##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 Form 10-Q  (MARK ONE)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004OR[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO
 . Commission File No. 1-13071  Hanover Compressor Company (Exact name of registrant as specified in its charter)
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    76-0625124
(I.R.S. Employer
Identification No.)12001 North Houston Rosslyn, Houston, Texas
(Address of principal executive offices)
    
    77086
(Zip Code)
 (281) 447-8787
(Registrants telephone number, including area code)  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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x] No [  ] Number of shares of the Common Stock of the registrant outstanding as of July
30, 2004: 85,778,859 shares.




---



TABLE OF CONTENTS PagePart I. Financial Information

3ITEM 1. FINANCIAL STATEMENTS

3CONDENSED CONSOLIDATED BALANCE SHEET

3CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

4CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

5CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

6NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

19ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

34ITEM 4. CONTROLS AND PROCEDURES

35PART II. OTHER INFORMATION

36ITEM 1. LEGAL PROCEEDINGS

36ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

37ITEM 3. DEFAULT UPON SENIOR SECURITIES

37ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

37ITEM 5. OTHER INFORMATION

37ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

38SIGNATURES

39EXHIBIT INDEX

40Employment Letter with Gary M. WilsonCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to 18 U.S.C. Section 1350Certification of CFO pursuant to 18 U.S.C. Section 1350
  2




---



##### Table of Contents



Part I. Financial Information 
 ITEM 1. FINANCIAL STATEMENTS HANOVER COMPRESSOR COMPANY 
 CONDENSED CONSOLIDATED BALANCE SHEET
  June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    51,874
    
    
    $
    56,619Restricted cashsecurities settlement escrow
    
    
    
    
    
    
    29,649Accounts
receivable, net of allowance of $7,737 and $5,460, respectively
    
    
    222,059
    
    
    
    195,183Inventory, net
    
    
    189,198
    
    
    
    155,297Costs and estimated earnings in excess of billings on uncompleted contracts
    
    
    62,996
    
    
    
    50,128Prepaid taxes
    
    
    4,194
    
    
    
    4,677Current
deferred income tax
    
    
    18,460
    
    
    
    23,808Assets held for sale
    
    
    13,349
    
    
    
    17,344Other current assets
    
    
    28,973
    
    
    
    35,105Total current assets
    
    
    591,103
    
    
    
    567,810Property, plant and equipment, net
    
    
    1,965,792
    
    
    
    2,027,654Goodwill, net
    
    
    176,798
    
    
    
    176,629Intangible and other assets
    
    
    65,832
    
    
    
    67,482Investments in non-consolidated affiliates
    
    
    87,365
    
    
    
    88,718Assets held for sale, non-current
    
    
    11,070
    
    
    
    13,981Total assets
    
    $
    2,897,960
    
    
    $
    2,942,274LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    24,499
    
    
    $
    32,519Current maturities of long-term debt
    
    
    1,002
    
    
    
    3,511Accounts payable, trade
    
    
    66,237
    
    
    
    53,354Accrued liabilities
    
    
    113,185
    
    
    
    155,441Advance billings
    
    
    22,492
    
    
    
    34,380Liabilities held for sale
    
    
    451
    
    
    
    1,128Billings on uncompleted contracts in excess of costs and estimated earnings
    
    
    26,173
    
    
    
    8,427Total current liabilities
    
    
    254,039
    
    
    
    288,760Long-term debt
    
    
    1,731,562
    
    
    
    1,746,793Other liabilities
    
    
    60,602
    
    
    
    72,464Deferred income taxes
    
    
    54,710
    
    
    
    52,141Total liabilities
    
    
    2,100,913
    
    
    
    2,160,158Commitments and contingencies (Note 9)Minority interest
    
    
    22,228
    
    
    
    28,628Common stockholders equity:Common
stock, $.001 par value; 200,000,000 shares authorized; 85,996,896
and 82,649,629 shares issued, respectively
    
    
    86
    
    
    
    83Additional paid-in capital
    
    
    892,637
    
    
    
    856,020Deferred employee compensation  restricted stock grants
    
    
    (4,076
    )
    
    
    (5,452
    )Accumulated other comprehensive income
    
    
    11,077
    
    
    
    9,227Retained deficit
    
    
    (122,580
    )
    
    
    (104,065
    )Treasury stock252,815 common shares, at cost
    
    
    (2,325
    )
    
    
    (2,325
    )Total common stockholders equity
    
    
    774,819
    
    
    
    753,488Total liabilities and common stockholders equity
    
    $
    2,897,960
    
    
    $
    2,942,274
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




---



##### Table of Contents



HANOVER COMPRESSOR COMPANY 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenues and other income:Domestic rentals
    
    $
    83,680
    
    
    $
    80,256
    
    
    $
    170,272
    
    
    $
    158,905International rentals
    
    
    58,359
    
    
    
    51,014
    
    
    
    113,928
    
    
    
    102,454Parts, service and used equipment
    
    
    41,913
    
    
    
    34,976
    
    
    
    86,520
    
    
    
    72,746Compressor and accessory fabrication
    
    
    44,159
    
    
    
    36,420
    
    
    
    72,309
    
    
    
    57,800Production and processing equipment fabrication
    
    
    63,017
    
    
    
    65,810
    
    
    
    116,446
    
    
    
    145,950Equity in income of non-consolidated affiliates
    
    
    4,907
    
    
    
    6,412
    
    
    
    9,759
    
    
    
    9,292Other
    
    
    646
    
    
    
    1,476
    
    
    
    1,738
    
    
    
    2,904296,681
    
    
    
    276,364
    
    
    
    570,972
    
    
    
    550,051Expenses:Domestic rentals
    
    
    34,950
    
    
    
    31,006
    
    
    
    70,489
    
    
    
    62,210International rentals
    
    
    15,196
    
    
    
    14,905
    
    
    
    32,322
    
    
    
    29,925Parts, service and used equipment
    
    
    31,748
    
    
    
    26,011
    
    
    
    64,978
    
    
    
    50,474Compressor and accessory fabrication
    
    
    40,454
    
    
    
    32,965
    
    
    
    66,370
    
    
    
    51,603Production and processing equipment fabrication
    
    
    53,887
    
    
    
    60,145
    
    
    
    101,583
    
    
    
    129,707Selling, general and administrative
    
    
    41,683
    
    
    
    40,222
    
    
    
    81,556
    
    
    
    79,494Foreign currency translation
    
    
    627
    
    
    
    (573
    )
    
    
    (875
    )
    
    
    (200
    )Securities related litigation settlement
    
    
    157
    
    
    
    1,650
    
    
    
    97
    
    
    
    43,753Other
    
    
    387
    
    
    
    (862
    )
    
    
    347
    
    
    
    505Depreciation and amortization
    
    
    44,460
    
    
    
    36,109
    
    
    
    87,444
    
    
    
    70,687Leasing expense
    
    
    
    
    
    
    20,804
    
    
    
    
    
    
    
    43,139Interest expense
    
    
    35,731
    
    
    
    12,287
    
    
    
    70,981
    
    
    
    24,434299,280
    
    
    
    274,669
    
    
    
    575,292
    
    
    
    585,731Income (loss) from continuing operations before income taxes
    
    
    (2,599
    )
    
    
    1,695
    
    
    
    (4,320
    )
    
    
    (35,680
    )Provision for (benefit from) income taxes
    
    
    6,804
    
    
    
    1,222
    
    
    
    14,451
    
    
    
    (10,523
    )Income (loss) from continuing operations
    
    
    (9,403
    )
    
    
    473
    
    
    
    (18,771
    )
    
    
    (25,157
    )Income (loss) from discontinued operations, net of tax
    
    
    (30
    )
    
    
    (58
    )
    
    
    (116
    )
    
    
    417Income (loss) from sales or write downs of discontinued operations, net of tax
    
    
    372
    
    
    
    (208
    )
    
    
    372
    
    
    
    (1,652
    )Net income (loss)
    
    $
    (9,061
    )
    
    $
    207
    
    
    $
    (18,515
    )
    
    $
    (26,392
    )Basic income (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.11
    )
    
    $
    0.01
    
    
    $
    (0.22
    )
    
    $
    (0.31
    )(Income) loss from discontinued operations, including sales or write
downs, net of tax
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Net income (loss)
    
    $
    (0.11
    )
    
    $
    
    
    
    $
    (0.22
    )
    
    $
    (0.33
    )Diluted income (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.11
    )
    
    $
    0.01
    
    
    $
    (0.22
    )
    
    $
    (0.31
    )(Income) loss from discontinued operations, including sales or write
downs, net of tax
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Net income (loss)
    
    $
    (0.11
    )
    
    $
    
    
    
    $
    (0.22
    )
    
    $
    (0.33
    )Weighted average common and common equivalent shares outstanding:Basic
    
    
    85,114
    
    
    
    80,804
    
    
    
    84,076
    
    
    
    80,620Diluted
    
    
    85,114
    
    
    
    82,004
    
    
    
    84,076
    
    
    
    80,620
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




---



##### Table of Contents



HANOVER COMPRESSOR COMPANY 
 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (9,061
    )
    
    $
    207
    
    
    $
    (18,515
    )
    
    $
    (26,392
    )Other comprehensive income (loss):Change in fair value of derivative financial instruments, net of tax
    
    
    4,700
    
    
    
    262
    
    
    
    5,748
    
    
    
    688Foreign currency translation adjustment
    
    
    (2,991
    )
    
    
    9,277
    
    
    
    (3,898
    )
    
    
    12,587Comprehensive income (loss)
    
    $
    (7,352
    )
    
    $
    9,746
    
    
    $
    (16,665
    )
    
    $
    (13,117
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




---



##### Table of Contents



HANOVER COMPRESSOR COMPANY 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (18,515
    )
    
    $
    (26,392
    )Adjustments:Depreciation and amortization
    
    
    87,444
    
    
    
    70,687Amortization of debt issuance costs and debt discount
    
    
    60
    
    
    
    60(Income) loss from discontinued operations, net of tax
    
    
    (256
    )
    
    
    1,235Bad debt expense
    
    
    918
    
    
    
    2,030(Gain) loss on sale of property, plant and equipment
    
    
    745
    
    
    
    (819
    )Equity in income of non-consolidated affiliates, net of dividends received
    
    
    (2,533
    )
    
    
    (9,189
    )Gain on derivative instruments
    
    
    (259
    )
    
    
    (4,139
    )Provision for inventory impairment and reserves
    
    
    1,527
    
    
    
    2,091Provision for estimated cost of litigation settlement, in excess of cash paid.
    
    
    
    
    
    
    40,899Gain on sale of non-consolidated affiliates
    
    
    (300
    )
    
    
    Restricted stock compensation expense
    
    
    765
    
    
    
    339Pay-in-kind interest on long-term notes payable
    
    
    10,203
    
    
    
    10,751Deferred income taxes
    
    
    7,722
    
    
    
    (15,186
    )Changes in assets and liabilities, excluding business combinations:Accounts receivable and notes
    
    
    (24,999
    )
    
    
    (10,755
    )Inventory
    
    
    (31,708
    )
    
    
    3,305Costs and estimated earnings versus billings on uncompleted contracts
    
    
    4,204
    
    
    
    8,827Accounts
payable and accrued liabilities
    
    
    3,298
    
    
    
    (31,873
    )Advance billings
    
    
    (1,467
    )
    
    
    (5,369
    )Prepaid and
other
    
    
    10,963
    
    
    
    7,384Net cash provided by continuing operations
    
    
    47,812
    
    
    
    43,886Net cash provided by discontinued operations
    
    
    251
    
    
    
    1,882Net cash provided by operating activities
    
    
    48,063
    
    
    
    45,768Cash flows from investing activities:Capital expenditures
    
    
    (37,064
    )
    
    
    (76,830
    )Payments for deferred lease transaction costs
    
    
    
    
    
    
    (1,303
    )Proceeds from sale of property, plant and equipment
    
    
    7,911
    
    
    
    8,916Proceeds from sale of non-consolidated affiliates
    
    
    4,663
    
    
    
    Cash used to acquire investments in and advances to non -consolidated affiliates
    
    
    (250
    )
    
    
    Net cash used in continuing operations
    
    
    (24,740
    )
    
    
    (69,217
    )Net cash provided by discontinued operations
    
    
    5,666
    
    
    
    4,834Net cash used in investing activities
    
    
    (19,074
    )
    
    
    (64,383
    )Cash flows from financing activities:Borrowings on revolving credit facility
    
    
    18,000
    
    
    
    55,000Repayments on revolving credit facility
    
    
    (45,000
    )
    
    
    (49,500
    )Payments for debt issue costs
    
    
    (193
    )
    
    
    (823
    )Proceeds from stock options exercised
    
    
    7,088
    
    
    
    2,899Net borrowings (repayments) of other debt
    
    
    (7,381
    )
    
    
    6,932Issuance of senior notes, net
    
    
    194,242
    
    
    
    Payments of 2000 equipment lease obligations
    
    
    (200,000
    )
    
    
    Net cash provided by (used in) continuing operations
    
    
    (33,244
    )
    
    
    14,508Net cash used in discontinued operations
    
    
    
    
    
    
    (762
    )Net cash provided (used in) by financing activities
    
    
    (33,244
    )
    
    
    13,746Effect of exchange rate changes on cash and equivalents
    
    
    (490
    )
    
    
    612Net decrease in cash and cash equivalents
    
    
    (4,745
    )
    
    
    (4,257
    )Cash and cash equivalents at beginning of period
    
    
    56,619
    
    
    
