-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, TLvmecviu5Tro4NrAzYyv3l70mGb8a2/GW1efME60xsrIDrbUEtfHedkoPVCxyea N2lVL9/Rm/GZ8wuzcrUV+g== 0000094328-95-000014.txt : 19950419 0000094328-95-000014.hdr.sgml : 19950419 ACCESSION NUMBER: 0000094328-95-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950131 FILED AS OF DATE: 19950418 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: 95529351 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 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, 1995 ("Fiscal 1994") 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: Name of Each Title of each class Exchange on Which Registered ___________________ ____________________________ Rights to Purchase Shares of Common NASDAQ Stock Market Stock, without par value 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. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. $923,162,460 (As of February 28, 1995) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Without Par Value 32,997,815 Shares (Class) (Outstanding at February 28, 1995) DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K ________ _________________ Proxy Statement for the 1995 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 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 is manufactured by General Electric Corporation ("GE"), and GE has selected the Company as the exclusive packager in the United States and Canada for the LM6000. The Company's engineered power systems and operations and maintenance services are marketed worldwide. The Company believes that the international market offers significant opportunities because of the potential growth in demand for electric power, particularly in developing nations. 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 Texas and other Western and Southern 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 believes that it will be able to sell additional trucks 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 1994" commenced on February 1, 1994 and ended on January 31, 1995. Identifiable assets at the close of Fiscal 1994, 1993 and 1992 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 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 56.5%, 61.4% and 62.6%, respectively, of consolidated sales during Fiscal 1994, 1993 and 1992. Gas Turbine Power Systems. The Company packages gas turbine products based on turbine engines purchased from General Electric Corporation ("GE"), Allison Engine Company ("Allison") and the Garrett Corporation ("Garrett"). The table below lists the 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 . . . . . . . 40.3 Mw GE LM5000 STIG . . . . 51.6 Mw GE LM5000 . . . . . . . 34.4 Mw GE LM2500+ . . . . . . 27.6 Mw GE LM2500 STIG . . . . 26.5 Mw GE LM2500 . . . . . . . 22.2 Mw GE LM1600 . . . . . . . 13.4 Mw ALLISON 501K . . . . . 3.7 Mw GARRETT IM831 . . . . . 0.5 Mw Gas turbine generator sets have a lower capital cost, higher efficiency, shorter lead times and are more environmentally acceptable than 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 52 Mw size incorporate GE gas turbine engines and are marketed primarily to independent power producers for prime power and cogeneration applications and to public utilities for base load capacity or additional capacity during peak demand periods. Generators in the 0.5 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 Allison gas turbine engines and vessel propulsion systems incorporating Allison gas turbine engines. The table below lists the output of each model of gas turbine engine offered by the Company for mechanical drive applications. Engine Model Output ____________ ______ GE LM6000 . . . . . . . 55,545 Shp GE LM2500+ . . . . . . 37,000 Shp GE LM2500 . . . . . . . 31,235 Shp GE LM1600 . . . . . . . 18,745 Shp ALLISON 501K . . . . . 5,510 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 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 and processing 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. During Fiscal 1994, the Company acquired substantially all of the operating and maintenance assets of Creole International, Inc. and its subsidiaries. The Creole companies were primarily engaged in the operation and maintenance of petroleum production, processing and transportation facilities. Operation and maintenance services are provided on a world-wide basis. During January 1995, the Company and General Electric Capital Corporation ("GE Capital") announced an agreement in principle to jointly offer turbine-driven equipment for lease. Partnerships owned by GE Capital and the Company will contract with the Company for the complete installation of a power generation or gas compression facility and for operation and maintenance services during the term of the lease. The complete system, including operation and maintenance services, will be leased to an independent power producer, public utility, gas producer or transporter or industrial user for an all-inclusive lease payment. In addition to complete turbine-driven packages and operation and maintenance services, Stewart & Stevenson offers parts and repair services for turbine- driven equipment and is authorized to perform complete overhaul services on GE and Allison gas turbine engines. Other turbine products manufactured by the Company include an exhaust flow enhancement device, manufactured under license from Norlock Technologies, Inc. This new product improves power output and fuel efficiency and reduces exhaust gas turbulence. Stewart & Stevenson believes that the international market provides significant sale and lease opportunities for the Company's gas turbine products. 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 is derived from packaging gas turbine engines manufactured by GE. The Company is the exclusive packager of all LM6000 generator sets sold by GE in the United States and Canada and has been an authorized packager of GE gas turbine engines since 1979. The Company has no reason to believe that its relationship with GE will not continue for the foreseeable future. Any interruption of this relationship, however, would adversely affect the Company. Sales of gas turbine products and services accounted for approximately 47.6%, 49.2% and 50.5%, respectively, of consolidated sales in Fiscal 1994, 1993 and 1992. Other Power Systems. The majority of other power systems packaged by Stewart & Stevenson are 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 Detroit Diesel Corporation ("Detroit Diesel"), General Motors Corporation ("General Motors") or other independent manufacturers. 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 stand-by power sources for emergency use and as prime power sources to supply electricity at remote locations. Mechanical drive packages include pump packages for irrigation and compressor packages for pipelines. Stewart & Stevenson is also a leading manufacturer of well stimulation equipment and other diesel equipment for the oilfield service industries. Despite the depressed domestic drilling markets, the Company has continued to manufacture these products, primarily for sale in the international market. 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 coil-tubing equipment, blowout preventors and high pressure valves for the drilling and workover industry. Stewart & Stevenson 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 8.8%, 12.5% and 12.2%, respectively, of consolidated sales in Fiscal 1994, 1993 and 1992. DISTRIBUTION SEGMENT 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 original distribution contract date relating to each product line.
