-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JclNh6Pk9cmdSH3GCAv87/h8aqPKSrF4DQxGDCHiY97QV1cV1sLRV5PONZlAmZ/s AynOVZyc4rHdRTd9zNq+cg== 0000094328-97-000007.txt : 19970430 0000094328-97-000007.hdr.sgml : 19970430 ACCESSION NUMBER: 0000094328-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART & STEVENSON SERVICES INC CENTRAL INDEX KEY: 0000094328 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 741051605 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11443 FILM NUMBER: 97589782 BUSINESS ADDRESS: STREET 1: 2707 N LOOP W CITY: HOUSTON STATE: TX ZIP: 77008 BUSINESS PHONE: 7138687700 MAIL ADDRESS: STREET 1: P O BOX 1637 CITY: HOUSTON STATE: TX ZIP: 77251-1637 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 31, 1997 ("Fiscal 1996") or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ Commission file number 0-8493 STEWART & STEVENSON SERVICES, INC. (Exact name of registrant as specified in its charter) Texas 74-1051605 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2707 North Loop West, Houston, Texas 77008 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 868-7700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Without Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting securities held by nonaffiliates as of February 28, 1997: $738,624,314 Number of shares outstanding of each of the issuer's classes of common stock, as of February 28, 1997: Common Stock, Without Par Value 33,120,460 Shares DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K - -------- ----------------- Proxy Statement for the 1997 Annual Meeting of Shareholders Part III PART I Item 1. Business. Stewart & Stevenson Services, Inc. (together with its wholly-owned subsidiaries, the "Company" or "Stewart & Stevenson") was founded in Houston, Texas in 1902 and was incorporated under the laws of the State of Texas in 1947. Since its beginning, the Company has been primarily engaged in custom fabrication enterprises. Stewart & Stevenson consists of three business segments: the Engineered Power Systems segment, the Distribution segment and the Tactical Vehicle Systems segment. The Engineered Power Systems segment designs, engineers, services and markets engine-driven equipment principally utilizing diesel or gas turbine engines supplied by independent manufacturers. In addition, this segment offers operation and maintenance contracts for large gas turbine projects and petroleum production facilities. The Company's products include gas turbine generator sets for primary electrical power and diesel generator sets for primary, emergency or stand-by electrical power sources. Stewart & Stevenson is a leading packager of aeroderivative gas turbine engines for electrical power generation. A majority of the gas turbine engines used by the Company are manufactured by General Electric Corporation. The Company's engineered power systems and operations and maintenance services are marketed worldwide, particularly in developing countries where there has been growth in demand for electrical power. Stewart & Stevenson also participates in the development of molten carbonate fuel cells and hybrid photo-voltaic/recip systems. The Distribution segment markets industrial equipment and related parts manufactured by others and provides in-shop and on-site repair services for such products. This segment began operations in 1938 and currently markets Detroit Diesel engines, General Motors Electro-Motive diesel engines, Allison automatic transmissions, Waukesha natural gas engines, Deutz diesel engines, Hyster material handling equipment, Thermo King transport refrigeration units and John Deere construction, utility and forestry equipment. The Distribution segment markets primarily in the Southern and Western United States, as well as in Mexico, Venezuela and Central America. The Tactical Vehicle Systems segment has received contracts with the United States Department of Defense to manufacture the U.S. Army's next generation of medium tactical vehicles (the "Family of Medium Tactical Vehicles" or "FMTV"). The FMTV contracts call for the production of approximately 11,000 newly-designed 2 1/2-ton and 5-ton trucks in several configurations, including troop carriers, wreckers, cargo trucks, vans and dump trucks. All variants of the FMTV incorporate a high level of common parts. Manufacturing of the FMTV is being performed by the Company's Tactical Vehicle Systems segment at a facility located near Houston, Texas. The Company is also offering the FMTV for sale to other branches of the U.S. Armed Forces and to the armed forces of foreign countries. The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, "Fiscal 1996" commenced on February 1, 1996 and ended on January 31, 1997. Identifiable assets at the close of Fiscal 1996, 1995 and 1994 and net sales, operating profit and export sales for such fiscal years for the Company's business segments and sales to customers which exceed 10% of consolidated sales are presented under "Industry Segment Data" in the Notes to the Consolidated Financial Statements in Item 8 Part II. ENGINEERED POWER SYSTEMS SEGMENT Stewart & Stevenson designs, engineers and markets engine-driven equipment of various descriptions utilizing diesel or gas turbine engines manufactured by independent suppliers and provides operation and maintenance services for power generation and petroleum facilities. As a custom packager of engine-driven equipment, the Company designs its products to meet the specific needs of its customers in a variety of applications. Both equipment and services are sold under the "Stewart & Stevenson" name throughout the world. Operations of the Engineered Power Systems segment accounted for approximately 40.2%, 50.9% and 56.5%, respectively, of consolidated sales during Fiscal 1996, 1995 and 1994. Gas Turbine Driven Equipment. The Company packages gas turbine products based on turbine engines purchased from General Electric Corporation ("GE"), European Gas Turbines ("EGT") and the Garrett Corporation ("Garrett"). The table below lists the simple cycle capacity of generator sets based on each model of gas turbine engine regularly packaged by the Company. Generator Set Capacity Engine Model in Megawatts GE LM6000 . . . . . . . . . . . . . . 40.30 Mw GE LM2500+. . . . . . . . . . . . . . 27.60 Mw GE LM2500 STIG. . . . . . . . . . . . 26.50 Mw GE LM2500 . . . . . . . . . . . . . . 22.20 Mw GE LM1600 . . . . . . . . . . . . . . 13.40 Mw EGT TEMPEST . . . . . . . . . . . . . 7.49 Mw EGT TORNADO . . . . . . . . . . . . . 6.25 Mw EGT TYPHOON . . . . . . . . . . . . . 4.91 Mw Gas turbine generator sets have a lower capital cost, higher efficiency and shorter lead times and are more environmentally acceptable than many alternative technologies. In addition, gas turbine generator sets may be used for the simultaneous production of electrical power and useful thermal energy ("cogeneration"). The gas turbine generator sets packaged by the Company in the 20 Mw to 42 Mw size incorporate GE gas turbine engines and are marketed primarily to independent power producers for prime power and cogeneration applications and to electrical utilities for base load capacity or additional capacity during peak demand periods. Generators in the 5 Mw to 20 Mw range are marketed to hospitals, hotels, office complexes and industrial facilities, both for prime power and cogeneration applications. Stewart & Stevenson's package design and full-load testing prior to shipment permit the complete installation and start-up of the Company's gas turbine generators in as little as 30 days after shipment and decrease both the time and expense required to build a complete electrical generation facility. The Company assembles turbine-driven mechanical drive packages, including gas compressor sets, powered by GE and EGT gas turbine engines. The table below lists the output of each model of gas turbine engine offered by the Company for mechanical drive applications. Output in Engine Model Shaft Horsepower GE LM6000. . . . . . . . . . . . . . 55,545 Shp GE LM2500+ . . . . . . . . . . . . . 37,000 Shp GE LM2500. . . . . . . . . . . . . . 31,235 Shp GE LM1600+ . . . . . . . . . . . . . 18,745 Shp EGT TORNADO. . . . . . . . . . . . . 8,900 Shp EGT TYPHOON. . . . . . . . . . . . . 6,500 Shp Like the Company's turbine-driven generator sets, gas compression packages are designed to be easily and quickly installed at the customer's location and can be full-load tested at the Company's facility before shipment. Gas compressor sets are marketed to gas production and pipeline operators for both offshore and onshore installation. Stewart & Stevenson offers the turnkey design, procurement and construction of power generation and compression facilities that incorporate turbine-driven generators, turbine-driven compressors and other equipment packaged by the Company. The balance of the equipment required for a complete facility and the installation and construction services are subcontracted by the Company and performed under the Company's supervision. Stewart & Stevenson believes that the international market provides significant sale and lease opportunities for the Company's gas turbine products and construction services. The market for electrical power in developing countries is growing, and the Company's gas turbine generator sets are well suited for the requirements of developing countries; providing quick delivery, low initial capital costs and ease of installation in areas without significant existing electrical power infrastructure. A majority of the Company's gas turbine sales are derived from packaging gas turbine engines manufactured by GE and EGT. The Company believes that its relationship with GE and EGT is good and will continue. Any interruption of these relationships, however, would adversely affect the Company. Sales of gas turbine products accounted for approximately 16.7%, 30.5% and 40.1%, respectively, of consolidated sales in Fiscal 1996, 1995 and 1994. Gas Turbine Product Support Services. Stewart & Stevenson enters into operation and maintenance contracts under which the Company provides all labor, supervision and expertise necessary to operate, maintain and repair power generation, gas compression and petroleum production, processing and transportation facilities. Operation and maintenance contracts may have a term of up to 10 years and provide for a fixed fee out of which the Company must pay all costs incurred under the contract or for the payment of a fixed fee plus reimbursement of the costs incurred by the Company. The Company has provided operation and maintenance services for power generation facilities since 1986. Operation and maintenance services are provided on a worldwide basis. In addition, Stewart & Stevenson offers parts and repair services for turbine-driven equipment and is authorized to perform complete overhaul services on certain GE and EGT gas turbine engines. Another turbine product manufactured by the Company is an exhaust flow enhancement device that is manufactured under license from Norlock Technologies, Inc. This new product improves power output and fuel efficiency and reduces exhaust gas turbulence. Sales of Gas Turbine Product Support Services accounted for approximately 14.2%, 12.6% and 7.6%, respectively, of consolidated sales in Fiscal 1996, 1995 and 1994. Other Power Systems. Stewart & Stevenson is a leading manufacturer of coil tubing units, well stimulation equipment and other diesel equipment for the oilfield service industries. Most of the Company's well stimulation equipment is manufactured according to the Company's proprietary designs and incorporates advanced microprocessor-based systems to automatically control the pressures, density and other characteristics of the high pressure fluids used to fracture oil-bearing formations. Other oilfield equipment includes blowout preventors and high pressure valves for the drilling and workover industry. Stewart & Stevenson also manufactures a complete line of aircraft ground support equipment, including gate tractors, air-start units, ground power equipment and air conditioning systems. Sales of other power systems and services accounted for approximately 9.2%, 7.8% and 8.8%, respectively, of consolidated sales in Fiscal 1996, 1995 and 1994. DISTRIBUTION SEGMENT Distribution Operations. Stewart & Stevenson markets various industrial equipment, components, replacement parts, accessories and other material supplied by independent manufacturers and provides in-shop and on-site repair services for diesel-driven equipment. The following table contains the name of each manufacturer with whom the Company presently maintains a distribution contract, a description of the products and territories covered thereby and the expiration date thereof.
Expiration Manufacturer Products Territories Date Detroit Diesel Corporation Heavy Duty High Speed Texas, Colorado, New 1998 ("Detroit Diesel") Diesel Engines Mexico, Wyoming, Nebraska, Louisiana, Mississippi, Alabama and Venezuela Electro-Motive Division of Heavy Duty Medium Speed Texas, Colorado, New 1998 General Motors Corporation Diesel Engines Mexico, Nebraska, ("EMD") Oklahoma, Arkansas, Louisiana, Tennessee, Mississippi, Alabama, Mexico, Central America and most of South America Allison Transmission On- and Off-Highway Texas, Colorado, New 1997 Division of General Motors Automatic Transmissions, Mexico, Wyoming, Nebraska, Corporation ("Allison") Power Shift Transmissions Louisiana, Mississippi, and Torque Converters Alabama and Venezuela Hyster Company Material Handling Equipment Texas * John Deere Industrial Construction, Utility and Southeast Texas and Wyoming * Equipment Company Forestry Equipment Thermo King Corporation Transport Refrigeration Southeast Texas and 1999 Equipment Southern Louisiana Waukesha Engine Division of Natural Gas Industrial Colorado, Montana, North 1997 Dresser Industries, Inc. Engines Dakota, Oklahoma, Wyoming, New Mexico, Utah, Oregon, Hawaii, Kansas, Arizona, California, Washington and Nevada KHD - Deutz Corporation Diesel Engines Colorado, Wyoming, 1997 Arizona, New Mexico, Washington and Alaska - ------------------------
*No expiration date. Agreements may be terminated by written notice of termination. Distribution agreements generally require the Company to purchase and stock the products and repair parts covered thereby for resale to end users, original equipment manufacturers or independent dealers within the franchise area of distribution. Such agreements also require the Company to provide after-sale service within its designated territory and may contain provisions prohibiting the sale of competitive products within the franchise territory. Distribution operations are conducted at branch facilities located in major cities within the Company's franchised area of distribution. New products are marketed primarily under the trademarks and the trade names of the original manufacturer. The Company's principal distribution agreements are subject to early termination by the suppliers for a variety of causes, including a change in control or a change in the principal management of the Company. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. Manufacturing Operations. The Distribution segment also manufactures and sells generator sets and mechanical drive packages using reciprocating engines fueled with diesel, natural gas, or both. Generator sets range in size from 20 kw to 12,700 kw and are based on engines supplied by companies with whom the Distribution segment has a distributor or packaging agreement. The Company undertakes the selection of the appropriate engine and generator based on the intended application and fabricates the completed package according to a design developed specifically to fit the needs of the customer. Reciprocating engine-driven generator sets are marketed by the Company as both standby power sources for emergency use and as prime power sources to supply electricity at remote locations. In addition to reciprocating engine-driven power systems, the Distribution segment manufactures and sells snow removal equipment and wheel chair lifts. Some products manufactured by the Distribution segment are based upon proprietary designs owned by the Company and others are based upon designs owned by others and licensed to the Company. Operations of the Distribution segment accounted for approximately 42.8%, 33.7% and 30.4%, respectively, of consolidated sales during Fiscal 1996, 1995 and 1994. The Distribution segment's marketing units regularly sell certain products manufactured by the Engineered Power Systems segment and also sell to military and airline users. In both cases, such sales are included in the Distribution segment. TACTICAL VEHICLE SYSTEMS SEGMENT In October 1991, the United States Department of Defense selected Stewart & Stevenson to manufacture the next generation of medium tactical vehicles (the "Family of Medium Tactical Vehicles" or "FMTV") for the U.S. Army and awarded the Company contracts for the production of 2 1/2-ton and 5-ton trucks, spare parts and logistical support. The Family of Medium Tactical Vehicles is the U.S. Army's next generation of basic transportation vehicle for personnel and materials. As such, the FMTV is produced in several variants to carry troops and cargo, including cargo beds, vans, troop carriers, wreckers, dump trucks and tractors. In addition, several of the vehicles are specially configured for airdrop operation. Although more than ten configurations of the FMTV are being produced, a high degree of common components is incorporated in the Stewart & Stevenson design. The Company also sells the FMTV to other government contractors as a platform for installation of weapons systems and other equipment which is then resold to the Armed Forces. Stewart & Stevenson believes that there will be opportunities to sell additional vehicles to the U.S. Army, to other branches of the U.S. Armed Forces and to the armed forces of foreign countries. The FMTV contracts allow for such sales, and the Company's facility has the capacity to produce vehicles for those additional sales. Operations of the Tactical Vehicle Systems segment accounted for approximately 16.9%, 15.3%, and 13.0%, respectively, of consolidated sales in Fiscal 1996, 1995 and 1994. COMPETITION The Company encounters strong competition in all segments of its business. Competition involves pricing, quality, availability, the range of products and services and other factors. Some of the Company's competitors have greater financial resources than Stewart & Stevenson. The Company believes that its reputation for quality engineering and after-sales service, and single-source responsibility, are important to its market position. The Engineered Power Systems segment competes with various entities, including certain suppliers of major components, for the sale of its products. Manufacturers of gas turbine generator sets in the 20-42 Mw size include General Electric Corporation, Ruston Gas Turbines Ltd., Seimens, Westinghouse and ABB Energy Services, Inc., a subsidiary of Asea Brown Boveri. Competition in the market for the other products manufactured, and services provided, by the Engineered Power Systems segment is highly diversified with no single competitor participating in all of the markets of the Company. The Distribution segment competes with distributors for other manufacturers in the sale of original equipment, with the manufacturers and distributors of non-original equipment parts for the sale of spare parts and with independent repair shops for in-shop and on-site repair services. The Tactical Vehicle Systems segment competes with domestic companies for incremental sales to the U.S. Armed Forces. Both domestic and foreign suppliers compete for the sale of vehicles to foreign governments. The Company's foreign competitors include Daimler-Benz, Steyr, and other vehicle manufacturers that have greater international recognition as vehicle manufacturers. INTERNATIONAL OPERATIONS International sales are subject to the risks of international political and economic changes, such as changes in foreign governmental policies, currency exchange rates and inflation. Generally, the Company accepts payments only in United States Dollars and makes most sales to customers outside the United States against letters of credit drawn on established international banks, thereby limiting the Company's exposure to the effects of exchange rate fluctuations and customer credit risks. In the limited circumstances in which the Company has entered into contracts in foreign currencies, it has hedged its exposure to fluctuations in such currencies. The profit margin on export sales is not materially different from that on domestic sales of the same or similar products with the same or similar delivery requirements. The performance of operation and maintenance contracts in some countries could be disrupted by political unrest, terrorist activity or government action. The Company believes that any such disruption would be temporary. UNFILLED ORDERS Stewart & Stevenson's unfilled orders consist of written purchase orders, letters of intent and oral commitments. These unfilled orders are generally subject to cancellation or modification due to customer relationships or other conditions. Purchase options are not included in unfilled orders until exercised. Unfilled orders at the close of Fiscal 1996 and Fiscal 1995 were as follows:
Estimated percentage to be recognized in Fiscal Fiscal Fiscal 1997 1996 1995 ----------- ---- ---- (Dollars in millions) Engineered Power Systems Equipment 70% $324.0 $208.9 Operations and Maintenance 27% 296.7 321.8 ----------------- ------------------ 620.7 530.7 Distribution 100% 92.2 50.9 Tactical Vehicle Systems 51% 817.3 862.7 ----------------- ------------------ Total 53% $1,530.2 $1,444.3 ================= ==================
Although no assurance can be given, the Company expects sales of the Engineered Power Systems segment to continue to be weighted in favor of turbine-driven equipment based on the number of unfilled orders for these units, the number of proposals that are presently outstanding and the current worldwide need for additional electrical generating and gas compression capacity. Unfilled orders of the Tactical Vehicle Systems segment consists principally of the contracts awarded in October 1991 by the United States Department of the Army to manufacture medium tactical vehicles, and options under the FMTV contract that have been exercised by the U.S. Army to purchase additional vehicles. EMPLOYEES At March 1, 1997, the Company employed approximately 4,879 persons. The Company considers its employee relations to be satisfactory. Item 2. Properties. The Company maintains its corporate and executive offices at 2707 North Loop West, Houston, Texas. The corporate office, which includes the executive offices, the national sales offices for the Engineered Power Systems segment and administrative offices for the Distribution segment, occupies about 133,000 square feet of space leased from a limited partnership in which the Company owns an 80% limited partnership interest. Stewart & Stevenson's Engineered Power Systems segment is headquartered in Houston, where the Company owns approximately 919,000 square feet and leases approximately 41,000 square feet of space at seven locations devoted to manufacturing, warehousing and administration. The Company leases gas turbine operations and maintenance facilities in Long Beach, California, and Anchorage, Alaska each totaling 5,000 square feet and maintains a sales office in Alexandria, Virginia and Fort Lauderdale, Florida. The Company also owns gas turbine parts, service, operations and maintenance facilities in Syracuse, New York (15,000 square feet) and Bakersfield, California (14,000 square feet) and a high pressure valve manufacturing facility in Jennings, Louisiana (89,000 square feet). Activities of the Distribution segment are coordinated from Houston, where the Company owns 293,000 square feet of space at three locations devoted to equipment and parts sales and service. To service its distribution territory (See "Item 1. Business -- Distribution Segment"), Stewart & Stevenson maintains Company-operated facilities occupying 523,000 square feet of owned space and 357,000 square feet of leased space in 25 cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah, North Dakota, Kansas, Washington and California. The Tactical Vehicle Systems segment is located in a 500,000 square foot Company-owned facility near Houston, Texas. The Tactical Vehicle Systems segment also leases 171,000 square feet of warehousing facilities in Houston, Texas. The Company considers all property owned or leased by it to be well maintained, adequately insured and suitable for its purposes. Item 3. Legal Proceedings. The Company is a defendant in a federal criminal matter and certain related civil litigation arising from a 1987 subcontract to supply diesel generators to the Kingdom of Saudi Arabia. See Note 5 to the Consolidated Financial Statements which is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol: SSSS. There were 760 shareholders of record as of February 28, 1997. The following table sets forth the high and low sales prices relating to the Company's Common Stock and the dividends declared by the Company in each quarterly period within the last two fiscal years.
Fiscal Fiscal 1996 1995 --------------------------------------------- --------------------------------------------- High Low Dividend High Low Dividend First Quarter $29 3/4 $23 1/4 $0.080 $40 1/2 $28 3/4 $0.07 Second Quarter 30 1/2 19 3/4 0.085 41 1/4 32 3/4 0.08 Third Quarter 23 3/4 19 5/8 0.085 38 3/4 21 1/2 0.08 Fourth Quarter 29 1/4 21 0.085 26 1/2 21 7/8 0.08
Item 6. Selected Financial Data. The Selected Financial Data set forth below should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Stewart & Stevenson Services, Inc. CONSOLIDATED FINANCIAL REVIEW
- -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------- ---------------- ----------------- -------------- ------------- ------------ (Dollars in thousands, except per share data) Fiscal Fiscal Fiscal Fiscal Fiscal 1996 1995 1994 1993 1992 - --------------------------------------------------- ---------------- ----------------- -------------- ------------- ------------ Financial Data: Sales $1,187,161 $1,233,981 $1,138,336 $981,892 $812,526 Earnings before income taxes and accounting change (a) 25,575 91,908 102,852 85,301 64,376 Earnings before accounting change (a) 16,851 61,803 67,558 56,780 43,958 Net earnings (a) 16,851 61,803 67,558 56,780 34,658 Total assets 1,145,285 1,040,583 875,616 692,624 573,348 Short-Term Debt (including current portion of Long-Term Debt) 29,100 66,100 43,344 7,219 3,252 Long-Term Debt 319,700 210,800 116,900 68,000 44,451 Per Share Data: Earnings before accounting change (a) .51 1.87 2.05 1.73 1.35 Net earnings (a) .51 1.87 2.05 1.73 1.06 Cash dividends declared 0.335 0.31 0.27 0.23 0.19 - ---------------------------------------------------------------------------------------------------------------------------
(a) The Company adopted Statement of Financial Accounting Standard No. 106 effective February 1, 1992, resulting in a cumulative charge to Fiscal 1992 earnings of $9,300, or $0.29 per share, after a deferred tax benefit of $4,790. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis, as well as the accompanying Consolidated Financial Statements and related footnotes, will aid in understanding the Company's results of operations as well as its financial position, cash flows, indebtedness and other key financial information. SUMMARY TABLES The following table sets forth for the periods indicated (i) percentages which certain items reflected in the Company's Consolidated Statements of Earnings bear to consolidated sales of the Company and (ii) the percentage increase (decrease) of such items as compared to the indicated prior period:
Relationship to Consolidated Sales Growth Rate - ---------------------------------------- -------------------------------------------------- --------------------------------- Fiscal Fiscal Fiscal Fiscal 1996 1995 1994 1995-1996 1994-1995 - ---------------------------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Sales 100.0% 100.0% 100.0% (3.8)% 8.4% Cost of sales 86.0 84.4 84.0 (2.0) 8.9 ---------------- ---------------- ---------------- Gross profit 14.0 15.6 16.0 (13.7) 5.8 Selling and administrative expenses 8.5 7.5 6.6 9.6 22.0 Interest expense 2.0 1.1 .6 73.7 102.2 Settlement of litigation 1.7 0 0 N/A N/A Other income, net (.3) (.4) (.2) (20.0) 85.0 ---------------- ---------------- ---------------- 11.9 8.2 7.0 39.6 26.9 Earnings before income taxes 2.1 7.4 9.0 (72.2) (10.6) Income taxes .7 2.5 3.0 (72.2) (11.2) ---------------- ---------------- ---------------- Earnings of consolidated companies 1.4 4.9 6.0 (72.2) (10.4) Equity in net earnings (losses)of unconsolidated affiliates 0 .1 (.1) (136.4) 172.4 ---------------- ---------------- ---------------- Net Earnings 1.4% 5.0% 5.9% (72.7) (8.5) ================ ================ ================
The following tables present both the contribution to sales and operational profit from each of the Company's business segments, as well as the growth rate year to year achieved by these segments.