    19,011Cash and cash equivalents at end of period
    
    $
    51,874
    
    
    $
    14,754
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




---



##### Table of Contents



HANOVER COMPRESSOR COMPANY 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of
Hanover Compressor Company (Hanover, we, us, our or the Company)
included herein have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America are not required in these
interim financial statements and have been condensed or omitted. It is the
opinion of our management that the information furnished includes all
adjustments, consisting only of normal recurring adjustments, which are
necessary to present fairly the financial position, results of operations, and
cash flows of Hanover for the periods indicated. The financial statement
information included herein should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2003. These interim results are not
necessarily indicative of results for a full year. Earnings Per Common Share Basic earnings (loss) per common share is computed by dividing earnings (loss)
available to common stockholders 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 and
warrants to purchase common stock, restricted stock, convertible senior notes
and convertible subordinated notes, unless their effect would be anti-dilutive. The table below indicates the potential shares of common stock that were
included in computing the dilutive potential shares of common stock used in
diluted earnings (loss) per common share (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Weighted average common shares outstandingused in basic earnings
(loss) per common share
    
    
    85,114
    
    
    
    80,804
    
    
    
    84,076
    
    
    
    80,620Net dilutive potential common shares issuable:On exercise of options and vesting of restricted stock
    
    
    **
    
    
    
    1,200
    
    
    
    **
    
    
    
    **On exercise of warrants
    
    
    **
    
    
    
    **
    
    
    
    **
    
    
    
    **On conversion of convertible subordinated notes due 2029
    
    
    **
    
    
    
    **
    
    
    
    **
    
    
    
    **On conversion of convertible senior notes due 2008
    
    
    **
    
    
    
    **
    
    
    
    **
    
    
    
    **On conversion of convertible senior notes due 2014
    
    
    **
    
    
    
    
    
    
    
    **
    
    
    
    Weighted average common shares and dilutive potential common shares
used in dilutive earnings (loss) per common share
    
    
    85,114
    
    
    
    82,004
    
    
    
    84,076
    
    
    
    80,620
  **
    
    Excluded from diluted earnings (loss) per common share as the effect would have been anti-dilutive. 7




---



##### Table of Contents



The table below indicates the potential shares of common stock issuable which
were excluded from net dilutive potential shares of common stock issuable as
their effect would be anti-dilutive (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net dilutive potential common shares issuable:On exercise of options and vesting of restricted stock
    
    
    1,928
    
    
    
    
    
    
    
    2,044
    
    
    
    1,248On exercise of options-exercise price greater than
average market value at end of period
    
    
    1,599
    
    
    
    4,117
    
    
    
    1,127
    
    
    
    4,142On exercise of warrants
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4On conversion of convertible subordinated notes due 2029
    
    
    4,825
    
    
    
    4,825
    
    
    
    4,825
    
    
    
    4,825On conversion of convertible senior notes due 2008
    
    
    4,370
    
    
    
    4,370
    
    
    
    4,370
    
    
    
    4,370On conversion of convertible senior notes due 2014
    
    
    9,583
    
    
    
    
    
    
    
    9,583
    
    
    
    22,309
    
    
    
    13,316
    
    
    
    21,953
    
    
    
    14,589
 Stock-Based Compensation Certain of our employees participate in stock option plans that provide for the
granting of options to purchase shares of Hanover common stock. In accordance
with Statement of Financial Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123), Hanover measures compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). The following pro forma net income (loss) and income (loss) per
share data illustrates the effect on net income (loss) and net income (loss)
per share if the fair value method had been applied to all outstanding and
unvested stock options in each period (in thousands). Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    (9,061
    )
    
    $
    207
    
    
    $
    (18,515
    )
    
    $
    (26,392
    )Add back: Restricted stock grant expense, net of tax
    
    
    374
    
    
    
    110
    
    
    
    765
    
    
    
    220Deduct: Stock-based employee compensation expense
determined under the fair value method, net of tax
    
    
    (714
    )
    
    
    (533
    )
    
    
    (1,692
    )
    
    
    (1,041
    )Pro forma net loss
    
    $
    (9,401
    )
    
    $
    (216
    )
    
    $
    (19,442
    )
    
    $
    (27,213
    )Income (loss) per share:Basic, as reported
    
    $
    (0.11
    )
    
    $
    0.00
    
    
    $
    (0.22
    )
    
    $
    (0.33
    )Basic, pro forma
    
    $
    (0.11
    )
    
    $
    0.00
    
    
    $
    (0.23
    )
    
    $
    (0.34
    )Diluted, as reported
    
    $
    (0.11
    )
    
    $
    0.00
    
    
    $
    (0.22
    )
    
    $
    (0.33
    )Diluted, pro forma
    
    $
    (0.11
    )
    
    $
    0.00
    
    
    $
    (0.23
    )
    
    $
    (0.34
    )
 As of June 30, 2004, 446,000 shares of restricted stock were outstanding under
our incentive compensation plans. We will recognize compensation expense equal
to the fair value of the restricted stock at the date of grant over the vesting
period related to these grants. During the three months ended June 30, 2004 and
2003, we recognized $0.4 million and $0.2 million, respectively, in
compensation expense related to these grants and during the six months ended
June 30, 2004 and 2003, we recognized $0.8 million and $0.3 million,
respectively, in compensation expense related to these grants. (See
Note 15.) Reclassifications Certain amounts in the prior periods financial statements have been
reclassified to conform to the 2004 financial statement classification. These
reclassifications had no impact on our consolidated results of operations,
cash flows or financial position. 8




---



##### Table of Contents



2. INVENTORIES Inventory, net of reserves, consisted of the following amounts (in thousands): June 30,
    
    December 31,2004
    
    2003Parts and supplies
    
    $
    140,944
    
    
    $
    114,063Work in progress
    
    
    37,864
    
    
    
    29,412Finished goods
    
    
    10,390
    
    
    
    11,822$
    189,198
    
    
    $
    155,297
 As of June 30, 2004 and December 31, 2003 we had inventory reserves of
approximately $13.5 million and $12.7 million, respectively. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Compression equipment, facilities and other rental assets
    
    $
    2,411,408
    
    
    $
    2,407,873Land and buildings
    
    
    82,435
    
    
    
    80,142Transportation and shop equipment
    
    
    74,100
    
    
    
    77,912Other
    
    
    49,699
    
    
    
    41,7412,617,642
    
    
    
    2,607,668Accumulated depreciation
    
    
    (651,850
    )
    
    
    (580,014
    )$
    1,965,792
    
    
    $
    2,027,654
 4. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES During the second quarter of 2004, we increased our ownership in CrystaTech,
Inc. a process technology company, to 47.24% for approximately $0.3 million. On March 5, 2004, we sold our 50.384% limited partnership interest and 0.001%
general partnership interest in Hanover Measurement Services Company, L.P. to
EMS Pipeline Services, L.L.C. for $4.9 million, of which $0.2 million was put
in escrow subject to the outcome of post closing working capital adjustments
and other matters that have resulted in the $0.2 million being returned to the
purchaser. We had no obligation to the purchaser with respect to any post-closing
adjustment in excess of the escrowed amount. We accounted for our interest in
Hanover Measurement under the equity method. As a result of the sale, we
recorded a $0.3 million gain that is included in other revenue. 5. DEBT Short-term debt consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Belleli-factored receivables
    
    $
    18,247
    
    
    $
    13,261Belleli-revolving credit facility
    
    
    6,252
    
    
    
    16,141Other, interest at 5.0%
    
    
    
    
    
    
    3,117Short-term debt
    
    $
    24,499
    
    
    $
    32,519
 Bellelis factoring arrangements are typically short term in nature and bore
interest at a weighted average rate of 4.3% and 4.0% at June 30, 2004 and
December 31, 2003, respectively. Bellelis revolving credit facilities bore
interest at a weighted 9




---



##### Table of Contents



average rate of 4.9% and 3.2% at June 30, 2004 and December 31, 2003,
respectively. These revolving credit facilities are all short-term and expire
at different times in 2004. Long-term debt consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Bank credit facility, interest at 4.2%, due December 2006
    
    $
    
    
    
    $
    27,0004.75% convertible senior notes due 2008
    
    
    192,000
    
    
    
    192,0004.75% convertible senior notes due 2014
    
    
    143,750
    
    
    
    143,7508.625% senior notes due 2010
    
    
    200,000
    
    
    
    200,0009.0% senior notes due 2014
    
    
    200,000
    
    
    
    2000A equipment lease notes
    
    
    
    
    
    
    193,6002000B
equipment lease notes, interest at 4.2% and 4.1%, respectively, due October 2005
    
    
    167,411
    
    
    
    167,4112001A equipment lease notes, interest at 8.5%, due September 2008
    
    
    300,000
    
    
    
    300,0002001B equipment lease notes, interest at 8.8%, due September 2011
    
    
    250,000
    
    
    
    250,000Zero coupon subordinated notes, interest at 11.0%, due March 2007
    
    
    195,703
    
    
    
    185,5017.25% convertible subordinated notes due 2029
    
    
    86,250
    
    
    
    86,250Real estate mortgage, collateralized by certain land and buildings,
payable through September 2004
    
    
    
    
    
    
    2,917Fair value adjustment  fixed to floating interest rate swaps
    
    
    (11,888
    )
    
    
    Other, interest at various rates, collateralized by equipment and other
assets, net of unamortized discount
    
    
    9,338
    
    
    
    1,8751,732,564
    
    
    
    1,750,304Less-current maturities
    
    
    (1,002
    )
    
    
    (3,511
    )Long-term debt
    
    $
    1,731,562
    
    
    $
    1,746,793
 Maturities of long-term debt (excluding interest to be accrued thereon) at June
30, 2004 are (in thousands): June 30,20042004
    
    $
    4312005
    
    
    168,5942006
    
    
    1,0022007
    
    
    202,2022008
    
    
    492,045Thereafter
    
    
    868,290$
    1,732,564
 In June 2004, we issued under our shelf registration statement $200.0 million
aggregate principal amount of our 9.0% Senior Notes due 2014, which are fully
and unconditionally guaranteed on a senior subordinated basis by our wholly
owned subsidiary, Hanover Compressor Limited Partnership
(HCLP). The net proceeds from this offering and available
cash were used to repay
the outstanding indebtedness and minority interest obligations of $193.6
million and $6.4 million, respectively, under our 2000A equipment lease that
was to expire in March 2005. We expect that our bank
credit facility and cash flow from operations will provide us
adequate capital resources to fund our estimated level of capital expenditures
for the short term. As of June 30, 2004, we had no outstanding borrowings and
approximately $94.1 million in letters of credit outstanding under our bank
credit facility. 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 (a) $40 million in
unsecured indebtedness, (b) $50 million of nonrecourse indebtedness of
unqualified subsidiaries and (c) $25 million of secured purchase money
indebtedness. As of June 30, 2004, we were in compliance with all material covenants and
other requirements set forth in our bank credit facility, the indentures and
agreements related to our compression equipment lease obligations and the
indentures and agreements relating to our other long-term debt. A default under
our bank credit facility or these agreements would trigger cross-default
provisions under the agreements relating to certain of our other debt
obligations. Such defaults would have a 10




---



##### Table of Contents



material adverse effect on our liquidity, financial position and operations.
Giving effect to our $94.1 million in outstanding letters of credit, the liquidity available under
our bank credit facility as of June 30, 2004 was approximately $256 million. In addition to purchase money and similar obligations, the indentures and the
agreements related to our compression equipment lease obligations for our 2001A
and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010 and
our 9% Senior Notes due 2014 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 governing such
obligations), or our coverage ratio, is greater than 2.25
to 1.0, and no
default or event of default has occurred or would occur as a consequence of
incurring such additional indebtedness and the application of the proceeds
thereon. The indentures and agreements for our 2001A and 2001B sale leaseback
transactions, our 8.625% Senior Notes due 2010 and our 9% Senior
Notes due 2014 define indebtedness to include the present value of our rental
obligations under sale leaseback transactions and under facilities similar to
our compression equipment operating leases. As of June 30, 2004, Hanovers
coverage ratio was less than 2.25 to 1.0, and therefore as of such date we could
not incur indebtedness other than under our bank credit facility and up to an
additional $75 million in unsecured indebtedness and certain other permitted
indebtedness, including certain refinancing of indebtedness. In May 2003, Hanover
reached an agreement that was subject to court approval, to
settle securities class actions, ERISA class actions and the shareholder
derivative actions. The terms of the settlement became final in March 2004 and
provided for Hanover to: (a) make a cash payment of approximately $30 million
to the securities settlement fund (of which $26.7 million was funded by payments from Hanovers directors and
officers insurance carriers), (b) issue 2.5 million shares
of Hanover common stock, and
(c) issue a contingent note with a principal amount of $6.7 million. During the
six months ended June 30, 2004 and 2003, we recorded $0.1 million
and $43.8 million expense, respectively, for the cost of the litigation settlement. For further
details regarding the securities settlement, see our Form 10-Q for the three
months ended March 31, 2004. On April 21, 2004, we issued the $6.7 million contingent note related to the
securities settlement. The note is payable, together with accrued interest, on
March 31, 2007 but will be extinguished (with no money owing under it) if our
common stock trades at or above the average price of $12.25 per share for 15
consecutive trading days at any time between March 31, 2004 and March 31, 2007.
We recorded the $3.6 million fair value of the contingent note issued based on
the present value of the future cash flows discounted at borrowing rates
currently available to us for debt with similar terms and maturities
and discounted for the value of the extinguishment feature that is
considered an embedded derivative. Using a
market-borrowing rate of 9.3%, the principal value and the stipulated interest
rate required by the note of 5% per annum, a discount of $0.8 million was
computed on the note to be issued. The discount will be amortized to interest
expense over the term of the note. In March 2004, we recorded an asset for the
value of the embedded derivative, as required by SFAS 133. We estimated the
value of the derivative and reduced the amount we included for the estimate of
the value of the note by approximately $2.2 million at each of June 30, 2004
and $2.3 million at December 31, 2003. This asset will be marked to market in
future periods with any increase or decrease included in our statement of
operations as a cost of the litigation settlement. During the three months
ended June 30, 2004 we recorded a $0.2 million expense for the change in
estimated value of the derivative. As of December 31, 2003, our balance sheet included a $33.4
million long-term liability related to the Hanover common stock and
the fair value of the contingent note payable in connection with the
securities settlement. In addition, as of December 31, 2003, our balance sheet included
approximately $32.7 million in accrued liabilities and
$29.6 million in restricted cash related to the securities settlement. In the first
quarter of 2004, we released the escrow settlement fund, which was included on
our balance sheet as restricted cash and the related securities settlement accrual, issued
the shares and reclassified $29.8 million, the estimated value of our common
stock issued, from other liabilities to stockholders equity and included the
shares in our weighted average outstanding shares used for earnings per share
calculations. 11