Original Contract Manufacturer Products Territories Date ____________ ________ ___________ ______ Detroit Diesel Corporation Heavy Duty High Speed Texas, Colorado, New 1938 Diesel Engines Mexico, Wyoming, Nebraska, Louisiana, Mississippi and Alabama; Venezuela Electro-Motive Division Heavy Duty Medium Speed Texas, Colorado, New 1988 of General Motors Corporation Diesel Engines Mexico, Nebraska, Oklahoma, Arkansas, Louisiana, Tennessee, Mississippi and Alabama; Mexico; Central America; most of South America Cooper Industries, Inc. Large-bore Natural Gas, Varies depending on engine 1991 Dual Fuel and Diesel size, fuel and application Engines Allison Transmission On- and Off-Highway Texas, Colorado, New 1962 Division of General Automatic Transmissions, Mexico, Wyoming, Nebraska, Motors Corporation Power Shift Transmissions Louisiana, Mississippi and and Torque Converters Alabama; Venezuela Hyster Company Material Handling Texas 1960 Equipment John Deere Industrial Construction, Utility Southeast Texas and 1987 Equipment Company and Forestry Equipment Wyoming Thermo King Corporation Transport Refrigeration Southeast Texas and 1970 Equipment Southern Louisiana Waukesha Engine Natural Gas Industrial Colorado, Montana, 1995 Division of Dresser Engines North Dakota, Oklahoma, Industries, Inc. Wyoming, New Mexico, Utah, Oregon, Hawaii, Kansas, Arizona, California, Washington and Nevada Deutz Corporation Diesel Engines Colorado, Wyoming, 1995 Arizona, New Mexico, Washington and Alaska
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. During Fiscal 1994, the Company acquired substantially all of the assets of Power Application & Mfg. Co. ("PAMCO"), a Waukesha distributor for the western United States. The Company's principal distribution agreements are subject to termination by the suppliers for a variety of causes, including a change in control or a change in the principal management of the Company. The Company's distribution agreements with Detroit Diesel expire in 1995. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. The Distribution segment also manufactures and sells snow removal equipment, wheel chair lifts and rail car movers. 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 30.4%, 31.8% and 33.1%, respectively, of consolidated sales during Fiscal 1994, 1993 and 1992. The Distribution segment's marketing units regularly sell certain products manufactured by units of 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, valued at $1.2 billion, for the production of 2 1/2-ton and 5-ton trucks, spare parts and logistical support. 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. In the event that vehicle or spare parts deliveries are canceled or terminated for the convenience of the government, the FMTV contracts provide for termination charges that will substantially reimburse the Company for all unamortized non-recurring costs. 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 airborne 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 vehicles manufactured by the Company are based on a design acquired from Steyr-Daimler-Puch, A.G., an established Austrian-based manufacturer of military and commercial vehicles. It was adapted to the requirements of the U.S. Army by Stewart & Stevenson and incorporates a diesel engine manufactured by Caterpillar, Inc., an automatic transmission and transfer case manufactured by Allison and drive axles manufactured by Rockwell Corporation. Although the FMTV is the Company's first high volume production vehicle, the Company has previously packaged various equipment for the U.S. Armed Forces using diesel and gas turbine engines. Stewart & Stevenson believes that there will be opportunities to sell additional vehicles 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 capacity to produce vehicles for those additional sales. The Company has already begun marketing efforts with potential customers other than the U.S. Army. Operations of the Tactical Vehicle Systems segment accounted for approximately 13.0%, 6.7% and 4.2%, respectively, of consolidated sales during Fiscal 1994, 1993 and 1992. 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, as well as 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 sale of its products. Manufacturers of gas turbine generator sets in the 20-52 Mw size include General Electric Corporation, Ruston Gas Turbines Ltd., ABB Energy Services, Inc., a subsidiary of Asea Brown Boveri, Seimens and Westinghouse. Competition in the market for the other products manufactured 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. INTERNATIONAL OPERATIONS The profit margin on export sales is typically not materially different from that on domestic sales of the same or similar products with the same or similar delivery requirements. 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 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. No business segment of the Company is dependent on foreign operations. 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 Fiscals 1994 and 1993 were as follows:
Estimated percentage to be recognized in Fiscal Fiscal Fiscal 1995 1994 1993 ___________________ ______ ______ (Dollars in millions) Engineered Power Systems Equipment 69.2% $ 416.0 $ 491.5 Operations and Maintenance 18.3% 311.6 269.7 _________ _________ 727.6 761.2 Distribution 100.0% 40.0 32.6 Tactical Vehicle Systems 13.3% 1,017.8 1,119.5 _________ _________ Total 29.2% $1,785.4 $1,913.3 ========= =========
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 because of the large number of unfilled orders for these units, the number of proposals that are presently outstanding and the current worldwide need for additional electrical generating 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. EMPLOYEES At the end of Fiscal 1994, the Company employed approximately 4,300 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 national sales offices for the Engineered Power Systems segment and administrative offices for the Distribution segment, occupies about 78,000 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 966,000 square feet and leases approximately 48,000 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 totaling 5,000 square feet and maintains a sales office in Alexandria, Virginia and Fort Lauderdale, Florida. The Company owns gas turbine parts, service, operations and maintenance facilities in Syracuse, New York, Bakersfield, California and Shreveport, Louisiana and a high pressure valve manufacturing facility in Jennings, Louisiana totaling 15,000, 14,000, 40,000 and 89,000 square feet, respectively. 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 546,000 square feet of owned space and 398,000 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 and leases 88,000 square feet of warehousing facilities in Houston and Lubbock, 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 has been advised that on January 5, 1993, John G. Runion, a former consultant of the Company, filed a civil suit for himself and the United States of America in the U. S. District Court, Southern District of Texas. The suit alleges that the Company supplied false information in violation of the False Claims Act (the "Act"), engaged in common law fraud and misapplied costs incurred in connection with a change order under a 1987 government subcontract. 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. The Company is aware that the Defense Criminal Investigation Service and the United States Air Force Office of Special Investigation are conducting an investigation into whether the Company violated any criminal statute in connection with the same facts. The Company has denied any wrongdoing in connection with the pricing of the change order and believes that both the criminal investigation and the civil case will be resolved without any material effect on the financial position, net worth or results of operations of 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. All such cases involve primarily a claim for damages and no individual case or group of cases presenting substantially the same legal or factual issues involve amounts in excess of ten percent (10%) of the current assets of the Company or is expected to result in any material liability. 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 864 shareholders of record as of February 28, 1995. The following table sets forth the high and low sales prices relating to the Company's Common Stock and the dividends paid by the Company in each quarterly period within the last two fiscal years.