Business Segment Highlights ------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) ------------------------------------------------------------------------------------------------------------------------- Sales Growth Rate ------------------------------------------------------------------------------------------------ Fiscal Fiscal Fiscal Fiscal 1996 1995 1994 1995-1996 1994-1995 ------------------------------------------------------------------------------------------------- Engineered Power Systems $476,680 40% $627,702 51% $642,804 57% -24% -2% Distribution 508,305 43 416,229 34 346,564 30 +22 +20 Tactical Vehicle Systems 200,916 17 189,009 15 147,920 13 +6 +28 Corporate Services 1,260 - 1,041 - 1,048 - +21 -1 ======================================================================== $1,187,161 100% $1,233,981 100% $1,138,336 100% -4 +8 ========================================================================
Operating Profit Growth Rate ------------------------------------------------------------------------------------------------ Fiscal Fiscal Fiscal Fiscal 1996 1995 1994 1995-1996 1994-1995 - ----------------------------------------------------------------------------------------------------------------------------- Engineered Power Systems $33,538 43% $73,449 65% $82,395 71% -54% -11% Distribution 33,143 42 30,130 27 24,015 21 +10 +25 Tactical Vehicle Systems 10,823 14 9,703 8 8,782 8 +12 +10 Corporate Services 528 1 292 - 376 - +81 -22 =================================================================== $78,032 100% $113,574 100% $115,568 100% -31 -2 ===================================================================
Operating Profit as a Percentage of Sales ------------------------------------------------------------------------ Fiscal Fiscal Fiscal 1996 1995 1994 - ----------------------------- ------------------------ ----------------------- ----------------------- Engineered Power Systems 7.0% 11.7% 12.8% Distribution 6.5 7.2 6.9 Tactical Vehicle Systems 5.4 5.1 5.9 Corporate Services 41.9 28.1 35.9 Consolidated 6.6 9.2 10.2
RESULTS OF OPERATIONS Fiscal 1996 vs. Fiscal 1995 Sales for Fiscal 1996 decreased 4% to $1.187 billion compared to sales of $1.234 billion for Fiscal 1995. The Company's international sales decreased 20% to $305 million in Fiscal 1996 as compared to $382 million in Fiscal 1995, representing 26% and 30% of consolidated sales for Fiscal 1996 and 1995, respectively. The Distribution segment was the primary growth contributor to the Company's sales with an increase in sales of $92 million (22%) in Fiscal 1996 compared to Fiscal 1995. A strengthening oil and gas market served by the Company's Distribution territory contributed to these sales improvements, particularly among the Company's Detroit Diesel, EMD and Waukesha product lines. The Tactical Vehicle Systems (TVS) segment sales increased $12 million (6%) during Fiscal 1996 as compared to Fiscal 1995. The increase in TVS sales reflects the increase in truck production under the "Family of Medium Tactical Vehicles" (FMTV) contract to 1,764 trucks in Fiscal 1996 as compared to 1,560 trucks in Fiscal 1995. The Engineered Power Systems (EPS) segment sales were the primary contributor to the Company's sales decline, decreasing $151 million (24%) in Fiscal 1996 as compared to Fiscal 1995. During Fiscal 1996, the EPS segment saw a continuation of the very weak domestic market for its gas turbine electrical power generation equipment, as well as a very competitive international market place. Incoming domestic orders, which declined significantly in Fiscal 1995, were non existent in Fiscal 1996. The international market activity, although encouraging, did not produce a level of new orders adequate to offset the lost revenue and profits from the domestic market. This decrease was partially offset by the gas turbine product support group (consisting of the servicing of customer's equipment and the long-term contracting for the operation and maintenance of the customer's power plants) which increased sales $16 million (10%) in Fiscal 1996 as compared to Fiscal 1995. Airline and petroleum equipment experienced increased sales of $12 million (40%) and $6 million (11%), respectively, in Fiscal 1996 as compared to Fiscal 1995. Operating profit decreased approximately 31% during Fiscal 1996 to $78 million as compared to $114 million in Fiscal 1995. The decrease in gross profit margin reflects both the decrease in turbine-driven equipment sales as well as decrease in the gross profit margin on these gas turbine-driven equipment sales. Fiscal 1995 vs. Fiscal 1994 Sales for Fiscal 1995 increased 8% to $1.234 billion compared to sales of $1.138 billion for Fiscal 1994. The Company's international sales increased 27% to $382 million in Fiscal 1995 as compared to $301 million in Fiscal 1994, representing 30% and 26% of consolidated sales for Fiscal 1995 and 1994, respectively. The Distribution segment was the primary contributor to the Company's sales growth with an increase in sales of $70 million (20%) in Fiscal 1995 compared to Fiscal 1994. This increase is primarily attributable to the acquisition of substantially all of the assets of Power Application & Mfg., Co. ("PAMCO"), a Waukesha distributor for the Western United States, during the fourth quarter of Fiscal 1994. The distribution of product lines acquired from PAMCO contributed sales of $49 million in Fiscal 1995 compared to $5 million in Fiscal 1994. Excluding sales relating to the PAMCO acquisition, the Distribution segment's sales increased 7% in Fiscal 1995 over Fiscal 1994 reflecting the continued economic growth in the territories serviced by the Company. The Tactical Vehicle Systems segment sales increased $41 million (28%) during Fiscal 1995 as compared to Fiscal 1994. The increase in TVS sales reflects the increase in truck production under the FMTV contract to 1,560 trucks in Fiscal 1995 as compared to 1,130 trucks in Fiscal 1994. Although sales increased for the current fiscal year, the increase was less than anticipated. Sales for the year were adversely affected by the deployment of certain U.S. Army personnel to Haiti in Fiscal 1994 which delayed the completion of testing and certification of the FMTV program for high volume production until the fourth quarter of Fiscal 1995. The Engineered Power Systems segment of the Company experienced a 2% decrease in sales in Fiscal 1995. This decline in EPS sales was primarily within the Gas Turbine equipment product lines which experienced sharply reduced domestic activity, reflecting the U.S. utility market's response to deregulation proposals, and delays in contract awards in the international markets. Gas Turbine product support sales, consisting of the servicing of customers' equipment and the long-term contracting for operation and maintenance of power plants, continued to grow with Fiscal 1995 sales increasing more than 10% above Fiscal 1994. Operating profit decreased by approximately 2% during Fiscal 1995 to $114 million as compared to $116 million in Fiscal 1994. Both the Distribution and the Tactical Vehicle Systems segments' operating profits increased at a rate comparable to the growth in sales volumes. The Engineered Power Systems segment's operating profit of 11.7% in Fiscal 1995 declined from 12.8% in Fiscal 1994. This decline is primarily related to lower profits realized on the sale of certain compression equipment during Fiscal 1995, and to increased market competitiveness.
Net Period Expenses - -------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1996 1995 1994 1995-1996 1994-1995 - --------------------------------------------------- ------------- ------------- ------------- ------------------------------ Selling and administrative expenses $100,624 $91,814 $75,249 +10% +22% Interest expense 24,113 13,884 6,865 +74 +102 Settlement of litigation 20,000 N/A N/A 0 0 Other income, net (3,742) (4,676) (2,528) -20 +85 ============= ============= ============= $140,995 $101,022 $79,586 +40 +27 ============= ============= ============= ============= ============= ============= Net period expenses as a percentage of sales 11.9% 8.2% 7.0% ============= ============= =============
Net period expenses increased significantly during Fiscal 1996, both in amount and in relation to sales, when compared to Fiscal 1995. Selling and administrative expenses increased primarily in those business lines having sales growth, in addition a one-time charge of approximately $900 thousand related to settling a lawsuit and substantial legal expenses related to the "Peace Shield" litigation are also included. Interest expense grew significantly in both Fiscal 1996 and 1995 reflecting the increased borrowings required to fund the Company's operations; primarily gas turbine inventories relating to international contracts that do not contain substantial progress payments and inventories of vehicles under the FMTV. The decrease in other income during Fiscal 1996 is primarily attributable to both decreased interest income and decreased gains on the disposal of real estate. On July 25, 1996, a jury in Houston, Texas returned a $43 million verdict against the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy agreement. The Company's liability in connection with this matter was limited pursuant to a pretrial agreement between the Company and Serv-Tech. The Company recognized a pre-tax charge against earnings of $20 million ($13 million or $.39 per share after taxes) relating to this case in the second quarter of Fiscal 1996. The judgment based on this verdict was paid by the Company in September 1996.
Net Earnings - -------------------------------------------------------------------------------------------- ---------------------------------- (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1996 1995 1994 1995-1996 1994-1995 - ---------------------------------------------------- ------------ ------------- ------------- -------------------------------- Amount $16,851 $61,803 $67,558 -73% -9% Percentage of sales 1.4% 5.0% 5.9% ============ ============= =============
Fiscal 1996's net earnings decline from Fiscal 1995 primarily reflects the decrease in operational profits and the increase in net period expense. Income tax expense, relative to operational profits, was comparable for Fiscal 1996, 1995 and 1994.
FINANCIAL CONDITION Working Capital - --------------------------------------------------------------------------------------------------------------------------- Percentage Change Fiscal Fiscal Fiscal (Dollars in thousands) 1996 1995 1995 - 1996 - --------------------------------------------------------------------------------------------------------------------------- Current Assets $974,128 $881,446 +11% Current Liabilities 320,559 330,080 -3% ============== ============== Working Capital 653,569 551,366 +19% ============== ============== Current Ratio 3.04:1 2.67:1 ============== ==============
Current assets increased $93 million from Fiscal 1995. This increase was primarily in accounts and notes receivable, which increased $41 million (+21%) and inventories which increased $40 million (+11%). The increase in accounts receivable reflects the significant increase (29%) in consolidated revenue during the fourth quarter of Fiscal 1996 compared to the same period a year ago. The growth in inventories, at a rate faster than annual revenue growth, can be attributed to the Engineered Power Systems' procurement and manufacturing activities in anticipation of increased demand. Current liabilities decreased $10 million from Fiscal 1995, with decreases primarily in notes payable of $37 million (-57%) and billings on uncompleted contracts in excess of incurred costs of $5 million (-35%), offset by an increase in accounts payable of $31 million (+23%). The reduction in notes payable reflects the Company strategy of replacing a portion of notes payable with long-term debt. The decrease in billings on uncompleted contracts in excess of incurred costs was caused by the customer payment terms on uncompleted contracts which were more favorable to the customer at the end of Fiscal 1996 than at the end of Fiscal 1995. INVESTMENTS The Company's capital expenditures for plant, rental machines and other property were $25 million for Fiscal 1996, an increase of $2 million from Fiscal 1995. The increase reflects the Company's continuing investment in business units capable of rapid growth. Depreciation and amortization totaled $26 million for Fiscal 1996, an increase of $2 million from Fiscal 1995. Additionally, the Company disposed of approximately $3 million of property during Fiscal 1996 versus disposals of $4 million during Fiscal 1995. Investments and other assets were $48 million at the end of Fiscal 1996, an increase of $16 million from the end of Fiscal 1995. This increase is primarily comprised of an investment in an independent power producer operating in Argentina, as well as an increase in the non-current portion of notes receivable.
Company's Capital - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Fiscal 1996 Fiscal 1995 Amount Percentage Amount Percentage - ------------------------------------------------------------------------------------------------------------------------------ Long-Term Debt $319,700 39% $210,800 30% Other Long-Term Liabilities 25,791 3 27,788 4 Shareholders' Equity 479,235 58 471,915 66 ======================================================= $824,726 100% $710,503 100% =======================================================
Long-term debt increased $109 million during Fiscal 1996, reflecting the Company's strategy to reduce its dependence on short-term notes payable and to take advantage of relatively attractive long-term interest rates. Shareholders' equity increased $7 million during Fiscal 1996 primarily as a result of earnings retained after dividends. LIQUIDITY The Company's sources of liquidity include cash and equivalents, cash from operations, amounts available under credit facilities and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures, dividends and other financial commitments. The following table summarizes the Company's cash flows from operating, investing and financing activities as prescribed by Generally Accepted Accounting Principles (GAAP), and reflected in the Consolidated Statement of Cash Flows.
Summarized Statement of Cash Flows - --------------------------------------------------------------------------------------- ------------- ------------- ------------- (Dollars in thousands) Fiscal Fiscal Fiscal 1996 1995 1994 - --------------------------------------------------------------------------------------- ------------- ------------- ------------- Net Cash Provided By (Used In): Operating Activities $(29,278) $(86,142) $(52,606) Investing Activities (30,284) (19,600) (29,007) Financing Activities 62,369 108,080 77,812 ============= ============= ============= $2,807 $2,338 $(3,801) ============= ============= ============= Cash Used In Operating Activities - ------------------------------------ --------------------------------------------------- ----------- ------------- -------------- (Dollars in thousands) Fiscal Fiscal Fiscal 1996 1995 1994 - ------------------------------------ --------------------------------------------------- ----------- ------------- -------------- Net Earnings $16,851 $61,803 $67,558 Depreciation and amortization 26,263 24,732 23,954 Deferred income taxes, net (1,667) (1,244) 2,170 ------------- ------------- ------------- Funds from operations 41,447 85,291 93,682 Change in net operating assets and liabilities (70,725) (171,433) (146,288) ------------- ------------- ------------- Net cash (used in) operating activities $(29,278) $(86,142) $(52,606) ============= ============= =============
Funds from operations decreased 51% during Fiscal 1996 versus a 9% decrease during Fiscal 1995, reflecting primarily the relative change in earnings each year. Working capital to support the operations of the Company fluctuates significantly depending on the progress payment streams of contracts in process. The Tactical Vehicle Systems segment is primarily funded by progress payments under government regulations which require that contractors retain a significant amount of the contract costs until government acceptance of the product. The Company regularly bids on commercial and government contracts, which if awarded to the Company, could significantly affect both working capital and capital expenditures needs.
Cash Used In Investing Activities - --------------------------------------------------------------------------------------- ------------- ------------- ------------ (Dollars in thousands) Fiscal Fiscal Fiscal 1996 1995 1994 - --------------------------------------------------------------------------------------- ------------- ------------- ------------ Expenditures for property, plant and equipment $(25,038) $(23,487) $(33,379) Investment (See Note 14) (8,000) 0 0 Disposal of property, plant and equipment 2,754 3,887 4,372 ------------- ------------- ------------ Net cash (used) in investing activities $(30,284) $(19,600) $(29,007) ============= ============= ============
Net cash used in investing activities increased 55% during Fiscal 1996 versus a 32% decrease during Fiscal 1995. During Fiscal 1996, the Company made an investment in an independent power producer. Proceeds from asset sales decreased 29% in Fiscal 1996 as compared to an 11% decrease in Fiscal 1995. On April 12, 1997, the Company acquired ownership of Sierra Detroit Diesel Allison, Inc. from Outer Drive Holdings, Inc. The acquisition will broaden the Company's distribution territory for certain products.
Cash Provided From Financing Activities - --------------------------------------------------------------------------------------- ------------- ------------- ------------ (Dollars in thousands) Fiscal Fiscal Fiscal 1996 1995 1994 - --------------------------------------------------------------------------------------- ------------- ------------- ------------ Additions to long-term debt $360,000 $200,071 $ 85,000 Payments on long-term debt (251,100) (106,100) (36,975) Net borrowings and payments on short-term notes payable (37,000) 23,000 37,000 Dividends paid (11,081) (10,243) (8,904) Exercise of stock options 1,550 1,352 1,691 ------------- ------------- ------------ Net cash provided by financing activities $62,369 $108,080 $77,812 ============= ============= ============
Net cash provided from financing activities decreased 42% for Fiscal 1996 compared to a 39% increase for Fiscal 1995. During Fiscal 1996 the Company increased long-term debt $360.0 million while retiring $251.1 million in long-term debt. In addition to the increased long-term debt, financing cash inflows included the exercise of stock options totaling $1.55 million. Payment of cash dividends on common stock totaled $11.081 million. On May 30, 1996, the Company completed a private placement of $135 million senior notes with an average maturity of 5 1/2 years. The notes are unsecured and were issued pursuant to an agreement containing a covenant which imposes a debt to total capitalization requirement. The notes will mature in three, five, seven and ten year increments with semi-annual interest payments at a weighted average life and coupon rate of 5 1/2 years and 7.01%, respectively. The proceeds from the sale of the notes were used to reduce other short-term outstanding indebtedness of the Company and for general corporate purposes. In the event that any acquisition of additional operations, growth in existing operations, changes in inventory levels, accounts receivable or other working capital items create a need for working capital or capital expenditures in excess of existing committed lines of credit, the Company may seek to convert uncommitted borrowing arrangements to committed credit facilities, to borrow under other long-term financing sources or to issue additional equity securities. The amount of cash dividends increased 8% and 15% during Fiscal 1996 and 1995, respectively. Cash dividends represented 66%, 17% and 13% of net earnings before accounting change for Fiscal 1996, 1995 and 1994, respectively. The Board of Directors of the Company intends to consider the payment of dividends on a quarterly basis, commensurate with the Company's earnings and financial needs. The Company uses both funds from operations, along with borrowings, to pay dividends. ACCOUNTING DEVELOPMENTS In June 1996, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This standard provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of this standard is not expected to impact the Company's consolidated results of operations, financial position or cash flow. TACTICAL VEHICLE SYSTEMS' CONTRACT STATUS Under the terms of the FMTV contract, approximately 2,936 vehicles produced before December 1995 were required to be retrofitted with any modifications required by test results or specification changes ordered by the U.S. government. This retrofit program was commenced during the fourth quarter of Fiscal 1995 and was substantially completed in the second quarter of Fiscal 1996. Full rate production of the FMTV commenced after the retrofit program was substantially completed and, as of January 31, 1997, the Company has completed approximately 4,750 of the 11,197 vehicles covered by the original contract plus options and additional requirements to date. During Fiscal 1996, the Company entered into a contract modification that extended the FMTV delivery schedule through December 1998 and reduced the annual product requirements. The total number of vehicles covered by the FMTV contract did not change. Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend not only upon the accuracy of the Company's cost projections, but also the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. The FMTV contract is a firm fixed-price multi-year contract whereby the price paid to the Company is not subject to adjustment to reflect the Company's actual costs, except costs incurred as a result of actions or inactions of the government. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the FMTV contract which the Company believes are primarily due to the government's decision to delay the testing of trucks and other government directed changes to the contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments (REAs), under the FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused delays and changes. Revenues and profits realized on the FMTV contract are based on the Company's estimates of total contract sales value and costs at completion. Amounts in excess of agreed upon contract price for government caused delays, disruptions, unpriced change orders and government caused additional contract costs are recognized in contract value when the Company believes it is probable that the claim for such amounts will result in additional contract revenue and the amount can be reasonably estimated. At January 31, 1997, the Company's FMTV contract accounting position reflects the expected recovery of substantial amounts in excess of the contract price for government caused delays, disruptions, unpriced change orders and other government caused additional contract costs. These claims are in varying stages of negotiation. Although management believes that the contract provides a legal basis for the claims and its estimates are based on reasonable assumptions and on a reasonable analysis of contract costs, due to uncertainties inherent in the estimation and claims negotiations process, no assurances can be given that its estimates will be accurate, and variances between such estimates and actual results could be material. In the event that the Company is unable to recover a substantial portion of the additional costs, the Company may suffer a material adverse effect on its earnings during the accounting period in which such contract issues are resolved. The funding of the contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contracts must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. The Company has received full funding for the production of approximately 10,155 vehicles through August 1997. It is anticipated that the remaining 1,042 vehicles will be funded after October 1997 when the 1998 Government fiscal year funding is approved. If the FMTV contract is terminated other than for default, the FMTV contract provides for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. EFFECT OF CERTAIN LITIGATION On May 3, 1995, the Company and four employees, including the Company's President, were indicted by a federal Grand Jury on six counts arising out of a 1987 subcontract to supply diesel generator sets for installation in Saudi Arabia. See Note 5: Commitments and Contingencies to the Consolidated Financial Statements. On May 12, 1995, the U.S. Air Force suspended the Company from contracting with any agency of the U.S. Government and from receiving the benefit of federal assistance programs. This suspension was temporarily terminated on November 8, 1995, pending the resolution of the charges covered by the indictment, pursuant to an Interim Administrative Agreement between the Company and the U.S. Air Force. The Interim Administrative Agreement does not have any effect on the indictment. The Interim Administrative Agreement requires the Company to maintain various internal procedures and policies intended to assure the U.S. Government that the Company is a responsible contractor. In the event that the Company or any of the indicted employees are convicted of the charges contained in the indictment, the U.S. Air Force may re-evaluate whether the Company should be suspended or debarred based on all of the facts and circumstances then known. An acquittal of all parties of the charges does not terminate the Interim Administrative Agreement and any failure by the Company to perform its obligations thereunder may also be grounds for suspension or debarment. If the Company is suspended or debarred, either because of a conviction pursuant to the indictment or as a result of a breach of the Interim Administrative Agreement, it would be ineligible to enter into new contracts or subcontracts with agencies of the U.S. Government or receive the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's future financial condition and results of operations. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this annual report contains forward-looking statements that are based on current expectations, estimates, and projections about the markets and industries in which the Company operates, management's beliefs and assumptions made by management. These forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors include increasing price and product/service competition by foreign and domestic competitors; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost effective basis; the mix of products/services; the achievement of lower costs and expenses; reliance on large customers; technological, implementation and cost/financial risks in use of large, multi-year contracts; the cyclical nature of the markets served; the outcome of pending and future litigation and governmental proceedings and continued availability of financing, financial instruments and financial resources in the amount, at the times and on the terms required to support the Company's business; and the risk of cancellation or adjustments of specific orders and termination of significant government programs. These are representative of the future factors that could affect the outcome of forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international conditions including interest rates, rates of inflation and currency exchange rate fluctuations and other future factors. Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders Stewart & Stevenson Services, Inc. We have audited the accompanying consolidated statements of financial position of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 20, 1997 =========================================================================== ===========================================================================
Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - ----------------------------------------------------------------------------------------------------------- (Dollars in thousands) Fiscal Fiscal 1996 1995 - ----------------------------------------------------------------------------------------------------------- Assets Current Assets Cash and equivalents $9,132 $6,325 Accounts and notes receivable, net 237,062 196,548 Recoverable costs and accrued profits not yet billed 326,952 317,855 Inventories 400,982 360,718 ---------------------- ------------------- Total Current Assets 974,128 881,446 Property, Plant and Equipment, net 123,433 127,055 Investments and Other Assets 47,724 32,082 ====================== =================== $1,145,285 $1,040,583 ====================== =================== Liabilities and Shareholders' Equity Current Liabilities Notes payable $28,000 $65,000 Accounts payable 165,999 134,562 Accrued payrolls and incentives 22,008 22,450 Billings on uncompleted contracts in excess of incurred 9,354 14,417 costs Current income taxes 65,881 68,650 Other accrued liabilities 29,317 25,001 ---------------------- ------------------- Total Current Liabilities 320,559 330,080 Commitments and Contingencies (See Note 5) Long-Term Debt 319,700 210,800 Deferred Income Taxes 5,127 6,794 Accrued Postretirement Benefits 15,091 15,454 Deferred Compensation 5,573 5,540 Shareholders' Equity Common Stock, without par value, 100,000,000 shares authorized at January 31, 1997 and January 31, 1996, respectively; 33,132,280 and 33,061,908 shares issued at January 31, 1997 and 1996, respectively, including 11,820 shares held in treasury 164,959 163,409 Retained earnings 314,309 308,539 ---------------------- ------------------- 479,268 471,948 Less cost of treasury stock (33) (33) ---------------------- ------------------- Total Shareholders' Equity 479,235 471,915 ------------------- ====================== $1,145,285 $1,040,583 ====================== ===================
The accompanying notes are an integral part of the consolidated financial statements
Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF EARNINGS ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data) Fiscal Fiscal Fiscal 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------------ Sales $1,187,161 $1,233,981 $1,138,336 Cost of sales 1,020,591 1,041,051 955,898 -------------- -------------- -------------- Gross profit 166,570 192,930 182,438 -------------- -------------- -------------- Selling and administrative expenses 100,624 91,814 75,249 Interest expense 24,113 13,884 6,865 Settlement of litigation (See Note 2) 20,000 0 0 Other income, net (3,742) (4,676) (2,528) -------------- -------------- -------------- 140,995 101,022 79,586 -------------- -------------- -------------- Earnings before income taxes 25,575 91,908 102,852 Income taxes 8,520 30,665 34,520 -------------- -------------- -------------- Earnings of consolidated companies 17,055 61,243 68,332 Equity in net earnings (losses) of unconsolidated affiliates (204) 560 (774) ============== ============== ============== Net earnings $16,851 $61,803 $67,558 ============== ============== ============== Weighted average number of shares of Common Stock outstanding 33,068 33,035 32,973 ============== ============== ============== Net earnings per share $.51 $1.87 $2.05 ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements
Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Common Retained Treasury Stock Earnings Total Stock - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of Fiscal 1993 $160,366 $198,325 $(33) $358,658 Net earnings 67,558 67,558 Cash dividends (8,904) (8,904) Exercise of stock options 1,691 1,691 ------------- ------------- ------------- ---------- Balance at end of Fiscal 1994 162,057 256,979 (33) 419,003 Net earnings 61,803 61,803 Cash dividends (10,243) (10,243) Exercise of stock options 1,352 1,352 ------------- ------------- ------------- ---------- Balance at end of Fiscal 1995 163,409 308,539 (33) 471,915 Net earnings 16,851 16,851 Cash dividends (11,081) (11,081) Exercise of stock options 1,550 1,550 ============= ============= ============= ========== Balance at end of Fiscal 1996 $164,959 $314,309 $(33) $479,235 ============= ============= ============= ==========
The accompanying notes are an integral part of the consolidated financial statements
Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Fiscal Fiscal Fiscal 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net earnings $16,851 $61,803 $67,558 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits (363) 202 224 Depreciation and amortization 26,263 24,732 23,954 Deferred income taxes, net (1,667) 2,170 (1,244) Change in operating assets and liabilities: Accounts and notes receivable, net (40,514) (9,734) (39,522) Recoverable costs and accrued profits not yet billed (9,097) (90,388) (111,599) Inventories (40,264) (64,851) (26,262) Accounts payable 31,437 (29,912) 32,694 Billings on uncompleted contracts in excess of incurred costs (5,063) 3,133 (19,804) Current income taxes (2,769) 26,410 14,309 Other current liabilities 3,874 (3,776) 6,644 Other--principally long-term assets and liabilities (7,966) (2,517) (2,972) ------------- ------------- ----------- Net Cash Used in Operating Activities (29,278) (86,142) (52,606) Investing Activities Expenditures for property, plant and equipment (25,038) (23,487) (33,379) Investment (See Note 14) (8,000) 0 0 Disposal of property, plant and equipment 2,754 3,887 4,372 ------------- ------------- ----------- Net Cash Used in Investing Activities (30,284) (19,600) (29,007) Financing Activities Additions to long-term debt 360,000 200,071 85,000 Payments on long-term debt (251,100) (106,100) (36,975) Net borrowings and payments on short-term notes payable (37,000) 23,000 37,000 Dividends paid (11,081) (10,243) (8,904) Exercise of stock options 1,550 1,352 1,691 ------------- ------------- ----------- Net Cash Provided by Financing Activities 62,369 108,080 77,812 ------------- ------------- ----------- Increase (decrease) in cash and equivalents 2,807 2,338 (3,801) Cash and equivalents, beginning of fiscal year 6,325 3,987 7,788 ------------- ------------- ----------- Cash and equivalents, end of fiscal year $9,132 $6,325 $3,987 ============= ============= ===========
The accompanying notes are an integral part of the consolidated financial statements Stewart & Stevenson Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Note 1: Summary of Principal Accounting Policies Fiscal Year: The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, "Fiscal 1996" commenced on February 1, 1996 and ended on January 31, 1997. Consolidation: The consolidated financial statements include the accounts of Stewart & Stevenson Services, Inc. and all of its majority-owned subsidiaries. Investments in other partially-owned companies and joint ventures in which ownership ranges from 20 to 50 percent are generally accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated. Stock-Based Compensation: The Company will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Pro forma disclosure of the compensation expense determined under the fair-value provision of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" has been provided. (See Note 10) Cash Equivalents: Interest-bearing deposits and other investments with original maturities of three months or less are considered cash equivalents. Inventories: Inventories are generally stated at the lower of cost (using LIFO) or market (determined on the basis of estimated realizable values), less related customer deposits. Inventory costs include material, labor and overhead. The carrying values of these assets approximate their fair values. Capitalized Interest: Interest costs associated with certain constructed assets are capitalized during the construction period. Capitalized interest in 1996 was $725 and was netted against interest expense in the consolidated statement of earnings. There was no capitalized interest in 1995 and 1994. Interest capitalized on assets constructed for customers will be included in cost of sales. Interest capitalized on assets developed for the Company's use will be amortized over the depreciable life of the related assets. Contract Revenues and Costs: Revenues relating to contracts or contract changes that have not been completely priced, negotiated, documented, or funded are not recognized unless realization is considered probable. Generally, revenue is recognized when a product is shipped or accepted by the customer, except for certain Engineered Power Systems' products, where revenue is recognized using the percentage-of-completion method. The revenues of the Tactical Vehicle Systems segment are generally recognized under the units-of-production method, whereby sales and estimated average cost of the units to be produced under the Family of Medium Tactical Vehicle ("FMTV") contract are recognized as units are substantially completed. Profits expected to be realized on contracts are based on the Company's estimates of total sales value and costs at completion. Changes in estimates for sales, costs, and profits are recognized in the period which they are determinable using the cumulative catch-up method of accounting. In certain cases, the estimated sales values include amounts expected to be realized from contract adjustments or claims when recovery of such amounts are probable, subject to negotiations or legal proceedings. Any anticipated losses on contracts are charged in full to operations in the period in which they are determinable. Depreciable Property: The Company depreciates property, plant and equipment over their estimated useful lives, using accelerated and straight-line methods. Expenditures for property, plant and equipment are capitalized and carried at cost. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred and replacements and betterments are capitalized. Foreign Exchange Contracts: The Company occasionally enters into forward exchange contracts only as a hedge against certain economic exposures and not for speculative or trading purposes. While the forward contracts affect the Company's results of operations, they do so only in connection with the underlying transactions. As a result, they do not subject the Company to risk from exchange rate movements, because gains and losses on these contracts offset losses and gains on the transactions being hedged. The Company limits exposure to foreign currency fluctuations in its operations and maintenance contracts through provisions that generally require customer payments in U.S. dollars or other currency either corresponding to the currency in which the costs are incurred or otherwise having the customer assume currency rate risk. Other Off-Balance Sheet Risks: The Company has entered into certain contracts whereby it has guaranteed the repayment of a customer's debt to third party lenders. (See Note 5) Fair Value of Financial Instruments: The Company's financial instruments consist primarily of cash and equivalents, trade receivables, trade payables and debt instruments. The book values of cash and equivalents, trade receivables and trade payables are considered to be representative of their respective fair values. Generally, the Company's notes receivable and payable have interest rates which are tied to current market rates. The Company estimates that the book value of its financial instruments approximates market values. Warranty Costs: Expected warranty and performance guarantee costs are accrued as revenue is recorded, based on historical experience and contract terms. Net Earnings Per Share: Net earnings per share of Common Stock are computed by dividing net earnings by the weighted average number of shares outstanding. Common Stock equivalents (outstanding options to purchase shares of Common Stock) are excluded from the computations because they are insignificant and adjustments could be material to the Company's results of operations. Use of Estimates and Assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: The accompanying consolidated financial statements for Fiscal 1995 and 1994 contain certain reclassifications to conform with the presentation used in Fiscal 1996. Note 2: Industry Segment Data The Engineered Power Systems segment includes the designing, packaging, manufacturing and marketing of diesel and gas turbine engine-driven equipment and the operations and maintenance of large gas turbine projects and petroleum production and processing facilities. The Distribution segment includes the marketing of diesel engines, automatic transmissions, material handling equipment, transport refrigeration units and construction equipment and the provision of related parts and service. The Tactical Vehicle Systems segment includes the designing, manufacturing and marketing of tactical vehicles, primarily 2 1/2-ton and 5-ton trucks under contract with the United States Army. The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. Corporate assets consist primarily of cash and equivalents and the assets of a limited partnership. The Company markets its products and services throughout the world and is not dependent upon any single geographic region or single customer. Other than the U.S. Government, no single group or customer represents greater than 10% of consolidated sales. Export sales, including sales to domestic customers for export, for Fiscal 1996, 1995 and 1994 were $304,508, $382,452 and $301,885 respectively. Export sales to any single geographic region in Fiscal 1996, 1995 and 1994 were not material to consolidated sales. During Fiscal 1996, a jury in Houston, Texas returned a $43,000 verdict against the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy agreement. The Company's liability in connection with this matter was limited pursuant to a pretrial agreement between the Company and Serv-Tech. The Company recognized a pre-tax charge against earnings of $20,000 ($13,000 or $.39 per share after taxes) relating to this case in the second quarter of Fiscal 1996. The judgment based on this verdict was paid by the Company in September 1996.