---



##### Table of Contents



6. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Accrued salaries, bonuses and other employee benefits
    
    $
    28,042
    
    
    $
    30,179Accrued income and other taxes
    
    
    18,689
    
    
    
    15,948Current portion of hedge instruments
    
    
    7,601
    
    
    
    11,703Securities settlement accrual
    
    
    801
    
    
    
    32,692Accrued interest
    
    
    26,901
    
    
    
    23,228Accrued other
    
    
    31,151
    
    
    
    41,691$
    113,185
    
    
    $
    155,441
 See Note 5 for a discussion of the securities settlement. 7. COMMON STOCKHOLDERS EQUITY In March 2004, we issued and delivered to the escrow agent for the settlement
fund 2.5 million shares of Hanover common stock, as required by
the settlement. (See Note 5.) 8. ACCOUNTING FOR DERIVATIVES We use derivative financial instruments to minimize the risks and/or costs
associated with financial and global operating activities by managing our
exposure to interest rate fluctuations on a portion of our debt and leasing
obligations. Our primary objective is to reduce our overall cost of borrowing
by managing the fixed and floating interest rate mix of our debt portfolio. We
do not use derivative financial instruments for trading or other speculative
purposes. The cash flow from hedges is classified in our consolidated
statements of cash flows under the same category as the cash flows from the
underlying assets, liabilities or anticipated transactions. For derivative instruments designated as fair value hedges, the gain or loss is
recognized in earnings in the period of change together with the gain or loss
on the hedged item attributable to the risk being hedged. For derivative
instruments designated as cash flow hedges, the effective portion of the
derivative gain or loss is included in other comprehensive income, but not
reflected in our consolidated statement of operations until the corresponding
hedged transaction is settled. The ineffective portion is reported in earnings
immediately. In March 2004, we entered into two interest rate swaps to hedge the risk of
changes in fair value of our 8.625% Senior Notes due 2010 resulting from
changes in interest rates. These interest rate swaps, under which we receive
fixed payments and make floating payments, result in the conversion of the
hedged obligation into floating rate debt. The following table summarizes, by
individual hedge instrument, these interest rate swaps as of June 30, 2004: Fair Value ofFixed Rate to be
    
    
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Notional Amount
    
    June 30, 2004Six
Month LIBOR +4.72%
Six Month LIBOR +4.64%
    
    December 15, 2010
December 15, 2010
    
    8.625%
8.625%
    
    $100,000,000
$100,000,000
    
    $(6,525)
$(5,363)
 As of June 30, 2004, a total of approximately $1.4 million in other current
assets, $13.3 million in long-term liabilities and a $11.9 million reduction of
long-term debt was recorded with respect to the fair value adjustment related
to these two swaps. 12




---



##### Table of Contents



During 2001, we entered into three interest rate swaps to convert variable
lease payments under certain lease arrangements to fixed payments as follows: Fair Value ofSwap atLease
    
    Maturity Date
    
    Fixed Rate to be Paid
    
    Notional Amount
    
    June 30, 2004March 2000
    
    March 11, 2005
    
    
    5.2550
    %
    
    $
    100,000,000
    
    
    $
    (2,242
    )August 2000
    
    March 11, 2005
    
    
    5.2725
    %
    
    $
    100,000,000
    
    
    $
    (2,264
    )October 2000
    
    October 26, 2005
    
    
    5.3975
    %
    
    $
    100,000,000
    
    
    $
    (3,701
    )
 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 six months ended June 30,
2004 and 2003, we recorded approximately $6.3 million and $1.1 million,
respectively, related to these three swaps ($6.3 million and $0.7 million net
of tax) in other comprehensive income. As of June 30, 2004, a total of
approximately $7.6 million was recorded in current liabilities and
approximately $0.6 million in long-term liabilities with respect to the fair
value adjustment related to these three swaps. On June 1, 2004, we repaid the outstanding indebtedness and minority interest
obligations of $193.6 million and $6.4 million, respectively, under our 2000A
equipment lease. As a result, the two interest rate swaps maturing on March
11, 2005, each having a notional amount of $100 million, associated with the
2000A equipment lease no longer meet specific hedge criteria and the unrealized
gain related to the mark-to-market adjustment prior to June 1, 2004 of $5.3
million will be amortized into interest expense over the remaining life of the
swap. In addition, beginning June 1, 2004, changes in the mark-to-market
adjustment were recognized as interest expense in the statement of operations.
The change in the mark-to-market adjustment for June 2004 was
a $0.8 million gain. Prior to 2001, we entered into two interest rate swaps with notional amounts of
$75 million and $125 million and strike rates of 5.51% and 5.56%, respectively.
The difference paid or received on the swap transactions was recorded as an
accrued liability and recognized in leasing expense in all periods before July
1, 2003, and in interest expense until expiration in July 2003. Because
management decided not to designate the interest rate swaps as hedges, we
recognized unrealized gains of approximately $4.1 million related to the change
in the fair value of these interest rate swaps in lease expense in our
statement of operations during the six months ended June 30, 2003. The counterparties to our interest rate swap agreements are major international
financial institutions. We 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. 9. COMMITMENTS AND CONTINGENCIES Hanover has issued the following guarantees that are not recorded on our
accompanying balance sheet: Maximum PotentialUndiscountedPayments as ofTerm
    
    June 30, 2004Indebtedness of non-consolidated affiliates:Simco/Harwat Consortium (1)
    
    
    2005
    
    
    $
    12,801El Furrial (1)
    
    
    2013
    
    
    
    38,024Other:Performance guarantees through letters of credit (2)
    
    
    2004-2007
    
    
    
    86,224Standby letters of credit
    
    
    2004
    
    
    
    26,127Bid bonds and performance bonds (2)
    
    
    2004-2007
    
    
    
    80,705$
    243,881
 13




---



##### Table of Contents



(1)
    
    We have guaranteed the amount included above, which is a percentage of the total debt of this
non-consolidated affiliate equal to our ownership percentage in such affiliate.(2)
    
    We have issued guarantees to third parties to
ensure performance of our obligations, some of
which may be fulfilled by third parties. As part of the Production Operators Corporation (POC) acquisition purchase
price, Hanover may be required to make a contingent payment to Schlumberger
based on the realization of certain tax benefits by Hanover through 2016. To
date we have not realized any of such tax benefits or made any payments to
Schlumberger in connection with them. Upon the occurrence of a change of control of Hanover, if the change of control
or shareholder approval of the change of control occurs before February 9,
2005, which is twelve months after the entry of the final court approval of the
securities related settlement that became final in March 2004, we will be
obligated to contribute an additional $3 million to the securities settlement
fund. (See Note 5.) On June 25, 1999, we notified the Air Quality Bureau of the Environmental
Protection Division, New Mexico Environmental Department (the Division), of
potential violations of State regulatory and permitting requirements. The
potential violations included failure to conduct required performance tests,
failure to file required notices and failure to pay annual filing fees for
compressor units located on sites for more than one year. We promptly paid the
required fees and filed the required notices, correcting the potential
violations. On June 12, 2001, after the potential violations had been
corrected, the Director of the Division issued a compliance order to us in
connection with the potential violations. The compliance order assessed a civil
penalty of $15,000 per day per alleged regulatory violation and permit; no
total penalty amount was proposed in the compliance order. On October 3, 2003,
the Division notified us that the total proposed penalty would be $759,072.
However, since the alleged violations had been self-disclosed, the amount was
reduced to $189,768. We subsequently responded to the penalty assessment,
challenging the basis of the Divisions penalty calculation. As a result of our
challenge, the Division agreed to a Stipulated Motion for Time to File Answer
and further agreed to meet with us and negotiate a final settlement. On April
8, 2004, Hanover met with Division officials in Santa Fe and agreed to a final
settlement of all alleged violations. In June 2004, we paid a penalty of
$105,464 in final resolution of this matter. On June 30, 2004, the Texas Commission on Environmental Quality (TCEQ) informed
the Company that it was pursuing an enforcement action against the Companys
subsidiary HCLP for alleged violations of the Texas Health and Safety Code and
Commission Rules at the Redwood Hanover Gateway Plant (RHG Plant) in Madison
County, Texas. The alleged violations include failure to comply with certain
permit limitations relating to sulfur emissions during certain periods in 2003
and 2004 and failure to provide certain required notifications in connection
therewith. TCEQ has proposed a settlement of $149,625 in respect of the alleged
violations in the form of a proposed Agreed Order dated June 29, 2004. The
Company has requested a meeting with the TCEQ to discuss the allegations and to
challenge certain assumptions made by the TCEQ. A date for the meeting is
pending further communication with TCEQ. In the ordinary course of business we are 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 our consolidated financial position, results of operations or cash
flows. We are involved in a project to build 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 an affiliate of The Royal/ Dutch
Shell Group (Shell) and Global Energy and Refining Ltd. (Global), a
Nigerian company. We have completed the building of the required barge-mounted
facilities. Under the terms of a series of contracts between Global and us,
Shell, and several other counterparties, respectively, Global is responsible
for the development of the overall project, which will require significant
financing. Global has orally informed us that it has completed a financing
transaction, although it is not clear to us whether the funds raised by Global
will be sufficient to perform its obligations under these contracts. In light
of the political environment in Nigeria, Globals lack of a successful track
record with respect to this project and other factors, there is no assurance
that Global will be able to comply with its obligations under these contracts.
In May 2004, we reached an agreement with Global whereby Global prepaid to us
$5.0 million in equipment rental fees that we recorded in other liabilities on
our condensed consolidated balance sheet in return for our agreement to waive
certain defaults by Global with respect to some of our agreements with them. 14




---



##### Table of Contents



If Shell were to terminate its contract with Global for any reason or we were
to terminate our involvement in the project, we would be required to find an
alternative use for the barge-mounted facility which could result in a
write-down of our investment. At June 30, 2004, we had an investment of
approximately $30.4 million associated with the barge-mounted facility and
approximately $4.1 million associated with advances to, and our investment in,
Global. 10. RELATED-PARTY TRANSACTIONS We received a letter on March 11, 2004 from the administrative trustee of the
GKH Liquidating Trust indicating it and one of its affiliates had decided to
distribute 5.8 million shares of the 8.3 million shares of Hanover common stock
owned by the GKH Liquidating Trust (formerly held by GKH Investments,
L.P. and GKH Private Limited (collectively GKH)) and its affiliate to
the relevant beneficiaries. We understand that in April 2004 GKH contributed
the remaining 2.5 million shares of our common stock held by GKH to the
settlement fund. (See Note 5.) 11. NEW ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
SFAS 150 changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. SFAS 150 requires that
those instruments be classified as liabilities in statements of financial
position. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for interim periods
beginning after June 15, 2004. On November 7, 2003 the FASB issued Staff
Position 150-3 that delayed the effective date for certain types of financial
instruments. We do not believe the adoption of the guidance currently provided
in SFAS 150 will have a material effect on our consolidated results of
operations or cash flow. However, we may be required to classify as debt
approximately $22.2 million in sale leaseback obligations that are currently
reported as Minority interest on our condensed consolidated balance sheet
pursuant to FIN 46. These minority interest obligations represent the equity of the entities that
lease compression equipment to us. In accordance with the provisions of our
compression equipment lease obligations, the equity certificate holders are
entitled to quarterly or semi-annual yield payments on the aggregate
outstanding equity certificates. As of June 30, 2004, the yield rates on the
outstanding equity certificates ranged from 4.4% to 9.5%. Equity certificate
holders may receive a return of capital payment upon termination of the lease
or our purchase of the leased compression equipment after full payment of all
debt obligations of the entities that lease compression equipment to us. At
June 30, 2004, the carrying value of the minority interest obligations
approximated the fair market value of assets that would be required to be
transferred to redeem the minority interest obligations. In April 2004, the Emerging Issues Task Force reached a consensus on Issue No.
03-06, Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earning per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The adoption of EITF 03-06 had no effect on
our net income (loss) per share. 12. REPORTABLE SEGMENTS We manage our business segments primarily based upon the type of product or
service provided. We have five principal industry segments: Domestic Rentals;
International Rentals; Parts, Service and Used Equipment; Compressor and
Accessory Fabrication; and Production and Processing Equipment Fabrication. The
Domestic and International Rentals segments primarily provide natural gas
compression and production and processing equipment rental and maintenance 15