Fiscal Fiscal 1994 1993 ______________________________ ______________________________ High Low Dividend High Low Dividend _____ ____ ________ _____ ____ ________ First Quarter 53 3/4 41 1/4 0.06 38 1/2 28 0.05 Second Quarter 45 3/4 38 1/4 0.07 46 3/4 35 3/4 0.06 Third Quarter 40 3/4 33 3/4 0.07 51 3/4 42 1/2 0.06 Fourth Quarter 38 3/4 28 0.07 53 3/4 44 1/4 0.06
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
_________________________________________________________________________________________________________________ (In thousands, except per share data) Fiscal Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1991 1990 _________________________________________________________________________________________________________________ Financial Data: Sales $1,138,336 $981,892 $812,526 $686,363 $645,766 Earnings before income taxes and accounting change 102,852 85,301 64,376 52,259 43,152 Earnings before accounting change 67,558 56,780 43,958 35,703 29,384 Net earnings 67,558 56,780 34,658 35,703 29,384 Total assets 875,616 692,624 573,348 477,858 394,118 Short-Term Debt (including current portion of Long-Term Debt) 43,344 7,219 3,252 4,582 58,616 Long-Term Debt 116,900 68,000 44,451 27,939 37,982 Per Share Data : Earnings before accounting change 2.05 1.73 1.35 1.18 0.99 Net earnings 2.05 1.73 1.06 1.18 0.99 Cash dividends declared 0.27 0.23 0.19 0.15 0.11 The Company adopted Statement of Financial Accounting Standard No. 106 effective February 1, 1992, resulting in a cumulative charge to 1992 earnings of $9,300, or $0.29 per share, after a deferred tax benefit of $4,790 (see Note 7 in the notes to the consolidated financial statements).
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 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 Percentage Consolidated Sales Increase (Decrease) __________________________________________________________________________________________________________ Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 ========================================================================================================== Sales 100.0% 100.0% 100.0% 15.9% 20.8% Cost of sales 84.0 84.1 84.4 15.7 20.4 _________________________________ Gross profit 16.0 15.9 15.6 17.0 23.2 Selling and administrative expenses 6.6 7.0 7.5 10.1 11.7 Interest expense .6 .3 .5 107.2 (10.2) Other income, net (.2) (.1) (.3) 161.4 (62.6) _________________________________ 7.0 7.2 7.7 12.6 13.5 _________________________________ Earnings before income taxes and accounting change 9.0 8.7 7.9 20.6 32.5 Income taxes 3.0 2.9 2.5 23.3 35.9 __________________________________ Earnings of consolidated companies before accounting change 6.0 5.8 5.4 19.3 30.9 Equity in net earnings (loss) of unconsolidated affiliates (.1) .0 .0 N/A N/A __________________________________ Earnings before accounting change 5.9% 5.8% 5.4% 19.0 29.2 ==================================
RESULTS OF OPERATIONS Business Segment Highlights
_____________________________________________________________________________________________________________________________ (Dollars in thousands) Sales Growth Rate _____________________________________________________________________________________ Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 _____________________________________________________________________________________________________________________________ Engineered Power Systems $ 642,804 57% $602,853 61% $508,898 63% +7% +18% Distribution 346,564 30 311,983 32 269,045 33 +11 +16 Tactical Vehicle Systems 147,920 13 65,894 7 34,112 4 +124 +93 Corporate Services 1,048 - 1,162 - 471 - -10 +147 ___________________________________________________________ $1,138,336 100% $981,892 100% $812,526 100% +16 +21 ===========================================================
Operating Profit Growth Rate _____________________________________________________________________________________ Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 _____________________________________________________________________________________________________________________________ Engineered Power Systems $ 82,395 71% $70,292 75% $59,578 81% +17% +18% Distribution 24,015 21 20,309 22 12,478 17 +18 +63 Tactical Vehicle Systems 8,782 8 2,886 3 1,602 2 +204 +80 Corporate Services 376 - 552 - 195 - -32 +183 ___________________________________________________________ $115,568 100% $94,039 100% $73,853 100% +23 +27 ===========================================================
Operating Profit as a Percentage of Sales ___________________________________________________________ Fiscal Fiscal Fiscal 1994 1993 1992 __________________________________________________________________________________________________ Engineered Power Systems 12.8% 11.7% 11.7% Distribution 6.9 6.5 4.6 Tactical Vehicle Systems 5.9 4.4 4.7 Corporate Services 35.9 47.5 41.4 Consolidated 10.2 9.6 9.1
Fiscal 1994 vs. Fiscal 1993 Sales increased to $1,138 million for Fiscal 1994 from $982 million for Fiscal 1993. This increase represents the setting of a new sales record for the seventh consecutive year. In total, sales increased by 16% with each of the Company's segments recording new sales records. The Company's international sales increased 28% to over $301 million. The Tactical Vehicle Systems segment showed the largest sales growth during Fiscal 1994, increasing sales by 124%. This sales growth, although significant, was less than was anticipated. Sales growth was restrained by the government's decision to delay both the testing of trucks and the approval for purchasing of key components, which effectively precluded the Company from achieving its planned production quantities. The Company has reached an agreement with the U. S. Army to restart Initial Operational Test and Evaluation of the FMTV truck program in April, 1995. The agreement also provides additional contract funding for direct support by the Company in connection with the restarted tests. Other provisions of the agreement permit the Company to file for compensation of the costs created by the suspension of testing in Fiscal 1994. The Company expects U. S. Government testing to be completed in June, 1995, which will enable the Company to increase from the current low level production to full rate production in the fourth quarter of Fiscal 1995. The Company's Distribution segment's sales increased by 11% in Fiscal 1994. This increase reflects the continuation of both the growth of the economies of the territories serviced by the Company and the market's reception of the products which the Company sells. The