Financial information relating to industry segments is as follows: - ---------------------------------------------------------------------------------------------------------------------------------- Operating Identifiable Capital Sales Profit Assets Expenditures Depreciation - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal 1996 Engineered Power Systems $476,680 $33,538 $651,768 $9,877 $6,925 Distribution 508,305 33,143 290,011 13,119 7,699 Tactical Vehicle Systems 200,916 10,823 185,211 1,422 10,746 Corporate Services 1,260 528 18,295 620 536 =============== ============== ================ =============== ============ Total $1,187,161 $78,032 $1,145,285 $25,038 $25,906 =============== ============== ================ =============== ============ Fiscal 1995 Engineered Power Systems $627,702 $73,449 $601,690 $9,495 $6,230 Distribution 416,229 30,130 240,390 10,780 6,900 Tactical Vehicle Systems 189,009 9,703 175,174 2,111 10,349 Corporate Services 1,041 292 23,329 1,101 926 =============== ============== =============== ============== ============= Total $1,233,981 $113,574 $1,040,583 $23,487 $24,405 =============== ============== ================ =============== ============ Fiscal 1994 Engineered Power Systems $642,804 $82,395 $478,354 $12,082 $6,759 Distribution 346,564 24,015 222,462 17,651 6,113 Tactical Vehicle Systems 147,920 8,782 152,772 2,929 9,943 Corporate Services 1,048 376 22,028 717 805 =============== ============== ================ =============== ============ Total $1,138,336 $115,568 $875,616 $33,379 $23,620 =============== ============== ================ =============== ============
A reconciliation of Operating profit to Earnings before income taxes is as follows: - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Operating profit $ 78,032 $113,574 $115,568 Corporate expenses, net (8,344) (7,782) (5,851) Interest expense (24,113) (13,884) (6,865) Settlement of litigation (20,000) 0 0 ---------------- ---------------- -------------- Earnings before income taxes $25,575 $91,908 $102,852 ================ ================ ==============
Note 3: Contracts in Process Amounts included in the financial statements which relate to recoverable costs and accrued profits not yet billed on contracts in process are classified as current assets, billings on uncompleted contracts in excess of incurred cost and accrued profits are classified as current liabilities. Summarized below are the components of the amounts:
- ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $1,008,332 $913,108 Accrued profits 30,140 83,824 --------------- -------------- $1,038,472 996,932 Less: Customer progress payments (720,874) (693,494) --------------- -------------- $317,598 $303,438 =============== ============== Included in the statements of financial position: Recoverable costs and accrued profits not yet billed $326,952 $317,855 Billings on uncompleted contracts in excess of incurred costs (9,354) (14,417) =============== ============== $317,598 $303,438 =============== ==============
Recoverable costs and accrued profits related to the Tactical Vehicle Systems segment include direct costs of manufacturing and engineering and allocable overhead costs. Generally, overhead costs include general and administrative expenses allowable in accordance with the United States Government contract cost principles and are charged to cost of sales at the time revenue is recognized. General and administrative costs remaining in recoverable costs and accrued profits not yet billed amounted to $33,943 and $26,640 at January 31, 1997 and 1996, respectively. The Company's total general and administrative expenses incurred amounted to $116,553, $103,999 and $86,292 in Fiscal 1996, 1995 and 1994, respectively. The United States Government has a security interest in unbilled amounts associated with contracts that provide for progress payments. In accordance with industry practice, recoverable costs and accrued profits not yet billed include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year. Note 4: Inventories
Summarized below are the components of inventories: - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1995 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Engineered Power Systems $308,027 $273,200 Customer deposits (1,081) (4,081) --------------- -------------- Total Engineered Power Systems 306,946 269,119 Distribution 149,238 145,179 Excess of current cost over LIFO values (55,202) (53,580) =============== ============== Total Inventories $400,982 $360,718 =============== ==============
The Company's inventory classifications correspond to its industry segments. As a custom packager of power systems to customer specifications, the Engineered Power Systems segment's inventory consists primarily of work-in-process which includes purchased and manufactured components in various stages of assembly. The Engineered Power Systems segment's inventory at January 31, 1997 and 1996 includes approximately $19,139 and $19,022, respectively, of costs on a certain U.S. Government contract in excess of contractual authorization which will be billable upon either contractual amendment or approval of claims increasing contract funding. During Fiscal 1995, the Company recognized $3,500 of additional costs under such contract based upon preliminary settlement discussions. Management's position, supported by outside legal counsel which specializes in government procurement law, is that the Company will recover a substantial portion of the amount claimed which significantly exceeds the inventory carrying value. The Distribution segment's inventory consists primarily of industrial equipment, equipment under modification and parts held in the Company's distribution network for resale. During Fiscal 1996, certain inventories were reduced. The reductions resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior fiscal years as compared with the cost of Fiscal 1996 purchases, the effect of which increased pre-tax earnings in Fiscal 1996 by approximately $4,047. Note 5: Commitments and Contingencies As a custom packager of power systems, the Company issues bid and performance guarantees in the form of performance bonds or standby letters of credit. Performance type letters of credit totaled $40,889 at the close of Fiscal 1996. On May 3, 1995, an indictment was returned by a federal Grand Jury in Houston, Texas, accusing the Company and four employees, including the Company's President, of one count of major fraud against the United States, four counts of false statements and one count of conspiracy to commit major fraud, make false statements and interfere with the administration of a foreign military sale. All of the counts arise from a 1987 subcontract to supply diesel generator sets for installation at long-range radar sites in Saudi Arabia (the "Peace Shield"). The indictment alleges that a former employee of the general contractor for the Peace Shield program, who later became a consultant to the Company, conspired with the Company and the other defendants to award the subcontract to the Company. The indictment also alleges that the government was defrauded out of approximately $5 million in connection with cost savings from a change order under the Peace Shield contract and that the Company made false statements relating to cost estimates in connection with such change order. The Company and each individual have denied all charges under the indictment and the case is pending in the United States District Court, Southern District of Texas, Houston Division. The Company is not able to make a reasonable estimate of the fines or penalties that could be imposed under the Federal Sentencing Guidelines in the event of a conviction under the indictment. Such fines and penalties could be substantial and adversely affect the Company's future financial position and results of operations. If the Company or any of the individuals are convicted of any charges under the indictment, the Company could also be suspended or debarred from entering into new contracts or subcontracts with agencies of the U.S. Government or receiving the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could prevent the Company from receiving future modifications to the Family of Medium Tactical Vehicle ("FMTV") contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. Also in connection with the Peace Shield contract, the Company has been advised that a former consultant of the Company filed a suit in the United States District Court, Southern District of Texas, Houston Division, for himself and the United States of America alleging that the Company supplied false information in violation of the False Claims Act (the "Act"), engaged in common law fraud and misapplied costs. Under the provisions of the Act, the suit has not been served upon the Company pending an investigation of the case by the U.S. Department of Justice and a determination as to whether the Department of Justice will intervene and pursue the matter on behalf of the United States. The suit alleges treble damages of $21 million plus unspecified penalties. Proceedings in this case have been stayed pending resolution of the criminal matter referred to above. The Company cannot predict the outcome of this action or the likelihood that substantial damages will result. However, the Company intends to vigorously defend this case if it is served upon the Company. The Company is a defendant in a number of other lawsuits relating to contractual, product liability, personal injury and warranty matters and otherwise of the type normally incident to the Company's business. Management is of the opinion that a negative outcome in any such lawsuits will not have a material effect on the Company's financial position, results of operations and cash flows. The Company has not established any reserves or accruals for any potential liability that may be subsequently found in any of the foregoing cases. The Company has provided certain guarantees in support of its customer's financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. At the end of Fiscal 1996 the maximum exposure of the Company had in this regard was $48 million which will decrease annually. At the end of Fiscal 1995 the Company's exposure was nominal. The Company leases certain property and equipment under lease arrangements of varying terms. Annual rentals under terms of noncancelable leases are less than 1% of consolidated sales. Note 6: Government Contracts Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend not only upon the accuracy of the Company's cost projections, but also the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. Revenues and profits realized on the FMTV contract are based on the Company's estimates of total contract sales value and costs at completion. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the FMTV contract which the Company believes are primarily due to the government's decision to delay the testing of trucks and other government directed changes to the contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments or claims, under the FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused delays and changes. Amounts in excess of agreed upon contract price for government caused delays, disruptions, unpriced change orders and government caused additional contract costs are recognized in contract value when the Company believes it is probable that the claim for such amounts will result in additional contract revenue and the amount can be reasonably estimated. The Company's FMTV contract accounting position reflects the expected recovery of substantial amounts in excess of the contract price for government caused delays, disruptions, unpriced change orders and other government caused additional contract costs. These claims are in varying stages of negotiations. Although management believes that the FMTV contract provides a legal basis for the claims and that its estimates are based on reasonable assumptions and on a reasonable analysis of the contract costs, the ultimate profitability of the FMTV contract will depend not only on the accuracy of the Company's cost projections but also on the outcome of these claims and other contractual issues. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. If the Company is unable to recover a substantial portion of the additional costs, previously recognized earnings may be overstated and the Company may suffer a material adverse effect on its operations during the accounting period in which such FMTV contract issues are resolved and future earnings may be recognized at reduced rates. The funding of the FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contract must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. The Company has received full funding for the production of approximately 10,155 vehicles through August 1997. Approximately 1,042 vehicles scheduled for production after that date have not been funded due to reductions in the U.S. Army's budget for acquisitions. Government Fiscal Year 1998 funding will not be available until after October 1, 1997. If the FMTV contract is terminated other than for default, the FMTV contract provides for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. Note 7: Debt Arrangements The Company has informal borrowing arrangements with banks which may be withdrawn at the banks' option. Borrowings under these credit arrangements are unsecured, are due within 90 days and bear interest at varying bid and negotiated rates. On January 31, 1997 and 1996, the amounts outstanding under these arrangements were $28,000 and $65,000, respectively, with a weighted average interest rate of 6.11% and 5.95%, respectively.
Long-Term Debt, which is generally unsecured, consists of the following: - ---------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Notes payable to insurance company: -10.20%, principal due $1,000 annually to 1998 $2,000 $3,000 Debt of consolidated limited partnership: -note payable to a bank, principal due monthly to 1998 (see note below) 8,800 8,900 Revolving credit notes payable to banks (see note below) 175,000 200,000 Senior Notes 6.72% principal due 1999 60,000 0 7.03% principal due 2001 20,000 0 7.29% principal due 2003 30,000 0 7.38% principal due 2006 25,000 0 ---------------- --------------- 320,800 211,900 Less current portion (1,100) (1,100) ---------------- --------------- Long-Term Debt $319,700 $210,800 ================ ===============
The Company has commitments of $225,000 from banks under revolving credit notes (subject to reduction at the Company's election) which mature on December 31, 2001. Under the terms of the revolving credit facility, the commitment fee on the daily average unused balance is based on the Company's debt to capitalization ratio with a maximum of 20 basis points per annum. Borrowings outstanding under the revolving credit notes bear interest at various options, the maximum rate being the prime rate. On May 30, 1996, the Company completed a private placement of $135,000 senior notes. The notes are unsecured and were issued pursuant to an agreement containing a covenant which imposes a debt to total capitalization requirement. The notes will mature in three, five, seven and ten year increments with semi-annual interest payments. The proceeds from the sale of the notes were used to reduce other outstanding indebtedness of the Company and for general corporate purposes. The Company's unsecured long-term debt was issued pursuant to agreements containing covenants which impose working capital requirements on the Company and designated subsidiaries and restrict indebtedness, guarantees, rentals, dividends and other items. At the close of Fiscal 1996, approximately $104,001 of retained earnings were available for payment of dividends under the most restrictive covenant. As a result of the acquisition of a majority interest in a partnership in which the Company is a limited partner, the Company's Consolidated Statements of Financial Position include the debt of this partnership, which owns the building where the Company's corporate office is located. Such debt is solely the obligation of the partnership and is secured by the office building and garage. Interest is payable in monthly installments at various rates, the maximum rate being 9%. Interest paid on both long-term and short-term debt during Fiscal 1996, 1995 and 1994 was $22,975, $13,261 and $6,679, respectively. The amounts of long-term debt which will become due during Fiscal 1997 through 2000, are approximately: 1997--$1,100; 1998--$9,700; 1999--$60,000; 2000--$0; 2001--$195,000 and beyond--$55,000. Note 8: Postretirement Medical Plan The Company has a postretirement medical plan which covers most of its employees and provides for the payment of medical costs of eligible employees and dependents upon retirement. The plan is currently not funded. The Company expects to continue financing postretirement medical costs as covered claims are incurred.
Postretirement medical benefit costs includes the following components: - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Service costs - benefits attributed to service during the period $457 $527 $418 Interest cost on accumulated postretirement medical benefit obligation 528 620 678 Amortization of prior service costs (874) (718) (718) -------------- -------------- --------------- Net postretirement medical benefit costs $111 $429 $378 ============== ============== ===============
The status of the plan is as follows: - ----------------------------------------------------------------------------------------------------------------------------------- January 31, January 31, January 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Accrued Postretirement Benefits: Retirees $3,692 $4,642 $4,454 Employees eligible to retire 1,696 2,073 1,978 Employees not eligible to retire 1,799 2,020 1,500 -------------- -------------- ------------- 7,187 8,735 7,932 Unrecognized prior service cost 4,074 4,701 5,328 Unrecognized net gain 3,830 2,018 1,992 -------------- -------------- ------------- $15,091 $15,454 $15,252 ============== ============== =============
The actuarial assumptions used are as follows: - -------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Discount Rate 7.50% 7.25% Health Care Cost Trend 8.40% - 9.50% (a) 8.50% - 10.00% (b)
(a) Gradually declining to 5.00% by 2005 (b) Gradually declining to 5.00% by 2004 Changing the health care cost trend rates by one percentage point would change the accumulated postretirement medical benefit obligation at January 31, 1997 by approximately $1,082 and the postretirement medical benefit costs for Fiscal 1996 by approximately $185. Note 9: Employee Pension and Other Benefit Plans The Company has a noncontributory defined benefit pension plan covering substantially all of its full-time employees. The pension benefits are based on years of service, limited to 45 years, and the employee's highest consecutive five-year average compensation out of the last ten years of employment. The Company funds pension costs in conformity with the funding requirements of applicable government regulations.
The following table sets forth the plan's funded status and amounts recognized in the Company's statements of financial position: - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $48,193 in 1996 and $45,809 in 1995 $52,478 $48,720 ============ ============= Projected benefit obligation for service rendered to date $(66,129) $(59,767) Plan assets at fair value for Fiscal 1996 and 1995; primarily publicly traded stocks and bonds, including 70,956 shares of the Company's Common Stock at the end of both Fiscal 1996 and 1995 68,196 62,136 ------------- ------------ Plan assets in excess of projected benefit obligations 2,067 2,369 Unrecognized net loss from past experience different from that assumed 3,297 5,467 ------------- ----------- Prepaid pension cost included in Investments and Other Assets $5,364 $7,836 ============ ============
Net pension (income)/expense includes the following components: - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Service cost -- benefits earned during the year $3,674 $2,187 $1,815 Interest cost on projected benefit obligation 4,360 3,800 3,541 Actual return on plan assets (8,197) (2,782) (5,494) Amortization of unrecognized net gain - (738) (406) Net amortization and deferrals 2,635 (2,494) 200 ----------- ------------- ------------ Net periodic pension (income) expense $2,472 $(27) $(344) =========== ============= ============
The actuarial assumptions used are as follows: - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 -------------------------------------------------------------------------------------------------------------------------------- Discount Rate 7.50% 7.25% Long-term rate of return on assets 9.50% 9.50% Rate of increase in future compensation 4.50 - 5.00% 4.50 - 5.00%
The expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets. The market-related value of plan assets for Fiscal 1996 and Fiscal 1995 was determined using the calculated value and for Fiscal 1994 using the fair value. There was no material impact to operating results as a result of the change. Effective June 1997, the Company will terminate its unfunded defined benefit retirement plan for non-employee directors which had provided for payments upon retirement, death, or disability. Retirement expense for this plan in Fiscal 1996, 1995 and 1994, respectively, was $59, $141 and $68. The Company has an unfunded supplemental retirement plan for certain corporate officers. Retirement expense for the plan in Fiscal 1996, 1995 and 1994 was $406, $459 and $216, respectively. Prior service cost not yet recognized in periodic pension cost was $1,547, $1,676, and $1,804 at January 31, 1997, 1996 and 1995, respectively. The Company has an employee savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may contribute up to 15% of their pre-tax salary, but not more than statutory limits. The Company contributes twenty five cents for each dollar contributed by a participant, subject to certain limitations. The Company's matching contribution to the savings plan was $981, $788 and $399 in Fiscal 1996, 1995 and 1994, respectively. Under a nonqualified deferred compensation plan for certain employees, a portion of eligible employees' discretionary income can be deferred at the election of the employee. These deferred funds accrue interest payable to the employee at the prime rate in effect on specified dates. Note 10: Common Stock Shareholder Rights Plan: In 1995, the Company adopted a shareholders rights plan. The rights may be exercised by their holders to purchase one-third (1/3) of a share at $30.00 for each share owned by a shareholder upon the acquisition, or announcement of intended acquisition, of 15% or more of the Company's stock by a person or group. The rights are subject to antidilution adjustments and will expire on March 20, 2005, unless the plan is further extended or the rights are earlier redeemed. Stock Option Plans: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan, the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock Option Plan, the 1994 Director Stock Option Plan and the 1996 Director Stock Plan authorize the grant of options to purchase an aggregate of up to 1,800,000, 984,950, 150,000 and 150,000 shares of Common Stock, respectively, at not less than fair market value at the date of grant. The options have a term not exceeding ten years and vest over periods not exceeding four years. Under the terms of the 1993 Nonofficer Stock Option Plan, the number of options available for grant increased from 757,150 to 984,950 shares as of February 1, 1997. Pursuant to an amendment adopted in Fiscal 1996, no future grants of options may be made pursuant to the 1994 Director Stock Option Plan.
A summary of the status of the Company's stock option plans during Fiscal years 1994, 1995 and 1996 is presented in the tables below: - ----------------------------------------------------------------------------------------------------------------------------------- Option Price Shares under Range Option Per Share - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of Fiscal 1993 478,100 $13.125 - $32.625 Granted 180,050 $50.25 Exercised (60,750) $13.125 - $32.625 Canceled (12,225) $18.75 - $50.25 -------------- Outstanding at end of Fiscal 1994 585,175 $18.75 - $50.25 Granted 386,300 $33.75 and $35.125 Exercised (52,750) $18.75 - $32.625 Canceled (20,650) $32.625 - $50.25 -------------- Outstanding at end of Fiscal 1995 898,075 $18.75 - $50.25 Granted 343,800 $24.25 and $24.375 Exercised (71,500) $18.75 Canceled (35,375) $24.25 - $50.25 -------------- Outstanding at end of Fiscal 1996 1,135,000 $18.75 - $50.25 ============== Options available for future grants at the end of Fiscal 1996 608,050 ==============
- ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Options exercisable at end of year 414,917 299,421 Weighted average exercise price of options exercisable $ 33.58 $ 27.67 Weighted average fair value of options granted $ 9.59 $ 15.01
------------------------- ------------------------ ------------------------ -- ------------------------ ------------------------ Weighted Average Remaining Contractual Exercise Price Exercise Price Options Outstanding Options Exercisable Life (Years) ------------------------- ------------------------ ------------------------ -- ------------------------ ------------------------ $18.75 $18.75 82,000 82,000 Less than 1 $24.25 - $35.125 $30.32 889,200 250,025 6 - 10 $50.25 $50.25 163,800 82,892 8 ======================== ======================== 1,135,000 414,917 ======================== ========================
The Company accounts for these plans under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
----------------------------------------------------------------------------------- ---------------------- ---------------------- Fiscal Fiscal 1996 1995 ----------------------------------------------------------------------------------- ---------------------- ---------------------- Net earnings As Reported $16,851 $61,803 Pro Forma $15,498 $60,961 Net earnings per share As Reported $.51 $1.87 Pro Forma $.47 $1.85
Because the Statement 123 method of accounting is not required to be applied to options granted prior to February 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in Fiscal 1996 and 1995:
----------------------------------------------------------------------------------- ---------------------- ---------------------- Fiscal Fiscal 1996 1995 ----------------------------------------------------------------------------------- ---------------------- ---------------------- 1988 Nonstatutory Stock Option Plan and 1993 Nonoffficer Stock Option Plan Risk free interest rates 6.13% 7.00% Expected dividend yields 1.30% .80% Expected volatility 34.42% 33.01% Expected life (years) 6 6 1994 Director Stock Option Plan Risk free interest rates 6.79% 6.19% Expected dividend yields 1.30% .80% Expected volatility 35.24% 32.56% Expected life (years) 6 6
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Note 11: Income Taxes The components of the income tax provision and the income tax payments are as follows: - --------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Current $3,887 $20,430 $2,194 Deferred 4,633 10,235 32,326 ------------- ------------- ------------- Income tax provision $8,520 $30,665 $34,520 ============= ============= ============= Income tax payments (excluding refunds) $15,320 $13,337 $17,422 ============= ============= ============= A reconciliation between the provision for income taxes and income taxes computed by applying the statutory U.S. Federal income tax rate of 35% in Fiscal 1996, 1995 and 1994 is as follows: - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal Fiscal 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Provision at statutory rates $ 8,952 $32,190 $35,998 Other (432) (1,525) (1,478) ------------- ------------- -------------- $ 8,520 $30,665 $34,520 ============= ============= ==============
The deferred tax liability is determined under the liability method based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted statutory tax rates and deferred tax expense is the result of changes in the net liability for deferred taxes.