---



##### Table of Contents



services to meet specific customer requirements on Hanover-owned assets. The
Parts, Service and Used Equipment segment provides a full range of services to
support the surface production needs of customers from installation and normal
maintenance and services to full operation of a customers owned assets and
surface equipment as well as sales of used equipment. The Compressor and
Accessory 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 used in the production and treating of
crude oil and natural gas and engineering, procurement and construction of
heavy wall reactors for refineries and desalination plants. We evaluate the performance of our segments based on segment gross profit.
Segment gross profit for each segment includes direct revenues and operating
expenses attributable to that segment. Costs excluded from segment gross profit
include selling, general and administrative, depreciation and amortization,
leasing, interest, foreign currency translation, provision for cost of
litigation settlement, goodwill impairment, other expenses and income taxes.
Amounts defined as Other include equity in income of non-consolidated
affiliates, results of other insignificant operations and corporate related
items primarily related to cash management activities. Revenues include sales
to external customers. Intersegment sales and any resulting profits are
eliminated in consolidation. We no longer include intersegment sales when we
evaluate the performance of our segments and have adjusted prior periods to
conform to the 2004 presentation. The following tables present sales and other financial information by industry
segment for the three months ended June 30, 2004 and 2003. Parts, service
    
    
    
    
    
    ProductionDomestic
    
    International
    
    and used
    
    Compressor
    
    equipmentrentals
    
    rentals
    
    equipment
    
    fabrication
    
    fabrication
    
    Other
    
    Consolidated(in thousands)June 30, 2004:Revenues from external customers
    
    $
    83,680
    
    
    $
    58,359
    
    
    $
    41,913
    
    
    $
    44,159
    
    
    $
    63,017
    
    
    $
    5,553
    
    
    $
    296,681Gross profit
    
    
    48,730
    
    
    
    43,163
    
    
    
    10,165
    
    
    
    3,705
    
    
    
    9,130
    
    
    
    5,553
    
    
    
    120,446June 30, 2003:Revenues from external customers
    
    $
    80,256
    
    
    $
    51,014
    
    
    $
    34,976
    
    
    $
    36,420
    
    
    $
    65,810
    
    
    $
    7,888
    
    
    $
    276,364Gross profit
    
    
    49,250
    
    
    
    36,109
    
    
    
    8,965
    
    
    
    3,455
    
    
    
    5,665
    
    
    
    7,888
    
    
    
    111,332
 The following tables present sales and other financial information by industry
segment for the six months ended June 30, 2004 and 2003. Parts, service
    
    
    
    
    
    ProductionDomestic
    
    International
    
    and used
    
    Compressor
    
    equipmentrentals
    
    rentals
    
    equipment
    
    fabrication
    
    fabrication
    
    Other
    
    Consolidated(in thousands)June 30, 2004:Revenues from external customers
    
    $
    170,272
    
    
    $
    113,928
    
    
    $
    86,520
    
    
    $
    72,309
    
    
    $
    116,446
    
    
    $
    11,497
    
    
    $
    570,972Gross profit
    
    
    99,783
    
    
    
    81,606
    
    
    
    21,542
    
    
    
    5,939
    
    
    
    14,863
    
    
    
    11,497
    
    
    
    235,230June 30, 2003:Revenues from external customers
    
    $
    158,905
    
    
    $
    102,454
    
    
    $
    72,746
    
    
    $
    57,800
    
    
    $
    145,950
    
    
    $
    12,196
    
    
    $
    550,051Gross profit
    
    
    96,695
    
    
    
    72,529
    
    
    
    22,272
    
    
    
    6,197
    
    
    
    16,243
    
    
    
    12,196
    
    
    
    226,132
 13. DISCONTINUED OPERATIONS AND OTHER ASSETS HELD FOR SALE During the fourth quarter of 2002, Hanovers Board of Directors approved
managements plan to dispose of our non-oilfield power generation projects,
which were part of our domestic rental business, and certain used equipment
businesses, which were part of our parts and service business. These disposals
meet the criteria established for recognition as discontinued operations under
SFAS 144, Accounting for the Impairment or 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 are reflected as discontinued
operations in our condensed consolidated statement of operations. Due to
changes in market conditions, the disposal plan was not completed in 2003. We
are continuing to actively market these assets and have made valuation
adjustments as a result of the change in market conditions. We have sold 16




---



##### Table of Contents



certain assets related to our used equipment business for total sales proceeds
of $5.7 million during the six months ended June 30, 2004 that resulted in a
$0.4 million gain. The remaining assets are expected to be sold
during the remainder of 2004 and the assets and liabilities are reflected as held-for-sale on our
condensed consolidated balance sheet. Summary of operating results of the discontinued operations (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues and other:Domestic rentals
    
    $
    10
    
    
    $
    1,705
    
    
    $
    15
    
    
    $
    3,376Parts, service and used equipment
    
    
    2,771
    
    
    
    3,658
    
    
    
    6,018
    
    
    
    7,287Equity in income of non-consolidated affiliates
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    550Other
    
    
    
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    (93
    )2,781
    
    
    
    5,493
    
    
    
    6,030
    
    
    
    11,120Expenses:Domestic rentals
    
    
    231
    
    
    
    494
    
    
    
    391
    
    
    
    793Parts, service and used equipment
    
    
    1,757
    
    
    
    2,255
    
    
    
    3,946
    
    
    
    4,759Selling, general and administrative
    
    
    689
    
    
    
    2,271
    
    
    
    1,675
    
    
    
    3,955Interest expense
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    600Other
    
    
    134
    
    
    
    325
    
    
    
    134
    
    
    
    3712,811
    
    
    
    5,641
    
    
    
    6,146
    
    
    
    10,478Income (loss) from discontinued operations before
income taxes
    
    
    (30
    )
    
    
    (148
    )
    
    
    (116
    )
    
    
    642Provision for (benefit from) income taxes
    
    
    
    
    
    
    (90
    )
    
    
    
    
    
    
    225Income (loss) from discontinued operations
    
    $
    (30
    )
    
    $
    (58
    )
    
    $
    (116
    )
    
    $
    417
 As a result of our
consolidation efforts during 2003, we reclassified certain closed
facilities to assets held for sale. Summary balance sheet data for assets held for sale as of June 30, 2004 (in
thousands): Non-OilfieldUsed
    
    PowerEquipment
    
    Generation
    
    Facilities
    
    TotalCurrent assets
    
    $
    3,818
    
    
    $
    9,531
    
    
    $
    
    
    
    $
    13,349Property, plant and equipment
    
    
    160
    
    
    
    1,145
    
    
    
    9,765
    
    
    
    11,070Assets held for sale
    
    
    3,978
    
    
    
    10,676
    
    
    
    9,765
    
    
    
    24,419Current liabilities
    
    
    
    
    
    
    451
    
    
    
    
    
    
    
    451Liabilities held for sale
    
    
    
    
    
    
    451
    
    
    
    
    
    
    
    451Net assets held for sale
    
    $
    3,978
    
    
    $
    10,225
    
    
    $
    9,765
    
    
    $
    23,968
 Summary balance sheet data for assets held for sale as of December 31, 2003 (in
thousands): Non-OilfieldUsed
    
    PowerEquipment
    
    Generation
    
    Facilities
    
    TotalCurrent assets
    
    $
    6,820
    
    
    $
    10,524
    
    
    $
    
    
    
    $
    17,344Property, plant and equipment
    
    
    924
    
    
    
    1,386
    
    
    
    11,671
    
    
    
    13,981Assets held for sale
    
    
    7,744
    
    
    
    11,910
    
    
    
    11,671
    
    
    
    31,325Current liabilities
    
    
    
    
    
    
    1,128
    
    
    
    
    
    
    
    1,128Liabilities held for sale
    
    
    
    
    
    
    1,128
    
    
    
    
    
    
    
    1,128Net assets held for sale
    
    $
    7,744
    
    
    $
    10,782
    
    
    $
    11,671
    
    
    $
    30,197
 17




---



##### Table of Contents



14. INCOME TAXES During the first six months of 2004, we recorded a net tax provision of $14.5
million compared to a benefit from taxes of $10.5 million for the first six
months of 2003. Our effective tax rate for the six months ended June 30, 2004
was (335)%, compared to 30% for the six months ended June 30, 2003. Due to
Hanovers recent domestic tax losses, we cannot reach the conclusion that it is
more likely than not that certain of our U.S. deferred
tax assets would be
realized in the near future. Accordingly, our provision for income taxes for
the six months ended June 30, 2004 did not include a tax benefit for our
estimate of anticipated U.S. losses because the benefit is not anticipated to
be realized in the near future. We reclassified approximately $23.8 million, net of a valuation allowance of
$2.4 million, to current deferred income taxes that, at December 31, 2003, had
previously been included as part of our net deferred income tax liability. This
immaterial reclassification had no impact on our consolidated results of
operations, cash flows or shareholders equity. Due to our current tax position
in the U.S., we have recorded a full valuation allowance, $2.4 million in
current deferred income taxes and $23.3 million in non-current
deferred tax liability, against
our net U.S. deferred tax assets. See Note 13 in Notes to the Consolidated
Financial Statements in our annual report on Form 10-K for the fiscal year end
December 31, 2003 for further information regarding our tax valuation
allowances. 15. SUBSEQUENT EVENTS In July 2004, we granted approximately 1.1 million shares of restricted Hanover
common stock under our 2003 Stock Incentive Plan to certain
employees, including our executive officers, as part of an
incentive compensation plan. Approximately 0.7 million of the shares
of restricted stock that were granted will
vest over a three-year period at a rate of one-third per year,
beginning on the first anniversary of the date of the grant, and
approximately 0.4 million of the shares of restricted stock that
were granted will vest in July 2007, subject to the achievement of certain pre-determined
performance based criteria. In the event of a change of control of
Hanover, a portion of these grants are subject to accelerated
vesting. Because 0.4 million of the restricted shares vest based on performance, we
will record an estimate of the compensation expense to be expensed
over three years related to these restricted shares. The compensation
expense that will be recognized in our statement of operations will
be adjusted for changes in our estimate of the number of restricted shares that will
vest as well as changes in our stock price. In July 2004, Wilpro Energy Services (PIGAP II) Limited (referred to as PIGAP
II) received a notice of default from the Venezuelan state oil company,
PDVSA, alleging that PIGAP II is not in compliance under a services agreement
as a result of certain operational issues. PIGAP II is a joint venture,
currently owned 70% by a subsidiary of The Williams Companies, Inc.
(Williams) and 30% by Hanover, that operates a natural gas compression
facility in Venezuela. PIGAP II has informed us that it does not believe a
basis exists for such notice and that it is contesting the giving of this
notice. Nonetheless, the giving of this notice of default could be deemed an
event of default under PIGAP IIs outstanding project loans totaling
approximately $219 million. We understand, however, that the lenders under the
PIGAP II project loan agreement have confirmed to PIGAP II that based on the
facts they currently know, they have no intention of exercising any rights or
remedies under the PIGAP II project loan agreements until the issues raised in
the notice and PIGAP IIs response are clarified. In any event, Hanover has
not guaranteed and is not otherwise liable for the PIGAP II project loans and
an event of default under such project loans does not trigger a default under
Hanovers debt obligations. Hanovers net book investment in PIGAP II at June
30, 2004 was approximately $27.9 million and Hanovers pretax income with
respect to PIGAP II for the six months ended June 30, 2004 was approximately
$6.6 million. 18




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Quarterly Report on Form 10-Q 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, as amended. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as we believe, anticipate,
expect, estimate or words of similar import. Similarly, statements that
describe Hanovers future plans, objectives or goals or future revenues or
other future 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 of equipment with our customers so as to fully recoup our cost of the equipment;
    
    a prolonged substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and natural gas
production equipment;
    
    reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;
    
    legislative changes or changes in economic or political conditions in the countries in which we do business;
    
    the inherent risks associated with our operations, such as equipment defects, malfunctions and failures and natural disasters;
    
    our inability to implement certain business objectives, such as:  
    
    integrating acquired businesses,
    
    implementing our new enterprise resource planning systems,
    
    generating sufficient cash,
    
    accessing the capital markets,
    
    refinancing existing or incurring additional indebtedness to fund our business, and
    
    executing our exit and sale strategy with respect to assets classified on our
balance sheet as discontinued operations and held for sale;  
    
    governmental safety, health, environmental and other regulations, which could require us to make significant expenditures; and
    
    our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our substantial debt. Other factors besides those described in this Form 10-Q could also affect our
actual results. You should not unduly rely on the forward-looking statements
contained in this Form 10-Q, which speak only as of the date of this Form 10-Q.
Except as otherwise required by law, we undertake no obligation to publicly
revise any forward-looking statement to reflect circumstances or events after
the date of this Form 10-Q or to reflect the occurrence of unanticipated
events. You should, however, review the factors and risks we describe in our
Annual Report on Form 10-K for the year ended December 31, 2003 and the reports
we file from time to time with the SEC after the date of this Form 10-Q. All
forward-looking statements attributable to Hanover are expressly qualified in
their entirety by this cautionary statement. 19