Company continued to expand the territories in which it operates and the products it represents through the acquisition, during the fourth quarter of Fiscal 1994, of substantially all of the assets of PAMCO, a Waukesha distributor for the western United States. The Engineered Power Systems segment of the Company experienced continued growth with Fiscal 1994 sales increasing 7%. The gas turbine product lines provided the majority of the sales growth. Gas turbine product support sales growth continued to exceed expectations and contributed significantly to this increase. Gas turbine product support consists of the servicing of customers' equipment and the long-term contracting for the operation and maintenance of the customers' power plants. Gas turbine equipment sales increased, but at a slower rate than the prior year, reflecting the U. S. utility market's uncertain response to deregulation trends. Excluding the discontinued bus product line, the diesel products group showed a slight increase in sales, primarily in products sold to the airline market. During the third quarter of Fiscal 1994, the Company completed its previously announced acquisition of substantially all of the assets of Creole International, Inc., a provider of operating and maintenance services for turbine and reciprocating engine driven equipment. Operating profit grew by approximately 23% during Fiscal 1994 to $116 million. Each of the Company's segment's operating profits increased both in absolute amounts and as a percentage of sales. The Tactical Vehicle Systems segment's growth reflects both an increase in production levels and an improvement in the anticipated profitability of the FMTV program. The Engineered Power Systems segment had an improved revenue mix resulting primarily from the rapid growth rate of its gas turbine product support sales which generally realize a higher operating profit. The Distribution segment benefitted from improved operating efficiencies and a revenue blend of higher value added products. Fiscal 1993 vs. Fiscal 1992 Sales increased to $982 million for Fiscal 1993 from $813 million for Fiscal 1992, primarily due to sales volume increases in the Engineered Power Systems segment. The Engineered Power Systems' gas turbine product lines were the primary source of its growth, with the highest rate of growth experienced in the gas turbine product support group. The Distribution segment's increased sales reflect both the general improvement in the U. S. economy and in the market penetration of the products distributed. The Tactical Vehicle Systems segment sales, which increased 93% in relation to Fiscal 1992, reflect the commencement of low volume truck production during Fiscal 1993. The Company's export sales declined slightly in Fiscal 1993, representing 24% of consolidated sales in Fiscal 1993 as compared to 32% in Fiscal 1992. Operating profit increased significantly during Fiscal 1993, with the overall rate of growth exceeding the growth in sales. The Distribution segment's operating profit grew at a rate substantially greater than its sales volume growth, reflecting primarily operating efficiencies achieved through better utilization of existing plants. Both the Engineered Power Systems and the Tactical Vehicle Systems segments' operating profits increased at a rate comparable to sales volume growth. Net Period Expense
___________________________________________________________________________________________________________ (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 ___________________________________________________________________________________________________________ Selling and administrative expenses $75,249 $68,331 $61,168 +10% +12% Interest expense 6,865 3,313 3,689 +107 -10 Other income, net (2,528) (967) (2,586) +161 -63 ________________________________ $79,586 $70,677 $62,271 +13 +13 ================================ Net period expense as a percentage of sales 7.0% 7.2% 7.7% ================================
Net period expense continued to grow at a much slower rate than sales. Operating efficiencies as a result of spreading certain fixed administrative costs over increased sales has facilitated the control of selling and administrative expenses. Interest expense increased significantly during Fiscal 1994, resulting from increases in interest rates and in the level of borrowing required to finance operations. Earnings Before Accounting Change
___________________________________________________________________________________________________________ (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 ___________________________________________________________________________________________________________ Amount $67,558 $56,780 $43,958 +19% +29% Percentage of sales 5.9% 5.8% 5.4% ===============================================================================
Earnings before the accounting change continued to increase in both amount and as a percentage of sales in Fiscal 1994 and 1993. These increases reflect the growth in operating profits each period. ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112 ("SFAS 112"), "Employer's Accounting for Postemployment Benefits", in November 1992. SFAS 112 requires that the liability for certain postemployment benefits be recognized over the employees' service lives when certain conditions are met. The Company adopted SFAS 112 in Fiscal 1994. The adoption of SFAS 112 did not have a material impact on the Company's financial statements. The Fiscal 1992 change in accounting represents the Company's adoption of Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits other than Pensions" (see Note 7 in the notes to consolidated financial statements). This standard requires that the cost of retiree medical and other non-pension benefits be recognized on the accrual method of accounting instead of expensing those costs when paid, as had been the generally accepted practice. The Company elected to expense previously unrecognized prior service costs immediately. This resulted in a cumulative charge to Fiscal 1992 earnings of $9.3 million, or $0.29 per share, after a deferred tax benefit of $4.8 million. During Fiscal 1992, the Company also adopted the Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes", effective February 1, 1992. SFAS 109 changed the criteria for recognition and measurement of deferred tax assets and reduces the complexity of accounting for income taxes established by Statement of Financial Accounting Standards No. 96 ("SFAS 96"), "Accounting for Income Taxes". Since the Company previously followed SFAS 96, adoption of SFAS 109 did not have a material impact on the Company's financial statements. FINANCIAL CONDITION Company's Capital