The tax effects of the significant temporary differences which comprise the deferred tax liability at the end of Fiscal 1996 and 1995 are as follows: --------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 --------------------------------------------------------------------------------------------------------------------------------- Deferred Tax Assets Postretirement benefit obligation $ 5,282 $ 5,407 Accrued expenses and other reserves 5,257 9,282 Other 33 33 ------------- ------------- Gross deferred tax assets 10,572 14,722 ------------- ------------- Deferred Tax Liabilities Property, plant and equipment 3,253 4,259 Pension accounting 1,114 2,233 Contract accounting 32,880 36,730 Prepaid expenses and deferred charges 50,918 44,485 Other 9,927 9,902 ------------- ------------- Gross deferred tax liabilities 98,092 97,609 ------------- ------------- Net deferred tax liability $87,520 $82,887 ============= ============= Current portion of deferred tax liability $82,393 $76,093 Non-current portion of deferred tax liability 5,127 6,794 ------------- ------------- Net deferred tax liability $ 87,520 $ 82,887 ============= =============
Note 12: Supplemental Financial Data Accounts and Notes Receivables, net consist of the following: - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Accounts receivable $234,843 $193,406 Notes receivable 24,614 18,121 Allowance for doubtful accounts (1,513) (1,409) Less non-current portion of notes receivable (20,882) (13,570) -------------- ------------- $237,062 $196,548 ============== ============= No single group or customer represents greater than 10% of total accounts receivable in Fiscal 1996. The U.S. Government accounted for approximately 7.3% and 16.3% of accounts receivable at January 31, 1997 and 1996, respectively. Due to the large number of entities and diversity of the Company's customer base, concentration of credit risk with respect to trade receivables is limited. At the end of Fiscal 1996 accounts receivable and notes receivable included immaterial amounts due from certain investees of the Company. Components of property, plant and equipment, net are as follows: - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal Fiscal 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Machinery and equipment $135,612 $126,306 Buildings and leasehold improvements 93,469 91,298 Revenue earning assets 16,174 12,917 Accumulated depreciation and amortization (138,759) (116,436) -------------- ------------- 106,496 114,085 Construction-in-progress 2,373 6 Land 14,564 12,964 -------------- ------------- $123,433 $127,055 ============== =============
Note 13: Consolidated Quarterly Data (unaudited) - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------------------- Sales $390,061 $336,834 $240,726 $219,540 Gross profit 47,258 42,698 38,511 38,103 Net earnings (loss) 10,636 7,189 (7,687) 6,713 Net earnings (loss) per share .32 .22 (.23) .20 Fiscal 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------------------------- Sales $301,340 $323,779 $319,840 $289,022 Gross profit 46,482 47,957 49,949 48,542 Net earnings 13,861 15,000 16,927 16,015 Net earnings per share .42 .45 .51 .49
Note 14: Acquisitions On April 12, 1997, the Company acquired ownership of Sierra Detroit Diesel Allison, Inc. from Outer Drive Holdings, Inc. The acquisition will broaden the Company's distribution territory for certain products. From time to time, the Company enters into investment arrangements that are related to its Engineered Power Systems segment. During Fiscal 1996, the Company made an approximate $8 million investment in an independent power producer. Note 15: Vulnerability Due To Certain Concentrations A majority of the Engineered Power Systems Segment sales is derived from packaging, operating and servicing gas turbine engines manufactured by General Electric Company ("GE") and European Gas Turbines ("EGT"). The Company has no reason to believe that its relationship with GE and EGT will not continue for the foreseeable future. Any interruption of these relationships, however, would adversely affect the Company. The Company's principal distribution agreements are subject to termination by the suppliers for a variety of causes. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III In accordance with General Instruction G(3) to Form 10-K, Items 10 through 13 have been omitted since the Company will file with the Commission a definitive proxy statement complying with Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. Such information is incorporated herein by reference. CROSS REFERENCE Form 10-K Item Caption in Definitive Number and Caption Proxy Statement Item 10. Directors and Executive Officers of the Registrant........... Election of Directors; Executive Officers; Compliance with Securities Laws Item 11. Executive Compensation.............. Election of Directors; Performance of Stewart & Stevenson Common Stock; Report of the Compensation and Management Development Committee; Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management...................... Voting Securities and Ownership Thereof by Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions............ Transactions with Management and Certain Business Relationships PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. The following financial statements for Stewart & Stevenson Services, Inc. are filed as a part of this report: Consolidated Statements of Financial Position--January 31, 1997 and 1996. Consolidated Statements of Earnings--Years ended January 31, 1997, 1996 and 1995. Consolidated Statements of Shareholders' Equity--Years ended January 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows--Years ended January 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. 2. Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto. 3. The Company has several instruments which define the rights of holders of long-term debt. Except for the instruments listed as exhibits 4.1 and 4.2 below, the total amount of securities authorized under any individual instrument with respect to long-term debt does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish upon request by the Securities and Exchange Commission any instruments not filed herewith relating to its long-term debt. The Company will furnish to any shareholder of record as of April 23, 1997, a copy of any exhibit to this annual report upon receipt of a written request addressed to Mr. Lawrence E. Wilson, Vice President and Secretary, P. O. Box 1637, Houston, Texas 77251-1637 and the payment of $.20 per page with a minimum charge of $5.00 for reasonable expenses prior to furnishing such exhibits. The following exhibits are part of this report pursuant to item 601 of regulation S-K. 3.1 Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (incorporated by reference to Exhibit 3(a) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001-11443). 3.2 Fourth Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (incorporated by reference to Exhibit 3(b) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001-11443). *4.1 Revolving Credit Agreement effective December 20, 1996, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and Bank of America Illinois and NationsBank of Texas, N.A. and ABM AMRO Bank N.V., Houston Agency and The Bank of New York and PNC Bank National Association and First National Bank of Commerce. 4.2 Note Purchase Agreement effective May 30, 1996, between Stewart & Stevenson Services, Inc. and the Purchasers named therein (incorporated by reference to Exhibit 4 of the Form 10-Q of Stewart & Stevenson for the quarterly period ended July 31, 1996 under the Commission File No. 0-8493). 4.3 Rights Agreement effective March 13, 1995, between Stewart & Stevenson Services, Inc. and The Bank of New York (incorporated by reference to Exhibit 1 of the Form 8-A Registration Statement of Stewart & Stevenson under the Commission File No. 001-11443). *10.1 Lease Agreement effective April 15, 1997, between Miles McInnes and Faye Manning Tosch, as Lessors, and the Company, as Lessee. 10.2 Distributor Sales and Service Agreement effective January 1, 1996, between the Company and Detroit Diesel Corporation (incorporated by reference to Exhibit 10.2 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1996 under Commission File No. 0-8493). 10.3 Contract Number DAAE07-92-R001 dated October 11, 1991 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive Command, as modified (incorporated by reference to Exhibit 28.1 of the Form S-3 Registration Statement of Stewart & Stevenson under the Commission File No. 33-44149). 10.4 Contract Number DAAE07-92-R002 dated October 15, 1991 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive Command, as modified (incorporated by reference to Exhibit 28.2 of the Form S-3 Registration Statement of Stewart & Stevenson under the Commission File No. 33-44149). 10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated as of December 31, 1979 (incorporated by reference to Exhibit 10.8 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 10.9 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.7 Amendment No. 1 to Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan, dated September 11, 1990 (incorporated by reference to Exhibit 10.10 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.8 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.11 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.9 Stewart & Stevenson Services, Inc. 1994 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 of the Form S-8 Registration Statement of Stewart & Stevenson under the Commission File No. 33-58685). *21.1 List of Subsidiaries. *23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. *27.1 Financial Data Schedule. ---------- * Filed with this report. (b) No reports on Form 8-K were filed during the three months ended January 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 8th day of April, 1997. STEWART & STEVENSON SERVICES, INC. By /s/ Robert L. Hargrave Robert L. Hargrave Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 8th day of April, 1997. /s/ Robert L. Hargrave Robert L. Hargrave Bob H. O'Neal Director, Principal Executive Officer, Director Principal Financial Officer and Principal Accounting Officer /s/ C. Jim Stewart II /s/ J. Carsey Manning C. Jim Stewart II J. Carsey Manning Director Director /s/ Donald E. Stevenson /s/ Robert H. Parsley Donald E. Stevenson Robert H. Parsley Director Director /s/ Jack W. Lander, Jr. /s/ Jack T. Currie Jack W. Lander, Jr. Jack T. Currie Director Director /s/ Robert S. Sullivan /s/ Richard R. Stewart Robert S. Sullivan Richard R. Stewart Director Director /s/ Orson C Clay /s/ Brian H. Rowe Orson C Clay Brian H. Rowe Director Director EXHIBIT INDEX Exhibit Number and Description 4.1 Revolving Credit Agreement. 10.1 Lease Agreement. 21.1 List of subsidiaries. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 27.1 Financial Data Schedule. EX-4 2 REVOLVING CREDIT AGREEMENT LOAN AGREEMENT by and among STEWART & STEVENSON SERVICES, INC., a Texas corporation, TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association acting in its individual capacity and as Agent for Lenders BANK OF AMERICA ILLINOIS and NATIONSBANK OF TEXAS, N.A. as Co-Agents and THE FINANCIAL INSTITUTIONS NOW OR HEREAFTER A PARTY HERETO $225,000,000 Revolving Credit Facility December 20, 1996 I N D E X 1. CERTAIN DEFINITIONS.................................................1 Accounts and Inventory..............................................1 Additional Interest.................................................1 Adjusted CD Rate....................................................1 Adjusted Eurodollar Interbank Rate..................................1 Affiliate...........................................................1 Agreement...........................................................1 Alternate Rates.....................................................2 Alternate Rate Borrowing............................................2 Annual Financial Statements.........................................2 Bankruptcy Code.....................................................2 Base CD Rate........................................................2 Base Rate...........................................................2 Base Rate Borrowing.................................................3 Borrowing Authorization.............................................3 Business Day........................................................3 Calculation Date....................................................3 Capital Expenditures................................................3 Capital Lease Obligations...........................................3 Cash Interest Expense...............................................4 CD Rate.............................................................4 CD Rate Borrowing...................................................4 CD Reserve Requirement..............................................4 Ceiling Rate........................................................4 Chapter One.........................................................5 Code................................................................5 Commitment..........................................................5 Commitment Fee Percentage...........................................5 Compliance Certificate..............................................5 Controlled Group....................................................5 Credit Documents....................................................5 Dealer Rate.........................................................5 Default.............................................................6 EBITDA..............................................................6 Eligible Assignee...................................................6 Environmental Claim.................................................6 Environmental Liabilities...........................................6 Environmental Permit................................................7 ERISA...............................................................7 Eurodollar Business Day.............................................7 Eurodollar Interbank Rate...........................................7 Eurodollar Rate.....................................................7 Eurodollar Rate Borrowing...........................................7 Eurodollar Reserve Requirement......................................8 Event of Default....................................................8 Facility Debt.......................................................8 FDIC Percentage.....................................................8 Federal Funds Rate..................................................8 FMTV Capital Expenditures...........................................8 Funding Loss........................................................8 GAAP................................................................9 Governmental Authority..............................................9 Hazardous Substance.................................................9 Indebtedness........................................................9 Interest Bearing Debt..............................................10 Interest Bearing Debt to Total Capitalization......................10 Interest Coverage Ratio............................................10 Interest Options...................................................10 Interest Payment Dates.............................................10 Interest Period....................................................10 Investment.........................................................11 Legal Requirement..................................................11 Lien...............................................................11 Loan Availability Period...........................................11 Loans..............................................................11 MAC................................................................11 Majority Lenders...................................................11 Margin Percentage..................................................11 Maturity Date......................................................11 Maximum Commitment.................................................11 Negotiated Base Rate...............................................12 Negotiated Rate....................................................12 Negotiated Rate Borrowing..........................................12 Net Income.........................................................12 Net Tangible Assets................................................12 Notes..............................................................12 Organizational Documents...........................................12 Original Notes.....................................................12 Past Due Rate......................................................12 PBGC...............................................................12 Percentage.........................................................12 Permitted Investments..............................................12 Person.............................................................13 Plan...............................................................13 Prime Rate.........................................................13 Proper Form........................................................13 Property...........................................................13 Quarterly Financial Statements.....................................13 Rate Designation Notice............................................14 Regulation D.......................................................14 Request for Credit.................................................14 Subsidiary.........................................................14 Superseded Loan Agreement..........................................14 Tangible Net Worth.................................................15 Taxes..............................................................15 Termination Date...................................................15 Texas Credit Code..................................................15 Total Capitalization...............................................15 Unfunded Liabilities...............................................15 2. LOANS..............................................................15 3. INTEREST OPTIONS FOR LOANS.........................................17 4. CONDITIONS PRECEDENT...............................................22 5. REPRESENTATIONS AND WARRANTIES.....................................23 6. AFFIRMATIVE COVENANTS..............................................27 7. NEGATIVE COVENANTS.................................................32 8. DEFAULT............................................................34 9. LENDERS' RIGHT TO CURE.............................................36 10. THE AGENT..........................................................37 11. PARTICIPATION; ASSIGNMENT..........................................40 12. USURY NOT INTENDED; SAVINGS PROVISIONS.............................40 13. DOCUMENTATION REQUIREMENTS.........................................41 14. SURVIVAL...........................................................41 15. BORROWER AGREES TO PAY OR REIMBURSE AGENT'S EXPENSES; INDEMNIFICATION..................................41 16. AMENDMENTS IN WRITING..............................................42 17. NOTICES............................................................42 18. "INCLUDING" IS NOT LIMITING; SECTION HEADINGS AND REFERENCES; EXHIBITS, ETC......................................43 19. OFFSET RIGHTS......................................................43 20. VENUE..............................................................44 21. RIGHTS CUMULATIVE; DELAY NOT WAIVER................................44 22. ENTIRE AGREEMENT; FORMER AGREEMENT SUPERSEDED......................45 23. SEVERABILITY.......................................................45 24. RELEASE OF CLAIMS..................................................45 25. COUNTERPARTS.......................................................45 26. ASSIGNMENT TO FEDERAL RESERVE BANK.................................46 EXHIBITS: A - Note form B - Rate Designation Notice C - Request for Credit D - Compliance Certificate E - Assignment form SCHEDULES: I - Litigation II - Subsidiaries III - Investments IV - Liens LOAN AGREEMENT This Loan Agreement ("Agreement") is made as of December 20, 1996 by and among STEWART & STEVENSON SERVICES, INC. ("Borrower"), a Texas corporation, the financial institutions (collectively herein called "Lenders") which are now or may hereafter become a party hereto, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association (in its individual capacity, "TCB"), as agent for Lenders (in such capacity, "Agent"). Borrower has requested that Lenders make loans to Borrower in the following manner and subject to the following terms and conditions: I. CERTAIN DEFINITIONS. Unless a particular word or phrase is otherwise defined or the context otherwise requires, capitalized words and phrases used in this Agreement shall have the following meanings (all definitions that are defined in this Agreement in the singular to have the same meanings when used in the plural and vice versa): Accounts and Inventory shall have the respective meanings assigned to them in the Texas Business and Commerce Code in force on the date hereof. Additional Interest means the aggregate of all amounts accrued or paid pursuant to the Notes or any of the other Credit Documents (other than interest on the Notes at the Stated Rate) which, under applicable laws, are or may be deemed to constitute interest on the indebtedness evidenced by the Notes. Adjusted CD Rate means, with respect to each Interest Period applicable to a CD Rate Borrowing, a rate per annum equal to the sum of(a) the quotient, expressed as a percentage, of (i) the Dealer Rate with respect to such Interest Period divided by (ii) 1.0000 minus the CD Reserve Requirement in effect on the first day of such Interest Period plus (b) the FDIC Percentage in effect on the first day of such Interest Period. Adjusted EurodollarInterbank Rate means, with respect to each Interest Period applicable to a Eurodollar Rate Borrowing, a rate per annum equal to the quotient, expressed as a percentage, of (a) the Eurodollar Interbank Rate with respect to such Interest Period divided by (b) 1.0000 minus the Eurodollar Reserve Requirement in effect on the first day of such Interest Period. Affiliate means any Person controlling, controlled by or under common control with any other Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of any indicia of equity rights (whether issued and outstanding capital stock, partnership interests or otherwise) or by any other means. Agreement means this Loan Agreement, as it may from time to time be amended, modified, restated or supplemented. Alternate Rates means the CD Rate, the Eurodollar Rate and the Negotiated Rate. Alternate Rate Borrowing means that portion of the principal balance of the Loans at any time bearing interest at an Alternate Rate. Annual Financial Statements means for any fiscal year of a Person the annual financial statements of such Person, including all notes thereto, which statements shall include a balance sheet as of the end of such fiscal year and an income statement, retained earnings statement and statement of cash flows for such fiscal year, all setting forth in comparative form the corresponding figures from the previous fiscal year, all prepared in conformity with GAAP, and accompanied by an unqualified report and opinion of Arthur Andersen & Co. or independent certified public accountants of recognized national standing satisfactory to Majority Lenders, which shall state that such financial statements, in the opinion of such accountants, present fairly, in all material respects, the financial position of such Person as of the date thereof and the results of its operations for the period covered thereby in conformity with GAAP. Such statements shall be accompanied by a certificate of such accountants that in making the appropriate audit and/or investigation in connection with such report and opinion, such accountants did not become aware of any Default or, if in the opinion of such accountant any such Default exists, a description of the nature and status thereof. The Annual Financial Statements for Borrower and its Subsidiaries shall be prepared on both a consolidated and a consolidating basis (the parties recognizing that such consolidating statements will be prepared in accordance with GAAP only to the extent normal and customary). Bankruptcy Code means the United States Bankruptcy Code, as amended, and any successor statute. Base CD Rate means, for any day, a rate per annum equal to the sum of (a) the quotient, expressed as a percentage, of (1) the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the immediately preceding Business Day) by the Federal Reserve Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Federal Reserve Board, be published in Federal Reserve Statistical Release H.15[519] during the week following such day) or, if such rate is not so reported on such day or such immediately preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., Houston, Texas time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by Agent in its sole and absolute discretion, divided by (2) 1.0000 minus the CD Reserve Requirement in effect on such day plus (b) the FDIC Percentage in effect for such day. Base Rate means for any day a rate per annum (rounded upwards to the nearest 1/16 of 1%) equal to the lesser of (a) the greater of (1) the Prime Rate for that day, (2) the Base CD Rate for that day plus 1 1/4%, and (3) the Federal Funds Rate for that day plus 1/2 of 1% and (b) the Ceiling Rate. If for any reason Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Rate, or both, for any reason, including the inability or failure of Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall, until the circumstances giving rise to such inability no longer exist, be the lesser of (a) the Prime Rate and (b) the Ceiling Rate. Base Rate Borrowing means that portion of the principal balance of the Loans at any time bearing interest at the Base Rate. Borrowing Authorization means a certificate, in Proper Form, of the Secretary or an Assistant Secretary of a corporation as to the resolutions of the Board of Directors of such corporation authorizing the execution, delivery and performance of the documents to be executed by such corporation; the incumbency and signature of the officer of such corporation executing such documents on behalf of such corporation, and the Organizational Documents of such corporation. Business Day means any day other than a day on which commercial banks are authorized or required to close in Houston, Texas or in the jurisdiction in which the principal place of business of any Lender is located. Calculation Date shall mean the Business Day on which Agent receives either an Annual Financial Statement of Borrower, as contemplated in Section 6(b), or the Quarterly Financial Statements of Borrower for a quarter-annual period as contemplated in Section 6(b), together with the applicable schedules and certificates required hereunder. Capital Expenditures means, as to any Person, expenditures in respect of fixed or capital assets by such Person, including the capital portion of lease payments made in respect of Capital Lease Obligations, but excluding expenditures for the restoration, repair or replacement of any fixed or capital asset which was destroyed or damaged, in whole or in part, to the extent financed by the proceeds of an insurance policy maintained by such Person and further excluding the FMTV Capital Expenditures. Expenditures in respect of replacements and maintenance consistent with the business practices of a Person in respect of plant facilities, machinery, fixtures and other like capital assets utilized in the ordinary course of business are not Capital Expenditures to the extent such expenditures are not capitalized in preparing a balance sheet of such Person in accordance with GAAP. Capital Lease Obligations means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal Property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board, as amended) and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). Cash Interest Expense means, for any period, the cash interest payments by a Person made during such period in connection with such Person's Interest Bearing Debt. CD Rate means for any day a rate per annum equal to the lesser of (a) the sum of (1) the Adjusted CD Rate in effect on the first day of the Interest Period for the applicable CD Rate Borrowing plus (2) the applicable Margin Percentage in effect on the first day of the Interest Period for the applicable CD Rate Borrowing and (b) the Ceiling Rate. The CD Rate shall be computed on the basis of the actual number of days elapsed in a year consisting of 360 days. The CD Rate is subject to adjustments for reserves, insurance assessments and other matters as provided for in Section 3(c). CD Rate Borrowing means that portion of the Loans at any time bearing interest at the CD Rate. CD Reserve Requirement means, on any day, that percentage (expressed as a decimal fraction and rounded, if necessary, to the next highest one ten thousandth [.0001]) which is in effect on such day for determining all reserve requirements (including basic, supplemental, marginal and emergency reserves) applicable to new, non-personal, negotiable certificates of deposit issued by Agent, in amounts of $100,000 or more with maturities equal to or comparable with the applicable Interest Period, all as specified by any governmental authority, including those imposed under Regulation D. The CD Reserve Requirement shall be adjusted automatically on and as of the effective date of any change without notice to Borrower or any other Person. Each determination of the CD Reserve Requirement by Agent shall be conclusive and binding, absent manifest error, and may be computed by using any reasonable averaging and attribution method. Ceiling Rate means, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas laws permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter One establishes the Ceiling Rate, the Ceiling Rate shall be the "indicated rate ceiling" (as defined in Chapter One) for that day. Lenders may from time to time, as to current and future balances, implement any other ceiling under Chapter One by notice to Borrower, if and to the extent permitted by Chapter One. Without notice to Borrower or any other Person, the Ceiling Rate shall automatically fluctuate upward and downward as and in the amount by which such maximum nonusurious rate of interest permitted by applicable law fluctuates. Change of Control means any of (a) the acquisition by any Person or two or more Persons acting in concert of beneficial ownership of 25% or more of the outstanding shares of voting stock of Borrower, or (b) a majority of the members of the Board of Directors of Borrower on any date shall not have been members of the Board of Directors of Borrower on the date 12 months prior to such date, or (c) all or substantially all of the assets of Borrower are sold in a single transaction or series of related transactions to any Person or Persons, or (d) the merger or consolidation of Borrower with or into any other Person. Chapter One means Chapter One of the Texas Credit Code, as in effect on the date hereof. Code means the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. Commitment means the Maximum Commitment or such lesser amount as Borrower may designate by notice to Agent pursuant to Section 2(b). Commitment Fee Percentage means, on any day, the per annum percentage corresponding to the Interest Bearing Debt to Total Capitalization Ratio (determined as of the most recent Calculation Date) on such day as provided below: Interest Bearing Debt Per Annum to Total Capitalization Ratio Percentage 0.45 or more to 1.00 0.20% 0.40 or more to 1.00 but less than 0.45 to 1.00 0.15% less than 0.40 to 1.00 0.125% Compliance Certificate shall have the meaning given to it in Section 6(b). Controlled Group means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the applicable Person, are treated as a single employer under Section 414 of the Code. Credit Documents means any and all papers now or hereafter governing, evidencing, guaranteeing or securing or otherwise relating to all or any part of the Facility Debt, including the Notes, this Agreement, Borrowing Authorizations of Borrower, all instruments, certificates and agreements now or hereafter executed or delivered to Agent or any Lender pursuant to any of the foregoing or in connection with the Loans or any commitment regarding the Loans and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. Dealer Rate means, for each Interest Period, the rate of interest per annum, rounded, if necessary, to the next highest whole multiple of one-sixteenth percent (1/16%), quoted by Agent at or before 10:00 a.m., Houston, Texas time (or as soon thereafter as practicable), on the first day of such Interest Period, to be the arithmetic average of the prevailing rates per annum at the time of determination and in accordance with the then existing practice in the applicable market, bid by one or more certificate of deposit dealers of recognized standing selected by Agent in its sole discretion, for the purchase at face value of domestic negotiable certificates of deposit from Agent, or any affiliate of Agent selected by Agent as the reference bank, having a maturity equal to the length of such Interest Period and in an amount equal (or as nearly equal as may be) to the CD Rate Borrowing to which such Interest Period relates. Each determination by Agent of the Dealer Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. Default means an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. EBITDA means Net Income plus (a) interest expense; (b) depreciation, amortization, depletion and obsolescence of Property; (c) other non-cash extraordinary charges (net of non-cash extraordinary credits), and (d) tax expense, all determined in accordance with GAAP; provided, however, that in determining EBITDA for the last three quarters of fiscal year 1996 and the first quarter of fiscal year 1997, the pre-tax charge of $20,000,000 resulting from the verdict in Serv-Tech, Inc. vs. Stewart & Stevenson Services, Inc. shall be excluded. EBITDA shall be determined on a consolidated basis. Eligible Assignee means a financial institution acceptable to Agent and Borrower, which acceptance shall not be unreasonably withheld. Environmental Claim means any claim; litigation; demand; action; cause of action; suit; judgment, governmental or private investigation and testing; notification of status of being potentially responsible for clean-up of any facility or for being in violation or in potential violation of any Environmental Law; proceeding; consent or administrative orders, agreements or decrees; lien; personal injury or death of any person; or property damage, whether threatened, sought, brought or imposed, that is related to or that seeks to recover or impose Environmental Liabilities for (i) failure to comply with Environmental Laws; (ii) improper use or treatment of wetlands, pinelands or other protected land or wildlife; (iii) radioactive materials (including naturally occurring radioactive materials ["NORM"]); (iv) pollution, contamination, Remediation or clean-up of the air, surface water, groundwater, or soil; (v) solid, gaseous or liquid waste generation, handling, discharge, release, threatened release, treatment, storage, disposal or transportation; (vi) exposure or death of, or injury to, persons or property from Hazardous Substances and the effects thereof; and (vii) the release or threatened release (into the indoor or outdoor environment) or Remediation of Hazardous Substances. Environmental Laws means any and all laws, rules, regulations, ordinances, orders, consent agreements, orders on consent, or guidance documents now or hereafter in effect of any applicable international, federal, state or local executive, legislative, judicial, regulatory or administrative agency, board or authority or any judicial or administrative decision relating thereto that relate in any manner to health, worker protection, the environment, Hazardous Substances or a community's right to know. Environmental Liabilities shall mean all liabilities arising from any Environmental Claim under any theory of recovery, at law or in equity, and whether based on negligence, strict liability, any Environmental Law or otherwise, including: remedial, removal, response, abatement, restoration (including natural resources), investigative, or monitoring costs, personal injury and damage to property or natural resources and any other related costs, expenses, losses, damages, penalties, fines, liabilities and obligations and including, but not limited to, attorneys' fees, diminution in value, and expert's fees and costs incurred in testing for the likelihood of Remediation or the likelihood of violation of any Environmental Laws, and monitoring or responding to efforts to require Remediation or any claim based upon any asserted or actual breach or violation of Environmental Law. Environmental Permit shall mean any permit, license, certificates, registrations, identification numbers, applications, consents, approvals, variances, notices of intent, exemptions approval or other authorization required under any Environmental Law. ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations, rulings and interpretations adopted by the Internal Revenue Service or the U.S. Department of Labor thereunder. Eurodollar Business Day means a Business Day on which transactions in United States dollar deposits between banks may be carried on in whatever Eurodollar interbank market may be selected by Agent in accordance herewith. Eurodollar Interbank Rate means, for each Interest Period, the rate of interest per annum, rounded, if necessary, to the next highest whole multiple of one-sixteenth percent (1/16%), quoted by Agent at or before 10:00 a.m., Houston, Texas time (or as soon thereafter as practicable), on the date two Eurodollar Business Days before the first day of such Interest Period, to be the arithmetic average of the prevailing rates per annum at the time of determination and in accordance with the then existing practice in the applicable market, for the offering to Agent by one or more prime banks selected by Agent in its sole discretion, in whatever Eurodollar interbank market may be selected by Agent in its sole discretion, of deposits in United States dollars for delivery on the first day of such Interest Period and having a maturity equal to the length of such Interest Period and in an amount equal (or as nearly equal as may be) to the Eurodollar Rate Borrowing to which such Interest Period relates. Each determination by Agent of the Eurodollar Interbank Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. Eurodollar Rate means for any day a rate per annum equal to the lesser of (a) the sum of (1) the Adjusted Eurodollar Interbank Rate in effect on the first day of the Interest Period for the applicable Eurodollar Rate Borrowing plus (2) the applicable Margin Percentage in effect on the first day of the Interest Period for the applicable Eurodollar Rate Borrowing and (b) the Ceiling Rate. Subject to Section 12, each Eurodollar Rate is subject to adjustments for reserves, insurance assessments and other matters as provided for in Section 3(c). Eurodollar Rate Borrowing means each portion of the principal balance of the Loans at any time bearing interest at a Eurodollar Rate. Eurodollar Reserve Requirement means, on any day, that percentage (expressed as a decimal fraction and rounded, if necessary, to the next highest one ten thousandth [.0001]) which is in effect on such day for determining all reserve requirements (including basic, supplemental, marginal and emergency reserves) applicable to "Eurocurrency liabilities," as currently defined in Regulation D, all as specified by any governmental authority, including those imposed under Regulation D. Each determination of the Eurodollar Reserve Requirement by Agent shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. Event of Default shall have the meaning assigned to it in Section 8. Facility Debt means the Indebtedness evidenced by the Notes and any and all other Indebtedness arising pursuant to this Agreement or any other Credit Document from time to time. FDIC Percentage means, on any day, the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as well capitalized and within supervisory subgroup "B" (or a comparable risk classification) within the means of 12 C.F.R. ss.372.3(d) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for its insuring time deposits at offices of such member in the United States. Each determination of the FDIC Percentage by Agent shall be conclusive and binding, absent manifest error, and may be computed by using any reasonable averaging and attribution method. Federal Funds Rate means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Agent from three Federal funds brokers of recognized standing selected by Agent in its sole and absolute discretion. FMTV Capital Expenditures shall mean the sum of all capitalized leases and capital expenditures, determined in accordance with GAAP, relating to the performance by Borrower of that certain contract between Borrower and the United States of America to assemble and furnish medium tactical vehicles. Funding Loss means, with respect to (a) Borrower's payment of principal of an Alternate Rate Borrowing on a day other than the last day of the applicable Interest Period; (b) Borrower's failure to borrow an Alternate Rate Borrowing on the date specified by Borrower; (c) Borrower's failure to make any prepayment of the Loans (other than Base Rate Borrowings) on the date specified by Borrower, or (d) any cessation of an Alternate Rate to apply to the Loans or any part thereof pursuant to Section 3(c), in each case whether voluntary or involuntary, any loss, expense, penalty, premium or liability incurred by Agent or any Lender (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Agent or any Lender to fund or maintain a Loan). GAAP means, as to a particular Person, such accounting practice as, in the opinion of the independent certified public accountants of recognized national standing regularly retained by such Person and acceptable to Majority Lenders, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles means those principles and practices (a) which are recognized as such by the Financial Accounting Standards Board or equivalent non-United States counterpart, (b) which are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the most recent audited financial statements of the relevant Person furnished to Lenders, and (c) which are consistently applied for all periods after the date hereof so as to reflect properly the financial condition, and results of operations and changes in financial position, of such Person. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board or equivalent non-United States counterpart in order for such principle or practice to continue as a generally accepted accounting principle or practice, all reports and financial statements required hereunder may be prepared in accordance with such change only after written notice of such change is given to Agent. Governmental Authority means any sovereign governmental authority, the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any central bank, agency, department, commission, board, bureau, court or other tribunal having jurisdiction over Agent, any Lender, Borrower, any Subsidiary of Borrower, or any of their respective Property. Hazardous Substance shall mean (i) those substances included within the statutory and/or regulatory definitions or listings of "hazardous substance," "medical waste," "special waste," "solid waste," "hazardous waste," "extremely hazardous substance," "regulated substance," "hazardous materials," or "toxic substances," under any Environmental Law; (ii) any material, waste or substance which is or contains: (A) petroleum, oil or a fraction thereof, (B) explosives, or (C) radioactive materials (including naturally occurring radioactive materials); and (iii) such other substances, materials, or wastes that are or become classified or regulated as hazardous or toxic under any applicable international, federal, state or local law or regulation. Indebtedness means and includes (a) all items which in accordance with GAAP would be included on the liability side of a balance sheet on the date as of which Indebtedness is to be determined (excluding capital stock, surplus, surplus reserves and deferred credits); (b) all guaranties, letter of credit contingent reimbursement obligations, endorsements and other contingent obligations in respect of, or any obligations to purchase or otherwise acquire, Indebtedness of others, and (c) all Indebtedness secured by any Lien existing on any interest of the Person with respect to which Indebtedness is being determined in Property owned subject to such Lien whether or not the Indebtedness secured thereby shall have been assumed (up to the amount of such Indebtedness or the book value of such Property, whichever is less); provided, that such term shall not mean or include any Indebtedness in respect of which monies sufficient to pay and discharge the same in full (either on the expressed date of maturity thereof or on such earlier date as such Indebtedness may be duly called for redemption and payment) shall be deposited with a depository, agency or trustee acceptable to Majority Lenders in trust for the payment thereof. Interest Bearing Debt means, as to any Person, (a) Indebtedness of such Person for borrowed money (other than Indebtedness which is non-recourse to such Person), (b) Indebtedness of such Person for deferred compensation and (c) Capital Lease Obligations. Interest Bearing Debt to Total Capitalization means, as of any day, the ratio of Interest Bearing Debt to Total Capitalization. Interest Coverage Ratio means, as of any day, the ratio of (a) the amount of EBITDA for the 12-month period ending on such date less cash taxes and Capital Expenditures for such period to (b) Cash Interest Expense for such period. Interest Options means the Base Rate and the Alternate Rates. Interest Payment Dates means (a) for Base Rate Borrowings, the last Business Day of each October, January, April and July and the Maturity Date; and (b) for Alternate Rate Borrowings, the end of the applicable Interest Period (and if such Interest Period exceeds three months' duration, quarterly, commencing on the first quarterly anniversary of the first day of such Interest Period), and, in all cases, the Maturity Date. Interest Period means, for each Alternate Rate Borrowing, a period commencing on the date such Alternate Rate Borrowing began and ending on the numerically corresponding day which is, subject to availability, (a) for each CD Rate Borrowing, 30, 60, 90 or 180 days thereafter, (b) for each Eurodollar Rate Borrowing, one, two, three or six months thereafter and (c) for each Negotiated Rate Borrowing, overnight or no less than seven but no more than 29 days thereafter, as Borrower shall elect in accordance herewith; provided, (v) any Interest Period with respect to a Eurodollar Rate Borrowing which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day, unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (w) any Interest Period with respect to a CD Rate Borrowing or Negotiated Rate Borrowing which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day (subject to the provisions of the clause [y] below), (x) any Interest Period with respect to a Eurodollar Rate Borrowing which begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of the appropriate calendar month; (y) no Interest Period shall ever extend beyond the Maturity Date; and (z) Interest Periods shall be selected by Borrower in such a manner that the Interest Period with respect to any portion of the Loans which shall become due shall not extend beyond such due date. Investment means the purchase or other acquisition of any securities or Indebtedness of, or the making of any loan, advance, transfer of Property or capital contribution to, or the incurring of any liability in respect of the Indebtedness of, any Person. Legal Requirement means any law, statute, ordinance, decree, requirement, order, judgment, rule, or regulation (or interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, whether presently existing or arising in the future. The term "Legal Requirement" includes Environmental Laws. Lien means any mortgage, pledge, charge, encumbrance, security interest, collateral assignment or other lien or restriction of any kind, whether based on common law, constitutional provision, statute or contract, and shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions. Loan Availability Period means the period from and including the date hereof to (but not including) the Termination Date. Loans means the loans described in and provided for by Section 2. MAC means Machinery Acceptance Corporation, a Texas corporation. Majority Lenders means Lenders the aggregate of whose Percentages is greater than fifty percent (50%). Margin Percentage means, on any day, the per annum percentage corresponding to the Interest Bearing Debt to Total Capitalization Ratio (determined as of the most recent Calculation Date) on such day as provided below: Interest Bearing Debt Per Annum to Total Capitalization Ratio Percentage 0.45 or more to 1.00 0.65% 0.40 or more to 1.00 but less than 0.45 to 1.00 0.45% 0.35 or more to 1.00 but less than 0.40 to 1.00 0.35% 0.30 or more to 1.00 but less than 0.35 to 1.00 0.30% less than 0.30 to 1.00 0.25% Maturity Date means the maturity of the Notes, December 20, 2001, as the same may hereafter be accelerated pursuant to the provisions of any of the Credit Documents. Maximum Commitment means Two Hundred Twenty-five Million Dollars ($225,000,000). Negotiated Base Rate means, for each Interest Period, the rate of interest per annum quoted by Agent to Borrower at the time of the applicable request by Borrower for a Negotiated Rate Borrowing as the "Negotiated Base Rate." Negotiated Rate means for any day a rate per annum equal to the lesser of (a) the Negotiated Base Rate in effect of the first day of the Interest Period for the applicable Negotiated Rate Borrowing and (b) the Ceiling Rate. Subject to Section 12, the Negotiated Rate is subject to adjustments for reserves, insurance assessments and other matters as provided for in Section 3(c). Negotiated Rate Borrowing means each portion of the principal balance of the Loans at any time bearing interest at the Negotiated Rate. Net Income means gross revenues and other proper income credits, less all proper income charges (including Taxes on income), all determined in accordance with GAAP. Net Income shall be determined on a consolidated basis. Net Tangible Assets means, as to a particular Person, assets (valued at cost less normal depreciation) of such Person and its Subsidiaries minus intangibles of such Person and its Subsidiaries, all determined in accordance with GAAP. Notes means the promissory notes of Borrower evidencing the Loans substantially in the form of Exhibit A, and any and all renewals, extensions, modifications, rearrangements and/or replacements thereof. Organizational Documents means the certificate or articles of incorporation and bylaws of a corporation. Original Notes shall mean the promissory notes issued pursuant to the Superseded Loan Agreement. Past Due Rate shall mean a rate per annum equal to the lesser of (a) the Base Rate plus four percent (4%)and (b) the Ceiling Rate. PBGC means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. Percentage means, for any Lender, such Lender's interest in the Maximum Commitment. The dollar amount of each Lender's interest in the Maximum Commitment as of the date hereof is set forth opposite such Lender's name on the signature pages of this Agreement. Permitted Investments means: (a) readily marketable securities issued or fully guaranteed by the United States of America with maturities of not more than one year, (b) financial instruments (including commercial paper) with maturities of not more than 270 days of Persons, in each case, rated "Prime 2" or better by Moody's Investors Service, Inc. or "A-2" or better by Standard and Poor's Corporation; (c) certificates of deposit, eurodollar deposits or repurchase obligations having a maturity of not more than one year from the date of issuance thereof, or tax exempt bonds backed by letters of credit, in each case, issued by any U.S. domestic bank having capital surplus of at least $100,000,000 or by any other financial institution acceptable to Majority Lenders, all of the foregoing; (d) readily marketable shares of any money market fund having total assets in excess of $250,000,000 and not disapproved in writing by Majority Lenders; and (e) common stock of Borrower, not to exceed $50,000,000 in aggregate cost; provided, that the aggregate value of the assets subject to Section 7(a) consisting of "margin stock" (as defined from time to time in or pursuant to Regulation U of the Board of Governors of the Federal Reserve System, or any successor regulation) shall never exceed 25% of the aggregate value of all assets subject to Section 7(a). Person means any individual, corporation, partnership, joint venture, joint stock association, business or other trust, unincorporated organization, Governmental Authority or any other form of entity. Plan means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by Borrower, any Subsidiary of Borrower or any member of a Controlled Group for employees of Borrower or any of its Subsidiaries or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which Borrower or any member of a Controlled Group for employees of Borrower or any of its Subsidiaries is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. Prime Rate means, on any day, the prime rate for that day as announced from time to time by TCB. Without notice to Borrower or any other Person, the Prime Rate shall automatically fluctuate upward and downward as and in the amount by which said prime rate fluctuates, with each change to be effective as of the date of each change in said prime rate. THE PRIME RATE IS A REFERENCE RATE AND DOES NOT NECESSARILY REPRESENT THE LOWEST OR BEST RATE OR A FAVORED RATE, AND AGENT AND LENDERS DISCLAIM ANY STATEMENT, REPRESENTATION OR WARRANTY TO THE CONTRARY. ANY LENDER MAY MAKE COMMERCIAL LOANS OR OTHER LOANS AT RATES OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE. Proper Form means in form and substance satisfactory to Agent and Majority Lenders. Property means any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible. Quarterly Financial Statements means for any fiscal quarter of a Person the quarterly financial statements of such Person which statements shall include a balance sheet as of the end of such fiscal quarter and an income statement, and a statement of cash flows for the fiscal year to date, subject only to normal year-end adjustments, all setting forth in comparative form the corresponding figures for the corresponding fiscal quarter of the preceding year, prepared in accordance with GAAP and certified as presenting fairly the financial condition and results of operations by the chief financial officer or treasurer of such Person. The Quarterly Financial Statements for Borrower and its Subsidiaries shall be prepared on both a consolidated and a consolidating basis (the parties recognizing that such consolidating statements will be prepared in accordance with GAAP only to the extent normal and customary and the statement of cash flows need not be furnished in a consolidating form). Rate Designation Date means that Business Day which is (a) in the case of Base Rate Borrowings and Negotiated Rate Borrowings, 10:00 a.m., Houston, Texas time, on the date of such borrowing; (b) in the case of Eurodollar Rate Borrowings, 10:00 a.m., Houston, Texas time, on the date two Eurodollar Business Days preceding the first day of any proposed Interest Period, and (c) in the case of CD Rate Borrowings, 10:00 a.m., Houston, Texas time, on the Business Day immediately preceding the first day of any proposed Interest Period. Rate Designation Notice means a written notice substantially in the form of Exhibit B. Regulation D means Regulation D of the Board of Governors of the Federal Reserve System or any successor from time to time in effect and includes any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System. Remediation means any action necessary to: (i) comply with and ensure compliance with the Environmental Laws and (ii) the taking of all reasonably necessary precautions to protect against and/or respond to, investigate, remove, remediate or monitor the release or threatened release of Hazardous Substances. Request for Credit means a request for credit duly executed by an appropriate officer on behalf of Borrower, appropriately completed and substantially in the form of Exhibit C attached hereto. Subsidiary means, as to a particular parent Person, any other Person of which 50% or more of the indicia of equity rights (whether outstanding capital stock, partnership interests or otherwise) is at the time directly or indirectly owned or held by such parent Person, or by one or more of its Affiliates. In cases herein where reference is made to the Subsidiaries of Borrower, such references shall not refer to or include 2707 North Loop West, Ltd., a Texas limited partnership, until such time as Borrower or any of its Subsidiaries becomes the general partner thereof. Superseded Loan Agreement shall have the meaning ascribed to it in Section 22. Tangible Net Worth means total stockholders' equity (adjusted for treasury stock), less all intangibles, all determined in accordance with GAAP. Taxes means any tax, levy, impost, duty, charge or fee. Termination Date means the earlier of (a) the Maturity Date or (b) the date of termination of the Commitment pursuant to Section 8. Texas Credit Code means Title 79, Texas Revised Civil Statutes, 1925, as amended. Total Capitalization shall mean the sum of (i) all Interest Bearing Debt and (ii) total stockholders' equity of Borrower (adjusted for treasury stock). Unfunded Liabilities means, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent actuarial valuation report for such Plan, but only to the extent that such excess represents a potential liability of any member of the applicable Controlled Group to the PBGC or a Plan under Title IV of ERISA. The words "hereof," "herein," and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement. 2. LOANS. (a) Loans and Commitments. Subject to the terms and conditions hereof, each Lender severally agrees to make Loans to Borrower from time to time during the Loan Availability Period, not to exceed at any time outstanding such Lender's Percentage of the Commitment, Borrower having the right to borrow, repay and reborrow. Each Request for Credit by Borrower shall be deemed a request for a Loan from each Lender equal to such Lender's Percentage of the aggregate amount so requested, and such aggregate amount shall be equal to the lesser of (1) an integral multiple of $1,000,000 and (2) the unused portion of the Commitment. Each repayment of the Loans shall be deemed a repayment of each Lender's Loans equal to such Lender's Percentage of the aggregate amount so repaid, and the aggregate amount so repaid shall be equal to the lesser of (i) an integral multiple of $1,000,000 and (ii) the aggregate unpaid principal balance of the Notes. The obligations of Lenders hereunder are several and not joint, and the preceding two sentences will give rise to certain inappropriate results if special provisions are not made to accommodate the failure of a Lender to fund a Loan as and when required by this Agreement; therefore, notwithstanding anything herein to the contrary, (I) no Lender shall be required to make Loans at any one time outstanding in excess of such Lender's Percentage of the Commitment or of the requested Loan and (II) if a Lender fails to make a Loan as and when required hereunder and Borrower subsequently makes a repayment on the Loans, such repayment shall be split among the non-defaulting Lenders ratably in accordance with their respective Percentages until each Lender has its Percentage of all of the outstanding Loans, and the balance of such repayment shall be divided among all of Lenders in accordance with their respective Percentages. The Loans shall be evidenced by the Notes. (b) Reduction in Commitment. Borrower shall have the right to terminate or permanently reduce the unused portion of the Commitment at any time or from time to time, provided that Borrower may not decrease the Commitment to an amount less than the aggregate outstanding principal balance of the Notes. Each decrease in the Commitment pursuant to this Section shall be permanent and shall be an integral multiple of $1,000,000. Each notice of a decrease in the Commitment shall be effective upon the date specified therein; provided that Agent must receive such notice at least five (5) Business Days prior to its effective date. (c) Commitment Fee. In consideration of the Commitment, Borrower agrees to pay commitment fee (computed on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be) computed by multiplying the Commitment Fee Percentage from time to time in effect times the daily average difference between the Commitment and the aggregate principal balance of the Notes, such commitment fee to be due and payable to Agent for the account of Lenders on each Interest Payment Date for Base Rate Borrowings before the Termination Date, and on the Termination Date, in addition to the installments of interest on the Notes. All past due commitment fees shall bear interest at the Past Due Rate. Lenders and Borrower agree that Chapter 15 of the Texas Credit Code shall not apply to this Agreement, the Notes or any Loan. (d) Mandatory Payments of Principal and Interest. Accrued and unpaid interest on the unpaid principal balance of the Notes shall be due and payable on the Interest Payment Dates. The entire unpaid principal balance of each Note shall be finally due and payable on the Maturity Date. All payments hereon made pursuant to this Section shall be applied first to accrued interest, the balance to principal. If any payment provided for in any Note shall become due on a day other than a Business Day, such payment may be made on the next succeeding Business Day (unless the result of such extension of time would be to extend the date of such payment into another calendar month or beyond the Maturity Date, and in either such event such payment shall be made on the Business Day immediately preceding the day on which such payment would otherwise have been due), and such extension of time shall in such case be included in the computation of interest on the Notes. (e) Mandatory Prepayments. Borrower shall from time to time prepay the Loans in such amounts as shall be necessary so that at all times the aggregate principal amount of all Loans outstanding shall be less than or equal to the Commitment. (f) Funding Mechanics for Loans. Agent shall forward a copy of each Request for Credit to Lenders promptly upon each receipt. Each Lender shall provide Agent with such Lender's Percentage of each requested Loan in immediately available funds no later than 12:00 noon Houston time on the date Borrower has requested such Loan to be made. If any Lender fails to so provide funds to Agent, Agent may (but shall not be obligated to) advance to Borrower such Lender's Percentage of such requested Loan; such advance shall be payable by such Lender on demand and shall bear interest at the Federal Funds Rate. Agent shall disburse to Lenders all funds received by it from or on account of Borrower pursuant to the Credit Documents in accordance with the respective interests of Lenders therein (in accordance with their respective Percentages) by wire transfer of immediately available funds (1) if such funds are received by Agent prior to 12:00 noon, Houston, Texas time, on the day of receipt and (2) if such funds are received by Agent after 12:00 noon, during the next Business Day, without interest, premium or penalty thereon. If Agent does not so disburse such funds, such funds shall be payable by Agent on demand and shall bear interest from the day when due at the Federal Funds Rate. If a Lender owes any amount to Agent pursuant to this Agreement, Agent shall give notice thereof, specifying the amount thereof and reasonable detail as to the determination thereof, to such Lender and the same shall be due and payable on demand and shall bear interest from the date when due at the Federal Funds Rate. (g) Sharing of Payments, Etc. If a Lender shall obtain payment of any principal of or interest on any Loan made by it under this Agreement or on other Facility Debt then due to such Lender hereunder, through the exercise of any right of set-off (including, without limitation, any right of setoff or lien granted under Section 19 hereof), banker's lien, counterclaim or similar right, or otherwise, it shall promptly purchase from the other Lenders participations in the Loans made or other Facility Debt held by the other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all Lenders shall share the benefit of such payment (net of any expenses which may be incurred by such Lenders in obtaining or preserving such benefit) pro rata in accordance with their respective Percentages. To such end, Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any Lender so purchasing a participation in the Loans made or other Facility Debt held, by other Lenders may exercise all rights of setoff, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other Facility Debt in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other Indebtedness of Borrower. 