---



##### Table of Contents



GENERAL Hanover Compressor Company, a Delaware
corporation (we, Hanover, or the Company), together with its subsidiaries, is a global market leader in the
full service natural gas compression business and is also a leading provider of
service, fabrication and equipment for oil and natural gas processing and
transportation applications. We sell and rent this equipment and provide
complete operation and maintenance services, including run-time guarantees, for
both customer-owned equipment and our fleet of rental equipment. Hanover was
founded as a Delaware corporation in 1990, and has been a public company since
1997. Our customers include both major and independent oil and gas producers
and distributors as well as national oil and gas companies in the countries in
which we operate. Our maintenance business, together with our parts and service
business, provides solutions to customers that own their own compression and
surface production and processing equipment, but want to outsource their
operations. We also fabricate compressor and oil and gas production and
processing equipment 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. In
addition, through our subsidiary, Belleli Energy S.r.l. (Belleli), we provide
engineering, procurement and construction services primarily related to the
manufacturing of heavy wall reactors for refineries and construction of
desalination plants, primarily for use in Europe and the Middle
East. Substantially all of our assets and operations are owned or conducted by our
wholly owned subsidiary, Hanover Compression Limited Partnership (HCLP). OVERVIEW Our revenue and other income for the three months ended June 30, 2004 was
$296.7 million compared to $276.4 million for the three months ended June 30,
2003. Net loss for the three months ended June 30, 2004 was $9.1 million, or
$0.11 per share, compared with a net income of $0.2 million, or $0.00 per
share, for the three months ended June 30, 2003. The decrease in our operating
results was primarily due to the impact of adoption of FIN 46 and an increase
in our provision for income taxes. As a result of the adoption of FIN 46, we
recorded approximately $4.2 million in additional depreciation expense
associated with the compression equipment operating leases that were
consolidated into Hanovers financials in the third quarter of 2003. Our
provision for income taxes for the three months ended June 30, 2004 did not
include a tax benefit for our estimate of anticipated U.S. losses. Based on a
statutory rate, we estimate that our tax expense was approximately $4.7 million
higher because of our current tax position in the United States. This expense
is discussed in greater detail under Income Taxes below. Our revenue and other income for the six months ended June 30, 2004 was $571.0
million compared to $550.1 million for the six months ended June 30, 2003. Net
loss for the six months ended June 30, 2004 was $18.5 million, or $0.22 per
share, compared with a net loss of $26.4 million, or $0.33 per share, for the
six months ended June 30, 2003. The improvement in our net income was primarily
the result of a $43.7 million decrease in the provision for cost of litigation
settlement offset by an approximately $8.5 million increase in additional
depreciation related to the adoption of FIN 46 and an increase in our provision
for income tax. Our provision for income taxes for the six months ended June
30, 2004 did not include a tax benefit for our estimate of anticipated U.S.
losses. Based on a 35% federal U.S. tax rate, we estimate that our tax expense was
approximately $14.1 million higher because of our current tax position in the
United States. This expense is discussed in greater detail under Income Taxes below. During the six months ended June 30, 2004, we realized continued improvement in
our domestic rental fleet utilization, which increased from approximately 76%
at December 31, 2003 to 79% at June 30, 2004. During the six months ended June
30, 2004, we also achieved an improvement in backlog in both the compression
and production and processing fabrication lines of our business. Our parts,
service and used equipment business segment benefited from strong international
service and installation revenue and gross profit during the six months ended
June 30, 2004, but the base parts and service revenue was lower than
anticipated. Hanover believes this lower revenue is due to continued delays in maintenance by our customers because of
the current strong gas price environment, particularly in North
America. Total compression horsepower at June 30, 2004 was approximately 3,481,000,
consisting of approximately 2,568,000 horsepower in the United States and
approximately 913,000 horsepower internationally. Our total compression
horsepower utilization rate at June 30, 2004 was approximately 83%, compared to
utilization of approximately 81% at December 31, 2003 and approximately 79% at
June 30, 2003. Domestic and international utilization at June 30, 2004 was
approximately 20




---



##### Table of Contents



79% and 96%, respectively, compared to approximately 76% and 94%, respectively,
at December 31, 2003, and approximately 73% and 94%, respectively, at June 30,
2003. At June 30, 2004, Hanovers total third-party fabrication backlog, excluding
Belleli, was approximately $104 million compared to approximately $46 million
at December 31, 2003 and $84 million at June 30, 2003. Backlog for Belleli at
June 30, 2004 was approximately $162 million, compared to approximately $107
million at December 31, 2003 and $77 million at June 30, 2003. The compressor
and accessory fabrication backlog was approximately $54 million at June 30,
2004, compared to approximately $28 million at December 31,
2003 and $37
million at June 30, 2003. The backlog for production and processing equipment
fabrication, excluding Belleli, was approximately $50 million at June 30, 2004,
compared to approximately $18 million at December 31, 2003
and $47 million at
June 30, 2003. Industry Conditions The North American rig count increased by 5% to 1,441 at June 30, 2004 from
1,375 at June 30, 2003, and the twelve-month rolling average North American rig
count increased by 23% to 1,500 at June 30, 2004 from 1,215 at June 30, 2003.
In addition, the twelve-month rolling average New York Mercantile Exchange
wellhead natural gas price increased to $5.31 per Mcf at June 30, 2004 from
$4.79 per Mcf at June 30, 2003. During 2003, we did not experience any
significant growth in domestic rentals or purchases of equipment and services
by our customers, which we believe is primarily the result of the lack of a
significant increase in U.S. natural gas production levels. However, with
several non-operational issues behind us, we are focused on improving our sales
success ratio on new bid opportunities and continue to anticipate some revenue
growth in 2004. Facility Consolidation We had previously announced our plan to reduce our U.S. headcount by
approximately 500 employees worldwide and to close four fabrication facilities.
During the year ended December 31, 2002, we accrued approximately $2.7 million
in employee separation costs related to the reduction in workforce. During the
year ended December 31, 2003, we paid approximately $2.0 million in employee
separation costs, implemented further cost saving initiatives and closed two
facilities in addition to the four fabrication facilities we closed
pursuant to our original reduction plan. During the first six months of 2004, we paid an
additional $0.7 million in employee separation costs related to the completion
of these activities. From December 31, 2002 to June 30, 2004, our U.S.
workforce has decreased by approximately 700 employees. U.S. Tax Position As a result of recent operating losses, we were in a net deferred tax asset
position (for U.S. income tax purposes) for the first time in 2003. Due to our
recent domestic tax losses, we could not reach the conclusion that it was more
likely than not that certain of our U.S. deferred tax assets
would be realized
in the near future. Accordingly, for 2003 we provided a $25.7 million deferred
tax valuation allowance against our net U.S. deferred tax asset. We will be
required to record additional valuation allowances if our domestic deferred tax
asset position is increased and the more likely than not criteria of SFAS 109
continues to not be met. If we are required to record additional valuation allowances, our
effective tax rate will be above the statutory rate. Our preliminary analysis
leads us to believe that we will likely be required to record additional
valuation allowances in 2004, and we may be required to
record additional valuation allowances in future periods. 21




---



##### Table of Contents



RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Summary of Business Segment Results Domestic Rentals
(in thousands) Three months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    83,680
    
    
    $
    80,256
    
    
    
    4
    %Operating expense
    
    
    34,950
    
    
    
    31,006
    
    
    
    13
    %Gross profit
    
    $
    48,730
    
    
    $
    49,250
    
    
    
    (1
    )%Gross margin
    
    
    58
    %
    
    
    61
    %
    
    
    (3
    )%
 Domestic rental revenue increased during the three months ended June 30, 2004,
compared to the three months ended June 30, 2003, due primarily to improved
utilization in our compression rental fleet. We believe that our utilization
increased due to an improvement in market conditions and our focus on putting
idle units into service. Utilization of our domestic compression rental fleet
increased to approximately 79% at June 30, 2004 from approximately 73% at June
30, 2003. Our utilization increased due to a 3% increase in contracted units,
the retirement of units to be sold or scrapped and the deployment of units into
international operations. Gross margin for the three months ended June 30, 2004
decreased slightly, compared to the three months ended June 30, 2003, due to
increased maintenance and repair expense and increased start up costs
associated with bringing idle compression units online. International Rentals
(in thousands) Three months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    58,359
    
    
    $
    51,014
    
    
    
    14
    %Operating expense
    
    
    15,196
    
    
    
    14,905
    
    
    
    2
    %Gross profit
    
    $
    43,163
    
    
    $
    36,109
    
    
    
    20
    %Gross margin
    
    
    74
    %
    
    
    71
    %
    
    
    3
    %
 During the three months ended June 30, 2004 international rental revenue and
gross profit increased, compared to the three months ended June 30, 2003,
primarily due to increased compression and processing plant rental activity in
Argentina, Brazil and Mexico. Gross margin for the three months ended June 30,
2004 increased when compared to the three months ended June 30, 2003, primarily
due to (a) lower repair and maintenance expense that is expected to increase in
the second half of 2004 and (b) the receipt of approximately $0.9 million in
additional contractual inflation adjustments in Venezuela and
approximately $1.1 million in
negotiated start up payments received in Brazil associated with a compression
rental project that was scheduled to start up in the first quarter of 2004 but
was delayed by the customer. The inflation and negotiated start up payment
increased our international rental gross margin by 1% during the three months
ended June 30, 2004. Parts, Service and Used Equipment
(in thousands) Three months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    41,913
    
    
    $
    34,976
    
    
    
    20
    %Operating expense
    
    
    31,748
    
    
    
    26,011
    
    
    
    22
    %Gross profit
    
    $
    10,165
    
    
    $
    8,965
    
    
    
    13
    %Gross margin
    
    
    24
    %
    
    
    26
    %
    
    
    (2
    )%
 22




---



##### Table of Contents



Parts, service and used equipment revenue and gross profit for the three months
ended June 30, 2004 was higher than the three months ended June 30, 2003 due
primarily to increased international service and installation sales which were
partly offset by a decrease in revenue from our domestic parts and service
business. We believe our North American customers have delayed maintenance in
order to keep their equipment on-line for longer periods due to the increase in
price of natural gas. Gross margin for the three months ended June 30, 2004
was lower than the results for the three months ended June 30, 2003 primarily
due to the higher margin on a used equipment sales in the second
quarter of 2003. For the
three months ended June 30, 2004, parts and service revenue was $35.4 million
with a gross margin of 28%, compared to $30.8 million and 27%, respectively,
for the three months ended June 30, 2003. Used rental equipment and
installation sales revenue in the three months ended June 30, 2004 was $6.5
million with a gross margin of 4%, compared to $4.2 million with a 19% gross
margin for the three months ended June 30, 2003. Our used rental equipment and
installation sales and gross margins vary significantly from period to period
and are dependent on the exercise of purchase options on rental equipment by
customers and the start-up of new projects by customers. Compression and Accessory Fabrication
(in thousands) Three months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    44,159
    
    
    $
    36,420
    
    
    
    21
    %Operating expense
    
    
    40,454
    
    
    
    32,965
    
    
    
    23
    %Gross profit
    
    $
    3,705
    
    
    $
    3,455
    
    
    
    7
    %Gross margin
    
    
    8
    %
    
    
    9
    %
    
    
    (1
    )%
 For the three months ended June 30, 2004, compression fabrication revenue and
gross profit increased primarily due to our increased focus on fabrication that
led to increased sales. Gross margin declined during the three months ended
June 30, 2004, compared to three months ended June 30, 2003, due primarily to
continued strong competition for new orders that negatively impacted sales
prices and the resulting gross margin. Production and Processing Equipment Fabrication
(in thousands) Three months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    63,017
    
    
    $
    65,810
    
    
    
    (4
    )%Operating expense
    
    
    53,887
    
    
    
    60,145
    
    
    
    (10
    )%Gross profit
    
    $
    9,130
    
    
    $
    5,665
    
    
    
    61
    %Gross margin
    
    
    14
    %
    
    
    9
    %
    
    
    5
    %
 Production and processing equipment fabrication revenue for the three months
ended June 30, 2004 was slightly lower than for the three months ended June 30,
2003, primarily due to a decrease in orders from our customers in the second
half of 2003. We believe our consolidation efforts, management changes and
non-operational issues impacted our sales efforts. However, we are focusing on
improving our sales success ratio on new bid opportunities that has resulted in
the recent improvement in our backlog. Gross profit and gross margin for
production and processing equipment fabrication for the three months ended June
30, 2004 increased, compared to the second quarter 2003, due primarily to
improvements in Bellelis operating performance. Other Income Equity in income of non-consolidated affiliates decreased by $1.5 million to
$4.9 million during the three months ended June 30, 2004, from $6.4 million
during the three months ended June 30, 2003. This decrease is primarily due to
a decrease in results from our equity interest in PIGAP II, which
experienced an increase in interest expense during the three months
ended June 30, 2004 compared to the three months ended
June 30, 2003 as a result of the
completion of PIGAP IIs project financing in October 2003. 23




---



##### Table of Contents



Expenses Selling, general, and administrative expense (SG&A) for the three months
ended June 30, 2004 was $41.7 million, compared to $40.2 million during the
three months ended June 30, 2003. As a percentage of revenue, SG&A in the
second quarter 2004 was 14%, compared to 15% for the same period a year
earlier. Depreciation and amortization expense for the three months ended June 30, 2004
increased to $44.5 million, compared to $36.1 million for the same period a
year ago. Second quarter 2004 depreciation and amortization expense increased primarily
due to (a) additional depreciation expense of approximately $4.2 million
associated with the compression equipment operating leases that were
consolidated into Hanovers financial statements in the third quarter 2003, (b)
increased depreciation expense due to additions to the rental fleet, including
maintenance capital, placed in service during the first six months of 2004 and
during 2003, and (c) approximately $1.0 million in additional amortization
expense to write-off deferred financing costs associated with the June 2004
refinancing of our 2000A compression equipment lease obligations. Beginning in July 2003, payments accrued under our sale leaseback transactions
were included in interest expense as a result of consolidating on our balance
sheet the entities that lease compression equipment to us. As a result, during
the three months ended June 30, 2004 as compared to the three months ended June
30, 2003, our interest expense increased $23.4 million to $35.7 million and our
leasing expense decreased $20.8 million to $0. Foreign currency translation for the three months ended June 30, 2004 was a
loss of $0.6 million, compared to a gain of $0.6 million for the three months
ended June 30, 2003. The foreign currency translation loss was primarily due to
foreign currency loss in our Canadian operations. The following table
summarizes the exchange gains and losses we recorded for assets exposed to
currency translation (in thousands): Three Months EndedJune 30,2004
    
