are required to enter into this Agreement on or before February 14, 2003; WHEREAS, Hanover Compressor Company ("Holdings") and Hanover Compression Limited Partnership (formerly known as Hanover Compression Inc.) ("HCC") are parties to the Transaction Documents (as hereinafter defined), pursuant to which the Secured Parties have made extensions of credit to HCC upon the terms and subject to the conditions set forth therein; WHEREAS, the Grantors have requested that the Secured Parties continue making loans and other financial accommodations available to HCC; WHEREAS, Holdings is a member of an affiliated group of companies that includes each other Grantor; WHEREAS, the proceeds of the extensions of credit under the Transaction Documents have been and will continue to be used in part to enable HCC to make valuable transfers to one or more of the other Grantors in connection with the operation of their respective businesses; WHEREAS, HCC and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the continued making of the extensions of credit under the Transaction Documents; and NOW, THEREFORE, in consideration of the premises and to induce the Collateral Agent and the Lenders to continue to make their respective extensions of credit to HCC under the Transaction Documents and to satisfy the requirements of the Amendment, the Original Guarantee and Collateral Agreement is hereby amended and restated, as follows: SECTION 1. DEFINED TERMS 1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Senior Credit Agreement are used herein as therein defined, and the following terms are used herein as defined in the New York UCC: Accounts, Certificated Security, Chattel Paper, Commercial Tort Claims, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory, Letter-of-Credit Rights and Supporting Obligations. (b) The following terms shall have the following meanings: "Agreement": the Original Guarantee and Collateral Agreement, as amended and restated by this Guarantee and Collateral Agreement, as the same may be further amended, supplemented or otherwise modified from time to time. "Collateral": as defined in Section 3. "Collateral Account": any collateral account established by the Collateral Agent as provided in Section 6.1 or 6.4. "Copyrights": (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, and (ii) the right to obtain all renewals thereof. "Copyright Licenses": any written agreement naming any Grantor as licensor or licensee, granting any right under any Copyright, including, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright. "Event of Default": as defined n the Senior Credit Agreement. "Excluded Equipment Lease Property": any property or assets of any Grantor that is subject to a Lien that secures any Equipment Lease Transaction. Notwithstanding anything to the contrary contained herein, it is intended that the Excluded Equipment Lease Property shall in no event be pledged hereunder or required to be pledged hereunder as long as such Property secures an Equipment Lease Transaction. "Excluded Foreign Subsidiary Stock": any shares of Capital Stock of Foreign Subsidiaries exceeding 66% of the outstanding voting Capital Stock of each Foreign Subsidiary. Notwithstanding anything to the contrary contained herein, it is intended that such Excluded Foreign Subsidiary Stock shall in no event be pledged hereunder or required to be pledged hereunder. "Default": any default or event of default under any Transaction Document. "Deposit Account": as defined in the Uniform Commercial Code of any applicable jurisdiction and, in any event, including, without limitation, any demand, time, savings, passbook or like account maintained with a depositary institution. "Derivatives Agreements": any agreement entered into by Holdings or any of its Subsidiaries pursuant to Subsection 8.9 of the Senior Credit Agreement or pursuant to Subsection 11.9 of any Synthetic Guarantee. 2 "Event of Default": as defined in the Senior Credit Agreement. "Foreign Subsidiary": any Subsidiary organized under the laws of any jurisdiction outside the United States of America. "Foreign Subsidiary Voting Stock": the voting Capital Stock of any Foreign Subsidiary. "Guarantor Obligations": with respect to any Guarantor, all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement (including, without limitation, Section 2) or any other Loan Document (as defined in the Senior Credit Agreement) to which such Guarantor is a party, in each case whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Collateral Agent or to the Secured Parties that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any such Loan Document). "Guarantors": the collective reference to each Grantor other than HCC and Non-Guarantor Subsidiaries. "HCC Obligations": the collective reference to the unpaid principal of and interest on the Loans and Reimbursement Obligations under the Senior Credit Agreement and all other obligations and liabilities of HCC (including, without limitation, interest accruing at the then applicable rate provided in the Senior Credit Agreement after the maturity of the Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Senior Credit Agreement 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) to the Administrative Agent or any Lender under the Senior Credit Agreement (or, in the case of any Derivatives Agreements, any Affiliate of any such 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, the Senior Credit Agreement, this Agreement, the other Loan Documents (as defined in the Senior Credit Agreement), any Letter of Credit, any Derivatives Agreements or any other document made, delivered or given in connection with any of the foregoing, in each case 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 HCC pursuant to the terms of any of the foregoing agreements). "Intellectual Property": the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "Intercompany Note": any promissory note evidencing loans made by any Grantor to Holdings or any of its Subsidiaries. "Investment Property": the collective reference to (i) all "investment property" as such term is defined in Section 9-102(a)(49) of the New York UCC (other than Excluded Foreign Subsidiary Stocks) and (ii) whether or not constituting "investment property" as so defined, all Pledged Notes and all Pledged Stock. "Issuers": the collective reference to each issuer of any Investment Property. 3 "New York UCC": the Uniform Commercial Code as from time to time in effect in the State of New York. "Obligations": (i) in the case of HCC and each Non-Guarantor Subsidiary, Secured Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations. "Non-Guarantor Subsidiary": each Subsidiary identified only as a Grantor on the signature pages hereto together with each Subsidiary which is required to execute this Agreement pursuant to subsection 7.10 of the Senior Credit Agreement or subsection 10.10 of each of the Synthetic Guarantees unless, in each case, (i) such Subsidiary has guaranteed payment of all or any portion of the Guarantee Obligations (as defined in the 2001A Participation Agreement and 2001B Participation Agreement) or (ii) such Subsidiary is requested to become a Guarantor by the Collateral Agent or the Required Secured Parties. "Participation Agreements": the 1999A Participation Agreement, the 2000A Participation Agreement and the 2000B Participation Agreement (each a "Participation Agreement", and collectively, the "Participation Agreements") "Patents": (i) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, (ii) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, and (iii) all rights to obtain any reissues or extensions of the foregoing. "Patent License": all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent. "Pledged Notes": all Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business). "Pledged Stock": any shares, stock certificates, options, interests or rights of any nature whatsoever in respect of the Capital Stock of any Person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect, but excluding the Excluded Foreign Subsidiary Stock. "Proceeds": all "proceeds" as such term is defined in Section 9-102(a)(64) of the New York UCC and, in any event, shall include, without limitation, all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto. "Receivable": any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account). "Required Secured Parties": collectively, the Required Lenders (as defined in the Senior Credit Agreement) and the Required Lenders (as defined in Annex A to each of the Participation Agreements). "Secured Obligations": the collective reference to the HCC Obligations and the Synthetic Guarantee Obligations. "Secured Parties": the Senior Credit Agreement Lenders, the Synthetic Lease Lenders , the Investors (as defined in Annex A to each of the Participation Agreements), their respective affiliates 4 and each other Person to whom HCC owes or may in the future owe a payment or performance obligation under the Synthetic Guarantees. "Securities Act": the Securities Act of 1933, as amended. "Senior Credit Agreement": the Credit Agreement, dated as of December 15, 1997, as amended and restated on December 3, 2001 (as may be further amended, supplemented or otherwise modified from time to time), among Holdings, HCC, the banks and other financial institutions parties thereto from time to time (the "Senior Credit Agreement Lenders") and JPMorgan Chase Bank as administrative agent, and any credit agreement refinancing, refunding, replacing, or increasing the same, whether or not with the same parties. "Subsidary Guarantor": each Guarantor which is a Subsidiary of Holdings. "Synthetic Credit Agreements": 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 "1999A Lenders"), the managing agents thereto and The Chase Manhattan Bank, as agent, (ii) the Credit Agreement dated as of March 13, 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 "2000A Lenders"), Industrial Bank of Japan, LTD., as syndication agent, The Bank of Nova Scotia, as documentation agent and The Chase Manhattan Bank, as agent and (iii) the Credit Agreement dated as of October 27, 2000 (as amended, supplemented or otherwise modified from time to time), among Hanover Equipment Trust 2000B, as borrower, the several lenders from time to time parties thereto (the "2000B Lenders, and together with the 1999A Lenders and the 2000A Lenders, the "Synthetic Lease Lenders"), National Westminster Bank PLC, as managing agent, Citibank, N.A., Credit Suisse First Boston and The Industrial Bank of Japan, Ltd., as co-agents and The Chase Manhattan Bank, as agent (each a "Synthetic Credit Agreement" and, collectively, the "Synthetic Credit Agreements"). "Synthetic Guarantee Obligations": all obligations and liabilities of HCC (including, without limitation, interest accruing and the then applicable rate provided in the applicable Transaction Document after the maturity of any obligation guaranteed by a Synthetic Lease and interest accruing at the then applicable rate provided in the applicable Transaction Document 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) to the Collateral Agent or any Secured Party under the Synthetic Guarantees, 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 the Synthetic Guarantees. "Synthetic Guarantees": (i) the Guarantee dated as of June 15, 1999 (as amended and restated through March 13, 2000 and as further amended, supplemented or otherwise modified from time to time), made by Holdings, HCC, and certain of their subsidiaries listed on the signature pages, in favor of Hanover Equipment Trust 1999A, The Chase Manhattan Bank, as agent, and certain lenders and investors, (ii) the Guarantee dated as of March 13, 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, The Chase Manhattan Bank, as agent, and certain lenders and investors and (iii) the Guarantee dated as of October 27, 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 2000B, The Chase Manhattan Bank, as agent, and certain lenders and investors (each a "Synthetic Guarantee" and, collectively, the "Synthetic Guarantees"). 5 "Trademarks": (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, and (ii) the right to obtain all renewals thereof. "Trademark License": any agreement, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark. "Transaction Documents": the Senior Credit Agreement (and the Loan Documents as described and defined therein), the Synthetic Credit Agreements, the Synthetic Guarantees, each Lease (as defined in each Synthetic Guarantee), the Participation Agreements and the Derivatives Agreements, as the same may be amended from time to time. "Vehicles": all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any state and all tires and other appurtenances to any of the foregoing. 1.2 Other Definitional Provisions. (a) The words "hereof," "herein", "hereto" 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 and Schedule references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor's Collateral or the relevant part thereof. SECTION 2. GUARANTEE 2.1 Guarantee. (a) This guarantee supplements the existing Holdings Guarantee and the existing Subsidiaries Guarantee (each as defined in the Senior Credit Agreement) and each of the Guarantees (as defined in Annex A to each of the Participation Agreements). Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Collateral Agent, for the ratable benefit of the Secured Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by HCC when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations. (b) Anything herein or in any Transaction Document, Loan Document (as defined in the Senior Credit Agreement) or Credit Document (as defined in Annex A to each of the Participation Agreements) to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Transaction 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 (after giving effect to the right of contribution established in Section 2.2). (c) Each Guarantor agrees that the Secured Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee 6 contained in this Section 2 or affecting the rights and remedies of the Collateral Agent or any Secured Party hereunder. (d) The guarantee contained in this Section 2 shall remain in full force and effect until all Secured Obligations and the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by payment in full, no Letter of Credit shall be outstanding and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Transaction Documents HCC may be free from any Secured Obligations. (e) No payment made by HCC, any of the Guarantors, any other guarantor or any other Person or received or collected by the Collateral Agent or any Secured Party from HCC, 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 Secured Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder (other than any payment made by such Person in respect of Secured Obligations or any payment received or collected from such Person in respect of Secured Obligations). Each Guarantor shall remain liable for the Secured Obligations up to the maximum liability of such Guarantor hereunder until Secured Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated 2.2 Right of Contribution. Each Subsidiary Guarantor hereby agrees that to the extent that a Subsidiary Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Subsidiary Guarantor shall be entitled to seek and receive contribution from and against any other Subsidiary Guarantor hereunder which has not paid its proportionate share of such payment. Each Subsidiary Guarantor's right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Subsidiary Guarantor to the Collateral Agent and the Secured Parties, and each Subsidiary Guarantor shall remain liable to the Collateral Agent and the Secured Parties for the full amount guaranteed by such Subsidiary Guarantor hereunder. 2.3 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by the Collateral Agent or any Secured Party, no Guarantor shall be entitled to be subrogated to any of the rights of the Collateral Agent or any Secured Party against HCC or any other Guarantor or any collateral security or guarantee or right of offset held by the Collateral Agent or any Secured Party for the payment of Secured Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from HCC or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Collateral Agent and the Secured Parties by HCC on account of Secured Obligations are paid in full, no Letter of Credit shall be outstanding 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 Secured Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Collateral Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Collateral Agent, if required), to be applied against Secured Obligations, whether matured or unmatured, in such order as the Collateral Agent may determine. 2.4 Amendments, etc. with respect to Secured Obligations. 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 Secured Obligations made by the Collateral Agent or any Secured Party may be rescinded by the Collateral Agent or such Secured Party and any of the Secured Obligations continued, and Secured Obligations, or the 7 liability of any other Person 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 Collateral Agent or any Secured Party, and the Transaction Documents, the other Loan Documents (as defined in the Senior Credit Agreement) and the other Credit Documents (as defined in Annex A to each of the Participation Agreements) and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Collateral Agent (or the Required Secured Parties or all Secured Parties, 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 Collateral Agent or any Secured Party for the payment of the Secured Obligations may be sold, exchanged, waived, surrendered or released. Neither the Collateral Agent nor any Secured Party shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Secured Obligations or for the guarantee contained in this Section 2 or any property subject thereto. 2.5 Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Secured Obligations and notice of or proof of reliance by the Collateral Agent or any Secured Party upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Secured 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 the guarantee contained in this Section 2; and all dealings between HCC and any of the Guarantors, on the one hand, and the Collateral Agent and the Secured Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon HCC or any of the Guarantors with respect to the Secured Obligations. Each Guarantor understands and agrees that, to the fullest extent permitted under applicable law, the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Transaction Documents or any other Loan Document (as defined in the Senior Credit Agreement) or any other Credit Document (as defined in Annex A to each of the Participation Agreements), any of the Secured 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 Collateral Agent or any Secured Party, (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 HCC or any other Person against the Collateral Agent or any Secured Party, or (c) any other circumstance whatsoever (with or without notice to or knowledge of HCC or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of HCC for the Secured Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the Collateral Agent or any Secured Party may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against HCC, any other Guarantor or any other Person or against any collateral security or guarantee for the Secured Obligations or any right of offset with respect thereto, and any failure by the Collateral Agent or any Secured Party to make any such demand, to pursue such other rights or remedies or to collect any payments from HCC, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of HCC, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Collateral Agent or any Secured Party against any Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 8 2.6 Reinstatement. The guarantee contained in this Section 2 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 Secured Obligations is rescinded or must otherwise be restored or returned by the Collateral Agent or any Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of HCC 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, HCC or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 2.7 Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Collateral Agent without set-off or counterclaim in Dollars at the Funding Office. SECTION 3. GRANT OF SECURITY INTEREST Each Grantor hereby assigns and transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in, all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor's Obligations,: (a) all Accounts; (b) all Chattel Paper; (c) all Deposit Accounts; (d) all Documents; (e) all Equipment; (f) all General Intangibles; (g) all Instruments; (h) all Intellectual Property; (i) all Inventory; (j) all Investment Property; (k) all Letter-of-Credit Rights; (l) all Vehicles and title documents with respect to Vehicles; (m) all other property not otherwise described above; (n) all books and records pertaining to the Collateral; and (o) to the extent not otherwise included, all Proceeds, Supporting Obligations and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing; 9 provided, however, that notwithstanding any of the other provisions set forth in this Section 3, (i) this Agreement shall not constitute a grant of a security interest in any property to the extent that such grant of a security interest is prohibited by any Requirements of Law of a Governmental Authority, requires a consent not obtained of any Governmental Authority pursuant to such Requirement of Law or is prohibited by, or constitutes a breach or default under or results in the termination of or requires any consent not obtained under, any contract, license, agreement, instrument or other document evidencing or giving rise to such property or, in the case of any Investment Property, Pledged Stock or Pledged Note, any applicable shareholder or similar agreement, except to the extent that such Requirement of Law or the term in such contract, license, agreement, instrument or other document or shareholder or similar agreement providing for such prohibition, breach, default or termination or requiring such consent is ineffective under applicable law and (ii) the Collateral shall in no event include the Excluded Foreign Subsidiary Stock or the Excluded Equipment Lease Property. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Collateral Agent and the Secured Parties to continue to make their respective extensions of credit to HCC under the Transaction Documents, each Grantor hereby represents and warrants to the Collateral Agent and each Secured Party that: 4.1 Title; No Other Liens. Except for the security interest granted to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to this Agreement and the other Liens permitted to exist on the Collateral by the Senior Credit Agreement, (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or termination) such Grantor owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, pursuant to this Agreement or as are permitted by the Senior Credit Agreement (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or termination). 4.2 Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) constitute valid perfected security interests (to the extent that such perfection may be achieved through the filing of a Uniform Commercial Code financing statement in the appropriate filing office) in all of the Collateral in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, as collateral security for such Grantor's Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and any Persons purporting to purchase any Collateral from such Grantor and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for Liens permitted by the Senior Credit Agreement (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or termination) which have priority over the Liens on the Collateral. 4.3 Jurisdiction of Organization; Chief Executive Office. On the date hereof, such Grantor's jurisdiction of organization, identification number from the jurisdiction of organization (if any), and the location of such Grantor's chief executive office or sole place of business or principal residence, as the case may be, are specified on Schedule 3. Such Grantor has furnished to the Collateral Agent a certified charter, certificate of incorporation or other organization document and long-form good standing certificate as of a date which is recent to the date hereof. 4.4 [Intentionally Reserved] 10 4.5 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. 4.6 Investment Property. (a) The shares of Pledged Stock pledged by such Grantor hereunder constitute all the issued and outstanding shares of all classes of the Capital Stock of each Issuer owned by such Grantor or, in the case of Foreign Subsidiary Voting Stock, if less, 66% of the outstanding Foreign Subsidiary Voting Stock of each relevant Issuer. (b) All the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable. (c) Each of the Pledged Notes constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (d) Such Grantor is the record and beneficial owner of, and has good and marketable title to, the Investment Property pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except (i) the security interest created by this Agreement, (ii) Liens permitted by subsection 8.3(a) of the Senior Credit Agreement (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or termination), and (iii) encumbrances and minor irregularities of title that, in the aggregate, are not substantial in amount and that in any case do not materially detract from the value of such Investment Property. 4.7 Receivables. The amounts represented by such Grantor to the Secured Parties from time to time as owing to such Grantor in respect of the Receivables will at such times be accurate in all material respects. 4.8 Intellectual Property. (a) On the date hereof, all material Intellectual Property is valid, subsisting, unexpired and enforceable, has not been abandoned and does not infringe the intellectual property rights of any other Person. (b) No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of, or such Grantor's rights in, any Intellectual Property in any respect that could reasonably be expected to have a Material Adverse Effect. (c) No action or proceeding is pending, or, to the knowledge of such Grantor, threatened, on the date hereof (i) seeking to limit, cancel or question the validity of any Intellectual Property or such Grantor's ownership interest therein, or (ii) which, if adversely determined, would have a material adverse effect on the value of any Intellectual Property. SECTION 5. COVENANTS Each Grantor covenants and agrees with the Collateral Agent and the Secured Parties that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding and the Commitments shall have terminated: 5.1 Delivery of Instruments, Certificated Securities and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper 11 shall, if requested by the Collateral Agent or the Required Secured Parties, be promptly delivered to the Collateral Agent, duly indorsed in a manner satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Agreement. 5.2 Maintenance of Insurance. (a) Such Grantor will maintain, with financially sound and reputable companies, insurance policies insuring such Grantor, the Collateral Agent and the Secured Parties against liability for personal injury and property damage relating to such Inventory, Equipment and Vehicles, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Collateral Agent and the Secured Parties. (b) All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Collateral Agent of written notice thereof, (ii) name the Collateral Agent as insured party or loss payee, and (iii) be reasonably satisfactory in all other respects to the Collateral Agent. 5.3 [Intentionally Reserved] 5.4 Maintenance of Perfected Security Interest; Further Documentation. (a) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest (it being agreed that, unless other means of perfection have been requested by the Collateral Agent or the Required Secured Parties, such perfected security interest is only to the extent that perfection may be achieved through the filing of a Uniform Commercial Code financing statement in the appropriate filing office) having at least the priority described in Section 4.2 and shall defend such security interest against the claims and demands of all Persons whomsoever, subject to the rights of such Grantor under the Transaction Documents to dispose of the Collateral. (b) Such Grantor will furnish to the Collateral Agent and the Secured Parties from time to time statements and schedules further identifying and describing the assets and property of such Grantor and such other reports in connection therewith as the Collateral Agent may reasonably request, all in reasonable detail. (c) At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Collateral 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, (i) filing any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby and (ii) in the case of Investment Property, Deposit Accounts, Letter-of-Credit Rights and any other relevant Collateral, taking any actions necessary to enable the Collateral Agent to obtain "control" (within the meaning of the applicable Uniform Commercial Code) with respect thereto. (d) Notwithstanding any other provision of the Transaction Documents to the contrary, the Grantors shall not be required to take any action to perfect the security interests created hereunder except for filing of properly completed Uniform Commercial Code financing statements in appropriate filing offices unless otherwise requested by the Collateral Agent or the Required Secured Parties. 5.5 Changes in Locations, Name, etc. Such Grantor will not, except upon 15 days' prior written notice to the Collateral Agent and delivery to the Collateral Agent of all additional executed 12 financing statements and other documents reasonably requested by the Collateral Agent to maintain the validity, perfection and priority of the security interests provided for herein: (i) change its jurisdiction of organization or the location of its chief executive office or sole place of business or principal residence from that referred to in Section 4.3; or (ii) change its name. 5.6 Notices. Such Grantor will advise the Collateral Agent and the Secured Parties promptly, in reasonable detail, of any Lien (other than security interests created hereby or Liens permitted under the Senior Credit Agreement (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or termination)) on any of the Collateral which would adversely affect the ability of the Collateral Agent to exercise any of its remedies hereunder. 5.7 Investment Property. (a) If such Grantor shall become entitled to receive or shall receive any certificate (including, without limitation, any certificate representing a dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof, such Grantor shall, if requested by the Collateral Agent or the Required Secured Parties, accept the same as the agent of the Collateral Agent and the Secured Parties, hold the same in trust for the Collateral Agent and the Secured Parties and deliver the same forthwith to the Collateral Agent in the exact form received, duly indorsed by such Grantor to the Collateral Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the Collateral Agent so requests, signature guaranteed, to be held by the Collateral Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Investment Property upon the liquidation or dissolution of any Issuer shall be paid over to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Investment Property or any property shall be distributed upon or with respect to the Investment Property pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Collateral Agent, if requested by the Collateral Agent or the Required Secured Parties, be delivered to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Investment Property shall be received by such Grantor, such Grantor shall, until such money or property is paid or delivered to the Collateral Agent, if requested by the Collateral Agent or the Required Secured Parties, hold such money or property in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Grantor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Collateral Agent, such Grantor will not (i) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Investment Property or Proceeds thereof (except pursuant to a transaction expressly permitted by the Transaction Documents), (ii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Investment Property or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or (iii) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Collateral Agent to sell, assign or transfer any of the Investment Property or Proceeds thereof. 13 (c) In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Investment Property issued by it and will comply with such terms insofar as such terms are applicable to it and (ii) the terms of Sections 6.3(c) and 6.7(b) shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) or 6.7(b) with respect to the Investment Property issued by it. 5.8 Receivables. Other than in the ordinary course of business, such Grantor will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof. 5.9 Intellectual Property. (a) Such Grantor (either itself or through licensees) will not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material Trademark may become invalidated or impaired in any material way. (b) Such Grantor (either itself or through licensees) will not do any act, or omit to do any act, whereby any material Patent may become forfeited, abandoned or dedicated to the public. (c) Such Grantor (either itself or through licensees) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of the Copyrights may become invalidated or otherwise materially impaired. Such Grantor will not (either itself or through licensees) do any act whereby any material portion of the Copyrights may fall into the public domain. (d) Such Grantor (either itself or through licensees) will not do any act that knowingly uses any material Intellectual Property to infringe, in any material way, the intellectual property rights of any other Person. (e) Such Grantor will notify the Collateral Agent and the Secured Parties promptly if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any material and adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor's ownership of, or the validity of, any material Intellectual Property or such Grantor's right to register the same or to own and maintain the same. (f) Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall, if so requested by the Collateral Agent, report such filing to the Collateral Agent within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Collateral Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent's and the Secured Parties' security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby. (g) Such Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, the United States Copyright 14 Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the material Intellectual Property, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (h) In the event that any material Intellectual Property is infringed, misappropriated or diluted by a third party, such Grantor shall (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Collateral Agent after a Responsible Officer of such Grantor learns thereof and sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution. 5.10 Vehicles. No Grantor shall be required to take any action to perfect any security interest in Vehicles created pursuant to this Agreement. SECTION 6. REMEDIAL PROVISIONS 6.1 Certain Matters Relating to Receivables. (a) The Collateral Agent hereby authorizes each Grantor to collect such Grantor's Receivables, and the Collateral Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of Default. If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 6.5, and (ii) until so turned over, shall be held by such Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (b) At the Collateral Agent's request after the occurrence and during the continuance of an Event of Default, each Grantor shall deliver to the Collateral Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all original orders, invoices and shipping receipts. 6.2 Communications with Obligors; Grantors Remain Liable. (a) The Collateral Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables to verify with them to the Collateral Agent's satisfaction the existence, amount and terms of any Receivables. (b) Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that the Receivables have been assigned to the Collateral Agent for the ratable benefit of the Secured Parties and that payments in respect thereof shall be made directly to the Collateral Agent. (c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Collateral Agent nor any Secured Party shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the 15 Collateral Agent or any Secured Party of any payment relating thereto, nor shall the Collateral Agent or any Secured Party be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 6.3 Pledged Stock. (a) Unless an Event of Default shall have occurred and be continuing and the Collateral Agent shall have given notice to the relevant Grantor of the Collateral Agent's intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer, to the extent permitted in the Senior Credit Agreement (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or termination), and to exercise all voting and corporate or other organizational rights with respect to the Investment Property; provided, however, that no vote shall be cast or corporate or other organizational right exercised or other action taken which would be inconsistent with or result in any violation of any provision of the Transaction Documents, this Agreement or any other Loan Document (as defined in the Senior Credit Agreement) or any other Credit Documents (as defined in Annex A to each of the Participation Agreements). (b) If an Event of Default shall occur and be continuing and the Collateral Agent shall give notice of its intent to exercise such rights to the relevant Grantor or Grantors, (i) the Collateral Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Investment Property and make application thereof to the Obligations in such order as the Collateral Agent may determine, and (ii) any or all of the Investment Property shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Investment Property at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Investment Property as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Investment Property upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate or other organizational structure of any Issuer, or upon the exercise by any Grantor or the Collateral Agent of any right, privilege or option pertaining to such Investment Property, and in connection therewith, the right to deposit and deliver any and all of the Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the Collateral Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) Each Grantor hereby authorizes and instructs each Issuer of any Investment Property pledged by such Grantor hereunder to (i) comply with any instruction received by it from the Collateral Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Investment Property directly to the Collateral Agent. 16 6.4 Proceeds to be Turned Over To Collateral Agent. In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 6.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required). All Proceeds received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 6.5. 6.5 Application of Proceeds. At such intervals as may be agreed upon by HCC and the Collateral Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Collateral Agent's election, the Collateral Agent may apply all or any part of Proceeds constituting Collateral, whether or not held in any Collateral Account, in payment of the Obligations in such order as the Collateral Agent may elect, and any part of such funds which the Collateral Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Collateral Agent to HCC or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding and the Commitments shall have terminated shall be paid over to HCC or to whomsoever may be lawfully entitled to receive the same. 6.6 Code and Other Remedies. If an Event of Default shall occur and be continuing, the Collateral Agent, on behalf of the Secured Parties, 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 New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Collateral Agent, 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 any Grantor 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 Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give 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 Collateral Agent or any Secured Party 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. The Collateral Agent or any Secured Party 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 any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Collateral Agent's request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.6, 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 Collateral Agent and the Secured Parties hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-615(a)(3) of the New York UCC, need 17 the Collateral Agent account for the surplus, if any, to any Grantor. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Collateral Agent or any Secured Party 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. 6.7 Private Sales. (a) Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (b) Each Grantor agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 6.7 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Grantor further agrees that a breach of any of the covenants contained in this Section 6.7 will cause irreparable injury to the Collateral Agent and the Secured Parties, that the Collateral Agent and the Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.7 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Senior Credit Agreement. 6.8 Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent or any Secured Party to collect such deficiency. SECTION 7. THE COLLATERAL AGENT 7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc. (a) Each Grantor hereby irrevocably constitutes and appoints the Collateral 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 such Grantor and in the name of such Grantor 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, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following: (i) in the name of such Grantor 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 any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral 18 Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable; (ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence the Collateral Agent's and the Secured Partys' security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby; (iii) 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 this Agreement and pay all or any part of the premiums therefor and the costs thereof; (iv) execute, in connection with any sale provided for in Section 6.6 or 6.7, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (v) (1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (2) ask or demand for, collect, and 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 Collateral; (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 Collateral; (4) 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; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (8) 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 Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's and the Secured Partys' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. Anything in this Section 7.1(a) to the contrary notwithstanding, the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing. (b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. (c) The expenses of the Collateral Agent incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at a rate per annum equal to the highest rate per annum at which interest would then be payable on any category of past due ABR Loans under the Senior Credit Agreement (or, if the Senior Credit Agreement shall have been paid in full or terminated, by the last version of the Senior Credit Agreement as in effect immediately prior to such payment in full or 19 termination), from the date of payment by the Collateral Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Collateral Agent on demand. (d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. 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. 7.2 Duty of Collateral Agent. The Collateral 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 New York UCC or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent, any Secured Party 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 any Grantor 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 Collateral Agent and the Secured Parties hereunder are solely to protect the Collateral Agent's and the Secured Partys' interests in the Collateral and shall not impose any duty upon the Collateral Agent or any Secured Party to exercise any such powers. The Collateral Agent and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 7.3 Execution of Financing Statements. Pursuant to any applicable law, each Grantor authorizes the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Collateral Agent determines appropriate to perfect the security interests of the Collateral Agent under this Agreement. Each Grantor authorizes the Collateral Agent to use the collateral description "all personal property" in any such financing statements. Each Grantor hereby ratifies and authorizes the filing by the Collateral Agent of any financing statement with respect to the Collateral made prior to the date hereof. 7.4 Authority of Collateral Agent. Each Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Secured Parties, be governed by the Transaction Documents and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 7.5 Appointment of Collateral Agent. (a) Each Secured Party hereby irrevocably appoints the Collateral Agent as its agent and authorizes the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. (b) The bank serving as the Collateral Agent hereunder shall have the same rights and powers in its capacity as a Secured Party as any other Secured Party and may exercise the same as though it were not the Collateral Agent, and such bank and its Affiliates may accept deposits from, lend money to 20 and generally engage in any kind of business with Holdings or any of its Subsidiaries as if it were not the Collateral Agent hereunder. (c) The Collateral Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Collateral Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Collateral Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Collateral Agent is required to exercise in writing as directed by the Required Secured Parties (or such other number or percentage of the Secured Parties as shall be necessary under the circumstances as provided in Section 8.1), and (c) except as expressly set forth herein, the Collateral Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to Holdings or any of its Subsidiaries that is communicated to or obtained by the bank serving as Collateral Agent or any of its Affiliates in any capacity. The Collateral Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Secured Parties (or such other number or percentage of the Secured Parties as shall be necessary under the circumstances as provided in Section 8.1) or in the absence of its own gross negligence or willful misconduct. The Collateral Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Collateral Agent by HCC or a Secured Party, and the Collateral Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document. (d) The Collateral Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Collateral Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Collateral Agent may consult with legal counsel (who may be counsel for HCC), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. (e) The Collateral Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Collateral Agent. The Collateral Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Affiliates. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Affiliates of the Collateral Agent and any such sub-agent in connection with its activities as Collateral Agent. (f) Subject to the appointment and acceptance of a successor Collateral Agent as provided in this paragraph, the Collateral Agent may resign at any time by notifying the Secured Parties and HCC. Upon any such resignation, the Required Secured Parties shall have the right, to appoint a successor, which successor shall be subject to the approval of HCC (such approval not to be unreasonably withheld or delayed). If no successor shall have been so appointed by the Required Secured Parties and shall have accepted such appointment within 30 days after the retiring Collateral Agent gives notice of its resignation, then the retiring Collateral Agent may, on behalf of the Secured Parties, appoint a successor Collateral Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank, which successor shall be subject to the approval of HCC (such approval not to be unreasonably withheld or delayed). Upon the acceptance of its appointment as Collateral Agent hereunder by a 21 successor and the approval of HCC as required above, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations hereunder. After the Collateral Agent's resignation hereunder, the provisions of this Article and Section 7.5 hereof shall continue in effect for the benefit of such retiring Collateral Agent, its sub-agents and their respective Affiliates in respect of any actions taken or omitted to be taken by any of them while it was acting as Collateral Agent. (g) Each Secured Party acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Secured Party and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Secured Party also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Secured Party and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. (h) Each Secured Party, by accepting the benefits of this Agreement, agrees to indemnify the Collateral Agent in its capacity as such (to the extent not reimbursed by HCC, or the other Grantors and without limiting the obligation of HCC and each other Grantor to do so), ratably according to the respective amounts of the Secured Obligations owed to such Secured Party, 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 Secured Obligations) be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of this Agreement, any of the other Transaction 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 Collateral 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 Collateral Agent's gross negligence or willful misconduct. The agreements in this paragraph shall survive the payment of the Secured Obligations and all other amounts payable hereunder. No Secured Party shall be entitled to the benefits of this Agreement if it has failed to confirm in writing (in form and substance satisfactory to the Collateral Agent) that it is bound by and subject to the provisions of this Section 7.5 following a request to do so by the Collateral Agent. Any Secured Party which fails to provide such a confirmation shall not be entitled to vote with respect to matters relating to this Agreement or the Collateral or to share in any distribution of, or payments or distributions in respect of, the Collateral. (i) The Collateral Agent shall be entitled to and succeed to all rights of the Administrative Agent under the Original Guarantee and Collateral Agreement and all liens created under the Original Guarantee and Collateral Agreement shall continue in full force and effect hereunder without interruption in perfection or priority. SECTION 8. MISCELLANEOUS 8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 11.1 of the Senior Credit Agreement (or the comparable provision of any bank credit agreement which refinances the Senior Credit Agreement), notwithstanding any provisions of the Transaction Documents to the contrary. 8.2 Notices. All notices, requests and demands to or upon the Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in Section 11.2 of the Senior Credit Agreement and Section 12.1 of each of the Synthetic Guarantees; provided that any such notice, request 22 or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1. 8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the Collateral Agent nor any Secured Party shall by any act (except by a written instrument pursuant to Section 8.1), 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. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any Secured Party, 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 Collateral Agent or any Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or such Secured Party would otherwise have on any future occasion. 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. 8.4 Enforcement Expenses; Indemnification. (a) Each Grantor agrees to pay or reimburse the Collateral Agent and each Secured Party for all its reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement and the other Transaction Documents to which such Grantor is a party, including, without limitation, reasonable fees and disbursements of counsel to the Collateral Agent and the several Secured Parties. (b) Each Grantor agrees to pay, and to save the Collateral Agent and the Secured Parties harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. (c) Each Grantor agrees to pay, and to save the Collateral Agent and the Secured Parties harmless from, any and all 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 to the extent that HCC would be required to do so pursuant to Section 11.5 of the Senior Credit Agreement, mutatis mutandis. (d) The agreements in this Section 8.4 shall survive repayment of the Obligations and all other amounts payable under the Transaction Documents. 8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Collateral Agent and the Secured Parties and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent. 8.6 Set-Off. Each Grantor hereby irrevocably authorizes the Collateral Agent and each Secured Party at any time and from time to time while an Event of Default shall have occurred and be continuing, without notice to such Grantor or any other Grantor, any such notice being expressly waived by each Grantor, 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 the Collateral Agent or such Secured Party to or for the credit or the account of such Grantor, or any part thereof in such amounts as the Collateral Agent or such Secured Party may elect, against and on account of the obligations and liabilities of such Grantor to the Collateral Agent or such Secured Party hereunder and claims of every nature and description of the Collateral Agent or such Secured Party against such Grantor, in any currency, whether arising hereunder, under any Transaction 23 Document or otherwise, as the Collateral Agent or such Secured Party may elect, whether or not the Collateral Agent or any Secured Party has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Collateral Agent and each Secured Party shall notify such Grantor promptly of any such set-off and the application made by the Collateral Agent or such Secured Party of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Collateral Agent and each Secured Party under this Section 9.6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Collateral Agent or such Secured Party may have. 8.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8.8 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. 8.9 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. 8.10 Integration. This Agreement and the other Transaction Documents represent the agreement of the Grantors, the Collateral Agent and the Secured Parties with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Collateral Agent or any Secured Party relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Transaction Documents. 8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8.12 Submission To Jurisdiction; Waivers. Each Grantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Transaction Documents to which it is a party, or for recognition and enforcement of any judgment 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 Grantor at its address referred to in Section 8.2 or at such other address of which the Collateral Agent shall have been notified pursuant thereto; 24 (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 Section any special, exemplary, punitive or consequential damages. 8.13 Acknowledgements. Each Grantor hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Transaction Documents to which it is a party; (b) neither the Collateral Agent nor any Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Transaction Documents, and the relationship between the Grantors, on the one hand, and the Collateral Agent and Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Transaction Documents or otherwise exists by virtue of the transactions contemplated hereby among the Secured Parties or among the Grantors and the Secured Parties. 8.14 Additional Grantors. Each Subsidiary of Holdings that is required to become a party to this Agreement pursuant to Section 7.10 of the Senior Credit Agreement or Section 10.10 of each of the Synthetic Guarantees shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1 hereto. 8.15 Releases. (a) At such time as the Secured Debt and the other Obligations (other than Obligations in respect of Derivatives Agreements) shall have been paid in full, the Commitments have been terminated and no Letters of Credit shall be outstanding, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Collateral Agent shall deliver to such Grantor any Collateral held by the Collateral Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Grantor in a transaction permitted by the Transaction Documents, then the Collateral Agent, at the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of HCC, a Subsidiary Guarantor shall be released from its obligations hereunder in the event that all the Capital Stock of such Subsidiary Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by the Transaction Documents. 8.16 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT (AS DEFINED IN THE SENIOR CREDIT AGREEMENT) OR ANY OTHER CREDIT 25 DOCUMENT (AS DEFINED IN ANNEX A TO EACH OF THE PARTICIPATION AGREEMENTS) AND FOR ANY COUNTERCLAIM THEREIN. 8.17 Amendment and Restatement. (a) As of the date hereof, the terms, conditions, agreements, covenants, representations and warranties set forth in the Original Guarantee and Collateral Agreement are hereby amended and restated in their entirety by the terms, conditions, agreements, covenants, representations and warranties set forth in this Agreement, except that nothing herein or in the other Transaction Documents shall impair or adversely affect the continuation of the liability of the Grantors for the Obligations heretofore incurred and the security interests, liens and other interests in the Collateral heretofore granted, pledged and/or assigned by the Grantors to the Collateral Agent and the Administrative Agent under the Original Guarantee and Collateral Agreement, for itself and for the benefit of the Secured Parties. (b) The amendment and restatement contained herein shall not, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of any of the obligations, liabilities and indebtedness of the Company evidenced by or arising under the Original Guarantee and Collateral Agreement or the Transaction Documents, and the liens and security interests securing such other obligations, liabilities and indebtedness, which shall not in any manner be impaired, limited, terminated, waived or released. (c) The Grantors hereby acknowledge, confirm and agree that (a) the Collateral Agent, for itself and for the benefit of the Secured Parties, has and shall continue to have a security interest in and lien upon the Collateral heretofore granted to the Collateral Agent (or Administrative Agent) under the Original Guarantee and Collateral Agent, and (b) the liens and security interests of the Collateral Agent in the Collateral shall be deemed to be continuously granted and perfected from the earliest date of the granting and perfection of such liens and security interest under the Original Guarantee and Collateral Agreement. 26 IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee and Collateral Agreement to be duly executed and delivered as of the date first above written. HANOVER COMPRESSOR COMPANY By: /s/ John E. Jackson Name: John E. Jackson Title: Senior Vice President & CFO HANOVER COMPRESSION LIMITED PARTNERSHIP By: /s/ John E. Jackson Name: John E. Jackson Title: Senior Vice President & CFO ENERGY TRANSFER - HANOVER VENTURE L.P. GULF COAST DISMANTLING, INC. HANOVER ASIA, INC. HANOVER AUSTRALIA, L.L.C. HANOVER COMPRESSED NATURAL GAS SERVICES, LLC HANOVER COMPRESSOR NIGERIA, INC. HANOVER COMPRESSION GENERAL HOLDINGS LLC HANOVER COMPRESSOR CAPITAL TRUST [HANOVER ECUADOR L.L.C.] HANOVER GENERAL ENERGY TRANSFER, LLC HANOVER HL HOLDINGS, LLC HANOVER HL, LLC HANOVER IDR, INC. HANOVER LIMITED ENERGY TRANSFER, LLC HANOVER MEASUREMENT, LLC HANOVER PARTNERS NIGERIA LLC HANOVER POWER (GATES), LLC HANOVER POWER, LLC HANOVER/TRINIDAD, L.L.C. HC CAYMAN LLC HC LEASING, INC. HCC HOLDINGS, INC. HCL COLOMBIA, INC. KOG, INC. SOUTHWEST INDUSTRIES, INC. By: /s/ John E. Jackson Name: John E. Jackson Title: V.P. Treasure HANOVER SPE, LLC By: Hanover Compressor Company, the managing member By: /s/ John E. Jackson Name: John E. Jackson Title: Senior Vice President Schedule 1 NOTICE ADDRESSES OF GUARANTORS Schedule 2 FILINGS AND OTHER ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS Uniform Commercial Code Filings [List each office where a financing statement is to be filed] Patent and Trademark Filings [List all filings] Actions with respect to Pledged Stock Other Actions [Describe other actions to be taken] Schedule 3 LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE Grantor Jurisdiction of Location of Chief Organization Executive Office ------- --------------- ----------------- ACKNOWLEDGEMENT AND CONSENT The undersigned hereby acknowledges receipt of a copy of the Guarantee and Collateral Agreement dated as of January 31, 2003 as amended and restated as of February 14, 2003 (the "Agreement"), made by the Grantors parties thereto for the benefit of JPMorgan Chase Bank, as Collateral Agent. The undersigned agrees for the benefit of the Collateral Agent and the Secured Parties as follows: 1. The undersigned will be bound by the terms of the Agreement and will comply with such terms insofar as such terms are applicable to the undersigned. 2. The terms of Sections 6.3(c) and 6.7(b) of the Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) or 6.7(b) of the Agreement. [NAME OF ISSUER] By: -------------------------------------- Name: Title: Address for Notices: ----------------------------------------- ----------------------------------------- ----------------------------------------- Fax: Annex 1 to Guarantee and Collateral Agreement ASSUMPTION AGREEMENT, dated as of ________________, 200_, made by ______________________________ (the "Additional Grantor"), in favor of JPMorgan Chase Bank, as collateral agent (in such capacity, the "Collateral Agent") for the banks and other financial institutions or entities (the "Secured Parties") parties to the Transaction Documents referred to below. All capitalized terms not defined herein shall have the meaning ascribed to them in such Senior Credit Agreement. W I T N E S S E T H : WHEREAS, Hanover Compressor Company ("Holdings"), Hanover Compression Limited Partnership ("HCC") and the Secured Parties have entered into the Transaction Documents (as defined in the Guarantee and Collateral Agreement referred to below); WHEREAS, in connection with the Transaction Documents, HCC and certain of its Affiliates (other than the Additional Grantor) have entered into the Guarantee and Collateral Agreement, dated as of January 31, 2003, as amended and restated as of February 14, 2003 (and as may be further amended, supplemented or otherwise modified from time to time, the "Guarantee and Collateral Agreement") in favor of the Collateral Agent for the benefit of the Secured Parties; WHEREAS, the Senior Credit Agreement and the Synthetic Guarantees require the Additional Grantor to become a party to the Guarantee and Collateral Agreement; and WHEREAS, the Additional Grantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guarantee and Collateral Agreement; NOW, THEREFORE, IT IS AGREED: 1. Guarantee and Collateral Agreement. By executing and delivering this Assumption Agreement, the Additional Grantor, as provided in Section 8.14 of the Guarantee and Collateral Agreement, hereby becomes a party to the Guarantee and Collateral Agreement as a Grantor thereunder with the same force and effect as if originally named therein as a Grantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Grantor thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in the Schedules to the Guarantee and Collateral Agreement. The Additional Grantor hereby represents and warrants that each of the representations and warranties contained in Section 4 of the Guarantee and Collateral Agreement is true and correct on and as the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date. 2. Governing Law. THIS ASSUMPTION AGREEMENT 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 Assumption Agreement to be duly executed and delivered as of the date first above written. [ADDITIONAL GRANTOR] By: ------------------------------- Name: Title: Annex 1-A to Assumption Agreement Supplement to Schedule 1 Supplement to Schedule 2 Supplement to Schedule 3 EX-10.9 5 dex109.txt AMENDED AND RESTATED GUARANTEE EXHIBIT 10.9 EXECUTION COPY ================================================================================ AMENDED AND RESTATED GUARANTEE made by HANOVER COMPRESSOR COMPANY HANOVER COMPRESSION INC. and certain of their Subsidiaries Dated as of March 13, 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 ...... 4 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 .................... 7 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 Year 2000 ..................................................................10 9.18 Senior Indebtedness ........................................................10 9.19 Representations and Warranties in Existing Guarantee .......................11 10. Affirmative Covenants of the Guarantor .............................................11 10.1 Financial Statements .......................................................11 10.2 Certificates; Other Information ............................................12 10.3 Payment of Obligations .....................................................13 10.4 Conduct of Business and Maintenance of Existence ...........................13
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Page ---- 10.5 Maintenance of Property; Insurance .........................................13 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 ........................................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 ...............................................24 11.13 Sale and Leaseback .........................................................24 11.14 Corporate Documents ........................................................24 11.15 Fiscal Year ................................................................24 11.16 Nature of Business .........................................................24 11.17 Unqualified Subsidiaries ...................................................24 12. Notices ............................................................................24 13. Severability .......................................................................25 14. Integration ........................................................................25 15. Amendments in Writing; No Waiver; Cumulative Remedies ..............................25 16. Section Headings ...................................................................25 17. Successors and Assigns .............................................................26 18. SUBMISSION TO JURISDICTION; WAIVERS ................................................26 19. GOVERNING LAW ......................................................................26 20. Survival of Representations, Warranties, etc .......................................26
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Page ---- 21. Authority of Agent..................................................................27 22. Third Party Beneficiaries...........................................................27 23. Right of Contribution...............................................................27 24. WAIVER OF JURY TRIAL................................................................27