3. INTEREST OPTIONS FOR LOANS. (a) Options Available. The outstanding principal balances of the Notes shall bear interest at the Base Rate; provided, that (1) all past due amounts, both principal and accrued interest, shall bear interest at the Past Due Rate, and (2) subject to the provisions hereof, Borrower shall have the option of having all or any portion of the principal balances of the Notes from time to time outstanding bear interest at an Alternate Rate. The records of Agent with respect to Interest Options, Interest Periods and the amounts of Loans to which they are applicable shall be binding and conclusive, absent manifest error. Interest on the Loans shall be calculated at the Base Rate except where it is expressly provided pursuant to this Agreement that an Alternate Rate is to apply. Interest on the amount of each advance against the Notes shall be computed on the amount of that advance and from the date it is made. Notwithstanding anything in this Agreement to the contrary, for the full term of the Notes the interest rate produced by the aggregate of all sums paid or agreed to be paid to the holder of the Notes for the use, forbearance or detention of the debt evidenced thereby (including all interest on the Notes at the Stated Rate plus the Additional Interest) shall not exceed the Ceiling Rate. (b) Designation and Conversion. Borrower shall have the right to designate or convert its Interest Options in accordance with the provisions hereof. Provided no Default has occurred and is continuing and subject to the last sentence of Section 3(a) and the provisions of Section 3(c), Borrower may elect to have an Alternate Rate apply or continue to apply to all or any portion of the principal balance of the Notes. Each change in Interest Options shall be a conversion of the rate of interest applicable to the specified portion of the Loans, but such conversion shall not change the respective outstanding principal balance of the Notes. The Interest Options shall be designated or converted in the manner provided below: (i) Borrower shall give Agent telephonic notice, promptly confirmed by a Rate Designation Notice (in the case of a conversion of an outstanding Loan) or a Request for Credit (in the case of a new Loan). Each such telephonic and written notice shall specify the amount of the Loan which is the subject of the designation, if any; the amount of borrowings into which such borrowings are to be converted or for which an Interest Option is designated; the proposed date for the designation or conversion and the Interest Period or Periods, if any, selected by Borrower. Such telephonic notice shall be irrevocable and shall be given to Agent no later than the applicable Rate Designation Date. (ii) No more than six (6) Alternate Rate Borrowings shall be in effect at any time. (iii) Each designation or conversion of a Eurodollar Rate Borrowing shall occur on a Eurodollar Business Day. Each designation or conversion of a CD Rate Borrowing or a Negotiated Rate Borrowing shall occur on a Business Day. (iv) Except as provided in Section 3(c), no Alternate Rate Borrowing shall be converted on any day other than the last day of the applicable Interest Period. (c) Special Provisions Applicable to Alternate Rate Borrowings. (i) Options Unlawful. If the adoption of any applicable Legal Requirement or any change in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by Agent or any Lender with any request or directive (whether or not having the force of law) of any Governmental Authority shall at any time make it unlawful or impossible for Agent or any Lender to permit the establishment of or to maintain any Alternate Rate Borrowing, the commitment to establish or maintain such Alternate Rate Borrowing shall forthwith be canceled and Borrower shall forthwith, upon demand by Agent to Borrower, (1) convert the Alternate Rate Borrowing with respect to which such demand was made to a Base Rate Borrowing or another Alternate Rate Borrowing; (2) pay all accrued and unpaid interest to date on the amount so converted; and (3) pay any amounts required to compensate Agent or any Lender for any additional cost or expense which Agent or any Lender may incur as a result of such adoption of or change in such Legal Requirement or in the interpretation or administration thereof and any Funding Loss which Agent or any Lender may incur as a result of such conversion. If, when Agent so notifies Borrower, Borrower has given a Rate Designation Notice or a Request for Credit specifying an Alternate Rate Borrowing but the selected Interest Period has not yet begun, such Rate Designation Notice or Request for Credit, as the case may be, shall be deemed to be of no force and effect, as if never made, and the balance of the Loans specified in such Rate Designation Notice or Request for Credit, as the case may be, shall bear interest at the Base Rate until a different available Interest Option shall be designated in accordance herewith. (ii) Increased Cost of Borrowings. Subject to Section 12, if the adoption of any applicable Legal Requirement or any change in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by Agent or any Lender with any request or directive (whether or not having the force of law) of any Governmental Authority shall at any time as a result of any portion of the principal balances of the Notes being maintained on the basis of an Alternate Rate would: (1) subject Agent or any Lender (or make it apparent that Agent or any Lender is subject) to any Taxes, or any deduction or withholding for any Taxes, on or from any payment due under any Alternate Rate Borrowing or other amount due hereunder, other than income and franchise taxes of the United States and its political subdivisions; or (2) change the basis of taxation of payments due from Borrower to any Lender under any Alternate Rate Borrowing (otherwise than by a change in the rate of taxation of the overall net income of such Lender); or (3) impose, modify, increase or deem applicable any reserve requirement (excluding that portion of any reserve requirement included in the calculation of the applicable Alternate Rate), special deposit requirement or similar requirement (including state law requirements and Regulation D) imposed, modified, increased or deemed applicable by any Governmental Authority against assets held by Agent or any Lender, or against deposits or accounts in or for the account of Agent or any Lender, or against loans made by Agent or any Lender, or against any other funds, obligations or other property owned or held by Agent or any Lender; or (4) impose on Agent or any Lender any other condition regarding any Alternate Rate Borrowing; and the result of any of the foregoing is to increase the cost to Agent or any Lender of agreeing to make or of making, renewing or maintaining such Alternate Rate Borrowing, or reduce the amount of principal or interest received by Agent or any Lender, then, upon demand by Agent, Borrower shall pay to Agent, from time to time as specified by Agent, additional amounts which shall compensate Agent and each Lender for such increased cost or reduced amount. The determination by Agent or any Lender, as the case may be, of the amount of any such increased cost, increased reserve requirement or reduced amount shall be conclusive and binding, absent manifest error. Each Lender will notify Borrower through Agent of any event occurring after the date of this Agreement which will entitle such Lender to compensation pursuant to this Section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. (iii) Inadequacy of Pricing and Rate Determination. Subject to Section 12, if for any reason with respect to any Interest Period Agent (or, in the case of clause 3 below, the applicable Lender) shall have determined (which determination shall be conclusive and binding upon Borrower) that: (1) Agent is unable through its customary general practices to determine any applicable Alternate Rate, or (2) by reason of circumstances affecting the applicable Eurodollar market, generally, Agent is not being offered deposits in United States dollars in such market, for the applicable Interest Period and in an amount equal to the amount of any applicable Alternate Rate Borrowing requested by Borrower, or (3) any applicable Alternate Rate will not adequately and fairly reflect the cost to any Lender of making and maintaining such Alternate Rate Borrowing hereunder for any proposed Interest Period, Agent shall give Borrower notice thereof and thereupon, (A) any Rate Designation Notice or Request for Credit previously given by Borrower designating the applicable Alternate Rate Borrowing which has not commenced as of the date of such notice from Agent shall be deemed for all purposes hereof to be of no force and effect, as if never given, and (B) until Agent shall notify Borrower that the circumstances giving rise to such notice from Agent no longer exist, each Rate Designation Notice and Request for Credit requesting the applicable Alternate Rate shall be deemed a request for a Base Rate Borrowing, and any applicable Alternate Rate Borrowing then outstanding shall be converted, without any notice to or from Borrower, upon the termination of the Interest Period then in effect with respect to it, to a Base Rate Borrowing. (iv) Funding Losses. Borrower shall indemnify Agent and each Lender against and hold Agent and each Lender harmless from any Funding Loss. This agreement shall survive the payment of the Notes. A certificate as to any additional amounts payable pursuant to this Section submitted to Borrower shall be conclusive and binding upon Borrower, absent manifest error. (d) Funding Offices; Adjustments Automatic; Calculation Year. Any Lender may, if it so elects, fulfill its obligation as to any Alternate Rate Borrowing by causing a branch or Affiliate of such Lender to make such Loan and may transfer and carry such Loan at, to or for the account of any branch office or Affiliate of such Lender; provided, that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Lender, and the obligation of Borrower to repay such Loan shall nevertheless be to such Lender, as the case may be, and shall be deemed held by it for the account of such branch or Affiliate. Without notice to Borrower or any other Person, each rate required to be calculated or determined under this Agreement shall automatically fluctuate upward and downward in accordance with the provisions of this Agreement. Interest at the Prime Rate shall be computed on the basis of the actual number of days elapsed in a year consisting of 365 or 366 days, as the case may be. All other interest and fees required to be calculated or determined under this Agreement shall be computed on the basis of the actual number of days elapsed in a year consisting of 360 days, unless the Ceiling Rate would thereby be exceeded, in which event, to the extent necessary to avoid exceeding the Ceiling Rate, the applicable interest and fees shall be computed on the basis of the actual number of days elapsed in the applicable calendar year in which accrued. (e) Funding Sources. Each Lender shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if each Lender had actually funded and maintained each Alternate Rate Borrowing during each Interest Period through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Alternate Rate for such Interest Period. (f) Stated Rate; Recapture. As used in the Credit Documents, "Stated Rate" means the effective weighted per annum rate of interest applicable to the Loans; provided, that if on any day such rate shall exceed the Ceiling Rate for that day, the Stated Rate shall be fixed at the Ceiling Rate on that day and on each day thereafter until the total amount of interest accrued at the Stated Rate on the unpaid principal balance of the Notes plus the Additional Interest equals the total amount of interest which would have accrued if there had been no Ceiling Rate. If the Notes mature (or are prepaid) before such equality is achieved, then, in addition to the unpaid principal and accrued interest then owing pursuant to the other provisions of the Credit Documents, Borrower promises to pay on demand to the order of the holders of the Notes interest in an amount equal to the excess (if any) of (a) the lesser of (i) the total interest which would have accrued on the Notes if the Stated Rate had been defined as equal to the Ceiling Rate from time to time in effect and (ii) the total interest which would have accrued on the Notes if the Stated Rate were not so prohibited from exceeding the Ceiling Rate, over (b) the total interest actually accrued on the Notes to such maturity (or prepayment) date. Without notice to Borrower or any other Person, the Stated Rate shall automatically fluctuate upward and downward in accordance with the provisions of this definition. 4. CONDITIONS PRECEDENT. (a) All Loans. The obligation of any Lender to make any Loan is subject to the accuracy of all representations and warranties of Borrower in this Agreement and any other Credit Document on the date thereof as if made on such date (and such Lender's receipt of evidence of such accuracy), to the performance by Borrower of its obligations under the Credit Documents (and such Lender's receipt of evidence of such performance) and to the satisfaction of the following conditions: (i) Agent shall have received (1) no later than (A) in the case of a Negotiated Rate Borrowing, the earlier of (y) 30 minutes from the time that a Negotiated Rate has been quoted for such Loan and (z) 10:00 a.m., Houston, Texas time, and (B) in all other cases, 10:00 a.m. Houston, Texas time, on the applicable Rate Designation Date, telephonic notice from Borrower of the proposed date and amount of such Loan, and (2) no later than 12:00 noon, Houston, Texas time, on the applicable Rate Designation Date, a Request for Credit signed by the President, a Vice President, the Treasurer or the Assistant Treasurer of Borrower and complete in all material respects. If any telephonic request for a Loan is received by Agent after the applicable times set forth above, or if the corresponding Request for Credit for such telephonic request is not received by 12:00 noon, Houston, Texas time, such telephonic request shall be treated as having been received on the next Business Day. (ii) prior to the date thereof, there shall have occurred, in the sole opinion of Majority Lenders, no material adverse change in the Property, liabilities, financial condition, business or affairs of Borrower or any of its Subsidiaries from those reflected in the most recent financial statements delivered to Lenders as of the date hereof or in the facts warranted or represented in any Credit Document. (iii) no Default or Event of Default shall have occurred and be continuing or will occur as a result of the requested Loan. (iv) the making of such Loan shall not be prohibited by, or subject Agent or any Lender to any penalty or onerous condition under, any applicable Legal Requirement. (vi) all fees and expenses owed to Agent or any Lender under any of the Credit Documents as of the date thereof shall have been paid in full. (a) Agent and Lenders shall have received such other documents as any of them may reasonably require. Each such Loan shall be subject to the further condition that, at the time thereof, all legal matters incident to the transactions herein contemplated shall be satisfactory to Agent's legal counsel. Delivery of any Request for Credit to Agent shall constitute a representation by Borrower that the representations and warranties made by Borrower under this Agreement and the other Credit Documents are true and correct as of the date of delivery of such Request for Credit. (b) First Loan. In addition to the conditions described in Section 4(a), the obligation of Lenders to make the initial Loan is subject to the following, in Proper Form: (1) Lenders shall have received their respective Notes and Agent shall have received the other Credit Documents; (2) Agent shall have received a duly executed Borrowing Authorization of Borrower; (3) Agent shall have received a current certificate from the Secretary of State or other appropriate official of the State of Texas as to the continued existence and good standing of Borrower, (4) Agent shall have received a legal opinion from the general counsel for Borrower acceptable to Agent and Majority Lenders. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that: (a) Borrower and each of its Subsidiaries (i) is duly organized, validly existing and in good standing under the laws of the state of its organization and has full legal right, power and authority to carry on its business as presently conducted and to execute, deliver and perform its obligations under the Credit Documents executed by it, and (ii) is duly qualified to do business and in good standing in each jurisdiction in which the nature of the business it conducts makes such qualification necessary or desirable. (b) The execution, delivery and performance of the Credit Documents executed by Borrower have been duly authorized by all necessary action under Borrower's Organizational Documents and otherwise. (c) Borrower's execution, delivery and performance of the Credit Documents do not and will not require (i) any consent of any other Person or (ii) any consent, license, permit, authorization or other approval (including foreign exchange approvals) of any Governmental Authority, or any notice to, exemption by, any registration, declaration or filing with or the taking of any other action in respect of, any Governmental Authority. (d) The execution, delivery and performance of any Credit Document will not (i) violate any Legal Requirement or the Organizational Documents of Borrower or any of its Subsidiaries or (ii) conflict with or result in a breach of the terms, conditions or provisions of, or cause a default under, any agreement, instrument, franchise, license or concession to which Borrower or any of its Subsidiaries is a party or by which any of them is bound. (e) Borrower has duly and validly executed, issued and delivered each Credit Document to which it is a party. The Credit Documents are in proper legal form for prompt enforcement and they are Borrower's legal, valid and binding obligations, enforceable in accordance with their terms. Borrower's obligations under them rank and will rank at least equal in priority of payment with all of Borrower's other Indebtedness (except only for Indebtedness preferred by operation of law or Indebtedness disclosed in writing to Lenders before execution and delivery of this Agreement). (f) All information supplied to Agent or any Lender, and all statements made to Agent or any Lender, by or on behalf of Borrower or any of its Subsidiaries before, concurrently with or after execution of this Agreement are and will be true, correct, complete, valid and genuine in all material respects. The most recent financial statements for Borrower and its Subsidiaries furnished to Lenders fairly present the financial condition of Borrower and its Subsidiaries as of their date and for the period then ended in accordance with GAAP. No material adverse change has occurred in the financial conditions reflected in the October 31, 1996 statements. (g) Borrower and each of its Subsidiaries have filed all tax returns required to be filed and paid all Taxes shown thereon to be due, including interest and penalties, except for Taxes which are being diligently contested in good faith and for payment of which adequate reserves have been set aside. (h) Except as set forth on Schedule I, there is no litigation, condemnation or other action, suit or proceeding pending--or, to the best of Borrower's knowledge, threatened--against or affecting Borrower or any of its Subsidiaries, at law or in equity, or before or by any Governmental Authority, which individually or together with all other such actions, suits or proceedings presenting substantially the same issue of fact, involves the assertion of claims for actual damages in excess of, on an aggregate basis, $1,000,000, or otherwise might result in any material adverse change in the business or financial condition or in other Property of Borrower or any of its Subsidiaries or any interest in it. (i) Neither Borrower nor any of its Subsidiaries is in default with respect to any order, writ, injunction, decree or demand of any Governmental Authority, in the payment of any Indebtedness for borrowed money or under any agreement or other papers evidencing or securing any such Indebtedness. (j) Neither Borrower nor any of its Subsidiaries is a party to any contract or agreement which materially and adversely affects any of their businesses, Property or financial conditions. (k) Borrower and its Subsidiaries are now solvent, and no bankruptcy or insolvency proceedings are pending or contemplated by or--to Borrower's knowledge--against Borrower or any of its Subsidiaries. Borrower's liabilities and obligations under the Credit Documents to which it is a party do not and will not render Borrower insolvent, cause Borrower's liabilities to exceed Borrower's assets or leave Borrower with too little capital to properly conduct all of its business as now conducted or contemplated to be conducted. (l) No representation or warranty contained in any Credit Document and no statement contained in any certificate, schedule, list, financial statement or other papers furnished to Agent or any Lender by or on behalf of Borrower contains--or will contain--any untrue statement of material fact, or omits--or will omit--to state a material fact necessary to make the statements contained therein not misleading. (m) None of the proceeds of any Note will be used for the purpose of purchasing or carrying, directly or indirectly, any margin stock or for any other purpose which would make such credit a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. (n) Borrower and each of its Subsidiaries possess all permits, licenses, patents, trademarks, tradenames and copyrights required to conduct their respective businesses. (o) Borrower and each of its Subsidiaries are in compliance with all applicable Legal Requirements and Borrower and each of its Subsidiaries manage and operate (and will continue to manage and operate) their businesses in accordance with good industry practices. (p) With respect to each Plan, Borrower and each member of a Controlled Group for the employees of Borrower or any of its Subsidiaries have fulfilled their obligations, including obligations under the minimum funding standards of ERISA and the Code and are in compliance in all material respects with the provisions of ERISA and the Code. No event has occurred which could result in a liability of Borrower or any member of a Controlled Group for the employees of Borrower or any of its Subsidiaries to the PBGC or a Plan (other than to make contributions in the ordinary course). Since the effective date of Title IV of ERISA, there have not been any nor are there now existing any events or conditions that would cause the Lien provided under Section 4068 of ERISA to attach to any Property of Borrower or any member of a Controlled Group for the employees of Borrower or any of its Subsidiaries. There are no Unfunded Liabilities with respect to any Plan. No "prohibited transaction" has occurred with respect to any Plan. (q) Neither Borrower nor any of its Subsidiaries is an investment company within the meaning of the Investment Company Act of 1940, as amended, or, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. (r) Neither Borrower nor any of its Subsidiaries is an "affiliate" or a "subsidiary company" of a "public utility company," or a "holding company," or an "affiliate" or a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended ("PUHC Act") or a "public utility" as defined in the Federal Power Act. Further, none of the transactions contemplated under this Agreement shall cause or constitute a violation of any of the provisions, rules, regulations or orders of or under the PUHC Act and the PUHC Act does not in any manner impair the legality, validity or enforceability of the Notes or the liabilities of Borrower under any of the Credit Documents. (s) Borrower and its Subsidiaries are and have been in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or Environmental Permit, except where failure to be in such compliance could not reasonably be expected to have a material adverse effect on Borrower and its Subsidiaries on a consolidated basis. Borrower and its Subsidiaries (i) have obtained and maintained in effect all Environmental Permits, the failure to obtain which could reasonably be expected to have a material adverse effect on Borrower and its Subsidiaries on a consolidated basis, (ii) along with their Property or any other facility operated, leased, managed or controlled by any of them are not and have not been subject to nor is there any basis for any (A) Environmental Claims or (B) Environmental Liabilities arising from or based upon any act, omission, event, condition or circumstance occurring or existing on or prior to the date hereof which could reasonably be expected to have or which within the past five (5) years has had a material adverse effect on Borrower and its Subsidiaries on a consolidated basis, and (iii) have not received individually or collectively any notice of any violation or alleged violation of any Environmental Law or Environmental Permit or any Environmental Claim in connection with their respective Property or any other facility operated, leased, managed or controlled by any of them which could reasonably be expected to have or which within the past five (5) years has had a material adverse effect on Borrower and its Subsidiaries on a consolidated basis. None of the off-site locations where Hazardous Substances generated from or in connection with any property, facility or operations of Borrower or any of its Subsidiaries have been stored, treated, recycled, disposed of or released has been nominated or identified as a facility which is subject to an existing or potential claim under Environmental Laws for which Borrower or any of its Subsidiaries could reasonably be expected to have liability which individually or aggregately could have a material adverse effect. Borrower is not aware of any requirement of Environmental Laws that will require future compliance costs or capital expenditures on the part of Borrower or any of its Subsidiaries which individually or aggregately could have a material adverse effect in relationship to costs or expenditures currently expended in the ordinary course of business. There are no obligations, undertakings or liabilities arising out of or relating to Environmental Laws which Borrower or any of its Subsidiaries has agreed to, assumed or retained, by contract or otherwise which individually or aggregately could have a material adverse effect. (t) Borrower's fiscal year ends January 31. (u) Borrower has no Subsidiaries other than the Subsidiaries listed on Schedule II. Each such Subsidiary is owned in the percentage set forth opposite such Subsidiary's name on Schedule II. (v) All statements made by or on behalf of Borrower in connection with this Agreement or any other Credit Document shall constitute the joint and several representations and warranties of the Person making the statement and of Borrower. (w) Borrower and each of its Subsidiaries has good and marketable title to their respective Property free and clear of all material Liens, except for those permitted in Section 7(a). All rights, permits, easements, servitudes and rights-of-way included in or necessary to the development, maintenance and operation of any such Property have been obtained and are in full force and effect. (x) Neither Borrower nor any of its Subsidiaries has made any Investment in, advance to or guaranty of the obligations of any Person, except as set forth in Schedule III. (y) All leases of real and personal Property to which Borrower or any of its Subsidiaries is a lessee are in full force and effect, and no default has occurred with regard to any such lease. (z) Neither Borrower nor any agent acting for it has offered the Notes or any similar obligation of Borrower for sale to or solicited any offers to buy the Notes or any similar obligations of Borrower from any Person other than Lenders, and Borrower will take no action which would subject the sale of the Notes to the provisions of Section 5 of the Securities Act of 1933, as amended, or any applicable state securities law. (aa) Borrower and each of its Subsidiaries carries insurance with reputable insurers in respect of such of its Property, in such amounts and against such risks as is customarily maintained by other Persons of similar size engaged in similar businesses. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that prior to termination of this Agreement: (a Borrower shall (and shall cause each of its Subsidiaries to) at all times (i) pay when due all Taxes and governmental charges of every kind upon it or against its income, profits or Property, unless and only to the extent that the same shall be contested diligently in good faith and reserves have been established therefor; (ii) to the extent applicable, do all things necessary to preserve its existence, qualifications, rights and franchises in all states where such qualification is necessary or desirable; (iii) comply with all applicable Legal Requirements (including Environmental Law) in respect of the conduct of its business and the ownership of its Property; (iv) cause its Property to be protected, maintained and kept in good repair and make all replacements and additions to its Property as may be reasonably necessary to conduct its business properly and efficiently, and (v) pay punctually and discharge when due, or renew or extend, any Indebtedness incurred by it and discharge, perform and observe the covenants, provisions and conditions to be performed, discharged and observed on its part in connection therewith, or in connection with any agreement or other instrument relating thereto or in connection with any mortgage, pledge or lien existing at any time upon any of its Property; provided, however, that nothing contained in this subparagraph (v) shall require payment, discharge, renewal or extension of any such Indebtedness or discharge, performance or observance of any such covenants, provisions and conditions so long as any claims which may be asserted against with respect to any such Indebtedness or any such covenants, provisions and conditions shall be contested diligently and in good faith and reserves with respect thereto shall be established. (b) Borrower shall furnish or cause to be furnished to Agent and shall furnish to each Lender (without duplication) three (3) copies of each of the following: (1) as soon as available and in any event within 120 days after the end of each fiscal year of Borrower, Annual Financial Statements of Borrower and its Subsidiaries; (2) as soon as available and in any event within 60 days after the end of each fiscal quarter (except the last fiscal quarter) of each fiscal year of Borrower, Quarterly Financial Statements of Borrower and its Subsidiaries; (3) promptly upon their becoming available, all financial statements, registration statements (except for registration statements on Form S-8 covering employee benefit plans), reports and proxy statements which Borrower or any of its Subsidiaries may file with the Securities and Exchange Commission from time to time; (4) as soon as available and in any event within 60 days after the end of each fiscal quarter of each fiscal year of Borrower, a schedule of all contingent liabilities of Borrower and its Subsidiaries as of the end of the period covered thereby; (5) concurrently with the financial statements provided for in subsections (1) and (2) of this Section 6(b), such schedules, computations and other information, in reasonable detail, as may be required by Agent or any Lender to demonstrate compliance with the covenants set forth herein or reflecting any non-compliance therewith as of the applicable date, and a compliance certificate ("Compliance Certificate") in the form of Exhibit D, duly executed by the chief financial officer, treasurer or assistant treasurer of Borrower, and (5) such other information relating to the financial condition, operations, prospects or business of Borrower and its Subsidiaries as from time to time may be reasonably requested by Agent or any Lender. Each delivery of a financial statement pursuant to this Section shall constitute a republication of the representations and warranties contained in Section 5. (c) Borrower and its Subsidiaries shall have and maintain, on a consolidated basis, at all times: (1) an Interest Bearing Debt to Total Capitalization Ratio for Borrower of not greater than 0.50 to 1.00. (2) a Tangible Net Worth for Borrower of not less than $350,000,000. (3) an Interest Coverage Ratio for Borrower of not less than 2.00 to 1.00. (d) Borrower shall (and shall cause each of its Subsidiaries to) permit each Lender upon reasonable advance notice to inspect its Property, to examine its files, books and records and make and take away copies thereof, and to discuss its affairs with its officers and accountants, all at such times during normal business hours and such intervals and to such extent as such Lender may reasonably desire. All such information shall be maintained by Lenders in confidence and shall not be disclosed to any Person except (a) in connection with a sale of a Lender's interest hereunder, (b) in connection with the enforcement or collection of any Credit Document, (c) as may be required or directed by any Legal Requirement or Governmental Authority, (d) where such information has become a part of the public domain, and (e) Affiliates of Lenders. (e) Borrower shall promptly execute and deliver (or cause to be executed and delivered), at Borrower's expense, any and all other and further instruments which may be requested by any Lender or Agent to cure any defect in the execution and delivery of any Credit Document or more fully to describe particular aspects of the agreements and undertakings set forth in the Credit Documents. (f) Borrower shall (and shall cause each of its Subsidiaries to) maintain books of record and account in accordance with GAAP. (g) Borrower shall (and shall cause each of its Subsidiaries to) maintain insurance with such insurers, on such of its Property, officers, directors and employees, in such amounts and against such risks as is customarily maintained by other Persons of similar size to that of, and engaged in businesses substantially similar to those of, Borrower and its Subsidiaries, and furnish Agent satisfactory evidence thereof promptly upon request. (h) Borrower shall notify Agent immediately upon acquiring knowledge of the occurrence of, or if Borrower or any of its Subsidiaries causes or intends to cause, as the case may be: (1) the institution of any lawsuit or administrative proceeding or the existence of an Environmental Claim or Remediation affecting Borrower or any of its Subsidiaries, the adverse determination under which could have a material adverse effect on the business, condition (financial or otherwise), operations, Property or prospects of Borrower or any of its Subsidiaries or on the ability of Borrower to perform its obligations under any Credit Document to which it is a party; (2) any material adverse change, either in any case or in the aggregate, in the assets, liabilities, business, condition (financial or otherwise), operations, Property or prospects of Borrower or any of its Subsidiaries; (3) any Event of Default or any Default, together with a detailed statement by an appropriate officer or other responsible party acceptable to Agent on behalf of Borrower of the steps being taken to cure the effect of such Event of Default or Default; (4) the receipt of any notice from, or the taking of any other action by, the holder of any Indebtedness of Borrower or any of its Subsidiaries with respect to a claimed default, together with a detailed statement by an appropriate officer or other responsible party acceptable to Agent on behalf of Borrower specifying the notice given or other action taken by such holder and the nature of the claimed default and what action is being taken or proposed to take with respect thereto; (5) the occurrence of a default or event of default by Borrower or any of its Subsidiaries under any agreement to which it is a party, which default or event of default could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, Property or prospects of Borrower or any of its Subsidiaries; and (6) any change in the accuracy of the representations and warranties of Borrower in this Agreement or any other Credit Document. Borrower shall provide to Agent such information as Agent may reasonably request regarding any of the enumerated matters set forth in this paragraph, any developments in connection therewith, and, as applicable, the Borrower's or its Subsidiary's anticipated or actual response thereto. (i) Borrower shall promptly furnish to Agent (1) immediately upon receipt, a copy of any notice of complete or partial withdrawal liability under Title IV of ERISA and any notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, (2) if requested by any Lender, promptly after the filing thereof with the United States Secretary of Labor or the PBGC or the Internal Revenue Service, copies of each annual and other report with respect to each Plan or any trust created thereunder, (3) immediately upon becoming aware of the occurrence