    2003Canada
    
    $
    (544
    )
    
    $
    38Argentina
    
    
    (227
    )
    
    
    770Venezuela
    
    
    477
    
    
    
    130All other countries
    
    
    (333
    )
    
    
    (365
    )Exchange gain (loss)
    
    $
    (627
    )
    
    $
    573
 Provision for Securities Litigation Settlement During the three months ended June 30, 2004, we recorded a $0.2 million
increase in the cost of the securities related litigation settlement to
mark-to-market the change in value of the embedded derivative related to the
shareholder note recorded. During the three months ended June 30, 2003, we
recorded a $1.7 million charge to adjust the estimated expense for the change
in market value of the 2.5 million shares of Hanover common stock that were
issued by Hanover as part of the securities related litigation settlement. Income Taxes During the three months ended June 30, 2004, we recorded a net tax provision of
$6.8 million compared to a provision for taxes of $1.2 million for the three
months ended June 30, 2003. Our effective tax rate for the three months ended
June 30, 2004 was (262)%, compared to 72% for the three months ended June 30,
2003. The increase in effective rate was primarily due to the impact
of valuation allowances provided in the U.S. and the weight of
foreign income to U.S. income (loss). Due to Hanovers recent domestic tax losses, we cannot reach the
conclusion that it is more likely than not that certain of our U.S. deferred
tax assets will be realized in the near future. Accordingly, our provision for
income taxes for the three months ended June 30, 2004 did not include a tax
benefit for our estimate of anticipated U.S. losses because the benefit is not
anticipated to be realized in the near future. Based on 35% federal U.S. tax rate, we estimate that
our tax expense for the three months ended June 30, 2004 was approximately
$4.7 million higher because of our current tax position in the U.S. 24




---



##### Table of Contents



SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Summary of Business Segment Results Domestic Rentals
(in thousands) Six months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    170,272
    
    
    $
    158,905
    
    
    
    7
    %Operating expense
    
    
    70,489
    
    
    
    62,210
    
    
    
    13
    %Gross profit
    
    $
    99,783
    
    
    $
    96,695
    
    
    
    3
    %Gross margin
    
    
    59
    %
    
    
    61
    %
    
    
    (2
    )%
 Domestic rental revenue and gross profit increased during the six months ended
June 30, 2004, compared to the six months ended June 30, 2003, due primarily to
improved utilization in our compression rental fleet. We believe that our
utilization increased due to an improvement in market conditions and our focus
on putting idle units into service. Utilization of our domestic compression
rental fleet increased to approximately 79% at June 30, 2004 from approximately
73% at June 30, 2003. Our utilization increased due to a 3% increase in
contracted units, the retirement of units to be sold or scrapped and the
deployment of units into international operations. Gross margin for the six
months ended June 30, 2004 decreased slightly, compared to the six months ended
June 30, 2003, due to increased maintenance and repair expense and increased
start up costs associated with bringing idle compression units online. International Rentals
(in thousands) Six months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    113,928
    
    
    $
    102,454
    
    
    
    11
    %Operating expense
    
    
    32,322
    
    
    
    29,925
    
    
    
    8
    %Gross profit
    
    $
    81,606
    
    
    $
    72,529
    
    
    
    13
    %Gross margin
    
    
    72
    %
    
    
    71
    %
    
    
    1
    %
 During the six months ended June 30, 2004 international rental revenue and
gross profit increased, compared to the six months ended June 30, 2003,
primarily due to increased compression and processing plant rental activity in
Argentina, Brazil and Mexico. Gross margin for the six months ended June 30,
2004 increased when compared to the six months ended June 30, 2003, primarily
due to lower repair and maintenance expense that is expected to increase in the
second half of 2004. Parts, Service and Used Equipment
(in thousands) Six months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    86,520
    
    
    $
    72,746
    
    
    
    19
    %Operating expense
    
    
    64,978
    
    
    
    50,474
    
    
    
    29
    %Gross profit
    
    $
    21,542
    
    
    $
    22,272
    
    
    
    (3
    )%Gross margin
    
    
    25
    %
    
    
    31
    %
    
    
    (6
    )%
 Parts, service and used equipment revenue for the six months ended June 30,
2004 was higher than the six months ended June 30, 2003 due primarily to
increased international installation sales which were partly offset by a
decrease in revenue from our domestic parts and service business. We believe
our North American customers have delayed maintenance in order to keep their
equipment on-line for longer periods due to the increase in the price of
natural gas. Gross profit and gross margin for the six months ended June 30,
2004 were lower than the results for the six months ended June 30, 2003 25




---



##### Table of Contents



primarily due to slower activity in parts and service in North America and a
high margin on a used equipment sale in the first six months of 2003. For the six
months ended June 30, 2004, parts and service revenue was $60.6 million with a
gross margin of 27%, compared to $60.6 million and 29%, respectively, for the
six months ended June 30, 2003. Used rental equipment and installation sales
revenue in the six months ended June 30, 2004 was $25.9 million with a gross
margin of 21%, compared to $12.2 million with a 38% gross margin for the six
months ended June 30, 2003. Our used rental equipment and installation sales
and gross margins vary significantly from period to period and are dependent on
the exercise of purchase options on rental equipment by customers and the
start-up of new projects by customers. Compression and Accessory Fabrication
(in thousands) Six months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    72,309
    
    
    $
    57,800
    
    
    
    25
    %Operating expense
    
    
    66,370
    
    
    
    51,603
    
    
    
    29
    %Gross profit
    
    $
    5,939
    
    
    $
    6,197
    
    
    
    (4
    )%Gross margin
    
    
    8
    %
    
    
    11
    %
    
    
    (3
    )%
 For the six months ended June 30, 2004, compression fabrication revenue
increased primarily due to our increased focus on fabrication that led to
increased sales. Gross profit and gross margin declined in the six months ended
June 30, 2004, compared to the six months ended June 30, 2003, due primarily to
continued strong competition for new orders, which negatively impacted sales
prices and the resulting gross margin. Production and Processing Equipment Fabrication
(in thousands) Six months endedJune 30,
    
    Increase2004
    
    2003
    
    (Decrease)Revenue
    
    $
    116,446
    
    
    $
    145,950
    
    
    
    (20
    )%Operating expense
    
    
    101,583
    
    
    
    129,707
    
    
    
    (22
    )%Gross profit
    
    $
    14,863
    
    
    $
    16,243
    
    
    
    (8
    )%Gross margin
    
    
    13
    %
    
    
    11
    %
    
    
    2
    %
 Production and processing
equipment fabrication revenue and gross profit for the six months
ended June 30, 2004 was lower than for the six months ended June 30, 2003,
primarily due to a decrease in orders received from our customers in the second
half of 2003. We believe our consolidation efforts, management changes and
non-operational issues impacted our sales efforts. However, we are focusing on
improving our sales success ratio on new bid opportunities which has resulted
in the recent improvement in our backlog. Gross
margin for production and processing equipment fabrication for the six months
ended June 30, 2004 increased, compared to the six months ended June 30,
2003, due primarily to the improvement in Bellelis operating
performance. Expenses SG&A for the six months ended
June 30, 2004 was $81.6 million, compared to $79.5 million in the six months
ended June 30, 2003. As a percentage of revenue, SG&A for the
six months ended June 30, 2004 and 2003 was 14%. During the first six
months of 2004, we incurred approximately $1.5 million of additional
selling, general and administrative costs related to our efforts in
connection with the implementation of Section 404 of the
Sarbanes-Oxley Act. We expect to incur approximately $2.5 million to
$4.5 million of additional costs in the second half of 2004 in
connection with these efforts. 26




---



##### Table of Contents



Depreciation and amortization expense for the six months ended June 30, 2004
increased to $87.4 million, compared to $70.7 million for the same period a
year ago. Depreciation and amortization expense for the six months ended June 30, 2004
increased primarily due to (a) additional depreciation expense of approximately
$8.5 million associated with the compression equipment operating leases that
were consolidated into Hanovers financial statements in the
third quarter 2003, (b) increased depreciation expense due to additions to the rental fleet,
including maintenance capital, placed in service during the six months ended
June 30, 2004 and during 2003 and (c) approximately $1.0 million in additional
amortization expense to write-off deferred financing costs associated with the
June 2004 refinancing of our 2000A compression equipment lease obligations. Beginning in July 2003, payments accrued under our sale leaseback transactions
are included in interest expense as a result of consolidating on our balance
sheet the entities that lease compression equipment to us. As a result, during
the six months ended June 30, 2004 as compared to the six months ended June 30,
2003, our interest expense increased $46.5 million to $71.0 million and our
leasing expense decreased $43.1 million to $0. Foreign currency translation for the six months ended June 30, 2004 was a gain
of $0.9 million, compared to a gain of $0.2 million for the six months ended
June 30, 2003. The foreign currency translation gain was primarily due to the
devaluation of the Venezuelan bolivar. The following table summarizes the
exchange gains (losses) we recorded for assets exposed to currency translation
(in thousands): Six Months EndedJune 30,2004
    
    2003Canada
    
    $
    (61
    )
    
    $
    129Argentina
    
    
    (448
    )
    
    
    2,084Venezuela
    
    
    1,433
    
    
    
    (1,396
    )All other countries
    
    
    (49
    )
    
    
    (617
    )Exchange gain
    
    $
    875
    
    
    $
    200
 Provision for Securities Litigation Settlement During the six months ended June 30, 2004, we recorded a $0.1 million increase
in the cost of the securities related litigation settlement to mark-to-market
the change in value of the embedded derivative related to the shareholder note
recorded. During the six months ended June 30, 2003, we recorded a $43.8
million charge to record the estimated cost of the securities related
litigation settlement. In May 2003, Hanover
reached an agreement that was subject to court approval to
settle securities class actions, ERISA class actions and the shareholder
derivative actions. The terms of the settlement became final in March 2004 and
provided for Hanover to: (a) make a cash payment of approximately $30 million
to the securities settlement fund (of which $26.7 million was funded by payments from Hanovers directors and
officers insurance carriers), (b) issue 2.5 million shares
of Hanover common stock, and (c) issue a contingent note with a principal amount of $6.7 million. For
further details regarding the securities settlement, see our Form 10-Q for the
three months ended March 31, 2004. Income Taxes During the six months ended June 30, 2004, we recorded a net tax provision of
$14.5 million compared to a benefit from taxes of $10.5 million for the six
months ended June 30, 2003. Our effective tax rate for the six months ended
June 30, 2004 was (335)%, compared to 30% for the six months ended June 30,
2003. The increase in effective rate was primarily due to the impact
of valuation allowances provided in the U.S. and the weight of
foreign income to U.S. income (loss). Due to Hanovers recent domestic tax losses, we cannot reach the
conclusion that it is more likely than not that certain of our U.S. deferred
tax assets would be realized in the near future. Accordingly, our provision for
income taxes for the six months ended June 30, 2004 did not include a tax
benefit for our estimate of anticipated U.S. losses because the benefit is not
anticipated to be realized during 2004. Based on a 35% federal U.S. tax rate, we estimate that
our tax expense for the six months ended June 30, 2004 was approximately $14.1
million higher because of our current tax position in the U.S. 27




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES Our unrestricted cash balance amounted to $51.9 million at June 30, 2004
compared to $56.6 million at December 31, 2003. Working capital increased to
$337.1 million at June 30, 2004 from $279.1 million at December 31, 2003. The
increase in working capital was primarily the result of an increase in accounts
receivable and inventory. Our cash flow from operating, investing and financing activities, as reflected
in the Consolidated Statement of Cash Flows, are summarized in the table below
(dollars in thousands): Six Months EndedJune 30,2004
    
    2003Net cash provided by (used in) continuing operations:Operating activities
    
    $
    47,812
    
    
    $
    43,886Investing activities
    
    
    (24,740
    )
    
    
    (69,217
    )Financing activities
    
    
    (33,244
    )
    
    
    14,508Effect of exchange rate changes on cash and cash equivalents
    
    
    (490
    )
    
    
    612Net cash provided by discontinued operations
    
    
    5,917
    
    
    
    5,954Net change in cash and cash equivalents
    
    $
    (4,745
    )
    
    $
    (4,257
    )
 The increase in cash provided by operating activities for the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003 was primarily
due to an increase in distributions from our non-consolidated affiliates. During
the six months ended June 30, 2004 and 2003, we received distributions of $7.2
million and $0.1 million, respectively, from our non-consolidated affiliates. The decrease in cash used in investing activities during the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003 was primarily
attributable to a decrease in capital expenditures and the $4.7 million in
proceeds received from the sale of our interest in Hanover Measurement Services
Company, LP. The increase in cash used in financing activities was primarily due to the
net repayments of approximately $27.0 million on our bank credit
facility. We may carry out new customer projects through rental 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 2004, we plan to spend approximately $100 million to $150
million on capital expenditures, including (a) rental equipment fleet additions
and (b) approximately $50 million to $60 million on equipment maintenance
capital. 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 were not realized. Historically, we have
funded our capital requirements with a combination of internally generated cash
flow, borrowings under a bank credit facility, sale leaseback transactions,
raising additional equity and issuing long-term debt. Subsequent to December
31, 2003, there have been no significant changes to our obligations to make
future payments under existing contracts except for the repayment of the
borrowings under our bank credit facility and the issuance of $200 million
Senior Notes in June 2004 as discussed below. 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 our having to honor these commitments 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 one to be
established. Our bank credit facility provides for a $350 million revolving credit facility
in which 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. A commitment fee
equal to 0.625% times the average daily amount of the available commitment
under the bank credit facility is payable quarterly to the lenders
participating in the bank credit
facility. Our bank credit facility contains certain financial covenants and
limitations on, among other things, indebtedness, liens, leases and sales of
assets. 28