____________________________________________________________________________________________ (Dollars in thousands) Fiscal 1994 Fiscal 1993 Amount Percentage Amount Percentage ____________________________________________________________________________________________ Long-Term Debt $116,900 21% $ 68,000 15% Other Long-Term Liabilities 28,559 5 24,780 5 Shareholders' Equity 419,003 74 358,658 80 ______________________________________________ $564,462 100% $451,438 100% ==============================================
The Company's capital consisted principally of shareholders' equity at the end of Fiscal 1994 and 1993. Shareholders' equity increased $60,345 during Fiscal 1994 and $52,990 during Fiscal 1993 primarily as a result of earnings retained after dividends. The Company had $42 million and $5 million in short-term borrowings at the end of Fiscal 1994 and 1993, respectively. Total debt increased during Fiscal 1994 and 1993 principally due to the timing of customer progress payments for contracts in process in Fiscal 1994 and 1993 and the previously discussed acquisitions made in Fiscal 1994. See related Note 6 in the notes to the consolidated financial statements. The Company may expand its Distribution and Engineered Power Systems segments by selective acquisition of additional distribution territories and product lines. In the event that such activities or growth in existing operations 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 Company has an agreement in principle to sell to GE Capital warrants for the Company's Common Stock in connection with certain transactions as described in Note 9 of the consolidated financial statements. The Company's current credit facilities appear adequate to meet its foreseeable cash requirements. LIQUIDITY Cash Provided From Operations
_________________________________________________________________________________________ (Dollars in thousands) Fiscal Fiscal Fiscal 1994 1993 1992 __________________________________________________________________________________________ Earnings before accounting change $ 67,558 $ 56,780 $43,958 Depreciation and amortization 23,954 21,175 12,305 Deferred income taxes 2,170 413 (2,935) ____________________________________ Funds from operations 93,682 78,368 53,328 Change in net operating assets and liabilities (146,288) (86,395) 23,068 ____________________________________ Net cash provided by (used in) operating activities $ (52,606) $ (8,027) $76,396 ====================================
Funds from operations increased 20% during Fiscal 1994 versus a 47% increase during 1993, reflecting primarily the growth in earnings each year. The Company's investment in net operating assets and liabilities increased by an amount greater than that provided from operations during Fiscal 1994 and 1993. The significant components of net operating assets and liabilities grew at rates comparable with sales growth, excluding recoverable costs and accrued profits not yet billed. Significant growth in recoverable costs and accrued profits not yet billed occurred in both the Tactical Vehicle Systems segment and the Engineered Power Systems segment. The Tactical Vehicle Systems segment is primarily funded progress payments under government regulations which require that contractors retain a significant amount of the contract costs until government acceptance of the product. The production delays for the FMTV contract increased costs and delayed deliveries resulting in a build up in the unliquidated contract costs in excess of what was planned. The Engineered Power Systems segment's gas turbine product line's mix of international contracts, which generally provide for lower customer contract funding requirements, experienced significant growth resulting in the increased recoverable costs and accrued profits not yet billed. Working capital to support the operations of the Company fluctuates significantly depending on the aforementioned progress payment streams of the contracts in process. 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. The Company's liquidity was comparable at the end of both Fiscal 1994 and 1993 using several measures of liquidity and leverage. The Company's current ratio (current assets divided by current liabilities) remained somewhat constant at 2.3:1 and 2.2:1 at the end of Fiscal 1994 and Fiscal 1993, respectively. The long-term debt to equity ratio (long-term debt including the current portion divided by total shareholders' equity) was 28% at the end of Fiscal 1994 and 20% at the end of Fiscal 1993. The Company's interest coverage (earnings before income taxes and interest expense divided by interest expense) decreased to 16.0 times interest for Fiscal 1994 versus 26.7 times interest for Fiscal 1993, as a result of increasing interest rates and total debt outstanding. CAPITAL EXPENDITURES AND COMMITMENTS Capital Expenditures By Industry Segment
___________________________________________________________________________________________________________ (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 ___________________________________________________________________________________________________________ Engineered Power Systems $12,082 $14,502 $18,646 -17% -22% Distribution 17,651 9,302 5,582 +90 +67 Tactical Vehicle Systems 2,929 6,061 36,852 -52 -84 Corporate Services 717 781 13,985 -8 -94 ________________________________ $33,379 $30,646 $75,065 +9 -59 ================================
Capital expenditures returned to historical levels in Fiscal 1994 and 1993 after having increased significantly during Fiscal 1992. The Distribution segment's increase during Fiscal 1994 includes the capital assets acquired in the acquisition of PAMCO. The capital expenditures program at the Tactical Vehicle Systems segment and the program to upgrade the Engineered Power Systems segment's facilities were both substantially completed during Fiscal 1993. The Corporate Services capital expenditures in Fiscal 1992 consisted primarily of the consolidation of a limited partnership, in which the Company became a majority limited partner. This limited partnership owns the building where the Company's corporate office is located. Cash Dividends