of any "reportable event," as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction," as such term is defined in Section 4975 of the Code, in connection with any Plan or any trust created thereunder, a written notice signed by an appropriate officer or other responsible party acceptable to Agent on behalf of Borrower or the applicable member of a Controlled Group for employees of Borrower or any of its Subsidiaries specifying the nature thereof, what action Borrower or the applicable member of such Controlled Group is taking or proposes to take with respect thereto, and, when known, any action taken by the PBGC, the Internal Revenue Service or the Department of Labor with respect thereto, (4) promptly after the filing or receiving thereof by Borrower or any member of a Controlled Group for employees of Borrower or any of its Subsidiaries of any notice of the institution of any proceedings or other actions which may result in the termination of any Plan, and (5) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by Borrower or any member of a Controlled Group for employees of Borrower or any of its Subsidiaries to the Secretary of the Treasury, the Department of Labor or the Internal Revenue Service, as the case may be. To the extent required under applicable statutory funding requirements, Borrower will fund, and will cause each of its Subsidiaries to fund, all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect, and comply with all applicable provisions of ERISA. Borrower covenants that it shall and shall cause each of its Subsidiaries and each other member of a Controlled Group for employees of Borrower or any of its Subsidiaries to (a) make contributions to each Plan in a timely manner and in an amount sufficient to comply with the contribution obligations under such Plan and the minimum funding standards requirements of ERISA; (b) prepare and file in a timely manner all notices and reports required under the terms of ERISA including annual reports, and (c) pay in a timely manner all required PBGC premiums. (j) Subject to Section 12, if, after the date of this Agreement, any Lender shall have determined that the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein or any change after the date hereof with respect to any existing law, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof or any change after the date hereof with respect to any existing law, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority has or would have the effect of reducing the rate of return on such Lender's capital (or on the capital of any Person owning or holding a participation interest in the Facility Debt) as a consequence of its obligations to Borrower with respect to the Loans to a level below that which could have been achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. A certificate of such Lender setting forth such amount or amounts as shall be necessary to compensate such Lender as specified in this Section shall be delivered as soon as practicable to Borrower and shall be conclusive and binding, absent manifest error. Borrower shall pay such Lender the amount shown as due on any such certificate within fifteen (15) days after such Lender delivers such certificate. In preparing such certificate, such Lender may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. (k) The proceeds of the Loans will be used for general corporate purposes and working capital for Borrower and its Subsidiaries. (l) With respect to each Plan, Borrower and each member of a Controlled Group for the employees of Borrower or any of its Subsidiaries shall fulfil their obligations, including obligations under the minimum funding standards of ERISA and the Code, and comply in all material respects with the provisions of ERISA and the Code and all other applicable laws. Borrower shall not permit any event to occur which could result in a liability of Borrower or any member of a Controlled Group for the employees of Borrower or any of its Subsidiaries to the PBGC or a Plan (other than to make contributions in the ordinary course). Borrower shall not permit to occur or exist any event or condition that would cause the Lien provided under Section 4068 of ERISA to attach to any Property of Borrower or any member of a Controlled Group for the employees of Borrower or any of its Subsidiaries. Borrower shall not permit to exist any Unfunded Liabilities with respect to any Plan. Borrower shall not permit to occur any "prohibited transaction" with respect to any Plan. 7. NEGATIVE COVENANTS. Borrower further covenants and agrees that prior to termination of this Agreement: (a) Borrower will not (and will not permit any of its Subsidiaries to) create or suffer to exist any Lien upon any of its Property now owned or hereafter acquired, or acquire any Property upon any conditional sale or other title retention device or arrangement or any purchase money security agreement; or in any manner directly or indirectly sell, assign, pledge or otherwise transfer any of its Accounts or contract rights; provided, however, that Borrower or any of its Subsidiaries may create or suffer to exist: (1) artisans', mechanics', operators' or drillers' Liens to secure claims for labor, materials or supplies arising in the ordinary course of business, and Liens for Taxes, but only to the extent that payment of the foregoing shall not at the time be due or shall be contested in good faith by appropriate proceedings diligently conducted and with respect to which appropriate reserves have been set aside; (2) Liens in effect on the date hereof and disclosed on Schedule IV, provided that neither the Indebtedness secured thereby nor the Property covered thereby shall increase; (3) Liens in favor of Agent for the ratable benefit of all Lenders or in favor of all Lenders on a pari passu basis; (4) deposits or pledges to secure payment of workers' compensation, unemployment insurance, old age pensions or other social security, or to secure the performance of bids, tenders, contracts (other than those relating to borrowed money) or leases or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business, or in connection with contests, to the extent that payment thereof shall not at the time be due or shall be contested in good faith by appropriate proceedings diligently conducted and there have been set aside on its books appropriate reserves with respect thereto; (5) Liens arising out of judgments or awards against Borrower or any of its Subsidiaries with respect to which Borrower or such Subsidiary shall be in good faith prosecuting an appeal or a proceeding for review; (6) Liens consisting of encumbrances, easements or reservations of, or rights of others for, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, zoning restrictions, restrictions on the use of real Property and minor defects and irregularities in the title thereto, landlord's or lessor's liens under leases to which Borrower or any of its Subsidiaries is a party and other similar encumbrances, none of which interferes with the use of the Property subject thereto by Borrower or such Subsidiary in the ordinary conduct of its business; (7) Liens or security interests on assets of a Subsidiary of Borrower to secure obligations of such Subsidiary to Borrower or another Subsidiary of Borrower; (8) Liens in or affecting Property of Borrower or any of its Subsidiaries securing any Indebtedness representing the purchase price, or any portion thereof, of any Property acquired or being acquired by Borrower or a Subsidiary, provided that such Liens shall attach only to Property of Borrower that is financed with such Indebtedness, and shall be in accordance with or similar to arrangements in existence as of the date hereof; (9) Liens in or limitations on the use of funds held in trust securing the repayment of Indebtedness to any Industrial Development Corporation, and (10) Liens in Property acquired by Borrower that existed when such Property was acquired (provided, that the Indebtedness which such Liens secure is not increased). (b) Borrower will not (and will not permit any of its Subsidiaries to), in any single transaction or series of transactions, directly or indirectly: (1) consolidate, terminate, liquidate or dissolve; (2) be a party to any consolidation, termination, merger or consolidation; (3) modify or amend any of its Organizational Documents if doing so would have a material adverse effect on Borrower's ability to repay the Facility Debt; or (4) sell, convey, lease, transfer or otherwise dispose of assets representing more than 10% of Net Tangible Assets of Borrower and its Subsidiaries in the aggregate during the term hereof, or agree to take any such action, except for sale of Inventory in the ordinary course of business. Borrower will not (and will not permit any of its Subsidiaries to) pledge, transfer or otherwise dispose of any of the indicia of equity rights (whether issued and outstanding capital stock, partnership interests or otherwise) of a Subsidiary or any Indebtedness of a Subsidiary, or permit any Subsidiary of any such Person to issue any additional indicia of equity rights (whether issued and outstanding capital stock, partnership interests or otherwise) other than to its parent. Notwithstanding the foregoing, (1) Any of Borrower's Subsidiaries may merge or consolidate with Borrower (provided that Borrower shall be the continuing or surviving Corporation), or with any one or more of Borrower's Subsidiaries, or with any other Person or Persons, provided that each surviving Person after any such merger or consolidation shall be a Subsidiary of Borrower; (2) Shares of stock and Indebtedness of any Subsidiary of Borrower at any time owned by or owed to Borrower or any of Borrower's Subsidiaries may be sold for a cash consideration which represents the fair value (as determined in good faith by the Board of Directors of Borrower) at the time of sale of the shares of stock or Indebtedness so sold, provided that the assets of such Subsidiary do not constitute more than ten percent (10%) of the Net Tangible Assets of Borrower and all of its Subsidiaries and that such Subsidiary shall not have contributed more than 10% of Net Income during the most recently completed fiscal year of Borrower, and, further provided, that upon consummation of such sale and after giving effect thereto, no Default exists under the Credit Documents; and (3) Borrower may merge or consolidate with any other Person provided that Borrower shall be the surviving Person and as such shall not, immediately after such merger or consolidation, be in default hereunder. (c) Borrower will not (and will not permit any of its Subsidiaries to) enter into any transaction or agreement with any officer, director, partner, trustee or owner or holder of any indicia of equity rights (whether issued and outstanding capital stock, partnership interests or otherwise) of Borrower or any of its Subsidiaries (or any Affiliate of any such Person) unless the same is upon terms substantially similar to those obtainable from wholly unrelated sources. (d) Borrower will not (and, subject to the last sentence of this Section, will not permit any of its Subsidiaries to) make any Investment in, any Person, or make any commitment to make any such Investment, except indicia of equity rights of Borrower's Subsidiaries; Permitted Investments; normal and reasonable travel advances in the ordinary course of business to employees; stock of or additional capital contributions to Subsidiaries; customer obligations and receivables owing to Borrower or any of its Subsidiaries and arising out of sales or leases made or the rendering of services by Borrower or any of its Subsidiaries in the ordinary course of business; acquisitions (with or without recourse and with or without discount) of negotiable instruments evidencing customer obligations and receivables of Borrower or any of its Subsidiaries and arising out of sales or leases made by Borrower or any of its Subsidiaries in the ordinary course of business; acquisitions of Indebtedness of Borrower or any Subsidiary by Borrower or any other Subsidiary; (8) the guarantee by Borrower of up to $44,000,000 of a credit facility to be extended to Ave Fenix Energia S.A. ("Ave Fenix") by NationsBank to finance a portion of the cost of acquiring a 160MW electric generating facility in Argentina for which Borrower will sell approximately $70,000,000 in equipment and obtain a 10-year $20,000,000 operations and maintenance agreement, such credit facility to be on substantially the same terms and conditions as the facility described by Borrower to the Agent by letter dated July 28, 1995; provided that the covenants and events of default contained in such guarantee shall all be less restrictive on Borrower than those binding upon Borrower under this Agreement; and (9) other Investments not to exceed an aggregate original cost amount of $50,000,000 outstanding at any one time subject to the provisions of Section 5(m). Notwithstanding the foregoing, the limitations on Investments set forth above in this Section shall not apply to those made by MAC so long as the assets of MAC do not exceed three percent (3%) of the Net Tangible Assets of Borrower and its Subsidiaries. (e) Borrower will not do or permit anything that will cause Borrower or any of its Subsidiaries or any of their respective properties or facilities which any of them may own, operate, lease, manage or control to be in violation of any applicable Environmental Laws, or to become subject to any Remediation obligations or Environmental Claims which may have a material adverse effect upon Borrower or its Subsidiaries on a consolidated basis. 8. DEFAULT. The occurrence of any of the following events shall constitute an Event of Default (herein so called) under this Agreement: (a) any part of the Facility Debt is not paid when due, whether by lapse of time or acceleration or otherwise. (b) Borrower or any of its Subsidiaries fails to perform, observe or comply with--or defaults under--any of the terms, covenants, conditions or provisions of any Credit Document. (c) any representation or warranty made in any Credit Document or in any other report or other paper now or hereafter provided to any Lender or Agent pursuant or incident to any Credit Document or the Facility Debt proves to have been untrue or misleading in any material respect as of the date made or deemed made. (d) any of Borrower and its Subsidiaries: (i) voluntarily suspends transaction of business; (ii) becomes insolvent or unable to pay its Indebtedness as it matures; (iii) commences a voluntary case in bankruptcy or a voluntary petition seeking reorganization or to effect a plan or other arrangement with creditors; (iv) makes an assignment for the benefit of creditors; (v) applies for or consents to the appointment of a receiver or trustee for any such Person or for any substantial portion of its Property; or (vi) makes an assignment to an agent authorized to liquidate any substantial part of its assets. (e) in respect of any of Borrower and its Subsidiaries: (i) an involuntary case shall be commenced with any court or other authority seeking liquidation, reorganization or a creditor's arrangement of any such Person; (ii) an order of any court or other authority shall be entered appointing any receiver or trustee for any such Person or for any substantial portion of its Property; or (iii) a writ or warrant of attachment or any similar process shall be issued by any court or other authority against any substantial portion of the Property of any such Person and such petition seeking liquidation, reorganization or a creditor's arrangement or such order appointing a receiver or trustee is not vacated or stayed, or such writ, warrant of attachment or similar process is not vacated, released or bonded off within sixty (60) days after its entry or levy. (f) dissolution, liquidation or termination of Borrower or any of its Subsidiaries, except as permitted in Section 7(b). (g) any action, suit or proceeding shall be commenced against or affecting any or involving the validity or enforceability of any Credit Document, at law or in equity, or before any Governmental Authority, which in Majority Lenders' reasonable judgment, impairs or might impair Lenders' ability to collect the Facility Debt when due or the enforceability of any Credit Document. (h) any one or more final judgments in the aggregate for the payment of money in excess of $100,000 shall be rendered against Borrower or any of its Subsidiaries and the same shall remain unstayed or undischarged for a period of 30 days or any appeal time provided by applicable law, if longer. (i) Borrower or any of its Subsidiaries shall be prevented or relieved by any Governmental Authority from performing or observing any material term, covenant or condition of any Credit Document. (j) any change shall occur in the Property, financial condition, business, operations, affairs or circumstances of Borrower or any of its Subsidiaries which materially adversely effects Borrower and its Subsidiaries taken as a whole. (k) Borrower or any of its Subsidiaries shall fail to pay when due any principal of or interest on any borrowed money obligation or the holder of such other obligation declares--or has the right to declare--such obligation due before its stated maturity because of default; provided, that a default for purposes of this Section 8(k) shall not be deemed to exist by reason of the acceleration of the maturity of any such obligation solely by reason of a default in the performance of a term or condition in any agreement or instrument under or by which such obligation is created, evidenced or secured, which term or condition restricts the right of Borrower or any other Person to sell, pledge or otherwise dispose of any margin stock (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System, or any entity succeeding to all or any part of its functions)) held by Borrower or such other Person. (l) Borrower or any of its Subsidiaries shall be in default under or in violation of any Legal Requirement of any Governmental Authority having jurisdiction over it or any of its Property; or any Property of any such Person shall be subject to any Remediation obligation or Environmental Claim which causes Borrower or any of its Subsidiaries to incur Environmental Liabilities in excess of $1,000,000. (m) Borrower or any of its Subsidiaries shall have concealed, removed, or permitted to be concealed or removed, any part of its Property, with intent to hinder, delay or defraud any of its creditors, or made or suffered a transfer of any of its Property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law, or shall have made any transfer of its Property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid, or, while insolvent, shall have suffered or permitted any creditor to obtain a lien upon any of its Property through legal proceedings or distraint which is not vacated with 30 days from its date. (n) a Change of Control shall occur. Upon the occurrence of any Event of Default, and at any time thereafter, the obligation, if any, to make Loans shall cease and terminate, and Majority Lenders shall have the right, at their option, to declare the Commitment terminated (whereupon the Commitment shall be terminated) and to declare the unpaid balance of the Indebtedness evidenced by the Notes to be immediately due and payable without further notice (including notice of intent to accelerate and notice of acceleration), protest or demand or presentment for payment, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY BORROWER; provided, that in the case of the occurrence of an Event of Default referred to in Section 8(d) or 8(e), the Commitment shall be automatically terminated and the unpaid balance of the Indebtedness evidenced by the Notes (principal and accrued and unpaid interest) shall be and become automatically due and payable, without notice (including notice of intent to accelerate and notice of acceleration) and without presentment, demand or other formalities of any kind, all which are hereby expressly WAIVED by Borrower; and acting through Agent, to enforce or exercise any and all powers, rights and remedies available at law or provided in this Agreement, the Notes, the other Credit Documents or any other document executed pursuant hereto or in connection herewith. 9. LENDERS' RIGHT TO CURE. If Borrower should fail to comply with any of its agreements, covenants or obligations under any Credit Document, Agent or any Lender (in Borrower's name or in its own name) may (but shall have no obligation to) perform them or cause them to be performed for Borrower's account and at Borrower's expense. Any and all expenses thus incurred or paid by Agent or such Lender shall be Borrower's obligations to such Person due and payable on demand, or if no demand is sooner made, then they shall be due on or before four (4) years after the respective dates on which they were incurred, and each shall bear interest from the date such Person pays it until the date Borrower repays it to such Person, at the Past Due Rate. Upon making any such payment or incurring any such expense, such Person shall be fully and automatically subrogated to all of the rights of the Person receiving such payment. The amount and nature of any such expense and the time when it was paid shall be fully established by the affidavit of Agent or the applicable Lender or any of such Person's officers or agents. The exercise of the privileges granted to Agent and Lenders in this Section shall in no event be considered or constitute a cure of the default or a waiver of Agent's or any Lender's right at any time after an Event of Default to declare the Notes to be at once due and payable, but is cumulative of such right and of all other rights given by this Agreement, the Notes and the Credit Documents and of all rights given Agent and Lenders by law or in equity. 10. THE AGENT. (a) Appointment. Each Lender hereby irrevocably appoints and authorizes Agent to act on such Lender's behalf and to exercise such powers under the Credit Documents as are specifically delegated to or required of Agent by the terms thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by the Credit Documents (including enforcement or collection of the Notes), Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of the Notes; provided that Agent shall not be required to take any action which it reasonably believes may (1) expose it to personal liability or (2) be contrary to the Credit Documents or applicable Legal Requirements. (b) Liability. Neither Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it under or in connection with the Credit Documents (1) with the consent or at the request of Majority Lenders or (2) in the absence of its or their own gross negligence or willful misconduct (IT BEING THE EXPRESS INTENTION OF LENDERS THAT AGENT AND ITS DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES SHALL HAVE NO LIABILITY FOR ACTIONS AND OMISSIONS UNDER THE CREDIT DOCUMENTS RESULTING FROM ITS OR THEIR ORDINARY OR CONTRIBUTORY NEGLIGENCE). Without limiting the generality of the foregoing, Agent (1) may treat the payee of each Note as the holder thereof until it receives written notice of the assignment or transfer thereof, in Proper Form and signed by such payee; (2) may consult with legal counsel (including counsel for Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (3) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with the Credit Documents, other than those made by Agent in writing; (4) except as otherwise expressly provided herein, shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of the Credit Documents or to inspect the Property (including the books and records) of Borrower; (5) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Documents, and (6) shall incur no liability under or with respect to the Credit Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopier, cable or telex) reasonably believed by it to be genuine and signed or sent by the proper party or parties. Neither of the Co-Agents (except in their capacity as Lenders) shall have any duties or responsibilities or be subject to any liability under this Agreement. (c) TCB a Lender. With respect to its Loans and Notes, TCB shall have the same rights and powers under the Credit Documents as any other Lender and may exercise the same as though it were not Agent. The term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include TCB in its individual capacity. TCB and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, issue letters of credit for the account of, and generally engage in any kind of business with, Borrower and any Person who may do business with or own securities of Borrower, all as if it was not Agent and without any duty to account therefor to Lenders. Without limiting the rights and remedies of the Banks specifically set forth herein, no other Bank by virtue of being a Bank hereunder shall have any interest in any such activities, any present or future guaranty by or for the account of Borrower, any present or future offset exercised by the Agent in respect of any such other activities, or any present or future property at any time taken as security for any such other activities; provided, however, that if any payment in respect of such guaranties or such property or the proceeds thereof shall be applied to the indebtedness under this Agreement, each Bank shall be entitled to share in such application pro rata according to its portion of the indebtedness under this Agreement. (d) Independent Review. Each Lender acknowledges and agrees that it has, independently and without reliance upon Agent or any other Lender and based on the financial statements referred to in Section 5(f) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges and agrees that it will, independently and without reliance upon Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. (e) Indemnification. Agent shall not be required to take any action hereunder or to prosecute or defend any suit in respect of the Credit Documents unless indemnified to its satisfaction by Lenders against loss, cost, liability and expense. If any indemnity furnished to Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. In addition, Lenders agree to indemnify Agent (to the extent not reimbursed by Borrower), ratably according to their respective Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of the Credit Documents or any action taken or omitted by Agent under the Credit Documents; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of Agent. EACH LENDER AGREES, HOWEVER, THAT IT EXPRESSLY INTENDS UNDER THIS SECTION TO INDEMNIFY AGENT RATABLY AS AFORESAID FOR ALL SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF AGENT. Without limitation of the foregoing, each Lender agrees to reimburse Agent promptly upon demand for such Lender's Percentage of any out-of-pocket expenses (including reasonable counsel fees) incurred by Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibilities under, the Credit Documents to the extent that Agent is not reimbursed for such expenses by Borrower. The provisions of this Section shall survive the termination of this Agreement and/or the payment or assignment of any of the Notes. (f) Knowledge of Defaults. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it shall have received written notice from Borrower or a Lender referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." If Agent receives such a notice, it shall give notice thereof to Lenders; provided that if such notice is received from a Lender, Agent also shall give notice thereof to Borrower. Agent shall be entitled to take action or refrain from taking action with respect to such Default or Event of Default as provided in this Section 10. (g) Resignation; Removal. Agent may resign at any time by giving written notice thereof to Lenders and Borrower, and may be removed as agent under the Credit Documents at any time with or without cause by Majority Lenders. Upon any such resignation or removal, Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by Majority Lenders and shall have accepted such appointment within 30 days after the notice of resignation or removal, then the retiring Agent may, on behalf of Lenders, appoint a successor, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent under the Credit Documents by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations under the Credit Documents. After the resignation or removal of Agent under the Credit Documents, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. (h) Reliance by Borrower. In any case requiring approval or consent by Majority Lenders, Borrower shall be entitled to rely on the written representation by Agent that Agent has obtained such approval or consent. 11. PARTICIPATION; ASSIGNMENT. Each Lender reserves the right, in its sole discretion, without notice to Borrower, to sell to any bank, savings and loan, savings bank, credit union or other deposit-taking financial institution participations in all or any part of such Lender's Loans, Notes or interest in the Commitment in which event, the provisions of the Credit Documents shall inure to the benefit of each purchaser of a participation, but the pro rata treatment of payments and funding obligations hereunder shall be determined as if such Lender had not sold such participation. Each Lender may assign any or all or its rights and obligations under the Credit Documents to any Eligible Assignee, if such assignment involves the Commitment or such Lender's Note, such consent not to be unreasonably withheld; provided that (a) no such assignment shall result in a Lender with an interest in the Commitment of less than $5,000,000, and (b) each such assignment shall be substantially in the form of Exhibit E, with the assignor to exchange its Note for a new Note and the assignee to receive a new Note and with the assignor to have no further right or obligation with respect to the rights and obligations assumed by the assignee. Borrower agrees to cooperate with the prompt execution and delivery of documents reasonably necessary to such assignment process, including the issuance of a new Note to the assignor (if retaining an interest hereunder) and the assignee immediately upon delivery to Borrower of the assignor's Note. Upon such assignment, the assignee shall be a Lender for all purposes under the Credit Documents and the Percentages (in each case as appropriate) and Percentages of the assignor and assignee Lenders shall be adjusted appropriately. 12. USURY NOT INTENDED; SAVINGS PROVISIONS. Notwithstanding any provision to the contrary contained in any Credit Document, it is expressly provided that in no case or event shall the aggregate of any amounts accrued or paid pursuant to this Agreement which under applicable laws are or may be deemed to constitute interest ever exceed the maximum nonusurious interest rate permitted by applicable Texas or federal laws, whichever permit the higher rate. In this connection, Borrower and Lenders stipulate and agree that it is their common and overriding intent to contract in strict compliance with applicable usury laws. In furtherance thereof, none of the terms of this Agreement shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the maximum rate permitted by applicable laws. Borrower shall never be liable for interest in excess of the maximum rate permitted by applicable laws. If, for any reason whatever, such interest paid or received during the full term of the applicable Indebtedness produces a rate which exceeds the maximum rate permitted by applicable laws, Lenders shall credit against the principal of such Indebtedness (or, if such Indebtedness shall have been paid in full, shall refund to the payor of such interest) such portion of said interest as shall be necessary to cause the interest paid to Agent produce a rate equal to the maximum rate permitted by applicable laws. All sums paid or agreed to be paid to Agent or any Lender for the use, forbearance or detention of money shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the applicable Indebtedness, so that the interest rate is uniform throughout the full term of such Indebtedness. The provisions of this Section shall control all agreements, whether now or hereafter existing and whether written or oral, between or among Borrower, Agent and/or any Lender. 13. DOCUMENTATION REQUIREMENTS. Each written instrument required by this Agreement, the Notes or the other Credit Documents to be furnished to Agent or any Lender shall be duly executed by the person or persons specified (or where no particular person is specified, by such person as Agent or such Lender shall require), duly acknowledged where reasonably required by Agent or such Lender and, in the case of affidavits and similar sworn instruments, duly sworn to and subscribed before a notary public duly authorized to act by Governmental Authority; shall be furnished to Agent or such Lender in one or more copies as required by such Lender; and shall in all respects be in form and substance satisfactory to Agent or such Lender and to its legal counsel. 14. SURVIVAL. All covenants, agreements, representations and warranties made by Borrower in this Agreement, the other Credit Documents and any other document executed pursuant hereto or in connection herewith, and in any certificates or other documents or instruments delivered pursuant to this Agreement, the other Credit Documents or any other document executed pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement, the other Credit Documents and the other documents executed pursuant hereto or in connection herewith, and shall continue in full force and effect until full payment of Facility Debt, complete performance of all of the obligations of Borrower under the Credit Documents and final termination of Lenders' obligations--if any--to make any further advances under the Notes or to provide any other financial accommodation to Borrower (provided, however, that all reimbursement obligations, indemnification and hold harmless obligations and other similar obligations of Borrower under any of the Credit Documents shall survive such payment, performance and termination). All such covenants, agreements, representations and warranties shall be binding upon any successors and assigns of Borrower, but any attempted assignment of any rights of Borrower hereunder without the prior written consent of Majority Lenders shall be null and void. No Person other than Borrower shall have any right or action hereon or any rights to Loans at any time, the Loans shall not constitute a trust fund for the benefit of any third parties and no third party shall under any circumstances have or be entitled to any Lien or any trust impressed on any undisbursed Loans. 