---



##### Table of Contents



As of June 30, 2004, we were in compliance with all material covenants and
other requirements set forth in our bank credit facility, the indentures and
agreements related to our compression equipment lease obligations and the
indentures and agreements relating to our other long-term debt. A default under
our bank credit facility or these agreements would trigger cross-default
provisions under the agreements relating to certain of our other debt
obligations. Such defaults would have a material adverse effect on our
liquidity, financial position and operations. While there is no
assurance, we believe based on our current projections for 2004 that we will be
in compliance with the financial covenants in our bank credit facility and the
agreements related to our compression equipment lease obligations. We expect that our bank credit facility and cash flow from operations will
provide us adequate capital resources to fund our estimated level of capital
expenditures for the short term. As of June 30, 2004, we had no outstanding
borrowings and approximately $94.1 million in letters of credit outstanding
under our bank credit facility. Our bank credit facility permits us to incur
indebtedness, subject to covenant limitations described above, up to a $350
million credit limit, plus, in addition to certain other indebtedness, an
additional (a) $40 million in unsecured indebtedness, (b) $50 million of
non-recourse indebtedness of unqualified subsidiaries, and (c) $25 million of
secured purchase money indebtedness. Giving effect to our
$94.1 million in outstanding letters of credit, the liquidity
available under our bank credit facility as of June 30, 2004 was approximately $256 million. In June 2003, we filed a shelf registration statement with the SEC pursuant to
which we may from time to time publicly offer equity, debt or other securities
in an aggregate amount not to exceed $700 million. The SEC subsequently
declared the shelf registration statement effective on November 19, 2003, and
in December 2003 we issued approximately $344 million in securities under our
shelf registration statement. In June 2004, we issued an additional $200
million aggregate principal amount of 9.0% Senior Notes due 2014, which are
fully and unconditionally guaranteed on a senior subordinated basis by our
wholly owned subsidiary, HCLP. The net proceeds from this offering and
available cash were used to
repay the outstanding indebtedness and minority interest obligations of $193.6
million and $6.4 million, respectively, under our 2000A equipment lease that
was to expire in March 2005. Subject to market conditions, the shelf
registration statement will be available to offer one or more series of
additional equity, debt or other securities. In addition to purchase money and similar obligations, the indentures and the
agreements related to our compression equipment lease obligations for our 2001A
and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010
and our 9% Senior Notes due 2014 permit us to incur indebtedness up to the $350 million credit limit under our
bank credit facility, plus (a) an additional $75 million in unsecured
indebtedness and (b) 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 governing such
obligations), or our coverage ratio, is greater than 2.25
to 1.0, and no
default or event of default has occurred or would occur as a consequence of
incurring such additional indebtedness and the application of the proceeds
thereon. The indentures and agreements related to our compression equipment
lease obligations for our 2001A and 2001B sale leaseback transactions, our 8.625% Senior Notes
due 2010 and our 9% Senior Notes due 2014 define
indebtedness to include the present value of our rental obligations under sale
leaseback transactions and under facilities similar to our compression
equipment operating leases. As of June 30, 2004, Hanovers coverage ratio was
less than 2.25 to 1.0, and therefore as of such date we could not incur
indebtedness other than under our bank credit facility and up to an additional
$75 million in unsecured indebtedness and certain other permitted indebtedness,
including certain refinancing of indebtedness. 29




---



##### Table of Contents



As of June 30, 2004, our credit ratings as assigned by Moodys Investors
Service, Inc. (Moodys) and Standard & Poors Ratings Services (Standard &
Poors) were: StandardMoody's
    
    & Poor'sOutlook
    
    Stable
    
    NegativeSenior implied rating
    
    
    B1
    
    
    BB-Bank credit facility due December 2006
    
    Ba3
    
    
    4.75% convertible senior notes due 2008
    
    
    B3
    
    
    
    4.75% convertible senior notes due 2014
    
    
    B3
    
    
    
    B8.625% senior notes due 2010
    
    
    B3
    
    
    
    B9.0% senior notes due 2014
    
    
    B3
    
    
    
    B2001A equipment lease notes, interest at 8.5%, due September 2008
    
    
    B2
    
    
    
    2001B equipment lease notes, interest at 8.8%, due September 2011
    
    
    B2
    
    
    
    Zero coupon subordinated notes, interest at 11%, due March 31, 2007
    
    Caa1
    
    
    B-7.25% convertible subordinated notes due 2029*
    
    Caa1
    
    
    Senior secured
    
    
    
    
    
    
    B+Senior unsecured
    
    
    
    
    
    
    B
   *
    
    Rating is on the Mandatorily Redeemable Convertible Preferred Securities that
were issued by Hanover Compressor Capital Trust, our wholly owned subsidiary.
See discussion of the impact of FIN 46 in Managements Discussion and
Analysis of Financial Condition and Results of Operations  New Accounting
Pronouncements under Item 7 of our annual report on Form
10-K for the year ended December 31, 2003. We do not have any credit rating downgrade provisions in our debt agreements or
the agreements related to our compression equipment lease obligations that
would accelerate their maturity dates. 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. In addition, our significant leverage puts us at greater risk of
default under one or more of our existing debt agreements if we experience an
adverse change to our financial condition or results of operations. 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. We use derivative financial instruments to minimize the risks and/or costs
associated with financial and global operating activities by managing our
exposure to interest rate fluctuation on a portion of our debt and leasing
obligations. Our primary objective is to reduce our overall cost of borrowing
by managing the fixed and floating interest rate mix of our debt portfolio. We
do not use derivative financial instruments for trading or other speculative
purposes. The cash flow from hedges is classified in our consolidated
statements of cash flows under the same category as the cash flows from the
underlying assets, liabilities or anticipated transactions. For derivative instruments designated as fair value hedges, the gain or loss is
recognized in earnings in the period of change together with the gain or loss
on the hedged item attributable to the risk being hedged. For derivative
instruments designated as cash flow hedges, the effective portion of the
derivative gain or loss is included in other comprehensive income, but not
reflected in our consolidated statement of operations until the corresponding
hedged transaction is settled. The ineffective portion is reported in earnings
immediately. In March 2004, we entered into two interest rate swaps to hedge the risk of
changes in fair value of our 8.625% Senior Notes due 2010 resulting from
changes in interest rates. These interest rate swaps, under which we receive
fixed payments and make floating payments, result in the conversion of the
hedged obligation into floating rate debt. The following table summarizes, by
individual hedge instrument, these interest rate swaps as of June 30, 2004: 30




---



##### Table of Contents



Fair Value ofFixed Rate to be
    
    
    
    Swap atFloating Rate to be Paid
    
    Maturity Date
    
    Received
    
    Notional Amount
    
    June 30, 2004Six
Month LIBOR +4.72%
Six Month LIBOR +4.64%
    
    December 15, 2010
December 15, 2010
    
    8.625%
8.625%
    
    $100,000,000
$100,000,000
    
    $(6,525)
$(5,363)
 As of June 30, 2004, a total of approximately $1.4 million in other current
assets, $13.3 million in long term liabilities and a $11.9 million reduction of
long-term debt was recorded with respect to the fair value adjustment related
to these two swaps. During 2001, we entered into three additional interest rate swaps to convert
variable lease payments under certain lease arrangements to fixed payments as
follows: Fair Value ofSwap atLease
    
    Maturity Date
    
    Fixed Rate to be Paid
    
    Notional Amount
    
    June 30, 2004March 2000
    
    March 11, 2005
    
    
    5.2550
    %
    
    $
    100,000,000
    
    
    $
    (2,242
    )August 2000
    
    March 11, 2005
    
    
    5.2725
    %
    
    $
    100,000,000
    
    
    $
    (2,264
    )October 2000
    
    October 26, 2005
    
    
    5.3975
    %
    
    $
    100,000,000
    
    
    $
    (3,701
    )
 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 six months ended June 30,
2004 and 2003, we recorded income of approximately $6.3 million and $1.1
million, respectively, related to these three swaps ($6.3 million and $0.7
million, respectively, net of tax) in other comprehensive income. As of June 30, 2004, a total
of approximately $7.6 million was recorded in current liabilities and
approximately $0.6 million in long-term liabilities with respect to the fair
value adjustment related to these three swaps. On June 1, 2004, we repaid the outstanding indebtedness and minority interest
obligations of $193.6 million and $6.4 million, respectively, under our 2000A
equipment lease. As a result, the two interest rate swaps maturing on March
11, 2005, each having a notional amount of $100 million, associated with the
2000A equipment lease no longer meet specific hedge criteria and the unrealized
gains of $5.3 million related to the mark-to-market adjustment prior to June 1, 2004 will be amortized into interest expense over the remaining life of the
swap. In addition, beginning June 1, 2004, changes in the mark-to-market
adjustment will be recognized as interest expense in the statement of
operations. Prior to 2001, we entered into two interest rate swaps with notional amounts of
$75 million and $125 million and strike rates of 5.51% and 5.56%, respectively.
The difference paid or received on the swap transactions was recorded as an
accrued liability and recognized in leasing expense in all periods before July
1, 2003, and in interest expense until their expiration in
July 2003. Because management decided not to
designate the interest rate swaps as hedges, we recognized unrealized gains of
approximately $4.1 million related to the change in the fair value of these
interest rate swaps in lease expense in our statement of operations during the
six months ended June 30, 2003. The counterparties to the interest rate swap agreements are major international
financial institutions. We 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. We have significant operations that expose us to currency risk in Argentina and
Venezuela. To mitigate that risk, the majority of our existing contracts
provide that we receive payment in or based on U.S. dollars rather than
Argentine pesos and Venezuelan bolivars, thus reducing our exposure to
fluctuations in the value of these currencies relative to the U.S.
dollar. In February 2003, the Venezuelan government fixed the exchange rate to 1,600
bolivars for each U.S. dollar. In February 2004, the government devalued the
currency by approximately 17%. The impact of any further devaluation on our
results will depend upon the amount of our net assets or liabilities exposed to
currency fluctuation in Venezuela in future periods. For the six months ended June 30, 2004, our Argentine operations represented
approximately 6% of our revenue and 9% of our gross profit. For the six months
ended June 30, 2004, our Venezuelan operations represented approximately 12% of
our revenue and 21% of our gross profit. At June 30, 2004, we had approximately
$16.1 million and $26.0 million in accounts receivable related to our Argentine
and Venezuelan operations, respectively. The following table summarizes the exchange gains (losses) we recorded for
assets exposed to currency translation (in thousands): 31




---



##### Table of Contents



Six Months EndedJune 30,2004
    
    2003Canada
    
    $
    (61
    )
    
    $
    129Argentina
    
    
    (448
    )
    
    
    2,084Venezuela
    
    
    1,433
    
    
    
    (1,396
    )All other countries
    
    
    (49
    )
    
    
    (617
    )Exchange gain
    
    $
    875
    
    
    $
    200
 In December 2002, opponents of Venezuelan President Hugo Chávez initiated a
country-wide strike by workers of the national oil company in Venezuela. This
strike, a two-month walkout, had a significant negative impact on Venezuelas
economy and temporarily shut down a substantial portion of Venezuelas oil
industry. As a result of the strike, Venezuelas oil production dropped
substantially. In addition, exchange controls have been put in place that put
limitations on the amount of Venezuelan currency that can be exchanged for
foreign currency by businesses operating inside Venezuela. In May 2003, after
six months of negotiation, the Organization of the American States brokered an
agreement between the Venezuelan government and its opponents. Although the
accord does offer the prospect of stabilizing Venezuelas economy, if another
national strike is staged, exchange controls remain in place, or economic and
political conditions in Venezuela continue to deteriorate, our results of
operations in Venezuela could be materially and adversely affected, which could
result in reductions in our net income. As a result of the disruption of our
operations in Venezuela, during the fourth quarter of 2002, our international
rental revenues decreased by approximately $2.7 million. In the six months
ended June 30, 2003, we recognized approximately $2.3 million of billings to
Venezuelan customers that were not recognized in 2002 due to concerns about the
ultimate receipt of those revenues. In addition, in August 2004 a recall referendum
is expected to be held to call for early presidential elections.
Depending on the results of the referendum, our results of operations in Venezuela could be further materially
and adversely affected. The economic situation in Argentina and Venezuela is subject to change. To the
extent that the situation deteriorates, exchange controls continue in place and
the value of the peso and bolivar against the dollar is reduced further, our
results of operations in Argentina and Venezuela could be materially and
adversely affected which could result in reductions in our net income. We are involved in a project to build 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 an affiliate of The Royal/ Dutch
Shell Group (Shell) and Global Energy and Refining Ltd. (Global), a
Nigerian company. We have completed the building of the required barge-mounted
facilities. Under the terms of a series of contracts between Global and us,
Shell, and several other counterparties, respectively, Global is responsible
for the development of the overall project, which will require significant
financing. Global has orally informed us that it has completed a financing
transaction, although it is not clear to us whether the funds raised by Global
will be sufficient to perform its obligations under these contracts. In light
of the political environment in Nigeria, Globals lack of a successful track
record with respect to this project and other factors, there is no assurance
that Global will be able to comply with its obligations under these contracts.
In May 2004, we reached an agreement with Global whereby Global prepaid to us
$5.0 million in equipment rental fees, that we recorded in other liabilities on
our condensed consolidated balance sheet, in return for our agreement to waive
certain defaults by Global with respect to some of our agreements with them. If Shell were to terminate its contract with Global for any reason or we were
to terminate our involvement in the project, we would be required to find an
alternative use for the barge-mounted facility which could result in a
write-down of our investment. At June 30, 2004, we had an investment of
approximately $30.4 million associated with the barge-mounted facility and
approximately $4.1 million associated with advances to, and our investment in,
Global. NEW ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150).
SFAS 150 changes the accounting for certain financial instruments that, under 32