___________________________________________________________________________________________________________ (In thousands, except per share data) Growth Rate Fiscal Fiscal Fiscal Fiscal 1994 1993 1992 1993-1994 1992-1993 ___________________________________________________________________________________________________________ Amount of Cash Dividends $8,904 $7,563 $6,193 +18% +22% Annual Rate of Cash Dividends per Share $ 0.27 $ 0.23 $ 0.19 +17 +21
The amount of cash dividends increased 18% and 22% during Fiscal 1994 and 1993, respectively. Cash dividends represented 13%, 13% and 14% of earnings before accounting change for Fiscal 1994, 1993 and 1992, respectively. Even though substantial dividends were paid, the Company retained sufficient earnings to invest in new plant and equipment for a wide variety of capital expenditure projects, particularly those which increase productivity, and to provide adequate financial resources for internal and external growth opportunities. 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. GOVERNMENT CONTRACTING The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or barred from government contracts. On November 5, 1993, the Company was advised that a former consultant had filed a suit on his own behalf and on behalf of the United States of America alleging that the Company supplied false information, engaged in fraud and misapplied costs in connection with a change order under a 1987 government subcontract. The suit claims treble damages of $21 million and unspecified penalties. Management of the Company has denied any wrongdoing and believes the case will be resolved with no material adverse effect on the Company's business, its financial condition or its operating results. 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 contract to produce 2 1/2-ton and 5-ton trucks for the U. S. Army is subject to congressional approval of necessary funding for future program years. As of January 31, 1995, funding for purchases for Program Year Five had not been received. If such funding is not approved or is limited or delayed, the number of trucks produced in each fiscal year may be reduced or contract performance may be delayed. Item 8. Financial Statements and Supplemental 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, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 7 and Note 10 to the consolidated financial statements, in Fiscal 1992 the Company changed its method of accounting for postretirement medical benefit costs to conform with Statement of Financial Accounting Standards No. 106 and its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109. As discussed in Note 8 to the consolidated financial statements, effective February 1, 1994, the Company changed its method of accounting for postemployment benefits to conform with Statement of Financial Accounting Standard No. 112. ARTHUR ANDERSEN LLP Houston, Texas March 13, 1995 Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
______________________________________________________________________________________________ (Dollars in thousands) Fiscal Fiscal 1994 1993 ______________________________________________________________________________________________ Assets Current Assets Cash and equivalents $ 3,987 $ 7,788 Accounts and notes receivable, net 186,814 147,292 Recoverable costs and accrued profits not yet billed 227,467 115,868 Inventories 295,867 269,605 Other 364 224 _________ _________ Total Current Assets 714,499 540,777 Property, Plant and Equipment, net 131,860 126,473 Other assets 29,257 25,374 _________ _________ $875,616 $692,624 ========= ========= Liabilities and Shareholders' Equity Current Liabilities Notes Payable $ 42,000 $ 5,000 Accounts Payable 164,474 131,780 Accrued payrolls and incentives 21,611 18,629 Billings on uncompleted contracts in excess of incurred costs 11,284 31,088 Current income taxes 42,240 27,931 Current portion of long-term debt 1,344 2,219 Other accured liabilities 28,201 24,539 _________ _________ Total Current Liabilities 311,154 241,186 Long-Term Debt 116,900 68,000 Deferred Income Taxes 8,038 5,868 Accrued Postretirement Benefits 15,252 15,028 Deferred Compensation 5,269 3,884 Shareholders' Equity Common Stock, without par value, 50,000,000 shares authorized; 33,009,635 and 32,948,885 shares issued at January 31, 1995 and 1994, respectively, including 11,820 shares held in treasury 162,057 160,366 Retained earnings 256,979 198,325 _________ _________ 419,036 358,691 Less cost of treasury stock (33) (33) _________ _________ Total Shareholders' Equity 419,003 358,658 _________ _________ $875,616 $692,624 ========= =========
See notes to consolidated financial statements Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF EARNINGS
___________________________________________________________________________________________________________ (In thousands, except per share data) Fiscal Fiscal Fiscal 1994 1993 1992 ___________________________________________________________________________________________________________ Sales $1,138,336 $981,892 $812,526 Cost of sales 955,898 825,914 685,879 ___________ _________ _________ Gross profit 182,438 155,978 126,647 Selling and administrative expenses 75,249 68,331 61,168 Interest expense 6,865 3,313 3,689 Other income, net (2,528) (967) (2,586) ___________ _________ _________ 79,586 70,677 62,271 ___________ _________ _________ Earnings before income taxes and accounting change 102,852 85,301 64,376 Income taxes 34,520 27,999 20,597 ___________ _________ _________ Earnings of consolidated companies before accounting change 68,332 57,302 43,779 Equity in net earnings (loss) of unconsolidated affiliates (774) (522) 179 ___________ _________ _________ Earnings before accounting change 67,558 56,780 43,958 Cumulative effect of accounting change -0- -0- (9,300) ___________ _________ _________ Net earnings $ 67,558 $ 56,780 $ 34,658 =========== ========= ========= Weighted average number of shares of Common Stock outstanding 32,973 32,861 32,560 =========== ========= ========= Earnings per share before accounting change $ 2.05 $ 1.73 $ 1.35 Cumulative effect of accounting change, per share -0- -0- (.29) ___________ _________ _________ Net earnings per share $ 2.05 $ 1.73 $ 1.06 =========== ========= =========
See notes to consolidated financial statements Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