Schedules Schedule 9.2 Material Changes Schedule 9.4 Required Consents Schedule 9.14 Subsidiaries Schedule 9.15 Environmental Schedule 11.2(c) 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 AMENDED AND RESTATED GUARANTEE AMENDED AND RESTATED GUARANTEE, dated as of March 13, 2000 (the "Agreement",) made by HANOVER COMPRESSOR COMPANY, a Delaware corporation, HANOVER COMPRESSION INC., a Delaware corporation, and certain of their Subsidiaries that are signatories hereto (individually, a "Guarantor", collectively, the "Guarantors"), in favor of the Beneficiaries (as hereinafter defined). W I T N E S S E T H: WHEREAS, on the Initial Closing Date, Holdings, HCC and certain Subsidiaries of Holdings entered into a Guarantee, dated as of June 15, 1999 (the "Existing Guarantee"), to induce (i) Hanover Equipment Trust 1999A (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) Societe Generale Financial Corporation 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; WHEREAS, (i) the Lenders have agreed to make, and have made, loans and (ii) the Investors have agreed to make, and have made, investments to the Lessor in order for the Lessor to acquire the Equipment and to pay other Equipment Acquisition Costs; WHEREAS, HCC has requested that the Investors, Agent and the Required Lenders (i) amend certain definitions and covenants in the Participation Agreement and Credit Agreement and (ii) amend and restate the Existing Guarantee so as to permit HCC to enter into a new equipment lease transaction; and NOW, THEREFORE, in consideration of the premises contained herein and to induce the Investors, Agent and the Required Lenders to enter into the requested amendments, 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 June 15, 1999 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: 2 "Agreement" means this Amended and Restated 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 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. 3 (c) Anything herein or in any other Operative Agreement to the contrary notwithstanding, the maximum liability of each Guarantor (other than 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. 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 4 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 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 5 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 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 September 30, 1999 (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 6 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. (b) 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 Subsidiairies, as applicable, of any material part of their business or property (other than to Holdings or any of its Subsidiaries). 9.2 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 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. 7 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 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 September 30, 1999, 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 8 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. 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 9 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. 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. 10 (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 has not been resolved, nor is HCC aware that any Governmental Authority is contemplating delivering to any Guarantor any such notice. (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.l(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 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. 9.18 Senior Indebtedness. The Guaranteed Obligations constitute "Senior Indebtedness" of HCC under and as defined in the Shareholder Subordinated Loan Agreement. 11 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. 9.19 Representations and Warranties in Existing Guarantee. The representations and warranties contained in Section 9 of the Existing Guarantee 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 Guarantee. 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 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; 12 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 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 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(b) and (c), a management summary describing and analyzing the performance of Holdings and its Subsidiaries during the periods covered by such financial statements; 13 (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. 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: 14 (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 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; 15 (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 Guarantor, 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. 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. 16 (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. 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 Guarantors under the Corporate Credit Agreement and the other Loan Document 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 $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 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 17 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. 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; 18 (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; (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; 19 (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 (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; (f) Guarantee Obligations of Holdings and any of its Subsidiaries arising pursuant to the Equipment Lease Transactions; (g) 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 (h) 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 20 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; (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. 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; 21 (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; (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. 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 22 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 Agent and the Lenders pursuant to subsection 10.1 at or prior to the time of such declaration or payment. 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; 23 (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 and the Loans, and the loans to be made and the Letters of Credit to be issued in connection with the Corporate Credit Agreement, 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 under the Corporate Credit Agreement, 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 under the Corporate Credit Agreement, the Available Commitments and the 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. 24 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. 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. 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: 25 (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. (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. 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 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. 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 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. 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. 26 17. 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. 18. SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) 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; (ii) 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; (iii) 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; (iv) 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 (v) 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. 19. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 20. Survival of Representations, Warranties, etc. All representations, warranties, covenants and agreements made herein and in statements or certificates delivered 27 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 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. 21. 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. 22. Third Party Beneficiaries. Each Guarantor expressly acknowledges and agrees that each Indemnified Person shall be a third party beneficiary of this Guaranty. 23. 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. 24. 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: /s/ [ILLEGIBLE] ---------------------------- Name: [ILLEGIBLE] Title: Treasurer HANOVER COMPRESSION INC. By: /s/ [ILLEGIBLE] ---------------------------- Name: [ILLEGIBLE] Title: Treasurer HANOVER COMPRESSOR LIMITED HOLDINGS, LLC by Hanover General Holdings, Inc., as sole member By: /s/ [ILLEGIBLE] ---------------------------- Name: [ILLEGIBLE] Title: Treasurer HANOVER MAINTECH LIMITED PARTNERSHIP by Hanover General Holdings, Inc., as general partner By: /s/ [ILLEGIBLE] ---------------------------- Name: [ILLEGIBLE] Title: Treasurer HANOVER/SMITH LIMITED PARTNERSHIP by Hanover General Holdings, Inc., as general partner By: /s/ [ILLEGIBLE] ---------------------------- Name: [ILLEGIBLE] Title: Treasurer HANOVER LAND LIMITED PARTNERSHIP by Hanover General Holdings, Inc., general partner By: /s/ [ILLEGIBLE] ---------------------------- Name: [ILLEGIBLE] Title: Treasurer 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 60602 Attention: Richard S. Meller and Michael A. Pucker Telecopy: 312-993-9767 EX-10.11 6 dex1011.txt FIRST AMENDMENT AND WAIVER TO THE PARTICIPATION AGREEMENT DATED JUNE 15, 1999 EXHIBIT 10.11 EXECUTION COPY FIRST AMENDMENT AND WAIVER FIRST AMENDMENT AND WAIVER, dated as of September 30, 1999 (this "Amendment"), to the Participation Agreement, dated as of June 15, 1999 (as the same may be amended, supplemented or otherwise modified from time to time, the "Participation Agreement"), among Hanover Compressor Company, a Delaware corporation ("HCC" and the "Lessee"), Hanover Equipment Trust 1999A (the "Lessor"), Societe General Financial Corporation and FBTC Leasing Corp., Inc. (the "Investors"), the lenders parties thereto (the "Lenders") and The Chase Manhattan Bank, a New York banking corporation, as the agent for the Lenders (in such capacity, the "Agent") and certain other Operative Agreements (as defined in the Participation Agreement). W I T N E S S E T H: WHEREAS, HCC has requested that the Agent and the Required Lenders amend and waive certain covenants in the Participation Agreement and Guarantee so as to extend certain lease filing deadlines and to permit HCC to enter into the HMS Transactions (as defined below); and WHEREAS, the Agent and the Required Lenders are agreeable to the requested amendments and waivers, but only on the terms and subject to the conditions set forth herein; NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in the Participation Agreement are used herein as therein defined and the following terms shall have the following meanings: "HMS" shall mean Hanover Measurement Services Company, L.P., a Delaware limited partnership formed as described in Annex A hereto, and its successors and assigns. 2 "HMS Transactions" shall mean the transactions described in Annex A hereto. "HPL" shall mean Houston Pipe Line Company, a Delaware corporation, and its successors and assigns. "MAC Demand Note Assumption" shall mean the assumption of $8,800,000.00 of obligations under the MAC Demand Note (as defined in Annex A) by Hanover MAC, LLC as contemplated by the HMS Transactions. "MAC Demand Note Prepayment" shall mean the prepayment of $8,800,000.00 of obligations under the MAC Demand Note (as defined in Annex A) assumed by Hanover MAC, LLC as contemplated by the HMS Transactions. "MAC Term Note Issuance" shall mean the issuance of the $8,800,000.00 Hanover MAC/MAC Term Note (as defined in Annex A) to Hanover MAC, LLC as contemplated by the HMS Transactions. "MAC Term Note Sale" shall mean the sale of the $8,800,000.00 Hanover MAC/MAC Term Note (as defined in Annex A) by Hanover MAC, LLC for the face amount thereof as contemplated by the HMS Transactions. II. Amendments to Participation Agreement. 1. Amendment to Subsection 8.8 (Oklahoma Equipment Subleases). Subsection 8.8 of the Participation Agreement is hereby amended by deleting the words "within 90 days of the Initial Closing Date" therefrom and substituting in place thereof the words "by November 15, 1999". 2. Amendment to Annex A (Rules of Usage). Annex A of the Participation Agreement is hereby amended by inserting the following new definitions in the appropriate alphabetical order: "HMS" shall mean Hanover Measurement Services Company, L.P., a Delaware limited partnership formed as described in Annex A to the First Amendment, and its successors and assigns. "HMS Transactions" means the transactions described in Annex A to the First Amendment. "HPL" shall mean Houston Pipe Line Company, a Delaware corporation, and its successors and assigns. 3 "First Amendment" shall mean the First Amendment and Waiver, dated as of September 30, 1999 to the Participation Agreement and certain other Operative Documents. "MAC" shall mean Meter Acquisition Company LP, LLLP, a Delaware registered limited liability limited partnership, and its successors and assigns. III. Amendments to Guarantee. 1. Amendment to Subsection 10.9 (Subsequent Guarantees). Subsection 10.9 of the Guarantee is hereby amended by adding the phrase "(other than HMS and MAC)" after the first use of the phrase "Qualified Subsidiary". 2. Amendment to Subsection 11.3 (Limitation on Liens). Subsection 11.3 of the Guarantee is hereby amended by deleting paragraphs (t) and (u) in their entirety therefrom and substituting in place thereof the following: "(t) Lessor Liens; (u) Liens listed on Schedule 11.3(u); and (v) Liens not otherwise permitted in clauses (a)-(u) above securing Indebtedness not exceeding $2,500,000 in the aggregate.". 3. Amendment to Subsection 11.4 (Limitation on Guarantor Obligations). Subsection 11.4 of the Guarantee is hereby amended by deleting paragraphs (f) and (g) in their entirety therefrom and substituting in place thereof the following: "(f) guarantees in respect of Indebtedness (other than Subordinated Debt) permitted under the Corporate Credit Agreement; (g) the Guarantor Obligations arising pursuant to the Operative Agreements and the Other Equipment Lease Operative Agreements; and (h) 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.". 4 4. Amendment to Subsection 11.6 (Limitation on Sale or Lease of Assets). Subsection 11.6 of the Guarantee is hereby amended by deleting the paragraphs (g) and (h) in their entirety therefrom and substituting in place thereof the following: "(g) the lease by Hanover Land Company 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 and Other Equipment Lessors in connection with the Operative Agreements and the Other Equipment Lease Operative Agreements; and (i) the lease of assets as listed on Schedule 11.6(i).". 5. Amendment to Subsection 11.16 (Nature of Business). Subsection 11.16 of the Guarantee is hereby amended by deleting such subsection in its entirety therefrom and substituting in place thereof the following: "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.". 6. Amendments to Schedules. (a) Schedules of the Guarantee are hereby amended by adding Schedules 11.3(u) and 11.6(i), in the form of Schedule 11.3(u) and 11.6(i), respectively, to this Amendment. (b) Schedule 11.3(n) of the Guarantee is hereby amended by deleting paragraphs 2 and 3 in their entirety and renumbering the remaining paragraphs accordingly thereto. (c) Schedule 11.12 of the Guarantee is hereby amended by deleting said Schedule in its entirety and substituting in lieu thereof new Schedule 11.12 in the form of Schedule 11.12 to this Amendment. IV. Waivers. 5 In connection with the HMS Transactions, The Required Lenders hereby waive (a) subsection 11.2 of the Guarantee with respect to the MAC Demand Note Assumption, (b) subsection 11.6 of the Guarantee with respect to the MAC Term Note Sale, (c) subsection 11.10 of the Guarantee with respect to the MAC Term Note Issuance and (d) subsection 11.11 of the Guarantee with respect to the MAC Demand Note Prepayment; provided, however, that the foregoing waivers (a) through (d) are conditioned upon the MAC Demand Note Assumption, MAC Term Note Sale, MAC Term Note Issuance and MAC Demand Note Prepayment occurring substantially concurrently. V. General. 1. Effectiveness. This Amendment shall become effective upon fulfillment of the following conditions precedent: (a) HCC and the Lessor shall have delivered to the Agent duly executed copies of this Amendment, (b) the Guarantors shall have delivered to the Agent duly executed copies of this Amendment, (c) the Agent shall have received duly executed copies of this Amendment from Required Lenders and (d) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment. 2. Representations and Warranties. HCC and each of the Guarantors hereby represents and warrants that the representations and warranties contained in the Participation Agreement and the Operative Agreements (except those which expressly speak as of a certain date) will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof. 3. Continuing Effect of Participation Agreement and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of the Participation Agreement or the Operative Agreements not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, the Lessor or Guarantors that would require a waiver or consent of the Agent and/or the Lenders. Except as expressly amended hereby, the provisions of the Participation Agreement and the Operative Agreements are and shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6 6. Expenses. HCC agrees to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as Lessee and as a Guarantor By: /s/ Curtis Bedrich --------------------------------- Name: Curtis Bedrich Title: Treasurer HANOVER EQUIPMENT TRUST 1999A By: Wilmington Trust Company, not individually but solely as Trustee By: ---------------------------------- Name: Title: HANOVER/SMITH, INC., as a Guarantor By: /s/ Curtis Bedrich ----------------------------------- Name: Curtis Bedrich Title: Treasurer HANOVER MAINTECH, INC., as a Guarantor By: /s/ Curtis Bedrich ----------------------------------- Name: Curtis Bedrich Title: Treasurer HANOVER LAND COMPANY, as a Guarantor By: /s/ Curtis Bedrich --------------------------------- Name: Curtis Bedrich Title: Treasurer IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as Lessee and as a Guarantor By: --------------------------------- Name: Title: HANOVER EQUIPMENT TRUST 1999A By: Wilmington Trust Company, not individually but solely as Trustee By: /s/ Robert P. Hines, Jr. ---------------------------------- Name: Robert P. Hines, Jr. Title: Financial Services Officer HANOVER/SMITH, INC., as a Guarantor By: ----------------------------------- Name: Title: HANOVER MAINTECH, INC., as a Guarantor By: ----------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Agent and as a Lender By: /s/ Peter M. Ling ----------------------------------- Name: Peter M. Ling Title: Vice President ABN AMRO BANK, N.V., as a Managing Agent and a Lender By: ------------------------------- Name: Title: SOCIETE GENERALE FINANCIAL CORPORATION as an Investor By: /s/ Richard W. Crannell, Jr. ------------------------------- Name: Richard W. Crannell, Jr. Title: Vice President FBTC LEASING CORP., as an Investor and as a Lender By: /s/ Masatoshi Kaishita ------------------------------------ Name: Masatoshi Kaishita Title: Treasurer THE BANK OF NOVA SCOTIA, as a Managing Agent and a Lender By: /s/ F.C.H. Ashby ------------------------------ Name: F.C.H. Ashby Title: Senior Manager Loan Operations BANK OF SCOTLAND, as a Lender By: /s/ Annie Glynn ---------------------------- Name: Annie Glynn Title: Senior Vice President PARIBAS, as a Lender By: /s/ Marian Livingston ------------------------------- Name: Marian Livingston Title: Vice President By: /s/ Betsy Jocher ------------------------------- Name: Betsy Jocher Title: Vice President FUJI BANK LIMITED, as a Managing Agent and a Lender By: ------------------------------- Name: Title: BANKERS TRUST COMPANY, as a Lender By: /s/ Calli S. Hayes ----------------------------- Name: Calli S. Hayes Title: Managing Director COMERICA BANK, as a Lender By: /s/ [ILLEGIBLE] --------------------------------- Name: [ILLEGIBLE] Title: First Vice President CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By: /s/ Phillippe Soustra ---------------------------------- Name: Phillippe Soustra Title: Senior Vice President DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG, as a Lender By: /s/ Mark K. Connelly ---------------------------- Name: Mark K. Connelly Title: Vice President By: /s/ Richard W. Wilbert ---------------------------- Name: Richard W. Wilbert Title: Vice President BANK ONE, N.A., Formerly known as THE FIRST NATIONAL BANK OF CHICAGO, as a Managing Agent and a Lender By: /s/ Karen A. Patterson --------------------------------- Name: Karen A. Patterson Title: First Vice President FUJI BANK, LIMITED, as a Lender By: ------------------------------ Name: Title: THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH, as a Lender By: /s/ Michael N. Oakes ------------------------------- Name: Michael N. Oakes Title: Senior Vice President, Houston Office SUNTRUST BANK, ATLANTA, as a Lender By: /s/ John A. Fields, Jr. ---------------------------------- Name: John A. Fields, Jr. Title: Managing Director SOCIETE GENERALE, SOUTHWEST AGENCY, as a Managing Agent and a Lender By: /s/ Mark A. Cox ----------------------------- Name: Mark A. Cox Title: Director Head of Houston Office WELLS FARGO BANK (TEXAS) N.A., as a Lender By: /s/ Joseph P. Maxwell -------------------------------- Name: Joseph P. Maxwell Title: Vice President WILMINGTON TRUST COMPANY, in its individual capacity, only to the extent expressly set forth herein By: /s/ Robert P. Hines, Jr. ----------------------------------- Name: Robert P. Hines, Jr. Title: Financial Services Officer EX-10.12 7 dex1012.txt TIDES AMENDMENT, CONSENT AND JOINDER DATED AS OF DECEMBER 9, 1999 EXHIBIT 10.12 EXECUTION COPY TIDES AMENDMENT, CONSENT AND JOINDER TIDES AMENDMENT, CONSENT AND JOINDER, dated as of December 9, 1999 (this "Amendment"), to (i) the Participation Agreement, dated as of June 15, 1999 (as the same may be amended, supplemented or otherwise modified from time to time, the "1999 Participation Agreement"), among Hanover Compression Inc. (formerly known as Hanover Compressor Company), a Delaware corporation ("HCC" and the "Lessee"), Hanover Equipment Trust 1999A (the "1999 Lessor"), Societe Generale Financial Corporation and FBTC Leasing Corp., Inc. (the "1999 Investors"), the lenders parties thereto (the "1999 Lenders") and The Chase Manhattan Bank, a New York banking corporation, as the agent for the 1999 Lenders (the "Agent"), and the Guarantee, as defined in the 1999 Participation Agreement (the "1999 Guarantee"), (ii) the Participation Agreement, dated as of July 22, 1998 (as the same may be amended, supplemented or otherwise modified from time to time, the "1998 Participation Agreement") (the 1999 Participation Agreement and the 1998 Participation Agreement, together the "Participation Agreements"), among HCC, Hanover Equipment Trust 1998A (the "1998 Lessor"), Societe Generale Financial Corporation (the "1998 Investor"), the lenders parties thereto (the "1998 Lenders") and the Agent, as agent for the 1998 Lenders, and the Guarantee, as defined in the 1998 Participation Agreement (the "1998 Guarantee") (the 1999 Guarantee and the 1998 Guarantee, together the "Guarantees") and (iii) the other Operative Documents (as defined in either Participation Agreement). W I T N E S S E T H: WHEREAS, HCC has requested that the Agent and the Required Lenders under each of the Participation Agreements amend certain covenants in each of the Participation Agreements and Guarantees so as to permit Holdings (as defined below) and the TIDES Trust (as defined below) to enter into the TIDES Transaction (as defined below); and WHEREAS, HCC has requested that each of the Agent, the Required Lenders and the Investors, as party to each Participation Agreement and each other Operative Document as applicable, consent to the proposed Restructuring Transactions (as defined below); and WHEREAS, upon the effectiveness of the Amendment, Holdings, a newly formed subsidiary of HCC, will become the parent company of HCC; and WHEREAS, Holdings (as defined below) has agreed to execute and deliver this Amendment in order to become a party to each of the Guarantees; and WHEREAS, the Agent and the Required Lenders under each of the Participation Agreements are agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; 2 NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in either Participation Agreement are used herein as therein defined and the following terms shall have the following meanings: "Holdings" shall mean Hanover Compressor Company, a Delaware corporation and a newly formed subsidiary of HCC, which, upon the effectiveness of the Amendment, will become the parent company of HCC as described in paragraph A of Annex B. "Restructuring Transactions" shall mean the restructuring transactions by HCC of its domestic legal structure to align its operations and to produce certain tax efficiencies, as further described in Annex B hereto. "TIDES Trust" shall mean Hanover Compressor Capital Trust, a Delaware business trust formed as described in Annex A hereto, and its successors and assigns. "TIDES Transactions" shall mean the transactions described in Annex A hereto. II. Amendments to all Operative Documents. 1. Change of Name. All Operative Documents are hereby amended by deleting therefrom any existing reference to "Hanover Compressor Company" in its entirety and substituting in place thereof "Hanover Compression Inc. (formerly known as Hanover Compressor Company)". III. Amendments to the Participation Agreements. 1. Amendment to Section 8. Section 8 of each of the Participation Agreements is hereby amended by deleting Subsection 8.8 in its entirety therefrom and substituting in place thereof the following: "8.8 Oklahoma Equipment Subleases. With respect to any leases or other agreement entered into by Lessee with respect to Equipment located in the State of Oklahoma ("Oklahoma Subleases"), Lessee shall, no later than May 15, 2000 (or, for any Oklahoma Sublease entered into after February 15, 2000, 90 days after the date such Oklahoma Sublease is entered into), undertake to file, in accordance with 60 Okla. Stat. 1991 Section 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.". 3 2. Amendment to Annex A (Rules of Usage). (a) Annex A to each of the Participation Agreements is hereby amended by deleting therefrom any existing reference to "HCC" (other than the definitions of "Commonly Controlled Entity", "Fee Letter", "HCC", "Shareholder Subordinated Debt" and "Wartsilla Guaranty Obligation") in its entirety and substituting in place thereof "Holdings". (b) Annex A to each of the Participation Agreements is hereby amended by deleting therefrom the definitions of the following defined terms in their respective entireties and substituting in place thereof the following new definitions: "Corporate Guarantees" shall mean, collectively, that certain Subsidiaries' Guarantee and that certain Holdings Guarantee made by the Guarantors pursuant to the Corporate Credit Agreement and such other guarantees of the loans and the other obligations of HCC under the Corporate Credit Agreement. "Guarantors" shall mean collectively, Holdings, the Lessee, Hanover/Smith, Inc., a Delaware corporation, Hanover Maintech, Inc., a Texas corporation and Hanover Land Company, a Texas corporation. "HCC" shall mean Hanover Compression Inc. (formerly known as Hanover Compressor Company), a Delaware corporation. "Lessee" shall mean Hanover Compression Inc. (formerly known as Hanover Compressor Company), a Delaware corporation. (c) Annex A to each of the Participation Agreements is hereby amended by inserting the following new definitions in the appropriate alphabetical order: "Holdings" shall mean Hanover Compressor Company, a Delaware corporation and a newly formed subsidiary of HCC, which, upon the effectiveness of the TIDES Amendment, will become the parent company of HCC as described in paragraph A of Annex B to the TIDES Amendment. "Qualified Subsidiary" shall mean each Subsidiary of Holdings organized under a jurisdiction of the United States and having assets located primarily in the United States. "Subordinated Debt" shall mean, with respect to Holdings and each Subsidiary, the Shareholder Subordinated Debt, the TIDES Debentures and any other unsecured Indebtedness 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 HCC to the Administrative Agent and the Lenders hereunder; provided that prior to an Event of Default, Holdings and any Subsidiaries may make regularly scheduled interest payments in respect of such Indebtedness. "Subordinated Guarantor Obligation" shall mean, with respect to Holdings and each Subsidiary, any unsecured Guarantor Obligation the terms of which provide that 4 such Guarantor Obligation is subordinate and junior in right to the payment of all the obligations and liabilities of HCC to the Agent and the Lenders. "TIDES" shall mean the Term Income Deferrable Equity Securities (TIDES)(SM) as further described in Annex A to the TIDES Amendment. "TIDES Amendment" shall mean the TIDES Amendment, Consent and Joinder, dated as of December 9, 1999, to the Participation Agreement and certain other Operative Documents. "TIDES Debentures" shall mean the unsecured debentures junior and subordinate in right of payment of all the obligations and liabilities of Holdings to be issued by Holdings in connection with the issuance of TIDES as further described in Annex A to the TIDES Amendment. "TIDES Trust" shall mean Hanover Compressor Capital Trust, a Delaware business trust formed as described in Annex A to the TIDES Amendment, and its successors and assigns. "TIDES Transactions" shall mean the transactions described in Annex A to the TIDES Amendment. "Unqualified Subsidiary" shall mean any Subsidiary of Holdings other than a Qualified Subsidiary. (d) Annex A to each of the Participation Agreements is hereby amended by inserting new paragraph (j) after paragraph (i) in the rules and usage portion thereof: "(e) After the effective date of the TIDES Amendment, for purposes of determining compliance with the covenants contained in Subsections 10.1 and 11.1 of the Guarantee, the term 'Holdings' shall be deemed a reference to HCC for any period which is prior to the effective date of the TIDES Amendment, covered by such covenants.". IV. Amendments to Guarantees. 2. Amendment to Section 10 (Affirmative Covenants of the Guarantor). (a) Section 10 of each of the Guarantees is hereby amended by adding the phrase "and such Guarantor (except in the case of delivery of financial information, reports, certificates and notices) shall cause each of its Subsidiaries to" after the first use of the phrase "such Guarantor will". (b) Section 10 of each of the Guarantees is hereby amended by deleting therefrom any existing reference to "HCC" in its entirety and substituting in place thereof "Holdings". 3. Amendment to Subsection 10.9 (Subsequent Guarantees). Subsection 10.9 of each of the Guarantees is hereby amended by replacing the phrase "(other than HMS and 5 MAC)" after the first use of the phrase "Qualified Subsidiary" with the phrase "(other than the TIDES Trust, HMS and MAC)". 4. Amendment to Section 11 (Negative Covenants). Section 11 of each of the Guarantees is hereby amended by deleting therefrom any existing reference to "HCC" (other than in subsection 8.3(n)) in its entirety and substituting in place thereof "Holdings". 5. Amendment to Subsection 11.1 (Financial Condition Covenants). Subsection 11.1 of each of the Guarantees is hereby amended by deleting paragraphs (a), (b), (c), (d) and (e) in their entirety therefrom and substituting in place thereof the following: "(a) Maintenance of Consolidated Indebtedness to Consolidated Capitalization. Permit the ratio (expressed as a percentage) of Consolidated Indebtedness to Consolidated Capitalization of Holdings and its Subsidiaries 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 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 and its Subsidiaries at the end of any of Holdings' fiscal quarters to be less than 1.0 to 1.0. (c) Consolidated Indebtedness to Consolidated U.S. EBITDA. Permit the ratio of Consolidated Indebtedness to Consolidated U.S. 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 foregoing ratio, Consolidated Indebtedness 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 for the four consecutive fiscal quarters of Holdings most recently ended to be greater than 4.0 to 1.0; provided that for purposes of calculating the foregoing ratio, Consolidated Indebtedness 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 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 shall exclude any accrued but unpaid interest relating to the TIDES or TIDES Debentures.". 6. Amendment to Subsection 11.4 (Limitation on Guarantor Obligations). Subsection 11.4 of each of the Guarantees is hereby amended by deleting paragraphs (g) and (h) in their entirety therefrom and substituting in place thereof the following: "(g) the Guarantor Obligations arising pursuant to the Operative Agreements and the Other Equipment Lease Operative Agreements; 6 (h) 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 (i) the Subordinated Guarantor Obligations of Holdings arising under agreements entered into by Holdings as contemplated by the TIDES Transactions.". 7. Amendment to Subsection 11.5 (Limitations on Fundamental Changes). Subsection 11.5 of each of the Guarantees is hereby amended by deleting paragraphs (d) and (e) in their entirety therefrom and substituting in place thereof the following: "(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 Operative Agreements and Other Equipment Lease Operative Agreements; and (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 Transactions.". 8. Amendment to Subsection 11.8 (Limitation on Dividends). Subsection 11.8 of each of the Guarantees is hereby amended by deleting sub-clause (i) in its entirety and substituting in place thereof the following: "(i) Subsidiaries of Holdings may declare and pay dividends to Holdings (to the extent necessary to pay interest on, or redeem, the TIDES Debentures) and other shareholders of such Subsidiaries and the TIDES Trust may redeem the TIDES as contemplated by the TIDES Transactions". Amendment to Subsection 11.10 (Limitation on Investments, Loans and Advances). Subsection 11.10 of each of the Guarantees is hereby amended by deleting the paragraphs (h) and (i) in their entirety and substituting in place thereof the following: "(h) Investments or acquisitions by Holdings or its Subsidiaries in 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), provided that the aggregate amount of all such 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 7 (j) the purchase by the TIDES Trust of debentures issued by Holdings as contemplated by the TIDES Transactions.". 9. Amendment to Subsection 11.11 (Limitation on Optional Payments and Modifications of Debt Instruments). Subsection 11.11 of each of the Guarantees is hereby amended by deleting such subsection in its entirety therefrom and substituting in place thereof the following: "11.11 Limitation on Optional Payments and Modifications of Debt Instruments. (i) Make any optional payment or prepayment on or redemption of any portion of the Shareholder Subordinated Debt, (ii) make any optional payment, 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 or TIDES as contemplated by the TIDES Transactions or (b) any optional payment, prepayment or redemption of any Indebtedness pursuant to the Corporate Credit Agreement, the Operative Agreements or the Other Equipment Lease Operative 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 Operative Agreements or the Other Equipment Lease Operative Agreement 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.". V. Joinder to the Guarantees. By executing and delivering this Amendment, Holdings hereby becomes a party to each of the Guarantees as a Guarantor thereunder with the same force and effect as if originally named therein as a Guarantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Guarantor thereunder. VI. Consent. In connection with the proposed Restructuring Transactions, each of the Required Lenders and the Investors, as party to each Participation Agreement and each other Operative Document, as applicable, consent to the proposed Restructuring Transactions; provided, however, that the foregoing consent with respect to the Restructuring Transactions (other than the portion thereof described in paragraph A of Annex B) is conditioned upon receipt by the Investors and the Administrative Agent, with a copy for each 1999 Lender and 1998 Lender, of (i) executed amendments to certain Operative Documents in form and substance as are satisfactory to the Administrative Agent and the Investors, (ii) executed joinders to each of the Guarantees pursuant to Subsection 10.9 of each such Guarantee, and (iii) legal opinions, certificates, resolutions and all other documents that are reasonably requested by the Administrative Agent or the Investors. 8 VII. General. 1. Effectiveness. This Amendment shall become effective upon fulfillment of the following conditions precedent: (a) Holdings, HCC, the 1999 Lessor and the 1998 Lessor shall have delivered to the Agent duly executed copies of this Amendment, (b) the Guarantors shall have delivered to the Agent duly executed copies of this Amendment, (c) the Agent shall have received duly executed copies of this Amendment from the Required Lenders and the Investors under each of the Participation Agreements, (d) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment, and (e) the Agent shall have received, for the account of each 1999 Lender and 1998 Lender that has delivered an executed counterpart of this Amendment to the Agent by December 8, 1999, payment by HCC of an amendment fee in the amount of $25,000. 2. Representations and Warranties. Holdings, HCC and each of the Guarantors hereby represents and warrants that the representations and warranties contained in each of the Participation Agreements (other than Section 8.8 of each Participation Agreement) and the Operative Agreements (as defined in each of the Participation Agreements) (except those which expressly speak as of a certain date) will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof. 3. Continuing Effect of Participation Agreements and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of either of the Participation Agreements or the Operative Agreements (as defined in either Participation Agreement) not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, the 1999 Lessor, the 1998 Lessor or Guarantors that would require a waiver or consent of the Agent and/or the 1999 Lenders or 1998 Lenders. Except as expressly amended hereby, the provisions of each of the Participation Agreements and the Operative Agreements (as defined in either Participation Agreement) are and shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6. Expenses. Holdings and HCC agree to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as a Guarantor By: /s/ [ILLEGIBLE] ------------------------------------ Name: [ILLEGIBLE] Title: Vice President HANOVER COMPRESSOR INC. (formerly known as Hanover Compressor Company), as Lessee and as a Guarantor By: /s/ [ILLEGIBLE] ------------------------------------ Name: [ILLEGIBLE] Title: Vice President HANOVER EQUIPMENT TRUST 1999A By: Wilmington Trust Company, not individually but solely as Trustee By: ------------------------------------ Name: Title: HANOVER EQUIPMENT TRUST 1998A By: Wilmington Trust Company, not individually but solely as Trustee By: ------------------------------------ Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as a Guarantor By: ------------------------------------ Name: Title: HANOVER COMPRESSION INC. (formerly known as Hanover Compressor Company), as Lessee and as a Guarantor By: ------------------------------------ Name: Title: HANOVER EQUIPMENT TRUST 1999A By: Wilmington Trust Company, not individually but solely as Trustee By: /s/ Robert P. Hines, Jr. ------------------------------------ Name: Robert P. Hines, Jr. Title: HANOVER EQUIPMENT TRUST 1998A By: Wilmington Trust Company, not individually but solely as Trustee By: /s/ Robert P. Hines, Jr. ------------------------------------ Name: Robert P. Hines, Jr. Title: THE CHASE MANHATTAN BANK, as Agent, a 1999 Lender and 1998 Lender By: /s/ Peter M. Ling ----------------------------- Name: Peter M. Ling Title: Vice President SOCIETE GENERALE FINANCIAL CORPORATION as a 1999 Investor By: /s/ Richard W. Crannell, Jr. -------------------------------- Name: Richard W. Crannell, Jr. Title: Vice President FBTC LEASING CORP., as a 1999 Investor and as a Lender By: /s/ Kazuaki Kitabatake --------------------------------- Name: Kazuaki Kitabatake Title: Vice President ABN AMRO BANK N.V., as a 1999 Lender and 1998 Lender By: /s/ Deanna Breland -------------------------------- Name: Deanna Breland Title: Vice President By: /s/ Brandi Lippincott -------------------------------- Name: Brandi Lippincott Title: Assistant Vice President THE BANK OF NOVA SCOTIA, as a 1999 Lender and 1998 Lender By: /s/ N. Bell -------------------------- Name: N. Bell title: Assistant Agent FIRST UNION NATIONAL BANK, as a 1998 Lender By: /s/ Robert R. Wetteroff ---------------------------------- Name: Robert R. Wetteroff Title: Senior Vice President BANK OF SCOTLAND, as a 1999 Lender By: /s/ Annie Glynn ------------------------------- Name: Annie Glynn Title: Senior Vice President PARIBAS, as a 1999 Lender By: /s/ Marian Livingston --------------------------------- Name: Marian Livingston Title: Vice President By: /s/ Betsy Jocher --------------------------------- Name: Betsy Jocher Title: Vice President THE FUJI BANK LIMITED, as a 1999 Lender By: /s/ Jacques Azagury ---------------------------------- Name: Jacques Azagury Title: Senior Vice President and Manager BANKERS TRUST COMPANY, as a 1999 Lender By: /s/ Marcus M. Tarkington ----------------------------------- Name: Marcus M. Tarkington Title: Principal COMERICA BANK, as a 1999 Lender By: /s/ T. Bancroft Mattei ----------------------------------- Name: T. Bancroft Mattei Title: Account Officer CREDIT LYONNAIS NEW YORK BRANCH, as a 1999 Lender and 1998 Lender By: /s/ Phillippe Soustra --------------------------------- Name: Phillippe Soustra Title: Senior Vice President DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG, as a 1999 Lender By: /s/ Craig Anderson ------------------------------- Name: Craig Anderson Title: Assistant Vice President By: /s/ Lynne McCarthy ------------------------------- Name: Lynne McCarthy Title: Asst. Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a 1998 Lender By: /s/ B. Craig Erickson ---------------------------------- Name: B. Craig Erickson Title: Vice President By: /s/ Joanna M. Solowski ---------------------------------- Name: Joanna M. Solowski Title: Vice President BANK ONE, N.A. (formerly known as The First National Bank of Chicago), as a 1998 Lender and a 1999 Lender By: /s/ Karen A. Patterson ----------------------------------- Name: Karen A. Patterson Title: First Vice President THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH, as a 1999 Lender By: /s/ Michael N. Oakes ------------------------------------ Name: Michael N. Oakes Title: Senior Vice President Houston Office SUNTRUST BANK, ATLANTA, as a 1999 Lender and 1998 Lender By: /s/ John A. Fields, Jr. ----------------------------------- Name: John A. Fields, Jr. Title: Vice President SOCIETE GENERALE, SOUTHWEST AGENCY, as a 1999 Lender and 1998 Lender By: /s/ Mark A. Cox -------------------------------- Name: Mark A. Cox Title: Director Head of Houston Office WELLS FARGO BANK (TEXAS) N.A., as a 1999 Lender By: /s/ Joseph P. Maxwell ----------------------------------- Name: Joseph P. Maxwell Title: Vice President WILMINGTON TRUST COMPANY, in its individual capacity, only to the extent expressly set forth herein By: /s/ Robert P. Hines, Jr. ------------------------------- Name: Robert P. Hines, Jr. Title: HANOVER/SMITH, INC., as a Guarantor By: /s/ [ILLEGIBLE] -------------------------------- Name: [ILLEGIBLE] Title: VICE PRESIDENT HANOVER MAINTECH, INC. as a Guarantor By: /s/ [ILLEGIBLE] -------------------------------- Name: [ILLEGIBLE] Title: VICE PRESIDENT HANOVER LAND COMPANY, as a Guarantor By: /s/ [ILLEGIBLE] -------------------------------- Name: [ILLEGIBLE] Title: EX-10.13 8 dex1013.txt THIRD AMENDMENT TO PARTICIPATION AGREEMENT DATED AS OF JUNE 15, 1999 EXHIBIT 10.13 EXECUTION COPY THIRD AMENDMENT THIRD AMENDMENT, dated as of March 13, 2000 (this "Amendment"), to (i) the Participation Agreement, dated as of June 15, 1999 (as the same may be amended, supplemented or otherwise modified from time to time, the "Participation Agreement"), among Hanover Compression Inc., a Delaware corporation ("HCC" and the "Lessee"), Hanover Equipment Trust 1999A (the "Lessor"), Societe Generale Financial Corporation and FBTC Leasing Corp., Inc. (the "Investors"), the lenders parties thereto (the "Lenders") and The Chase Manhattan Bank, a New York banking corporation, as the agent for the Lenders (the "Agent"), (ii) the Credit Agreement, as defined in the Participation Agreement (the "Credit Agreement"). W I T N E S S E T H: WHEREAS, (i) the Lenders have agreed to make, and have made, loans and (ii) the Investors have agreed to make, and have made, investments to the Lessor in order for the Lessor to acquire the Equipment and to pay other Equipment Acquisition Costs; WHEREAS, HCC has requested that the Investors, Agent and the Required Lenders (i) amend certain definitions and covenants in the Participation Agreement and Credit Agreement and (ii) amend and restate the Guarantee, dated as of June 15, 1999, among Hanover Compressor Company ("Holdings"), HCC and certain subsidiaries of Holdings (the "Existing Guarantee") so as to permit HCC to enter into transactions involving the New Equipment Lease Transactions; and WHEREAS, the Investors, Agent and the Required Lenders are agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; and WHEREAS, Holdings, HCC and the New Guarantors have agreed to execute and deliver the Amended and Restated Guarantee to the Agent and the Lessor, for the ratable benefit of the Lenders and the Investors; NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in either Participation Agreement are used herein as therein defined and the following terms shall have the following meanings: 2 "Amended and Restated Guarantee" shall mean the Amended and Restated Guarantee, dated as of March 13, 2000, among Holdings, HCC and the New Guarantors, substantially in the form of Exhibit A hereto. "New Equipment Lease Transactions" shall mean the transactions contemplated under the New Equipment Lease Documents, as further described in the term sheet attached as Annex A hereto. "New Equipment Lease Documents" shall mean (i) the Participation Agreement, dated as of March 13, 2000 (the "New Participation Agreement"), among Hanover Compression Inc., a Delaware corporation, Hanover Equipment Trust 2000A, First Union National Bank and Scotiabanc Inc., as investors, the lenders parties thereto and The Chase Manhattan Bank, a New York banking corporation, as the agent for the lenders thereunder and (ii) the other "Operative Documents" as defined in the New Participation Agreement. "New Guarantors" shall mean Hanover Compressor Limited Holdings, LLC, Hanover Maintech Limited Partnership, Hanover/Smith Limited Partnership, Hanover Land Limited Partnership, Hanover Maintech Limited Partnership. II. Amendments to the Participation Agreement. 1. Amendment to Annex A (Rules of Usage). Annex A to the Participation Agreement is hereby amended by deleting it in its entirety and substituting in place thereof Annex B as attached hereto. 2. Addition of Annex B (Pricing Grid). The Participation Agreement is hereby amended by adding Annex C hereto as Annex B thereto. III. Amendments to the Credit Agreement. 1. Sections 9.5 though 9.17 (a) Sections 9.5 through 9.8 to the Credit Agreement are hereby amended by deleting them in their entirety and substituting in place thereof the following: "9.5 Successors and Assigns; Participations; Purchasing Lenders. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Loans and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) 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 Operative Agreements, 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 3 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 Operative Agreements, and the Guarantors and the 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 Operative Agreements. The Borrower 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 a Credit Agreement 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 9.6. The Borrower also agrees that each Participant shall be entitled to the benefits of subsections 2.13, 2.14 and 2.15 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. (c) 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 the Borrower and the 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 Operative Agreements pursuant to an Assignment and Acceptance, substantially in the form of Exhibit B, 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 the Borrower and the Agent) and delivered to the 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. Any such assignment shall be ratable as between the Tranche A Loans and Tranche B Loans. 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 4 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. (d) The Agent shall, on behalf of the Borrower, maintain at its address referred to in subsection 9.2 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 the Borrower, the 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. (e) 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 the Borrower and the Agent) together with payment to the Agent of a registration and processing fee of $3,500, the 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. (f) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section 9.5 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. (g) The Borrower, 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. (h) Holdings and the Borrower 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 Guarantor 5 and its affiliates which has been delivered to such Lender by or on behalf of Holdings or the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of Holdings or the Borrower in connection with such Lender's credit evaluation of the Guarantors and their affiliates prior to becoming a party to this Agreement. (i) 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 Agent and the Borrower) that under applicable law and treaties no taxes will be required to be withheld by the Administrative Agent, the Borrower 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 Agent and the Borrower) 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 Agent and the Borrower) to provide the transferor Lender (and, in the case of any Purchasing Lender registered in the Register, the Agent and the Borrower) 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. (j) Nothing herein shall prohibit any Lender from pledging or assigning any Note to any Federal Reserve Lender in accordance with applicable law.". (b) Section 9.9 through 9.17 to the Credit Agreement are hereby amended by renumbering them as Sections 9.6 through 9.14 respectively. IV. General. 3. Effectiveness. This Amendment shall become effective upon fulfillment of the following conditions precedent: (a) The Agent shall have received duly executed copies of this Amendment from HCC, acknowledged and agreed to by each of Holdings and the New Guarantors, (b) The Agent shall have received, with a copy for each Lender, the Amended and Restated Guarantee, executed and delivered by duly authorized officers of Holdings and each New Guarantor, (c) the Agent shall have received duly executed copies of this Amendment from the Required Lenders and the Investors under the Participation Agreement, (d) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment and (e) the Agent shall have received duly executed copies of the New Equipment Lease Documents. 4. Representations and Warranties. Holdings, The Borrower and each of the New Guarantors hereby represents and warrants that the representations and warranties contained 6 in the Participation Agreements and the Operative Agreements (as defined in the Participation Agreement) (except those which expressly speak as of a certain date) will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof. 5. Continuing Effect of Participation Agreements and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of either the Participation Agreement or the Operative Agreements (as defined in the Participation Agreement) not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, Holdings, the Lessor, or New Guarantors that would require a waiver or consent of the Agent and/or the Lenders. Except as expressly amended hereby, the provisions of the Participation Agreement and the Operative Agreements (as defined in the Participation Agreement) are and shall remain in full force and effect. 6. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 8. Expenses. Holdings and HCC agree to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSION INC. (formerly known as Hanover Compressor Company), as Lessee and as a Guarantor By: /s/ Curtis Bedrich ---------------------------- Name: Curtis Bedrich Title: Treasurer HANOVER EQUIPMENT TRUST 1999A By: Wilmington Trust Company, not individually but solely as Trustee By: ----------------------------- Name: Title: IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSION INC. (formerly known as Hanover Compressor Company), as Lessee and as a Guarantor By: ---------------------------- Name: Title: HANOVER EQUIPMENT TRUST 1999A By: Wilmington Trust Company, not individually but solely as Trustee By: /s/ Anita E. Dallago ----------------------------- Name: Anita E. Dallago Title: Administrative Account Manager Acknowledged and agreed to as of the date hereof: HANOVER COMPRESSOR COMPANY, as a Guarantor By: /s/ Curtis Bedrich ------------------------------ Name: Curtis Bedrich Title: Treasurer HANOVER COMPRESSOR LIMITED HOLDINGS, LLC, as a Guarantor by Hanover General Holdings, Inc. as sole member By: /s/ Curtis Bedrich ------------------------------ Name: Curtis Bedrich Title: Treasurer HANOVER MAINTECH LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., as general partner By: /s/ Curtis Bedrich ------------------------------ Name: Curtis Bedrich Title: Treasurer HANOVER/SMITH LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., as general partner By: /s/ Curtis Bedrich ------------------------------ Name: Curtis Bedrich Title: Treasurer HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor by Hanover General Holdings, Inc., general partner By: /s/ Curtis Bedrich --------------------------------- Name: Curtis Bedrich Title: Treasurer SOCIETE GENERALE, SOUTHWEST AGENCY, as a Lender By: /s/ Mark A. Cox -------------------------------- Name: Mark A. Cox Title: Director Head of Houston Office SUNTRUST BANK, ATLANTA, as a Lender By: /s/ John A. Fields, Jr. ------------------------------- Name: John A. Fields, Jr. Title: Managing Director THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH, as a Lender By: /s/ Michael N. Oakes --------------------------------- Name: Michael N. Oakes Title: Senior Vice President, Houston Office BANK ONE, N.A. (formerly known as The First National Bank of Chicago), as a Lender By: /s/ Karen Patterson ------------------------------- Name: Karen Patterson Title: First Vice President DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG, as a Lender By: /s/ Mark K. Connelly --------------------------------- Name: Mark K. Connelly Title: Vice President By: /s/ Richard W. Wilbert --------------------------------- Name: Richard W. Wilbert Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By: /s/ [Illegible] --------------------------------- Name: [Illegible] Title: [Illegible] COMERICA BANK, as a Lender By: /s/ T. Bancroft Mattei ---------------------------------- Name: T. Bancroft Mattei Title: Account Officer BANKERS TRUST COMPANY, as a Lender By: /s/ Marcus M. Tarkington --------------------------------- Name: Marcus M. Tarkington Title: Principal FUJI BANK, LIMITED, as a Lender By: /s/ Toru Maeda --------------------------------- Name: Toru Maeda Title: Executive Vice President and General Manager PARIBAS, as a Lender By: /s/ [Illegible] ------------------------------------ Name: [Illegible] Title: Vice President By: /s/ Betsy Jocher ------------------------------------- Name: Betsy Jocher Title: Vice President BANK OF SCOTLAND, as a Lender By: /s/ Joseph Fratus -------------------------------- Name: Joseph Fratus Title: Asst. Vice President THE BANK OF NOVA SCOTIA, as a Lender By: /s/ N. Bell ------------------------------ Name: N. Bell Title: Assistant Agent ABN AMRO BANK N.V., as a Lender By: /s/ [Illegible] ------------------------------ Name: [Illegible] Title: Vice President By: /s/ Brandi Lippincott ------------------------------ Name: Brandi Lippincott Title: Assistant Vice President FBTC LEASING CORP., as an Investor By: /s/ Victor Mora ------------------------------ Name: Victor Mora Title: Vice President SOCIETE GENERALE FINANCIAL CORPORATION, as an Investor By: /s/ [Illegible] ------------------------------ Name: [Illegible] Title: [Illegible] THE CHASE MANHATTAN BANK, as Agent and Lender By: /s/ Peter M. Ling ------------------------------ Name: Peter M. Ling Title: Vice President WELLS FARGO BANK (TEXAS) N.A., as a Lender By: /s/ Joseph P. Maxwell ------------------------------ Name: Joseph P. Maxwell Title: Vice President WILMINGTON TRUST COMPANY, in its individual capacity, only to the extent expressly set forth herein By: /s/ Anita E. Dallago ------------------------------ Name: Anita E. Dallago Title: Administrative Account Manager ANNEX A DESCRIPTION OF NEW EQUIPMENT LEASE TRANSACTIONS ANNEX B TO THIRD AMENDMENT RULES OF USAGE AND DEFINITIONS Rules of Usage The following rules of usage shall apply to this Annex A and the Operative Agreements (and each appendix, schedule, exhibit and annex to the foregoing) unless otherwise required by the context or unless otherwise defined therein: (a) Except as otherwise expressly provided, any definitions defined herein or in any other document shall be equally applicable to the singular and plural forms of the terms defined. (b) Except as otherwise expressly provided, references in any document to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits are references to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits in or to such document. (c) The headings, subheadings and table of contents used in any document are solely for convenience of reference and shall not constitute a part of any such document nor shall they affect the meaning, construction or effect of any provision thereof. (d) References to any Person shall include such Person, its successors and permitted assigns and transferees. (e) Except as otherwise expressly provided, reference to any agreement means such agreement as amended, modified, extended or supplemented from time to time in accordance with the applicable provisions thereof. (f) Except as otherwise expressly provided, references to any law includes any amendment or modification to such law and any rules or regulations issued thereunder or any law enacted in substitution or replacement therefor. (g) When used in any document, words such as "hereunder", "hereto", "hereof" and "herein" and other words of like import shall, unless the context clearly indicates to the contrary, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof. 2 (h) References to "including" means including without limiting the generality of any description preceding such term and for purposes hereof the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. (i) Each of the parties to the Operative Agreements and their counsel have reviewed and revised, or requested revisions to, the Operative Agreements, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall be inapplicable in the construing and interpretation of the Operative Agreements and any amendments or exhibits thereto. (j) For purposes of determining compliance with the covenants contained in Subsection 10.1 and 11.1 of the Guarantee, the term "Holdings" shall be deemed a reference to HCC for any period which is prior to December 9, 1999, covered by such covenants. Definitions "ABR" shall mean, 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 Bank 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 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 3 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 Agent from three federal funds brokers of recognized standing selected by it. If for any reason the 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 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" shall mean Loans the rate of interest applicable to which is based upon the ABR. "Acceleration" shall have the meaning set forth in Section 6.1 of the Credit Agreement. "Account" shall have the meaning set forth in Section 8.1(a) of the Credit Agreement. "Adjustment Date" as defined in the Pricing Grid. "Adjusted EBITDA Companies" shall mean 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 11.1(c). "Advance" shall mean an advance of Loans by the Lenders and an advance of the Investor Contribution by the Investors, in each case pursuant to Section 5.2 of the Participation Agreement to pay Equipment Acquisition Costs. "Affiliate" shall mean, 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 4 common control with, such Person; provided, however, that in no case shall the Trust Company be considered to be an Affiliate of any of the Trustee, the Trust, the Agent or the Investors, nor shall any of the Trustee, Trust, Agent or Investors be considered to be an Affiliate of the Trust Company. 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. "After Tax Basis" shall mean, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient (less any tax savings realized and the present value of any tax savings projected to be realized by the recipient as a result of the payment of the indemnified amount) with respect to the receipt by the recipient of such amounts, such increased payment (as so reduced) is equal to the payment otherwise required to be made. "Agent" shall mean The Chase Manhattan Bank, a New York banking corporation, as the agent for the Lenders under the Credit Agreement and the other Operative Agreements, or any successor agent appointed in accordance with the terms of the Credit Agreement. "Aggregate Tranche A Percentage" shall mean, as of any date of determination, a fraction, expressed as a percentage, equal to the sum of the aggregate of the Maximum Residual Guarantee Amounts with respect to each piece of Equipment as of such date divided by the aggregate of the Tranche A/B Equipment Cost of each of the pieces of Equipment as of such date. "Applicable Commitment Fee Rate" shall mean, for each day, the rate per annum determined pursuant to the Pricing Grid. "Applicable Margin" shall mean, for each day, the rate per annum determined pursuant to the Pricing Grid. "Applicable Margin Certificate" shall have the meaning set forth in Section 10.2(f) of the Guarantee. "Appraisal" shall mean, with respect to the Equipment, an appraisal, ordered by the Agent, prepared by a reputable independent appraiser acceptable to the Agent, of such Equipment, which complies with all applicable Legal Requirements and is otherwise in a form satisfactory to Agent. The appraisal shall state an estimate of the value thereof at the end of the Term and may cover more than one piece of Equipment. 5 "Appraisal Procedure" shall have the meaning given such term in Section 21.4 of the Lease. "Arranger" shall mean Chase Securities Inc. "Assignment and Acceptance" shall have the meaning set forth in Section 9.7 of the Credit Agreement. "Assignment of Lease" shall mean the collective reference to the Assignment of Leases, Rents and Guarantee dated as of the Initial Closing Date from the Lessor to the Agent for the benefit of the Lenders and each Supplement to Assignment of Leases dated as of each Equipment Closing Date, as each may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement. "Available Commitment" shall mean, as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) the aggregate principal amount of all Loans made by such Lender then outstanding. "Available Investor Commitment" shall mean at any time, an amount equal to the excess, if any, of (a) the amount of Investor Commitment over (b) the aggregate amount of all Investor Contributions made by the Investors as of such date. "Basic Rent" shall mean, the sum of (i) the Tranche A Basic Rent, (ii) the Tranche B Basic Rent and (iii) the Investor Yield, calculated as of the applicable date on which Basic Rent is due. "Basic Term" shall mean for each piece of Equipment, the period commencing on the Equipment Closing Date for such Equipment and ending on the Maturity Date. "Benefitted Lender" shall have the meaning set forth in Section 9.9 of the Credit Agreement. "Bill of Sale" shall have the meaning set forth in Section 6.2(b) of the Participation Agreement. "Borrower" shall mean Lessor, in its capacity of borrower under the Credit Agreement. 6 "Borrowing Date" shall mean any Business Day specified in a Requisition as a date on which the Borrower requests the Lenders to make Loans under the Credit Agreement. "Business Day" shall mean any 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, and in the case of a Eurodollar Loan, any day on which dealings in U.S. dollar deposits are carried on in the interbank Eurodollar market and on which commercial banks are open for domestic and international business in New York and London. "Capital Stock" shall mean 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. "Capitalized Lease Obligations" shall mean all obligations under capital leases of any Person, in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Cash Equivalents" shall mean (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. 7 "Casualty" shall mean any damage or destruction of all or any portion of a piece of Equipment as a result of fire or other casualty. "C/D Assessment Rate" shall mean 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" shall mean 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. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of-1980, 42 U.S.C. Sections 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986, and all rules and regulations thereunder. "Certificate" shall mean a certificate issued pursuant to the Trust Agreement to evidence an investment in the beneficial ownership of the Trust Estate, and shall include any certificate issued in exchange therefor or replacement thereof. "Chase" shall mean The Chase Manhattan Bank, a New York banking corporation. "Claims" shall mean any and all actions, suits, penalties, claims and demands and reasonable out-of-pocket liabilities, losses, costs and expenses (including, without limitation, reasonable attorney's fees and expenses) of any nature whatsoever. "Closing Date" shall mean the Initial Closing Date and each Equipment Closing Date. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. "Collateral" shall mean all assets of the Lessor, now owned or hereafter acquired, upon which a Lien is purported to be created by the Security Documents. 8 "Collicut" shall mean Collicut Hanover Compression Co., a Nova Scotia unlimited liability company. "Commitment" shall mean, as to any Lender, the obligation of such Lender to make Loans to the Borrower under the Credit Agreement in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1.1 of the Credit Agreement. "Commitment Fee" shall mean, on each Commitment Fee Payment Date, an amount equal to the product of (i) the Available Commitment on such Commitment Fee Payment Date times (ii) the Applicable Commitment Fee Rate. "Commitment Fee Payment Date" shall mean the last day of each March, June, September and December during the Commitment Period and the last Business Day of the Commitment Period or such earlier date as the Commitments shall terminate as provided in the Credit Agreement. "Commitment Percentage" shall mean, as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any time after the Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Loans then outstanding constitutes of the aggregate principal amount of the Loans then outstanding). "Commitment Period" shall mean the period from and including the Initial Closing Date to but not including the earlier of (i) the first anniversary of the Initial Closing Date and (ii) the date on which an Acceleration occurs. "Commonly Controlled Entity" shall mean 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. "Condemnation" shall mean any taking or sale of the use, access, or title to any piece of Equipment or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual eminent domain proceeding or other taking of action by any Person having the power of eminent domain. "Consent to Assignment" shall mean the collective reference to the Lessee's Consent to Assignment dated as of the Initial Closing Date from the Lessee and the Guarantors to the Agent with respect to the Assignment of Leases, as amended, 9 supplemented or otherwise modified from lime to time in accordance with the terms thereof or of any other Operative Agreement. "Consolidated Adjusted EBITDA" shall mean, for any period, the sum of Consolidated EBITDA for the Adjusted EBITDA Companies. "Consolidated Capitalization" shall mean, 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" shall mean, 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" shall mean, 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" shall mean, 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" shall have the meaning set forth in Section 11.l(d) of the Guarantee. "Consolidated Interest Expense" shall mean, 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, 10 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 Equipment Investors in connection with the Equipment Lease Transactions. "Consolidated Lease Expense" shall mean, 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" shall mean, 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 Equipment Investors in connection with the Equipment Lease Transactions shall be considered interest expense. "Consolidated Net Worth" shall mean, at a particular date, as to any Person, the amount which could 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" shall mean, 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 parry or by which it or any of its property is bound. "Corporate Credit Agreement" means that Credit Agreement among HCC, Agent and the several banks from time to time parties thereto dated as of December 15, 1997, as amended and restated through March 13, 2000, and as it may be further amended, modified, or supplemented from time-to-time. "Corporate Guarantees" shall mean, collectively, that certain Subsidiaries' Guarantee and Parent Guarantee made by the Guarantors pursuant to the Corporate Credit Agreement and such other guarantees of the loans and the other obligations of HCC under the Corporate Credit Agreement. 11 "Credit Agreement" shall mean the Credit Agreement dated as of the Initial Closing Date among the Lessor, the Agent and the Lenders, as amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement. "Credit Agreement Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Credit Agreement Event of Default. "Credit Agreement Event of Default" shall have the meaning set forth in Section 6.1 of the Credit Agreement. "Credit Documents" shall mean the Credit Agreement, the Notes, the Guarantee, the Lease and the Security Documents. "Current Ratio" shall mean, 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" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Derivatives" shall mean, 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 "$" shall mean dollars in lawful currency of the United States of America. "Effective Date" shall have the meaning set forth in the Assignment and Acceptance. 12 "Environmental Claim" shall mean any claim, notice of claim, complaint, notice of violation, letter, or other assertion or inquiry of any kind concerning any asserted or actual violation of or liability under any Environmental Law or any asserted or actual violation or liability relating to any Hazardous Substance. "Environmental Law" shall mean 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 Substances, as now or may at any time hereafter be in effect. "Environmental Violation" shall mean any activity, occurrence or condition that violates or results in non-compliance with any applicable Environmental Laws or results in a written complaint or other written claim from a Governmental Authority with respect to any Environmental Laws. "Equipment" shall mean natural gas compressors used in gas and oil field gathering, transmission and processing activities that are acquired by the Lessor and then leased by the Lessor to Lessee pursuant to the terms of the Operative Agreements. "Equipment Acquisition Costs" shall mean all costs and expenses incurred in connection with the acquisition of any Equipment, including all reasonable professional fees and other soft costs incurred in connection therewith, Transaction Expenses and other pre-closing and closing costs incurred by Lessee in connection with the transactions contemplated by the Operative Agreements. "Equipment Closing Certificate" shall mean a certificate executed by a Responsible Officer of the Lessee certifying (i) the Tranche A Percentage for the particular piece of Equipment and (ii) the Aggregate Tranche A Percentage for all Equipment after giving effect to the acquisition of the particular piece of Equipment substantially in the form attached as Exhibit F to the Participation Agreement. "Equipment Closing Date" shall mean each date on which the Lessor purchases any piece of Equipment. "Equipment Cost" shall mean with respect to a piece of Equipment the aggregate amount of the Tranche A/B Equipment Cost allocated to such piece of Equipment pursuant to the Credit Agreement, plus the Investor Equipment Cost for such piece of Equipment. 13 "Equipment Guarantees" shall mean (i) the Guarantee dated as of July 22, 1998 (as amended, supplemented or otherwise modified from time to time), made by Holdings. HCC, Hanover/Smith, HMI, Hanover Land Company, 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, Hanover/Smith, HMI, Hanover Land Company, in favor of Hanover Equipment Trust 1999A and The Chase Manhattan Bank, as agent and (iii) the Guarantee dated as of March 13, 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 2000 A and The Chase Manhattan Bank, as agent. "Equipment Lease Credit Agreements" shall mean (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 13, 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, Industrial Bank of Japan, LTD., as syndication agent, the Bank of Nova Scotia, as documentation agent and The Chase Manhattan Bank, as agent. "Equipment Lease Participation Agreements" shall mean (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 13, 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. 14 "Equipment Lease Tranche A Loans" shall mean 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" shall mean 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" shall mean 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 13, 2000 (as amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 2000A, as lessor, and HCC, as lessee. "Equipment Investors" means the parties that hold the beneficial interest in the respective Equipment Lessors. "Equipment Lessors" means the lessors under the Equipment Leases. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean each entity required to be aggregated with the Lessee pursuant to the requirements of Section 414(b) or (c) of the Code. "Eurocurrency Reserve Requirements" shall mean 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 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 the Board) maintained by a member bank of the Federal Reserve System. 