15. BORROWER AGREES TO PAY OR REIMBURSE AGENT'S EXPENSES; INDEMNIFICATION. To the extent not prohibited by applicable law, Borrower will pay all costs and expenses and reimburse Agent for any and all reasonable expenditures of every character incurred or expended from time to time, regardless of whether an Event of Default shall have occurred, in connection with the preparation, negotiation, documentation, closing, renewal, revision, modification, increase, review or restructuring of any loan or credit facility secured by the Credit Documents, including legal, accounting, auditing, architectural, engineering and inspection services and disbursements, and shall pay Agent and Lenders for any and all reasonable expenditures of every character incurred or expended in connection with collecting or attempting to enforce or collect any Credit Document. Provided, that no right or option granted by Borrower to Agent or any Lender or otherwise arising pursuant to any provision of any Credit Document shall be deemed to impose or admit a duty on Agent or any Lender to supervise, monitor or control any aspect of the character or condition of any operations conducted in connection therewith for the benefit of Borrower or any Person other than Agent or such Lender. Borrower shall indemnify Agent, Lenders and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities (including Environmental Liabilities), claims (including Environmental Claims), expenses (including reasonable attorneys' fees) or damages to which any of them may become subject, insofar as such losses, liabilities, claims, expenses or damages arise out of or result from (a) any actual or proposed use by Borrower of the proceeds of any Loan made by any Lender or growing out of or resulting from any Credit Document or any transaction or event contemplated therein; (b) violation by Borrower or any of its Subsidiaries of any law, rule, regulation or order including Environmental Laws; (c) any Lender or Agent being deemed an operator of any of Borrower's real or personal Property by a court or other regulatory or administrative agency or tribunal or other third party, to the extent such losses, liabilities, claims or damages arise out of or result from any Hazardous Substance, or (d) any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to any of the foregoing. The obligations of the Borrower under this Section shall survive the termination of this Agreement and the repayment of the Loans. Any amount to be paid under this Section by Borrower to Agent or any Lender shall be a demand obligation owing by Borrower to Agent or such Lender and shall bear interest from the date of expenditure until paid at the Past Due Rate. 16. AMENDMENTS IN WRITING. This Agreement shall not be changed orally but shall be changed only by agreement in writing signed by Borrower, Agent and all Lenders. Any waiver or consent with respect to this Agreement shall be effective only in the specific instance and for the specific purpose for which given. No course of dealing between the parties, no usage of trade and no parol or extrinsic evidence of any nature shall be used to supplement or modify any of the terms or provisions of this Agreement. 17. NOTICES. Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by (a) delivering it against receipt for it, (b) depositing it with an overnight delivery service or by depositing it in a receptacle maintained by the United States Postal Service, postage prepaid, registered or certified mail, return receipt requested, addressed to the respective parties at the addresses shown herein (and if so given, shall be deemed given when mailed), or (c) by telecopy (provided, that notice by telecopy is intended for the convenience of the Person giving such notice and the Person receiving such notice may rely on, and shall not be liable for acting or refraining from acting upon, any notice, instruction or request purporting to have been signed or presented by the proper Person). Borrower's address for notice may be changed at any time and from time to time, but only after 30 days' advance written notice to Agent and Lenders and shall be the most recent such address furnished in writing by Borrower to Agent and Lenders. Agent's address for notice may be changed at any time and from time to time, but only after ten days' advance written notice to Borrower and shall be the most recent such address furnished in writing by Agent to Borrower and Lenders. Any Lender's address for notice may be changed at any time and from time to time, but only after ten days' advanced notice to Borrower, Agent and the other Lenders and shall be the most recent such address furnished in writing by such Lender to Borrower, Agent and the other Lenders. Actual notice, however and from whomever given or received, shall always be effective when received. Notwithstanding anything to the contrary contained in the Section, any notice required or permitted to be given to Agent under Section 2 shall be effective only when actually received by Agent. Notices given by telecopy shall be effective on the day transmitted; provided, that telecopies transmitted after 5 p.m. Houston time shall be deemed sent on the next succeeding Business Day. 18. "INCLUDING" IS NOT LIMITING; SECTION HEADINGS AND REFERENCES; EXHIBITS, ETC. Wherever the term "including" or a similar term is used in this Agreement, it shall be read as if it were written "including by way of example only and without in any way limiting the generality of the clause or concept referred to." The headings used is this Agreement are included for reference only and shall not be considered in interpreting, applying or enforcing this Agreement. References in any Credit Document to paragraph or section numbers are references to paragraphs or sections, as the case may be, to such Credit Document. References in any Credit Document to Exhibits, Schedules, Annexes and Appendices are to the Exhibits, Schedules, Annexes and Appendices to such Credit Document and they shall be deemed incorporated into such Credit Document by reference. 19. OFFSET RIGHTS. Each Lender is hereby authorized at any time and from time to time, without notice to any Person (and Borrower hereby WAIVES any such notice) to the fullest extent permitted by law, to set-off and apply any and all monies, securities and other Property of Borrower now or in the future in the possession, custody or control of such Lender, or on deposit with or otherwise owed to Borrower by such Lender--including all such monies, securities and other Property held in general, special, time, demand, provisional or final accounts or for safekeeping or as collateral or otherwise (but excluding those accounts clearly designated as escrow or trust accounts held by Borrower for others unaffiliated with Borrower)--against any and all of Borrower's obligations to Agent or any Lender now or hereafter existing under this Agreement, irrespective of whether any demand shall have made under this Agreement. Each Lender agrees to use reasonable efforts to promptly notify Borrower after any such set-off and application, provided that failure to give--or delay in giving--any such notice shall not affect the validity of such set-off and application or impose any liability on such Lender. Each Lender's rights under this Section are in addition to other rights and remedies (including other rights of set-off) which such Lender may have. Borrower is hereby authorized, without notice to any Person (and Lenders hereby WAIVE any such notice), to set-off and apply against any and all amounts from time to time owing to any Lender hereunder or under such Lender's Note, any and all of such Lender's obligation to Borrower pursuant to any general, special, time, demand, provisional or final account with such Lender to the extent (but only to the extent) that such account is not insured by the Federal Deposit Insurance Corporation and Borrower incurs a loss thereof as a result of the bankruptcy, insolvency, liquidation, dissolution or other cessation of business by such Lender. Borrower's rights under this Section are in addition to other rights and remedies (including other rights of set-off) which Borrower may have at law or in equity with respect to a failed financial institution. 20. VENUE. THIS AGREEMENT IS PERFORMABLE IN HARRIS COUNTY, TEXAS, WHICH SHALL BE A PROPER PLACE OF VENUE FOR SUIT ON OR IN RESPECT OF THIS AGREEMENT. BORROWER IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING IN RESPECT OF THIS AGREEMENT SHALL BE BROUGHT IN THE DISTRICT COURTS OF HARRIS COUNTY, TEXAS OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION (COLLECTIVELY, THE "SPECIFIED COURTS"). BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS. BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENT BROUGHT IN ANY SPECIFIED COURT, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIMS THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE SPECIFIED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS AS PROVIDED IN THIS AGREEMENT OR AS OTHERWISE PROVIDED BY TEXAS LAW. NOTHING HEREIN SHALL AFFECT THE RIGHT OF AGENT OR ANY LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY APPLICABLE LAW. BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT. 21. RIGHTS CUMULATIVE; DELAY NOT WAIVER. Agent's or any Lender's exercise of any right, benefit or privilege under any of the Credit Documents or any other papers or at law or in equity shall not preclude the concurrent or subsequent exercise of Agent's or any Lender's other present or future rights, benefits or privileges. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law, the Credit Documents or any other papers; provided, however, that to the extent of any conflict between any provision of this Agreement and any provision contained in any Note, the other Credit Documents or any other document executed pursuant hereto or in connection herewith, the provisions of this Agreement shall control. Every power, right or remedy of Agent or any Lender set forth in this Agreement, the Notes, the other Credit Documents or any other document executed pursuant hereto or in connection herewith, or afforded by law may be exercised from time to time, and as often as may be deemed expedient by the Person entitled to enforce or exercise such. No failure by Agent or any Lender to exercise, and no delay in exercising, any right under any Credit Document or any other papers shall operate as a waiver thereof. 22. ENTIRE AGREEMENT; FORMER AGREEMENT SUPERSEDED. This Agreement embodies the entire agreement and understanding among Borrower and Agent and Lenders relating to the subject matter hereof and supersedes all prior proposals, agreements and understandings relating to such subject matter. The other Credit Documents are incorporated herein by reference; however, in the event and to the extent of any conflict, the provisions of this Agreement shall control. Without limiting the effect of the foregoing provisions of this Section 22, this Agreement supersedes all of the terms and provisions of that certain Loan Agreement dated as of September 3, 1993, by and among Borrower, TCB individually and as agent, and the financial institutions party thereto, as amended from time to time (collectively, the "Superseded Loan Agreement"). All rights of Borrower to request loans under the Superseded Loan Agreement are hereby terminated. 23. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws, the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby, and this Agreement shall be liberally construed so as to carry out the intent of the parties to it. Each waiver in this Agreement is subject to the overriding and controlling rule that it shall be effective only if and to the extent that (a) it is not prohibited by applicable law and (b) applicable law neither provides for nor allows any material sanctions to be imposed against Agent or any Lender for having bargained for and obtained it. 24. RELEASE OF CLAIMS. Borrower hereby releases, discharges and acquits forever Agent and Lenders and their respective officers, directors, trustees, agents, employees and counsel (in each case, past, present or future) from any and all Claims existing as of the date hereof (or the date of actual execution hereof by Borrower, if later) including those arising pursuant to the Superseded Loan Agreement and/or any of the Original Notes. As used herein, the term "Claim" shall mean any and all liabilities, claims, defenses, demands, actions, causes of action, judgments, deficiencies, interest, liens, costs or expenses (including court costs, penalties, attorneys' fees and disbursements, and amounts paid in settlement) of any kind and character whatsoever, including claims for usury, breach of contract, breach of commitment, negligent misrepresentation or failure to act in good faith, in each case whether now known or unknown, suspected or unsuspected, asserted or unasserted or primary or contingent, and whether arising out of written documents, unwritten undertakings, course of conduct, tort, violations of laws or regulations or otherwise. 25. COUNTERPARTS. This Agreement may be executed in several identical counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. 26. ASSIGNMENT TO FEDERAL RESERVE BANK. Notwithstanding any other language in this Agreement, any Lender shall may at any time assign all or any portion of its rights under this Agreement, its Note and the Credit Documents to a Federal Reserve Bank as collateral in accordance with Regulation A and the applicable operating circular of such Federal Reserve Bank. NOTICE PURSUANT TO TEX. BUS. & COMM. CODE ss.26.02 THIS AGREEMENT, THE NOTES AND THE OTHER CREDIT DOCUMENTS AND ALL OTHER CREDIT DOCUMENTS EXECUTED BY ANY OF THE PARTIES SUBSTANTIALLY CONCURRENTLY HEREWITH CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. STEWART & STEVENSON SERVICES, INC., a Texas corporation By:/s/ Robert L. Hargrave Name:Robert L. Hargrave Title:CEO Address for Notices: If by mail: Stewart & Stevenson Services, Inc. P. O. Box 1637 Houston, Texas 77251-1637 Attention: Chief Financial Officer If by hand delivery or telecopy: Stewart & Stevenson Services, Inc. 2707 North Loop West, 8th Floor Houston, Texas 77008 Attention: Chief Financial Officer Telecopier No. (713) 868-0208 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association acting in its individual capacity and as Agent for Lenders named herein By:/s/ Mona M. Foch Name:Mona M. Foch Title:Vice President Address for Notices: Texas Commerce Bank National Association 712 Main Street Houston, Texas 77002 Attention: Manager, Manufacturing and Oilfield Services Division Telecopy No. (713) 216-4227 Interest in Maximum Commitment: $50,000,000 BANK OF AMERICA ILLINOIS, an Illinois banking association as a Co-Agent and a Lender By:/s/ Claire Liu Claire Liu Vice President Address for Notices: Bank of America Illinois 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Juanita Hester Telecopy No.: (312) 974-9626 with a copy to: Bank of America Illinois 333 Clay Street, Suite 4550 Houston, Texas 77002 Attention: Pamela Rodgers Telecopy No.: (713) 651-4807 Interest in Maximum Commitment: $40,000,000 NATIONSBANK OF TEXAS, N.A., a national banking association By:/s/ Forest Scott Singhoff Name:Forest Scott Singhoff Title:Senior Vice President Address for Notices: NationsBank of Texas, N.A. 700 Louisiana P.O. Box 2518 Houston, Texas 77252-2518 Attention: Corporate Banking Group Telecopy No.: (713) 247-6360 Interest in Maximum Commitment: $40,000,000 ABN AMRO BANK N.V., HOUSTON AGENCY By: ABN AMRO NORTH AMERICA, INC., its agent By:/s/ Timothy M. Schneider Name:Timothy M. Schneider Title:Officer By:/s/ Ronald A. Mahle Name:Ronald A. Mahle Title:Group Vice President & Director Address for Notices: ABN AMRO Bank N.V., Houston Agency Three Riverway, Suite 1700 Houston, Texas 77056 Attention: Telecopy No. (713) 629-7533 Interest in Maximum Commitment: $30,000,000 THE BANK OF NEW YORK, a New York banking corporation By:/s/ Gregory L. batson Name:Gregory L. Batson Title:Vice President Address for Notices: The Bank of New York One Wall Street, 22nd Floor New York, New York 10286 Attention:Alen Lyster, Jr. Telecopy No.: (212) 635-6434 Interest in Maximum Commitment: $30,000,000 PNC BANK, NATIONAL ASSOCIATION, a national banking association By:/s/ Tamara R. O'Connor Name:Tamara R. O'Connor Title:Vice President Address for Notices: PNC Bank, National Association One Pnc Plaza 249 Fifth Avenue MS P1-POPP-02-2 Pittsburgh, PA 15222-2707 Attn: Sally Hunter Fax: (412) 768-4586 Interest in Maximum Commitment: $20,000,000 FIRST NATIONAL BANK OF COMMERCE, a national banking association By:/s/ Joshua C. Cummings Name:Joshua C. Cummings Title:Relationship Manager Address for Notices: First National Bank of Commerce 210 Baronne Street, 2nd Floor New Orleans, LA 70112 Attention: Joshua C. Cummings Telecopy No.: (504) 561-1316 Interest in Maximum Commitment: $15,000,000 EX-10 3 LEASE AGREEMENT LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into on the date of execution hereof by and between STEWART & STEVENSON SERVICES, INC. (hereinafter "Lessee"), a Texas corporation, and MILES McINNIS and FAYE TOTSCH (hereinafter referred to as "Lessor"), individual residents of Texas. ARTICLE 1. PREMISES Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the premises situated in the City of Beaumont, Jefferson County, Texas, and more particularly described in Exhibit A attached and made a part hereof. Said premises together with all improvements thereon are hereinafter referred to as the "Leased Premises". ARTICLE 2. TERM The term of this Lease Agreement shall begin on April 15, 1997, and shall terminate at midnight on April 14, 2002, unless extended as provided below. The term of this Lease Agreement may be extended, at the option of Lessee, for five successive periods of one year, each such period of one year being hereinafter referred to as an Extended Term, as follows: First Extended Term - April 15, 2002 through April 14, 2003 Second Extended Term - April 15, 2003 through April 14, 2004 Third Extended Term - April 15, 2004 through April 14, 2005 Fourth Extended Term - April 15, 2005 through April 14, 2006 Fifth Extended Term - April 15, 2006 through April 14, 2007 Such options to extend the term of this Lease Agreement shall be exercised by Lessee by the giving of written notice to Lessor not less than sixty days prior to the expiration of the then existing term. Each extended term shall be upon the same terms, covenants, and conditions, with the same monthly rent payable, as provided in this Lease Agreement for the initial term. ARTICLE 3. PURCHASE OPTION At any time from the date of execution of this Lease Agreement, Lessee may, at its option, purchase the Leased Premises for a price to be agreed upon with Lessor. Should the parties fail to agree upon such price, the price shall be determined by appraisal. Lessor and Lessee shall each appoint one appraiser who shall, in turn, jointly select a third appraiser. The three appraisers shall appraise promptly the Leased Premises and the decision of any two appraisers as to the purchase price for the Leased Premises shall be binding upon the parties. ARTICLE 4. RENT Without offset or deduction, Lessee shall pay Lessor at the address shown in Article 18, or at such other address as Lessor may from time to time notify Lessee in writing on the first day of each calendar month, monthly in advance, for each and every month in the term hereof, the sum of Six Thousand Six Hundred United States Dollars (U.S. $6,600.00). The monthly rent will be divided as follows: 90.675% Miles McInnis and 9.325% Mrs. Faye Totsch. ARTICLE 5. PAYMENT OF TAXES Lessee, in addition to the rent and all other charges provided for in this Lease Agreement, shall pay all taxes and assessments upon the Leased Premises which are assessed during the existence of this Lease Agreement. All taxes assessed prior to but payable in whole or in installments after the effective date of this Lease Agreement and all taxes assessed during the existence of this Lease Agreement but payable in whole or in installments after termination of this Lease Agreement shall be adjusted and prorated so that Lessor shall pay its prorated share for the period prior to the commencement and subsequent to the termination of this Lease Agreement and Lessee shall pay its prorated share for the duration of this Lease Agreement. ARTICLE 6. UTILITY CHARGES Lessee shall pay all charges for utilities used in and about the Leased Premises. All such charges are to be paid by Lessee to the utility companies or municipalities furnishing the same, before the same shall become delinquent. ARTICLE 7. INSURANCE Throughout the duration of this Lease Agreement, Lessee shall maintain fire and casualty insurance equal to the replacement value of all structures and fixtures situated upon the Leased Premises. Additionally, Lessee shall maintain liability insurance protecting both Lessor and Lessee from claims by their persons for personal injury and property damage. ARTICLE 8. REPAIRS At its own expense, Lessee shall perform all routine maintenance as is reasonably necessary to keep the Leased Premises in good condition and repair normal wear and tear excepted. Lessee agrees that all damages or injury done to the Leased Premises shall be repaired by Lessee at Lessee's sole expense (other than structural damage to the walls, roofs, and foundations not caused by Lessee). ARTICLE 9. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS Lessee shall not make any alterations, additions, or improvements to the Leased Premises without the prior written consent thereto by Lessor. All alterations, additions, or improvements made by Lessee to the Leased Premises shall become the property of Lessor at the termination of this Lease Agreement. However, Lessee shall remove promptly, if Lessor so elects, all alterations, additions, and improvements or any other property placed on the Leased Premises by Lessee and Lessee shall repair any damages caused by such removal. ARTICLE 10. ENTRY AND INSPECTION Lessee shall permit Lessor to enter and to inspect the Leased Premises at any time and shall permit Lessor to make whatever reasonable repairs Lessor deems necessary to satisfy Lessee's obligations under Article 7 of this Lease Agreement. Any such necessary repairs shall be charged to Lessee together with interest at the rate of ten percent (10%) per annum from the time Lessor pays for such repairs until the time Lessor is repaid by Lessee. The rights of Lessor under this Article shall be exercisable without the rebate of any rent to Lessee for the loss of any occupancy or quiet enjoyment of the Leased Premises occasioned by such repairs. ARTICLE 11. DESTRUCTION OF THE LEASED PREMISES If the building situated upon the Lease Premises should be damaged or destroyed by fire, tornado, or other casualty, Lessee shall give immediate notice thereof to Lessor. If the building(s) situated on the Leased Premises should be totally destroyed by fire, tornado, or other casualty or if the building(s) should be so damaged that rebuilding or repair cannot be completed within thirty days after the date the Lessor is notified by Lessee of such damage or destruction, this Lease Agreement shall terminate at Lessee's elections and the rent shall be abated effective with the date of such damage or destruction. Lessor will rebuild or repair the Leased Premises promptly if requested to do so by Lessee. ARTICLE 12. CONDEMNATION OF THE LEASED PREMISES If during the term of this Lease Agreement, all of the Leased Premises should be taken for any public or quasi-public use under any governmental law, ordinance, or regulation, or by right of eminent domain, or should be sold to the condemning authority under threat of condemnation, this Lease Agreement shall terminate effective as of the date of the taking of the Leased Premises by the condemning authority or as of the date of the sale of the Leased Premises to such authority. If less, then all of the Leased Premises shall be taken for any public or quasi-public use under any governmental law, ordinance, or regulation, or by right of eminent domain, or should be sold to the condemning authority under threat of condemnation, this Lease Agreement shall neither terminate nor shall the rent be abated. Lessor and Lessee shall each be entitled to receive and retain such separate awards and portions of lump sum awards as may be allocated to their respective interest in any condemnation proceedings. Termination of this Lease Agreement will not affect the rights of the parties hereto to such awards. ARTICLE 13. LIMITATION LIABILITY Lessor shall not be liable for any injury or damage to the persons or property of Lessee, its agents and employees, or to any other occupant of the Leased Premises irrespective of how such injury or damage may be caused except where such injury or damage is caused by Lessor or its agents in bad faith and with the intent to cause such injury or damage. ARTICLE 14. INDEMNITY Except as to injury, death, or property damage proximately caused solely by the negligence of Lessor for which Lessor is legally liable, Lessee agrees to indemnify and to hold Lessor harmless from all claims, suit, actions, damages, and liability (including attorney's fees and other expenses of defending against all of the aforesaid) arising or alleged to have arisen from any act or omissions or Lessee or Lessee's agent, employees, assignees, subleases, contractors, customers, or invitees, or arising from any injury to or death of any person(s) or damage to the property of any person(s) occurring on or about the Leased Premises or on the sidewalks adjacent thereto. Lessee assumes full responsibility for the condition of the Leased Premises except as otherwise provided in this Lease Agreement, and agrees to use and to occupy the Leased Premises and to place its fixtures, equipment, merchandise, and other property therein at its own risk. ARTICLE 15. ASSIGNMENT OR SUBLEASING Lessee neither will assign his rights hereunder, nor sublease the Leased Premises or any part thereof, nor mortgage, pledge, or hypothecate its leasehold interest without the express prior written consent of Lessor which consent will not be unreasonably withheld. In any case where Lessor consents to any assignment, subleasing, or mortgage, pledge, or hypothecation of the leasehold, Lessee will remain liable for all its obligations hereunder. ARTICLE 16. REMEDIES 16.1 The occurrence of any one or more of the following events shall constitute a default and breach of this Lease Agreement by Lessee: (a) The vacating or abandonment of the Leased Premises. (b) Failure by Lessee to make any payment or rent or any other payment required to be made by Lessee hereunder, as and when due, when such failure shall continue for a period of ten days after written notice thereof from Lessor to Lessee. (c) The failure by Lessee to observe or to perform any of the terms of this Lease Agreement other than described in sub-article (b) above, where such failure shall continue for a period of thirty days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than thirty days are reasonably required for its cure, the Lessee shall not be deemed to be in default if Lessee commences such a cure within the said thirty-day period and thereafter diligently prosecutes such cure to completion. (d) (i) The making of Lessee of any general assignment or general arrangement for the benefit of creditors; (ii) The adjudication of Lessee as a bankrupt; (iii) The appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the premises or of Lessee's interest in this Lease Agreement where possession is not restored to Lessee within thirty days; (iv) The attachment, execution, or other judicial seizure of substantially of all of Lessee's assets located at the Leased Premises or of Lessee's interest in this Lease Agreement, where such seizure is not discharged within thirty days. 16.2 In the event of any such default by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor's exercise of any right or remedy which Lessor may have reason of such default of breach; (a) Terminate Lessee's right to possession of the Leased Premises by any lawful means in which case this Lease Agreement shall terminate and Lessee shall immediately surrender possession of the Lease Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason or Lessee's default including, but not limited to, the cost of recovering possession of the Leased Premises, expenses of reletting, including necessary renovation and alteration of the Leased Premises, reasonable attorney's fees, and any real estate commission actually paid; the worth at the time of the award by the court having jurisdiction thereof of the amount of which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; and that portion of the leasing commission paid by lessor applicable to the unexpired term of this Lease Agreement. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of ten percent per annum. In the event Lessee shall have abandoned the Leased Premises, Lessor shall have the option of either retaking possession of the Leased Premises and recovering from Lessee the amount specified in this sub-article or proceeding under the following sub-articles set forth below. (b) Maintain Lessee's right to possession, in which case this Lease Agreement shall continue in effect whether or not Lessee shall have abandoned the premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease Agreement, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws of the State of Texas. ARTICLE 17. NON-WAIVER OF DEFAULT The forbearance of the exercise of any right of Lessor arising hereunder or the subsequent acceptance of rent hereunder by Lessor shall not be deemed a waiver of any right of Lessor. All rights and remedies of Lessor hereunder shall be cumulative and may be exercised and enforced concurrently whenever and as often as occasion therefor arises. ARTICLE 18. COMPLIANCE WITH THE LAW Lessee, at its own cost and expense, shall comply with all applicable laws, rules, regulations, and order of all federal, state, and municipal governments and agencies. ARTICLE 19. NOTICE All notices to be given to Lessee by Lessor shall be in writing, deposited in the United States mail, certified or registered, postage prepaid, and addressed to Lessee at Stewart & Stevenson Services, Inc., P.O. Box 1637, Houston, Texas 77001. All notices to be given to Lessor by Lessee shall be in writing, deposited in the United States mail, certified or registered, postage prepaid, and addressed to Lessor at 4113 San Carlos, Dallas, Texas 75205, to the attention of Miles W. McInnis and Faye Totsch. Notices shall be deemed to be delivered when deposited in the United States mail as above provided. Changes of address of either party must be by notice given to the other party in the same manner as above provided. ARTICLE 20. PRIOR AGREEMENTS SUPERSEDED This Lease Agreement constitutes the sole and only agreement between the parties respecting the subject matter of this Lease Agreement and supersedes any prior agreements and understandings, whether oral or written, including a lease dated and beginning April 15, 1982, with monthly rental of $5,070.00. ARTICLE 21. AMENDMENT No amendment or alteration of the terms hereof shall be of any force or effect unless the same shall be in writing, dated subsequent to the date of execution hereof, and duly executed by the parties hereto. EXECUTED this 7th day of April, 1997. STEWART & STEVENSON SERVICES, INC. By: /s/ C. Jim Stewart II /s/ Miles McInnis /s/ Faye Totsch by /s/ Joe Manning POA Faye Totsch EX-21 4 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF STEWART & STEVENSON SERVICES, INC.
The following list sets forth the name of each subsidiary of the Company, which is also the name under which such subsidiary does business: Jurisdiction of Names under which Incorporation business is Or Organization conducted C. Jim Stewart & Stevenson, Inc. Delaware Stewart & Stevenson CPS International, Inc. Panama None Creole Stewart & Stevenson, Inc. Delaware None Sierra Detroit Diesel Allison, Inc. Nevada Stewart & Stevenson Stewart & Stevenson Capital Corporation Texas Stewart & Stevenson Stewart & Stevenson Development Services, Inc. Delaware Stewart & Stevenson Stewart & Stevenson International, Inc. Delaware Stewart & Stevenson Stewart & Stevenson International Sales, Inc. Barbados None Stewart & Stevenson Operations, Inc. Delaware Stewart & Stevenson Stewart & Stevenson Overseas, Inc. Texas None Stewart & Stevenson Power, Inc. Delaware Pamco-Stewart & Stevenson Stewart & Stevenson Project Services, Inc. Delaware Stewart & Stevenson Stewart & Stevenson Realty Corporation Texas None Stewart & Stevenson Technical Services, Inc. Delaware Stewart & Stevenson Stewart & Stevenson Transportation, Inc. Texas None Stewart & Stevenson (U.K.) Limited Scotland None Stewart & Stevenson Vehicle Services, Inc. Delaware Stewart & Stevenson Tokumei Kumiai Holdings, Inc. Delaware None
The Company has additional subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 5 CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in Registration Statement No. 33-21515 on Form S-8 dated April 28, 1988, Registration Statement No. 33-22463 on Form S-8 dated June 13, 1988, Registration Statement No. 33-65404 on Form S-8 dated July 1, 1993, Registration Statement No. 33-52881 on Form S-8 dated March 30, 1994, Registration Statement No. 33-52903 on Form S-8 dated March 30, 1994, Registration Statement No. 33-54389 on Form S-4 dated June 30, 1994, Registration Statement No. 33-58679 on Form S-8 dated April 18, 1995, Registration Statement No. 33-58685 on Form S-8 dated April 18, 1995, Registration Statement No. 333-02817 on Form S-8 dated April 25, 1996, and Registration Statement No. 333-15271 on Form S-8 dated October 31, 1996 of our report dated March 20, 1997 included in Stewart & Stevenson Services, Inc.'s Form 10-K for the fiscal year ended January 31, 1997. /s/ Arthur Andersen LLP Houston, Texas April 28, 1997 EX-27 6 FDS --
5 (THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS) 1000 Year Jan-31-1997 Jan-31-1997 9,132 0 238,575 (1513) 727,934 974,128 262,192 (138,759) 1,145,285 320,559 319,700 164,959 0 0 314,309 1,145,285 1,187,161 1,187,161 1,020,591 1,020,591 140,995 0 24,113 25,575 8,520 16,851 0 0 0 16,851 .51 .51
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