---



##### Table of Contents



previous guidance, issuers could account for as equity. SFAS 150 requires that
those instruments be classified as liabilities in statements of financial
position. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for interim periods
beginning after June 15, 2004. On November 7, 2003 the FASB issued Staff
Position 150-3 that delayed the effective date for certain types of financial
instruments. We do not believe the adoption of the guidance currently provided
in SFAS 150 will have a material effect on our consolidated results of
operations or cash flow. However, we may be required to classify as debt
approximately $22.2 million in sale leaseback obligations that are currently
reported as Minority interest on our condensed consolidated balance sheet
pursuant to FIN 46. These minority interest obligations represent the equity of the entities that
lease compression equipment to us. In accordance with the provisions of our
compression equipment lease obligations, the equity certificate holders are
entitled to quarterly or semi-annual yield payments on the aggregate
outstanding equity certificates. As of June 30, 2004, the yield rates on the
outstanding equity certificates ranged from 4.4% to 9.5%. Equity certificate
holders may receive a return of capital payment upon termination of the lease
or our purchase of the leased compression equipment after full payment of all
debt obligations of the entities that lease compression equipment to us. At
June 30, 2004, the carrying value of the minority interest obligations
approximated the fair market value of assets that would be required to be
transferred to redeem the minority interest obligations. In April 2004, the Emerging Issues Task Force reached a consensus on Issue No.
03-06, Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earning per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The adoption of EITF 03-06 had no effect on
our net income (loss) per share. 33




---



##### Table of Contents



ITEM 3. 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 our exposure
to fluctuations in interest rates. At June 30, 2004, the fair market value of
our interest rate swaps, excluding the portion attributable to and included in
accrued interest, was a liability of approximately $20.1 million. At June 30, 2004 we were
a party to three interest rate swaps to convert variable
lease payments under certain lease arrangements to fixed payments as follows
(dollars in thousands): Fair Value of theCompany Pays
    
    
    
    
    
    Swap atMaturity Date
    
    Fixed Rate
    
    Notional Amount
    
    June 30, 20043/11/2005
    
    
    5.2550
    %
    
    $
    100,000
    
    
    $
    (2,242
    )3/11/2005
    
    
    5.2725
    %
    
    $
    100,000
    
    
    $
    (2,264
    )10/26/2005
    
    
    5.3975
    %
    
    $
    100,000
    
    
    $
    (3,701
    )
 At June 30, 2004 we were
a party to two interest rate swaps to convert fixed rate
debt to floating rate debt as follows (dollars in thousands): Fair Value of theCompany Pays
    
    
    
    
    
    Swap atMaturity Date
    
    Fixed Rate
    
    Notional Amount
    
    June 30, 200412/15/2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (6,525
    )12/15/2010
    
    
    8.625
    %
    
    $
    100,000
    
    
    $
    (5,363
    )
 At June 30, 2004, due to
these two swaps, we were exposed to variable interest
rates, which fluctuate with market interest rates, on $200 million in notional
debt. Assuming a hypothetical 10% increase in the variable rates from those in
effect at June 30, 2004, the increase in our annual interest
expense with respect to such swaps would be
approximately $1.5 million. At June 30, 2004, we were exposed to variable rental rates, which fluctuate
with market interest rates, on a portion of the equipment leases we entered
into in 2001 and 2000. Assuming a hypothetical 10% increase in the variable
rates from those in effect at June 30, 2004, the increase in annual interest
expense on the equipment lease notes would be approximately $0.5 million. We are also exposed to interest rate risk on borrowings under our bank credit
facility under which interest may be accrued on advances at a floating interest
rate. At June 30, 2004, there were no outstanding borrowings
under our bank
credit facility. We have significant operations that expose us to currency risk in Argentina and
Venezuela. To mitigate that risk, the majority of our existing contracts
provide that we receive payment in or based on U.S. dollars rather than
Argentine pesos and Venezuelan bolivars, thus reducing our exposure to
fluctuations in the value of those currencies relative to the U.S. dollar. In
February 2003, the Venezuelan government fixed the exchange rate to 1,600
bolivars for each U.S. dollar. In February 2004, the government devalued the
currency by approximately 17%. The impact of any further devaluation on our
results will depend upon the amount of our net assets or liabilities exposed to
currency fluctuation in Venezuela in future periods. For the six months ended June 30, 2004, our Argentine operations represented
approximately 6% of our revenue and 9% of our gross profit. For the six months
ended June 30, 2004, our Venezuelan operations represented approximately 12% of
our revenue and 21% of our gross profit. At June 30, 2004, we had approximately
$16.1 million and $26.0 million in accounts receivable
related to our Argentine and Venezuelan operations, respectively. 34




---



##### Table of Contents



The following table summarizes the exchange gains (losses) we recorded for
assets exposed to currency translation (in thousands): Six Months EndedJune 30,2004
    
    2003Canada
    
    $
    (61
    )
    
    $
    129Argentina
    
    
    (448
    )
    
    
    2,084Venezuela
    
    
    1,433
    
    
    
    (1,396
    )All other countries
    
    
    (49
    )
    
    
    (617
    )Exchange gain
    
    $
    875
    
    
    $
    200
 The economic situation in Argentina and Venezuela is subject to change. To the
extent that the situation deteriorates, exchange controls continue in place and
the value of the peso and bolivar against the dollar is reduced further, our
results of operations in Argentina and Venezuela could be materially and
adversely affected which could result in reductions in our net income. 
 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures.Hanovers principal
executive officer and principal financial officer evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934) as of June 30, 2004. Based on the
evaluation, our principal executive officer and principal financial officer
believe that our disclosure controls and procedures were effective to ensure
that material information was accumulated and communicated to our management,
including our 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 President and
Chief Executive Officer and Senior Vice President and Chief Financial Officer,
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: information
systems (including controls over access to the systems and segregation of
duties); human resources; internal audit; tax accounting; planning and
analysis; reconciliation of accounts; approval of 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 of our integration and internal audit functions. This review
is ongoing, and the review to date constitutes the evaluation required by Rule
13a-15(d) of the Securities Exchange Act of 1934. 35




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On June 25, 1999, we notified the Air Quality Bureau of the Environmental
Protection Division, New Mexico Environmental Department (the Division), of
potential violations of State regulatory and permitting requirements. The
potential violations included failure to conduct required performance tests,
failure to file required notices and failure to pay annual filing fees for
compressor units located on sites for more than one year. We promptly paid the
required fees and filed the required notices, correcting the potential
violations. On June 12, 2001, after the potential violations had been
corrected, the Director of the Division issued a compliance order to us in
connection with the potential violations. The compliance order assessed a civil
penalty of $15,000 per day per alleged regulatory violation and permit; no
total penalty amount was proposed in the compliance order. On October 3, 2003,
the Division notified us that the total proposed penalty would be $759,072.
However, since the alleged violations had been self-disclosed, the amount was
reduced to $189,768. We subsequently responded to the penalty assessment,
challenging the basis of the Divisions penalty calculation. As a result of our
challenge, the Division agreed to a Stipulated Motion for Time to File Answer
and further agreed to meet with us and negotiate a final settlement. On April
8, 2004, Hanover met with Division officials in Santa Fe and agreed to a final
settlement of all alleged violations. In June 2004, we paid a penalty of
$105,464 in final resolution of this matter. On June 30, 2004, the Texas Commission on Environmental Quality (TCEQ) informed
the Company that it was pursuing an enforcement action against the Companys
subsidiary HCLP for alleged violations of the Texas Health and Safety Code and
Commission Rules at the Redwood Hanover Gateway Plant (RHG Plant) in Madison
County, Texas. The alleged violations include failure to comply with certain
permit limitations relating to sulfur emissions during certain periods in 2003
and 2004 and failure to provide certain required notifications in connection
therewith. TCEQ has proposed a settlement of $149,625 in respect of the alleged
violations in the form of a proposed Agreed Order dated June 29, 2004. The
Company has requested a meeting with the TCEQ to discuss the allegations and to
challenge certain assumptions made by the TCEQ. A date for the meeting is
pending further communication with TCEQ. In the ordinary course of business we are 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 our consolidated financial position, results of operations or cash
flows. 36




---



##### Table of Contents



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At its Annual Meeting of Stockholders held on May 20, 2004, the Company
presented the following matters to the stockholders for action and the votes
cast are indicated below: 1. Election of Nine Directors Term Ending 2005
    
    For
    
    WithheldI. Jon Brumley
    
    
    60,078,343
    
    
    
    2,997,441Ted Collins, Jr.
    
    
    57,863,728
    
    
    
    5,212,056Chad C. Deaton
    
    
    61,374,978
    
    
    
    1,700,806Margaret K. Dorman
    
    
    61,362,955
    
    
    
    1,712,829Robert R. Furgason
    
    
    58,255,536
    
    
    
    4,820,248Victor E. Grijalva
    
    
    61,335,599
    
    
    
    1,740,185Gordon T. Hall
    
    
    60,080,336
    
    
    
    2,995,448Stephen M. Pazuk
    
    
    61,368,993
    
    
    
    1,706,791Alvin V. Shoemaker
    
    
    56,673,146
    
    
    
    6,402,638
 2. Ratification of the Appointment of PricewaterhouseCoopers LLP as
Independent Public Accountants For
    
    Against
    
    Abstaining61,320,590
    
    
    1,704,556
    
    
    
    50,639
 
 ITEM 5. OTHER INFORMATION None. 37




---



##### Table of Contents



ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits  4.1
    
    Senior Indenture, dated as of December 15, 2003, between Hanover
Compressor Company and Wachovia Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registration Statement of
Hanover Compressor Company and Hanover Compression Limited Partnership on
Form 8-A under the Securities Act of 1934, as filed on December 15, 2003).4.2
    
    Third Supplemental Indenture to Senior Indenture, dated as of June 1,
2004, among Hanover Compressor Company, Hanover Compression Limited
Partnership and Wachovia Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Registration Statement of
Hanover Compressor Company and Hanover Compression Limited Partnership on
Form 8-A under the Securities Act of 1934, as filed on June 2, 2004).4.3
    
    Form of Global Note representing $200,000,000 aggregate principal amount
of 9% Senior Notes due 2014 (included in Exhibit 4.2 as Exhibit A
thereto).10.1
    
    Employment Letter with Gary M. Wilson dated April 9, 2004 (1)31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)  (1) Filed herewith.  (b) Reports submitted on Form 8-K:  1.
    
    On April 29, 2004, we filed a current report on Form 8-K, furnishing
under Item 12 a press release announcing our financial results for the
quarter ended March 31, 2004. The date of such report (the date of the
earliest event reported) was April 29, 2004.2.
    
    On June 2, 2004, we filed a current report on Form 8-K, reporting
under Item 5 that we entered into an underwriting agreement with J.P.
Morgan Securities Inc., as representative of the several underwriters,
and Citigroup Global Markets Inc., as independent underwriter, in
connection with the issuance and sale of $200,000,000 aggregate
principal amount of our 9% Senior Notes due 2014. In addition, we
filed the underwriting agreement, senior indenture, supplement
indenture, forms of note, and opinion of Vinson & Elkins L.L.P. under
Item 7. The date of such report (the date of the earliest event
reported) was May 25, 2004. 38




---



##### Table of Contents



SIGNATURES Pursuant to the requirements 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 Date:
    
    August 9, 2004By:
    
    /s/ CHAD C. DEATONChad C. DeatonPresident and Chief Executive OfficerDate:
    
    August 9, 2004By:
    
    /s/ JOHN E. JACKSONJohn E. JacksonSenior Vice President and Chief Financial Officer
 39




---



##### Table of Contents



EXHIBIT INDEX  4.1
    
    Senior Indenture, dated as of December 15, 2003, between Hanover
Compressor Company and Wachovia Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registration Statement of
Hanover Compressor Company and Hanover Compression Limited Partnership on
Form 8-A under the Securities Act of 1934, as filed on December 15, 2003).4.2
    
    Third Supplemental Indenture to Senior Indenture, dated as of June 1,
2004, among Hanover Compressor Company, Hanover Compression Limited
Partnership and Wachovia Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Registration Statement of
Hanover Compressor Company and Hanover Compression Limited Partnership on
Form 8-A under the Securities Act of 1934, as filed on June 2, 2004).4.3
    
    Form of Global Note representing $200,000,000 aggregate principal amount
of 9% Senior Notes due 2014 (included in Exhibit 4.2 as Exhibit A
thereto).10.1
    
    Employment Letter with Gary M. Wilson dated April 9, 2004 (1)31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (2)  (1)
    
    Filed herewith.(2)
    
    Furnished herewith. 40