15 "Eurodollar Base Rate" shall mean, 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" shall mean Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate" shall mean 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 "Eurodollar Tranche" shall mean the collective reference to Eurodollar Loans the then current 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). "Event of Default" shall mean a Lease Event of Default or a Credit Agreement Event of Default. "Excepted Payments" shall mean: (a) all indemnity payments (including indemnity payments made pursuant to Section 12 of the Participation Agreement), to which the Lessor, Trust Company or the Investors are entitled; (b) any amounts (other than Basic Rent, Termination Value, or Purchase Option Price) payable under any Operative Agreement to reimburse the Lessor, the Trust Company, the Investors, or any of their respective Affiliates (including the reasonable expenses of the Trust Company and the Investors incurred in connection with any such payment) for performing or complying with any of the obligations of Lessee under and as permitted by any Operative Agreement; 16 (c) any amount payable to the Investors by any transferee of the interest of the Investors as the purchase price of the Investors' interest in the Trust Estate (or a portion thereof); (d) any insurance proceeds (or payments with respect to risks self- insured or policy deductibles) under liability policies with respect to the Equipment other than such proceeds or payments payable to the Lessee or the Agent; (e) any insurance proceeds under policies maintained by the Lessor, Trust Company or the Investors; (f) Transaction Expenses or other amounts or expenses paid or payable to or for the benefit of the Trust Company or the Investors; (g) all right, title and interest of the Investors or the Lessor to any Equipment, any portion thereof or any other property to the extent any of the foregoing has been released from the Liens of the Security Agreement and the Assignment of Lease pursuant to the terms thereof and not otherwise purchased by the Lessee or a third party pursuant to the terms of the Lease; (h) any payments in respect of interest to the extent attributable to payments referred to in clauses (a) through (g) above; and (i) any rights of the Investors, the Trust Company or the Lessor to demand, collect, sue for or otherwise receive and enforce payment of any of the foregoing amounts. "Excepted Rights" shall mean the rights retained by the Lessor pursuant to Section 8.3(i) of the Credit Agreement and all right, title and interest of the Lessor in the Shared Rights. "Excess Sales Proceeds" shall have the meaning given to such term in Section 8.l(b)(iii) of the Credit Agreement. "Exculpated Persons" shall have the meaning set forth in Section 9.17 of the Credit Agreement. "Expiration Date" shall mean the final day of the Term. 17 "Fair Market Sales Value" shall mean the amount, which in any event shall not be less than zero, that would be paid in cash in an arm's-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, for the ownership of any piece of Equipment. Fair Market Sales Value shall be determined based on the assumption that, except for purposes of Section 21.3 of the Lease, any piece of Equipment is in the condition and state of repair required under Section 10.1 of the Lease and that the Lessee is in compliance with the other requirements of the Operative Agreements. "Fee Letter" shall mean the Fee Letter dated May 11, 1999 from Chase and Chase Securities Inc. to HCC. "Financing Lease" shall mean 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, and excluding all obligations with respect to the Equipment Leases. "GAAP" means generally accepted accounting principles in the United States of America consistent with those used in preparing the audited financial statements referred to in Section 10.1 of the Guarantee. "Governmental Action" shall mean all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Legal Requirement, and shall include, without limitation, all environmental and operating permits and licenses that are required for the full use and operation of the Equipment. "Governmental Authority" shall mean 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" shall mean the Guarantee dated as of the Initial Closing Date from the Guarantors to the Agent for the benefit of the Lenders and to the Lessor for the benefit of the Investors, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement. "Guaranteed Obligations" shall have the meaning specified in Section l(b) of the Guarantee. 18 "Guarantee Obligation" means 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 Guarantor Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantor 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 Guarantor 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 Guarantor 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 Guarantor Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by HCC, in good faith. "Guarantors" shall mean collectively, Lessee, Holdings, Hanover Compressor Limited Holdings, LLC, Hanover Maintech Limited Partnership, Hanover/Smith Limited Partnership, Hanover Land Limited Partnership, Hanover Maintech Limited Partnership. "HCC" shall mean Hanover Compression Inc., a Delaware corporation, or its assigns or successors. "Hazardous Substance" shall mean 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" shall mean Hanover Measurement Services Company, L.P., a Delaware limited partnership, and its successors and assigns. 19 "HMS Entities" shall mean 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" shall mean 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" shall mean Hanover Compressor Company, a Delaware corporation, the parent company of HCC. "HPL" shall mean Houston Pipe Line Company, a Delaware corporation, and its successors and assigns. "Impositions" shall mean, except to the extent described in the following sentence, any and all liabilities, losses, expenses and costs of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings ("Taxes") (including (i) real and personal property taxes, including personal property taxes on any property covered by the Lease that is classified by Governmental Authorities as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) any excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, privilege and doing business taxes, license and registration fees; and (vi) assessments on the Equipment), and in each case all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the Term or in respect of any period for which the Lessee shall be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any Federal, state, city, county or local authority upon or with respect to (a) the Equipment or any part thereof or interest therein; (b) the purchase, sale, leasing, financing, refinancing, demolition, construction, renovation, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, transfer of title, return or other disposition of the Equipment or any part thereof or interest therein; (c) the Notes or other indebtedness with respect to the Equipment or any part thereof or interest therein; (d) the rentals, receipts or earnings arising from the Equipment or any part thereof or interest therein; (e) the Operative Agreements or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to the Equipment or any part thereof or interest therein 20 upon the sale or disposition thereof; (g) any contract relating to the construction or renovation of the Equipment; (h) the issuance of the Notes; or (i) otherwise in connection with the transactions contemplated by the Operative Agreements. The term "Imposition" shall not mean or include: (i) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on a Tax Indemnitee by the United States federal government that are based on or measured by the gross or net income (including taxes based on capital gains and minimum taxes) of such Person; provided that this clause (i) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (ii) Taxes and impositions (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed by any state or local jurisdiction or taxing authority within any state or local jurisdiction and that are based upon or measured by the gross or net income or gross or net receipts from rental (including any minimum taxes, withholding taxes or taxes on or measured by capital, net worth, excess profits or items of tax preference or taxes that are capital stock, franchise or doing business taxes) except that this clause (ii) shall not apply to (and thus shall not exclude) any such Taxes imposed on a Tax Indemnitee by a state (or any local taxing authority thereof or therein) where the Equipment is located, possessed or used under the Lease unless the Tax Indemnitee was subject to such tax in such jurisdiction without regard to the transaction contemplated by the Operative Agreements; provided that this clause (ii) shall not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (iii) any interest or penalties imposed on a Tax Indemnitee as a result of the failure of such Tax Indemnitee to file any return or report timely and in the form prescribed by law or to pay any Tax or imposition; provided that this clause (iii) shall not apply (x) if such interest or penalties arise as a result of a position taken (or requested to be taken) by the Lessee in a contest controlled by the Lessee under Section 12.2(g) of the Participation Agreement or (y) to any such interest or penalties that result from such Tax Indemnitee's complying with the reporting procedures set forth in Section 12.2(d) of the Participation Agreement; (iv) any Taxes or impositions imposed on the Lessor that are a result of the Lessor not being considered a "United States person" as defined in Section 7701(a)(30) of the Code; 21 (v) any Taxes which are imposed on a Tax Indemnitee solely as a result of the gross negligence or willful misconduct of such Tax Indemnitee itself (as opposed to gross negligence or willful misconduct imputed to such Tax Indemnitee), but not Taxes imposed as a result of ordinary negligence of such Tax Indemnitee; (vi) any Taxes or impositions imposed upon the Lessor with respect to any voluntary transfer, sale, financing or other voluntary disposition by the Lessor (other than a transfer contemplated and permitted by the Operative Agreements, including any transfer in connection with (1) the exercise by the Lessee of its Purchase Option, (2) the occurrence of a Lease Event of Default or a Credit Agreement Event of Default, or (3) a Casualty or Condemnation affecting the Equipment) of any interest in the Equipment or any interest in, or created pursuant to, the Operative Agreements) or any voluntary transfer of any interest in the Lessor (other than in connection with the existence of a Lease Event of Default or a Credit Agreement Event of Default or any involuntary transfer of any of the foregoing interests resulting from the bankruptcy or insolvency of the Lessor (other than in connection with the existence of a Lease Event of Default or a Credit Agreement Event of Default; (vii) any gift, or inheritance, taxes; (viii) Taxes imposed on the Tax Indemnitee or any person who is a "disqualified person", within the meaning of Section 4975(e)(2) of the Code, or a "party in interest", within the meaning of Section 3(14) of ERISA, by virtue of such person's relationship to the Tax Indemnitee as the result of any prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975(c)(1) of the Code, involving the exercise of discretion or control by such Tax Indemnitee; or (ix) Taxes on, with respect to or measured by any trustee fees for services rendered as trustee of the Trust. Any Tax or imposition excluded from the defined term "Imposition" in any one of the foregoing clauses (i) through (vii) shall not be construed as constituting an Imposition by any provision of any other of the aforementioned clauses. "Indebtedness" shall mean, 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 22 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 Person" shall mean the Trust Company, in its individual and its trust capacity, the Agent, the Lessor, the Investors, the Lenders and their respective successors, assigns, directors, shareholders, partners, officers, employees, agents and Affiliates. "Initial Closing Date" shall mean June 15, 1999. "Insolvent" shall mean, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insurance Requirements" shall mean all terms and conditions of any insurance policy required by the Lease to be maintained by the Lessee and all requirements of the issuer of any such policy. "Interest Period" shall mean, 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 the Borrower 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 immediately preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a Eurodollar Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be 23 extended to the next succeeding Business 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 Business Day; (ii) any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date; (iii) any Interest Period that begins on the last Business 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 Business Day of a calendar month; and (iv) Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "Investments" shall have the meaning specified in Section 11.10 of the Guarantee. "Investors" shall mean Societe General Financial Corporation, a Delaware corporation and FBTC Leasing Corp., a New York corporation. "Investor Commitment" shall mean $6,000,000. "Investor Commitment Fee" shall mean, on each Commitment Fee Payment Date, an amount equal to the product of (i) the Available Investor Commitment on such Commitment Fee Payment Date times (ii) the Applicable Commitment Fee Rate "Investor Contribution" shall have the meaning specified in Section 2.1 of the Participation Agreement. "Investor Equipment Cost" shall mean with respect to a piece of Equipment an amount equal to the Investor Contribution attributable to such Equipment outstanding from time to time, if any. "Investor Yield" shall mean an amount, as of any Payment Date, sufficient to provide the Investors with an annual pre-tax yield on the Investor Contribution of 325 basis points in excess of (i) the highest Eurodollar Rate applicable to any then outstanding 24 Eurodollar Tranche or (ii) if no Eurodollar Tranche is then outstanding, the rate of interest per annum on any then outstanding ABR Loan. "L/C Obligations" shall mean, 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) of the Corporate Credit Agreement. "Lease" shall mean the lease dated as of the Initial Closing Date between the Lessor and the Lessee, together with any Lease Supplements thereto, as amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement. "Lease Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" shall have the meaning given to such term in Section 17.1 of the Lease. "Lease Secured Obligations" shall have the meaning set forth in Section 28.1 of the Lease. "Lease Supplement" shall mean each Lease Supplement substantially in the form of Exhibit A to the Lease together with all attachments and schedules thereto, as such Lease Supplement may be supplemented, amended or modified from time to time. "Legal Requirements" shall mean all Federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting any Equipment or the use or alteration thereof, whether now or hereafter enacted and in force, including any that require repairs, modifications or alterations in or to any Equipment or in any way limit the use and enjoyment thereof and any that may relate to Environmental Laws, and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to the Lessee affecting any Equipment. "Lender Financing Statements" shall mean UCC financing statements appropriately completed and executed by the Lessor, as debtor, for filing in the appropriate state (and, where required by the UCC, county) offices in the State in which each piece of Equipment is located in order to perfect a security interest in favor of the 25 Agent in the Equipment, as the same may be supplemented, amended or modified from time to time. "Lenders" shall mean the several banks and other financial institutions from time to time party to the Credit Agreement. "Lessee" shall mean Hanover Compressor Company, a Delaware corporation, as lessee under the Lease or its successor and assigns. "Lessor" shall mean Hanover Equipment Trust 1999A, a Delaware business trust or its successor and assigns. "Lessor Financing Statements" shall mean UCC financing statements appropriately completed and executed by the Lessee, as debtor, for filing in the appropriate (state and, where required by the UCC, county) offices in the State in which each piece of Equipment is located in order to protect the Lessor's interest under the Lease as a security agreement, as the same may be supplemented, amended or modified from time to time, as the same shall be assigned to the Agent pursuant to appropriate UCC financing statements. "Lessor Lien" shall mean any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against the Lessor, the Trust Company, the Investors or any Affiliate of the Lessor, the Trust Company and/or the Investors, not resulting from the transactions contemplated by the Operative Agreements, (b) any act or omission of the Lessor, the Trust Company, the Investors or any Affiliate of the Lessor, the Trust Company and/or the Investors, which is not required by the Operative Agreements or is in violation of any of the terms of the Operative Agreements, (c) any claim against the Lessor, the Trust Company, the Investors or any Affiliate of the Lessor, the Trust Company and/or the Investors, with respect to Taxes or Transaction Expenses against which the Lessee is not required to indemnify the Lessor, the Trust Company, the Investors or any Affiliate of the Lessor, the Trust Company and/or the Investors, pursuant to the Participation Agreement or (d) any claim against the Lessor arising out of any transfer by the Lessor of all or any portion of the interest of the Lessor in the Equipment, the Trust Estate or the Operative Agreements other than the transfer of title to or possession of the Equipment by the Lessor pursuant to and in accordance with the Lease, the Credit Agreement or the Participation Agreement or pursuant to the exercise of the remedies set forth in Section 17 of the Lease. "Letters of Credit" shall have the meaning set forth in paragraph 4.1(a) of the Corporate Credit Agreement. 26 "Lien" shall mean 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). "Limited Deficiency Amount" shall mean, with respect to each piece of Equipment, the amount equal to the sum of the Termination Value with respect to such piece of Equipment on each Payment Date less the Maximum Residual Guarantee Amount as of such date with respect to such piece of Equipment. "Loan Year" shall mean a period of time from the Initial Closing Date or any anniversary of the Initial Closing Date to the immediately succeeding anniversary of the Initial Closing Date. "Loans" shall have the meaning set forth in Section 2.l(a) of the Credit Agreement. "MAC" shall mean Meter Acquisition Company LP, LLLP, a Delaware registered limited liability limited partnership, and its successors and assigns. "Managing Agents" shall mean the institutions listed on Schedule 1 to the Participation Agreement or Schedule 2 to the Credit Agreement. "Marketing Period" shall mean, if the Lessee has not given the Maturity Date Election Notice in accordance with Section 20.2 of the Lease, the period commencing on the date six months prior to the Maturity Date and ending on the Maturity Date. "Marketing Period Equity Return" shall mean the total of all amounts received by the Lessor or the Investors during the Marketing Period with respect to the Lessee's payment of the Purchase Option Price or the proceeds of any sale of a piece of Equipment pursuant to Section 21 of the Lease; provided that "Marketing Period Equity Return" shall in no event include any payment made by the Lessee in respect of Investor Yield. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of HCC and its Subsidiaries taken as a whole, (b) the ability of HCC or any of the Subsidiaries of HCC to perform their respective obligations under the Operative Agreements to which each is a 27 party, or (c) the validity or enforceability of any of the Operative Agreements to which each is a party or the rights or remedies of the Agent or the Lenders thereunder. "Material Subsidiary" shall mean, at any particular date, each Subsidiary of HCC for which the aggregate value of all assets owned by such Subsidiary is greater than $5,000,000. "Maturity Date" shall mean the day immediately preceding the fifth anniversary of the Initial Closing Date. "Maturity Date Election Notice" shall have the meaning set forth in Section 20.2 of the Lease. "Maturity Date Purchase Option" shall mean the Lessee's option to purchase all of the Equipment on the Maturity Date in accordance with Section 20.2 of the Lease. "Maximum Purchase Option Amount" shall mean 75% of the highest Termination Value of all Equipment owned by the Lessor at any one time during the period from the first anniversary of the Initial Closing Date to 6 months prior to the Maturity Date. "Maximum Residual Guarantee Amount" for each piece of Equipment at any time shall mean an amount equal to the product of (x) the Tranche A/B Equipment Cost in respect of such Equipment at such time and (y) the Tranche A Percentage in respect of such Equipment. "Modifications" shall have the meaning set forth in Section 11.1(a) of the Lease. "Multiemployer Plan" shall mean a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Proceeds" shall mean all amounts paid in connection with any Casualty or Condemnation, and all interest earned thereon, less the expense of claiming and collecting such amounts, including all reasonable costs and expenses in connection therewith for which the Agent or Lessor are entitled to be reimbursed pursuant to the Lease. "Net Sale Proceeds Shortfall" shall mean the amount by which the proceeds of a sale of a piece of Equipment described in Section 21.1 of the Lease (net of all expenses of sale) are less than the Limited Deficiency Amount for such Equipment. 28 "Non-Excluded Taxes" shall have the meaning set forth in Section 2.15(a) of the Credit Agreement. "Non-Recourse Indebtedness" shall mean Indebtedness (i) as to which neither HCC 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 HCC 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 HCC or its Qualified Subsidiaries (other than the Capital Stock of an Unqualified Subsidiary). "Notes" shall mean the collective reference to the Tranche A Notes and the Tranche B Notes. "Obligations" shall mean the collective reference to (i) the unpaid principal of and interest on the Notes and all other obligations and liabilities of the Borrower to the Agent or the Lenders (including 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 other Credit 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 all reasonable fees and disbursements of counsel to the Agent or to the Lenders that are required to be paid by the Borrower pursuant to the terms of the Credit Agreement or any other Credit Document), (ii) all amounts payable by the Lessee under any of the Operative Agreements (including indemnities and Commitment Fees) to the Agent and/or the Lenders and the Lessor and (iii) all amounts owing by the Lessee to the Investors in respect of accrued and unpaid Investor Yield and outstanding fundings of the Investor Contribution. "Officer's Certificate" shall mean a certificate signed by any individual holding the office of secretary, vice president or higher, which certificate shall certify as true and correct the subject matter being certified to in such certificate. 29 "Operative Agreements" shall mean the following: (a) the Participation Agreement; (b) the Notes; (c) the Lease and each Lease Supplement; (d) the Assignment of Lease; (e) the Credit Agreement; (f) the Security Agreement; (g) the UCC Financing Statements; (h) the Guarantee; (i) the Requisitions; and (j) the Trust Agreement. "Overdue Interest" shall mean any interest payable pursuant to Section 2.8(c) of the Credit Agreement. "Overdue Rate" shall mean (i) with respect to Tranche A Basic Rent, Tranche B Basic Rent and any other amount owed under or with respect to the Credit Agreement or the Security Documents, the rate set forth in Section 2.8(c)(ii)(y) of the Credit Agreement, (ii) with respect to Investor Yield the rate set forth in Section 2.8(c)(ii)(y) of the Credit Agreement and (iii) with respect to the Investor Contribution and any other amount, the amount referred to in Section 2.8(c)(ii)(x) of the Credit Agreement. "Participant" shall have the meaning set forth in Section 9.6 of the Credit Agreement. "Participation Agreement" shall mean the Participation Agreement dated as of the Initial Closing Date 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 in accordance with the terms thereof or of any other Operative Agreement. "Payment Date" shall mean each Specified Interest Payment Date and any other date on which a payment is otherwise due under the terms of the Credit Agreement or, if all amounts due under the Credit Agreement have been paid in full and the Credit Agreement has been terminated, the first Business Day of each calendar month during the Term. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. 30 "Permitted Business Acquisition" shall mean 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 Section 10.9 of the Guarantee shall have been taken, (d)(i) HCC shall be in compliance, on a pro forma basis after giving effect to such acquisition or formation, with the covenants contained in Section 11.1 of the Guarantee recomputed as at the last day of the most recently ended fiscal quarter of HCC as if such acquisition had occurred on the first day of each relevant period for testing such compliance, and HCC shall have delivered to the 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 Guarantor Obligations (except for Indebtedness and Guarantor Obligations permitted by Sections 11.2 and 11.4 of the Guarantee), (e) any acquired or newly formed Subsidiary (including Subsidiaries thereof) shall not have (except for Indebtedness and Guarantor Obligations permitted by Sections 11.2 and 11.4 of the Guarantee) any material liabilities (contingent or otherwise), including, without limitation, liabilities under Environmental Laws and liabilities with respect to any Plan, and HCC shall have delivered to the Agent a certificate, signed by a Responsible Officer, that to the best of such officer's knowledge, no such material liabilities exist. "Permitted Exceptions" shall mean (i) Liens of the types described in clauses (i), (ii), (iv) and (v) of the definition of Permitted Liens; (ii) Liens for Taxes not yet due; (iii) Lessor Liens and (iv) all non-monetary encumbrances, exceptions, restrictions, easements, rights of way, servitudes, encroachments and irregularities in title, other than Liens which, in the reasonable assessment of the Agent, materially impair the use of the Equipment for its intended purpose. "Permitted Liens" shall mean (i) the respective rights and interests of the parties to the Operative Agreements as provided in the Operative Agreements; (ii) the rights of any sublessee or assignee under a sublease or an assignment or a compressor management agreement expressly permitted by the terms of the Lease; (iii) Liens for Taxes that either are not yet due or are being contested in accordance with the provisions of Section 12.2 of the Participation Agreement; (iv) Liens arising by operation of law, materialmen's, 31 mechanics', workmen's, repairmen's, employees', warehousemen's and other like Liens in connection with any Modifications or arising in the ordinary course of business for amounts that either are not more than 30 days past due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 12.2(g) of the Participation Agreement; (v) Liens of any of the types referred to in clause (iv) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Lessor have been made), which bonding (or arrangements) shall comply with applicable Legal Requirements, and shall have effectively stayed any execution or enforcement of such Liens; (vi) Liens arising out of judgments or awards with respect to which appeals or other proceedings for review are being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by GAAP or other appropriate provisions have been made, so long as such proceedings have the effect of staying the execution of such judgments or awards and satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 12.2 of the Participation Agreement; (vii) Permitted Exceptions; and (viii) Lessor Liens. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization, governmental authority or any other entity. "Plan" shall mean at a particular time, any employee benefit plan which is covered by ERISA and in respect of which Lessee, 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" means the pricing grid attached to the Participation Agreement as Annex B. "Properties" shall have the meaning set forth in Section 9.15 of the Guarantee. "Purchase Notice" shall have the meaning set forth in Section 20.1 of the Lease. "Purchase Option" shall have the meaning set forth in Section 20.1 of the Lease. "Purchase Option Price" shall have the meaning set forth in Section 20.1 of the Lease. "Purchasing Lender" shall have the meaning specified in Section 9.7(a) of the Credit Agreement. 32 "Qualified Subsidiary" shall mean each Subsidiary of the Lessee organized under a jurisdiction of the United States and having assets located primarily in the United States. "Register" shall have the meaning set forth in Section 9.8(a) of the Credit Agreement. "Release" shall mean any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge, disposal or emission of a Hazardous Substance. "Rent" shall mean, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Lease. "Reorganization" shall mean, with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Replacement Equipment" shall have the meaning set forth in Section 30 of the Lease. "Replacement Equipment Closing Date" shall mean each date on which the Lessee substitutes Equipment with Replacement Equipment pursuant to Section 30 of the Lease. "Reportable Event" shall mean any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived by the PBGC. "Required Lenders" shall mean, at any time, the Lenders the Commitment Percentages of which aggregate at least 51%. "Requirement of Law" shall mean, as to any Person, the Certificate of Incorporation, By-Laws, Articles of Association 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. "Requisition" shall have the meaning set forth in Section 5.2(a) of the Participation Agreement. 33 "Responsible Officer" shall mean the chief executive officer, president, the executive vice president, treasurer or secretary of any Person, or, with respect to financial matters, the chief financial officer or treasurer of the applicable Person. "Restructuring" shall mean 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). "Sale and Leaseback Transaction" shall have the meaning ascribed to it in subsection 11.13 of the Guarantee. "Scheduled Interest Payment Date" shall mean (a) as to any ABR Loan, the last day of each March, June, September and December to occur while such Loan is outstanding and the Maturity Date, (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. "Securities Act" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Security Agreement" shall mean that certain Security Agreement dated as of the Initial Closing Date, made by the Lessor in favor of the Agent, as amended, supplemented or otherwise modified from time to time. "Security Documents" shall mean the collective reference to the Security Agreement, the Lease, the Assignment of Lease and all other security documents hereafter delivered to the Agent granting a Lien on any asset or assets of any Person to secure the obligations and liabilities of the Lessor under the Credit Agreement and/or under any of the other Credit Documents or to secure any guarantee of any such obligations and liabilities. "Shared Rights" shall mean the rights retained by the Lessor, but not to the exclusion of the Agent, pursuant to Section 8.3(ii) of the Credit Agreement. "Shareholder Subordinated Debt" shall mean all Subordinated Debt of the HCC under the Shareholder Subordinated Loan Agreement. 34 "Shareholder Subordinated Loan Agreement" shall mean the Exchange and Subordinated Loan Agreement, dated as of December 23, 1996, between HCC and the lenders parties thereto, as amended, supplemented or otherwise modified from time to time. "Significant Casualty" shall mean a Casualty that in the reasonable, good faith judgment of the Lessee (as evidenced by an Officer's Certificate) either (a) renders the related Equipment unsuitable for continued use for its intended purpose immediately prior to such Casualty or (b) is so substantial in nature that restoration of such Equipment to substantially its condition as existed immediately prior to such Casualty would be impracticable or impossible. "Significant Condemnation" shall mean a Condemnation that in the reasonable, good faith judgment of the Lessee (as evidenced by an Officer's Certificate) either (a) renders the Equipment unsuitable for continued use for its intended purpose immediately prior to such Condemnation or (b) is such that restoration of such Equipment to substantially its condition as existed immediately prior to such Condemnation would be impracticable or impossible. "Single Employer Plan" shall mean any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Specified Interest Payment Date" shall mean (a) any Scheduled Interest Payment Date and (b) any date on which interest is payable pursuant to Section 2.8(d)(ii) of the Credit Agreement in connection with any prepayment of the Loans. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Agent is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to the applicable Interest Period. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subordinated Debt" shall mean, 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 35 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. "Subsidiary" shall mean 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 any of the Operative Agreements shall refer to a Subsidiary or Subsidiaries of Holdings. "Supplement to Assignment of Lease" shall mean each Supplement to Assignment of Lease substantially in the form of Exhibit G to the Participation Agreement together with all attachments and schedules thereto, as the same may be supplemented, amended or modified from time to time. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay to Lessor or any other Person under the Lease or under any of the other Operative Agreements (other than the Guarantee made by the Guarantors in favor of the Agent). "Tax Indemnitee" shall mean the Lessor, the Investors, the Trust Company, the Agent, each Lender and their Affiliates, successors, assignees and assigns. "Taxes" shall have the meaning set forth in the definition of Impositions. "Term" shall mean the Basic Term. "Termination Date" shall have the meaning set forth in Section 16.2(a) of the Lease. "Termination Notice" shall have the meaning set forth in Section 16.1(a) of the Lease. 36 "Termination Value" shall mean with respect to all Equipment, as of any determination date, an amount equal to the sum of (i) the aggregate outstanding principal of the Notes, accrued and unpaid interest on the Notes and any other amounts due under the Credit Agreement, plus (ii) the aggregate outstanding amount of the Investor Contributions and all accrued amounts due on account of the Investor Yield plus (iii) all other amounts due and owing to the Investors, Agent or Lenders under any Operative Agreements. "Termination Value" with respect to a particular piece of Equipment shall mean an amount equal to the product of the Termination Value of all the Equipment times a fraction, the numerator of which is the Equipment Cost allocable to the particular piece of Equipment in question and the denominator of which is the aggregate Equipment Cost for all Equipment. "TIDES" shall mean the Term Income Deferrable Equity Securities (TIDES) (SM) 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" shall mean 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" shall mean Hanover Compressor Capital Trust, a Delaware business trust, and its successors and assigns. "Total Condemnation" shall mean a Condemnation that involves a taking of Lessor's entire title to a piece of Equipment. "Tranche A Basic Rent" shall mean the interest due on the Tranche A Loans on any Specified Interest Payment Date pursuant to the Credit Agreement (but not including interest on overdue amounts under Section 2.8(c) of the Credit Agreement or otherwise). 37 "Tranche A Loan" shall have the meaning set forth in Section 2.3(b) of the Credit Agreement. "Tranche A Note" shall have the meaning set forth in Section 2.2 of the Credit Agreement. "Tranche A Percentage" shall mean, with respect to a piece of Equipment, upon the date on which the Borrower first borrows any Loans in connection with the payment of Tranche A/B Equipment Cost for such piece of Equipment, the maximum percentage of the Tranche A/B Equipment Cost in respect of such piece of Equipment which may be allocated to Tranche A Loans as of such date without causing the Lease to be treated as a capital lease for the purposes of Statement of Financial Accounting Standards (SFAS) No. 13, as determined in good faith by the Lessee and certified to the Agent in accordance with the terms of the Participation Agreement; provided, however, in no event shall such percentage be less than 82.45% of Equipment Costs. The Tranche A Percentage for a piece of Equipment, as determined upon the date on which the Borrower first borrows any Loans in connection with the payment of Tranche A/B Equipment Cost for such piece of Equipment, shall be the Tranche A Percentage for such piece of Equipment at all times thereafter. "Tranche A/B Equipment Cost" shall mean, with respect to each piece of Equipment at any date of determination, an amount equal to (a) the aggregate principal amount of Loans made on or prior to such date with respect to such piece of Equipment minus (b) the aggregate amount of prepayments of the Loans allocated to reduce the Tranche A/B Equipment Cost of such piece of Equipment pursuant to Section 2.5(d) of the Credit Agreement. "Tranche B Basic Rent" shall mean the scheduled interest due on the Tranche B Loans on any Payment Date pursuant to the Credit Agreement (but not including interest on overdue amounts under Section 2.8(c) of the Credit Agreement or otherwise). "Tranche B Deficit" shall have the meaning specified in Section 9.2 of the Participation Agreement. "Tranche B Loan" shall have the meaning set forth in Section 2.3(b) of the Credit Agreement. "Tranche B Note" shall have the meaning set forth in Section 2.2 of the Credit Agreement. "Tranche B Percentage" shall mean 100% minus the Tranche A Percentage. 38 "Transaction Expenses" shall mean: (a) the reasonable out-of-pocket expenses, disbursement or cost of Agent and Arranger incurred in connection with the consummation of the transactions contemplated by the Operative Agreements; (b) the reasonable fees and reasonable out-of-pocket expenses of the Trust Company in connection with the transactions contemplated by the Operative Agreements, including, without limitation, the initial and annual Trust Company's fee and all reasonable fees and reasonable out-of pocket expenses of the Trust Company and any necessary co-trustees (including reasonable counsel fees and expenses) or any successor trustee, for acting as trustee under the Trust Agreement; (c) the fee payable to Arranger in connection with the transactions contemplated by the Operative Agreements; (d) any and all Taxes (to the extent provided in Section 11.2 of the Participation Agreement) and fees incurred in recording or filing any Operative Agreement or any other transaction document, any bill of sale, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Agreements; (e) any brokers' fees (with respect to brokers retained by or with the prior consent of HCC) 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 acquisition of any piece of Equipment; (f) all reasonable out-of-pocket costs and expenses incurred in connection with the enforcement or preservation of any rights under the Operative Agreements, including, without limitation, the reasonable fees and disbursements of counsel to the Agent, each Lender and the Investors; (g) all reasonable out-of-pocket costs and expenses incurred in connection with any amendment, supplement or modification to the Operative Agreements requested by the Lessee or any Guarantors and any other documents prepared in connection therewith, and the consummation and administration of the transactions contemplated thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent and the Investors; and 39 (h) all reasonable out-of-pocket costs and expenses incurred by the Lessor, the Lessee, the Investors or the Agent in connection with any purchase of the Equipment by the Lessee pursuant to the Lease. "Transferee" shall have the meaning set forth in Section 2.12 of the Credit Agreement. "Trust" shall mean the Lessor. "Trustee" shall have the meaning set forth in the Trust Agreement. "Trust Agreement" shall mean the Trust Agreement dated as of the Initial Closing Date between the Investors and the Trust Company as amended, supplemented and otherwise modified from time to time in accordance with the terms thereof and of any other Operative Agreement. "Trust Company" shall mean Wilmington Trust Company, in its individual capacity, and any successor trustee under the Trust Agreement in its individual capacity. "Trust Estate" shall have the meaning set forth in the Trust Agreement. "Type" shall mean, as to any Loan, its nature as an ABR Loan or a Eurodollar Loan. "UCC Financing Statements" shall mean collectively the Lender Financing Statements and the Lessor Financing Statements. "Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial Code as in effect in any applicable jurisdiction. "Unperfected Jurisdiction" shall mean any jurisdiction for which the Agent has not received evidence in form and substance satisfactory to it that all filings, recordings, registrations and other actions, including the filing of duly executed Lessee Financing Statements and Lessor Financing Statements, necessary to perfect the Liens created by the Security Documents, have been completed for such jurisdiction (other than filings or other actions required pursuant to Subsection 8.8 of the Participation Agreement). "Unqualified Subsidiary" shall mean any Subsidiary of the Lessee other than Qualified Subsidiaries. 40 "Wear and Tear Payment" shall have the meaning set forth in Section 2.5(b) of the Credit Agreement. ANNEX C 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 *3.0 to 1.0 1.75% .750% .375% **3.0 to 1.0 and *2.0 to 1.0 1.50% .500% .300% **2.0 to 1.0 and *1.0 to 1.0 1.25% .500% .300% **l.0 to 1.0 1.00% 0% .250% 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. * Greater Than ** Less Than or equal to EX-10.40 9 dex1040.txt AMENDMENT AND CONSENT DATED AS OF JUNE 26, 2000 TO THE GUARANTEE EXHIBIT 10.40 EXECUTION COPY AMENDMENT AND CONSENT AMENDMENT AND CONSENT, dated as of June 26, 2000 (this "Amendment"), to (i) the Guarantee (the "2000 Guarantee"), as defined in the Participation Agreement, dated as of March 13, 2000 (as the same may be amended, supplemented or otherwise modified from time to time, the "2000 Participation Agreement"), among Hanover Compressor Company ("Holdings"), Hanover Compression Inc., a Delaware corporation ("HCC"), Hanover Equipment Trust 2000A, (the "2000 Lessor"), First Union National Bank and Scotiabanc Inc. (the "2000 Investors"), the lenders parties thereto (the "2000 Lenders"), and The Chase Manhattan Bank, a New York banking corporation, as the agent for the 2000 Lenders (the "Agent"), (ii) the Guarantee (the "1999 Guarantee"), as defined in the Participation Agreement, dated as of June 15, 1999 (as the same may be amended, supplemented or otherwise modified from time to time, the "1999 Participation Agreement"), among HCC, Hanover Equipment Trust 1999A (the "1999 Lessor"), and Societe Generale Financial Corporation and FBTC Leasing Corp., Inc. (the "1999 Investors"), the lenders parties thereto (the "1999 Lenders") and the Agent as agent for the 1999 Lenders, (iii) the Guarantee (the "1998 Guarantee"), as defined in the Participation Agreement, dated as of July 22, 1998 (as the same may be amended, supplemented or otherwise modified from time to time, the "1998 Participation Agreement"), among HCC, Hanover Equipment Trust 1998A (the "1998 Lessor"), Societe Generale Financial Corporation (the "1998 Investor"), and the lenders parties thereto (the "1998 Lenders") and the Agent, as agent for the 1998 Lenders, and (iv) the Amended and Restated Senior Credit Agreement ("Senior Credit Agreement"), dated March 13, 2000, among Holdings, HCC, the Agent, and the lenders parties thereto (the "Senior Credit Lenders"). The 2000 Participation Agreement, the 1999 Participation Agreement and the 1998 Participation Agreement are collectively hereinafter referred to as the "Participation Agreements". W I T N E S S E T H: WHEREAS, Holdings and HCC have requested that the Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement amend certain covenants in each of the Synthetic Guarantees and the Senior Credit Agreement; and WHEREAS, the Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement are agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in any of the Participation Agreements or the Senior Credit Agreement are used herein as therein defined and the following terms shall have the following meanings: " Synthetic Guarantee" shall mean any of the 2000 Guarantee, the 1999 Guarantee, or the 1998 Guarantee. " Guarantor" shall mean a Guarantor under any of the Synthetic Guarantees or the Senior Credit Agreement. II. Amendments to the Senior Credit Agreement and the Synthetic Guarantees. 1. Amendment to Subsection 11.2 of each of the Synthetic Guarantees and Subsection 8.2 of the Senior Credit Agreement. (a) Subsections 11.2 of each of the Synthetic Guarantees are hereby amended by deleting paragraph (d) in its entirety therefrom and substituting in place thereof the following: " (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 of its 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." (b) Subsection 8.2 of the Senior Credit Agreement is hereby amended by deleting paragraph (d) in its entirety therefrom and substituting in place thereof the following: " (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 of its 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 8.1 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 Administrative Agent an officers' certificate to such effect, together with all relevant financial information." (c) Subsections 11.2(j) of each of the Synthetic Guarantees and 8.2(j) of the Senior Credit Agreement are hereby amended by replacing "$5,000,000" with "$20,000,000". 2. Amendment to Subsection 11.8 of each of the Synthetic Guarantees and Subsection 8.8 of the Senior Credit Agreement. Subsections 11.8 of each of the Synthetic Guarantees and 8.8 of the Senior Credit Agreement are hereby amended by (i) deleting the word "and" which appears before clause (v) thereof and (ii) adding the following new clause (vi) at the end thereof: " 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 (pound)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." 3. Amendment to Subsection 11.10 of each of the Synthetic Guarantees and Subsection 8.10 of the Senior Credit Agreement. (a) Subsections 11.10 of each of the Synthetic Guarantees are hereby amended by deleting paragraph (g) in its entirety therefrom and substituting in place thereof the following: " (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 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;". (b) Subsection 8.10 of the Senior Credit Agreement is hereby amended by deleting paragraph (g) in its entirety therefrom and substituting in place thereof the following: " (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, (ii) the Available Commitments of all the Lenders hereunder, and (iii) the Available Commitments and Available Investor Commitments (each as defined in the Participation Agreements) under the Equipment Lease Participation Agreements at such time, equals at least $20,000,000;". III. Consent. Each of the Required Lenders and the Investors, as party to each Participation Agreement and each other Operative Document, as applicable, consents to the amendments in Section I hereto. IV. General. 1. Effectiveness. This Amendment shall become effective upon fulfillment of the following conditions precedent: (a) Holdings and HCC shall have delivered to the Agent duly executed copies of this Amendment, (b) the Guarantors (other than Holdings or HCC) shall have delivered to the Agent duly executed copies of this Amendment, (c) the Agent shall have received duly executed copies of this Amendment from the Required Lenders, and (d) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment. 2. Representations and Warranties. Holdings, HCC and each of the other Guarantors hereby represents and warrants that the representations and warranties contained in each of the Participation Agreements and the Operative Agreements will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof (except those which expressly speak as of a certain date). 3. Continuing Effect of the Senior Credit Agreement, Participation Agreements and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of the Participation Agreements, the Senior Credit Agreement, Loan Documents or the Operative Agreements not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, Holdings, the 2000 Lessor, 1999 Lessor, the 1998 Lessor or the other Guarantors that would require a waiver or consent of the Agent and/or the 2000 Lenders, 1999 Lenders or 1998 Lenders. Except as expressly amended hereby, the provisions of each of the Participation Agreements, the Senior Credit Agreement, the Loan Documents and the Operative Agreements are and shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6. Expenses. Holdings and HCC agree to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as a signatory to the Senior Credit Agreement and as a Guarantor By: /s/ [Illegible] --------------------------------------- Name: Title: HANOVER COMPRESSION INC., as a signatory to the Senior Credit Agreement and as a Guarantor By: /s/ [Illegible] --------------------------------------- Name: Title: HANOVER EQUIPMENT TRUST 2000A, as a Borrower under the 2000 Participation Agreement By: Wilmington Trust Company, not individually but solely as Trustee By: ---------------------------------------- Name: Title: HANOVER EQUIPMENT TRUST 1999A, as a Borrower under the 1999 Participation Agreement By: Wilmington Trust Company, not individually but solely as Trustee By: ---------------------------------------- Name: Title: HANOVER EQUIPMENT TRUST 1998A, as a Borrower under the 1998 Participation Agreement By: Wilmington Trust Company, not individually but solely as Trustee By: -------------------------------------------- Name: Title: HANOVER/SMITH, LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ [Illegible] -------------------------------------------- Name: Title: HANOVER MAINTECH, LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ [Illegible] -------------------------------------------- Name: Title: HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ [Illegible] -------------------------------------------- Name: Title: HANOVER COMPRESSOR LIMITED HOLDINGS, LLC By: Hanover General Holdings, Inc., as sole member By: /s/ [Illegible] -------------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Agent, a 2000 Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ Steven Wood -------------------------------------------- Name: Steven Wood Title: Vice President FIRST UNION NATIONAL BANK, as a 2000 Lender, 1998 Lender, and Senior Credit Lender By: /s/ Robert R. Wetteroff -------------------------------------------- Name: Robert R. Wetteroff Title: Senior Vice President SOCIETE GENERALE, SOUTHWEST AGENCY, as a 1999 Lender and 1998 Lender By: /s/ Mark A. Cox -------------------------------------------- Name: Mark A. Cox Title: Director ABN AMBRO BANK N.V., as a 1999 Lender and 1998 Lender By: /s/ Deanna Breland -------------------------------------------- Name: Deanna Breland Title: Vice President By: /s/ Matt McCain -------------------------------------------- Name: Matt McCain Title: Assistant Vice President THE BANK OF NOVA SCOTIA, as a 2000 Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ F.C.H Ashby -------------------------------------------- Name: F.C.H. Ashby Title: Senior Manager Loan Operations BANK OF SCOTLAND, as a 1999 Lender By: /s/ Joseph Fratus -------------------------------------------- Name: Joseph Fratus Title: Vice President BNP PARIBAS, as a 2000 Lender, 1999 Lender, and Senior Credit Lender By: /s/ Marian Livingston -------------------------------------------- Name: Marian Livingston Title: Vice President By: /s/ Betsy Jocher -------------------------------------------- Name: Betsy Jocher Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH, as a 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ [ILLEGIBLE] -------------------------------------------- Name: [ILLEGIBLE] Title: [ILLEGIBLE] DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG, as a 2000 Lender and 1999 Lender By: /s/ Mark K. Connelly -------------------------------------------- Name: Mark K. Connelly Title: Vice President By: /s/ Richard W. Wilbert -------------------------------------------- Name: Richard W. Wilbert Title: Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a 1998 Lender By: /s/ B. Craig Erickson -------------------------------------------- Name: B. Craig Erickson Title: Vice President By: /s/ Deborah Slusarczyk -------------------------------------------- Name: Deborah Slusarczyk Title: First Vice President BANK ONE, N.A. (formerly known as The First National Bank of Chicago), as a 1998 Lender, 1999 Lender, and 2000 Lender By: /s/ Karen Patterson -------------------------------------------- Name: Karen Patterson Title: First Vice President THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH, as a 2000 Lender and 1999 Lender By: /s/ Michael N. Oakes -------------------------------------------- Name: Michael N. Oakes Title: Senior Vice President, HOUSTON OFFICE SUNTRUST BANK, as a 2000 Lender, 1999 Lender and 1998 Lender By: /s/ Linda L. Stanley -------------------------------------------- Name: Linda L. Stanley Title: Director WELLS FARGO BANK (TEXAS) N.A., as a 1999 Lender and Senior Credit Lender By: /s/ Spencer Smith -------------------------------------------- Name: Spencer Smith Title: Vice President CREDIT SUISSE FIRST BOSTON, as a 2000 Lender By: /s/ James P. Moran -------------------------------------------- Name: James P. Moran Title: Director By: /s/ William S. Lutkins -------------------------------------------- Name: William S. Lutkins Title: Vice President NATEXIS BANQUE BFCE, as a 2000 Lender By: /s/ Donovan C. Broussard -------------------------------------------- Name: Donovan C. Broussard Title: Vice President By: /s/ Renaud J. d'Herbes -------------------------------------------- Name: Renaud J. d'Herbes Title: Senior Vice President and Regional Manager NATEXIS BANQUE BFCE, as a 2000 Lender By: /s/ Donovan C. Broussard -------------------------------------------- Name: Donovan C. Broussard Title: Vice President By: /s/ Renaud J. d'Herbes -------------------------------------------- Name: Renaud J. d'Herbes Title: Senior Vice President and Regional Manager NATIONAL CITY BANK, as a 2000 Lender By: /s/ Scott L. Brewer -------------------------------------------- Name: Scott L. Brewer Title: AVP EX-10.41 10 dex1041.txt SECOND AMENDMENT, DATED AS OF AUGUST 30, 2000 TO THE GUARANTEE EXHIBIT 10.41 EXECUTION COPY SECOND AMENDMENT SECOND AMENDMENT, dated as of August 30, 2000 (this "Amendment"), to (i) the Guarantee (the "2000A Guarantee"), as defined in the Participation Agreement, dated as of March 13, 2000 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "2000A Participation Agreement"), among Hanover Compressor Company ("Holdings"), Hanover Compression Inc., a Delaware corporation ("HCC"), Hanover Equipment Trust 2000A, (the "2000A Lessor"), First Union National Bank and Scotiabanc Inc. (the "2000A Investors"), the lenders parties thereto (the "2000A Lenders"), and The Chase Manhattan Bank, a New York banking corporation, as the agent for the 2000A Lenders (the "Agent"), (ii) the Guarantee (the "1999 Guarantee"), as defined in the Participation Agreement, dated as of June 15, 1999 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "1999 Participation Agreement"), among HCC, Hanover Equipment Trust 1999A (the "1999 Lessor"), and Societe Generale Financial Corporation and FBTC Leasing Corp., Inc. (the "1999 Investors"), the lenders parties thereto (the "1999 Lenders") and the Agent as agent for the 1999 Lenders, (iii) the Guarantee (the "1998 Guarantee"), as defined in the Participation Agreement, dated as of July 22, 1998 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "1998 Participation Agreement"), among HCC, Hanover Equipment Trust 1998A (the "1998 Lessor"), Societe Generale Financial Corporation (the "1998 Investor"), and the lenders parties thereto (the "1998 Lenders") and the Agent, as agent for the 1998 Lenders and (iv) the Amended and Restated Senior Credit Agreement (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "Senior Credit Agreement"), dated March 13, 2000, among Holdings, HCC, the Agent, and the lenders parties thereto (the "Senior Credit Lenders"). The 2000A Participation Agreement, the 1999 Participation Agreement and the 1998 Participation Agreement are collectively hereinafter referred to as the "Participation Agreements". W I T N E S S E T H: WHEREAS, Holdings and HCC have requested that the Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement amend certain covenants and certain defined terms in each of the Synthetic Guarantees and the Senior Credit Agreement; and WHEREAS, the Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement are agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in any of the 2 Participation Agreements and the Senior Credit Agreement and not defined herein are used herein as therein defined and the following terms shall have the following meanings: "Synthetic Guarantee" shall mean any of the 2000A Guarantee, the 1999 Guarantee, or the 1998 Guarantee. "Guarantor" shall mean a Guarantor under any of the Synthetic Guarantees or the Senior Credit Agreement. II. Amendments to the Senior Credit Agreement and the Synthetic Guarantees. 1. Amendment to Subsection 1.1 of the Senior Credit Agreement and Subsection 1(b) of each of the Synthetic Guarantees. (a) Subsection 1.1 of the Senior Credit Agreement is hereby amended by deleting therefrom the definitions of the following defined terms in their entireties and substituting in place thereof the following new definitions, and Subsection l(b) of each of the Synthetic Guarantees is hereby amended by inserting therein in alphabetical order such defined terms with such definitions: "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); provided that, if during such period such Person shall have made a Material Acquisition, Consolidated EBITDA for such period shall be calculated after giving pro forma effect to such Material Acquisition as if such Material Acquisition had occurred on the first day of such period; provided further that, the foregoing proviso shall have effect only if the Agent has been furnished with unaudited, or, if available, audited, consolidated financial statements of the acquired property for such period, such financial statements to include the balance sheet and statements of income and cash flows reflecting the historical performance of the acquired property for such period to the extent applicable. As used in this definition, "Material Acquisition" means any acquisition of property or series of related acquisitions of property that (a) constitutes assets or constitutes all or substantially all of the equity interests of a Person and (b) involves the payment of consideration of at least $15,000,000. "Equipment Guarantees": (i) the Guarantee dated as of July 22, 1998 (as amended and restated through March 13, 2000 and as further amended, supplemented or otherwise modified from time to time), made by Holdings, HCC, and certain of their subsidiaries listed on the signature pages, in favor of Hanover Equipment Trust 1998A, The Chase Manhattan Bank, as agent, and certain lenders and investors, (ii) the Guarantee dated as of June 15, 1999 (as amended and restated through March 13, 2000 and as further amended, supplemented or otherwise modified from time to time), made by Holdings, HCC, and certain of their subsidiaries listed on the signature pages, in favor of Hanover Equipment Trust 1999A, The Chase Manhattan Bank, as agent, and certain 3 lenders and investors, (iii) the Guarantee dated as of March 13, 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, The Chase Manhattan Bank, as agent, and certain lenders and investors, (iv) a Guarantee, in connection with and dated as of the date of the 2000B Participation Agreement (as amended, supplemented or otherwise modified from time to time), to be made by Holdings, HCC and certain of their subsidiaries that will be listed on the signature pages thereto, in favor of a Delaware business trust that may be named "Hanover Equipment Trust 2000B," The Chase Manhattan Bank, as agent, and certain lenders and investors and (v) any Guarantee, in connection with and dated as of the date of an Additional Participation Agreement (as amended, supplemented or otherwise modified from time to time), to be made by Holdings, HCC and certain of their subsidiaries that will be listed on the signature pages thereto, in favor of a Delaware business trust, the agent and certain lenders and investors. "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, (iii) the Credit Agreement dated as of March 13, 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, Industrial Bank of Japan, LTD., as syndication agent, The Bank of Nova Scotia, as documentation agent and The Chase Manhattan Bank, as agent, (iv) a Credit Agreement, in connection with and dated as of the date of the 2000B Participation Agreement (as amended, supplemented or otherwise modified from time to time), among a Delaware business trust that may be named "Hanover Equipment Trust 2000B," as borrower, the several lenders from time to time parties thereto, a syndication agent, a documentation agent and The Chase Manhattan Bank, as agent and (v) any Credit Agreement, in connection with and dated as of the date of an Additional Participation Agreement (as amended, supplemented or otherwise modified from time to time), among a Delaware business trust, as borrower, the several lenders from time to time parties thereto, a syndication agent, a documentation agent and an 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, (iii) the Participation Agreement dated March 13, 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 4 documentation agent, The Chase Manhattan Bank, as agent, and the lenders parties thereto, (iv) a Participation Agreement (as amended, supplemented or otherwise modified from time to time, the "2000B Participation Agreement"), among HCC, a Delaware business trust that may be named "Hanover Equipment Trust 2000B," an investor or investors, a syndication agent, a documentation agent, The Chase Manhattan Bank, as agent, and the lenders parties thereto and (v) any additional participation agreements that may be entered into, upon notice to the Agent, by and among HCC, a Delaware business trust, an investor or investors, one or more agents and the lenders parties thereto (as amended, supplemented or otherwise modified from time to time, the "Additional Participation Agreements"); provided that, the 2000B Participation Agreement and any Additional Participation Agreements shall be considered Equipment Lease Participation Agreements only so long as (1) such 2000B Participation Agreement and any Additional Participation Agreements provide for transactions reasonably similar to those provided for in the Participation Agreements described in (i)-(iii) above and (2) the aggregate value of (a) the equipment leased under such 2000B Participation Agreement and any Additional Participation Agreements and (b) any natural gas compressors leased by Holdings or HCC as lessee under any other leases ("Equipment True Leases") other than the Equipment Leases, does not exceed $300,000,000. "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, (iii) the Lease dated as of March 13, 2000 (as amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 2000A, as lessor, and HCC, as lessee, (iv) a Lease, in connection with and dated as of the date of the 2000B Participation Agreement (as amended, supplemented or otherwise modified from time to time), between a Delaware business trust that may be named "Hanover Equipment Trust 2000B," as lessor, and HCC, as lessee and (v) any Lease, in connection with and dated as of the date of an Additional Participation Agreement (as amended, supplemented or otherwise modified from time to time), between a Delaware business trust, as lessor, and HCC, as lessee. (b) Subsection 1.1 of the Senior Credit Agreement is hereby amended by deleting therefrom the definition of the following defined term in its entirety and substituting in place thereof the following: "Adjusted EBITDA Companies": Holdings and each of its wholly-owned Subsidiaries which (i) is organized under a jurisdiction of the United States, Canada, the United Kingdom and any other country approved by the 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). (c) Subsection l(b) of each of the Synthetic Guarantees is hereby amended by inserting therein in alphabetical order the following defined term and definition: "Adjusted EBITDA Companies": Holdings and each of its wholly-owned Subsidiaries which (i) is organized under a jurisdiction of the United States, Canada, the United Kingdom and any other country approved by the Required Lenders and (ii) has at 5 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 11.1(c). 2. Amendment to Subsection 7.2(b) of the Senior Credit Agreement and Subsection 10.2(b) of each of the Synthetic Guarantees. Subsection 7.2(b) of the Senior Credit Agreement and Subsection 10.2(b) of each of the Synthetic Guarantees are hereby amended by inserting the following immediately preceding the final semicolon: ", such certificate to include the original total dollar amount of any Equipment True Leases". 3. Amendment to Subsection 8.7 of the Senior Credit Agreement and Subsection 11.7 of each of the Synthetic Guarantees. Subsection 8.7 of the Senior Credit Agreement and Subsection 11.7 of each of the Synthetic Guarantees are hereby amended by inserting the following immediately preceding the final period: ", except to the extent any such excess results from expenses relating to any Equipment True Leases". III. General. 1. Effectiveness. This Amendment shall become effective upon fulfillment of the following conditions precedent: (a) Holdings and HCC shall have delivered to the Agent duly executed copies of this Amendment, (b) the Guarantors (other than Holdings or HCC) shall have delivered to the Agent duly executed copies of this Amendment, (c) the Agent shall have received duly executed copies of this Amendment from the Required Lenders, and (d) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment. 2. Representations and Warranties. Holdings, HCC and each of the other Guarantors hereby represents and warrants that the representations and warranties contained in each of the Participation Agreements and the Operative Agreements will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof (except those which expressly speak as of a certain date). 3. Continuing Effect of the Senior Credit Agreement, Participation Agreements and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of the Senior Credit Agreement, Loan Documents or the Operative Agreements not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, Holdings, the 2000A Lessor, 1999 Lessor, the 1998 Lessor or the other Guarantors that would require a waiver or consent of the Agent and/or the 2000A Lenders, 1999 Lenders or 1998 Lenders. Except as expressly amended hereby, the provisions of each of the the Senior Credit Agreement, the Loan Documents and the Operative Agreements are and shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6 6. Expenses. Holdings and HCC agree to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as a signatory to the Senior Credit Agreement and as a Guarantor By: -------------------------------------- Name: Title: HANOVER COMPRESSION INC., as a signatory to the Senior Credit Agreement and as a Guarantor By: -------------------------------------- Name: Title: HANOVER/SMITH LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: -------------------------------------- Name: Title: HANOVER MAINTECH LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: -------------------------------------- Name: Title: HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: -------------------------------------- Name: Title: HANOVER COMPRESSOR LIMITED HOLDINGS, LLC By: Hanover General Holdings, Inc., as sole member By: -------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Agent, a 2000A Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: ------------------------------------- Name: Title: ABN AMRO BANK N.V., as a 1999 Lender and 1998 Lender By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: THE BANK OF NOVA SCOTIA, as a 2000A Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: -------------------------------------- Name: Title: FIRST UNION NATIONAL BANK, as a 2000A Lender, 1998 Lender, and Senior Credit Lender By: -------------------------------------- Name: Title: BANK OF SCOTLAND, as a 1999 Lender By: -------------------------------------- Name: Title: BNP PARIBAS, as a 2000A Lender, 1999 Lender, and Senior Credit Lender By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: FUJI BANK, LIMITED, as a 1999 Lender, and 1998 Lender By: -------------------------------------- Name: Title: BANKERS TRUST COMPANY, as a 1999 Lender and Senior Credit Lender By: -------------------------------------- Name: Title: COMERICA BANK, as a 1999 Lender By: -------------------------------------- Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, as a 1999 Lender, 1998 Lender, and Senior Credit Lender By: -------------------------------------- Name: Title: DG BANK DEUTSCHE GENOSSENSCHAFTBANK AG, as a 2000A Lender and 1999 Lender By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a 1998 Lender By: -------------------------------------- Name: Title: BANK ONE, N.A. (formerly known as The First National Bank of Chicago), as a 1998 Lender, 1999 Lender, and 2000A Lender By: -------------------------------------- Name: Title: THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH, as a 2000A Lender and 1999 Lender By: -------------------------------------- Name: Title: SUNTRUST BANK, as a 2000A Lender, 1999 Lender and 1998 Lender By: -------------------------------------- Name: Title: SOCIETE GENERALE, SOUTHWEST AGENCY, as a 1999 Lender and 1998 Lender By: -------------------------------------- Name: Title: WELLS FARGO BANK (TEXAS) N.A., as a 1999 Lender and Senior Credit Lender By: -------------------------------------- Name: Title: CREDIT SUISSE FIRST BOSTON, as a 2000A Lender By: -------------------------------------- Name: Title: NATEXIS BANQUE BFCE, as a 2000A Lender By: -------------------------------------- Name: Title: NATIONAL CITY BANK, as a 2000A Lender By: --------------------------------- Name: Title: FBTC LEASING CORP, as a 1999 Lender By: -------------------------------------- Name: Title: EX-10.42 11 dex1042.txt FIRST AMENDMENT, DATED AS OF JANUARY 31, 2001, TO THE GUARANTEE EXHIBIT 10.42 EXECUTION COPY FIRST AMENDMENT FIRST AMENDMENT, dated as of January 31, 2001 (this "Amendment"), to (i) the Guarantee (the "2000B Guarantee"), as defined in the Participation Agreement, dated as of October 27, 2000 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "2000B Participation Agreement"), among Hanover Compression Limited Partnership (formerly known as Hanover Compression Inc., "HCC"), Hanover Equipment Trust 2000B, (the "2000B Lessor"), Bank Hapoalim B.M. and FBTC Leasing Corp., as investors, the lenders parties thereto (the "2000B Lenders") and The Chase Manhattan Bank, a New York banking corporation, as the agent for the 2000B Lenders (the "Agent"), (ii) the Guarantee (the "2000A Guarantee"), as defined in the Participation Agreement, dated as of March 13, 2000 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "2000A Participation Agreement"), among HCC, Hanover Equipment Trust 2000A (the "2000A Lessor"), First Union National Bank and Scotiabanc Inc., as investors, the lenders parties thereto (the '2OOOA Lenders") and the Agent, as agent for the 2000A Lenders, (iii) the Guarantee (the "1999 Guarantee"), as defined in the Participation Agreement, dated as of June 15, 1999 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "1999 Participation Agreement"), among HCC, Hanover Equipment Trust 1999A (the "1999 Lessor"), Societe Generale Financial Corporation and FBTC Leasing Corp., as investors, the lenders parties thereto (the "1999 Lenders") and the Agent, as agent for the 1999 Lenders, (iv) the Guarantee (the "1998 Guarantee"), as defined in the Participation Agreement, dated as of July 22, 1998 (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "1998 Participation Agreement"), among HCC, Hanover Equipment Trust 1998A (the "1998 Lessor"), Societe Generale Financial Corporation, as investor, the lenders parties thereto (the "1998 Lenders") and the Agent, as agent for the 1998 Lenders, and (v) the Amended and Restated Senior Credit Agreement (as the same may be, and may have been, amended, supplemented or otherwise modified from time to time, the "Senior Credit Agreement"), dated March 13, 2000, among Hanover Compressor Company ("Holdings"), HCC, the Agent and the lenders parties thereto (the "Senior Credit Lenders"). The 2000B Participation Agreement, the 2000A Participation Agreement, the 1999 Participation Agreement and the 1998 Participation Agreement are collectively hereinafter referred to as the "Participation Agreements". The 2000B Guarantee, the 2000A Guarantee, the 1999 Guarantee and the 1998 Guarantee are collectively hereinafter referred to as the "Synthetic Guarantees". W I T N E S S E T H: WHEREAS, Holdings and HCC have requested that the Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement amend certain covenants in and add a defined term to each of the Synthetic Guarantees and the Senior Credit Agreement; and WHEREAS, the Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement are agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; 2 NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in any of the Participation Agreements and the Senior Credit Agreement and not defined herein are used herein as therein defined and the following terms shall have the following meanings: "Guarantor" shall mean a Guarantor under any of the Synthetic Guarantees or the Senior Credit Agreement. II. Amendments to the Senior Credit Agreement and the Synthetic Guarantees. 1. Amendment to Subsection 1.1 of the Senior Credit Agreement and Subsection 1(b) of each of the Synthetic Guarantees. (a) Each of Subsection 1.1 of the Senior Credit Agreement and Subsection l(b) of each of the Synthetic Guarantees is hereby amended by inserting therein in alphabetical order the following defined term and definition: "2008 Notes": convertible notes to be offered and issued by Holdings in an aggregate principal amount not to exceed $172,500,000, due 2008 and having terms substantially similar to those reflected in the draft term sheet attached hereto as Annex A. (b) Subsection 1.1 of the Senior Credit Agreement is hereby amended by deleting therefrom the definition of the following defined term in its entirety and substituting in place thereof the following: "Qualified Subsidiary": each Subsidiary of HCC organized under a jurisdiction of the United States and having assets located primarily in the United States. 2. Amendment to Subsection 8.2 of the Senior Credit Agreement and Subsection 11.2 of each of the Synthetic Guarantees. Each of Subsection 8.2 of the Senior Credit Agreement and Subsection 11.2 of each of the Synthetic Guarantees is hereby amended by (w) deleting the word "and" that appears at the end of paragraph (i) thereof, (x) replacing the "(i)" that appears in the middle of paragraph (j) with "(j)", (y) replacing "(j)" as the label for paragraph (j) with "(k)" and (z) inserting the following after paragraph (i): (j) Indebtedness in respect of the 2008 Notes; and 3. Amendment to Subsection 8.5 of the Senior Credit Agreement and Subsection 11.5 of each of the Synthetic Guarantees. (a) Each of Subsection 8.5(b) of the Senior Credit Agreement and Subsection 11.5(b) of each of the Synthetic Guarantees is hereby amended by inserting the following immediately after the word "Person" therein: "other than HCC". 3 (b) Each of Subsection 8.5(c) of the Senior Credit Agreement and Subsection 11.5(c) of each of the Synthetic Guarantees is hereby amended by deleting "Holdings or" therefrom. (c) Each of Subsection 8.5(d) of the Senior Credit Agreement and Subsection 11.5(d) of each of the Synthetic Guarantees is hereby amended by inserting the following immediately after each occurrence of the word "Person" therein: "other than Holdings". 4. Amendment to Subsection 8.8 of the Senior Credit Agreement and Subsection 11.8 of each of the Synthetic Guarantees. Each of Subsection 8.8 of the Senior Credit Agreement and Subsection 11.8 of each of the Synthetic Guarantees is hereby amended by (x) deleting the word "and" that appears before clause (vi) thereof and (y) adding the following new clause (vii) to the end thereof: and (vii) Subsidiaries of Holdings may declare and pay dividends, or make distributions, to Holdings to the extent necessary to allow Holdings to pay interest on, or redeem, the 2008 Notes. 5. Amendment to Subsection 8.11 of the Senior Credit Agreement and Subsection 11.11 of each of the Synthetic Guarantees. Each of Subsection 8.11 of the Senior Credit Agreement and Subsection 11.11 of each of the Synthetic Guarantees is hereby amended by deleting clause (ii) in its entirety therefrom and inserting in place thereof the following: (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 2008 Notes pursuant to the terms thereof, including, without limitation, the terms of any indenture in respect thereof, (b) 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 (c) any optional payment, prepayment or redemption of any Indebtedness pursuant to the Corporate Credit Agreement or the Equipment Lease Credit Agreements or 6. Amendment to Subsection 8.16 of the Senior Credit Agreement and Subsection 11.16 of each of the Synthetic Guarantees. (a) Subsection 8.16 of the Senior Credit Agreement is hereby amended by (x) deleting the entire portion of such subsection that follows the period immediately after the subsection heading ("Nature of Business") and (y) substituting in place thereof the following: (A) In the case of any Subsidiary, 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, (f) the provision of gas measurement and related services, (g) the design, engineering, fabrication, maintenance, leasing, purchase and sale of 0- to 50-megawatt skid-mounted, engine-driven generators, together with services related thereto and (h) any activities related thereto which are consistent with past practice and conducted in the ordinary course of business; and (B) in the 4 case of Holdings, notwithstanding anything to the contrary contained herein, engage in any business other than (a) the direct or indirect ownership of HCC together with any activities related thereto, (b) the performance of its obligations under the Loan Documents, (c) the performance of its obligations under the 2008 Notes, (d) the performance of its obligations in connection with the TIDES, including, without limitation, its obligations under the TIDES Indenture, the TIDES Guarantees and the TIDES Declaration of Trust, (e) the formation and ownership of Subsidiaries for the purpose of making acquisitions to the extent permitted under the Loan Documents and (f) any actions required by law or the rules of any securities exchange on which its securities are listed and/or traded. (b) Subsection 11.16 of each of the Synthetic Guarantees is hereby amended by (x) deleting the entire portion of such subsection that follows the period immediately after the subsection heading ("Nature of Business") and (y) substituting in place thereof the following: (A) In the case of any Subsidiary, 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, (f) the provision of gas measurement and related services, (g) the design, engineering, fabrication, maintenance, leasing, purchase and sale of 0- to 50-megawatt skid-mounted, engine-driven generators, together with services related and (h) any activities related thereto which are consistent with past practice and conducted in the ordinary course of business; and (B) in the case of Holdings, notwithstanding anything to the contrary contained herein, engage in any business other than (a) the direct or indirect ownership of HCC together with any activities related thereto, (b) the performance of its obligations under the Operative Agreements, (c) the performance of its obligations under the 2008 Notes, (d) the performance of its obligations in connection with the TIDES, including, without limitation, its obligations under the TIDES Indenture, the TIDES Guarantees and the TIDES Declaration of Trust, (e) the formation and ownership of Subsidiaries for the purpose of making acquisitions to the extent permitted under the Operative Agreements and (f) any actions required by law or the rules of any securities exchange on which its securities are listed and/or traded. 7. Amendment to Section 9 of the Senior Credit Agreement. Section 9 of the Senior Credit Agreement is hereby amended by deleting the word "Holdings" from paragraph (a) of such Section 9 and inserting "HCC" in place thereof. 8. Amendment to the Senior Credit Agreement and each of the Synthetic Guarantees. The Senior Credit Agreement and each of the Synthetic Guarantees are hereby amended by substituting each of the schedules attached hereto under Annex B, which schedules are satisfactory to the Agent, for its counterpart schedule to the Senior Credit Agreement or each of the Synthetic Guarantees, as the case may be. III. Change in Name and Form of HCC. Holdings and HCC hereby represent and warrant that, pursuant to the Restructuring, on December 29, 2000, the successor in interest 5 to Hanover Compression Inc., a Delaware corporation, merged with and into Hanover Compression Limited Partnership, a Delaware limited partnership, and that such limited partnership succeeded to all of HCC's assets and obligations. IV. General. 1. Effectiveness. This Amendment shall become effective upon fulfillment of the following conditions precedent: (a) Holdings and HCC shall have delivered to the Agent duly executed copies of this Amendment, (b) the Guarantors (other than Holdings or HCC) shall have delivered to the Agent duly executed copies of this Amendment, (c) the Agent shall have received duly executed copies of this Amendment from the Required Lenders, and (d) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment. 2. Representations and Warranties. Holdings, HCC and each of the other Guarantors hereby represent and warrant that the representations and warranties contained in each of the Participation Agreements and the Operative Agreements will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof (except those which expressly speak as of a certain date). 3. Continuing Effect of the Senior Credit Agreement, Participation Agreements and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of the Senior Credit Agreement, the Loan Documents or the Operative Agreements (as defined in each of the Synthetic Guarantees) not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, Holdings, the 2000B Lessor, the 2000A Lessor, the 1999 Lessor, the 1998 Lessor or the other Guarantors that would require a waiver or consent of the Agent and/or the 2000B Lenders, the 2000A Lenders, the 1999 Lenders or the 1998 Lenders. Except as expressly amended hereby, the provisions of each of the Senior Credit Agreement, the Loan Documents and the Operative Agreements (as defined in each of the Synthetic Guarantees) are and shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 6. Expenses. Holdings and HCC agree to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as a signatory to the Senior Credit Agreement and as a Guarantor By: /s/ William S. Goldberg -------------------------------------- Name: William S. Goldberg Title: Executive Vice President HANOVER COMPRESSION LIMITED PARTNERSHIP (formerly known as Hanover Compression Inc.), as a signatory to the Senior Credit Agreement and as a Guarantor By: Hanover Compression General Holdings, LLC, its general partner By: /s/ William S. Goldberg -------------------------------------- Name: William S. Goldberg Title: President HANOVER/SMITH LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ William S. Goldberg -------------------------------------- Name: William S. Goldberg Title: Executive Vice President HANOVER MAINTECH LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ William S. Goldberg -------------------------------------- Name: William S. Goldberg Title: Executive Vice President HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ William S. Goldberg -------------------------------------- Name: William S. Goldberg Title: Executive Vice President HANOVER COMPRESSOR LIMITED HOLDINGS, LLC By: Hanover General Holdings, Inc., as sole member By: /s/ William S. Goldberg -------------------------------------- Name: William S. Goldberg Title: President THE CHASE MANHATTAN BANK, as Agent, a 2000B Lender, 2000A Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ Mona M. Foch --------------------------------- Name: MONA M. FOCH Title: MANAGING DIRECTOR THE BANK OF TOKYO MITSUBISHI LIMITED, as a 2000B Lender By: /s/ Kalton Glasscock ----------------------------------- Name: Mr. Kalton Glasscock Title: Vice President & Manager CITIBANK, N.A., as a 2000B Lender By: /s/ Gregory S. Morzanq -------------------------------------- Name: GREGORY S. MORZANQ Title: Vice President FIRST UNION NATIONAL BANK, as a 2000A Lender, 1998 Lender, and Senior Credit Lender By: /s/ Robert R. Wetteroff -------------------------------------- Name: ROBERT R. WETTEROFF Title: SENIOR VICE PRESIDENT GUARANTY FEDERAL BANK, F.S.B., as a 2000B Lender and Senior Credit Lender By: /s/ Jim R. Hamilton -------------------------------------- Name: Jim R. Hamilton Title: Vice President NATIONAL WESTMINSTER BANK Plc, NASSAU BRANCH, as a 2000B Lender By: /s/ Kevin J. Howard ---------------------------------- Name: KEVIN J. HOWARD Title: MANAGING DIRECTOR NATIONAL WESTMINSTER BANK Plc, NEW YORK BRANCH, as a 2000B Lender By: /s/ Kevin J. Howard ----------------------------------- Name: KEVIN J. HOWARD Title: MANAGING DIRECTOR BANK OF SCOTLAND, as a 1999 Lender By: /s/ Joseph Fratus ------------------------- Name: JOSEPH FRATUS Title: VICE PRESIDENT BNP PARIBAS, as a 2000A Lender, 1999 Lender, and Senior Credit Lender By: /s/ Marian Livingston ----------------------------------------- Name: Marian Livingston Title: Vice President By: /s/ Betsy Jocher ----------------------------------------- Name: Betsy Jocher Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH, as a 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ Philippe Soustra ----------------------------------- Name: Philippe Soustra Title: Senior Vice President DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG, as a 2000A Lender and 1999 Lender By: /s/ [ILLEGIBLE] ------------------------------- Name: [ILLEGIBLE] Title: Vice President By: /s/ Richard W. Wilbert ------------------------------ Name: RICHARD W. WILBERT Title: Vice President SUNTRUST BANK, as a 2000B Lender, 2000A Lender, 1999 Lender and 1998 Lender By: /s/ Steven J. Newby ------------------------------------- Name: Steven J. Newby Title: Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a 1998 Lender By: /s/ Vincent Carotenuto -------------------------------------- Name: VINCENT CAROTENUTO Title: ASSISTANT VICE PRESIDENT By: /s/ B. Craig Erickson --------------------------------------- Name: B. CRAIG ERICKSON Title: Vice President BANK ONE, N.A. (formerly known as The First National Bank of Chicago), as a 1998 Lender, 1999 Lender, and 2000A Lender By: /s/ [ILLEGIBLE] ---------------------------------------- Name: [ILLEGIBLE] Title: VICE PRESIDENT THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH, as a 2000B Lender, 2000A Lender and 1999 Lender By: /s/ Ryusuke Aya --------------------------------------------- Name: Ryusuke Aya Title: Senior Vice President, Houston Office SOCIETE GENERALE, SOUTHWEST AGENCY, as a 1999 Lender and 1998 Lender By: /s/ Mark A. Cox ----------------------------------- Name: MARK A. COX Title: DIRECTOR WELLS FARGO BANK (TEXAS) N.A., as a 1999 Lender and Senior Credit Lender By: /s/ Spencer N. Smith ----------------------------------- Name: Spencer N. Smith Title: Vice President CREDIT SUISSE FIRST BOSTON, as a 2000B Lender and 2000A Lender By: /s/ James P. Moran ------------------------------------ Name: JAMES P. MORAN Title: DIRECTOR By: /s/ Robert N. Finney ------------------------------------ Name: Robert N. Finney Title: Managing Director NATEXIS BANQUES POPULAIRES, as a 2000A Lender By: /s/ Donovan C. Broussard ------------------------------------ Name: Donovan C. Broussard Title: Vice President By: /s/ Louis P. Laville, III ------------------------------------ Name: Louis P. Laville, III Title: Vice President and Group Manager NATIONAL CITY BANK, as a 2000A Lender By: /s/ Tom Gurbach ------------------------------------ Name: Tom Gurbach Title: Vice President ARAB BANKING CORPORATION (B.S.C.), as a 2000B Lender By: /s/ [ILLEGIBLE] --------------------------------------- Name: [ILLEGIBLE] Title: Vice President ANNEX A SUMMARY TERMS OF $150,000,000 CONVERTIBLE NOTE OFFERING (DRAFT) - -------------------------------------------------------------------------------- Securities offered $150,000,000 aggregate principal amount of ___% convertible notes due _____, 2008. We have also granted the underwriters an over-allotment option to purchase up to an additional $22,500,000 aggregate principal amount of convertible notes. - -------------------------------------------------------------------------------- Offering price 100% of the principal amount of the convertible notes, plus accrued interest, if any, from the date of original issuance of the convertible notes, which we expect to be ________, 2001. - -------------------------------------------------------------------------------- Interest payable We will pay interest on the convertible notes semi-annually on ________ and ________ of each year, commencing ________, 2001. - -------------------------------------------------------------------------------- Conversion The convertible notes are convertible at the option of the holder into shares of our common stock, at any time before the close of business on the business day immediately preceding the maturity date, unless we have previously redeemed or repurchased the notes, at a conversion rate of ________ shares of common stock per $1,000 principal amount of convertible notes. The conversion rate is subject to anti-dilution adjustment in certain events. - -------------------------------------------------------------------------------- Optional redemption by the On or after ________, 2004, we have the right at issuer any time to redeem some or all of the convertible notes, unless we have previously converted the notes, at the redemption prices set forth in this prospectus plus accrued and unpaid interest to the redemption date. - -------------------------------------------------------------------------------- Repurchase at the option of If we experience a change in control, a holder of holders upon a change in convertible notes will have the right, subject to control certain conditions and restrictions, to require us to repurchase some or all of the convertible notes at a price equal to 100% of the principal amount plus accrued and unpaid interest to the repurchase date. - -------------------------------------------------------------------------------- Ranking The convertible notes are our general unsecured obligations and will rank equally in right of payment will all of our other unsecured senior debt. The convertible notes will be effectively subordinated to all existing and future liabilities of our subsidiaries. As of September 30, 2000, our subsidiaries had approximately $________ of debt outstanding. - -------------------------------------------------------------------------------- Use of proceeds We intend to use the net proceeds from this offering and our concurrent offering of common stock to repay [a portion of] the indebtedness outstanding under our bank credit agreement and for working capital and other general purposes. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Events of default Events of default include: . failure to pay principal of or premium, if any, on any of the convertible notes when due; . failure to pay interest on any of the convertible notes within 30 days after payment becomes due; . failure to perform or comply with certain covenants in the indenture with respect to the convertible notes, and such failure is not cured within 60 days after we are given notice of such failure; . failure by us or any of our subsidiaries to pay when due, or the acceleration of the due date of, more than $10 million of indebtedness for money borrowed, and such failure continues for 60 days after we are given notice of such failure as provided in the indenture; . certain events of bankruptcy, insolvency or reorganization of our company; . failure to provide the required notice of any change in control or to pay the repurchase price in connection with a change in control; and . failure to convert any portion of the principal amount of a convertible note following exercise by its holder of the right to convert such convertible note. - -------------------------------------------------------------------------------- Listing of convertible The convertible notes will not be listed on any notes securities exchange or any automated quotation system. The underwriters have advised us that they currently intend to make a market in the convertible notes. However, the underwriters are not obligated to do so, and any such market making may be discontinued at any time at the sole discretion of the underwriters without notice. - -------------------------------------------------------------------------------- Global note; book-entry We will issue the convertible notes only in book- system entry form, registered in the name of DTC or its nominee. Purchasers will not receive individually certificated notes. Instead, the convertible notes will be evidenced by a global note, in fully registered form and without coupons, and deposited with the trustee, as custodian for DTC. The interest of any holder in the global note will be shown on, and transfers of that interest will be effected only through, records maintained by DTC and its direct and indirect participants. - -------------------------------------------------------------------------------- Governing law The indenture and the convertible notes will be governed by the laws of the State of New York. - -------------------------------------------------------------------------------- Risk factors You should read the "Risk Factors" section, beginning on page__, as well as the other cautionary statements described in this prospectus so that you understand the risks associated with an investment in the convertible notes. - -------------------------------------------------------------------------------- ANNEX B HANOVER COMPRESSION LIMITED PARTNERSHIP AMENDED DISCLOSURE SCHEDULES SCHEDULE 5.16 AND 9.15: ENVIRONMENTAL (1) Bryan, Texas (4511 Highway 21 E, Bryan, Texas): Preliminary Phase II surface soil and water testing revealed elevated levels of TPH and metals in the soils from the operations of a prior owner/operator. Hanover Compression Limited Partners ("HCLP") alerted the lessor to these test results. (2) Columbus, Texas (Rt. 2, Box 179, Alleyton, Texas): A prior owner/operator of this facility released TPH and metals into the soil at the property. HCLP conducted remedial activities at the property pursuant to the State of Texas voluntary cleanup program. (3) Corpus Christi, Texas (455 Lantana, Corpus Christi, TX): Soil staining exists on the property from the operations of a neighboring business. (4) Davis, Oklahoma (100 Halliburton Road, Rt. 2, Box 151, Davis, Oklahoma): Phase I and II testing at the property revealed chlorinated hydrocarbons in both the soil and groundwater. The prior property owner engaged in remedial activities at the facility. (5) Edmonton, Alberta (6115 30th St., Edmonton, Alberta): An underground storage tank is being utilized at this facility for the storage of hydro-test water. There may be some associated leakage from this tank and it may not be in full compliance with environmental laws. (6) Houston, Texas (825 South Loop West, Houston, Texas): A preliminary Phase II investigation at the property revealed limited soil and groundwater contamination. The lessor accepted responsibility for the contamination and has submitted a Voluntary Cleanup Plan Application to the State of Texas. (7) Lakewood, NY (4477 Gleason Rd., Lakewood, NY): The previous owner, Columbia Gas, was bound by a Consent Decree to remedy certain environmental contamination at this facility. (8) Victoria, TX (1203 Industrial Park, Victoria, TX): A Phase I revealed several areas of contaminated soil at this facility. HCLP removed and disposed of such materials at a licensed disposal facility. (9) Limited hydrocarbon contamination exists around some of the compressors currently owned/operated by HCLP. The compressor packages and/or production equipment can impact environmental conditions either through air emissions and/or soil contamination. (10) Several of HCLP's operations generate hazardous wastes via parts washing vats, caustic vats, packaging, cleaning and/or paint operations. (11) HCLP may not be in full compliance with Environmental Laws at newly-acquired facilities. HCLP's practice is to evaluate and address non-compliance issues promptly after acquiring new properties or leases. SCHEDULE 8.3(n) AND 11.3(n): ADDITIONAL EXISTING LIENS HANOVER COMPRESSION INC. (n/k/a Hanover Compression Limited Partnership) 1. Liens in favor of Wells Fargo granted pursuant to the Wells Fargo Credit Agreement. 2. Hanover Compression Inc. ("HCI") granted Houston Pipe Line Company an option to repurchase all or a portion of the property that it sold to HCI pursuant to Purchase Agreement, dated as of September 29, 1997, between HCI and Houston Pipe Line Company. Under this Purchase Agreement, HCI cannot transfer the property prior to the date on which Houston Pipe Line Company's option right to repurchase may be exercised without its prior written consent. 3. HCI granted Houston Pipe Line Company an option to repurchase all or a portion of the property that it sold to HCI pursuant to Purchase Agreement, dated as of March 1, 1998, between HCI and Houston Pipe Line Company. Under this Purchase Agreement, HCI cannot transfer the property prior to the date on which Houston Pipe Line Company's option right to repurchase may be exercised without its prior written consent. 4. HCI granted Houston Pipe Line Company an option to repurchase all or a portion of the property that it sold to HCI pursuant to Purchase Agreement, dated as of June 24, 1999, between HCI and Houston Pipe Line Company. Under this Purchase Agreement, HCI cannot transfer the property prior to the date on which Houston Pipe Line Company's o option right to repurchase may be exercised without its prior written consent. 5. HCI granted Houston Pipe Line Company an option to repurchase all or a portion of the property that it sold to HCI pursuant to Purchase Agreement, dated as of March 31, 2000, between HCI and Houston Pipe Line Company. Under this Purchase Agreement, HCI cannot transfer the property prior to the date on which Houston Pipe Line Company's option right to repurchase may be exercised without its prior written consent. 6. Certain natural gas compression units are subject to purchase options in accordance with the terms of the respective leases pursuant to which HCI leases each such unit to third parties. HANOVER COMPRESSOR COMPANY (n/k/a Hanover Compression Limited Partnership) 1. True lease filing evidenced by Financing Statement No. 058574 filed with the Oklahoma County, Oklahoma Clerk listing GECC as secured party and the Hanover Compressor Company as debtor filed pursuant to the lease by Hanover Compressor Company of Gas Compressors from GECC. 2. True lease filing evidenced by Financing Statement No. 0004920 filed with the Oklahoma County, Oklahoma Clerk listing Joe Gregor, as secured party, Snap On Tool, as assignee, and Hanover Compressor Company as debtor against a PBC-55 Washer. 3. Lien evidenced by Financing Statement No. 97-00071781 filed with the Secretary of State of Texas listing Ikon Office Solutions as secured party and Hanover Compressor Company as debtor filed against one Sharp fax machine. 4. Lease evidenced by Financing Statement No. 98-103465 filed with the Secretary of State of Texas listing Ikon Office Solutions as secured party and Hanover Compressor Company as debtor filed against one Canon L9000. 5. True lease filing evidenced by Financing Statement No. 97-00085459 filed with the Secretary of State of Texas listing Associate Leasing, Inc. as secured party and Hanover Compressor Company as debtor filed against all Motorola equipment and all equipment leased by Associate Leasing, Inc. 6. Lease evidenced by Financing Statement No. 99-237802 filed with the Secretary of State of Texas listing General Electric Capital Corporation as secured party and Hanover Compressor Company as debtor filed against four Caterpillar gas compressors and one Waukesha gas compressor. 7. Lease evidenced by Financing Statement No. 99-218408 filed with the Secretary of State of Texas listing Minolta Business Systems as secured party and Hanover Compressor Company as debtor filed against three Minolta DI 350 Copiers and two Minolta DI 250 Copiers. 8. Lease evidenced by Financing Statement No. 99-225986 filed with the Secretary of State of Texas listing Minolta Business Systems as secured party and Hanover Compressor Company as debtor filed against one Minolta DI 620 Digital Copier. 9. Lease evidenced by Financing Statement No. 99-226584 filed with the Secretary of State of Texas listing Minolta Business Systems as secured party and Hanover Compressor Company as debtor filed against one Minolta CF 910 Color Copier, one Minolta Fiery X2E Controller. 10. Lease evidenced by Financing Statement No. 00-533200 filed with the Secretary of State listing Minolta Business Systems as secured party and Hanover Compressor Company as debtor filed against one Minolta DI 520 Copier, one Minolta DI 350 Copier. THE HANOVER COMPANY a/k/a HANOVER COMPRESSION INC. (n/k/a Hanover Compression Limited Partnership) 1. True lease filing evidenced by Financing Statement No. 98-258479 filed with the Secretary of State of Texas listing Minolta Business Systems, Inc. as secured party and The Hanover Company as debtor filed pursuant to the lease by The Hanover Company of equipment from Minolta. 2. True lease filing evidenced by Financing Statement No. 95-00055240 filed with the Secretary of State of Texas listing Pitney Bowes Credit Corp. as secured party and The Hanover Company as debtor filed pursuant to the lease by The Hanover Company of equipment from Pitney Bowes. 3. True lease filing evidenced by Financing Statement No. 96-00162832 filed with the Secretary of State of Texas listing Pitney Bowes Credit Corp. as secured party and The Hanover Company as debtor filed pursuant to the lease by The Hanover Company of equipment from Pitney Bowes. 4. Lien evidenced by Financing Statement No. 96-00012471 filed with the Secretary of State of Texas listing Global Services, Inc. as secured party and The Hanover Company as debtor filed against a Canon color copier. MAINTECH ENTERPRISES, INC. (n/k/a Hanover Maintech Limited Partnership). 1. Lien evidenced by Financing Statement No. 95-00096087 filed with the Secretary of State of Texas listing C. Jim Stewart & Stevenson, Inc. as secured party and Maintech Enterprises, Inc. ("MEI") as debtor filed against a forklift and an order-picker. 2. Lien evidenced by Financing Statement No. 95-00153342 filed with the Secretary of State of Texas listing C. Jim Stewart & Stevenson, Inc. as secured party and MEI as debtor filed against two lift trucks. 3. Lien evidenced by Financing Statement No. 95-00167108 filed with the Secretary of State of Texas listing Safeco Credit Company as secured party and MEI as debtor filed against a forklift. HANOVER MAINTECH, INC. (n/k/a Hanover Maintech Limited Partnership) 1. True lease filing evidenced by Financing Statement No. 96-0044340 filed with the Secretary of State of Texas listing Pitney Bowes Credit Corp. as secured party and Hanover Maintech, Inc. ("HMI") as debtor filed pursuant to the lease by HMI of equipment from Pitney Bowes. 2. True lease filing evidenced by Financing Statement No. 96-0061451 filed with the Secretary of State of Texas listing Pitney Bowes Credit Corp. as secured party and HMI as debtor filed pursuant to the lease by HMI of equipment from Pitney Bowes. 3. True lease filing evidenced by Financing Statement No. 95-00167108 filed with the Secretary of State of Texas listing Safeco Credit Company, Inc. d/b/a Safeline Leasing as secured party and HMI as debtor pursuant to the lease by HMI from Safeline Leasing. HANOVER/SMITH, INC. (n/k/a Hanover/Smith Limited Partnership) 1. Lien evidenced by Financing Statement No. 95-00105634 filed with the Secretary of State of Texas listing Southwestern Bell Telecommunications as secured party and Hanover/Smith, Inc. as debtor filed against a telecommunications system. EX-10.43 12 dex1043.txt SECOND AMENDMENT, DATED AS OF JULY 27, 2001, TO THE 2000B GUARANTEE EXHIBIT 10.43 EXECUTION COPY SECOND AMENDMENT SECOND AMENDMENT, dated as of July 27, 2001 (this "Amendment"), to (i) the Guarantee (the "2000B Guarantee"), as defined in the Participation Agreement, dated as of October 27, 2000 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "2000B Participation Agreement"), among Hanover Compression Limited Partnership (formerly known as Hanover Compression Inc, "HCC"), Hanover Equipment Trust 2000B, (the "2000B Lessor"), Bank Hapoalim B.M. and FBTC Leasing Corp., as investors, the lenders parties thereto (the "2000B Lenders") and The Chase Manhattan Bank, a New York banking corporation, as the administrative agent for the 2000B Lenders (the "Administrative Agent"), (ii) the Guarantee (the "2000A Guarantee"), as defined in the Participation Agreement, dated as of March 13, 2000 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "2000A Participation Agreement"), among HCC, Hanover Equipment Trust 2000A (the "2000A Lessor"), First Union National Bank and Scotiabanc Inc., as investors, the lenders parties thereto (the "2000A Lenders") and the Administrative Agent, as agent for the 2000A Lenders, (iii) the Guarantee (the "1999 Guarantee"), as defined in the Participation Agreement, dated as of June 15, 1999 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "1999 Participation Agreement"), among HCC, Hanover Equipment Trust 1999A (the "1999 Lessor"), Societe Generale Financial Corporation and FBTC Leasing Corp., as investors, the lenders parties thereto (the "1999 Lenders") and the Administrative Agent, as agent for the 1999 Lenders, (iv) the Guarantee (the "1998 Guarantee"), as defined in the Participation Agreement, dated as of July 22, 1998 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "1998 Participation Agreement"), among HCC, Hanover Equipment Trust 1998A (the "1998 Lessor"), Societe Generale Financial Corporation, as investor, the lenders parties thereto (the "1998 Lenders") and the Administrative Agent, as agent for the 1998 Lenders, and (v) the Credit Agreement (as the same may have been, amended, supplemented or otherwise modified from time to time, the "Senior Credit Agreement"), dated as of December 15, 1997, as amended and restated on March 13, 2000, among Hanover Compressor Company ("Holdings"), HCC, the Administrative Agent and the lenders parties thereto (the "Senior Credit Lenders"). The 2000B Participation Agreement, the 2000A Participation Agreement, the 1999 Participation Agreement and the 1998 Participation Agreement are collectively hereinafter referred to as the "Participation Agreements". The 2000B Guarantee, the 2000A Guarantee, the 1999 Guarantee and the 1998 Guarantee are collectively hereinafter referred to as the "Synthetic Guarantees". W I T N E S S E T H: WHEREAS, Holdings and HCC have requested that the Administrative Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement amend certain of the provisions of each of the Synthetic Guarantees and the Senior Credit Agreement; and WHEREAS, the Administrative Agent and the Required Lenders under each of the Synthetic Guarantees and the Senior Credit Agreement are agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; 2 NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: I. Defined Terms. As used in this Amendment, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, terms defined in any of the Participation Agreements, the Synthetic Guarantees and the Senior Credit Agreement and not defined herein are used herein as therein defined. II. Amendments to the Senior Credit Agreement, the Synthetic Guarantees and Annex A of the Participation Agreements. 1. Amendments to Subsection 1.1 of the Senior Credit Agreement. (a) Subsection 1.1 of the Senior Credit Agreement is hereby amended by adding the following defined terms in proper alphabetical order; "Consolidated Senior Indebtedness": at a particular date, as to any Person, Consolidated Indebtedness of such Person and its Subsidiaries other than (i) the aggregate principal amount of the 2001 Senior Subordinated Bridge Loans, (ii) subordinated guarantees of the 2001A Equipment Lease Securities, (iii) any New Subordinated Notes, (iv) any convertible notes of Holdings, (v) the TIDES Debentures (and any subordinated debt securities issued in connection with a structured equity financing similar to the TIDES) and (vi) any unsecured subordinated debt or any subordinated guarantees not included in clauses (i)-(v) above and otherwise permitted herein. "Joint Venture": any Person in which Holdings or one or more Subsidiaries own equity interests representing 1% or more but 50% or less of the aggregate equity interests of such Person. "New Convertible Notes": convertible notes to be offered and issued by Holdings in an aggregate principal amount not to exceed $150,000,000 which will not have any scheduled principal payments prior to 2008 and which will have terms and conditions either (i) at least as favorable to the Lenders, Holdings and HCC as are contained in the 2008 Notes or (ii) approved by the Required Lenders. The proceeds of the New Convertible Notes will be used first to repay the Seller Note, second to pay fees and expenses of issuance of the New Convertible Notes and third, for general corporate purposes. "New Subordinated Notes": notes to be offered and issued by Holdings or HCC in an aggregate principal amount not to exceed $320,000,000 in a Rule 144A or other private placement on terms and conditions then customary for high-yield subordinated debt securities issued in a public offering or a Rule 144A offering. "POC": the collective reference to Production Operators Corporation, a Delaware corporation, and its direct and indirect subsidiaries and in joint ventures in which it directly or indirectly owns an interest, which are being acquired by Holdings and its Subsidiaries. "POC Acquisition": the acquisition by HCC of the capital stock of POC in accordance with subsection 8.10(k). 3 "Seller Note": as defined in subsection 8.2(k). "2001 Senior Subordinated Bridge Loans": as defined in subsection 8.2(l). "2001A Equipment Lease Securities": as defined in the definition of "2001A Equipment Lease Transaction". "2001A Equipment Lease Transaction": the synthetic off-balance sheet lease financing to be consummated in 2001 consisting of the following: (i) natural gas compressors owned by POC and/or by the 1998 Lessor and presently leased to HCC having an aggregate value not to exceed $600,000,000 will be sold to a Lessor; (ii) HCC and/or POC will lease such natural gas compressors (and such lease will be deemed to be an Equipment Lease); (iii) the Lessor will enter into a participation agreement having terms and conditions satisfactory to the Administrative Agent with respect to the financing of its acquisition of such natural gas compressors (and such participation agreement will be deemed to be an Equipment Lease Participation Agreement); (iv) a portion (not to exceed $582,000,000) of the funding for the acquisition (representing up to 97% of the value of such compressors) will be financed by the issuance by the Lessor of its senior debt securities in a public offering or in a Rule 144A or other private placement (the "2001A Equipment Lease Securities") on terms and conditions satisfactory to the Administrative Agent (and such securities and the related Indenture will be deemed to be an Equipment Lease Credit Agreement); and (v) Holdings, HCC and their Subsidiaries that are Guarantors may guarantee the obligations of the Lessee under the Lease and certain other obligations in connection with the transaction described herein on terms and conditions satisfactory to the Administrative Agent (and such guarantee shall be deemed to be an Equipment Guarantee) (and the 2001A Equipment Lease Transaction will be deemed to be an Equipment Lease Transaction). "Unrestricted Subsidiary": (i) any Subsidiary of HCC that exists on July 27, 2001 and is so designated as an Unrestricted Subsidiary by HCC in writing to the Administrative Agent, (ii) any Subsidiary of HCC that at the time of determination shall be an Unrestricted Subsidiary (as designated by the Board of Directors of HCC, as provided below), and (iii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of HCC (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all of the following conditions apply and continue to apply following such designation: (a) neither HCC nor any of its Subsidiaries (other than another Unrestricted Subsidiary) provides credit support for Indebtedness or other obligations of such Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness or obligations) except as permitted by subsection 8.10 and (b) any Investment by HCC or the Restricted Subsidiaries in such Unrestricted Subsidiary made as a result of designating such subsidiary an Unrestricted Subsidiary shall not violate the provisions described under subsection 8.10 and such Unrestricted Subsidiary is not party to any agreement, contract, arrangement or understanding at such time with HCC or any other Subsidiary (other than another Unrestricted Subsidiary) of HCC unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to HCC or such other Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of HCC or, in the event such condition is not satisfied, the value of such agreement, contract, arrangement or understanding to such Unrestricted Subsidiary shall be deemed an Investment. Any such designation by the Board of Directors shall be 4 evidenced to the Administrative Agent by filing with the Administrative Agent a resolution of the Board of Directors of HCC giving effect to such designation and an officer's certificate certifying that such designation complies with the foregoing conditions and any Investment by HCC in such Unrestricted Subsidiary shall be deemed the making of an Investment on the date of designation in an amount equal to the greater of (1) the net book value of such Investment or (2) the fair market value of such Investment as determined in good faith by the Board of Directors (and evidenced by a resolution of the Board of Directors). The Board of Directors may designate any Unrestricted Subsidiary as a Subsidiary; provided (i) that, if such Unrestricted Subsidiary has any Indebtedness, immediately after giving effect to such designation, no Default or Event of Default would result, and (ii) that all Indebtedness of such Subsidiary shall be deemed to be incurred on the date such Unrestricted Subsidiary becomes a Subsidiary. Unrestricted Subsidiaries shall be deemed to be Affiliates of Holdings, HCC and their Subsidiaries. Any Subsidiary of an Unrestricted Subsidiary shall also be deemed to be an Unrestricted Subsidiary. Any Subsidiary of Holdings that is not an Unrestricted Subsidiary shall be a "Restricted Subsidiary". (b) Subsection 1.1 of the Senior Credit Agreement is hereby amended by deleting therefrom the definitions of the following defined terms and substituting in place thereof the following new definitions: "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 stated 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 or increased from time to time in accordance with the terms of this Agreement; collectively, as to all of the Lenders, the "Commitments". "L/C Commitment": $75,000,000. 2. Amendment to Subsection 1.1 of the Senior Credit Agreement and Annex A of the Participation Agreements. (a) Subsection 1.1 of the Senior Credit Agreement and Annex A of each of the Participation Agreements is hereby amended by deleting therefrom the following defined terms and substituting in place thereof the following new definitions: "Consolidated EBITDA": for any period, with respect to any Person, the sum of, without duplication, (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) plus (d) cash dividends received by Holdings or any Restricted Subsidiary from any Joint Venture or Unrestricted Subsidiary minus (e) 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); provided that, if during such period such Person shall have made a Material Acquisition, Consolidated EBITDA for such period shall be calculated after giving pro forma effect to such Material Acquisition as if such Material Acquisition had occurred on the first day of such period; provided further that, the foregoing proviso shall have effect only if the 5 Agent has been furnished with unaudited, or, if available, audited, consolidated financial statements of the acquired property for such period, such financial statements to include the balance sheet and statements of income and cash flows reflecting the historical performance of the acquired property for such period to the extent applicable. As used in this definition, "Material Acquisition" means any acquisition of property or series of related acquisitions of property that (a) constitutes assets or constitutes all or substantially all of the equity interests of a Person and (b) involves the payment of consideration of at least $15,000,000. In calculating Consolidated EBITDA, the financial performance of Joint Ventures and Unrestricted Subsidiaries shall be disregarded except as provided in clause (d) above. "Consolidated Indebtedness": at a particular date, as to any Person, the sum of (without duplication) (a) all Indebtedness of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP, excluding (i) Indebtedness in respect of Financing Leases, and (ii) the Seller Note plus the principal amount of any additional notes issued in payment of interest thereon plus (b)(i) Guarantee Obligations of Holdings and its Subsidiaries in respect of obligations of Joint Ventures and Unrestricted Subsidiaries, (ii) the Equipment Lease Tranche A Loans and (iii) the Tranche A Portion of the 2001A Equipment Lease Transaction. "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 or 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 (i) all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of Holdings and (ii) all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall exclude Unrestricted Subsidiaries unless Unrestricted Subsidiaries are expressly included. "Tranche A Portion of the 2001A Equipment Lease Transaction" shall mean the product of (i) the "Tranche A Percentage" determined for purposes of, and prior to closing of, the 2001A Equipment Lease Transaction (which is currently expected to be approximately 82-87%) and (ii) the aggregate outstanding principal amount of the 2001A Equipment Lease Securities plus the aggregate outstanding principal amount of the equity financing for the 2001A Equipment Lease Transaction. (b) Subsection 1.1 of the Senior Credit Agreement and Annex A of each of the Participation Agreements is hereby further amended by adding the following new sentence at the end of the definition for "Indebtedness": For purposes of clarification, the obligations with respect to the Equipment Leases shall not be deemed to constitute Indebtedness under the preceding clause (d) solely by virtue of the grant by HCC thereunder of a Lien and its interest in the Equipment subject to such Equipment Lease to secure HCC's and the Guarantor's obligations in connection therewith. 6 3. Amendments to Subsection 1(b) of each of the Synthetic Guarantees. Subsection 1(b) of each of the Synthetic Guarantees is hereby amended by adding the following defined terms in proper alphabetical order: "Consolidated Senior Indebtedness": at a particular date, as to any Person, Consolidated Indebtedness of such Person and its Subsidiaries other than (i) the aggregate principal amount of the 2001 Senior Subordinated Bridge Loans, (ii) subordinated guarantees of the 2001A Equipment Lease Securities, (iii) any New Subordinated Notes, (iv) any convertible notes of Holdings, (v) the TIDES Debentures (and any subordinated debt securities issued in connection with a structured equity financing similar to the TIDES) and (vi) any unsecured subordinated debt or any subordinated guarantees not included in clauses (i)-(v) above and otherwise permitted herein. "Guarantee Obligations": shall have the meaning set forth in subsection 1.1 of the Corporate Credit Agreement. "Joint Venture": any Person in which Holdings or one or more Subsidiaries own equity interests representing 1% or more but 50% or less of the aggregate equity interests of such Person. "New Convertible Notes": convertible notes to be offered and issued by Holdings in an aggregate principal amount not to exceed $150,000,000 which will not have any scheduled principal payments prior to 2008 and which will have terms and conditions either (i) at least as favorable to the Lenders, Holdings and HCC as are contained in the 2008 Notes or (ii) approved by the Required Lenders. The proceeds of the New Convertible Notes will be used first, to repay the Seller Note, second to pay fees and expenses of issuance of the New Convertible Notes and third, for general corporate purposes. "New Subordinated Notes": notes to be offered and issued by Holdings or HCC in an aggregate principal amount not to exceed $320,000,000 in a Rule 144A or other private placement on terms and conditions then customary for high-yield subordinated debt securities issued in a public offering or a Rule 144A offering. "POC": the collective reference to Production Operators Corporation, a Delaware corporation, and its direct and indirect subsidiaries and joint ventures in which it directly or indirectly owns an interest, which are being acquired by Holdings and its Subsidiaries. "POC Acquisition": the acquisition by HCC of the capital stock of POC in accordance with subsection 11.10(k). "Seller Note": as defined in subsection 11.2(k). "2001 Senior Subordinated Bridge Loans": as defined in subsection 11.2(l) "2001A Equipment Lease Securities": as defined in the definition of "2001A Equipment Lease Transaction". 7 "2001A Equipment Lease Transaction": the synthetic off-balance sheet lease financing to be consummated in 2001 consisting of the following; (i) natural gas compressors owned by POC and/or by the 1998 Lessor and presently leased to HCC having an aggregate value not to exceed $600,000,000 will be sold to a Lessor, (ii) HCC and/or POC will lease such natural gas compressors (and such lease will be deemed to be an Equipment Lease); (iii) the Lessor will enter into a participation agreement having terms and conditions satisfactory to the Administrative Agent with respect to the financing of its acquisition of such natural gas compressors (and such participation agreement will be deemed to be an Equipment Lease Participation Agreement); (iv) a portion (not to exceed $582,000,000) of the funding for the acquisition (representing up to 97% of the value of such compressors) will be financed by the issuance by the Lessor of its senior debt securities in a public offering or in a Rule 144A or other private placement (the "2001A Equipment Lease Securities") on terms and conditions satisfactory to the Administrative Agent (and such securities and the related Indenture will be deemed to be an Equipment Lease Credit Agreement); and (v) Holdings, HCC and their Subsidiaries that are Guarantors may guarantee the obligations of the Lessee under the Lease and certain other obligations in connection with the transaction described herein on terms and conditions satisfactory to the Administrative Agent (and such guarantee shall be deemed to be an Equipment Guarantee) (and the 2001A Equipment Lease Transaction will be deemed to be an Equipment Lease Transaction). "Unrestricted Subsidiary": (i) any Subsidiary of HCC that exists on July 27, 2001 and is so designated as an Unrestricted Subsidiary by HCC in writing to the Administrative Agent, (ii) any Subsidiary of HCC that at the time of determination shall be an Unrestricted Subsidiary (as designated by the Board of Directors of HCC, as provided below), and (iii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of HCC (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all of the following conditions apply and continue to apply following such designation: (a) neither HCC nor any of its Subsidiaries (other than another Unrestricted Subsidiary) provides credit support for Indebtedness or other obligations of such Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness or obligations) except as permitted by subsection 11.10 and (b) any Investment by HCC or the Restricted Subsidiaries in such Unrestricted Subsidiary made as a result of designating such subsidiary an Unrestricted Subsidiary shall not violate the provisions described under subsection 11.10 and such Unrestricted Subsidiary is not party to any agreement, contract, arrangement or understanding at such time with HCC or any other Subsidiary (other than another Unrestricted Subsidiary) of HCC unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to HCC or such other Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of HCC or, in the event such condition is not satisfied, the value of such agreement, contract, arrangement or understanding to such Unrestricted Subsidiary shall be deemed an Investment. Any such designation by the Board of Directors shall be evidenced to the Administrative Agent by filing with the Administrative Agent a resolution of the Board of Directors of HCC giving effect to such designation and an officer's certificate certifying that such designation complies with the foregoing conditions and any Investment by HCC in such Unrestricted Subsidiary shall be deemed the making of an Investment on the date of designation in an amount equal to the greater of (1) the net book value of such Investment or (2) the fair market value of such 8 Investment as determined in good faith by the Board of Directors (and evidenced by a resolution of the Board of Directors). The Board of Directors may designate any Unrestricted Subsidiary as a Subsidiary; provided (i) that, if such Unrestricted Subsidiary has any Indebtedness, immediately after giving effect to such designation, no Default or Event of Default would result, and (ii) that all Indebtedness of such Subsidiary shall be deemed to be incurred on the date such Unrestricted Subsidiary becomes a Subsidiary. Unrestricted Subsidiaries shall be deemed to be Affiliates of Holdings, HCC and their Subsidiaries. Any Subsidiary of an Unrestricted Subsidiary shall also be deemed to be an Unrestricted Subsidiary. Any Subsidiary of Holdings that is not an Unrestricted Subsidiary shall be a "Restricted Subsidiary". 4. Amendment to Section 2 of the Senior Credit Agreement. Section 2 of the Senior Credit Agreement is amended by adding the following new subsection 2.3: 2.3 Increase of Commitments. (a) HCC shall have the right to increase the Commitments from time to time pursuant to this subsection 2.3 by up to $200,000,000 in the aggregate as long as no Default or Event of Default has occurred and is continuing. In the event that HCC wishes to increase the aggregate Commitments at any time, it shall notify the Administrative Agent in writing of the amount (the "Offered Increase Amount") of such proposed increase (such notice, a "Commitment Increase Notice"); provided that the aggregate amount of any such increase in Commitments shall be at least $10,000,000. HCC may, at its election, (i) offer one or more of the Lenders the opportunity to participate in all or a portion of the Offered Increase Amount pursuant to paragraph (c) below and/or (ii) with the consent of the Administrative Agent (which consent shall not be unreasonably withheld), offer one or more additional banks, financial institutions or other entities the opportunity to participate in all or a portion of the Offered Increase Amount pursuant to paragraph (b) below. Each Commitment Increase Notice shall specify which Lenders and/or banks, financial institutions or other entities HCC desires to participate in such Commitment increase. HCC or, if requested by HCC, the Administrative Agent, will notify such Lenders and/or banks, financial institutions or other entities of such offer. (b) Any additional bank, financial institution or other entity which HCC selects to offer participation in the increased Commitments and which elects to become a party to this Agreement and provide a Commitment in an amount so offered and accepted by it pursuant to subsection 2.3(a)(ii) shall execute a New Lender Supplement (in the form specified by the Administrative Agent) with HCC and the Administrative Agent, whereupon such bank, financial institution or other entity (herein called a "New Lender") shall become a Lender for all purposes and to the same extent as if originally a party hereto and shall be bound by and entitled to the benefits of this Agreement, and Schedule 1.1A shall be deemed to be amended to add the name and Commitment of such New Lender, provided that the Commitment of any such new Lender shall be in an amount not less than $5,000,000, provided further that on the effective date of such New Lender Supplement, there shall be no outstanding Eurodollar Loans hereunder or, if any Eurodollar Loans would be outstanding on the effective date of any such New Lender 9 Supplement, HCC shall either (x) convert such Eurodollar Loans to ABR Loans, or (y) prepay, in accordance with the provisions of Section 3,4, such Eurodollar Loans immediately prior to such New Lender Supplement becoming effective (subject, in either case, to the payment provisions hereof). (c) Any Lender which accepts an offer to it by HCC to increase its Commitment pursuant to subsection 2.3(a)(ii) shall, in each case, execute a Commitment Increase Supplement (in the form specified by the Administrative Agent) with HCC and the Administrative Agent whereupon such Lender shall be bound by and entitled to the benefits of this Agreement with respect to the full amount of its Commitment as so increased, and Schedule 1.1A shall be deemed to be amended to so increase the Commitment of such Lender. (d) Notwithstanding anything to the contrary in this subsection 2.3(i) in no event shall any transaction effected pursuant to this subsection 2.3 cause the aggregate Commitments hereunder to exceed $400,000,000 and (ii) no Lender shall have any obligation to increase its Commitment unless it agrees to do so in its sole discretion. 5. Amendment to Subsection 3.13 of the Senior Credit Agreement. Subsection 3.13 of the Senior Credit Agreement is hereby amendment by inserting the phrase "conversion of or" immediately before the phrase "the making of" in clause (d). 6. Amendment to Subsection 4.1 of the Senior Credit Agreement. Subsection 4.1 of the Senior Credit Agreement is hereby amended by deleting paragraph (b)(ii) of such subsection in its entirety and inserting in lieu thereof the following: (ii) expire at or prior to the close of business on the date that is five Business Days prior to the Termination Date. 7. Amendment to Subsection 5.1 of the Senior Credit Agreement and Subsection 9.1 of the 2000B Guarantee. (a) Subsection 5.1 of the Senior Credit Agreement is hereby amended by deleting such subsection 5.1 in its entirety and inserting in lieu thereof the following: 5.1 Financial Condition. (a) The unaudited pro forma consolidated balance sheet of Holdings and its consolidated Subsidiaries as at March 31, 2001 (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 POC Acquisition. The Pro Forma Balance Sheet has been prepared based on the best information available to Holdings as of the date of delivery thereof, and presents fairly in all material respects on a pro forma basis the estimated financial position of Holdings and its consolidated Subsidiaries as at March 31, 2001, assuming that the events specified in the preceding sentence had actually occurred at such date. (b) The audited consolidated balance sheets of HCC and Production Operators Corporation as at December 31, 1999 and December 31, 2000, and 10 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 conditions of HCC and Production Operators Corporation, respectively, as at such date, and the consolidated results of their respective operations and their respective consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of HCC and Production Operators Corporation as at March 31, 2001, and the related unaudited consolidated statements of income and cash flows for the three-month period ended on such date, present fairly in all material respects the consolidated financial conditions of HCC and Production Operators Corporation, respectively, as at such date, and the consolidated results of their respective operations and their respective consolidated cash flows for the three-month period 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 April 1, 2001 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). Notwithstanding the foregoing, all representations and warranties in this subsection 5.1 with respect to POC and its financial statements are made to the knowledge of HCC. (b) Subsection 9.1 of the 2000B Guarantee is hereby amended by deleting such Subsection 9.1 in its entirety and inserting in lieu thereof the following: 9.1 Financial Condition. (a) The unaudited pro forma consolidated balance sheet of Holdings and its consolidated Subsidiaries as at March 31, 2001 (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 POC Acquisition. The Pro Forma Balance Sheet has been prepared based on the best information available to Holdings as of the date of delivery thereof, and presents fairly in all material respects on a pro forma basis the estimated financial position of Holdings and its consolidated Subsidiaries as at March 31, 2001, assuming that the events specified in the preceding sentence had actually occurred at such date. (b) The audited consolidated balance sheets of Holdings and Production Operators Corporation as at December 31, 1999 and December 31, 2000, 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 11 unqualified report from PricewaterhouseCoopers LLP, present fairly in all material respects the consolidated financial conditions of Holdings and Production Operators Corporation, respectively, as at such date, and the consolidated results of their respective operations and their respective consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of Holdings and Production Operators Corporation as at March 31, 2001, and the related unaudited consolidated statements of income and cash flows for the three-month period ended on such date, present fairly in all material respects the consolidated financial conditions of Holdings and Production Operators Corporation, respectively, as at such date, and the consolidated results of their respective operations and their respective consolidated cash flows for the three-month period 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 April 1, 2001 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). Notwithstanding the foregoing, all representations and warranties in this subsection 9.1 with respect to Production Operators Corporation and its financial statements are made to the knowledge of Holdings. 8. Amendment to Subsection 5.2 of the Senior Credit Agreement. Subsection 5.2 of the Senior Credit Agreement is hereby amended by deleting the phrase "September 30, 1999" where it appears in the first sentence and inserting in lieu thereof the phrase "March 31, 2001". 9. Amendment to Subsection 9.2 of the 2000B Guarantee. Subsection 9.2 of the 2000B Guarantee is hereby amended by deleting the phrase "June 30, 2000" where it appears in the first sentence and inserting in lieu thereof the phrase "March 31, 2001". 10. Amendment to Subsection 5.14 of the Senior Credit Agreement and Subsection 9.14 of each of the Synthetic Guarantees. (a) Subsection 5.14 of the Senior Credit Agreement is hereby amended by deleting the phrase "As of the Closing Date" and inserting in lieu thereof the phrase "Immediately after giving effect to the POC Acquisition,". (b) Subsection 9.14 of each of the Synthetic Guarantees is hereby amended by deleting the phrase "As of the Initial Closing Date" and inserting in lieu thereof the phrase "Immediately after giving effect to the POC Acquisition,". 11. Deletion of Subsection 5.18 of the Senior Credit Agreement. Subsection 5.18 of the Senior Credit Agreement is hereby deleted its entirety and the following is substituted therefore: "5.18 [INTENTIONALLY OMITTED]". 12 12. Amendment of Subsection 5.19 of the Senior Credit Agreement and Subsection 9.18 of the 2000B Guarantee. (a) Subsection 5.19 of the Senior Credit Agreement is hereby amended by adding the following at the end thereof: The obligations of Holdings under the Holdings Guarantee constitute "Senior Indebtedness" or "Senior Debt" under the (i) if applicable, terms of the Seller Note, (ii) if applicable, under the documentation relating to the 2001 Senior Subordinated Bridge Loans or the New Subordinated Notes and (iii) if applicable, the documentation for the 2001A Equipment Lease Transaction. The Obligations of HCC constitute "Senior Indebtedness" or "Guarantor Senior Indebtedness" (i) if applicable, under the documentation relating to the 2001 Senior Subordinated Bridge Loans or the New Subordinated Notes and (ii) if applicable, under the documentation for the 2001A Equipment Lease Transaction. The obligations of each Subsidiary under the Guarantees constitute "Guarantor Senior Indebtedness" under the documentation relating to the 2001A Equipment Lease Transaction (if applicable), under the documentation relating to the 2001A Senior Subordinated Bridge Loans (if applicable), and under the documentation relating to the New Subordinated Notes (if applicable). (b) Subsection 9.18 of the 2000B Guarantee is hereby amended by adding the following at the end thereof: The obligations of Holdings under the Guarantee constitute "Senior Indebtedness" or "Senior Debt" under the (i) if applicable, terms of the Seller Note, (ii) if applicable, under the documentation relating to the 2001 Senior Subordinated Bridge Loans or the New Subordinated Notes and (iii) if applicable, the documentation for the 2001A Equipment Lease Transaction. The obligations of HCC under the Guarantee constitute "Senior Indebtedness" or "Guarantor Senior Indebtedness" (i) if applicable, under the documentation relating to the 2001 Senior Subordinated Bridge Loans or the New Subordinated Notes and (ii) if applicable, under the documentation for the 2001A Equipment Lease Transaction. The obligations of each Subsidiary under the Guarantee constitute "Senior Indebtedness" or "Guarantor Senior Indebtedness" under the documentation relating to the 2001A Equipment Lease Transaction (if applicable), the documentation relating to the 2001A Senior Subordinated Bridge Loans (if applicable) and the documentation relating to the New Subordinated Notes (if applicable). 13. Amendment of Subsection 8.1 of the Senior Credit Agreement and Subsection 11.1 of each of the Synthetic Guarantees. (a) Subsection 8.1 of the Senior Credit Agreement is hereby amended by inserting after paragraph (e) the following new paragraph: (f) Consolidated Senior Indebtedness to Consolidated EBITDA. Permit the ratio of Consolidated Senior Indebtedness to Consolidated EBITDA of Holdings for the four consecutive fiscal quarters of Holdings 13 most recently ended ("Consolidated Senior Indebtedness Ratio") to be greater than 3.0 to 1.0. (b) Subsection 11.1 of each of the Synthetic Guarantees is hereby amended by inserting after paragraph (e) the following new paragraph: (f) Consolidated Senior Indebtedness to Consolidated EBITDA. Permit the ratio of Consolidated Senior Indebtedness to Consolidated EBITDA of Holdings for the four consecutive fiscal quarters of Holdings most recently ended ("Consolidated Senior Indebtedness Ratio") to be greater than 3.0 to 1.0. 14. Amendment of Subsection 8.1(c) of the Senior Credit Agreement and Subsection 11.1(c) of each of the Synthetic Guarantees. (a) Subsection 8.1(c) of the Senior Credit Agreement is hereby amended by deleting such subsection 8.1(c) in its entirety and inserting in lieu thereof the following: (c) Consolidated Senior Indebtedness to Consolidated Adjusted EBITDA. Permit the ratio of Consolidated Senior Indebtedness of Holdings to Consolidated Adjusted EBITDA for the four consecutive fiscal quarters of Holdings most recently ended to be greater than 4.0 to 1.0. (b) Subsection 11.1(c) of each of the Synthetic Guarantees is hereby amended by deleting such Subsection 11.1(c) in its entirety and inserting in lieu thereof the following: (c) Consolidated Senior Indebtedness to Consolidated Adjusted EBITDA. Permit the ratio of Consolidated Senior Indebtedness of Holdings to Consolidated Adjusted EBITDA for the four consecutive fiscal quarters of Holdings most recently ended to be greater than 4.0 to 1.0. 15. Amendment of Subsection 8.1(d) of the Senior Credit Agreement and Subsection 11.1(d) of each of the Synthetic Guarantees. Each of subsection 8.l(d) of the Senior Credit Agreement and subsection 11.1(d) of each of the Synthetic Guarantees is hereby amended by (i) deleting the number "4.0" where it appears in such subsection 8.l(d) of the Senior Credit Agreement and subsection 11.1(c) and (ii) inserting in lieu thereof the number "4.5". 16. Amendment of Subsection 8.2 of the Senior Credit Agreement and Subsection 11.2 of each of the Synthetic Guarantees. (a)(i) Subsection 8.2 of the Senior Credit Agreement is hereby amended by (i) deleting from paragraph (c) the phrase "Closing Date" and substituting therefor the phrase "date of consummation of the POC Acquisition" and (ii) subsection 11.2 of each of the Synthetic Guarantees is hereby amended by (i) deleting from paragraph (c) the phrase "Initial Closing Date" and substituting therefor the phrase "date of consummation of the POC Acquisition". (b) Each of subsection 8.2 of the Senior Credit Agreement and subsection 11.2 of each of the Synthetic Guarantees is hereby further amended by deleting paragraph (d) in its entirety therefrom and substituting in place thereof the following: 14 (d) [INTENTIONALLY OMITTED]; (c)(i) Subsection 8.2 of the Senior Credit Agreement is hereby further amended by deleting paragraph (k) in its entirety and inserting the following new paragraphs: (k) Indebtedness of Holdings evidenced by a subordinated promissory note issued by Holdings in a principal amount not to exceed $150,000,000 plus the principal amount of any additional notes issued in payment of interest thereon (plus, in each case, the amount of all accrued and unpaid interest thereon which is added to the principal amount thereof) in connection with the POC Acquisition provided that the terms and conditions thereof (including interest, payment dates, covenants, defaults and subordination) are substantially similar to those set forth on Schedule I and such note is unsecured and unguaranteed (all such notes collectively, the "Seller Note"); (l) Indebtedness of Holdings in respect of senior subordinated bridge loans (including Indebtedness evidenced by any exchange notes issued in exchange therefor, the "2001 Senior Subordinated Bridge Loans") in an aggregate principal amount not to exceed $320,000,000 incurred in connection with the POC Acquisition provided that the terms and conditions thereof are substantially similar to those set forth on Schedule II, which Indebtedness will be repaid on the earlier of the consummation of the 2001A Equipment Lease Transaction and the issuance of the New Subordinated Notes; (m) Indebtedness in respect of New Convertible Notes in an aggregate amount not to exceed $150,000,000; provided that the proceeds of such Indebtedness are used first, to repay the Seller Note, second, to pay fees and expenses of issuance of the New Convertible Notes and third, for general corporate purposes; and provided, further, the New Convertible Notes may be issued only if the Seller Note has been or is concurrently being issued; (n) if the 2001A Equipment Lease Financing Transaction is not consummated, Indebtedness of Holdings or HCC in respect of New Subordinated Notes, if any; (o) Indebtedness in respect of the increased Commitments permitted by subsection 2.3 of this Agreement and Indebtedness consisting of additional unsecured credit facilities entered into by HCC, provided that the aggregate principal amount of Indebtedness permitted by this paragraph (o) shall not exceed $200,000,000; (p) Guarantee Obligations permitted by subsection 8.4; and (q) unsecured Indebtedness not otherwise permitted by clauses (a)-(p) above not exceeding $100,000,000 in the aggregate at any time outstanding. 15 (ii) Subsection 11.2 of each of the Synthetic Guarantees is hereby further amended by deleting paragraph (k) in its entirety and inserting the following new paragraphs: (k) Indebtedness of Holdings evidenced by a subordinated promissory note issued by Holdings in a principal amount not to exceed $150,000,000 plus the principal amount of any additional notes issued in payment of interest thereon (plus, in each case, the amount of all accrued and unpaid interest thereon which is added to the principal amount thereof) in connection with the POC Acquisition provided that the terms and conditions thereof (including interest, payment dates, covenants, defaults and subordination) are substantially similar to those set forth on Schedule I and such note is unsecured and unguaranteed (all such notes collectively, the "Seller Note"); (l) Indebtedness of Holdings in respect of senior subordinated bridge loans (including Indebtedness evidenced by any exchange notes issued in exchange therefor, the "2001 Senior Subordinated Bridge Loans") in an aggregate principal amount not to exceed $320,000,000 incurred in connection with the POC Acquisition provided that the terms and conditions thereof are substantially similar to those set forth on Schedule II, which Indebtedness will be repaid on the earlier of the consummation of the 2001A Equipment Lease Transaction and the issuance of the New Subordinated Notes; (m) Indebtedness in respect of New Convertible Notes in an aggregate amount not to exceed $150,000,000; provided that the proceeds of such Indebtedness are used first, to repay the Seller Note, second, to pay fees and expenses of issuance of the New Convertible Notes and third, for general corporate purposes; and provided, further, the New Convertible Notes may be issued only if the Seller Note has been or is concurrently being issued; (n) if the 2001A Equipment Lease Financing Transaction is not consummated, Indebtedness of Holdings or HCC in respect of New Subordinated Notes, if any; (o) Indebtedness in respect of the increased Commitments permitted by subsection 2.3 of this Agreement and Indebtedness consisting of additional unsecured credit facilities entered into by HCC, provided that the aggregate principal amount of Indebtedness permitted by this paragraph (o) shall not exceed $200,000,000; (p) Guarantee Obligations permitted by subsection 11.4; and (q) unsecured Indebtedness not otherwise permitted by clauses (a)-(p) above not exceeding $100,000,000 in the aggregate at any time outstanding. 16 17. Amendment of Subsection 8.3 of the Senior Credit Agreement and Subsection 11.3 of each of the Synthetic Guarantees. (a) Subsection 8.3 of the Senior Credit Agreement is hereby amended by (i) deleting the "and" at then end of paragraph (t),(ii) deleting the period from the end of paragraph (u) and substituting therefore the phrase "; "and" and (iii) inserting the following paragraph (v): (v) Liens on the property or assets of POC securing Indebtedness permitted by subsection 8.2 and Guarantee Obligations permitted by subsection 8.4(j), provided that (i) such Liens existed at the time POC became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of POC after the time POC becomes a Subsidiary, and (iii) the amount of Indebtedness, Guarantee Obligations and other obligations secured thereby is not increased. (b) Subsection 11.3 of each of the Synthetic Guarantees is hereby amended by (i) deleting the "and" at then end of paragraph (t), (ii) deleting the period from the end of paragraph (u) and substituting therefore the phrase "; and" and (iii) inserting the following paragraph (v): (v) Liens on the property or assets of POC securing Indebtedness permitted by subsection 11.2 and Guarantee Obligations permitted by subsection 11.4(j), provided that (i) such Liens existed at the time POC became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of POC after the time POC becomes a Subsidiary, and (iii) the amount of Indebtedness, Guarantee Obligations and other obligations secured thereby is not increased. 18. Amendment of Subsection 8.4 of the Senior Credit Agreement and Subsection 11.4 of each of the Synthetic Guarantees. (i) Subsection 8.4 of the Senior Credit Agreement is hereby amended by (i) deleting the word "and" where it appears at the end of subsection 8.4(g); (ii) replacing the period at the end of subsection 8.4(h) with a semicolon; and (iii) inserting the following new paragraphs immediately following paragraph (h): (i) senior subordinated Guarantee Obligations of Holdings and its Subsidiaries which are guarantors of the Obligations in respect of the 2001 Senior Subordinated Bridge Loans and the New Subordinated Notes; (j) up to $70,000,000 in the aggregate of existing Guarantee Obligations of POC and listed on Schedule 8.4, provided that such Guarantee Obligations existed at the time POC became a Subsidiary and were not created in anticipation thereof; (k) Guarantee Obligations of HCC and its Subsidiaries in respect of the obligations of POC listed on Schedule 8.4, provided that the aggregate principal amount of such obligations for which HCC and its Subsidiaries shall be liable shall not exceed $70,000,000; 17 (l) Guarantee Obligations of Holdings and its Subsidiaries, which are guarantors of the Obligations, in respect of the 2001A Equipment Lease Transaction; provided that, (i) Guarantee Obligations in respect of the 2001A Equipment Lease Securities (and related obligations) shall be subordinated in right of payment to other Indebtedness and Guarantee Obligations of the respective Loan Parties, including Guarantee Obligations under the other Equipment Guarantees and (ii) the proceeds of the 2001A Equipment Lease Transaction are used to pay the purchase price for POC, to pay obligations under and in connection with the 1998 Lease, to repay the 2001A Senior Subordinated Bridge Loans (or, if applicable, the New Subordinated Notes) and to pay other Indebtedness of HCC and its subsidiaries including costs in connection with the POC Acquisition and the 2001A Equipment Lease Transaction; (m) Guarantee Obligations of Holdings and its Subsidiaries which are guarantors of the Obligations in respect of the Indebtedness permitted by subsection 8.2(o) of this Agreement; and (n) senior subordinated Guarantee Obligations of Holdings and its Subsidiaries which are guarantors of the Obligations in respect of New Subordinated Notes, if any. (ii) Subsection 11.4 of each of the Synthetic Guarantees is hereby amended by (i) deleting the word "and" where it appears at the end of subsection 11.4(g); (ii) replacing the period at the end of subsection 11.4(h) with a semicolon; and (iii) inserting the following new paragraphs immediately following paragraph (h): (i) senior subordinated Guarantee Obligations of Holdings and its Subsidiaries which are guarantors of the Obligations in respect of the 2001 Senior Subordinated Bridge Loans and the New Subordinated Notes; (j) up to $70,000,000 in the aggregate of existing Guarantee Obligations of POC and listed on Schedule 11.4, provided that such Guarantee Obligations existed at the time POC became a Subsidiary and were not created in anticipation thereof; (k) Guarantee Obligations of HCC and its Subsidiaries in respect of the obligations of POC listed on Schedule 11.4, provided that the aggregate principal amount of such obligations for which HCC and its Subsidiaries shall be liable shall not exceed $70,000,000; (l) Guarantee Obligations of Holdings and its Subsidiaries, which are guarantors of the Obligations, in respect of the 2001A Equipment Lease Transaction; provided that, (i) Guarantee Obligations in respect of the 2001A Equipment Lease Securities (and related obligations) shall be subordinated in right of payment to other Indebtedness and Guarantee Obligations of the respective Loan Parties, including Guarantee Obligations under the other Equipment Guarantees and (ii) the proceeds of the 2001A Equipment Lease Transaction are used to pay the purchase price for POC, to pay obligations under and in connection with the 1998 18 Lease, to repay the 2001A Senior Subordinated Bridge Loans (or, if applicable, the New Subordinated Notes) and to pay other Indebtedness of HCC and its subsidiaries including costs in connection with the POC Acquisition and the 2001A Equipment Lease Transaction; (m) Guarantee Obligations of Holdings and its Subsidiaries which are guarantors of the Obligations in respect of the Indebtedness permitted by subsection 11.2(o) of this Agreement; and (n) senior subordinated Guarantee Obligations of Holdings and its Subsidiaries which are guarantors of the Obligations in respect of New Subordinated Notes, if any. 19. Amendment to Subsection 8.6 of the Senior Credit Agreement and Subsection 11.6 of each of the Synthetic Guarantees. Each of subsection 8.6 of the Senior Credit Agreement and subsection 11.6 of each of the Synthetic Guarantees is hereby amended by (x) deleting the amount "$5,000,000" where it appears in paragraph (a) and inserting in lieu thereof the amount "$20,000,000" and (y) inserting after the word "sale" in paragraph (h) the phrase "or exchange". 20. Amendment to Subsection 8.8 of the Senior Credit Agreement and Subsection 11.8 of each of the Synthetic Guarantees. Each of subsection 8.8 of the Senior Credit Agreement and subsection 11.8 of each of the Synthetic Guarantees is hereby amended by (x) deleting the word "and" which appears before clause (vii) thereof and (y) adding the following new clause (viii) to the end thereof: and (viii) Subsidiaries of Holdings may declare and pay dividends, or make distributions, to Holdings to the extent necessary to allow Holdings to pay interest when due on the New Convertible Notes, the 2001 Senior Subordinated Bridge Loans and any New Subordinated Notes (in each case subject to any applicable subordination provisions). 21. Amendment to Subsection 8.9 of the Senior Credit Agreement and Subsection 11.9 of each of the Synthetic Guarantees. Each of subsection 8.9 of the Senior Credit Agreement and subsection 11.9 of each of the Synthetic Guarantees is hereby amended by deleting such subsection in its entirety and inserting in lieu thereof the following: Enter into or assume any obligations with respect to any Derivatives except for (i) 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 the Derivatives permitted by this clause (i) shall not exceed the aggregate amount of loans outstanding under this Agreement and the Equipment Lease Transactions and (ii) existing Derivatives of POC provided that such Derivatives exist at the time POC became a Subsidiary and were not created in anticipation thereof. 22. Amendment to Subsection 8.10 of the Senior Credit Agreement and Subsection 11.10 of each of the Synthetic Guarantees. (a) Each of subsection 8.10 of the Senior Credit Agreement and subsection 11.10 of each of the Synthetic Guarantees is hereby amended 19 by deleting the amount "$25,000,000" where it appears in paragraph (h) and inserting in lieu thereof the amount "$50,000,000". (b) Each of subsection 8.10 of the Senior Credit Agreement and subsection 11.10 of each of the Synthetic Guarantees is hereby further amended by (x) deleting the "and" at the end of paragraph (i),(y) deleting the period at the end of paragraph (j) and inserting in lieu thereof a semi-colon, and (z) adding new paragraphs (k) and (1) immediately after paragraph (j) as follows: (k) HCC may consummate the POC Acquisition provided that (i) the conditions set forth in clauses (a)-(e) of the definition of "Permitted Business Acquisition" are satisfied with respect to the POC Acquisition and (ii) the POC Acquisition is consummated on terms and conditions previously disclosed to the Administrative Agent; and (l)(i) Investments in POC's Joint Ventures existing on the date of consummation of the POC Acquisition and (ii) Investments in POC's Joint Ventures pursuant to commitments existing at the time of the POC Acquisition in an aggregate amount not to exceed $30,000,000. 23. Amendment to Subsection 8.11 of the Senior Credit Agreement and Subsection 11.11 of each of the Synthetic Guarantees. (a) Subsection 8.11 of the Senior Credit Agreement is hereby amended by deleting such subsection in its entirety and inserting in lieu thereof the following: 8.11 Limitation on Optional Payments and Modifications of Debt Instruments. (i) Make any optional payment or optional prepayment on or optional redemption, optional purchase or optional defeasance of any portion of the Shareholder Subordinated Debt, the 2008 Notes (other than scheduled cash interest payments), New Convertible Notes (other than scheduled cash interest payments), the 2001 Senior Subordinated Bridge Loans (other than scheduled cash interest payments and payments with the proceeds from the 2001A Equipment Lease Securities and New Subordinated Notes), the 2001A Equipment Lease Securities (other than scheduled cash interest payments, subject to applicable subordination provisions), any New Subordinated Notes (other than scheduled cash interest payments, subject to subordination provisions, and payments with the proceeds from the 2001A Equipment Lease Securities), and lease and guarantee payments in respect of the 2001A Equipment Lease Transaction (other than scheduled lease payments, subject to applicable subordination provisions), (ii) make any optional payment or optional prepayment in excess of $10,000,000 during any calendar year on or redemption of any Indebtedness (excluding the Seller Note for which no optional payments or prepayments are permitted) or Guarantee Obligations other than (a) as permitted in clause (i) above, (b) redemptions of any portion of the 2008 Notes pursuant to the terms thereof, including, without limitation, the terms of any indenture in respect thereof, (c) redemptions of any portion of the 20 TIDES Debentures pursuant to the TIDES Indenture or redemptions of any portion of the TIDES pursuant to the TIDES Declaration of Trust or (d) any optional payment, prepayment or redemption of any Indebtedness or Guarantee Obligations pursuant to the Corporate Credit Agreement or the Equipment Lease Transactions (other than the 2001A Equipment Lease Transaction) or (iii) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any Indebtedness or Guarantee Obligations other than (a) any Indebtedness or Guarantee Obligations pursuant to the Corporate Credit Agreement or the Equipment Lease Transactions (other than the 2001A Equipment Lease Transaction) 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 or Guarantee Obligations less restrictive. In addition, Holdings and its Subsidiaries will not (i) make any optional or voluntary payment, prepayment, redemption or purchase of the Seller Note or any other payment or distribution with respect to the Seller Note unless such payment or distribution is permitted by the subordination provisions of the Seller Note or (ii) amend, waive, modify or terminate (or consent to any amendment, waiver, modification or termination) of the subordination provisions of the Seller Note or if such amendment, waiver, modification or termination is adverse to the interest of the Lenders. (b) Subsection 11.11 of each of the Synthetic Guarantees is hereby amended by deleting such Subsection 11.11 in its entirety and inserting in lieu thereof the following: 11.11 Limitation on Optional Payments and Modifications of Debt Instruments. (i) Make any optional payment or optional prepayment on or optional redemption, optional purchase or optional defeasance of any portion of the Shareholder Subordinated Debt, the 2008 Notes (other than scheduled cash interest payments), New Convertible Notes, the 2001 Senior Subordinated Bridge Loans (other than scheduled cash interest payments and payments with the proceeds from the 2001A Equipment Lease Securities), the 2001A Equipment Lease Securities (other than scheduled cash interest payments, subject to applicable subordination provisions), any New Subordinated Notes (other than scheduled cash interest payments, subject to subordination provisions, and payments with the proceeds from the 2001A Equipment Lease Securities), and lease and guarantee payments in respect of the 2001A Equipment Lease Transaction (other than scheduled lease payments, subject to applicable subordination provisions), (ii) make any optional payment or optional prepayment in excess of $10,000,000 during any calendar year on or redemption of any Indebtedness (excluding the Seller 21 Note for which no optional payments or prepayments are permitted) or Guarantee Obligations other than (a) as permitted by clause (i) above, (b) redemptions of any portion of the 2008 Notes pursuant to the terms thereof, including, without limitation, the terms of any indenture in respect thereof, (c) 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 (d) any optional payment, prepayment or redemption of any Indebtedness or Guarantee Obligations pursuant to the Corporate Credit Agreement or the Equipment Lease Transactions (other than the 2001A Equipment Lease Transaction) or (iii) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any Indebtedness or Guarantee Obligations other than (a) any Indebtedness pursuant to the Corporate Credit Agreement or the Equipment Lease Transactions (other than the 2001A Equipment Lease Transaction) 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 or Guarantee Obligations less restrictive. In addition, Holdings and its Subsidiaries will not (i) make any optional or voluntary payment, prepayment, redemption or purchase of the Seller Note or any other payment or distribution with respect to the Seller Note unless such payment or distribution is permitted by the subordination provisions of the Seller Note or (ii) amend, waive, modify or terminate (or consent to any amendment, waiver, modification or termination) of the subordination provisions of the Seller Note or if such amendment, waiver, modification or termination is adverse to the interest of the Lenders. 24. Amendment to Subsection 8.13 of the Senior Credit Agreement and Subsection 11.13 of each of the Synthetic Guarantees. Each of subsection 8.13 of the Senior Credit Agreement and subsection 11.13 of each of the Synthetic Guarantees is hereby amended by (x) replacing the "and" that appears before clause (ii) with a comma and (y) inserting at the end of clause (ii) the following: and (iii) POC may remain party to and perform Sale and Leaseback Transactions existing at the time POC became a Subsidiary and which were not entered into in anticipation thereof. 25. Amendment to Section 9 of the Senior Credit Agreement. Section 9 of the Senior Credit Agreement is hereby amended by (i) deleting the word "or" at the end of paragraph (i); (ii) inserting the word "or" at the end of paragraph (j); and (iii) inserting immediately after paragraph (j) the following new paragraph (k): (k) a "change of control" (however denominated) with respect to Holdings or HCC shall have occurred under, or for purposes of, the 2001A Equipment Lease Securities, the 2001 Senior Subordinated Bridge Loans or the New Subordinated 22 Notes and at least 50% of the Indebtedness then outstanding under the 2001A Equipment Lease Securities, the 2001 Senior Subordinated Bridge Loans, the New Subordinated Notes or the New Convertible Notes, as the case may be, shall be tendered to, or required to be purchased by, Holdings, HCC or any of their Subsidiaries as a result of such change of control; 26. Amendment to Subsection 11.6 of each of the Synthetic Guarantees. Subsection 11.6 of each of the Synthetic Guarantees is hereby amended by deleting the word "Lessor" where it appears in paragraph (h) of such subsection 11.6 and inserting in lieu thereof the phrase "applicable lessor". 27. Amendment to the Senior Credit Agreement and each of the Synthetic Guarantees. The Senior Credit Agreement and each of the Synthetic Guarantees are hereby amended by substituting each of the schedules attached hereto under Annex B, which schedules are satisfactory to the Administrative Agent, for its counterpart schedule to the Senior Credit Agreement or each of the Synthetic Guarantees, as the case may be. 28. Amendment to Subsection 30.1 of the Leases. Subsection 30.1 of each of the Leases is hereby amended by (a) inserting the phrase "in substitution for Equipment in the ordinary course of business or" after the words "Lessee hereunder" where it appears in such subsection 30.1 and (b) inserting at the beginning of paragraph (f) the phrase "unless such replacement is in the ordinary course of business." 29. Effectiveness. This Amendment shall become effective (the "Effective Date") upon fulfillment of the following conditions precedent: (a) the consummation of the POC Acquisition, (b) Holdings and HCC shall have delivered to the Administrative Agent duly executed copies of this Amendment, (c) the Guarantors (other than Holdings or HCC) shall have delivered to the Administrative Agent duly executed copies of this Amendment, (d) the Administrative Agent shall have received duly executed copies of this Amendment from the Required Lenders, and (e) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Amendment. 30. Representations and Warranties. Holdings, HCC and each of the other Guarantors hereby represent and warrant that the representations and warranties contained in each of the Senior Credit Agreement, the Loan Documents and the Operative Agreements will be, after giving effect to this Amendment, true and correct in all material respects, as if made on and as of the date hereof (except those which expressly speak as of a certain date). 31. Continuing Effect of the Senior Credit Agreement, Participation Agreements and Operative Agreements. This Amendment shall not constitute an amendment or waiver of any other provision of the Senior Credit Agreement, the Loan Documents or the Operative Agreements (as defined in each of the Synthetic Guarantees) not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, Holdings, the 2000B Lessor, the 2000A Lessor, the 1999 Lessor, the 1998 Lessor or the other Guarantors that would require a waiver or consent of the Administrative Agent and/or the 2000B Lenders, the 2000A Lenders, the 1999 Lenders or the 1998 Lenders. Except as expressly amended hereby, the provisions of each of the Senior Credit Agreement, the Loan Documents and the Operative Agreements (as defined in each of the Synthetic Guarantees) are and shall remain in full force and effect. 23 32. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 33. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 34. Expenses. Holdings and HCC agree to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Administrative Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY, as a signatory to the Senior Credit Agreement and as a Guarantor By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: V.P. - Treasury & Planning HANOVER COMPRESSION LIMITED PARTNERSHIP (formerly known as Hanover Compression Inc.), as a signatory to the Senior Credit Agreement and as a Guarantor By: Hanover Compression General Holdings, LLC, its general partner By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILEGIBLE] Title: V.P. - Treasury & Planning HANOVER/SMITH LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: V.P. - Treasury & Planning HANOVER MAINTECH LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: V.P. - Treasury & Planning HANOVER LAND LIMITED PARTNERSHIP, as a Guarantor By: Hanover General Holdings, Inc., its general partner By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: V.P. - Treasury & Planning HANOVER COMPRESSOR LIMITED HOLDINGS, LLC By: Hanover General Holdings, Inc., as sole member By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: V.P. - Treasury & Planning THE CHASE MANHATTAN BANK, as Administrative Agent, a 2000B Lender, 2000A Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ Beth Lawrence ---------------------------------- Name: BETH LAWRENCE Title: MANAGING DIRECTOR SOCIETE GENERALE, SOUTHWEST AGENCY, as a 1999 Lender and 1998 Lender By: /s/ Cary Hughes ---------------------------------- Name: Cary Hughes Title: Director FBTC LEASING CORP, as a 2000B Lender and a 1999 Lender By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: Treasurer BANK ONE, N.A. (formerly known as The First National Bank of Chicago), as a 1998 Lender, 1999 Lender, and 2000A Lender By: /s/ Dianne L. Russell ---------------------------------- Name: DIANNE L. RUSSELL Title: VICE PRESIDENT NATIONAL CITY BANK, as a 2000A Lender By: /s/ Tom Gurbach ---------------------------------- Name: Tom Gurbach Title: Vice President BNP PARIBAS, as a 2000A Lender, 1999 Lender, and Senior Credit Lender By: /s/ Betsy Jocher ---------------------------------- Name: Betsy Jocher Title: Vice President By: /s/ Larry Robinson ---------------------------------- Name: Larry Robinson Title: Vice President CREDIT SUISSE FIRST BOSTON, as a 2000B Lender and 2000A Lender By: /s/ James P. Moran ---------------------------------- Name: JAMES P. MORAN Title: DIRECTOR By: /s/ David W. Kratovil ---------------------------------- Name: DAVID W. KRATOVIL Title: DIRECTOR CITIBANK, N.A., as a 2000B Lender By: /s/ J.Christopher Lyons ---------------------------------- Name: J.CHRISTOPHER LYONS Title: ATTORNEY-IN-FACT DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG, as a 2000A Lender and 1999 Lender By: /s/ William J. Procasky ---------------------------------- Name: WILLIAM J. PROCASKY Title: Vice President By: /s/ Richard W. Wilbert ---------------------------------- Name: RICHARD W. WILBERT Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH, as a 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ Attila Itoc ---------------------------------- Name: Attila Itoc Title: Senior Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a 1998 Lender By: /s/ Joanna M. Solowski ---------------------------------- Name: JOANNA M. SOLOWSKI Title: Vice President By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: [ILLEGIBLE] COMERICA BANK, as a 2000B Lender and a 1999 Lender By: /s/ T. Bancroft Mattei ---------------------------------- Name: T. BANCROFT MATTEI Title: ACCOUNT OFFICER THE BANK OF TOKYO MITSUBISHI LIMITED, as a 2000B Lender By: /s/ Relton Glasscock ---------------------------------- Name: Relton Glasscock Title: Vice President & Manager FIRST UNION NATIONAL BANK, as a 2000A Lender, 1998 Lender, and Senior Credit Lender By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: Vice President WELLS FARGO BANK (TEXAS) N.A., as a 1999 Lender and Senior Credit Lender By: /s/ Philip C. Lauinger III ---------------------------------- Name: Philip C. Lauinger III Title: Vice President NATIONAL WESTMINSTER BANK Plc, NEW YORK BRANCH, as a 2000B Lender By: /s/ Patricia J. Dundee ---------------------------------- Name: PATRICIA J. DUNDEE Title: SENIOR VICE PRESIDENT THE BANK OF NOVA SCOTIA, as a 2000A Lender, 1999 Lender, 1998 Lender, and Senior Credit Lender By: /s/ F.C.H. Ashby ------------------------------------------ Name: F.C.H. Ashby Title: Senior Manager, Loan Operations SUNTRUST BANK, as a 2000B Lender, 2000A Lender, 1999 Lender and 1998 Lender By: /s/ John A. Flelda, Jr. ---------------------------------- Name: John A. Flelda, Jr. Title: Managing Director THE FUJI BANK, LIMITED, as a 2000B Lender, 1999 Lender, and 1998 Lender By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] Title: SENIOR VICE PRESIDENT & MANAGER ARAB BANKING CORPORATION (B.S.C.), as a 2000B Lender By: /s/ Robert Ivosevich ---------------------------------- Name: ROBERT IVOSEVICH Title: [ILLEGIBLE] By: /s/ B. Sanderson ---------------------------------- Name: B. SANDERSON Title: VP HEAD OF CREDIT BANKERS TRUST COMPANY, as a 1999 Lender and Senior Credit Lender By: /s/ Marcus M. Tarkington ---------------------------------- Name: Marcus M. Tarkington Title: Director NATEXIS BANQUES POPULAIRES, as a 2000A Lender By: /s/ Timothy L. Polvado ------------------------------ Name: Timothy L. Polvado Title: Vice President and Group Manager /s/ Louis P. Laville, III ------------------------------ Name: Louis P. Laville, III Title: Vice President and Group Manager ABN AMRO BANK N.V., as a 1999 Lender and 1998 Lender By: /s/ Stuart Murray ------------------------------ Name: Stuart Murray Title: Group Vice President By: /s/ John D. Reed ------------------------------ Name: John D. Reed Title: Vice President BANK HAPOALIM B.M., as a 2000B Lender By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] Title: FIRST VICE PRESIDENT By: /s/ Shaun Breidbart ------------------------------ Name: SHAUN BREIDBART Title: VICE PRESIDENT BANK OF SCOTLAND, as a 1999 Lender By: /s/ Joseph Fratus ------------------------------ Name: JOSEPH FRATUS Title: VICE PRESIDENT ANNEX B HANOVER COMPRESSION LIMITED PARTNERSHIP AMENDED DISCLOSURE SCHEDULES SCHEDULE 5.14 AND 9.14: SUBSIDIARIES SCHEDULE 8.2(c) AND 11.2(c): EXISTING INDEBTEDNESS SCHEDULE 8.3(n) AND 11.3(n): EXISTING LIENS SCHEDULE 8.4 AND 11.4: GUARANTEE OBLIGATIONS EX-10.45 13 dex1045.txt WAIVER AND AMENDMENT, DATED AS OF MARCH 15, 2002, TO THE 2000B GUARANTEE EXHIBIT 10.45 WAIVER AND AMENDMENT WAIVER AND AMENDMENT, dated as of March 15, 2002 (this "Waiver"), under (i) the Guarantee (the "2000B Guarantee") and the Credit Agreement (the "2000B Credit Agreement"), as defined in the Participation Agreement, dated as of October 27, 2000 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "2000B Participation Agreement"), among Hanover Compression Limited Partnership (formerly known as Hanover Compression Inc., "HCC"), Hanover Equipment Trust 2000B, (the "2000B Lessor"), Bank Hapoalim B.M. and FBTC Leasing Corp., as investors, the lenders parties thereto (the "2000B Lenders") and The Chase Manhattan Bank, a New York banking corporation, as the administrative agent for the 2000B Lenders (the "Administrative Agent"), (ii) the Guarantee (the "2000A Guarantee") and the Credit Agreement (the "2000A Credit Agreement"), as defined in the Participation Agreement, dated as of March 13, 2000 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "2000A Participation Agreement"), among HCC, Hanover Equipment Trust 2000A (the "2000A Lessor"), First Union National Bank and Scotiabanc Inc., as investors, the lenders parties thereto (the "2000A Lenders") and the Administrative Agent, as agent for the 2000A Lenders, (iii) the Guarantee (the "1999 Guarantee") and the Credit Agreement (the "1999 Credit Agreement"), as defined in the Participation Agreement, dated as of June 15, 1999 (as the same may have been, amended, supplemented or otherwise modified from time to time, the "1999 Participation Agreement"), among HCC, Hanover Equipment Trust 1999A (the "1999 Lessor"), Societe Generale Financial Corporation and FBTC Leasing Corp., as investors, the lenders parties thereto (the "1999 Lenders") and the Administrative Agent, as agent for the 1999 Lenders, and (iv) the Credit Agreement (as the same may have been, amended, supplemented or otherwise modified from time to time, the "Senior Credit Agreement"), dated as of December 15, 1997, as amended and restated on December 3, 2002, among Hanover Compressor Company ("Holdings"), HCC, the Administrative Agent and the lenders parties thereto (the "Senior Credit Lenders"). The 2000B Participation Agreement, the 2000A Participation Agreement and the 1999 Participation Agreement are collectively hereinafter referred to as the "Participation Agreements". The 2000B Guarantee, the 2000A Guarantee and the 1999 Guarantee are collectively hereinafter referred to as the "Synthetic Guarantees", and the 2000B Credit Agreement, the 2000A Credit Agreement and the 1999 Credit Agreement are collectively referred to herein as the "Synthetic Credit Agreements". W I T N E S S E T H: WHEREAS, pursuant to a report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2002 Holdings disclosed (the "8-K Earnings Disclosure") that it would restate earnings for its fiscal year ended December 31, 2000 and the nine months ended September 30, 2001 to reflect changes in its accounting treatment for certain transactions; WHEREAS, Holdings has disclosed to the Lenders under the Senior Credit Agreement and the Synthetic Credit Agreements that it has violated Section 30.1(c) of the Lease (as defined in the 2000A Participation Agreement) as a result of equipment substitutions made prior to the date hereof; WHEREAS, Holdings and HCC have requested that the Administrative Agent and the Required Lenders under each of the Synthetic Guarantees, the Synthetic Credit 2 Agreements and the Senior Credit Agreement waive any Default or Event of Default arising under the Synthetic Guarantees, the Synthetic Credit Agreements and the Senior Credit Agreement as a result of or with respect to the matters disclosed in the 8-K Earnings Disclosure and such equipment substitution; NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. As used in this Waiver, terms defined in the preamble hereof and the recitals hereto are used herein as so defined, and terms defined in any of the Participation Agreements, the Synthetic Guarantees and the Senior Credit Agreement and not defined herein are used herein as therein defined. 2. Waiver of the Senior Credit Agreement, the Synthetic Guarantees and Synthetic Credit Agreements; Amendment of Synthetic Guarantees and 2000A Synthetic Lease. (a) The Required Lenders under the Senior Credit Agreement waive any Default or Event of Default that may arise (i) under paragraph (d) or (f) of Section 9 of the Senior Credit Agreement as a result of any default under Section 7.1, 7.2, 7.6 or 7.7 of the Senior Credit Agreement or Section 10.1, 10.2, 10.6 or 10.7 of the Synthetic Guarantees arising from or with respect to the matters disclosed in the 8-K Earnings Disclosure, (ii) from non-compliance with Section 6 of the Senior Credit Agreement arising from or with respect to the matters disclosed in the 8-K Earnings Disclosure and (iii) under paragraph (f) of Section 9 of the Senior Credit Agreement arising from the matters described in paragraph (d) below. (b) The Required Lenders under each Synthetic Credit Agreement waive any Default or Event of Default that may arise (i) under paragraph (c) or (k) of Section 6 of the Synthetic Credit Agreements as a result of any default under Section 10.1, 10.2, 10.6 or 10.7 of the Synthetic Guarantees or Section 7.1, 7.2, 7.6 or 7.7 of the Senior Credit Agreement arising from or with respect to the matters disclosed in the 8-K Earnings Disclosure, (ii) from non-compliance with Section 4 of the Synthetic Credit Agreements arising from or with respect to the matters disclosed in the 8-K Earnings Disclosure and (iii) under paragraph (k) of Section 6 of the Synthetic Credit Agreements and paragraph (g) of Section 17.1 of the Leases (as defined in the respective Participation Agreements) arising from the matters described in paragraph (d) below. (c) Section 10.2 of each of the Synthetic Guarantees is amended by adding at the end of paragraph (b) thereof the phrase: and to set forth a description of each substitution of Equipment made during such period pursuant to Section 30.1 (i) of the Lease, including the identification, value and location of the Replacement Equipment and the Equipment for which it has been substituted and (ii) the other Equipment subject to the Lease, including the identification, value and location of such Equipment. (d) The Required Lenders under the 2000A Synthetic Credit Agreement waive any Default, Event of Default or Lease Event of Default that may arise under Section 17 of the Lease (as defined in the 2000A Participation Agreement) or under paragraph (f) of Section 6 of the Credit Agreement (as defined in the 2000A Participation Agreement) as a result of any default under Section 30.1(c) of the Lease prior to the Effective Date (as defined below). The 3 Required Lenders under the Credit Agreement (as defined in the 2000A Participation Agreement) agree that the reference in Section 30.1(c) of the Lease (as defined in the 2000A Participation Agreement) to the "Initial Closing Date" shall instead be deemed to be a reference to the Effective Date. 3. Effectiveness. The Waiver shall become effective (the "Effective Date") upon fulfillment of the following conditions precedent: (a) Holdings and HCC shall have delivered to the Administrative Agent duly executed copies of this Waiver, (b) the Administrative Agent shall have received duly executed copies of this Waiver from the Required Lenders under each of the Senior Credit Agreement and the Synthetic Guarantees, (c) no Default or Event of Default shall have occurred and be continuing on the date hereof after giving effect to this Waiver and (d) HCC shall have delivered to the Lenders (as defined in the 2000A Participation Agreement) an Appraisal of the Equipment subject to the Lease on the Effective Date demonstrating that the value of the Equipment subject to the Lease is equal to or greater than the Termination Value (as such terms are defined in the 2001A Participation Agreement). 4. Representations and Warranties. Holdings and HCC hereby represent and warrant that the representations and warranties contained in each of the Senior Credit Agreement, the Loan Documents and the Operative Agreements (as defined in each of the Synthetic Guarantees) will be, after giving effect to this Waiver, true and correct in all material respects, as if made on and as of the date hereof (except those which expressly speak as of a certain date). 5. Continuing Effect of the Senior Credit Agreement, Participation Agreements and Operative Agreements. This Waiver shall not constitute an amendment or waiver of any other provision of the Senior Credit Agreement, the Loan Documents or the Operative Agreements not expressly referred to herein and shall not be construed as a waiver or consent to any further or future action on the part of HCC, Holdings, the 2000B Lessor, the 2000A Lessor or the 1999 Lessor that would require a waiver or consent of the Administrative Agent and/or the 2000B Lenders, the 2000A Lenders or the 1999 Lenders. Except as expressly amended hereby, the provisions of each of the Senior Credit Agreement, the Loan Documents and the Operative Agreements are and shall remain in full force and effect. 6. Counterparts. This Waiver may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Waiver by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. 7. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 8. Expenses. Holdings and HCC agree to pay or reimburse the Administrative Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Waiver, including, without limitation, the fees and disbursements of counsel to the Administrative Agent. IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. HANOVER COMPRESSOR COMPANY By: /s/ [ILLEGIBLE] ------------------------------ Name: Title: HANOVER COMPRESSION LIMITED PARTNERSHIP By: /s/ [ILLEGIBLE] ------------------------------ Name: Title: HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 BNP PARIBAS ---------------------------------- [LENDER] By: /s/ Brian M. Malono ------------------------------ Name: Brian M. Malono Title: Managing Director By: /s/ Polly Schott ------------------------------ Name: Polly Schott Title: Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 /s/ Calli S. Hayes ---------------------------------- Bankers Trust Company By: /s/ Calli S. Hayes ------------------------------ Name: Calli S. Hayes Title: MANAGING DIRECTOR HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 CREDIT SUISSE FIRST BOSTON /s/ James P. Moran ------------------------------ JAMES P. MORAN DIRECTOR /S/ David M. Koczan ------------------------------ DAVID M. KOCZAN ASSOCIATE HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 Natexis Banques Populaires By: /s/ Timothy L. Polvado ------------------------------ Name: Timothy L. Polvado Title: Vice President and Group Manager By: /s/ Louis P. Laville, III ------------------------------ Name: Louis P. Laville, III Title: Vice President and Group Manager HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 RZB Finance LLC By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] Title: PRESIDENT By: /s/ FRANK J. YAUTZ ------------------------------ Name: FRANK J. YAUTZ Title: First Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 Bank One, NA (Main Office Chicago) By: /s/ Dianne L. Russell ------------------------------ Name: Dianne L. Russell Title: Director HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 BANK OF SCOTLAND ---------------------------------- [LENDER] By: /s/ Joseph Fratus ------------------------------ Name: JOSEPH FRATUS Title: VICE PRESIDENT HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 SUNTRUST BANK ---------------------------------- [LENDER] By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] Title: Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 COMERICA BANK ---------------------------------- [LENDER] By: /s/ Mark B. Grover ------------------------------ Name: Mark B. Grover Title: First Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 ARABBANKING CORPORATION ------------------------------ By: /s/ Barbara C. Sanderson ------------------------------ Name: BARBARA C. SANDERSON Title: VP HEAD OF CREDIT HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 ---------------------------------- Bank of Tokyo-Mitsubishi, Ltd. By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] Title: VP & Manager HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 THE ROYAL BANK OF SCOTLAND PLC NEW YORK BRANCH By: /s/ Keith Johnson ------------------------------ Name: KEITH JOHNSON Title: SENIOR VICE PRESIDENT. HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 NATIONAL WESTMINSTER BANK PLC NEW YORK BRANCH By: /s/ Keith Johnson ------------------------------ Name: KEITH JOHNSON Title: SENIOR VICE PRESIDENT. HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 First Union National Bank ---------------------------------- [LENDER] By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] Title: Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 WELLS FARGO BANK (TEXAS) N.A. ---------------------------------- By: /s/ P.C. Lauinger III ------------------------------ Name: Philip C. Lauinger III Title: Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 CREDIT LYONNAIS NEW YORK BRANCH ---------------------------------- [LENDER] By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] Title: Senior Vice President HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 The Bank of Nova Scotia By: /s/ N. Bell ------------------------------ Name: N. Bell Title: Senior Manager HANOVER COMPRESSOR COMPANY WAIVER AND AMENDMENT DATED AS OF MARCH 15, 2002 JPMORGAN CHASE BANK ---------------------------------- [LENDER] By: /s/ Beth Lawrence ------------------------------ Name: BETH LAWRENCE Title: MANAGING DIRECTOR EX-10.61 14 dex1061.txt SUBORDINATED PROMISSORY NOTE EXHIBIT 10.61 HANOVER COMPRESSOR COMPANY SUBORDINATED PROMISSORY NOTE $150,000,000 August 31, 2001 FOR VALUE RECEIVED, the undersigned, HANOVER COMPRESSOR COMPANY (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, with its principal place of business located at 12001 North Houston Rosslyn, Houston, Texas 77086, hereby unconditionally promises to pay, subject to the subordination provisions of Section 8, to the order of CAMCO INTERNATIONAL INC., a Delaware corporation or its assigns (including any assignee or transferee of, or other holder of, this Note, the "Seller"), at such place as the Seller may from time to time designate in writing, the principal sum of ONE HUNDRED FIFTY MILLION DOLLARS on December 31, 2005 (the "Maturity Date"), with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the Interest Rate (as hereinafter defined) (or, during any period when an Event of Default (as hereinafter defined) shall be in existence, the Default Rate (as hereinafter defined)) from the date hereof, payable semi-annually, on the last day of June and December in each year (each, an "Interest Payment Date"), commencing on December 31, 2001, until the principal hereof shall have become due and payable, and (b) to the extent permitted by applicable law on any overdue payment (including any overdue prepayment) of principal and any overdue payment of interest, payable semi-annually as aforesaid (or, at the option of the Seller, on demand), at a rate per annum from time to time equal to the Default Rate. Payments of principal of and interest on this Note are to be made in lawful money of the United States of America. Notwithstanding the foregoing, except in connection with an Offset Interest Payment (as hereinafter defined), an Offset Prepayment (as hereinafter defined), a Section 4.2 Required Prepayment (as hereinafter defined) or payment on the Maturity Date, interest on this Note shall be payable only in kind and not in cash or other property. On each Interest Payment Date, accrued interest that is then unpaid and that has not been previously added to the principal amount of this Note shall be added to the principal amount of this Note and amounts so added shall thereafter be deemed to be a part of the principal amount of this Note (the "PIK Interest Portion"); provided, however, that if on or prior to an Interest Payment Date the Seller shall have delivered to the Company a written notice of its election to have all or a portion of such accrued interest paid by means of an Offset Interest Payment, only that portion of such accrued interest that exceeds the amount of such Offset Interest Payment shall be added to the principal amount of this Note. This Note is referred to in, and was executed and delivered in connection with, that certain Stock Purchase Agreement dated as of June 28, 2001 (the "Stock Purchase Agreement") by and among Schlumberger Technology Corporation, a Texas corporation, Schlumberger Oilfield Holdings LTD., a British Virgin Islands corporation, Schlumberger Surenco S.A., a Panamanian corporation, the Seller, the Company and Hanover Compression Limited Partnership, a Delaware limited partnership. SECTION 1. DEFINITIONS. "Alliance Agreement" shall mean that certain Most Favored Supplier and Alliance Agreement dated as of August 31, 2001 by and between Schlumberger Oilfield Holdings Limited, Schlumberger Technology Corporation and Hanover Compression Limited Partnership, as amended, restated, supplemented, waived, replaced, restructured or otherwise modified from time to time; provided that, in case of any replacement agreement, the parties to the Alliance Agreement shall have agreed in writing that such replacement agreement replaces all or a portion of the Alliance Agreement. "Bank Agent" shall mean with respect to any Senior Debt Agreement, the lead agent for the lenders and/or creditors thereunder. "Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978, as codified under Title 11 of the United States Code, and the Bankruptcy Rules promulgated thereunder, as the same may be in effect from time to time. "Capital Lease" shall mean, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Company" is defined in the first paragraph of this Note. "Credit Agreement" shall mean that certain Credit Agreement, dated as of December 15, 1997, as amended and restated through March 13, 2000, among the Company, certain of its Subsidiaries named therein from time to time, the lenders named therein and The Chase Manhattan Bank, as administrative agent, together with any Guaranties thereof by the Company or its Subsidiaries, in each case, as amended, restated, supplemented, waived, replaced (whether or not upon termination and whether with the original lenders or otherwise), restructured, refinanced, increased or otherwise modified from time to time. "Default" shall mean an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Default Rate" shall mean that rate of interest that is 2% per annum above the then applicable Interest Rate. "Event of Default" is defined in Section 6. "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States of America. -2 "Governmental Authority" shall mean (a) the government of (1) the United States of America or any State or other political subdivision thereof, or (2) any jurisdiction in which the Company conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "Guaranty" shall mean, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including, without limitation, obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such Indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (1) for the purchase or payment of such Indebtedness or obligation, or (2) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of any other Person to make payment of the Indebtedness or obligation; or (d) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof. In any computation of the Indebtedness or other liabilities of the obligor under any Guaranty, the Indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "Indebtedness" with respect to any Person shall mean, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable preferred stock; -3 (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) swaps of such Person; (g) the principal or lease balance outstanding under Synthetic Leases; and (h) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (g) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (h) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "Insolvency Proceeding" shall mean (a) any case, action, or proceeding before any court or other Governmental Authority having jurisdiction over the applicable Person or its assets relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up, or relief of debtors or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other similar arrangement in respect of its creditors generally or any substantial portion of its creditors; in each case whether undertaken under Federal (including the Bankruptcy Code), state, or foreign law. "Interest Payment Date" is defined in the first paragraph of this Note. "Interest Rate" shall mean (a) for the period from and after the date hereof to and including February 28, 2002, a rate of interest equal to 8.50% per annum, (b) for the period from and after March 1, 2002 to and including, August 31, 2002, a rate of interest equal to 10.50% per annum, (c) for the period from and after September 1, 2002 to and including February 28, 2003, a rate of interest equal to 12.50% per annum, (d) for the period from and after March 1, 2003 to and including February 29, 2004, a rate of interest equal to 13.50% per annum, (e) for the period from and after March 1, 2004 to and -4 including February 28, 2005, a rate of interest equal to 14.50% per annum and (f) for the period from and after March 1, 2005 to and including December 31, 2005, a rate of interest equal to 15.50% per annum. "Lien" shall mean, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Material Adverse Effect" shall mean a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Note or (c) the validity or enforceability of this Note. "Maturity Date" is defined in the first paragraph of this Note. "Non-Payment Default" shall mean any default or event of default by the Company or its Subsidiaries under any Senior Debt Agreement, not constituting a Payment Default. "Offset Interest Payment" shall mean a payment of all or a portion of the interest then due and payable on this Note by means of an offset against an equal amount of sums that the Seller has identified to the Company in writing as being due and payable by the Seller or any of its affiliates to the Company or any of its affiliates in respect of any products or services provided to the Seller or any of its affiliates in accordance with the Company's "Most Favored Supplier Status" established pursuant to Section 3.4 of the Alliance Agreement and which sums the Company has not, in good faith and within five business days after the identification thereof, claimed, in a writing delivered to the Seller, not to have been incurred in accordance with the Company's "Most Favored Supplier Status." "Offset Prepayment" shall mean a prepayment of the PIK Interest Portion of the principal of this Note together with accrued interest thereon by means of an offset against an equal amount of sums that the Seller has identified to the Company in writing as being due and payable by the Seller or any of its affiliates to the Company or any of its affiliates in respect of any products or services provided to the Seller or any of its affiliates in accordance with the Company's "Most Favored Supplier Status" established pursuant to Section 3.4 of the Alliance Agreement and which sums the Company has not, in good faith and within five business days after the identification thereof, claimed, in a writing delivered to the Seller, not to have been incurred in accordance with the Company's "Most Favored Supplier Status." "pay this Note" is defined in Section 8.1 of this Note. -5 "Payment Default" shall mean any default or event of default by the Company or its Subsidiaries in any payment of the principal of or interest on any Senior Debt when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or acceleration or otherwise. "Person" shall mean an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PIK Interest Portion" is defined in the first paragraph of this Note. "Reorganization Securities" shall mean (a) debt securities that are issued pursuant to an Insolvency Proceeding (1) that do not impair or materially alter the rights of the holders of any Senior Debt outstanding at the time of issuance thereof or any debt securities issued in exchange for such Senior Debt in such Insolvency Proceeding set forth in Section 8 and (2) the payment of which is subordinate and junior at least to the extent provided in Section 8 to the payment of all Senior Debt outstanding at the time of the issuance thereof and to the payment of all debt securities issued in exchange for such Senior Debt in such Insolvency Proceeding (whether such subordination is effected by the terms of such securities, an order or decree issued in such Insolvency Proceeding, by agreement of the Seller or otherwise) or (b) equity securities that are issued pursuant to an Insolvency Proceeding; provided, in either case, that (x) such securities are authorized by an order or decree made by a court of competent jurisdiction in such Insolvency Proceeding (which order or decree states that the authorization of such securities is intended to give effect to the subordination of the Subordinated Obligations pursuant to Section 8 hereof) and (y) this Note and such securities are not treated as the same class of securities as any Senior Debt outstanding at the time of the issuance thereof or any securities issued in exchange for such Senior Debt in such Insolvency Proceeding. "Responsible Officer" shall mean any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Note. "Section 4.2 Prepayment Event" is defined in Section 4.2. "Section 4.2 Required Prepayment" is defined in Section 4.2. "Seller" is defined in the first paragraph of this Note. "Senior Debt" shall mean all payment obligations (whether now outstanding or hereafter incurred) of the Company in respect of (a) Indebtedness of the Company other than (1) this Note, (2) any Indebtedness that by its terms is expressly subordinated to this Note, (3) any Indebtedness (i) incurred by the Company that represents all or a portion of the consideration for the acquisition of all or a portion of the capital stock or assets of any Person and (ii) which is owing to the Person that sold or otherwise transferred such capital stock or assets or to an affiliate of such Person and (4) any Indebtedness incurred -6 by the Company after the date hereof in contravention of the provisions of Section 5.3, (b) interest (including default interest) and premium on the outstanding Indebtedness referred to in clause (a) above, (c) the fees and commissions (including commitment, agency and letter of credit fees and commissions) payable pursuant to the Senior Debt Agreements, (d) all other payment obligations (including costs, expenses, penalties, indemnifications, damages, liabilities or otherwise on the Company) owing under or arising pursuant to the Senior Debt Agreements not of the type described in clauses (a) through (c) above, and (e) post-petition interest on the Indebtedness referred to in clauses (a) through (d) above accruing subsequent to the commencement of a proceeding under the Bankruptcy Code (whether or not such interest is allowed as a claim in such proceeding). Without limiting the foregoing, Senior Debt shall include all payment obligations of the Company under the Credit Agreement, the Synthetic Leases and the Synthetic Lease Guaranties. Senior Debt shall not include trade accounts payable, tax claims or assessments. "Senior Debt Agreement" shall mean each instrument or agreement evidencing or governing the Indebtedness referred to in clause (a) of the definition of Senior Debt. "Senior Debt Default" shall mean a Non-Payment Default or a Payment Default. "Senior Financial Officer" shall mean the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subordinated Obligation" is defined in Section 8.1 of this Note. "Subsidiary" shall mean, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Synthetic Lease" shall mean any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product, where such transaction is considered debt for borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP. "Synthetic Lease Guaranties" shall mean Guaranties by the Company of the obligations of one or more of its Subsidiaries under Synthetic Leases and the related financing agreements (including credit agreements and debt instruments) as such Guaranties may be amended, restated, supplemented, waived, replaced (whether or not -7 upon termination and whether with the original lenders or otherwise), restructured, refinanced, increased or otherwise modified from time to time. "Voidable Transfer" is defined in Section 8.5 of this Note. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Seller that: Section 2.1. Organization; Power and Authority. The Company is a corporation duly organized validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it owns or holds under lease, to transact the business it transacts, to execute and deliver this Note and to perform the provisions of this Note. Section 2.2. Authorization, Etc. This Note has been duly authorized by all necessary corporate action on the part of the Company, and this Note constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section 2.3. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by the Company of this Note will not (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under (1) its corporate charter or by-laws or (2), any material indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease or any other material agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or (c) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company. Section 2.4. Governmental Authorizations, Etc. No material consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Note other than those that have been previously obtained and, on the date of this Note, remain in full force and effect. -8 Section 2.5. No Default under Section 8.1(d) of the Credit Agreement. On the date of this Note, the Company is not in default and no waiver of default is currently in effect under Section 8.1(d) of the Credit Agreement. SECTION 3. INFORMATION AS TO COMPANY. Section 3.1. Notices of Default. Promptly, and in any event within 15 days after a Responsible Officer becoming aware of the existence of any Default, Event of Default or Senior Debt Default or that any Person has taken any action with respect to a Senior Debt Default, the Company shall deliver to the Seller a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto. Section 3.2. Requested Information. With reasonable promptness, the Company shall deliver to the Seller such data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations under this Note as from time to time may be reasonably requested by the Seller. SECTION 4. PREPAYMENT. Section 4.1. Required Prepayments. (a) Except in accordance with the provisions of Section 4.2 and Section 4.3, this Note shall not be subject to any required prepayment prior to the Maturity Date. (b) On the Maturity Date, the Company will pay the then outstanding principal amount of this Note together with accrued interest thereon. Section 4.2. Required Prepayment upon Equity Issuance. Upon the issuance, sale or other disposition by the Company of any shares of capital stock or other equity interests or any rights, warrants or options to acquire any shares of capital stock or other equity interests of the Company (other than to employees, officers or directors of the Company) pursuant to a public offering or a private placement (a "Section 4.2 Prepayment Event"), on the second Business Day following the occurrence of any such Section 4.2 Prepayment Event, the Company shall apply the net proceeds of such Section 4.2 Prepayment Event to prepay all or a portion of this Note, at 100% of the principal amount so prepaid, together with accrued interest thereon but without any premium (a "Section 4.2 Required Prepayment"). The Company will give the Seller written notice of each Section 4.2 Required Prepayment not less than five days and not more than 30 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the principal amount of this Note to be prepaid, and the interest to be paid on the prepayment date with respect to such principal amount being prepaid. -9 Section 4.3. Offset Prepayment. Upon receipt by the Company of written notice from the Seller that the Seller has elected to have all or a portion of the PIK Interest Portion of the principal of this Note prepaid by means of an Offset Prepayment, the Company shall, on the date of such notice, be deemed to have prepaid a portion of the principal amount of this Note together with accrued interest thereon, in the amounts set forth in such notice. From and after the date of such deemed prepayment, interest on the principal prepaid shall cease to accrue. Section 4.4. Optional Prepayments. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, this Note, at 100% of the principal amount so prepaid, together with accrued interest thereon but without any premium. The Company will give the Seller written notice of each optional prepayment under this Section 4.4 not less than one day and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the principal amount of this Note to be prepaid, and the interest to be paid on the prepayment date with respect to such principal amount being prepaid. Section 4.5. Maturity; Surrender, Etc. In the case of each prepayment of this Note pursuant to this Section 4.2 or Section 4.4, the principal amount of this Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date but without any premium, subject to the subordination provisions of Section 8. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest as aforesaid, interest on such principal amount shall cease to accrue. SECTION 5. COVENANTS. The Company covenants that so long as this Note is outstanding: Section 5.1. Merger, Consolidation, Etc. The Company shall not consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be, shall be, immediately after giving effect to such consolidation or merger, a solvent Person organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, such corporation shall have executed and delivered to the Seller its assumption of the due and punctual performance and observance of each covenant and condition of this Note; and (b) immediately after giving effect to such transaction, no Default or Event of Default shall exist. -10 No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 5.1 from its liability under this Note. Section 5.2. Payment Limitations. The Company covenants that it will not enter into or become subject to any restriction on the payment of any Subordinated Obligations other than (a) the provisions of Section 8 and (b) any such restriction prohibiting optional prepayments, optional redemptions or optional purchases of the Subordinated Obligations (whether by way of offset (other than Offset Interest Payments and Offset Prepayments) or otherwise). Section 5.3. Amendments to Credit Agreement. Without the prior written consent of the Seller, the Company covenants that it will not enter into any amendment or modification of, or waive, or consent to any waiver of, any of the provisions of the negative covenant (including all related definitions) contained in Section 8.1(d) of the Credit Agreement (as in effect on the date hereof) restricting the ratio of Consolidated Indebtedness to Consolidated EBITDA (as such terms are defined in the Credit Agreement as in effect on the date hereof) of the Company if such amendment, modification or waiver would permit such ratio for any period of four consecutive fully completed fiscal quarters to be greater than 15% above the maximum ratio permitted under the Credit Agreement as in effect on the date hereof. SECTION 6. EVENTS OF DEFAULT. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal on this Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on this Note for more than five days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in Sections 5.1 through 5.3, inclusive; or (d) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Note proves to have been false or incorrect in any material respect on the date as of which made; or (e) the Company is in default under one or more Senior Debt Agreements pursuant to which (1) Senior Debt in an aggregate principal amount of $100,000,000 or more is outstanding or (2) there are commitments thereunder to provide Senior Debt in an aggregate principal amount of $100,000,000 or more -11 and as a consequence of such default the Indebtedness under such Senior Debt Agreements has become, or has been declared, due and payable before its regularly scheduled dates of payment; or (f) the Company (1) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (2) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, seeking to adjudicate it as a bankrupt or insolvent, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (3) makes a general assignment for the benefit of its creditors, (4) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property or (5) takes corporate action for the purpose of any of the foregoing; or (g) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company, or any such petition shall be filed against the Company and such petition shall not be dismissed within 60 days. SECTION 7. REMEDIES ON DEFAULT, ETC. Section 7.1. Acceleration. (a) If an Event of Default with respect to the Company described in paragraph (f) or (g) of Section 6 (other than an Event of Default described in clause (1) of paragraph (f) or described in clause (5) of paragraph (f) by virtue of the fact that such clause encompasses clause (1) of paragraph (f)) has occurred, concurrently with the Indebtedness under the Credit Agreement becoming immediately due and payable, this Note then shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing or if any Event of Default described in clause (a) of Section 7.1 has occurred and is continuing and the Indebtedness under the Credit Agreement has not become immediately due and payable, the Seller may, at any time at its option, by notice to the Company, declare this Note to be immediately due and payable. Upon this Note becoming due and payable under this Section 7.1, whether automatically or by declaration, this Note will forthwith mature and the entire unpaid principal amount of this Note, plus all accrued and unpaid interest, shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. -12 Section 7.2. Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether this Note has become or has been declared immediately due and payable under Section 7.1, the Seller may proceed to protect and enforce its rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein, or for an injunction against a violation of any of the terms hereof, or in aid of the exercise of any power granted hereby or by law or otherwise. Section 7.3. Rescission. At any time after this Note has been declared due and payable pursuant to clause (b) of Section 7.1, the Seller, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on this Note, all principal of this Note that is due and payable and is unpaid other than by reason of such declaration, and all interest on such overdue principal and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Defaults and Events of Default, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 11, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto. No rescission and annulment under this Section 7.3 will extend to or affect any subsequent Default or Event of Default or impair any right consequent thereon. Section 7.4. No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of the Seller in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice the Seller's rights, powers or remedies. No right, power or remedy conferred by this Note upon the Seller shall be exclusive of any other right, power or remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 9, the Company will pay to the Seller on demand such further amount as shall be sufficient to cover all costs and expenses of the Seller incurred in any enforcement or collection under this Section 7, including, without limitation, reasonable attorneys' fees, expenses and disbursements. SECTION 8. SUBORDINATION. Anything in this Note to the contrary notwithstanding, the Seller and each subsequent holder of this Note by its acceptance hereof covenants and agrees that the payment of the principal of and interest on this Note and all other amounts payable by the Company under or in respect of this Note (all of the foregoing, the "Subordinated Obligations") shall, to the extent set forth in this Section 8, be subordinate and junior and subject in right of payment to the prior payment in full in cash of all Senior Debt. Section 8.1. Payments. No payment or distribution (whether directly, by purchase or redemption by right of set-off (other than Offset Interest Payments and Offset Prepayments) or otherwise) in respect of this Note, whether as principal, interest or otherwise, and whether in cash, securities or property (collectively, "pay this Note"), shall be made by or on behalf of the Company or received, accepted or demanded, -13 directly or indirectly, by or on behalf of the Seller unless and until all Senior Debt has been indefeasibly paid in full in cash to the holders of the Senior Debt. Notwithstanding the immediately preceding sentence, the Company may (a) make payments of interest in kind under this Note when due and payable pursuant to the first paragraph of this Note, (b) make Offset Interest Payments in accordance with the first paragraph of this Note, (c) make Offset Prepayments in accordance with Section 4.3, (d) so long as no Senior Debt Default exists on the date of a Section 4.2 Prepayment Event or would result from the then making of a Section 4.2 Required Prepayment, prepay all or a portion of the outstanding principal amount of this Note together with accrued interest thereon in accordance with Section 4.2; provided, however, that, if a Senior Debt Default exists on the date of such Section 4.2 Prepayment Event or would result from the making of such Section 4.2 Required Prepayment, then (1) in the case of a Senior Debt Default that is a Payment Default, the proceeds of such Section 4.2 Prepayment Event shall be applied first to cure such Payment Default and then to make such Section 4.2 Required Prepayment and (2) in the case of a Senior Debt Default that is a Non-Payment Default, upon such Non-Payment Default being cured or waived, the proceeds of such Section 4.2 Prepayment Event, other than any such proceeds used to cure or obtain a waiver in respect of such Non-Payment Default, shall be applied to make such Section 4.2 Required Prepayment, (e) so long as no Senior Debt Default exists on the Maturity Date or would result from the payment of this Note on the Maturity Date, pay the outstanding principal amount of this Note together with accrued interest thereon on the Maturity Date in accordance with Section 4.1(b); provided, however, that if a Senior Debt Default exists on the Maturity Date or would result from such payment of this Note on the Maturity Date, then the Company shall not make such payment until such Senior Debt Default is cured or waived and (f) pay this Note without regard to the foregoing if the Company receives the written consent of the requisite holders of the Senior Debt (or any duly authorized representative thereof) under each of the Senior Debt Agreements. In the event that, notwithstanding the foregoing, the Company shall make any payment or distribution to the Seller prohibited by the foregoing provisions of this Section 8.1, then and in such event such payment or distribution shall be segregated by the Seller and held in trust for the benefit of and immediately shall be paid over to the holders of the Senior Debt for application against the Senior Debt remaining unpaid until such Senior Debt is paid in full in cash. Section 8.2. Insolvency; Bankruptcy; Etc. (a) In the event of the institution of any Insolvency Proceeding relative to the Company, then any payment or distribution of any kind or character, whether in cash, property or securities, by setoff (other than Offset Interest Payments and Offset Prepayments) or otherwise, which may be payable or deliverable in such proceedings in respect of the Subordinated Obligations shall (notwithstanding any other provision of this Note, including Section 8.1, but excluding the proviso to this Section 8.2(a)) be paid or delivered by the Person making such payment or distribution, whether a trustee in bankruptcy, a receiver, a liquidating trustee, or otherwise, directly to the holders of the Senior Debt to the extent necessary to make payment in full in cash of all Senior Debt -14 remaining unpaid; provided, however, that no such delivery of any Reorganization Securities shall be made to holders of the Senior Debt. (b) If the Seller does not file a proper claim or proof of debt or other document or amendment thereof in the form required in any Insolvency Proceeding relative to the Company under applicable law prior to 15 days before the expiration of time to file such claim or other document or amendment thereof, then the holders of the Senior Debt shall have the right (but not the obligation) in such Insolvency Proceeding, and hereby irrevocably are appointed lawful attorney of the Seller for the purpose of enabling the holders of the Senior Debt, to demand, sue for, collect, receive and give receipt for the payments and distributions in respect of this Note that are made in such Insolvency Proceeding and that are required to be paid or delivered to the holders of the Senior Debt as provided in Section 8.2(a), and to file and prove all claims therefor and to execute and deliver all documents in such proceeding in the name of the Seller or in the name of the holders of the Senior Debt or otherwise in respect of such claims, as the holders of the Senior Debt reasonably may determine to be necessary or appropriate to effectuate the foregoing, provided, that the holders of the Senior Debt shall act in a commercially reasonable manner and shall notify the Seller prior to commencing the first of any such actions. The holders of the Senior Debt are authorized (but shall not be required) to vote or otherwise act in any such Insolvency Proceeding in the capacity of the holder of this Note (including, without limitation, the right to vote to accept or reject any plan of reorganization, composition, arrangement or liquidation), subject to the rights of the Seller set forth in Section 8.3. (c) In the event that, notwithstanding the foregoing provisions of this Section 8.2, the Seller shall have received any payment or distribution of any kind or character, whether in cash, property or securities (other than Reorganization Securities), by setoff (other than Offset Interest Payments or Offset Prepayments) or otherwise which was paid or delivered in respect of the Subordinated Obligations pursuant to an Insolvency Proceeding, before all Senior Debt is paid in full in cash, then and in such event such payment or distribution shall be segregated and held in trust for the benefit of and immediately shall be paid over to the holders of the Senior Debt for application to the payment of all Senior Debt remaining unpaid until all such Senior Debt shall have been paid in full in cash. Section 8.3. Standstill. Until the Senior Debt is paid in full in cash, the Seller shall (notwithstanding the provisions of Section 7) be prohibited from accelerating this Note and shall be prohibited from enforcing any of its default remedies with respect thereto (including any right to sue the Company or to file or participate in the filing of an involuntary bankruptcy petition against the Company) except that (a) in the case of the failure by the Company (1) to make a Section 4.2 Required Prepayment when due or (2) to pay the outstanding principal amount of this Note together with accrued interest thereon on the Maturity Date, so long as no Senior Debt Default exists or would result from the making of any prepayment or payment described in clause (1) or (2) of this Section 8.3 (other than a Senior Debt Default arising from the Company's failure to make any prepayment or payment described in clause (1) or (2) of this Section 8.3), the Seller -15 may accelerate or take any other enforcement action with respect to this Note (subject to the other subordination provisions of this Section 8); provided, however, that if a Senior Debt Default then exists or would result from the making of any prepayment or payment described in clause (1) or (2) of this Section 8.3 (other than a Senior Debt Default arising from the Company's failure to make any prepayment or payment described in clause (1) or (2) of this Section 8.3), the Seller may, upon the first to occur of (i) the 180th day after the due date of such Section 4.2 Required Prepayment or the Maturity Date, as applicable, (ii) the date on which there is commenced by or against the Company any Insolvency Proceeding, (iii) the date upon which any Bank Agent or any holder of Senior Debt commences a judicial proceeding to collect any Senior Debt (in respect of $10,000,000 or more of Senior Debt) or commences to realize upon any collateral for any such Senior Debt pursuant to the exercise of remedies or gives notice of any non-judicial sale of any such collateral or (iv) the date upon which the date for payment of any Senior Debt is accelerated under the Credit Agreement or any Synthetic Lease Guaranty, the Seller may accelerate or take any other enforcement action with respect to this Note (subject to the other subordination provisions of this Section 8) and (b) this Note may be declared immediately due and payable and the Seller may take any other enforcement action with respect to this Note (subject to the other subordination provisions of this Section 8) if the Indebtedness under one or more Senior Debt Agreements pursuant to which (1) Senior Debt in an aggregate principal amount of $100,000,000 or more is outstanding or (2) there are commitments thereunder to provide Senior Debt in an aggregate principal amount of $100,000,000 or more, is declared immediately due and payable. The provisions of this Section 8.3 shall not, however, prohibit the Seller from seeking specific performance of, or an injunction to enjoin violation of, any covenant by the Company (other than a covenant to pay any Subordinated Obligation). Section 8.4. No Impairment. No right of any present or future holder of Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any non-compliance by the Company with the terms, provisions and covenants of this Note, regardless of any knowledge thereof the Seller may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of the Senior Debt may, at any time and from time to time, without the consent of or notice to the Seller, without incurring responsibility and without impairing or releasing the subordination provided in this Section 8, do any one or more of the following (so long as such actions or omissions are not prohibited by Section 5.3 hereof): (a) change the manner, place or terms of payment or extend the time of payment of, or renew, amend, modify, or alter, any Senior Debt or any Senior Debt Agreement evidencing the same or evidencing, governing, creating, guaranteeing or securing any Senior Debt; (b) sell, exchange, release, or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (c) release any Person liable in any manner for the collection of Senior Debt; (d) fail or delay in the perfection of Liens securing the Senior Debt, (e) exercise or refrain from exercising any rights against the Company and any other Person (including, without limitation, actions with respect to the foreclosure upon, sale, release or failure to realize upon, any of its collateral, and actions with respect to the collection of -16 any claim for all or any part of the Senior Debt from any account debtor or any other Person, regardless of whether any such actions or omissions may affect the rights of the holders of the Senior Debt to a deficiency) and (f) from time to time enter into agreements and settlements with the Company as it may determine, including, without limitation, any substitution of collateral, any release of any Lien and any release of the Company. The provisions of this Section 8 are for the purpose of defining the relative rights of the holders of Senior Debt on the one hand, and the Seller on the other hand, and nothing herein shall impair, as between the Company and the Seller, the obligation of the Company, which is unconditional and absolute, to pay to the Seller the principal hereof and interest hereon in accordance with the terms and provisions of this Note, nor shall anything herein prevent the Seller from exercising all remedies otherwise permitted by applicable law or hereunder upon Default hereunder (including the right to demand payment and sue for performance hereof and to accelerate the maturity hereof as provided in Section 7), subject to the rights, if any, of holders of Senior Debt under this Section 8. Upon payment in full in cash of all Senior Debt, the Seller shall, to the extent of any payments or distributions paid or delivered to the holders of the Senior Debt or otherwise applied to the Senior Debt pursuant to the provisions of this Section 8, be subrogated to the rights of the holders of the Senior Debt to receive payments or distributions of assets of the Company made on Senior Debt (and any security therefor) until the Subordinated Obligations shall be paid in full in cash, and, for the purposes of such subrogation, no payments to the holders of Senior Debt of any cash, assets, stock, or obligations to which the Seller would be entitled except for the provisions of this Section 8 shall, as between the Company, its creditors (other than the holders of the Senior Debt), and the Seller, be deemed to be a payment by the Company to or on account of Senior Debt. The fact that failure to make any payment on account of the Subordinated Obligations is caused by reason of the operation of any provision of this Section 8 shall not be construed as preventing the occurrence of an Event of Default. Section 8.5. Recoveries. If a claim is made upon any holder or holders of Senior Debt for repayment or recovery of any amount (a "Voidable Transfer") on account of any Senior Debt under any state or Federal law, whether by reason of preference, fraudulent conveyance, or otherwise and if such holder or holders of Senior Debt repay all or a portion of such amounts by reason of (a) any judgment, decree, or order of any court or administrative body having jurisdiction over such holder or holders, or (b) any settlement or compromise of any claim effected by such holder or holders based upon the reasonable advice of counsel, then, as to the amount that has been repaid, the provisions of this Section 8 automatically shall be reinstated and restored and the amount so repaid shall constitute Senior Debt entitled to the benefits of this Section 8 as if such Voidable Transfer never had been made. The foregoing provisions of this Section 8 shall constitute a continuing offer to all Persons who become holders of Senior Debt, and such provisions are made for the benefit of, and may be enforced directly by, holders of Senior Debt, who hereby are expressly stated to be intended beneficiaries of this Section 8, whether or not they actually relied thereon. The Seller covenants that it will not enter into any amendment or modification of the provisions of this Section 8 (and the -17 related definitions) without having obtained the prior written consent of the holders of the Senior Debt under the Credit Agreement. Section 8.6. Payments to Bank Agent. Any payment or distribution to be paid or delivered to the holders of the Senior Debt under the provisions of this Section 8 may be paid or delivered to one or more Bank Agents for such holders. The Seller shall be entitled to rely on the delivery to it of a written notice purported to be signed on behalf of an officer or representative of any Bank Agent believed by it in good faith to be genuine to establish the identity of such Bank Agent, the amount of the outstanding Senior Debt and other matters relevant to the provisions of this Section 8. SECTION 9. EXPENSES, ETC. Section 9.1. Expenses. The Company will pay all reasonable costs and expenses (including reasonable attorneys' fees) incurred by the Seller in connection with any amendment, waiver or consent requested by the Company under or in respect of this Note (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Note or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Note, or by reason of being the holder of this Note and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or in connection with any work-out or restructuring of the transactions contemplated by this Note. Section 9.2. Survival. The obligations of the Company under this Section 9 will survive the payment or transfer of this Note and the enforcement, amendment or waiver of any provision hereof. SECTION 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Note, the transfer by the Seller of this Note or any portion hereof or interest herein and the payment of this Note, and may be relied upon by any subsequent holder of this Note, regardless of any investigation made at any time by or on behalf of the Seller or any subsequent holder of this Note. This Note embodies the entire agreement and understanding between the Company and the Seller and supersedes all prior agreements and understandings relating to the subject matter hereof. SECTION 11. AMENDMENT AND WAIVER. Section 11.1. Requirements. This Note may be amended, and the observance of any term hereof may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Seller. -18 Section 11.2. Binding Effect, Etc. Any amendment or waiver consented to as provided in this Section 11 is binding upon the Seller, each subsequent holder of this Note and upon the Company without regard to whether this Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the Seller nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of the Seller. As used herein, the term "this Note" and references hereto shall mean this Note as it may from time to time be amended or supplemented. SECTION 12. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid); or (b) by registered or certified mail with return receipt requested (postage prepaid) or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (1) if to the Seller, to it at 7030 Ardmore, Houston, Texas 77054 to the attention of the General Counsel, or at such other address as the Seller shall have specified to the Company in writing, (2) if to any subsequent holder of this Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (3) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of William S. Goldberg, or at such other address as the Company shall have specified to the Seller in writing. Notices under this Section 12 will be deemed given only when actually received. SECTION 13. MISCELLANEOUS. Section 13.1. Successors and Assigns. All covenants and other agreements contained in this Note by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of this Note) whether so expressed or not. Section 13.2. Payments Due on Non-Business Days. Anything in this Note to the contrary notwithstanding, any payment of principal of or interest on this Note that is due on a date other than a Business Day shall be due and made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. -19 Section 13.3. Severability. Any provision of this Note 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 (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. Section 13.4. Construction. Each covenant contained in this Note shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision in this Note refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Section 13.5. Limitation on Interest. (a) It is the intent of the Company and the Seller to comply strictly with applicable usury laws, and the Company and the Seller stipulate and agree that none of the terms and provisions contained in this Note shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. If any excess of interest in such respect is hereby provided for or shall be adjudicated to be so provided in this Note, the provisions of this Section 13.5 shall govern and prevail, and neither the Company nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of this Note shall ever be obligated to pay the excess amount of such interest. The provisions of this Section 13.5 shall control over all other provisions of this Note that may be in conflict or apparent conflict herewith. The Seller expressly disavows any intention to charge, collect or contract for excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note is accelerated for any reason, any amounts held to constitute interest which are then unearned and have theretofore been collected by the Seller shall be applied as of the date of receipt thereof to reduce the principal balance hereof then outstanding and if the principal of this Note has been paid in full, any remaining excess shall be forthwith paid to the Company. If the Seller shall receive, collect or apply monies which are deemed to constitute interest which would otherwise increase the interest on this Note to an amount in excess of that permitted to be charged by applicable law then in effect, all such sums deemed to constitute interest in excess of such legal limit shall be applied to reduce the principal balance hereof then outstanding or immediately returned to the Company or the other payor thereof upon such determination. All sums paid or agreed to be paid to the Seller for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by law applicable to the Seller, be amortized, prorated, allocated and spread throughout the full term of the Indebtedness evidenced by this Note until payment in full so that the rate or amount of interest on account of any Indebtedness hereunder does not exceed the maximum amount allowed by such applicable law. If at any time and from time to time -20 (1) the amount of interest payable to the Seller on any date shall, pursuant to this Section 13.5, be limited and (2) in respect of any subsequent interest computation period, the amount of interest otherwise payable to the Seller would be less than the amount of interest payable to the Seller computed at the maximum lawful rate applicable to the Seller, then the amount of interest payable to the Seller in respect to such subsequent interest computation period shall continue to be computed at the maximum lawful rate applicable to the Seller until the total amount of interest payable to the Seller shall equal the total amount of interest which would have been payable to the Seller if the total amount of interest had been computed without giving effect to this Section 13.5. (b) As used in this section the term "applicable law" means the laws of the State of Texas or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. Section 13.6. Governing Law. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Texas excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. HANOVER COMPRESSOR COMPANY By /s/ [ILLEGIBLE] -------------------------- Its PRESIDENT & CEO -21 EX-10.62 15 dex1062.txt AGREEMENT BY AND AMONG BELLELI EXHIBIT 10.62 AGREEMENT BY AND AMONG SJMB, L.P., CHARLES E. UNDERBRINK, JOHN L. THOMPSON AND BELLELI ENERGY SrL, AND HANOVER COMPRESSOR COMPANY HANOVER COMPRESSION GENERAL HOLDINGS, LLC HANOVER COMPRESSOR HOLDING COMPANY NL B.V. HANOVER COMPRESSOR NIGERIA, INC., HANOVER COMPRESSION LIMITED PARTNERSHIP HCC MANTOVA S.r.L. September 20, 2002 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS............................................................................................1 1.1. Definitions.....................................................................................1 1.2. Interpretation..................................................................................5 ARTICLE II. PURCHASE AND SALE OF THE SUBJECT QUOTAS...............................................................5 2.1. Capital Structure...............................................................................5 2.2. Purchase and Sale of the Quotas.................................................................5 2.3. Purchase Price..................................................................................5 ARTICLE III. CLOSING..............................................................................................6 3.1. Closing.........................................................................................6 3.2. SJMB Deliveries at Closing......................................................................6 3.3. Hanover Entities Deliveries at Closing..........................................................6 3.4. Recordation.....................................................................................7 ARTICLE IV. CONDITIONS PRECEDENT TO THE CLOSING...................................................................7 4.1. Conditions Precedent to Obligations of SJMB, Underbrink and Thompson............................7 4.2. Conditions Precedent to Obligations of the Hanover Entities.....................................8 ARTICLE V. OPTIONS TO PURCHASE....................................................................................9 5.1. SJMB Purchase Option............................................................................9 5.2. HCHC Purchase Option...........................................................................11 ARTICLE VI. BONDS AND LETTERS OF CREDIT..........................................................................13 6.1. Existing Belleli Financing.....................................................................13 6.2. Additional Financing...........................................................................13 6.3. Replacement of Scheduled Bonds or Letters of Credit and Repayment of Scheduled Cash............14 6.4. Interest Payments on Scheduled Letters of Credit and Scheduled Cash............................14 6.5. Invoices and Payment...........................................................................14 ARTICLE VII. BELLELI FINANCING AND CAPITAL STRUCTURE.............................................................14 7.1. Additional Financing...........................................................................14 7.2. Capital Contributions..........................................................................14 7.3. Additional Actions.............................................................................15 7.4. Capital Structure..............................................................................15 7.5. Assets.........................................................................................15
ii 7.6. Distributions..................................................................................16 7.7. Control........................................................................................16 7.8. Further Financing, Bonding, Letters of Credit, Guarantees, Etc.................................16 ARTICLE VIII. HCC MANTOVA FINANCING & CAPITAL STRUCTURE..........................................................16 8.1. Existing HCC Mantova Financing.................................................................16 8.2. Additional Financing...........................................................................16 8.3. Capital Contributions..........................................................................16 8.4. Capital Structure..............................................................................16 8.5. Assets.........................................................................................17 8.6. Distributions..................................................................................17 8.7. Control........................................................................................17 ARTICLE IX. ENTERPRISE VALUATION SALE............................................................................17 9.1. Enterprise Valuation Sale......................................................................17 9.2. Enterprise Valuation Sale to Unaffiliated Third Party..........................................18 9.3. Cooperation....................................................................................19 9.4. Representations and Warranties.................................................................19 ARTICLE X. REPRESENTATIONS AND WARRANTIES........................................................................19 10.1. Representations and Warranties of SJMB.........................................................19 10.2. Representations and Warranties of Non-Mantova Hanover Entities.................................21 10.3. Representations and Warranties of Belleli......................................................22 10.4. Representations and Warranties of HCC Mantova..................................................24 10.5. Representations and Warranties of HCHC.........................................................26 10.6. Representations and Warranties of HCLP.........................................................26 ARTICLE XI. INDEMNIFICATION AND GUARANTEE........................................................................27 11.1. Survival of Representations and Warranties.....................................................27 11.2. Indemnification................................................................................27 ARTICLE XII. TERMINATION OF OTHER AGREEMENTS AND RELEASES........................................................28 12.1. Termination of Other Agreements................................................................28 ARTICLE XIII. MISCELLANEOUS......................................................................................28 13.1. Notices........................................................................................28 13.2. Binding Effect; Benefits.......................................................................29 13.3. Waiver.........................................................................................29 13.4. Amendments.....................................................................................30 13.5. Assignability..................................................................................30 13.6. Governing Law..................................................................................30 13.7. Counterparts...................................................................................30
iii 13.8. Entire Agreement...............................................................................30 13.9. Severability...................................................................................30 13.10. Disputes...................................................................................... 30 13.11. Fees and Expenses..............................................................................30 13.12. Remedy.........................................................................................30 13.13. Cooperation....................................................................................31 13.14. Restriction on Sale of Subject Quotas..........................................................31
SCHEDULES Schedule 3.2(a) SJMB Release Schedule 3.2(d) Lease Consent (to lease of assets of business from HCC Mantova to Belleli) Schedule 3.2(f) Instrument of Transfer of the "Subject Quotas" Schedule 3.3(a) Hanover Release Schedule 3.3(e) Satisfaction, Release and Indemnification Agreement Schedule 5.1(f) Representations and Warranties at Option Closing Schedule 6.1-1 Hanover Entities Scheduled Bonds or Letters of Credit Schedule 6.1-2 SJMB Scheduled Bonds or Letters of Credit Schedule 6.1(a)-1 Hanover Entities Scheduled Cash Schedule 6.1(a)-2 SJMB Scheduled Cash Schedule 6.1(b) Hanover Capital Contribution Schedule 10.3(c) Litigation against Belleli Schedule 10.3(f) Belleli Unaudited Financial Statements as of June 30, 2002 Schedule 10.3(g) Belleli Capital Calls Schedule 10.3(h) Belleli Distributions Schedule 10.3(i) Belleli Material Assets Schedule 10.4(e) Litigation against HCC Mantova Schedule 10.4(i) HCC Mantova Unaudited Financial Statements as of June 30, 2002 Schedule 10.4(j) HCC Mantova Capital Calls Schedule 10.4(k) HCC Mantova Distributions Schedule 10.4(l) HCC Mantova Material Assets Schedule 12.1 Agreements Subject to Termination Schedule 12.1-2 Agreements Not Subject to Termination iv THIS AGREEMENT (the "Agreement") is made and entered into effective as of September 20, 2002 (the "Effective Date"), among SJMB, L.P., a Delaware limited partnership ("SJMB"), Charles E. Underbrink ("Underbrink"), John L. Thompson ("Thompson"), Belleli Energy, SrL, an Italian company ("Belleli"), Hanover Compressor Company, a Delaware corporation ("Hanover"), Hanover Compression General Holdings, LLC, a Delaware limited liability company ("HCGH"), Hanover Compressor Holding Company NL B.V. ("HCHC"), a Dutch corporation, Hanover Compressor Nigeria, Inc. a Delaware corporation (formerly known as Hanover Compressor Colombia, Inc., a Delaware corporation) ("HCNI"), Hanover Compression Limited Partnership, a Delaware limited partnership ("HCLP"), and HCC Mantova S.r.L., an Italian company, ("HCC Mantova"). SJMB, Underbrink, Thompson, Belleli, Hanover, HCGH, HCHC, HCLP, HCNI, and HCC Mantova are sometimes hereinafter referred to individually as a "Party" and collectively as the "Parties". WHEREAS, HCHC owns quotas of Belleli representing 40.31% of the outstanding and issued quotas of Belleli; WHEREAS, HCHC desires to purchase quotas of Belleli representing an 10.69% ownership interest of Belleli from SJMB, on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby agree as follows. ARTICLE I. DEFINITIONS 1.1. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Affiliate" shall mean, with respect to any person, any person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such person. The term "control" (including "controlled by" or "under common control with") shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies, of a person, whether through the ownership of voting securities, by contract or otherwise. The term "person" as used in this Agreement shall be broadly interpreted to include, without limitation, any corporation, company, partnership, individual or other entity. "Additional Financing" shall have the meaning set forth in Section 6.2 herein. "Agreement" shall have the meaning set forth in the introductory paragraph. "Belleli" shall have the meaning set forth in the introductory paragraph. "Belleli-Related Business" shall have the meaning set forth in Section 8.5 herein. "Closing" shall have the meaning set forth in Section 3.1 herein. 1 "Closing Date" shall have the meaning set forth in Section 3.1 herein. "EBITDA" shall mean earnings before interest, taxes, depreciation and amortization. "Effective Date" shall have the meaning set forth in the introductory paragraph. "Encumbrance" shall mean any encumbrance, charge, lien, pledge, condemnation award, claim, restriction, security interest, mortgage, defect of title, joint ownership, right of first offer, option, right of first refusal or other encumbrance or charge of any kind. "Enterprise Valuation Purchase Price" shall have the meaning set forth in Section 9.1 herein. "Governmental Authority" shall mean any governmental authority or judicial, regulatory, or administrative body of any country or political subdivision thereof exercising jurisdiction over SJMB, Belleli, Hanover, HCGH, HCHC, HCNI, HCLP or HCC Mantova. "Hanover" shall have the meaning set forth in the introductory paragraph. "Hanover Capital Contribution" shall have the meaning set forth in Section 6.1 herein. "Hanover Entities" shall mean Hanover, HCGH, HCHC, HCNI, HCLP and HCC Mantova. "HCNI" shall have the meaning set forth in the introductory paragraph. "HCC Mantova" shall have the meaning set forth in the introductory paragraph. "HCC Mantova Assets" shall have the meaning set forth in Section 10.4 herein. "HCC Mantova Assets, Taxes and Fees" shall have the meaning set forth in Section 8.1 herein. "HCGH" shall have the meaning set forth in the introductory paragraph. "HCHC" shall have the meaning set forth in the introductory paragraph. "HCHC Initial Belleli Quotas" shall have the meaning set forth in Section 2.1 herein. "HCHC Initial HCC Mantova Quotas" shall have the meaning set forth in Section 10.4 herein. "HCLP Initial HCC Mantova Quotas" shall have the meaning set forth in Section 10.4 herein. 2 "HCHC Ownership Interest in Belleli" shall have the meaning set forth in Section 2.2 herein. "HCHC Ownership Interest in HCC Mantova" shall have the meaning set forth in Section 5.1 herein. "HCLP Ownership Interest in HCC Mantova" shall have the meaning set forth in Section 5.1 herein. "HCHC Percentage Ownership" shall have the meaning set forth in Section 2.2 herein. "HCHC Purchase Option" shall have the meaning set forth in Section 5.2 herein. "HCHC Purchase Option Closing" shall have the meaning set forth in Section 5.2 herein. "HCHC Purchase Option Closing Date" shall have the meaning set forth in Section 5.2 herein. "HCHC Purchase Option Price" shall have the meaning set forth in Section 5.2 herein. "HCLP" shall have the meaning set forth in the introductory paragraph. "Losses" shall have the meaning set forth in Section 11.2 herein. "Management Employees" shall have the meaning set forth in Section 4.2 herein. "Material Adverse Effect", with respect to any entity, shall mean a material adverse change in, or effect on the business, financial position, prospects or results of operations of such entity. "Non-Mantova Hanover Entities" shall have the meaning set forth in Section 5.1 herein. "Other Party" shall have the meaning set forth in Section 9.1 herein. "Party" and "Parties" shall have the meaning set forth in the introductory paragraph. "Proposing Party" shall have the meaning set forth in Section 9.1 herein. "Purchase Price" shall have the meaning set forth in Section 2.3 herein. "Quarterly EBITDA Notice" shall have the meaning set forth in Section 9.1 herein. 3 "Refund Distribution or Dividend" shall have the meaning set forth in Section 8.6 herein. "Selling Party's Percentage Ownership Interest" shall have the meaning set forth in Section 9.1 herein. "SJMB" shall have the meaning set forth in the introductory paragraph. "SJMB Initial Quotas" shall have the meaning set forth in Section 2.1 herein. "SJMB Ownership Interest in Belleli" shall have the meaning set forth in Section 2.2 herein. "SJMB Percentage Ownership" shall have the meaning set forth in Section 2.2 herein. "SJMB Purchase Option" shall have the meaning set forth in Section 5.1 herein. "SJMB Purchase Option Closing" shall have the meaning set forth in Section 5.1 herein. "SJMB Purchase Option Closing Date" shall have the meaning set forth in Section 5.1 herein. "SJMB Purchase Option Price" shall have the meaning set forth in Section 5.1 herein. "Scheduled Advancer" shall have the meaning set forth in Section 6.3 herein. "Scheduled Bond" shall have the meaning set forth in Section 6.1 herein. "Scheduled Bonds or Letters of Credit" shall have the meaning set forth in Section 6.1 herein. "Scheduled Cash" shall have the meaning set forth in Section 6.1 herein. "Scheduled Issuer" shall have the meaning set forth in Section 6.3 herein. "Scheduled Letter of Credit" shall have the meaning set forth in Section 6.1 herein. "Subject Quotas" shall have the meaning set forth in Section 2.2 herein. "Thompson" shall have the meaning set forth in the introductory paragraph. "Triggering Valuation" shall have the meaning set forth in Section 9.1 herein. "Unaffiliated Third Parties" shall have the meaning set forth in Section 6.2 herein. 4 "Underbrink" shall have the meaning set forth in the introductory paragraph. "U.S.$" or "Dollars" shall mean the legal currency and tender of the United States of America. 1.2. Interpretation. Unless otherwise indicated: 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 or section, unless otherwise specified. The words "include" and "including" and words of similar import when used in this Agreement shall not be limiting but shall rather be deemed to be followed by the words "without limitation." The singular includes the plural, and the plural includes the singular. Words importing any gender include the other gender. The word "or" shall mean "and/or." ARTICLE II. PURCHASE AND SALE OF THE SUBJECT QUOTAS 2.1. Capital Structure. HCHC and SJMB acknowledge and agree that, as of the Effective Date of this Agreement, (i) SJMB is the record holder of 3,988,773 quotas, equal to a 59.58% interest in Belleli ("SJMB Initial Quotas"), and (ii) HCHC is the record holder of 2,698,679 quotas, equal to a 40.31% interest in Belleli ("HCHC Initial Belleli Quotas"). 2.2. Purchase and Sale of the Quotas. Pursuant to the terms of this Agreement, subject to the satisfaction to the conditions precedent to closing set forth in Article IV, SJMB hereby agrees to sell, transfer and deliver, or cause to be sold, transferred and delivered to HCHC, and HCHC hereby agrees to purchase 715,408 quotas of Belleli from SJMB ("Subject Quotas") such that upon the transfer to HCHC by SJMB of the Subject Quotas as provided herein, that (i) SJMB will be the record holder of 3,273,365 quotas (which quotas together with any additional quotas in Belleli as SJMB may acquire after the Effective Date and excluding any quotas which SJMB may dispose of after the Effective Date shall collectively be referred to for purposes of this Agreement as the "SJMB Ownership Interest in Belleli"), equal to a 48.898% interest in Belleli ("SJMB Percentage Ownership") and (ii) HCHC will be the record holder of 3,414,087 quotas (which quotas together with any additional quotas in Belleli that HCHC or its Affiliates may acquire after the Effective Date and excluding any quotas which HCHC may dispose of after the Effective Date shall collectively be referred to for purposes of this Agreement as the "HCHC Ownership Interest in Belleli"), equal to a 51.000% interest in Belleli ("HCHC Percentage Ownership"). 2.3. Purchase Price. The purchase consideration for the Subject Quotas shall be the forgiveness of all indebtedness of any kind, including principal and interest, owed any of the Hanover Entities or their Affiliates by SJMB, Thompson and Underbrink and the release of all security interests, guarantees, indemnifications, and liens previously granted by any of SJMB, Thompson and Underbrink or their Affiliates to any of the Hanover Entities or their Affiliates (including those security agreements included in prior agreements between those parties) (the "Purchase Price"). 5 ARTICLE III. CLOSING 3.1. Closing. The closing of the transactions contemplated hereby (the "Closing") will be held in the offices of Latham & Watkins on September 30, 2002 at 10:00 a.m. Central time (the "Closing Date"), or, if the conditions to the Closing set forth in Article IV shall not have been satisfied by such date, as soon as practicable after such conditions shall have been satisfied. 3.2. SJMB Deliveries at Closing. At the Closing, SJMB shall deliver to the Hanover Entities the following: (a) an executed release by SJMB, SJMB, L.L.C., Thompson and Underbrink in the form attached hereto as Schedule 3.2(a); (b) a certificate signed by an authorized officer of SJMB to the effect that each of the conditions specified in clause (d) of Section 4.2 of this Agreement is satisfied; (c) evidence satisfactory to HCHC that each of the conditions specified in clause (e) of Section 4.2 of this Agreement is satisfied; (d) an executed lease consent in the form attached hereto as Schedule 3.2(d); (e) a copy of resolutions of the Managers of SJMB, L.L.C., the general partner of SJMB, certified as of the Closing Date by the Secretary or an Assistant Secretary of SJMB, L.L.C., which certified resolutions shall duly authorize the execution, delivery and performance of this Agreement, together with a certificate as to the incumbency of the persons executing such documents on its behalf, such certificate to be in a form and substance reasonably satisfactory to HCHC; and (f) an executed and notarized instrument of transfer (substantially in the form attached hereto as Schedule 3.2(f)) in respect of the Subject Quotas, as provided by and in accordance with Article 2479 of the Italian Civil Code, it being understood and agreed that such instrument of transfer shall not constitute a novation of the terms and conditions herein contained and that the language of such instrument of transfer is subject to adjustment to reflect (1) the precise number of quotas owned by HCHC and SJMB before the transfer (including any subscription by HCHC and/or SJMB of the quotas pertaining to unexercised options held by Impianti) and (2) the consideration for the transfer. 3.3. Hanover Entities Deliveries at Closing. At the Closing, the Hanover Entities shall deliver to SJMB, Underbrink and Thompson the following: (a) an executed release by the Hanover Entities in the form attached hereto as Schedule 3.3(a); (b) a certificate signed by the president or chief executive officer of each of the Hanover Entities to the effect that each of the conditions specified in clause (d) of Section 4.1 of this Agreement is satisfied; 6 (c) evidence satisfactory to SJMB that each of the conditions specified in clause (e) of Section 4.1 of this Agreement is satisfied; (d) a copy of resolutions of the Board of Directors or other governing body of each of the Non-Mantova Hanover Entities, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Hanover Entity, which certified resolutions shall duly authorize the execution, delivery and performance of this Agreement, together with a certificate as to the incumbency of the persons executing such documents on their behalf, such certificate to be in a form and substance reasonably satisfactory to SJMB; (e) an executed Satisfaction, Release and Indemnification Agreement in the form attached hereto as Schedule 3.3(e); (f) the original Unconditional Guaranty of Payment and Performance by Underbrink dated February 4, 2000 marked "cancelled"; (g) the original Unconditional Guaranty of Payment and Performance by Thompson dated February 4, 2000 marked "cancelled"; (h) the original $400,000 Promissory Note by SJMB to the order of HCLP dated February 14, 2001 marked "paid in full"; (i) the original $1,500,000 Promissory Note by SJMB to the order of HCLP dated July 31, 2001 marked "paid in full"; (j) executed UCC termination statements terminating all security interests granted in the past by SJMB in favor of any of the Hanover Entities in a form and substance reasonably satisfactory to St. James; and (k) SJMB's Black Warrior Stock Certificate No. 0399 representing 5,017,481 common shares currently held in escrow by Stephenson & Snokhous for the benefit of HCLP. 3.4. Recordation. The Parties shall each take such actions as are necessary to cause the sale of the Subject Quotas to be recorded in the quotaholders' ledger of Belleli promptly upon registration of the deed with Belleli's registrar. ARTICLE IV. CONDITIONS PRECEDENT TO THE CLOSING 4.1. Conditions Precedent to Obligations of SJMB, Underbrink and Thompson. The obligations of SJMB, Underbrink and Thompson set forth in this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions: (a) the representations and warranties made by the Hanover Entities, and each of them, herein, without taking into account any materiality qualifications therein, shall have been true and correct in all material respects when made, and shall be true and correct in all material respects at and as of the Closing, with the same force and effect as though made at the Closing except to the extent that such representations and warranties relate to an earlier date; 7 (b) the Hanover Entities, and each of them, shall have performed and complied in all material respects with all covenants, agreements and obligations in this Agreement to be performed or complied with prior to or at the Closing; (c) no action, proceeding, suit or investigation shall have been instituted nor shall governmental action before any court or other Governmental Authority be threatened in writing, nor shall any order, judgment or decree have been issued or proposed to be issued by any court or other Governmental Authority which does, or is reasonably likely to: (1) set aside, restrain, enjoin or prevent the consummation of transactions contemplated hereby; or (2) otherwise have a Material Adverse Effect on Belleli or HCC Mantova; (d) all necessary authorizations, agreements, registrations, orders, approvals and consents of any persons, entities or Governmental Authorities to the consummation of the transactions contemplated by this Agreement, or otherwise pertaining to the matters covered by it, shall have been obtained and delivered to SJMB and shall be in full force and effect as of the Closing Date, and no such authorizations, agreements, registrations, orders, approvals or consents shall impose any burdensome or, in SJMB's reasonable determination, unsatisfactory conditions or requirements on SJMB; and (e) the Hanover Entities shall have released all existing pledges and powers of attorney from SJMB to any of the Hanover Entities, HCHC shall have returned full ownership of the SJMB Initial Quotas to SJMB and HCHC shall have caused title to the SJMB Initial Quotas to be returned to SJMB, without encumbrance of any kind, and shall have caused such clear title to be reflected on the Register of Members of Belleli and in all appropriate public records, other than Encumbrances created by the terms of this Agreement. 4.2. Conditions Precedent to Obligations of the Hanover Entities. The obligations of the Hanover Entities set forth in this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions: (a) the representations and warranties made by SJMB herein, without taking into account any materiality qualifications therein, shall have been true and correct in all material respects when made, and shall be true and correct in all material respects at and as of the Closing, with the same force and effect as though made at the Closing except to the extent that such representations and warranties relate to an earlier date; (b) SJMB shall have performed and complied in all material respects with all covenants, agreements and obligations in this Agreement to be performed or complied with prior to or at the Closing; (c) no action, proceeding, suit or investigation shall have been instituted nor shall governmental action before any court or other Governmental Authority be threatened in writing, nor shall any order, judgment or decree have been issued or proposed to be issued by any court or other Governmental Authority which does, or is reasonably likely to: (1) set aside, restrain, enjoin or prevent the consummation of transactions contemplated hereby; or (2) otherwise have a Material Adverse Effect on Belleli or HCC Mantova; 8 (d) all necessary authorizations, agreements, registrations, orders, approvals and consents of any persons, entities or Governmental Authorities to the consummation of the transactions contemplated by this Agreement, or otherwise pertaining to the matters covered by it shall have been delivered to HCHC and shall be in full force and effect as of the Closing Date, and no such authorizations, agreements, registrations, orders, approvals or consents shall impose any burdensome, or in HCHC's reasonable determination, unsatisfactory conditions or requirements on HCHC; and (e) SJMB shall have obtained and delivered to HCHC a release from each of Sergio Garrone, Aldo Patrini and Ettorre Prucco (the "Management Employees") for any obligation of Belleli or HCLP or its Affiliates to sell or issue any equity interests in Belleli to such Management Employee. ARTICLE V. OPTIONS TO PURCHASE 5.1. SJMB Purchase Option. SJMB will have the option following the Closing Date to purchase the HCHC Ownership Interest in Belleli, plus HCHC's ownership interest in HCC Mantova, (which interest shall be equal to the HCHC Initial HCC Mantova Quotas (as defined in Section 10.4 herein)) (the "HCHC Ownership Interest in HCC Mantova"), plus the 0.01% ownership interest in HCC Mantova owned by HCLP (which interest shall be equal to the HCLP Initial HCC Mantova Quotas (as defined in Section 10.4 herein)) (the "HCLP Ownership Interest in HCC Mantova"), as follows: (a) Exercise Period. HCHC and HCLP grant to SJMB and its assigns the right to acquire the HCHC Ownership Interest in Belleli, the HCHC Ownership Interest in HCC Mantova, and the HCLP Ownership Interest in HCC Mantova (the "SJMB Purchase Option"). Such purchase option is exercisable at any time prior to June 30, 2003 by the delivery of irrevocable written notice to HCHC at least 15 days prior to the closing of the purchase thereunder (the "SJMB Purchase Option Closing"), which notice shall set forth the date of closing (the "SJMB Purchase Option Closing Date"). (b) SJMB Purchase Option Price. The exercise price for the SJMB Purchase Option (the "SJMB Purchase Option Price"), which shall be paid to HCHC in full in cash at the SJMB Purchase Option Closing, shall be the sum of: (i) Thirty-eight Million Six Hundred Twenty-two Thousand Four Hundred Twenty Seven and 00/100 Dollars (U.S. $38,622,427); plus, (ii) the payment or satisfaction in full of all obligations of SJMB to the Hanover Entities or their Affiliates (not including HCC Mantova or Belleli) incurred after the Effective Date (provided that such payment will be made only with respect to such obligations as were incurred in accordance with the terms of this Agreement); plus, 9 (iii) the repayment of any additional capital HCHC has contributed after the Effective Date to Belleli or HCC Mantova (provided that such capital contributions have been made only in accordance with the terms of this Agreement), excluding any capital contributions made by the Hanover Entities or their Affiliates after the Effective Date that are treated as debt for purposes of Article IX hereof; plus, (iv) the repayment of any loans made to Belleli by any of the Hanover Entities or their Affiliates (not including HCC Mantova) ("Non-Mantova Hanover Entities") (provided that such loans have been disclosed or made only in accordance with the terms of this Agreement), including, without limitation, any capital contributions made by the Non-Mantova Hanover Entities or their Affiliates after the Effective Date that are treated as debt for purposes of Article IX hereof; plus (v) the greater of: (a) the product of (1) the HCHC Percentage Ownership, and (2) Belleli's EBITDA, as determined by Arthur Andersen, for the period commencing January 1, 2002 and ending on the forty-fifth (45th) day prior to the SJMB Purchase Option Closing Date; or (b) $0.00; minus (vi) the amount of any payments to HCHC or any other Non-Mantova Hanover Entity in repayment of any of the loans referenced in Section 5.1(b)(iv) hereof. (c) Releases Upon Exercise of SJMB Purchase Option. At the SJMB Purchase Option Closing, SJMB shall provide for the release and return of all letters of credit, bonds, guarantees and other sureties provided by the Non-Mantova Hanover Entities for the benefit of Belleli (provided that such letters of credit, bonds, guarantees and other sureties have been disclosed or made only in accordance with the terms of this Agreement). (d) Cooperation. HCHC and HCC Mantova and Belleli shall cooperate with and use their reasonable best efforts to assist SJMB and its agents in obtaining a new equity partner or financing for the purpose of exercising the SJMB Purchase Option, including access to the financial information, physical assets, customers, and holders of liabilities of Belleli and HCC Mantova, subject to non-interference with the business of Belleli and HCC Mantova and the execution of confidentiality agreements with any such prospective partner or financing source and their representatives. (e) Duties Upon Close of SJMB Purchase Option. HCHC, HCLP and HCC Mantova will, at the SJMB Purchase Option Closing, and thereafter to the extent reasonable upon SJMB's request, take the following actions: (i) HCHC will take all action as is required to immediately cause good and marketable title to the HCHC Ownership Interest in Belleli to be transferred to SJMB or its assigns without counterclaims or setoffs, free of Encumbrances; 10 (ii) HCHC will further cause each person who is in any way affiliated with HCHC or any Hanover Entity to immediately resign any position as an officer or director of Belleli; (iii) HCHC and HCLP will further immediately cause good and marketable title to the HCHC Ownership Interest in HCC Mantova and the HCLP Ownership Interest in HCC Mantova, respectively, to be transferred to SJMB or its assigns without counterclaims or setoffs, free of Encumbrances; and (iv) HCHC and HCLP will further cause each person who is in any way affiliated with HCHC, HCLP or any Hanover Entity to immediately resign any position as an officer or director of HCC Mantova. (f) HCHC Representations and Warranties at SJMB Purchase Option Closing. At the SJMB Purchase Option Closing, HCHC shall make such representations and warranties as are customary in transactions of this sort relating to the interests being sold and the assets and liabilities associated therewith (including but not limited to the representations and warranties set forth in Schedule 5.1(f)); provided, however, that HCHC shall not be required to make any representation or warranty with respect to which (i) HCHC believes in good faith is not true or will not be true when made or (ii) HCHC does not have a good faith reasonable basis to believe is true and accurate when given or made. 5.2. HCHC Purchase Option. HCHC will have the option following the Closing Date to purchase the SJMB Ownership Interest in Belleli, as follows: (a) Exercise Period. SJMB grants to HCHC and its assigns the right to acquire the SJMB Ownership Interest in Belleli (the "HCHC Purchase Option"). Such purchase option is exercisable at any time after June 30, 2003 and prior to September 30, 2003 by the delivery of irrevocable written notice to SJMB at least 15 days prior to the closing of the purchase thereunder ("HCHC Purchase Option Closing"), which notice shall set forth the date of closing ("HCHC Purchase Option Closing Date"). (b) HCHC Purchase Option Price. The exercise price for the HCHC Purchase Option (the "HCHC Purchase Option Price") which shall be paid to SJMB in full in cash at the HCHC Purchase Option Closing shall be the sum of: (i) Eleven Million and 00/100 Dollars (U.S. $11,000,000); plus, (ii) the payment or satisfaction in full of all obligations of the Hanover Entities to SJMB or its Affiliates incurred after the Effective Date (provided that such payment will be made only with respect to such obligations as were incurred in accordance with the terms of this Agreement); plus, 11 (iii) the repayment of any additional capital SJMB has contributed after the Effective Date to Belleli (provided that such capital contributions have been made only in accordance with the terms of this Agreement), excluding any capital contributions made by SJMB after the Effective Date that are treated as debt for purposes of Article IX hereof; plus, (iv) the repayment of any loans made to Belleli by SJMB (provided that such loans have been disclosed or made only in accordance with the terms of this Agreement), including, without limitation, any capital contributions made by the SJMB after the Effective Date that are treated as debt for purposes of Article IX hereof; plus, (v) the greater of: (a) the product of (1) the SJMB Percentage Ownership Interest, and (2) Belleli's EBITDA, as determined by Arthur Andersen, for the period commencing January 1, 2002 and ending on the forty-fifth (45th) day prior to the SJMB Purchase Option Closing Date; or (b) $0.00; minus, (vi) the amount of any payments to SJMB in repayment of any of the loans referenced in Section 5.2(b)(iv) hereof. (c) Releases Upon Exercise of HCHC Purchase Option. At the HCHC Purchase Option Closing, the Hanover Entities shall provide for the release and return of all letters of credit, bonds, guarantees and other sureties provided by SJMB or its Affiliates for the benefit of Belleli (provided that such letters of credit, bonds, guarantees and other sureties have been disclosed or made only in accordance with the terms of this Agreement). (d) Duties Upon Close of HCHC Purchase Option. SJMB will, at the HCHC Purchase Option Closing, and thereafter to the extent reasonable upon HCHC's request, take the following actions: (i) SJMB will take all action as is required to immediately cause good and marketable title of the SJMB Ownership Interest in Belleli to be transferred to HCHC or its assigns without counterclaims or setoffs, free of Encumbrances; and (ii) SJMB will further cause each person who is in any way affiliated with SJMB to immediately resign any position as an officer or director of Belleli. (e) SJMB Representations and Warranties at HCHC Purchase Option Closing. At the HCHC Purchase Option Closing, SJMB shall make such representations and warranties as are customary in transactions of this sort relating to the interests being sold and the assets and liabilities associated therewith (including but not limited to the representations and warranties set forth in Schedule 5.1(f)); provided, however, that SJMB shall not be required to make any representation or warranty with respect to which (i) SJMB believes in good faith is not 12 true or will not be true when made or (ii) SJMB does not have a good faith reasonable basis to believe is true and accurate when given or made. ARTICLE VI. BONDS AND LETTERS OF CREDIT 6.1. Existing Belleli Financing. As of the Effective Date hereof, the current outstanding face amounts of bonds and letters of credit issued by one or more of the Hanover Entities and SJMB are set forth on Schedule 6.1-1 and Schedule 6.1-2 attached hereto, respectively (collectively, "Scheduled Bonds and Letters of Credit" and, individually "Scheduled Bond" or "Scheduled Letter of Credit"). (a) As of the Effective Date hereof, the current outstanding amount of any cash or other consideration advanced by one or more of the Hanover Entities or SJMB to or for the benefit of Belleli (whether characterized as constituting a loan to Belleli, as creating a debt, a repayment, or a reimbursement obligation by Belleli or otherwise) is set forth on Schedule 6.1(a)-1 or Schedule 6.1(a)-2 attached hereto, respectively ("Scheduled Cash"). Scheduled Cash for purposes of hereof shall include any costs incurred by SJMB and the Hanover Entities to issue any Scheduled Bond or Scheduled Letter of Credit. (b) Prior to the Effective Date, the Hanover Entities contributed the cash advances set forth on Schedule 6.1(b) to the capital of Belleli (the "Hanover Capital Contribution"). The Parties acknowledge and agree that the Hanover Capital Contribution shall be treated as debt for purposes of Article IX hereof. (c) The Scheduled Bonds and Letters of Credit and Scheduled Cash shall not constitute capital contributions to Belleli for purposes of Section 5.1(b) or Section 5.2(b) hereof. 6.2. Additional Financing. Neither the Non-Mantova Hanover Entities nor SJMB shall be required to advance additional cash or provide additional bonds, letters of credit, guaranties or sureties to or for the benefit of Belleli or HCC Mantova. (a) If either of Belleli or HCC Mantova (for purposes of Belleli-Related Business only) needs or desires to obtain additional financing (whether in the form of loans, bonds, letters of credit, or other alternative financing) ("Additional Financing"), Belleli, HCC Mantova, HCHC, and SJMB shall use their reasonable best efforts to cause Belleli or HCC Mantova to obtain such Additional Financing from HCC Mantova or third parties unaffiliated with SJMB or the Non-Mantova Hanover Entities ("Unaffiliated Third Parties"). (b) No Additional Financing may be provided to or for the benefit of Belleli or HCC Mantova by SJMB or the Non-Mantova Hanover Entities, without the prior joint written consent of SJMB and HCHC; provided, however, that such consent shall not be unreasonably withheld or delayed if: (1) Belleli, HCC Mantova, HCHC or SJMB have used their reasonable best efforts to cause Belleli or HCC Mantova to obtain such Additional Financing from HCC Mantova or Unaffiliated Third Parties; and (2) SJMB and HCHC have determined in good faith that such Additional Financing is otherwise necessary or desirable. 13 (c) Any cash, bond, or letter of credit so advanced to or for the benefit of Belleli or HCC Mantova by SJMB or any of the Non-Mantova Hanover Entities in accordance with the terms of this Agreement shall be treated as Scheduled Cash, a Scheduled Bond, or a Scheduled Letter of Credit, respectively, for purposes of this Article VI, except that the effective date of such Scheduled Cash, Scheduled Bond, or Scheduled Letter of Credit for purposes of Section 6.4 shall be the date that such cash, bond, or letter of credit is advanced. 6.3. Replacement of Scheduled Bonds or Letters of Credit and Repayment of Scheduled Cash. (a) Belleli, HCHC, and SJMB or the Non-Mantova Hanover Entities that have issued such Scheduled Bonds or Letters of Credit, whichever applies ("Scheduled Issuer"), shall use their reasonable best efforts to cause Belleli to replace as soon as practicable such Scheduled Bonds or Letters of Credit with bonds, letters of credit or other alternative financing issued or provided by HCC Mantova or Unaffiliated Third Parties. (b) Belleli, HCHC, and SJMB or the Non-Mantova Hanover Entities that have advanced such Scheduled Cash, whichever applies ("Scheduled Advancer"), shall use their reasonable best efforts to cause Belleli to repay as soon as practicable such Scheduled Cash; provided, however, that such repayment shall not require a capital call or cause a working capital shortfall for Belleli. 6.4. Interest Payments on Scheduled Letters of Credit and Scheduled Cash. Commencing on the Effective Date and continuing until such obligations have been paid, satisfied, replaced, released or terminated, Belleli will pay to each Scheduled Issuer or Scheduled Advancer an amount equal to (i) four percent (4%) per annum on the outstanding face amount of the Scheduled Letter of Credit issued by such Scheduled Issuer, and (ii) twelve percent (12%) per annum on any Scheduled Cash or draw on Scheduled Bonds or Letters of Credit provided by a Scheduled Advancer. 6.5. Invoices and Payment. Each Scheduled Issuer or Scheduled Advancer will send Belleli quarterly invoices in arrears for amounts due to any Scheduled Issuer or Scheduled Advancer by Belleli. Belleli will pay in cash to any such Scheduled Issuer or Scheduled Advancer all amounts due to such Scheduled Issuer or Scheduled Advancer based upon the payment terms in such invoices; provided, however, that such Scheduled Issuers or Scheduled Advancers will not provide for payment terms, the effect of which would require any additional capital call or the payment of which would cause a working capital shortfall for Belleli. ARTICLE VII. BELLELI FINANCING AND CAPITAL STRUCTURE 7.1. Additional Financing. Additional Financing for Belleli shall neither be required nor permitted except as set forth in Section 6.2 hereof. 7.2. Capital Contributions. Belleli shall not require and neither HCHC nor SJMB shall be permitted or required to make any future capital contributions to Belleli following 14 the Effective Date hereof without the prior joint written consent of HCHC and SJMB, provided, however, that such consent shall not be unreasonably withheld or delayed if: (i) such capital contributions are reasonably necessary in order to maintain the solvency of Belleli and (ii) such capital contributions will not result in the issuance of additional quotas to the contributing Party. Any capital contributions in accordance with this Section 7.2 that do not result in the issuance of additional quotas to the contributing Party shall be treated as debt for purposes of Article IX hereof. 7.3. Additional Actions. HCHC and SJMB acknowledge and agree that (i) no capital contribution pursuant to Section 7.2 hereof is intended to result in a change in the number of quotas defined to equal the HCHC Ownership Interest in Belleli or the SJMB Ownership Interest in Belleli or the percentage of ownership defined to equal the HCHC Percentage Ownership or the SJMB Percentage Ownership and (ii) capital contributions pursuant to Section 7.2 shall be treated as debt for purposes of Article IX hereof. If the Hanover Capital Contribution or any capital contribution pursuant to Section 7.2 hereof is deemed whether by operation of law or otherwise to result in a change in the number of quotas defined to equal the HCHC Ownership Interest in Belleli or the SJMB Ownership Interest in Belleli or the percentage of ownership defined to equal the HCHC Percentage Ownership or the SJMB Percentage Ownership, any Party shall, at the request of HCHC or SJMB, execute and deliver such additional agreements, certificates, instruments or other documents and take such other actions as the other Party may reasonably request to vest in HCHC and SJMB, as applicable, valid title to the quotas defined to equal the HCHC Ownership Interest in Belleli or the SJMB Ownership Interest in Belleli, respectively, or to the percentage of ownership defined to equal the HCHC Percentage Ownership or the SJMB Percentage Ownership, respectively. In addition, any Party shall, at the request of SJMB or HCHC, execute and deliver such additional agreements, certificates, instruments or other documents and take such other actions as the other Party may reasonably request to confirm and effectuate the treatment of any capital contributions pursuant to Section 7.2 as debt for purposes of Article IX hereof. 7.4. Capital Structure. Neither HCHC nor SJMB shall sell, transfer, assign or encumber all or a part of the HCHC Ownership Interest in Belleli or the SJMB Ownership Interest in Belleli, respectively, following the Effective Date hereof without the prior written joint consent of SJMB and HCHC, or as provided for in Article V or Article IX of this Agreement. Belleli shall not issue additional ownership interests or cause or approve a sale of existing ownership interests following the Effective Date without the prior written joint consent of HCHC and SJMB. Belleli shall not complete any capital transactions (excluding debt financings in accordance with Article VI hereof) or enter into any merger, joint venture or other similar transaction of any kind without the prior written joint consent of HCHC and SJMB. The Parties shall take such action as is necessary to include the foregoing restrictions in the By-Laws of Belleli. 7.5. Assets. Belleli shall not sell, transfer, assign or encumber all or a part of its assets (other than partial sales of assets in the ordinary course of business) following the Effective Date hereof without the prior written joint consent of HCHC and SJMB. Belleli shall not make any material purchase of assets outside the ordinary course of business without the prior written joint consent of HCHC and SJMB. 15 7.6. Distributions. Belleli shall not make any distributions or dividends following the Effective Date hereof without the prior written joint consent of HCHC and SJMB. 7.7. Control. HCHC shall not use its control of Belleli to cause Belleli to breach any covenant set forth in Article VII. 7.8. Further Financing, Bonding, Letters of Credit, Guarantees, Etc. Following the Effective Date hereof, HCC Mantova will use its best efforts to provide Additional Financing as feasible to the extent so requested by Belleli. ARTICLE VIII. HCC MANTOVA FINANCING & CAPITAL STRUCTURE 8.1. Existing HCC Mantova Financing. The Non-Mantova Hanover Entities acknowledge and agree that neither they nor their Affiliates has as of the Effective Date: (i) issued letters of credit, bonds, guarantees, or other sureties for the benefit of HCC Mantova; (ii) advanced cash or other consideration to HCC Mantova or for the benefit of HCC Mantova that must be repaid or reimbursed by HCC Mantova to such Non-Mantova Hanover Entities or their Affiliates, except for 4,135,786 EURO equal to the amount paid by or on behalf of HCC Mantova for value added tax or other taxes or fees in connection with the purchase of the HCC Mantova Assets ("HCC Mantova Assets Taxes and Fees") which amount shall be satisfied as provided in Section 8.6 hereof. The Non-Mantova Hanover Entities further acknowledge and agree that any debts or obligations to any Non-Mantova Hanover Entities or their Affiliates in excess of the HCC Mantova Assets Taxes and Fees as reflected in the unaudited financial statement of HCC Mantova as of June 30, 2002 (attached hereto) as Schedule 10.4(i) have been or are forgiven as part of the consideration for this Agreement as of the Effective Date hereof. 8.2. Additional Financing. Additional Financing for HCC Mantova shall neither be required nor permitted except as set forth in Section 6.2 hereof. 8.3. Capital Contributions. HCC Mantova shall not require and neither HCHC nor HCLP shall be permitted or required to make any capital contributions to HCC Mantova following the Effective Date hereof without the prior written consent of SJMB. 8.4. Capital Structure. HCHC and HCLP shall not sell, transfer, assign or encumber all or a part of the HCHC Ownership Interest in HCC Mantova or the HCLP Ownership Interest in HCC Mantova following the Effective Date hereof without the prior written consent of SJMB or as provided for in Article V or Article IX of this Agreement. HCC Mantova shall not issue additional ownership interests or cause or approve a sale of existing ownership interests of HCC Mantova following the Effective Date hereof without the prior written consent of SJMB. HCC Mantova shall not complete any capital transactions (excluding debt financings in accordance with Article VI hereof) or enter into any merger, joint venture or other similar transaction of any kind without the prior written consent of SJMB. The Parties shall take such action as is necessary to include the foregoing restrictions in the By-Laws of HCC Mantova. 16 8.5. Assets. HCC Mantova shall not sell, transfer, assign or encumber all or a part of its assets (other than partial sales of assets in the ordinary course of business or to provide funding for the business of Belleli or to fund cash needs in connection with the ownership, maintenance, preservation, operation or lease of the assets leased to Belleli (the "Belleli-Related Business")) following the Effective Date hereof without the prior written consent of SJMB. HCC Mantova shall not make any material purchase of assets outside the ordinary course of business without the prior written consent of SJMB. 8.6. Distributions. HCC Mantova shall not make any distributions or dividends following the Effective Date hereof without the prior written consent of SJMB; provided, however, that HCC Mantova shall have the right to distribute and/or dividend to any Hanover Entity or any Affiliate thereof any amounts received by HCC Mantova as a refund of the HCC Mantova Assets Taxes and Fees ("Refund Distribution or Dividend"). In the case of such a Refund Distribution or Dividend, HCC Mantova shall provide SJMB with a written notice of the proposed Refund Distribution or Dividend, and SJMB's consent to such Refund Distribution or Dividend will be required immediately upon receipt of documentation sufficient to verify that the proposed Refund Distribution or Dividend is an amount equal to or less than the amount of any refund to HCC Mantova of VAT or other taxes or fees paid by or on behalf of HCC Mantova in connection with its purchase of the HCC Mantova Assets. In no event, however, shall the total amount of such Refund Distributions or Dividends exceed the amount of the HCC Mantova Assets Taxes and Fees. 8.7. Control. HCHC shall not use its control of HCC Mantova to cause HCC Mantova to breach any covenant set forth herein. ARTICLE IX. ENTERPRISE VALUATION SALE 9.1. Enterprise Valuation Sale. (a) After November 1, 2002, either HCHC and HCLP or SJMB (the "Proposing Party") may give notice to the other (the "Other Party") that the Proposing Party is providing the Other Party with an enterprise valuation for all of the equity interests in Belleli and HCC Mantova (the "Triggering Valuation"). The notice shall be in writing and will include the amount of the Triggering Valuation. The Triggering Valuation shall be used for the purpose of determining the purchase price for the interest owned by either the Proposing Party or the Other Party (the "Enterprise Valuation Purchase Price") which shall be the Triggering Valuation multiplied by the HCHC Percentage Ownership, if HCHC and HCLP are the sellers, or the SJMB Percentage Ownership, if SJMB is the seller ("Selling Party's Percentage Ownership Interest"). At the closing of any enterprise valuation sale pursuant to this Section 9.1, (i) the Enterprise Valuation Purchase Price shall be paid in cash, (ii) all Scheduled Cash, all loans made to Belleli in accordance with Article VI hereof, and all capital contributions treated as debt for purposes of this Article IX provided by the selling party shall be repaid in cash, and (iii) all Scheduled Bonds and Letters of Credit provided by the selling party and its Affiliates shall be released. 17 (b) The Other Party shall have 30 days after receipt of the notice from the Proposing Party to give the Proposing Party notice that it will either sell its equity interest in Belleli and HCC Mantova to the Proposing Party for the Enterprise Valuation Purchase Price or it will acquire the Proposing Party's equity interest in Belleli and HCC Mantova for the Enterprise Valuation Purchase Price. The purchasing party shall have 45 days from the date of receipt of notice of the election by the Other Party to pay the Enterprise Valuation Purchase Price and satisfy the other terms of sale set forth in this paragraph. In the event that the purchasing party fails to pay the Enterprise Valuation Purchase Price and satisfy the other terms of sale within the 45 day period the purchasing party shall not be entitled to present another Triggering Valuation as a Proposing Party under this Article IX for 18 months. (c) Notwithstanding any other provision of this Section 9.1: (i) Belleli shall provide to SJMB and HCHC within sixty (60) days following the end of each quarter in the calendar year (beginning on November 29, 2002), Belleli's EBITDA, as determined by Arthur Andersen, for the period commencing on January 1, 2002 and ending as of the date of the quarter just completed ("Quarterly EBITDA Notice"). (ii) In no event shall HCHC and HCLP present a Triggering Valuation which, together with the amounts payable to SJMB pursuant to clause (ii) of the last sentence of Section 9.1(a), would result in an aggregate payment to SJMB under this Section 9.1 that is less than the HCHC Purchase Option Price calculated in accordance with Section 5.2(b), except that for purposes of calculating the amount described in Section 5.2(b)(iv) the amount of Belleli's EBITDA shall be equal to the EBITDA reported in the Quarterly EBITDA Notice which most recently preceded notice of such Triggering Valuation. (iii) In no event shall SJMB present a Triggering Valuation which, together with the amounts payable to HCHC and its Affiliates pursuant to clause (ii) of the last sentence of Section 9.1(a), would result in an aggregate payment to HCHC under this Section 9.1 that is less than the SJMB Purchase Option Price calculated in accordance with Section 5.1(b), except that for purposes of calculating the amount described in Section 5.1(b)(iv) the amount of Belleli's EBITDA shall be equal to the EBITDA reported in the Quarterly EBITDA Notice which most recently preceded notice of such Triggering Valuation. 9.2. Enterprise Valuation Sale to Unaffiliated Third Party. In the event that the Proposing Party gives notice to the Other Party of a Triggering Valuation with the intent to conduct a sale of all of the equity interests in or substantially all of the assets of Belleli and HCC Mantova to an Unaffiliated Third Party, the Proposing Party shall so state in the notice to the Other Party. If the Proposing Party elects to give such notice and the Other Party elects to sell its interest to the Proposing Party as described in the preceding paragraph, the Proposing Party shall have 150 days to pay the Other Party the Enterprise Valuation Purchase Price and satisfy the other terms of sale set forth in Section 9.1, provided, however, that the Enterprise 18 Valuation Purchase Price shall be adjusted higher by an amount equal to the Selling Party's Percentage Ownership Interest in Belleli multiplied by the difference between the Triggering Valuation of the Proposing Party and the price actually paid by the Unaffiliated Third Party purchaser. This Enterprise Valuation Purchase Price adjustment shall only be made if it increases the Enterprise Valuation Purchase Price to be paid to the selling party. 9.3. Cooperation. The Proposing Party and the Other Party agree to use their respective reasonable efforts to cooperate and assist in the sale process regardless of whether the Other Party elects to purchase or sell and regardless of whether the Proposing Party elects to conduct a sale to an Unaffiliated Third Party as set forth in Section 9.2 hereof. 9.4. Representations and Warranties. Either HCHC and HCLP or SJMB, if the selling party pursuant to Section 9.1, or each of them in the event of a sale to an Unaffiliated Third Party pursuant to Section 9.2, shall make the representations and warranties described in Section 5.1(e) (in the case of HCHC and HCLP) or Section 5.2(e) (in the case of SJMB). ARTICLE X. REPRESENTATIONS AND WARRANTIES 10.1. Representations and Warranties of SJMB. SJMB hereby represents and warrants to the Hanover Entities and Belleli as of the Effective Date and the Closing Date as follows: (a) Organization. SJMB is a limited partnership duly formed, validly existing and in good standing under the laws of the jurisdiction of its organization. SJMB has all requisite power and authority to: (i) own and operate its properties and carry on its business as currently conducted; and (ii) to execute this Agreement and perform its obligations hereunder. (b) Qualification. SJMB is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business as now conducted or its assets make such qualification necessary, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect on SJMB. (c) Authorizations; Approvals. The execution and delivery by SJMB of this Agreement and the performance of its obligations hereunder have been duly and validly authorized by all requisite limited partnership action. This Agreement has been duly executed and delivered by SJMB, and this Agreement constitutes the legal, valid and binding obligation of SJMB enforceable against SJMB in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Upon the execution and delivery thereof, all agreements, contracts, documents and instruments relating to this Agreement and the transactions contemplated hereby that are to be executed and delivered by SJMB will be so executed and delivered by a duly authorized officer of SJMB, will constitute the legal, valid and binding obligations of SJMB, and will be enforceable against SJMB in accordance with their terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general 19 principles of equity, regardless of whether such enforceability is considered in equity or at law). SJMB is not required to give any notice, make any filing or register with, or obtain any consent, approval, authorization, waiver, permit, certificate or order of any Governmental Authority or third party to consummate the transactions contemplated by this Agreement to be consummated on the Closing Date. (d) Absence of Conflicts. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby to be consummated on the Closing Date will: (i) conflict with, result in a breach under, or give rise to any consent or preferential purchase right under (A) any statute, law or regulation applicable to SJMB, (B) the constituent documents of SJMB, (C) any material contract, agreement, lease, license or other arrangement to which SJMB is a party or by which it or any of its properties is bound, or (D) any order, judgment, injunction, award or decree of any court or regulatory or governmental body, or (ii) result in the creation or imposition of any Encumbrance on any of the property of SJMB. (e) Litigation. There are no actions, suits, proceedings or investigations pending or, to the knowledge of SJMB, threatened against SJMB before or by any Governmental Authority that would reasonably be expected to have a Material Adverse Effect on the ability of SJMB to sell the Subject Quotas pursuant to this Agreement. (f) Brokers. There is no broker or finder or other person entitled to a commission or brokerage fee or payment in connection with this Agreement or the transactions contemplated hereby (including the sale of the Subject Quotas) as a result of any agreement of, or action taken by, SJMB, any Affiliate of SJMB, or any partner, member, officer, or director of SJMB. (g) Subject Quotas. As of the Closing Date, SJMB will be the sole legal owner and holder of record of the Subject Quotas and will have good, valid and marketable title to the Subject Quotas, free and clear of all restrictions on transfer, purchase rights, warrants, options, contracts, commitments, taxes, and other Encumbrances. Upon delivery to HCHC at the Closing of a notarized instrument of transfer in respect of the Subject Quotas as provided by and in accordance with, the provisions of Article 2479 of the Italian Civil Code, and upon SJMB's receipt of the Purchase Price, and upon HCHC being entered in the Register of Members of Belleli as the holder of the Subject Quotas, good and valid title to the Subject Quotas will pass to HCHC, free and clear of any Encumbrances of any kind. Other than this Agreement and the Statuto of Belleli, the Subject Quotas are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the Subject Quotas. The Subject Quotas have not been sold, pledged, hypothecated, assigned or otherwise transferred, and neither SJMB nor any of its Affiliates has agreed to sell, pledge, hypothecate, assign or otherwise transfer the Subject Quotas, except as set forth in the Statuto of Belleli and pursuant to this Agreement. Each of SJMB's representations and warranties set forth in this Section 10.1(g) is subject to and contingent upon the Hanover Entities' compliance with their obligations under Section 4.1(e) and Section 7.3 hereof. 20 (h) Prior Obligations. As of the Effective Date of this Agreement, SJMB has not failed to perform or observe any covenant, agreement or provision to be performed or observed by SJMB in any of the agreements or obligations referenced in Article VI herein. SJMB has taken no action and has refrained from taking any action as of the Effective Date of this Agreement that would affect the validity or enforceability of any of the agreements referenced in Article VI. (i) Continuing Obligations. Prior to the release or termination thereof by mutual agreement of the parties thereto or in accordance with their respective terms, SJMB will take no action or refrain from taking any action that would result in a breach of or effect the validity or enforceability of the agreements or obligations referenced in Article VI herein. 10.2. Representations and Warranties of Non-Mantova Hanover Entities. Each of the Non-Mantova Hanover Entities, severally and not jointly, represents and warrants to SJMB and Belleli as of the Effective Date and the Closing Date as follows: (a) Organization. Such Non-Mantova Hanover Entity has been duly formed and is validly existing and in good standing under the laws of the jurisdiction of its organization. Such Non-Mantova Hanover Entity has all requisite power and authority to: (i) own and operate its properties and carry on its business as currently conducted; and (ii) to execute this Agreement and perform its obligations hereunder. (b) Qualification. Such Non-Mantova Hanover Entity is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business as now conducted or its assets make such qualification necessary, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect on such Non-Mantova Hanover Entity. (c) Authorizations; Approvals. The execution and delivery by such Non-Mantova Hanover Entity of this Agreement and the performance of its obligations hereunder have been duly and validly authorized by all requisite action. This Agreement has been duly executed and delivered by such Non-Mantova Hanover Entity, and this Agreement constitutes the legal, valid and binding obligation of such Non-Mantova Hanover Entity enforceable against it in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Upon the execution and delivery thereof, all agreements, contracts, documents and instruments relating to this Agreement and the transactions contemplated hereby that are to be executed and delivered by such Non-Mantova Hanover Entity will be so executed and delivered by a duly authorized officer of such Non-Mantova Hanover Entity, will constitute the legal, valid and binding obligations of such Non-Mantova Hanover Entity, and will be enforceable against such Non-Mantova Hanover Entity in accordance with their terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Such Non-Mantova Hanover Entity is not required to give any notice, make any filing or register with, or obtain any consent, approval, authorization, waiver, permit, certificate or order of any 21 Governmental Authority or third party to consummate the transactions contemplated by this Agreement to be consummated on the Closing Date. (d) Absence of Conflicts. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby to be consummated on the Closing Date will: (i) conflict with, result in a breach under, or give rise to any consent or preferential purchase right under (A) any statute, law or regulation applicable to such Non-Mantova Hanover Entity, (B) the constituent documents of such Non-Mantova Hanover Entity, (C) any material contract, agreement, lease, license or other arrangement to which such Non-Mantova Hanover Entity is a party or by which such Non-Mantova Hanover Entity or any of its properties is bound, or (D) any order, judgment, injunction, award or decree of any court or regulatory or governmental body, or (ii) result in the creation or imposition of any Encumbrance on any of the property of such Non-Mantova Hanover Entity. (e) Brokers. There is no broker or finder or other person entitled to a commission or brokerage fee or payment in connection with this Agreement or the transactions contemplated hereby (including the sale of the Subject Quotas) as a result of any agreement of, or action taken by, such Non-Mantova Hanover Entity, any of its Affiliates, or any partner, member, officer, or director of such Non-Mantova Hanover Entity. (f) Prior Obligations. As of the Effective Date of this Agreement, such Non-Mantova Hanover Entity has not failed to perform or observe any covenant, agreement or provision to be performed or observed by it in any of the agreements or obligations referenced in Article VI. Such Non-Mantova Hanover Entity has taken no action or has refrained from taking any action as of the Effective Date of this Agreement that would affect the validity or enforceability of any of the agreements referenced in Article VI. (g) Continuing Obligations. Prior to the release or termination thereof by mutual agreement of the parties thereto or in accordance with their respective terms, such Non-Mantova Hanover Entity will take no action or refrain from taking any action that would result in a breach of or effect the validity or enforceability of the agreements or obligations referenced in Article VI. 10.3. Representations and Warranties of Belleli. Belleli represents and warrants to SJMB and the Hanover Entities as of the Effective Date and the Closing Date as follows: (a) Authorizations; Approvals. The execution and delivery by Belleli of this Agreement and the performance of its obligations hereunder have been duly and validly authorized by all requisite corporation action. This Agreement has been duly executed and delivered by Belleli, and this Agreement constitutes the legal, valid and binding obligation of Belleli enforceable against Belleli in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Upon the execution and delivery thereof, all agreements, contracts, documents and instruments relating to this Agreement and the transactions contemplated hereby that are to be executed and delivered by Belleli will be so 22 executed and delivered by a duly authorized officer of Belleli, will constitute the legal, valid and binding obligations of Belleli, and will be enforceable against Belleli in accordance with their terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Belleli is not required to give any notice, make any filing or register with, or obtain any consent, approval, authorization, waiver, permit, certificate or order of any Governmental Authority or third party to consummate the transactions contemplated by this Agreement on the Closing Date. (b) Absence of Conflicts. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will: (i) conflict with, result in a breach under, or give rise to any consent or preferential purchase right under (A) any statute, law or regulation applicable to Belleli, (B) the constituent documents of Belleli, (C) any material contract, agreement, lease, license or other arrangement to which Belleli is a party or by which Belleli or any of its properties is bound, or (D) any order, judgment, injunction, award or decree of any court or regulatory or governmental body, or (ii) result in the creation or imposition of any Encumbrance on any of the property of Belleli. (c) Litigation. Except as disclosed on Schedule 10.3(c), since May 9, 2001, there are no actions, suits, proceedings or investigations pending or, to the knowledge of Belleli, threatened against Belleli before or by any Governmental Authority that would have a Material Adverse Effect on the ability of Belleli to perform its obligations pursuant to this Agreement. (d) Brokers. There is no broker or finder or other person entitled to a commission or brokerage fee or payment in connection with this Agreement or the transactions contemplated hereby as a result of any agreement of, or action taken by, Belleli, any Affiliate of Belleli, or any member, officer, or director of Belleli. (e) Capitalization. As reflected in the quotaholders' ledger of Belleli on file with Belleli's registrar, (i) the authorized quotas of Belleli consist of 6,694,287 quotas, (ii) SJMB is the record holder of 3,988,773 quotas, equal to a 59.58% interest in Belleli, and (iii) HCHC is the record holder of 2,698,679 quotas, equal to a 40.31% interest in Belleli. (f) Financial Condition. The unaudited financial statement of Belleli as of June 30, 2002, is attached as Schedule 10.3(f). Such financial statement was prepared by Belleli in good faith and is based on reasonable assumptions. (g) Capital Calls. Since May 9, 2001, Belleli has not made and is currently not obliged to make any capital call not reflected in Schedule 10.3(g). (h) Distributions. Since May 9, 2001, Belleli has not made and is currently not obliged to make any distribution not reflected in Schedule 10.3(h). (i) Assets. A list of the material assets of Belleli as of the Effective Date is attached as Schedule 10.3(i) ("Belleli Assets"). Belleli has not sold, transferred, assigned or encumbered and is not as of the Effective Date hereof obliged to sell, transfer, assign or 23 encumber all or a part of the Belleli Assets, except to the extent that such sale would be permitted under Section 7.5 hereof. 10.4. Representations and Warranties of HCC Mantova. HCC Mantova represents and warrants to SJMB as of the Effective Date and the Closing Date as follows: (a) Organization. HCC Mantova is a company duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation. HCC Mantova has all requisite power and authority to: (i) own and operate its properties and carry on its business as currently conducted; and (ii) to execute this Agreement and perform its obligations hereunder. (b) Qualification. HCC Mantova is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business as now conducted or its assets make such qualification necessary, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect on HCC Mantova. (c) Authorizations; Approvals. The execution and delivery by HCC Mantova of this Agreement and the performance of its obligations hereunder have been duly and validly authorized by all requisite corporation action. This Agreement has been duly executed and delivered by HCC Mantova, and this Agreement constitutes the legal, valid and binding obligation of HCC Mantova enforceable against HCC Mantova in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). Upon the execution and delivery thereof, all agreements, contracts, documents and instruments relating to this Agreement and the transactions contemplated hereby that are to be executed and delivered by HCC Mantova will be so executed and delivered by a duly authorized officer of HCC Mantova, will constitute the legal, valid and binding obligations of HCC Mantova, and will be enforceable against HCC Mantova in accordance with their terms (except as the enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). HCC Mantova is not required to give any notice, make any filing or register with, or obtain any consent, approval, authorization, waiver, permit, certificate or order of any Governmental Authority or third party to consummate the transactions contemplated by this Agreement to be consummated on the Closing Date. (d) Absence of Conflicts. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby to be consummated on the Closing Date will: (i) conflict with, result in a breach under, or give rise to any consent or preferential purchase right under (A) any statute, law or regulation applicable to HCC Mantova, (B) the constituent documents of HCC Mantova, (C) any material contract, agreement, lease, license or other arrangement to which HCC Mantova is a party or by which HCC Mantova or any of its properties is bound, or (D) any order, judgment, injunction, award or decree of any court or regulatory or governmental body, or (ii) result in the creation or imposition of any Encumbrance on any of the property HCC Mantova. 24 (e) Litigation. Except as disclosed on Schedule 10.4(e), there are no actions, suits, proceedings or investigations pending or, to the knowledge of HCC Mantova, threatened against HCC Mantova before or by any Governmental Authority that would reasonably be expected to have a Material Adverse Effect on the ability of HCC Mantova to perform its obligations pursuant to this Agreement. (f) Brokers. There is no broker or finder or other person entitled to a commission or brokerage fee or payment in connection with this Agreement or the transactions contemplated hereby as a result of any agreement of, or action taken by, HCC Mantova, any Affiliate of HCC Mantova, or any member, officer, or director of HCC Mantova. (g) Capitalization. The authorized capital quotas of HCC Mantova consist of 20,688,934 quotas, and are duly authorized, validly issued, fully paid and nonassessable. As of the Effective Date of this Agreement, HCHC is the record and beneficial owner of 20,688,834 quotas, equal to a ninety-nine and 99/100 percent (99.99%) interest in HCC Mantova ("HCHC Initial HCC Mantova Quotas"). The remaining 1/100 of a percent (0.01%) of the quotas of HCC Mantova are owned by HCLP ("HCLP Initial HCC Mantova Quotas"). There are, and have been, no preemptive rights with respect to the issuance of such quotas or any other capital quotas of HCC Mantova. There are no outstanding subscriptions, warrants, options, rights, "phantom" stock rights, agreements, calls, convertible or exchangeable securities or other commitments (contingent or otherwise) pursuant to which HCHC, HCLP, or HCC Mantova is or may become obligated to issue, sell, purchase, return or redeem any such quotas or any other capital quotas of HCC Mantova. (h) Compliance with Laws. Since its formation, HCC Mantova has complied in all material respects with all laws, rules, regulations and orders of Governmental Authorities applicable to HCC Mantova and its assets and business. (i) Financial Condition. The unaudited financial statement of HCC Mantova as of June 30, 2002, is attached as Schedule 10.4(i). Such financial statement was prepared by HCC Mantova in good faith and is based on reasonable assumptions. (j) Capital Calls. HCC Mantova has not made and is not obliged to make any capital call not reflected in Schedule 10.4(j). (k) Distributions. HCC Mantova has not made and is not obliged to make any distribution or dividend not reflected Schedule 10.4(k). (l) Assets. HCC Mantova purchased the assets it now owns in accordance with Schedule 10.4(l) ("HCC Mantova Assets"). HCC Mantova has not, other than in the ordinary course of business, sold, transferred, assigned or encumbered and is not as of the Effective Date hereof obliged to sell, transfer, assign or encumber all or a part of the material HCC Mantova Assets other than in connection with providing financing and/or guaranties or sureties on behalf of Belleli. 25 10.5. Representations and Warranties of HCHC. In addition to the representations and warranties set forth in Section 10.2 hereof, HCHC represents and warrants to SJMB as of the Effective Date as follows: (a) HCHC Initial Belleli Quotas. HCHC is the sole legal owner and holder of record of the quotas representing the HCHC Initial Belleli Quotas and has good, valid and marketable title to the HCHC Initial Belleli Quotas, free and clear of all restrictions on transfer, purchase rights, warrants, options, contracts, commitments, taxes, and other Encumbrances. Other than this Agreement and the Statuto of Belleli, the HCHC Initial Belleli Quotas are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the HCHC Initial Belleli Quotas. The HCHC Initial Belleli Quotas have not been sold, pledged, hypothecated, assigned, transferred or otherwise encumbered, and neither HCHC nor any of its Affiliates has agreed or is obliged to sell, pledge, hypothecate, assign, transfer or otherwise encumber all or a part of the HCHC Initial Belleli Quotas, except as set forth in the Statuto of Belleli and pursuant to this Agreement. (b) HCHC Initial HCC Mantova Quotas. HCHC is the sole legal owner and holder of record of the quotas representing the HCHC Initial HCC Mantova Quotas and has good, valid and marketable title to the HCHC Initial HCC Mantova Quotas, free and clear of all restrictions on transfer, purchase rights, warrants, options, contracts, commitments, taxes, and other Encumbrances. Other than this Agreement and the Statuto of HCC Mantova, the HCHC Initial HCC Mantova Quotas are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the HCHC Initial HCC Mantova Quotas. The HCHC Initial HCC Mantova Quotas have not been sold, pledged, hypothecated, assigned, transferred or otherwise encumbered, and neither HCHC nor any of its Affiliates has agreed or is obliged to sell, pledge, hypothecate, assign, transfer or otherwise encumber all or a part of the HCHC Initial HCC Mantova Quotas, except as set forth in the Statuto of HCC Mantova and pursuant to this Agreement. (c) Litigation. There are no actions, suits, proceedings or investigations pending, or to the knowledge of HCHC, threatened against HCHC before or by any Governmental Authority that would reasonably be expected to have a Material Adverse Effect on the ability of HCHC to perform its obligations pursuant to this Agreement. 10.6. Representations and Warranties of HCLP. In addition to the representations and warranties set forth in Section 10.2 hereof, HCLP represents and warrants to SJMB as of the Effective Date as follows: (a) HCLP Initial HCC Mantova Quotas. HCLP is the sole legal owner and holder of record of the quotas representing the HCLP Initial HCC Mantova Quotas and has good, valid and marketable title to the HCLP Initial HCC Mantova Quotas, free and clear of all restrictions on transfer, purchase rights, warrants, options, contracts, commitments, taxes, and other Encumbrances. Other than this Agreement and the Statuto of HCC Mantova, the HCLP 26 Initial HCC Mantova Quotas are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the HCLP Initial HCC Mantova Quotas. The HCLP Initial HCC Mantova Quotas have not been sold, pledged, hypothecated, assigned, transferred or otherwise encumbered, and neither HCLP nor any of its Affiliates has agreed or is obliged to sell, pledge, hypothecate, assign, transfer or otherwise encumber all or a part of the HCLP Initial HCC Mantova Quotas, except as set forth in the Statuto of HCC Mantova and pursuant to this Agreement. (b) Litigation. Except as referenced and disclosed in Hanover's quarterly report on Form 10-Q for the quarter ended June 30, 2002, there are no actions, suits, proceedings or investigations pending, or to the knowledge of HCLP, threatened against HCLP before or by any Governmental Authority that would reasonably be expected to have a Material Adverse Effect on the ability of HCLP to perform its obligations pursuant to this Agreement. ARTICLE XI. INDEMNIFICATION AND GUARANTEE 11.1. Survival of Representations and Warranties. The representations and warranties of the Parties contained in this Agreement shall lapse two (2) years following the Closing Date. Any representation or warranty as to which a written claim shall have been asserted during the survival period shall continue in effect with respect to such claims until such claim shall have been finally resolved or settled. 11.2. Indemnification. (a) SJMB covenants and agrees to defend, indemnify and hold harmless the Hanover Entities and Belleli and their respective Affiliates from and against any damages, claims, losses, liabilities, costs and expenses (including, without limitation, settlement costs and any legal, accounting or other expenses for defending any actions or threatened actions) (collectively, "Losses"), arising out of or resulting from: (i) any inaccuracy in or breach of any representation or warranty made by SJMB in this Agreement or in any writing delivered pursuant to this Agreement or at the Closing; (ii) the failure of SJMB to perform or observe fully any covenant, agreement or provision to be performed or observed by SJMB pursuant to this Agreement or any other agreement between the Parties still in effect following the Closing and (iii) any options, subscriptions, warrants, rights, "phantom" stock rights, agreements, calls, convertible or exchangeable securities or commitments (contingent or otherwise) granted by or through SJMB or its Affiliates pursuant to which Belleli is or may become obligated to issue, sell, purchase, return or redeem any quotas of Belleli. (b) Each Hanover Entity, severally and not jointly, covenants and agrees to defend, indemnify and hold harmless SJMB, Underbrink, Thompson, Belleli and their respective Affiliates from and against any Losses arising out of or resulting from: (i) any inaccuracy in or breach of any representation or warranty made by such Hanover Entity in this Agreement or in any writing delivered pursuant to this Agreement or at the Closing; and (ii) the failure by such Hanover Entity to perform or observe any covenant, agreement or provision to be performed or 27 observed by it pursuant to this Agreement or any other agreement between the Parties still in effect following the Closing. (c) Belleli covenants and agrees to defend, indemnify and hold harmless the Hanover Entities, SJMB, Underbrink, Thompson, and their respective Affiliates from and against any Losses arising out of or resulting from: (i) any inaccuracy in or breach of any representation or warranty made by Belleli in this Agreement or in any writing delivered pursuant to this Agreement or at the Closing; and (ii) the failure by Belleli to perform or observe any covenant, agreement or provision to be performed or observed by it pursuant to this Agreement or any other agreement between the Parties still in effect following the Closing. ARTICLE XII. TERMINATION OF OTHER AGREEMENTS AND RELEASES 12.1. Termination of Other Agreements. All agreements among SJMB, the Hanover Entities and Belleli are hereby terminated (including without limitation, those listed on Schedule 12.1-1 attached hereto) excluding (i) this Agreement and any other documents, instruments and certificates delivered or executed in connection herewith and (ii) those agreements listed in Schedule 12.1-2. ARTICLE XIII. MISCELLANEOUS 13.1. Notices. Notices and other communications given under this Agreement, if any, shall be in writing and delivered personally or by facsimile, receipt confirmed, or sent by certified mail, return receipt requested, postage prepaid, or by overnight delivery or courier service to the Parties to this Agreement at the following addresses or to such other address as the Party to this Agreement whose address it is shall specify by notice to the other: if to SJMB: SJMB, L.P. d/b/a SJMB Merchant Bankers, L.P. 4295 San Felipe, Suite 200 Houston, Texas 77027 Attn: John Thompson, Chief Executive Officer Facsimile: (713) 871-1028 with a copy to: Gardere Wynne Sewell LLP 1000 Louisiana, Suite 3400 Houston, Texas 77002-5007 Attn: John Nabors, Esquire Attn: Orin Lewis, Esquire Facsimile: (713) 276-5555 if to Mr. Thompson: John L. Thompson 4295 San Felipe, Suite 200 Houston, Texas 77027 Facsimile: (713) 871-1028 28 if to Mr. Underbrink: Charles E. Underbrink 4295 San Felipe, Suite 200 Houston, Texas 77027 Facsimile: (713) 871-1028 if to Hanover, HCHC Hanover Compressor Nigeria, Inc. HCNI, HCC Mantova, Hanover Compression Limited Partnership HCGH, or HCLP Hanover Compression General Holdings, LLC HCC Mantova S.r.L. c/o Hanover Compressor Company 12001 N. Houston Rosslyn Houston, Texas 77086 Attn: Mark Berg, General Counsel Facsimile: (281) 447-0821 with a copy to: Latham & Watkins Sears Tower, Suite 5800 Chicago, Illinois 60606 Attn: Richard S. Meller, Esquire Facsimile: (312) 993-9767 If to Belleli: Belleli Energy SrL Via G. Taliercio, 3 46111 Mantova ITALY Attn: Sergio Garrone Facsimile: 011+39 0376 333813
A notice shall be deemed to have been given to a party to whom it is directed (i) upon actual receipt by courier, (ii) upon dispatch by facsimile (with transmission confirmed), or (iii) one business day after sent by overnight delivery service. 13.2. Binding Effect; Benefits. Subject to Section 13.5 below, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the Parties and their respective successors or permitted assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. 13.3. Waiver. Any waiver of a provision hereof must be in writing and signed by the waiving Party. No action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any Party, shall be deemed to constitute a waiver, by the Party taking such action, of compliance by any other Party with any representations, warranties, covenants or agreements contained herein. The waiver by any Party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or 29 succeeding breach and no failure by any Party to exercise any right or privilege hereunder shall be deemed a waiver of such Party's rights or privileges hereunder or shall be deemed a waiver of such Party's rights to exercise the same at any subsequent time or times hereunder. 13.4. Amendments. This Agreement may only be amended, modified, or supplemented by a written instrument executed by each of the Parties. 13.5. Assignability. None of the Parties may assign any rights under this Agreement without the prior consent of the other Parties. 13.6. Governing Law. THIS AGREEMENT AND ANY CLAIMS RELATED TO THIS AGREEMENT WHETHER CONTRACTUAL, TORT BASED OR OTHERWISE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, UNITED STATES OF AMERICA, WITHOUT REFERENCE TO ITS CHOICE OF LAW PRINCIPLES. NOTWITHSTANDING THE FOREGOING, THE APPLICABLE LAW GOVERNING THE PURCHASE AND DELIVERY OF THE SUBJECT QUOTAS SHALL BE THE LAWS OF ITALY WITHOUT REFERENCE TO ITS CHOICE OF LAW PRINCIPLES. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE TO RECEIVE PUNITIVE DAMAGES IN CONNECTION WITH ANY JUDICIAL ACTION BROUGHT IN CONNECTION WITH THIS AGREEMENT. 13.7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 13.8. Entire Agreement. With the exception of the documents required to be provided in satisfaction of conditions hereunder, this Agreement shall constitute the entire agreement of the Parties hereto with respect to the subject matter contained herein. 13.9. Severability. In case any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, the validity and enforceability of the remaining provisions shall not in any way be affected thereby. 13.10. Disputes. All Parties hereto shall submit to the jurisdiction of and consent to have any disputes arising out of or related to this Agreement adjudicated in the federal or state courts located in Houston, Harris County, Texas. 13.11. Fees and Expenses. Each Party hereto shall pay its own legal, accounting or other professional fees and disbursements of any kind incurred by such Party arising out of the negotiation, preparation or execution of this Agreement and the consummation of the transactions contemplated hereby. In the event that a dispute between the Parties is litigated, the prevailing Party shall be entitled to a reimbursement of professional fees, disbursements and direct expenses from the other Party. 13.12. Remedy. The Parties hereto recognize that irrevocable injury may result to one or more of such Parties in the event of a breach of this Agreement and that the acceptance of this Agreement by all of the Parties hereto was a material factor in each Party's decision to 30 enter into this Agreement and to consummate the transactions contemplated herein. Each Party hereto agrees that if it engages in any acts in violation of this Agreement, any other Party to this Agreement shall be entitled, in addition to such other remedies and damages as may be available to such Party, in law or equity, or otherwise, to a mandatory injunction compelling specific performance of the offending Party's obligations hereunder. 13.13. Cooperation. After the execution hereof, the Parties hereto agree to execute and deliver such other instruments and take such other actions as are reasonably necessary to carry out such transactions as intended by the Parties hereto. 13.14. Restriction on Sale of Subject Quotas. THE SUBJECT QUOTAS SOLD AND PURCHASED PURSUANT TO THIS AGREEMENT WILL BE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER APPLICABLE SECURITIES LAWS. THE SUBJECT QUOTAS ALSO WILL BE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY CONTAINED IN THE ARTICLES OF ASSOCIATION OF BELLELI. [Intentionally Left Blank-Signature Pages Follow] 31 IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the date first written above. SJMB, L.P. By: SJMB, L.L.C., its General Partner By: /s/ JOHN L. THOMPSON ------------------------------------ Name: John L. Thompson ---------------------------------- Title: CEO --------------------------------- John L. Thompson /s/ JOHN L. THOMPSON --------------------------------------- Charles E. Underbrink /s/ CHARLES E. UNDERBRINK --------------------------------------- HANOVER COMPRESSOR COMPANY Signed September 20, 2002 /s/ CCD By: /s/ CHAD C. DEATON ------------------------------------ Name: Chad C. Deaton ---------------------------------- Title: President and Chief Executive Officer --------------------------------- HANOVER COMPRESSION GENERAL HOLDINGS, LLC By: Hanover Compressor Company, its sole member Signed September 20, 2002 /s/ CCD By: /s/ CHAD C. DEATON ------------------------------------ Name: Chad C. Deaton ---------------------------------- Title: President --------------------------------- S-1 HANOVER COMPRESSION LIMITED PARTNERSHIP By: Hanover Compression General Holdings, LLC, its General Partner By: Hanover Compressor Company, its sole member Signed September 20, 2002 /s/ CCD By: /s/ CHAD C. DEATON ------------------------------------ Name: Chad C. Deaton ---------------------------------- Title: President and Chief Executive Officer --------------------------------- HANOVER COMPRESSOR HOLDING COMPANY NL B.V. By: /s/ W.P. RUOFF ------------------------------------ Name: Equity Trust Co. N.V. ---------------------------------- Title: Managing Director --------------------------------- S-2 HANOVER COMPRESSOR NIGERIA, INC.: Signed September 20, 2002 /s/ JEJ By: /s/ JOHN E. JACKSON ------------------------------------ Name: John E. Jackson ---------------------------------- Title: Vice President & Treasurer --------------------------------- HCC MANTOVA S.r.L. Signed September 20, 2002 /s/ PGS By: /s/ PETER G. SCHRECK ------------------------------------ Name: Peter G. Schreck ---------------------------------- Title: President and Sole Director --------------------------------- BELLELI ENERGY SrL Signed September 20, 2002 /s/ ROP By: /s/ ROBERT O. PIERCE ----------------------------------- Name: Robert O. Pierce ---------------------------------- Title: Chairman --------------------------------- S-3 EX-10.63 16 dex1063.txt STOCK COMPENSATION PLAN EXHIBIT 10.63 HANOVER COMPRESSOR COMPANY STOCK COMPENSATION PLAN ARTICLE I The Plan 1.1 Name. This plan shall be known as the "Hanover Compressor Company Stock Compensation Plan" (the "Plan"). 1.2 Purpose. The purpose of the Plan is to promote the growth and general prosperity of Hanover Compressor Company, a Texas corporation (the "Company"), by permitting the Company to grant to its Directors, Officers, Employees and Advisors options to purchase Common Stock of the Company (the "Options"). The Plan is designed to help the Company and its subsidiaries and affiliates attract and retain superior personnel for positions of substantial responsibility and to provide Directors, Officers, Employees and Advisors with an additional incentive to contribute to the success of the Company. The Company intends that Options granted pursuant to the Plan will be nonstatutory options and will not be classified as "incentive stock options" within the meaning of Section 422 of the Code. 1.3 Effective Date. The Plan shall become effective upon the Effective Date. 1.4 Eligibility to Participate. Any Director, Officer, Employee or Advisor shall be eligible to participate in the Plan. The Committee may grant Options to a Director, Officer, Employee or Advisor in accordance with such determinations as the Committee from time to time in its sole discretion shall make. 1.5 Shares Subject to the Plan. The shares available for issuance upon exercise of Options granted under the Plan shall be shares of Common Stock (the "Plan Shares"). 1.6 Maximum Number of Plan Shares. Subject to adjustment pursuant to the provisions of Section 5.2, and subject to any additional restrictions elsewhere in the Plan, the maximum number of Plan Shares that may be issued and sold hereunder shall be equal to 15% of the total shares of Common Stock outstanding, computed on a fully diluted basis and including the unissued Plan Shares, at the time of the grant of an Option. 1.7 Options Granted Under Plan. Plan Shares with respect to which an Option shall have been exercised shall not again be available for grant hereunder. If Options terminate for any reason without being wholly exercised, new Options may be granted hereunder covering the number of Plan Shares to which such Option termination relates. 1.8 Conditions Precedent. The Company shall not issue or deliver any Option Agreement or any certificate for Plan Shares pursuant to the Plan prior to fulfillment of all of the following conditions: (a) The admission of the Plan Shares to listing on all stock exchanges on which the Common Stock is then listed, unless the Committee determines in its sole discretion that such listing is neither necessary nor advisable; (b) The completion of any registration or other qualification of the Plan Shares under any federal or state -2- law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body that the Committee shall in its sole discretion deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any federal or state governmental agency that the Committee shall in its sole discretion determine to be necessary or advisable. 1.9 Reservation of Shares of Common Stock. During the term of the Plan, the Company will at all times reserve and keep available such number of shares of Common Stock as shall be necessary to satisfy the requirements of the Plan as to the number of Plan Shares. In addition, the Company will from time to time, as is necessary to accomplish the purposes of the Plan, seek or obtain from any regulatory agency having jurisdiction any requisite authority that is necessary to issue Plan Shares hereunder. The inability of the Company to obtain from any regulatory agency having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance of any Plan Shares shall relieve the Company of any liability in respect of the non-issuance of Plan Shares as to which the requisite authority shall not have been obtained. 1.10 Tax Withholding. (a) Condition Precedent. The issuance, delivery, exercise or vesting of any Options under the Plan is subject to the condition that if at any time the Committee shall -3- determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Options, then the issuance, delivery, exercise or vesting of the Options shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Committee. (b) Manner of Satisfying Withholding Obligation. When a Director, Officer, Employee or Advisor participating in the Plan is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of an Option, subject to Section 1.10(c), such individual may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Plan Shares acquired upon the exercise of the Option and having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld or (ii) deliver to the Company shares of Common Stock already owned and having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, in the event a request is made by a Director, Officer, Employee or Advisor, the amount to be withheld shall be the approximate -4- [This Page Intentionally Left Blank] -5- without cause and appoint successor or additional Committee members at any time. 2.3 Majority Rule; Unanimous Written Consent. A majority of the members of the Committee shall constitute a quorum, and any action taken by a majority present at a meeting at which a quorum is present or any action taken without a meeting evidenced by a writing executed by all members of the Committee shall constitute the action of the Committee. Meetings of the Committee may take place by telephone conference call. 2.4 Company Assistance. The Company shall supply full and timely information to the Committee on all matters relating to Directors, Officers, Employees and Advisors, their employment, death, retirement, disability, or other termination of employment, and such other pertinent facts as the Committee may require. The Company shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties. ARTICLE III Stock Options 3.1 Option Terms and Conditions. The terms and conditions of Options granted under this Article may differ from one another as the Committee shall, in its discretion, determine as long as all Options granted under this Article satisfy the requirements of this Article. 3.2 Duration of Options. Each Option granted pursuant to this Article and all rights thereunder shall expire on the date determined by the Committee, but in no event shall any Option -6- granted under this Article expire later than 15 years after the date on which the Option is granted. In addition, each Option shall be subject to early termination as provided elsewhere in the Plan. 3.3 Purchase Price. The purchase price for Plan Shares acquired pursuant to the exercise, in whole or in part, of any Option shall be determined by the Committee at the time of the grant of the Option. 3.4 Individual Option Agreements. Each Optionee receiving Options pursuant to this Article shall be required to enter into a written Option Agreement with the Company as a precondition to receiving an Option under this Article. In such Option Agreement, the Optionee shall agree to be bound by the terms and conditions of the Plan, the awards made pursuant hereto, and such other matters as the Committee deems appropriate. 3.5 Non-Competition and Confidential Information. Each Optionee receiving Options pursuant to this Article shall be subject to the restriction that during the term of the Option Agreement and for a period of one year thereafter, he or she will not compete with any business of the Company, and will not disclose to persons outside the Company confidential information concerning the Company without the Company's consent. 3.6 Exercise of Options. (a) Method of Exercise. Each Option shall be exercisable in accordance with the terms of the Option Agreement -7- pursuant to which the Option was granted. No Option may be exercised for a fraction of a Plan Share. (b) Payment of Purchase Price. The purchase price of any Plan Shares purchased shall be paid at the time of exercise of the Option either (i) in cash, (ii) by certified or cashier's check, (iii) if permitted by the Committee, by shares of Common Stock, (iv) if permitted by the Committee, by cash or certified or cashier's check for the par value of the Plan Shares plus a promissory note for the balance of the purchase price, which note shall provide for full personal liability of the maker and shall contain such other terms and provisions as the Committee may determine, including without limitation the right to repay the note partially or wholly with Common Stock, or (v) by delivery of a copy of irrevocable instructions from the Optionee to a broker or dealer, reasonably acceptable to the Company, to sell certain of the Plan Shares purchased upon exercise of the Option or to pledge them as collateral for a loan and promptly deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Common Stock, those shares shall be valued at the then Fair Market Value. 3.7 Written Notice Required. Any Option shall be deemed to be exercised for purposes of the Plan when written notice of exercise has been received by the Company at its principal office -8- from the person entitled to exercise the Option and payment for the Plan Shares with respect to which the Option is exercised has been received by the Company in accordance with Section 3.6. 3.8 Compliance with Securities Laws. Plan Shares shall not be issued with respect to any Option unless the exercise of the Option and the issuance and delivery of the Plan Shares shall comply with all applicable provisions of state and federal law (including without limitation (a) the Securities Act, the Exchange Act, Rule 16b-3, and the rules and regulations promulgated thereunder, and (b) the requirements of any stock exchange upon which the Plan Shares may then be listed) and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Committee may also require an Optionee to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the Plan Shares are being acquired only for investment and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the certificate representing the Plan Shares issued upon the exercise of the Option restricting their transferability as required by law or by this Section. 3.9 Employment of Participant or Optionee. Nothing in the Plan or in any Option granted or Restricted Stock issued hereunder shall confer upon any Participant or Optionee any right to -9- continued employment by the Company or any of its subsidiaries or affiliates or limit in any way the right of the Company or any subsidiary or affiliate at any time to terminate or alter the terms of that employment. 3.10 Option Rights Upon Termination of Employment. If an Optionee that is an Employee ceases to be employed by the Company or any subsidiary or affiliate for any reason other than death, Permanent Disability, or for Cause (as defined in Section 3.11), his Option shall be exercisable (to the extent exercisable on the date of termination of employment) at any time within 90 days after the date of termination of employment unless by its terms the Option expires sooner or the Committee agrees, in its sole discretion, to extend the term of such Option. 3.11 Termination of Employment for Cause. If an Optionee that is an Employee ceases to be employed by the Company or any subsidiary or affiliate of the company because the optionee is terminated for Cause, the Option shall automatically expire. For purposes of this Article III and Section 4.3,"Cause" shall mean an act or acts involving a felony, fraud, willful misconduct, the commission of any act that causes or reasonably may be expected to cause substantial injury to the Company, a violation of the restrictions imposed by Section 3.5, or other good cause. The term "other good cause" as used in this Section shall include, but shall not be limited to, habitual impertinence, a pattern of conduct that tends to hold the Company up to ridicule in the community, conduct disloyal to the Company, conviction of any crime of moral turpi- -10- tude, and substantial dependence, as judged by the Committee, on alcohol or any controlled substance. "Controlled substance" means a drug, immediate precursor, or other substance listed in Schedules I-V of the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as amended. 3.12 Option Rights Upon Permanent Disability of Optionee. Unless either the Option or the Option Agreement pursuant to which it was issued otherwise provides, an Option that is issued to (a) an Employee shall become fully exercisable on the date of the Optionee's termination of employment if the Optionee ceases to be an Employee as a result of his or her Permanent Disability and shall expire 1 year thereafter unless by its terms it expires sooner or (b) a Non-employee Director or Advisor that is not also classified as an Employee shall not be affected as a result of the Permanent Disability of the Optionee. 3.13 Option Rights Upon Death of Optionee. Unless either the Optionor the Option Agreement pursuant to which it was issued otherwise provides, an Option that is issued to (a) an Employee shall become fully exercisable on the date of the Employee's death and shall expire 1 year thereafter unless by its terms its expires sooner or (b) a Non-employee Director or Advisor that is not also classified as an Employee shall not be affected as a result of the Death of the Optionee. Following the death of an Optionee, the Option may be fully exercised, to the extent that it remains unexercised on the date of death, by the Optionee's personal representative or by the distributee to whom the Optionee's rights -11- under the Option shall pass by will or by the laws of descent and distribution. 3.14 Options Not Transferable and Subject to Certain Restrictions. Options may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of an Optionee only by that Optionee or by his legally authorized representative. ARTICLE IV Change in Control and Constructive Termination of Employment 4.1 Consequences of Change in Control and Constructive Termination of Employment. Notwithstanding any other term or provision of this Plan, upon the occurrence of a Change in Control of the Company followed or accompanied within two years thereafter by a Constructive Termination of Employment of a person who holds an Option, that portion of each such Option that is not then exercisable shall become exercisable. 4.2 Change in Control Defined. As used herein, a "Change in Control of the Company" sha11 be deemed to have occurred if, after the Effective Date (a) any "person", or persons acting as a "group" (as such terms are used in Sections 13 (d) and 14 (d) (2) of the Securities Exchange Act of 1934, as amended, but excluding any Company employee stock ownership plan and any person that was a stockholder of the Company at the Effective Date), (i) becomes the beneficial owner, directly or indirectly, of securities of the -12- Company representing 50% or more of the combined voting power of the Company's then outstanding securities, or (ii) acquires or obtains, directly or indirectly, the power, authority or ability, whether through share ownership, contract, proxy, voting agreement or any other arrangement, understanding or circumstance, to mange or direct the operations of the Company, (b) the Company or its stockholders enter into an agreement to dispose of all or substantially all of the assets of the Company by means of a sale, merger, or other reorganization or liquidation, or otherwise in a reorganization transaction in which the Company is not the surviving corporation, or (c) the Board of Directors of the Company ceases to consist of a majority of Continuing Directors. For purposes hereof, "Continuing Director" shall mean a member of the Board of Directors of the Company who either (1) was a member of the Board of Directors as of the Effective Date or (2) was nominated, appointed or approved (before initial election as a director) to serve as a director by a majority of the then Continuing Directors. 4.3 Constructive Termination of Employment. As used herein, "Constructive Termination of Employment" shall mean the termination of an Employee's employment by the Company for reasons other than Cause (as defined in Section 3.11) or Permanent Disability, or if any of the following shall occur without the Employee's written consent: (a) The assignment of duties and responsibilities materially inconsistent with or of materially lesser statute than, the Employee's positions, duties, responsibilities and -13- status with the Company immediately prior to the first Change in Control of the Company that occurred prior to such assignment; (b) The removal of the Employee from, or any failure to re-elect the Employee to, any office of the Company or any successor of the Company, except in connection with his termination of employment for cause, death, disability or retirement; (c) A reduction by the Company or any successor of the Company in the Employee's annual base salary in effect immediately prior to the first Change in Control of the Company that occurred prior to such reduction or as the said salary may thereafter be increased from time to time; (d) Failure by the Company or any successor to the Company to permit the Employee to continue to participate in incentive compensation and benefit programs (other than stock-related plans or arrangements) comparable to those in effect immediately prior to the first Change in Control of the Company that occurred prior to such failure; or (e) Any purported termination of the Employee's employment for Cause or Permanent Disability not in accordance with the provisions of this Plan with respect thereto. ARTICLE V Termination, Amendment, and Adjustment 5.1 Termination and Amendment. The Plan shall terminate 10 years after the Effective Date. No Options shall be granted under -14- the Plan after that date of termination. The Committee may at any time amend or revise the terms of the Plan, including the form and substance of the Option Agreements to be used in connection herewith. No amendment, suspension, or termination of the Plan shall, without the consent of the individual who has received an Option hereunder, alter or impair any of that individual's rights or obligations under any Option granted under the Plan prior to that amendment, suspension, or termination. 5.2 Adjustments. If the outstanding Common Stock is increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split, or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of Plan Shares as to which Options may be granted under the Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised Options or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option, but with a corresponding adjustment in the price for each share covered by the Option. The foregoing adjustments and the manner of application of the forgoing provisions shall be determined solely by the Committee, and any such adjustment may provide for the elimination of fractional share interests. -15- ARTICLE VI Miscellaneous 6.1 Other Compensation Plans. The adoption of the Plan shall not affect any other stock option or incentive or other compensation plans in effect for the Company or any subsidiary or affiliate of the Company, nor shall the Plan preclude the Company or any subsidiary or affiliate thereof from establishing any other forms of incentive or other compensation plans. 6.2 Plans Binding on Successors. The Plan shall be binding upon the successors and assigns of the Company and any subsidiary or affiliate of the Company that adopts the Plan. 6.3 Number and Gender. Whenever used herein, nouns in the singular shall include the plural where appropriate, and the masculine pronoun shall include the feminine gender. 6.4 Headings. Headings of articles and sections hereof are inserted for convenience of reference and constitute no part of the Plan. ARTICLE VII Definitions As used herein with initial capital letters, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary: 7.1 "Advisor" shall mean any person performing services for the Company or any subsidiary or affiliate of the Company, with or without compensation, to whom the Company chooses to grant Options in accordance with the Plan, provided that bona fide services must -16- be rendered by such person and such services shall not be rendered in connection with the offer or sale of securities in a capital raising transaction. 7.2 "Board" shall mean the Board of Directors of the Company. 7.3 "Code" shall mean the Internal Revenue Code of 1986, as amended. 7.4 "Committee" shall mean the Committee appointed in accordance with Section 2.2. 7.5 "Common Stock" shall mean the Common Stock, par value $ .01 per share, of the Company or, in the event that the outstanding shares of such Common Stock are hereafter changed into or exchanged for shares of a difference stock or security of the Company or some other corporation, such other stock or security. 7.6 "Company" shall mean Hanover Compressor Company, a Texas corporation. 7.7 "Director" shall mean a member of the Board of Directors of the Company or any subsidiary or affiliate of the Company. 7.8 "Effective Date" shall meant the date of the Plan's adoption by the Board. 7.9 "Employee" shall mean an employee of the Company, or of any subsidiary or affiliate of the Company the board of directors of which adopts the Plan, as determined under Section 3401 (c) of the Code and the regulations thereunder. Unless the context otherwise indicates, the term "Employee" shall include Officers and Directors that are not Non-employee Directors. -17- 7.10 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 7.11 "Fair Market Value" shall mean such value as determined by the Committee on the basis of such factors as it deems appropriate; provided that if the Common Stock is traded on a national securities exchange or transactions in the Common Stock are quoted on the NASDAQ National Market System, such value as shall be determined by the Committee on the basis of the average reported sales price for the Common Stock for the ten days preceding the date for which such determination is relevant, as reported on the national securities exchange or the NASDAQ National Market System, as the case may be. 7.12 "Non-employee Director" shall mean a Director who is not an Officer or Employee. 7.13 "Officer" shall mean an officer of the Company or any subsidiary or affiliate of the Company. 7.14 "Option" shall mean an option granted pursuant to Article III. 7.15 "Optionee" shall mean a Director, Officer, Employee or Advisor to whom an Option has been granted hereunder. 7.16 "Option Agreement" shall mean an agreement between the Company and an Optionee with respect to one or more Options. 7.17 "Permanent Disability" or " Permanently Disabled" shall mean the Employee's inability, because of mental or physical illness or incapacity, to perform his or her duties for the Company -18- for a continuous period of 120 days or for 120 days out of a 150-day period. 7.18 "Plan" shall mean Hanover Compressor Company Stock Compensation Plan, the terms of which are set forth herein. 7.19 "Plan Shares" shall mean shares of Common Stock issuable pursuant to the Plan (including, but not limited to, shares of Common Stock issued or issuable upon exercise of Options granted pursuant to the Plan). 7.20 "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act or any successor rule. 7.21 "Securities Act" shall mean the Securities Act of 1933, as amended. -19- EX-10.70 17 dex1070.txt STOCK OPTION AGREEMENT - OPTIONEE EXHIBIT 10.70 EXECUTION COPY HANOVER COMPRESSOR COMPANY STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") is entered into between HANOVER COMPRESSOR COMPANY, a Delaware corporation (the "Company"), and ("Optionee"), on this __________ day of _______________ (all capitalized terms used herein but not otherwise defined shall have the meaning assigned to them in Section 19). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. Grant of Option. Under the terms and conditions set forth herein, the Company grants to Optionee an option to purchase the Shares at a purchase price of $__________ per share (the "Option"). The "Shares" shall consist of ________ shares of the Company's common stock, par value $.001 per share (the "Common Stock"). The Option is a non-statutory option and is not intended to qualify for any special tax benefits in the hands of Optionee. The Option is not intended to qualify as an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended. All provisions of this Agreement are to be construed in conformity with this intention. 2. Term. Except as provided below, the Option shall be valid for a term commencing on the date hereof (the "Date of Grant") and ending 10 years from the Date of Grant (the "Termination Date"). (a) Option Rights Upon Termination of Employment. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof for any reason other than Cause or Optionee's Permanent Disability or death, the Option shall be exercisable (to the extent exercisable on the date of termination of employment) at any time prior to the earlier of (i) the Termination Date or (ii) within 30 days after the date of termination of employment. (b) Termination of Employment for Cause. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof because Optionee is terminated for Cause, the Option shall automatically expire and Optionee shall have no right to exercise any portion of the Option, whether or not vested, thereafter. (c) Option Rights Upon Permanent Disability or Death of Optionee. If Optionee ceases to be employed by the Company as a result of Optionee's Permanent Disability or death, the Option shall be exercisable at any time prior to the earlier of (i) the Termination Date or (ii) 30 days after the date of termination of employment. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 3. Vesting. The Option may only be exercised to the extent vested. (a) The Option will vest according to the following schedule: Number of Years Since Grant Date Vested Percentage ---------------- ----------------- Fewer than one 0% One but fewer than two 20% Two but fewer than three 40% Three but fewer than four 60% Four but fewer than five 80% Five or more 100% If Optionee's employment with the Company is terminated prior to becoming fully vested, Optionee will forfeit the non-vested portion of the Option. (b) Notwithstanding the vesting provisions in Section 3(a), if Optionee's employment is terminated for Cause, Optionee's vested percentage shall be zero percent (0%) and Optionee shall forfeit any and all rights in and to the Option. (c) Notwithstanding the vesting provisions in Section 3(a), (i) if Optionee's employment is terminated because of Optionee's death or Permanent Disability or (ii) upon the occurrence of a Capital Event, Optionee shall be immediately one hundred percent (100%) fully vested in the Option. The Company shall notify Optionee at least 10 days prior to a contemplated Capital Event. 4. Restriction on Exercise. The Option may not be exercised during any period in which Optionee is in default under the terms of any loan or other obligation that Optionee may have with the Company. Upon cure of such default, the restrictions of this Section 4 will lapse and the Option shall be exercisable to the extent vested and otherwise exercisable under the terms of this Agreement. 5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by the giving of written notice by Optionee to the Company at its principal office and payment of the pro rata portion of the purchase price prescribed in Section 1 for the number of Shares to be acquired pursuant to the exercise. 6. Payment for Shares. Payment of the purchase price for any shares purchased pursuant to the exercise of the Option shall be made in (i) cash; (ii) by certified or cashier's check, (iii) by shares of Common Stock, subject to the consent of the Board, (iv) by cash or certified or cashier's check for the par value of the Shares plus a promissory note for the balance of the purchase price, which note shall not provide for full personal liability of Optionee and shall contain such other terms and provisions as the Board may determine, including, without -2- limitation, the right to repay the note partially or wholly with Common Stock or (v) by delivery of a copy of irrevocable instructions from Optionee to a broker or dealer, reasonably acceptable to the Company, to sell certain of the Shares purchased upon exercise of the Option or to pledge them as collateral for a loan and promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Common Stock, those shares shall be valued at their then Fair Market Value. 7. Option Not Transferable and Subject to Certain Restrictions. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee or by Optionee's legally authorized representative. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 8. Non-Competition and Confidential Information. In consideration hereof, Optionee agrees that during the term of this Agreement and for a period of one year thereafter, Optionee (i) will not compete with any business of the Company or any subsidiary or affiliate thereof and (ii) will not disclose to persons outside the Company confidential information concerning the Company or any subsidiary or affiliate thereof without the Company's express written consent. 9. Consent to Stockholders' Agreement. Optionee hereby acknowledges and confirms that the Shares purchased upon exercise of the Option are subject to the terms and conditions of the Stockholders' Agreement. Optionee further acknowledges and agrees that prior to delivery of any Shares by the Company, Optionee will execute such instruments as are necessary to be bound by the terms and conditions of the Stockholders' Agreement. 10. Investment Purpose. Upon exercise of the Option, Optionee shall represent and warrant to the Company that Optionee is acquiring the Shares for Optionee's own account for investment and not with a view to, or for sale in connection with, any distribution of the Shares and that Optionee consents to be bound by any transfer restrictions imposed by law, legend, condition or otherwise. Optionee consents to the imposition of the following legend on all stock certificates representing the Shares: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN COMPLIANCE WITH SUCH ACT. THE TRANSFERABILITY OF THIS SECURITY IS ALSO SUBJECT TO RESTRICTIONS CONTAINED IN A STOCKHOLDERS AGREEMENT WHICH -3- AGREEMENT THE COMPANY WILL FURNISH TO THE HOLDER OF THIS SECURITY UPON REQUEST. A STATEMENT SUMMARIZING THE VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS, RESTRICTIONS AND RELATIVE RIGHTS OF THE VARIOUS CLASSES OF STOCK OR SERIES THEREOF MAY BE OBTAINED BY THE STOCKHOLDERS OF THE COMPANY, WITHOUT CHARGE, FROM THE PRINCIPAL OFFICES OF THE COMPANY. 11. Tax Withholding. (a) Option Conditioned upon Satisfaction of Withholding Obligation. The issuance, delivery, exercise or vesting of the Option is subject to the condition that if at any time the Board shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Option, then the issuance, delivery, exercise or vesting of the Option shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Company. (b) Manner of Satisfying Withholding Obligation. If Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of the Option, subject to Section 11(c), Optionee may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Shares acquired upon the exercise of the Option having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld or (ii) deliver to the Company shares of Common Stock already owned having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, in the event a request is made by Optionee, the amount to be withheld shall be the approximate amount of federal and state income taxes that will be incurred by Optionee with respect to such issuance, delivery, exercise or vesting of Options under this Agreement. (c) Special Rules for Use of Stock. An election to have Shares or other shares of Common Stock withheld or delivered out of already-owned Common Stock for the purposes of Section 11(b) (i) must be made prior to the Tax Date and (ii) must be irrevocable. 12. Compliance with Securities Laws. Shares shall not be issued unless the exercise of the Option and the issuance and delivery of the Shares shall comply, in the opinion of counsel -4- for the Company, with all applicable provisions of state and federal law including, without limitation, (a) the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder (including Rule 16b-3) and (b) the requirements of any stock exchange upon which the Shares may then be listed. Optionee shall furnish evidence showing such compliance, satisfactory to the Company, including a written and signed representation to such effect. 13. Employment of Optionee. Nothing in this Agreement shall confer upon Optionee any right to continued employment by the Company or any subsidiary or affiliate thereof or limit in any way the right of the Company or any subsidiary or affiliate thereof at any time to terminate or alter the terms of such employment. 14. Adjustments. If the outstanding Common Stock of the Company is increased, decreased, changed into or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made in the number and kind of Shares subject to the Option; provided, however, that no adjustment shall be made upon any conversion of preferred stock of the Company to Common Stock. Any such adjustment in the Option shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option, but with a corresponding adjustment in the price for each security covered by the Option. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined solely by the Board and any such adjustments may provide for the elimination of fractional share interests. 15. Shares Not Outstanding. Prior to issuance, the Shares are not deemed to be outstanding for any purpose and Optionee shall have no voting, preemptive or other shareholder rights with respect to the Shares. 16. Number. Whenever used herein, nouns in the singular shall include the plural where appropriate. 17. Headings. Headings of articles and sections hereof are inserted for convenience of reference only and constitute no part of this Agreement. 18. Binding on Successors. This Agreement shall be binding upon the successors and assigns of the Company and on the heirs, personal representatives, successors, assigns and distributees of Optionee. 19. Definitions. Unless otherwise defined herein, terms used herein with initial capital letters shall have the meanings hereinafter set forth unless the context clearly indicates to the contrary: (a) "Board" means the Board of Directors of the Company. -5- (b) "Capital Event" means the first to occur of: (A) the date that GKH sells or otherwise transfers more than 50% of its Common Stock interest in the Company; (B) the date all or substantially all the assets or property of the Company are sold or otherwise transferred to an unrelated third-party; (C) the effective date of a merger or consolidation under which the Company is not the surviving entity or the surviving entity is not controlled by GKH either individually or collectively; (D) the dissolution or liquidation of the Company; or (E) the effective date (as declared by the Securities and Exchange Commission) the Common Stock is registered in a public offering and listed on a nationally recognized stock exchange or national inter-dealer quotation system. (c) "Cause" means a termination of Optionee's employment by the Company or any subsidiary or affiliate thereof due to (i) the commission by Optionee of an act of fraud, embezzlement or willful breach of a fiduciary duty to the Company or any subsidiary or affiliate thereof (including the unauthorized disclosure of confidential or proprietary material information of the Company or any subsidiary or affiliate thereof), (ii) a conviction of Optionee (or a plea of nolo contendere in lieu thereof) for a felony or a crime involving fraud, dishonesty or moral turpitude, (iii) willful misconduct as an employee of the Company or any subsidiary or affiliate thereof, (iv) the willful failure of Optionee to render services to the Company or any subsidiary or affiliate thereof in accordance with Optionee's employment, which failure amounts to a material neglect of Optionee's duties to the Company or any subsidiary or affiliate thereof or (v) substantial dependence, as determined by the Board, on alcohol or any drug, immediate precursor or other substance listed in Schedule I-V of the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as amended. (d) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (e) "Fair Market Value" means such value as determined by the Board on the basis of such factors as it deems appropriate; provided, however, that if the Common Stock is traded on a national securities exchange or transactions in the Common Stock are quoted on the NASDAQ National Market System, such value shall be determined by the Board on the basis of the average reported sales price of the Common Stock on the national securities exchange or the NASDAQ National Market System, as the case may be, for the ten days preceding the date for which such determination is relevant. -6- (f) "GKH" shall mean the collective reference to (i) GKH Investments, L.P., a Delaware limited partnership ("Investments"), (ii) GKH Partners, L.P., a Delaware limited partnership ("Partners") and (iii) the respective affiliates of Investments and Partners. (g) "Permanent Disability" means the inability of Optionee to perform substantially all of Optionee's duties and responsibilities to the Company for either (i) a continuous period of six months or (ii) 180 days during any consecutive twelve month period by reason of a physical or mental disability or infirmity which is expected to be permanent and continuous for life as determined by a physician selected by the Board. The date of such Permanent Disability shall be (a) in the case of clause (i) above, the last day of such six month period or, if later, the day on which Optionee submits satisfactory medical evidence of such Permanent Disability or (b) in the case of clause (ii) above, such date as is determined in good faith by the Board. (h) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor rule. (i) "Securities Act" means the Securities Act of 1933, as amended. (j) "Stockholders' Agreement" means the Amended and Restated Stockholders' Agreement of the Company dated as of August 7, 1995. 20. Governing Law. The construction and operation of this Agreement are governed by the laws of the State of Delaware. 21. Amendment. This Agreement may be amended only by an instrument in writing signed by both the Company and Optionee. 22. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior and contemporaneous agreements between the Company and Optionee relating to the subject matter hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -7- Executed on the date first written above. COMPANY: HANOVER COMPRESSOR COMPANY, a Delaware corporation By: /s/ Curtis A. Bedrich ------------------------ Curtis A. Bedrich Chief Financial Officer and Treasurer OPTIONEE: ------------------------------ -8- EX-10.71 18 dex1071.txt STOCK OPTION AGREEMENT - WIND EXHIBIT 10.71 HANOVER COMPRESSOR COMPANY STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT (the "Agreement") is entered into between HANOVER COMPRESSOR COMPANY, a Delaware corporation (the "Company"), and (the "Optionee") on this ___ day of ______,______. In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. Grant of Option. Under the terms and conditions set forth herein, the Company grants to Optionee an option to purchase the Shares at a purchase price of $ ____ per share (the "Option"). The "Shares" shall consist of ___ shares of the Company's common stock, par value $.001 per share (the "Common Stock"). The Option is a non-statutory option and is not intended to qualify for any special tax benefits in the hands of Optionee. The Option is not intended to qualify as an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended. All provisions of this Agreement are to be construed in conformity with this intention. 2. Term. Except as provided below, the Option shall be valid for a term commencing on the date hereof (the "Date of Grant") and ending 10 years from the Date of Grant (the "Termination Date"). (a) Option Rights Upon Termination of Employment. If Optionee ceases to be employed by the Company or any subsidiary or affiliate for any reason other than Cause, the Option shall be exercisable (to the extent exercisable on the date of termination of employment) at any time prior to the earlier of (i) the Termination Date or (ii) within 30 days after the date of termination of employment. (b) Termination of Employment for Cause. If Optionee ceases to be employed by the Company or any subsidiary or affiliate of the Company because Optionee is terminated for Cause, the Option shall automatically expire, and, notwithstanding the provisions of Section 3, Optionee shall forfeit any previously vested Option. 3. Vesting. The Option will vest according to the following schedule: Number of Years Since June 30, 1993 Vested Percentage ------------------- ----------------- Fewer than one 0% One but fewer than two 20% Two but fewer than three 40% Three but fewer than four 60% Four but fewer than five 80% Five or more 100% If Optionee terminates employment with the Company prior to becoming fully vested, he will forfeit the non-vested portion of the Option. Notwithstanding the foregoing vesting schedule, if Optionee's employment is terminated because for Cause, Optionee's vested percentage shall be 0% and he shall forfeit the Option. Notwithstanding the foregoing vesting schedule, upon occurrence of a Capital Event, then the Optionee shall be 100% fully vested in his Option. The Company shall notify Optionee at least 10 days prior to a contemplated Capital Event. 4. Restriction on Exercise. The Option may not be exercised during any period in which Optionee is in default under the terms of any loan or other obligation that Optionee may have with the Company. Upon cure of such default, the restrictions of this Section 4 will lapse and the Option shall be exercisable to the extent vested and otherwise exercisable under the terms of this Agreement. 5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by the giving of written notice to the Company by Optionee at its principal office and payment of the pro rata portion of the purchase price prescribed in Section 1 for the number of Shares to be acquired pursuant to the exercise. 6. Payment for Shares. Payment of the purchase price for any shares purchased pursuant to the exercise of the Option shall be made in (i) cash; (ii) by certified or cashier's check, (iii) by shares of Common Stock, subject to the consent of the Board, by cash or certified or cashier's check for the par value of the Shares plus a promissory note for the balance of the purchase price, which shall not provide for full personal liability of Optionee and shall contain such other terms and provisions as the Board of Directors may determine, including, without limitation, the right to repay the note partially or wholly with Common Stock or (v) by delivery of a copy of irrevocable instructions from the Optionee to a broker or dealer, reasonably acceptable to the Company, to sell certain of the Shares purchased upon the exercise of the Option or to pledge them as collateral for a loan and promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Common Stock, those shares shall be valued at their then Fair Market Value. 2 7. Option Not Transferable and Subject to Certain Restrictions. The Option may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee or by his legally authorized representative. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 8. Non-Competition and Confidential Information. In consideration hereof, Optionee agrees that during the term of this Agreement and for a period of one year thereafter, he (i) will not compete with any business of the Company or its subsidiaries or affiliates and (ii) will not disclose to persons outside the Company confidential information concerning the Company or its subsidiaries or affiliates without the Company's express written consent. 9. Consent to Stockholders' Agreement. Optionee hereby acknowledges and confirms that the Shares purchased upon exercise of the Option are subject to the terms and conditions of the Stockholders' Agreement. Optionee further acknowledges and agrees that prior to delivery of any Shares by the Company, Optionee will execute such instruments as are necessary to be bound by the terms and conditions of the Stockholders' Agreement. 10. Investment Purpose. Upon exercise of the Option, Optionee shall represent and warrant to the Company that he is acquiring the Shares for his own account for investment and not with a view to or for sale in connection with any distribution of the Shares and that he consents to be bound by any transfer restrictions imposed by law, legend, condition or otherwise. The Option consents to the imposition of the following legend on all stock certificates representing the Shares: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION, THE SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SHARES EVIDENCED BY THIS CERTAIN AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF AUGUST 7, 1995 AMONG THE COMPANY AND EACH OF THE STOCKHOLDERS SPECIFIED THEREIN, WHICH AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT MAY BE EXAMINED AT THE PRINCIPAL OFFICES OF THE COMPANY. THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH (I) SAID SECURITIES LAWS OR AN APPLICABLE 3 EXEMPTION THEREFROM AND (II) SAID AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT. 11. Tax Withholding. (a) Option Conditioned upon Satisfaction of Withholding Obligation. The issuance, delivery, exercise or vesting of the Option is subject to the condition that if at any time the Board of Directors shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Option, then the issuance, delivery, exercise or vesting of the Options shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Company. (b) Manner of Satisfying Withholding Obligation. If Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of an Option, subject to Section 11(c), he may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Shares acquired upon the exercise of the Option and having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld or (ii) deliver to the Company shares of Common Stock already owned and having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, in the event a request is made by Optionee, the amount of federal and state income taxes that will be incurred by Optionee with respect to such issuance, delivery, exercise or vesting of Options under the this Agreement. (c) Special Rules for Use of Stock. An election to have Shares or other shares of Common Stock withheld or delivered out of already-owned Common Stock for this purpose (i) must be made prior to the Tax Date, and (ii) must be irrevocable. 12. Compliance with Securities Laws. Shares shall not be issued unless the exercise of the Option and the issuance and delivery of the Shares shall comply with all applicable provisions of state and federal law (including, without limitation, (a) the Securities Act, the Exchange Act, Rule 16b-3, and the rules and regulations promulgated thereunder and (b) the requirements of any stock exchange upon which the Shares may then be listed and shall be further subject to the approval of counsel for the Company with respect to such compliance. Optionee shall furnish evidence satisfactory to the Company, including a written and signed representation. 13. Employment of Optionee. Nothing in this Agreement shall confer upon the Optionee any right to continued employment by the Company or any of its subsidiaries or 4 affiliates or limit in any way the right of the Company or any subsidiary or affiliate at any time to terminate or alter the terms of such employment. 14. Adjustments. If the outstanding Common Stock of the Company is increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split, or reverse stock split, an appropriate and proportionate adjustment shall be made in the number and kind of Shares subject to the Option; provided, however that no adjustment shall be made upon any conversion of preferred stock to Common Stock. Any such adjustment in the Option shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option, but with a corresponding adjustment in the price for each share covered by the Option. The foregoing adjustments and the manner of application of the forgoing provisions shall be determined solely by the Board of Directors and any such adjustments may provide for the elimination of fractional share interests. 15. Shares Not Outstanding. Prior to issuance upon the exercise of the Option, the Shares are not deemed to be outstanding for any purpose and Optionee shall have no voting, preemptive or other shareholder rights with respect to such Shares. 16. Number of Gender. Whenever used herein, nouns in the singular shall include the plural where appropriate, and the masculine pronoun shall include the feminine gender. 17. Headings. Headings of articles and sections hereof are inserted for convenience of reference and constitute no part of the Agreement. 18. Binding on Successors. This Agreement shall be binding upon the successors and assigns of the Company and on the heirs, personal representatives, successors, assigns and distributees of Optionee. 19. Definitions. Unless otherwise defined herein, terms used herein with initial capital letters, shall have the meanings hereinafter set forth unless the context clearly indicates to the contrary: (a) "Board" means the Board of Directors of the Company. (b) "Capital Event" means the first to occur of: (A) the date that GKH sells or otherwise transfers more than 50% of its Common Stock interest in the Company; (B) the date all or substantially all the assets or property of the Company are sold or otherwise transferred to an unrelated third-party; 5 (C) the effective date of a merger or consolidation, under which the Company is not the surviving entity or the surviving entity is not controlled by GKH either individually or collectively; (D) the dissolution or liquidation of the Company; or (E) the effective date (as declared by the Securities and Exchange Commission) the Common Stock is registered in a public offering and listed on a nationally recognized stock exchange or national inter-dealer quotation system. (c) "Cause" means a termination of an Optionee's employment by the Company, any subsidiary or affiliate due to (i) the commission by such Optionee of an act of fraud, embezzlement or willful breach of a fiduciary duty to the Company, any subsidiary or affiliate (including the unauthorized disclosure of confidential or proprietary material information of the Company, any subsidiary or affiliate), (ii) a conviction of such Optionee (or a plea of nolo contendere in lieu thereof) for a felony or a crime involving fraud, dishonesty or moral turpitude, (iii) willful misconduct as an employee of the Company, any subsidiary or affiliate, (iv) the willful failure of such Optionee to render services to the Company, any subsidiary or affiliate in accordance with his employment, which failure amounts to a material neglect of his duties to the Company, any subsidiary or affiliate or (v) substantial dependence, as determined by the Board, on alcohol or any drug, immediate precursor or other substance listed in Schedule I-V of the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as amended. (d) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (e) "Fair Market Value" means such value as determined by the Board on the basis of such factors as it deems appropriate; provided, however, that if the Common Stock is traded on a national securities exchange or transactions in the Common Stock are quoted on the NASDAQ National Market System, such value as shall be determined by the Board on the basis of the average reported sales price for the Common Stock for the ten days preceding the date for which such determination is relevant, as reported on the national securities exchange or the NASDAQ National Market System, as the case may be. (f) "GKH" shall mean the collective reference to (i) GKH Investments, L.P., a Delaware limited partnership ("Investments"), (ii) GKH Partners, L.P., a Delaware limited partnership ("Partners") and (iii) the respective affiliates of Investments and Partners. (g) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor rule. 6 (h) "Securities Act" means the Securities Act of 1933, as amended. (i) "Stockholders' Agreement" means the Amended and Restated Stockholders' Agreement dated as of August 7, 1995. 20. Governing Law. The construction and operation of this Agreement are governed by the laws of the State of Delaware. 21. Amendment. This Agreement may be amended only by an instrument in writing signed by both the Company and Optionee. 22. Entire Agreement. This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements between the Company and Optionee relating to the subject matter hereof. Executed on the date first written above. COMPANY: HANOVER COMPRESSOR COMPANY, a Delaware corporation By: /s/ William S. Goldberg ------------------------- William S. Goldberg Executive Vice President OPTIONEE: ------------------------------ 7 EX-10.88 19 dex1088.txt STOCK OPTION AGREEMENT - BERG EXHIBIT 10.88 HANOVER COMPRESSOR COMPANY STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") is entered into between HANOVER COMPRESSOR COMPANY, a Delaware corporation (the "Company"), and Mark Berg ("Optionee"), as of May 6, 2002 (all capitalized terms used herein but not otherwise defined shall have the meaning assigned to them in Section 18). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. Grant of Option. Under the Company's 2001 Equity Incentive Plan (the "Plan") and subject to the terms and conditions set forth herein, the Company grants to Optionee an option (the "Option") to purchase the Shares at a purchase price of $17.32 per share (the "Option Price"). The "Shares" shall consist of 100,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"). The Option is a non-statutory option and is not intended to qualify as an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended. All provisions of this Agreement are to be construed in conformity with this intention. 2. Term. Except as provided below, the Option shall be valid for a term commencing on the date hereof (the "Date of Grant") and ending ten (10) years from the Date of Grant (the "Termination Date"). (a) Option Rights Upon Termination of Employment. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof for any reason other than Cause or Optionee's Disability or death, the Option shall be exercisable (to the extent exercisable on the date of Termination of Employment) at any time prior to the earlier of (i) the Termination Date or (ii) within ninety (90) days after the Optionee's Termination of Employment. (b) Termination of Employment for Cause. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof because Optionee is terminated for Cause, the Option shall automatically expire and Optionee shall have no right to exercise any portion of the Option, whether or not vested, thereafter. (c) Option Rights Upon Disability or Death of Optionee. If Optionee ceases to be employed by the Company as a result of his Disability or death the Option shall be exercisable at any time prior to the earlier of (i) the Termination Date or (ii) twelve (12) months after the date of Termination of Employment. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 3. Vesting. The Option may only be exercised to the extent vested. (a) The Option will vest according to the following schedule: Number of Years Since Date of Grant Vested Percentage ------------- ----------------- Fewer than one 0% One but fewer than two 33.3% Two but fewer than three 66.7% Three or more 100.0% Upon Optionee's Termination of Employment, he will forfeit the non-vested portion of the Option. (b) Notwithstanding the vesting schedule in Section 3(a) hereof, if Optionee's Termination of Employment is for Cause, Optionee's vested percentage shall be 0% and Optionee shall forfeit any and all rights in and to the Option. (c) Notwithstanding the vesting schedule in Section 3(a) hereof, immediately prior to a Change in Control the Option shall be fully vested and non-forfeitable. In addition, the Company hereby agrees to exercise its right under Section 11.1(a) of the Plan to acquire from Optionee his vested Options by payment of the difference between the price per share of Common Stock established in the Change in Control and the Option Price. 4. Restriction on Exercise. The Option may not be exercised during any period in which Optionee is in default under the terms of any loan or other obligation that Optionee may have with the Company. Upon cure of such default, the restrictions of this Section 4 will lapse and the Option shall be exercisable to the extent vested and otherwise exercisable under the terms of this Agreement. 5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by the giving of written notice by Optionee to the Company in accordance with Section 7 of the Plan and the payment of the pro rata portion of the Option Price for the number of Shares to be acquired pursuant to the exercise. 6. Payment for Shares. Payment of the Option Price for any Shares purchased pursuant to the exercise of the Option shall be made in cash or by such other method as may be permitted by the Committee administering the Plan in accordance with the provisions of Section 7 of the Plan. No shares shall be delivered upon the exercise of the Option until full payment has been made and all applicable withholding requirements satisfied. -2- 7. Option Not Transferable and Subject to Certain Restrictions. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee or by his legally authorized representative. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 8. Non-Competition and Confidential Information. In consideration hereof, Optionee' agrees that during the term of this Agreement and for a period of one (1) year thereafter, Optionee (i) will not compete with any business of the Company or any of its subsidiaries or affiliates, and (ii) will not disclose to persons outside the Company confidential information concerning the Company or any of its subsidiaries or affiliates without the Company's express written consent. 9. Acceptance of Agreement and Plan. Optionee hereby accepts and agrees to be bound by all the terms and conditions of this Agreement and the Plan. 10. Tax Withholding. (a) Option Conditioned upon Satisfaction of Withholding Obligation. The issuance, delivery, exercise or vesting of the Option is subject to the condition that if at any time the Committee shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Option, then the issuance, delivery, exercise or vesting of the Option shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Company. (b) Manner of Satisfying Withholding Obligation. If Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of the Option, subject to Section 10(c), Optionee may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Shares acquired upon the exercise of the Option having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld, or (ii) deliver to the Company shares of Common Stock already owned for at least six months and having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, if a request is made by Optionee, the amount to be withheld shall be the approximate amount of federal and state income taxes that will be incurred by Optionee with respect to such issuance, delivery, exercise or vesting of Options under this Agreement. (c) Special Rules for Use of Stock. An election to have Shares or other shares of Common Stock withheld or delivered out of already-owned Common Stock for the purposes of Section 10(b) (i) must be made prior to the Tax Date and (ii) must be irrevocable. -3- 11. Compliance with Securities Laws. The Option shall not be exercisable and Shares shall not be issued pursuant to the exercise of the Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. If, in the opinion of counsel for the Company, a representation is required to be made by Optionee in order to satisfy any of the foregoing relevant provisions of law, the Company may, as a condition to the exercise of the Option, require Optionee to represent and warrant at the time of exercise that the Shares to be delivered as a result of such exercise are being acquired solely for investment and without any present intention to sell or distribute such Shares. 12. Employment of Optionee. Nothing in this Agreement shall confer upon Optionee any right to continued employment by the Company or any of its subsidiaries or affiliates or limit in any way the right of the Company or any subsidiary or affiliate at any time to terminate or alter the terms of such employment. 13. Adjustments. The Committee may in its discretion make any adjustments necessary to prevent accretion, or to protect against dilution, in the number and kind of Shares with respect to any unexercised portion of the Option, and in the Option Price in the event of a recapitalization, stock split, stock dividend, consolidation, rights offering, spin-off, reorganization, or liquidation and any transaction in which Shares are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another entity. 14. Shares Not Outstanding. Prior to issuance, the Shares are not deemed to be outstanding for any purpose and Optionee shall have no voting, preemptive or other shareholder rights with respect to such Shares. 15. Number. Whenever used herein, nouns in the singular shall include the plural where appropriate. 16. Headings. Headings of articles and sections hereof are inserted for convenience of reference only and constitute no part of this Agreement. 17. Binding on Successors. This Agreement shall be binding upon the successors and assigns of the Company and on the heirs, personal representatives, successors, assigns and distributees of Optionee. 18. Definitions. Unless otherwise defined herein, terms used herein with initial capital letters shall have the meanings set forth in the Plan. 19. Governing Law. The construction and operation of this Agreement are governed by the laws of the State of Delaware. -4- 20. Amendment. This Agreement may be amended only by an instrument in writing signed by both the Company and Optionee. 21. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior and contemporaneous agreements between the Company and Optionee relating to the subject matter hereof. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. [Signature Page Follows] -5- IN WITNESS WHEREOF, each party hereto has executed this Agreement on the date first written above. COMPANY: HANOVER COMPRESSOR COMPANY, a Delaware corporation By: /s/ Michael J. McGhan _____________________________________ Michael J. McGhan President and Chief Executive Officer OPTIONEE: /s/ Mark Berg _________________________________________ Mark Berg EX-10.89 20 dex1089.txt STOCK OPTION AGREEMENT - DEATON EXHIBIT 10.89 HANOVER COMPRESSOR COMPANY STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") is entered into between HANOVER COMPRESSOR COMPANY, a Delaware corporation (the "Company"), and Chad Deaton ("Optionee"), as of August 19, 2002 (all capitalized terms used herein but not otherwise defined shall have the meaning assigned to them in Section 16). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. Grant of Option. Under the Company's 2001 Equity Incentive Plan (the "Plan") and subject to the terms and conditions set forth herein, the Company grants to Optionee an option (the "Option") to purchase the Shares at a purchase price of $9.99 per share (the "Option Price"). The "Shares" shall consist of 200,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"). The Option is a non-statutory option and is not intended to qualify as an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended. All provisions of this Agreement are to be construed in conformity with this intention. 2. Term. Except as provided below, the Option shall be valid for a term commencing on the date hereof (the "Date of Grant") and ending ten (10) years from the Date of Grant (the "Termination Date"). (a) Option Rights Upon Termination of Employment. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof for any reason other than Cause or Optionee's Disability or death, the Option shall be exercisable (to the extent exercisable on the date of Termination of Employment) at any time prior to the earlier of (i) the Termination Date or (ii) within ninety (90) days after the Optionee's Termination of Employment. (b) Termination of Employment for Cause. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof because Optionee is terminated for Cause, the Option shall automatically expire and Optionee shall have no right to exercise any portion of the Option, whether or not vested, thereafter. (c) Option Rights Upon Disability or Death of Optionee. If Optionee ceases to be employed by the Company as a result of his Disability or death the Option shall be exercisable at any time prior to the earlier of (i) the Termination Date or (ii) twelve (12) months after the date of Termination of Employment. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 3. Vesting. The Option may only be exercised to the extent vested. (a) The Option will vest according to the following schedule: Number of Years Since Date of Grant Vested Percentage --------------------- ----------------- Fewer than one 0% One but fewer than two 25% Two but fewer than three 50% Three but fewer than four 75% Four or more 100% Upon Optionee's Termination of Employment, he will forfeit the non-vested portion of the Option. (b) Notwithstanding the vesting schedule in Section 3(a) hereof, if Optionee's Termination of Employment is for Cause, Optionee's vested percentage shall be 0% and Optionee shall forfeit any and all rights in and to the Option. (c) Notwithstanding the vesting schedule in Section 3(a) hereof, immediately prior to a Change in Control the Option shall be fully vested and non-forfeitable. In addition, the Company hereby agrees to exercise its right under Section 11.1(a) of the Plan to acquire from Optionee his vested Options by payment of the difference between the price per share of Common Stock established in the Change in Control and the Option Price. 4. Restriction on Exercise. The Option may not be exercised during any period in which Optionee is in default under the terms of any loan or other obligation that Optionee may have with the Company. Upon cure of such default, the restrictions of this Section 4 will lapse and the Option shall be exercisable to the extent vested and otherwise exercisable under the terms of this Agreement. 5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by the giving of written notice by Optionee to the Company in accordance with Section 7 of the Plan and the payment of the pro rata portion of the Option Price for the number of Shares to be acquired pursuant to the exercise. 6. Payment for Shares. Payment of the Option Price for any Shares purchased pursuant to the exercise of the Option shall be made in cash or by such other method as may be permitted by the Committee administering the Plan in accordance with the provisions of Section 2 7 of the Plan. No shares shall be delivered upon the exercise of the Option until full payment has been made and all applicable withholding requirements satisfied. 7. Option Not Transferable and Subject to Certain Restrictions. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee or by his legally authorized representative. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 8. Acceptance of Agreement and Plan. Optionee hereby accepts and agrees to be bound by all the terms and conditions of this Agreement and the Plan. 9. Tax Withholding. (a) Option Conditioned upon Satisfaction of Withholding Obligation. The issuance, delivery, exercise or vesting of the Option is subject to the condition that if at any time the Committee shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Option, then the issuance, delivery, exercise or vesting of the Option shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Company. (b) Manner of Satisfying Withholding Obligation. If Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of the Option, subject to Section 9(c), Optionee may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Shares acquired upon the exercise of the Option having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld, or (ii) deliver to the Company shares of Common Stock already owned for at least six months and having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, if a request is made by Optionee, the amount to be withheld shall be the approximate amount of federal and state income taxes that will be incurred by Optionee with respect to such issuance, delivery, exercise or vesting of Options under this Agreement. (c) Special Rules for Use of Stock. An election to have Shares or other shares of Common Stock withheld or delivered out of already-owned Common Stock for the purposes of Section 9(b) (i) must be made prior to the Tax Date and (ii) must be irrevocable. 10. Compliance with Securities Laws. The Option shall not be exercisable and Shares shall not be issued pursuant to the exercise of the Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all 3 relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. If, in the opinion of counsel for the Company, a representation is required to be made by Optionee in order to satisfy any of the foregoing relevant provisions of law, the Company may, as a condition to the exercise of the Option, require Optionee to represent and warrant at the time of exercise that the Shares to be delivered as a result of such exercise are being acquired solely for investment and without any present intention to sell or distribute such Shares. 11. Employment of Optionee. Nothing in this Agreement shall confer upon Optionee any right to continued employment by the Company or any of its subsidiaries or affiliates or limit in any way the right of the Company or any subsidiary or affiliate at any time to terminate or alter the terms of such employment. 12. Adjustments. The Committee may in its discretion make any adjustments necessary to prevent accretion, or to protect against dilution, in the number and kind of Shares with respect to any unexercised portion of the Option, and in the Option Price in the event of a recapitalization, stock split, stock dividend, consolidation, rights offering, spin-off, reorganization, or liquidation and any transaction in which Shares are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another entity. 13. Shares Not Outstanding. Prior to issuance, the Shares are not deemed to be outstanding for any purpose and Optionee shall have no voting, preemptive or other shareholder rights with respect to such Shares. 14. Number. Whenever used herein, nouns in the singular shall include the plural where appropriate. 15. Headings. Headings of articles and sections hereof are inserted for convenience of reference only and constitute no part of this Agreement. 16. Binding on Successors. This Agreement shall be binding upon the successors and assigns of the Company and on the heirs, personal representatives, successors, assigns and distributees of Optionee. 17. Definitions. Unless otherwise defined herein, terms used herein with initial capital letters shall have the meanings set forth in the Plan. 18. Governing Law. The construction and operation of this Agreement are governed by the laws of the State of Delaware. 19. Amendment. This Agreement may be amended only by an instrument in writing signed by both the Company and Optionee. 4 20. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior and contemporaneous agreements between the Company and Optionee relating to the subject matter hereof. 21. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. [Signature Page Follows] 5 IN WITNESS WHEREOF, each party hereto has executed this Agreement on the date first written above. COMPANY: HANOVER COMPRESSOR COMPANY, a Delaware corporation By: /s/ Victor E. Grijalva ------------------------------------------------ Victor E. Grijalva Chairman of the Board OPTIONEE: /s/ Chad Deaton ----------------------------------------------------- Chad Deaton 6 EX-10.90 21 dex1090.txt STOCK OPTION AGREEMENT - GRIJALVA EXHIBIT 10.90 HANOVER COMPRESSOR COMPANY STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") is entered into between HANOVER COMPRESSOR COMPANY, a Delaware corporation (the "Company"), and Victor E. Grijalva ("Optionee"), as of March 19, 2002 (all capitalized terms used herein but not otherwise defined shall have the meaning assigned to them in Section 18). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. Grant of Option. Under the Company's 2001 Equity Incentive Plan (the "Plan") and subject to the terms and conditions set forth herein, the Company grants to Optionee an option (the "Option") to purchase the Shares at a purchase price of $17.25 per share (the "Option Price"). The "Shares" shall consist of 75,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"). The Option is a non-statutory option and is not intended to qualify as an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended. All provisions of this Agreement are to be construed in conformity with this intention. Defined terms not defined herein shall have the meaning set forth in the Plan. 2. Term. Except as provided below, the Option shall be valid for a term commencing on the date hereof (the "Date of Grant") and ending ten (10) years from the Date of Grant (the "Termination Date"). (a) Option Rights Upon Termination as a Director. If Optionee ceases to be a director of the Company or any subsidiary or affiliate thereof for any reason other than Cause or Optionee's Disability or death, the Option shall be exercisable (to the extent exercisable on the date of such termination) at any time prior to the earlier of (i) the Termination Date, or (ii) within ninety (90) days after the Optionee's Termination of Employment. (b) Termination for Cause. If Optionee ceases to be a director of the Company or any subsidiary or affiliate thereof because Optionee is terminated for Cause, the Option shall automatically expire and Optionee shall have no right to exercise any portion of the Option, whether or not vested, thereafter. (c) Option Rights Upon Disability or Death of Optionee. If Optionee ceases to be a director of the Company as a result of his Disability or death the Option shall be exercisable at any time prior to the earlier of (i) the Termination Date, or (ii) twelve (12) months after the date of Termination of Employment. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 3. Vesting. The Option may only be exercised to the extent vested. (a) The Option will vest according to the following schedule: Number of Years Since Date of Grant Vested Percentage --------------------- ----------------- Fewer than one 0.0% One but fewer than two 33.3% Two but fewer than three 66.7% Three or more 100.0% Upon Optionee's Termination of Employment, he will forfeit the non-vested portion of the Option. (b) Notwithstanding the vesting schedule in Section 3(a) hereof, if Optionee's Termination of Employment is for Cause, Optionee's vested percentage shall be 0% and Optionee shall forfeit any and all rights in and to the Option. (c) Notwithstanding the vesting schedule in Section 3(a) hereof, immediately prior to a Change in Control the Option shall be fully vested and non-forfeitable. In addition, the Company hereby agrees to exercise its right under Section 11.1(a) of the Plan to acquire from Optionee his vested Options by payment of the difference between the price per share of Common Stock established in the Change in Control and the Option Price. 4. Restriction on Exercise. The Option may not be exercised during any period in which Optionee is in default under the terms of any loan or other obligation that Optionee may have with the Company. Upon cure of such default, the restrictions of this Section 4 will lapse and the Option shall be exercisable to the extent vested and otherwise exercisable under the terms of this Agreement. 5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by the giving of written notice by Optionee to the Company in accordance with Section 7 of the Plan and the payment of the pro rata portion of the Option Price for the number of Shares to be acquired pursuant to the exercise. 6. Payment for Shares. Payment of the Option Price for any Shares purchased pursuant to the exercise of the Option shall be made in cash or by such other method as may be permitted by the Committee administering the Plan in accordance with the provisions of Section 7 of the Plan. No shares shall be delivered upon the exercise of the Option until full payment has been made and all applicable withholding requirements satisfied. 7. Option Not Transferable and Subject to Certain Restrictions. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee or by his legally authorized representative. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 2 8. Non-Competition and Confidential Information. In consideration hereof, Optionee agrees that during the term of this Agreement and for a period of one (1) year thereafter, Optionee (i) will not compete with any business of the Company or any of its subsidiaries or affiliates, and (ii) will not disclose to persons outside the Company confidential information concerning the Company or any of its subsidiaries or affiliates without the Company's express written consent. 9. Acceptance of Agreement and Plan. Optionee hereby accepts and agrees to be bound by all the terms and conditions of this Agreement and the Plan. 10. Tax Withholding. (a) Option Conditioned upon Satisfaction of Withholding Obligation. The issuance, delivery, exercise or vesting of the Option is subject to the condition that if at any time the Committee shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Option, then the issuance, delivery, exercise or vesting of the Option shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Company. (b) Manner of Satisfying Withholding Obligation. If Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of the Option, subject to Section 10(c), Optionee may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Shares acquired upon the exercise of the Option having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld, or (ii) deliver to the Company shares of Common Stock already owned for at least six months and having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, if a request is made by Optionee, the amount to be withheld shall be the approximate amount of federal and state income taxes that will be incurred by Optionee with respect to such issuance, delivery, exercise or vesting of Options under this Agreement. (c) Special Rules for Use of Stock. An election to have Shares or other shares of Common Stock withheld or delivered out of already-owned Common Stock for the purposes of Section 10(b) (i) must be made prior to the Tax Date and (ii) must be irrevocable. 11. Compliance with Securities Laws. The Option shall not be exercisable and Shares shall not be issued pursuant to the exercise of the Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares 3 may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. If, in the opinion of counsel for the Company, a representation is required to be made by Optionee in order to satisfy any of the foregoing relevant provisions of law, the Company may, as a condition to the exercise of the Option, require Optionee to represent and warrant at the time of exercise that the Shares to be delivered as a result of such exercise are being acquired solely for investment and without any present intention to sell or distribute such Shares. 12. Employment of Optionee. Optionee serves solely as a Director of the Company in the capacity of Chairman of the Board. Optionee is not an Employee of the Company and nothing contained in this Agreement should be construed to create any employment relationship between the Company and Optionee. Nothing in this Agreement shall confer upon Optionee any right to employment by the Company or any of its subsidiaries or affiliates. 13. Adjustments. The Committee may in its discretion make any adjustments necessary to prevent accretion, or to protect against dilution, in the number and kind of Shares with respect to any unexercised portion of the Option, and in the Option Price in the event of a recapitalization, stock split, stock dividend, consolidation, rights offering, spin-off, reorganization, or liquidation and any transaction in which Shares are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another entity. 14. Shares Not Outstanding. Prior to issuance, the Shares are not deemed to be outstanding for any purpose and Optionee shall have no voting, preemptive or other shareholder rights with respect to such Shares. 15. Number. Whenever used herein, nouns in the singular shall include the plural where appropriate. 16. Headings. Headings of articles and sections hereof are inserted for convenience of reference only and constitute no part of this Agreement. 17. Binding on Successors. This Agreement shall be binding upon the successors and assigns of the Company and on the heirs, personal representatives, successors, assigns and distributees of Optionee. 18. Definitions. Unless otherwise defined herein, terms used herein with initial capital letters shall have the meanings set forth in the Plan. 19. Governing Law. The construction and operation of this Agreement are governed by the laws of the State of Delaware. 20. Amendment. This Agreement may be amended only by an instrument in writing signed by both the Company and Optionee. 21. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior and 4 contemporaneous agreements between the Company and Optionee relating to the subject matter hereof. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, each party hereto has executed this Agreement on the date first written above. COMPANY: HANOVER COMPRESSOR COMPANY, a Delaware corporation By: /s/ Mark Berg ------------------------------------------------ Mark Berg Senior Vice President OPTIONEE: /s/ Victor E. Grijalva ------------------------------------------------------ Victor E. Grijalva 5 EX-10.91 22 dex1091.txt STOCK OPTION AGREEMENT - JACKSON EXHIBIT 10.91 HANOVER COMPRESSOR COMPANY STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT ("Agreement") is entered into between HANOVER COMPRESSOR COMPANY, a Delaware corporation (the "Company"), and John E. Jackson ("Optionee"), as of January 22, 2002 (all capitalized terms used herein but not otherwise defined shall have the meaning assigned to them in Section 18). In consideration of the mutual promises and covenants made herein, the parties hereby agree as follows: 1. Grant of Option. Under the Company's 2001 Equity Incentive Plan (the "Plan") and subject to the terms and conditions set forth herein, the Company grants to Optionee an option (the "Option") to purchase the Shares at a purchase price of $13.98 per share (the "Option Price"). The "Shares" shall consist of 50,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"). The Option is a non-statutory option and is not intended to qualify as an incentive stock option described in Section 422 of the Internal Revenue Code of 1986, as amended. All provisions of this Agreement are to be construed in conformity with this intention. 2. Term. Except as provided below, the Option shall be valid for a term commencing on the date hereof (the "Date of Grant") and ending ten (10) years from the Date of Grant (the "Termination Date"). (a) Option Rights Upon Termination of Employment. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof for any reason other than Cause or Optionee's Disability or death, the Option shall be exercisable (to the extent exercisable on the date of Termination of Employment) at any time prior to the earlier of (i) the Termination Date or (ii) within ninety (90) days after the Optionee's Termination of Employment. (b) Termination of Employment for Cause. If Optionee ceases to be employed by the Company or any subsidiary or affiliate thereof because Optionee is terminated for Cause, the Option shall automatically expire and Optionee shall have no right to exercise any portion of the Option, whether or not vested, thereafter. (c) Option Rights Upon Disability or Death of Optionee. If Optionee ceases to be employed by the Company as a result of his Disability or death the Option shall be exercisable at any time prior to the earlier of (i) the Termination Date or (ii) twelve (12) months after the date of Termination of Employment. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 3. Vesting. The Option may only be exercised to the extent vested. (a) The Option will vest according to the following schedule: Number of Years Since Date of Grant Vested Percentage --------------------- ----------------- Fewer than one 0% One but fewer than two 33.3% Two but fewer than three 66.7% Three or more 100.0% Upon Optionee's Termination of Employment, he will forfeit the non-vested portion of the Option. (b) Notwithstanding the vesting schedule in Section 3(a) hereof, if Optionee's Termination of Employment is for Cause, Optionee's vested percentage shall be 0% and Optionee shall forfeit any and all rights in and to the Option. (c) Notwithstanding the vesting schedule in Section 3(a) hereof, immediately prior to a Change in Control the Option shall be fully vested and non-forfeitable. In addition, the Company hereby agrees to exercise its right under Section 11.1(a) of the Plan to acquire from Optionee his vested Options by payment of the difference between the price per share of Common Stock established in the Change in Control and the Option Price. 4. Restriction on Exercise. The Option may not be exercised during any period in which Optionee is in default under the terms of any loan or other obligation that Optionee may have with the Company. Upon cure of such default, the restrictions of this Section 4 will lapse and the Option shall be exercisable to the extent vested and otherwise exercisable under the terms of this Agreement. 5. Procedure for Exercise. Exercise of the Option or a portion thereof shall be effected by the giving of written notice by Optionee to the Company in accordance with Section 7 of the Plan and the payment of the pro rata portion of the Option Price for the number of Shares to be acquired pursuant to the exercise. 6. Payment for Shares. Payment of the Option Price for any Shares purchased pursuant to the exercise of the Option shall be made in cash or by such other method as may be permitted by the Committee administering the Plan in accordance with the provisions of Section 7 of the Plan. No shares shall be delivered upon the exercise of the Option until full payment has been made and all applicable withholding requirements satisfied. 2 7. Option Not Transferable and Subject to Certain Restrictions. The Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee or by his legally authorized representative. Following the death of Optionee, the Option may be exercised by Optionee's personal representative or by the distributee to whom Optionee's rights under the Option shall pass by will or by the laws of descent and distribution. 8. Non-Competition and Confidential Information. In consideration hereof, Optionee' agrees that during the term of this Agreement and for a period of one (1) year thereafter, Optionee (i) will not compete with any business of the Company or any of its subsidiaries or affiliates, and (ii) will not disclose to persons outside the Company confidential information concerning the Company or any of its subsidiaries or affiliates without the Company's express written consent. 9. Acceptance of Agreement and Plan. Optionee hereby accepts and agrees to be bound by all the terms and conditions of this Agreement and the Plan. 10. Tax Withholding. (a) Option Conditioned upon Satisfaction of Withholding Obligation. The issuance, delivery, exercise or vesting of the Option is subject to the condition that if at any time the Committee shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance, delivery, exercise or vesting of the Option, then the issuance, delivery, exercise or vesting of the Option shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Company. (b) Manner of Satisfying Withholding Obligation. If Optionee is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of the Option, subject to Section 10(c), Optionee may satisfy the obligation, in whole or in part, by electing to (i) have the Company withhold a portion of the Shares acquired upon the exercise of the Option having a Fair Market Value on the date the amount of tax to be withheld is to be determined (the "Tax Date") equal to the amount required to be withheld, or (ii) deliver to the Company shares of Common Stock already owned for at least six months and having a Fair Market Value on the Tax Date equal to the amount required to be withheld. The amount to be withheld shall be the minimum amount that is required to be withheld under applicable federal and state income tax laws; provided, however, if a request is made by Optionee, the amount to be withheld shall be the approximate amount of federal and state income taxes that will be incurred by Optionee with respect to such issuance, delivery, exercise or vesting of Options under this Agreement. (c) Special Rules for Use of Stock. An election to have Shares or other shares of Common Stock withheld or delivered out of already-owned Common Stock for the purposes of Section 10(b) (i) must be made prior to the Tax Date and (ii) must be irrevocable. 3 11. Compliance with Securities Laws. The Option shall not be exercisable and Shares shall not be issued pursuant to the exercise of the Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. If, in the opinion of counsel for the Company, a representation is required to be made by Optionee in order to satisfy any of the foregoing relevant provisions of law, the Company may, as a condition to the exercise of the Option, require Optionee to represent and warrant at the time of exercise that the Shares to be delivered as a result of such exercise are being acquired solely for investment and without any present intention to sell or distribute such Shares. 12. Employment of Optionee. Nothing in this Agreement shall confer upon Optionee any right to continued employment by the Company or any of its subsidiaries or affiliates or limit in any way the right of the Company or any subsidiary or affiliate at any time to terminate or alter the terms of such employment. 13. Adjustments. The Committee may in its discretion make any adjustments necessary to prevent accretion, or to protect against dilution, in the number and kind of Shares with respect to any unexercised portion of the Option, and in the Option Price in the event of a recapitalization, stock split, stock dividend, consolidation, rights offering, spin-off, reorganization, or liquidation and any transaction in which Shares are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another entity. 14. Shares Not Outstanding. Prior to issuance, the Shares are not deemed to be outstanding for any purpose and Optionee shall have no voting, preemptive or other shareholder rights with respect to such Shares. 15. Number. Whenever used herein, nouns in the singular shall include the plural where appropriate. 16. Headings. Headings of articles and sections hereof are inserted for convenience of reference only and constitute no part of this Agreement. 17. Binding on Successors. This Agreement shall be binding upon the successors and assigns of the Company and on the heirs, personal representatives, successors, assigns and distributees of Optionee. 18. Definitions. Unless otherwise defined herein, terms used herein with initial capital letters shall have the meanings set forth in the Plan. 19. Governing Law. The construction and operation of this Agreement are governed by the laws of the State of Delaware. 4 20. Amendment. This Agreement may be amended only by an instrument in writing signed by both the Company and Optionee. 21. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior and contemporaneous agreements between the Company and Optionee relating to the subject matter hereof. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. [Signature Page Follows] 5 IN WITNESS WHEREOF, each party hereto has executed this Agreement on the date first written above. COMPANY: HANOVER COMPRESSOR COMPANY, a Delaware corporation By: /s/ MICHAEL J. MCGHAM ---------------------------------------------- Michael J. McGhan President and Chief Executive Officer OPTIONEE: /s/ JOHN E. JACKSON -------------------------------------------------- John E. Jackson 6 EX-10.92 23 dex1092.txt PIERCE AGREEMENT Exhibit 10.92 September 18, 2002 Hanover Compressor Company 12001 North Houston Rosslyn Houston, Texas 77086 Attn: Board of Directors Gentlemen: This letter agreement sets forth my agreement to assign and transfer the Shares (as hereafter defined) from me to Hanover Compressor Company (the "Company") effective the date hereof. In consideration of a payment by the Company of $288,518.40 (the "Funds") to me and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, I hereby transfer, convey and assign to the Company 30,054 shares of common stock, par value $0.001, of the Company (the "Shares"), which amount was derived by multiplying 30,054 by $9.60, which was the closing price of the Company's common stock quoted on the New York Stock Exchange on September 18, 2002. In connection with the transfer of the Shares, I represent and warrant to the Company that I am the record and beneficial owner of, and have good and marketable title to, the Shares. I represent and warrant to the Company that the Shares are free and clear of any liens (including judgment and mechanics liens, regardless of whether liquidated), mortgages, assessments, security interests, pledges, options or other charges, claims, encumbrances, hypothecations, restrictions, or adverse claims of any kind (collectively the "Liens"), other than (a) the security interest and claim of Sterling Bank (Sterling") on the Shares (the "Lien"), which will be released upon receipt by Sterling of funds sufficient to repay the balance of my outstanding loan held by them (the "Sterling Loan"), and (b) restrictions which may be imposed by the securities laws. I will use a portion of the Funds to repay the Sterling Loan in full and to effect release of the Lien. Upon delivery of the Shares pursuant to this letter agreement, together with a duly executed stock power, the Company will have good and marketable title to the Shares, free and clear of all Liens, created by or through me. I represent and warrant to the Company that I have full power and authority to execute and deliver this letter agreement and perform my obligations hereunder, that no approval, authorization, consent or other action by, or filing with, any governmental authority or other party is required in connection with my execution and delivery of this letter agreement and the performance of my obligations hereunder (except the filing of Form 4 with the Securities and Exchange Commission), and that this letter agreement constitutes a legal, valid and binding obligation, enforceable against me in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. I represent and warrant to the Company that the execution, delivery and performance of this letter agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any term or provision of, or constitute a default under any agreement, instrument, judgment, or order binding upon me. I covenant and agree to defend, indemnify and hold harmless the Company from and against any inaccuracy in or breach of any representations or warranties made by me in this letter agreement, provided that my liability under this sentence shall not exceed the amount paid to me hereunder by the Company for the Shares. I also agree to take any other action and execute any other documents or agreements that the Company may reasonably request to carry out the purpose and intent of this letter agreement. Each party acknowledges that it may possess nonpublic information about the Company. I hereby represent that the purpose of the transaction described in this letter agreement is to prevent any appearance of impropriety by my selling shares of Hanover common stock in the open market. In consideration for the mutual agreements contained herein, each party hereby waives and releases any claim that it might have against the other party (which includes, for this purpose, the Company's officers and directors) that such party may possess certain nonpublic information about the Company, its businesses, finances, prospects or other matters, that the other party does not have and which might affect a decision to buy or sell the Shares in the transaction described in this letter agreement. It is understood that the Company will wire transfer to Sterling pursuant to the wire instructions set forth on an attachment hereto, such portion of the Funds as I direct to the Company in writing and that I will deliver the Shares to the Company as soon as reasonably possible. The remainder of the Funds shall be applied to the payment of principal and interest on that certain $100,000 Unsecured Promissory Note, dated February 5, 2002, executed by me in favor of Hanover Compression Limited Partnership (the "Note"), with any amounts in excess of that necessary to repay the principal and interest on the Note in full to be remitted to me. This letter agreement shall be governed by the laws of the state of Texas without regard to conflicts of laws principles and venue for any dispute hereunder shall lie in the state or federal courts of Harris County, Texas. Very truly yours, /s/ Robert O. Pierce ----------------------------------- Robert O. Pierce Acknowledged and agreed: HANOVER COMPRESSOR COMPANY By: /s/ Mark S. Berg -------------------------------- Name: Mark S. Berg Title: Senior Vice President and General Counsel SPOUSAL CONSENT The spouse of Robert O. Pierce by executing this letter agreement is aware of, understands, and consents to the provisions of the letter agreement and its binding effect upon any community property interest or marital settlement awards she may now or hereafter own or receive. ---------------------------------- Name: ----------------------------- STOCK POWER For the full and adequate consideration received, Robert O. Pierce, hereby sells, assigns, and transfers to_____________ his interest in ____________ and all of his legal and beneficial interest in_____________ being ________ (____) fully paid and non-assessable shares of common stock, now registered in the name of _________ on the books of said Corporation, being Certificate No.___, and hereby appoints ____________, to transfer the aforesaid shares of stock on the books of the Corporation. Dated the____ day of September, 2002. WIRE INSTRUCTIONS EX-12.1 24 dex121.txt RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.1 Hanover Compressor Company Computation of Ratio of Earnings to Fixed Charges (Amounts in thousands of dollars, except ratio amounts)
Years Ended December 31, ---------------------------------------------- 2002(1) 2001 2000 1999 1998 -------- -------- -------- ------- ------- Earnings: Income (loss) from continuing operations before income taxes.................................................. $(92,419) $112,000 $ 74,948 $60,463 $49,636 Add: Interest on indebtedness and amortization of capitalized interest, debt expense and discount (2)................ 43,698 24,164 15,110 9,115 11,716 Leasing expense and the estimated interest factor attributable to rents.................................. 96,863 71,347 46,132 22,486 6,310 Equity in income of non-consolidated affiliates in excess of distributions of income............................. (2,223) (9,350) (3,518) (1,188) (1,369) -------- -------- -------- ------- ------- Earnings as adjusted.................................. $ 45,919 $198,161 $132,672 $90,876 $66,293 ======== ======== ======== ======= ======= Fixed charges: Interest on indebtedness, amortization of debt expense and discount and capitalized interest (2).............. $ 45,822 $ 26,654 $ 16,871 $10,597 $11,716 Leasing expense and the estimated interest factor attributable to rents.................................. 96,863 71,347 46,132 22,486 6,310 -------- -------- -------- ------- ------- Total fixed charges................................... $142,685 $ 98,001 $ 63,003 $33,083 $18,026 ======== ======== ======== ======= ======= Ratio of earnings to fixed charges....................... -- 2.02 2.11 2.75 3.68 ======== ======== ======== ======= =======
- -------- (1) Due to Hanover's loss for the year ended December 31, 2002, the ratio coverage was less than 1:1. Hanover must generate additional pre-tax earnings of $96.8 million to achieve a coverage of 1:1. During 2002, the Company recorded $182.7 million in pre-tax charges. See Note 27 of the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K. (2) Includes distributions on mandatorily redeemable convertible preferred securities. 1 EX-21.1 25 dex211.txt LIST OF SUBSIDIARIES Exhibit 21.1 Hanover Compressor Company ("HCC"), list of subsidiaries
Place of Company Name Incorporation Ownership ------------ ------------- --------- 1 Aurora Barbados S.r.L. Barbados 100% Wholly owned 2 Burnett & Lewis Ltd. United Kingdom 100% Wholly owned 3 Collicutt Hanover Compression Co. Canada 100% Wholly owned 4 E I Venezuela Development Ltd. Cayman Islands 100% Wholly owned 5 Gulf Coast Dismantling, Inc. Texas 100% Wholly owned 6 H.C.C. Compressor de Venezuela, C.A. Venezuela 100% Wholly owned 7 Hanover Argentina, S.A. Argentina 100% Wholly owned 8 Hanover Asia, Inc. Delaware 100% Wholly owned 9 Hanover Australia, LLC Delaware 100% Wholly owned 10 Hanover Bolivia, Ltda. Bolivia 100% Wholly owned 11 Hanover Brasil, Ltda. (f/k/a Hanover do Brazil, Ltda.) Brazil 100% Wholly owned 12 Hanover Canada, Inc. Canada 100% Wholly owned 13 Hanover Cayman Limited Cayman Islands 100% Wholly owned 14 Hanover Compressed Natural Gas Services, LLC Delaware 100% Wholly owned 15 Hanover Compression General Holdings, LLC Delaware 100% Wholly owned 16 Hanover Compression Limited Partnership Delaware 100% Wholly owned 17 Hanover Compressor Capital Trust Delaware 100% Wholly owned 18 Hanover Compressor Company Mexico Mexico 100% Wholly owned 19 Hanover Compressor Company Sucursal Colombia Colombia 100% Wholly owned 20 Hanover Compressor Company Trinidad Branch Trinidad 100% Wholly owned 21 Hanover Compressor Company Venezuelan Branch Venezuela 100% Wholly owned 22 Hanover Compressor Holding Company NL B.V. Netherlands 100% Wholly owned 23 Hanover Compressor Mexico SRL Mexico 100% Wholly owned 24 Hanover Compressor Nigeria, Inc. (f/k/a Hanover Compressor Delaware 100% Wholly owned Colombia, Inc.) 25 Hanover Compressor Peru, SAC Peru 100% Wholly owned 26 Hanover HL Holdings, LLC Delaware 100% Wholly owned 27 Hanover HL, LLC Delaware 100% Wholly owned 28 Hanover IDR, Inc. Delaware 100% Wholly owned 29 Hanover Maloney (UK) Limited (f/k/a Maloney Industries (UK) United Kingdom 100% Wholly owned Limited) 30 Hanover Maloney Limited United Kingdom 100% Wholly owned 31 Hanover Maloney, Inc. Canada 100% Wholly owned 32 Hanover Measurement , LLC Delaware 100% Wholly owned 33 Hanover Nigeria Energy Services Limited Nigeria 100% Wholly owned 34 Hanover Partners Nigeria, LLC Delaware 100% Wholly owned 35 Hanover Power (Gates), LLC Delaware 100% Wholly owned 36 Hanover Power, LLC Delaware 100% Wholly owned 37 Hanover SPE, L.L.C. Delaware 100% Wholly owned 38 Hanover Trade Corp. Barbados 100% Wholly owned 39 Hanover Venezuela, C.A. (f/k/a Hanover-PGN Compressor, C.A.) Venezuela 100% Wholly owned 40 Hanover Wells Hall, Inc. Canada 100% Wholly owned 41 Hanover/Cosacol Consortium Colombia 100% Wholly owned
Place of Company Name Incorporation Ownership ------------ ------------- --------- 42 Hanover/Enron Venezuela, Ltd. Cayman Islands 100% Wholly owned 43 Hanover/Trinidad, LLC Delaware 100% Wholly owned 44 HC Cayman, LLC Delaware 100% Wholly owned 45 HC Leasing, Inc. Delaware 100% Wholly owned 46 HCC Holdings, Inc. Delaware 100% Wholly owned 47 HCC Mantova S.r.L. Italy 100% Wholly owned 48 HCL Colombia, Inc. Delaware 100% Wholly owned 49 KOG, Inc. (f/k/a Kamlok Oil & Gas, Inc.) Delaware 100% Wholly owned 50 Maloney Industries (France), S.A. France 100% Wholly owned 51 Maloney Industries International Ltd. Canada 100% Wholly owned 52 P.T. Hanover Indonesia Indonesia 100% Wholly owned 53 POI Mexico Service Company S. de R.L. Mexico 100% Wholly owned 54 POI Operating Company S. de R.L. Mexico 100% Wholly owned 55 Production Operators Argentina, S.A. Argentina 100% Wholly owned 56 Production Operators Cayman (Pigap II) Ltd. Cayman Islands 100% Wholly owned 57 Production Operators Cayman, Inc. Cayman Islands 100% Wholly owned 58 Servicios Tipsa, S.A. Argentina 100% Wholly owned 59 Southwest Industries Inc. Delaware 100% Wholly owned 60 Talleres Petroleros de Colombia Ltda. Colombia 100% Wholly owned 61 Tubefabs Ltd. United Kingdom 100% Wholly owned 62 WilPro Energy Services (Guara) Limited Cayman Islands 100% Wholly owned 63 Hanover Equador, LLC Delaware 100% Wholly owned 64 Hanover General Energy Transfer, LLC Delaware 100% Wholly owned 65 Hanover Limited Energy Transfer, LLC Delaware 100% Wholly owned 66 Wellhead Power Gates, LLC California 92.5% Owned 67 Hanover DR Compression Services, B.V. Netherlands 97% Owned 68 Hanover DR Compression Services, S.A. (f/k/a Hanover-DRCS Switzerland 97% Owned Compression Services) 69 Energy Transfer-Hanover Ventures LP Delaware 99% Owned 70 Belleli Energy S.R.L. Italy 51% Owned 71 Global Hanover Limited Nigeria Nigeria 51% Owned 72 Hanover Compressor Colombia Ltda. Colombia 51% Owned 73 Hanover Global Limited Nigeria 51% Owned 74 Hanover Malaysia SDN, BHD. Malaysia 60% Owned
EX-23.1 26 dex231.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-30344 and 333-51430) and on Form S-8 (Nos. 333-73904, 333-55978, 333-53446, 333-32096, 333-32092 and 333-65923) of Hanover Compressor Company of our report dated March 26, 2003, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 31, 2003 EX-99.3 27 dex993.txt CERTIFICATION OF CEO Exhibit 99.3 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-K of Hanover Compressor Company (the "Company") for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Chad C. Deaton, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. (S)1350, as adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Chad C. Deaton - ------------------------------------- Name: Chad C. Deaton Title: Chief Executive Officer Date: March 31, 2003 A signed original of this written statement required by Section 906 has been provided to Hanover Compressor Company and will be retained by Hanover Compressor Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Report pursuant to (S)906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of (S)18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. EX-99.4 28 dex994.txt CERTIFICATION OF CEO BY CFO Exhibit 99.4 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-K of Hanover Compressor Company (the "Company") for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), John E. Jackson, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. (S)1350, as adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John E. Jackson - -------------------------------------- Name: John E. Jackson Title: Chief Financial Officer Date: March 31, 2003 A signed original of this written statement required by Section 906 has been provided to Hanover Compressor Company and will be retained by Hanover Compressor Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Report pursuant to (S)906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of (S)18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. -----END PRIVACY-ENHANCED MESSAGE-----