___________________________________________________________________________________________________________ (Dollars in thousands) Common Retained Treasury Stock Earnings Stock Total ___________________________________________________________________________________________________________ Balance at end of Fiscal 1991 $151,704 $120,805 $ (33) $272,476 Net earnings 34,658 34,658 Stock dividends 162 (162) -0- Cash dividends (6,193) (6,193) Exercise of stock options 4,727 4,727 _________ _________ _________ _________ Balance at end of Fiscal 1992 156,593 149,108 (33) 305,668 Net earnings 56,780 56,780 Cash dividends (7,563) (7,563) Exercise of stock options 3,773 3,773 _________ _________ _________ _________ 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 ========= ========= ========= =========
See notes to consolidated financial statements Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
___________________________________________________________________________________________________________ (Dollars in thousands) Fiscal Fiscal Fiscal 1994 1993 1992 ___________________________________________________________________________________________________________ Operating Activities Net earnings $ 67,558 $ 56,780 $ 34,658 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits 224 (91) 15,119 Depreciation and amortization 23,954 21,175 12,305 Deferred income taxes, net 2,170 413 (2,935) Change in operating assets and liabilities: Accounts and notes receivable (39,522) (4,126) (22,136) Recoverable costs and accrued profits not yet billed (111,599) (59,175) (5,664) Inventories (26,262) (57,099) 21,050 Accounts payable 32,694 3,010 30,283 Billings on uncompleted contracts in excess of incurred costs (19,804) 14,104 (8,680) Current income taxes 14,309 14,081 2,083 Other current liabilities 6,644 7,126 10,831 Other--principally long-term assets and liabilities (2,972) (4,225) (10,518) __________ __________ __________ Net Cash Provided by (Used in) Operating Activities (52,606) (8,027) 76,396 Investing Activities Expenditures for property, plant and equipment (33,379) (30,646) (75,065) Disposal of property, plant and equipment 4,372 796 377 __________ __________ __________ Net Cash Used in Investing Activities (29,007) (29,850) (74,688) Financing Activities Additions to long-term borrowings 85,000 192,918 190,000 Payments on long-term borrowings (36,975) (170,402) (174,818) Net borrowings and payments on short-term notes payable 37,000 5,000 -0- Dividends paid (8,904) (7,563) (6,193) Exercise of stock options 1,691 3,773 4,727 __________ __________ __________ Net Cash Provided by Financing Activities 77,812 23,726 13,716 __________ __________ __________ Increase (decrease) in cash and equivalents (3,801) (14,151) 15,424 Cash and equivalents, beginning of fiscal year 7,788 21,939 6,515 __________ __________ __________ Cash and equivalents, end of fiscal year $ 3,987 $ 7,788 $ 21,939 ========== ========== ==========
See notes to 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 1994" commenced on February 1, 1994 and ended on January 31, 1995. 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. Accounting Change: Effective February 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting For Postretirement Benefits Other Than Pensions" ("SFAS 106")(see Note 7), and No. 109, "Accounting For Income Taxes" ("SFAS 109")(see Note 10). During the fourth quarter of Fiscal 1994, the Company adopted, effective February 1, 1994, Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112")(see Note 8). Cash Equivalents: Interest-bearing deposits and other investments with original maturities of three months or less are considered cash equivalents. Inventories: Inventories are 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. Contract Revenues and Costs: Revenue is recognized when a product is shipped or accepted by the customer, except for large gas turbine contracts, 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 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 and replacements and betterments are capitalized. Off-Balance Sheet Risk: The Company enters into forward exchange contracts to hedge certain foreign currency transactions for periods consistent with the terms of the underlying transactions. The Company does not engage in speculation, nor does the Company typically hedge nontransaction-related balance sheet exposure. 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's other off- balance sheet risks are not material. 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 cash 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 as they are insignificant. Reclassifications: The accompanying consolidated financial statements for Fiscal 1993 and 1992 contain certain reclassifications to conform with the presentation used in Fiscal 1994. 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 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 engineered power systems 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 1994, 1993 and 1992 were $301,885, $237,807 and $256,269, respectively. Export sales to any single geographic region in Fiscal 1994 were not material to consolidated sales. Export sales in Fiscal 1993 included $113,597 destined for Asia and in Fiscal 1992 included $87,271 destined for South America. Financial information relating to industry segments is as follows:
_______________________________________________________________________________________________________________ Operating Identifiable Capital Sales Profit Assets Expenditures Depreciation _______________________________________________________________________________________________________________ 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 =========== ========= ========= ======== ======== Fiscal 1993 Engineered Power Systems $ 602,853 $ 70,292 $396,712 $14,502 $ 5,330 Distribution 311,983 20,309 157,696 9,302 5,075 Tactical Vehicle Systems 65,894 2,886 113,917 6,061 9,405 Corporate Services 1,162 552 24,299 781 926 ___________ _________ _________ ________ ________ Total $ 981,892 $ 94,039 $692,624 $30,646 $20,736 =========== ========= ========= ======== ======== Fiscal 1992 Engineered Power Systems $ 508,898 $ 59,578 $311,075 $18,646 $ 3,267 Distribution 269,045 12,478 138,359 5,582 5,041 Tactical Vehicle Systems 34,112 1,602 86,351 36,852 3,303 Corporate Services 471 195 37,563 13,985 468 ___________ _________ _________ ________ ________ Total $ 812,526 $ 73,853 $573,348 $75,065 $12,079 =========== ========= ========= ======== ========
A reconciliation of Operating profit to Earnings before income taxes and accounting change is as follows:
_____________________________________________________________________________________________________________ Fiscal Fiscal Fiscal 1994 1993 1992 _____________________________________________________________________________________________________________ Operating profit $115,568 $94,039 $73,853 Corporate expenses (5,851) (5,425) (5,819) Interest expense (6,865) (3,313) (3,658) _________ ________ ________ Earnings before income taxes and accounting change $102,852 $85,301 $64,376 ========= ======== ========
Note 3: Recoverable Costs and Accrued Profits Not Yet Billed Amounts included in the financial statements which relate to recoverable costs and accrued profits not yet billed on contracts in process are as follows:
_________________________________________________________________________________________________ Fiscal Fiscal 1994 1993 _________________________________________________________________________________________________ Costs incurred on uncompleted contracts $ 581,151 $ 355,184 Accrued profits 47,627 33,300 __________ __________ 628,778 388,484 Less: Customer progress payments (412,595) (303,704) __________ __________ $ 216,183 $ 84,780 ========== ========== Included in the statements of financial position: Recoverable costs and accrued profits not yet billed $ 227,467 $ 115,868 Billings on uncompleted contracts in excess of incurred costs (11,284) (31,088) __________ __________ $ 216,183 $ 84,780 ========== ==========
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 $22,582 and $17,852 at January 31, 1995 and 1994, respectively. The Company's total general and administrative expense incurred amounted to $86,292, $79,290 and $70,075 in Fiscal 1994, 1993 and 1992, 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 1994 1993 _______________________________________________________________________________________ Engineered Power Systems $229,898 $218,358 Customer deposits (5,169) (1,178) _________ _________ Total Engineered Power Systems 224,729 217,180 Distribution 121,273 98,885 Excess of current cost over LIFO values (50,135) (46,460) _________ _________ Total Inventories $295,867 $269,605 ========= =========
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, 1995 and 1994 includes approximately $14,789 and $14,271, 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. 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 1994 and 1992, certain inventories were reduced. These reductions resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior fiscal years as compared with the cost of Fiscal 1994 and 1992 purchases, the effect of which increased pre-tax earnings in Fiscal 1994 and 1992 by approximately $1,741 and $204, respectively. 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 $44,415 at the close of Fiscal 1994. 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 Company has been advised that on January 5, 1993, a former consultant of the Company filed a civil suit 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 incurred in connection with a change order under a 1987 government subcontract. 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. The Company is aware that the Defense Criminal Investigation Service and the United States Air Force Office of Special Investigation are conducting an investigation into whether the Company violated any criminal statute in connection with the same facts. The Company has denied any wrongdoing in connection with the pricing of the change order and believes that both the criminal investigation and the civil case will be resolved without any material effect on the financial position, net worth or results of operations of 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 such lawsuits will not result in any material liability to the Company. 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: 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, 1995 and 1994, the amounts outstanding under these arrangements were $42,000 and $5,000, respectively, with a weighted average interest rate of 6.30% and 3.39%, respectively. Long-Term Debt, which is generally unsecured, consists of the following:
__________________________________________________________________________________________________________ Fiscal Fiscal 1994 1993 __________________________________________________________________________________________________________ Notes payable to insurance companies: -10.20%, principal due $1,000 annually to 1998 $ 4,000 $ 5,000 -Installment note, 10.20%, principal retired in 1994 -0- 451 Debt of consolidated limited partnership: -note payable to a bank, principal due monthly to 1998 (see note below) 9,000 9,000 Revolving credit notes payable to banks (see note below) 105,000 55,000 Other 244 768 _________ ________ 118,244 70,219 Less current portion (1,344) (2,219) _________ ________ Long-Term Debt $116,900 $68,000 ========= ========
The Company has commitments of $105,000 from banks under revolving credit notes (subject to reduction at the Company's election) which mature on December 31, 1997. A commitment fee at the rate of 15 basis points per annum is paid on the daily average unused balance during the revolving period. Borrowings outstanding under the revolving credit notes bear interest at various options, the maximum rate being the prime rate. In Fiscal 1992, the Company entered into an interest rate swap agreement, which expires in Fiscal 1995, that presently converts $10,000 of floating rate debt into fixed rate debt with an interest rate of 4.28%. The net interest paid or received is included in interest expense. 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 1994, approximately $124,678 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 1994, 1993 and 1992 was $6,679, $3,425 and $3,707, respectively. The amounts of long-term debt which will become due during Fiscal 1995 through 1998, are approximately: 1995--$1,344; 1996--$1,100; 1997--$106,100 and 1998--$9,700. Note 7: 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. Effective February 1, 1992, the Company adopted SFAS 106 and changed its method of accounting for such costs to the accrual basis of accounting instead of expensing these costs when paid as had been the generally accepted method. The Company elected to record the previously unrecognized prior service cost of such benefits on the immediate recognition basis 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. 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 1994 1993 1992 ______________________________________________________________________________________________________ Service costs - benefits attributed to service during the period $ 418 $ 377 $ 466 Interest cost on accumulated postretirement medical benefit obligation 678 768 1,105 Amortization of prior service costs (718) (618) -0- ______ ______ _______ Net postretirement medical benefit costs $ 378 $ 527 $1,571 ====== ====== =======
The status of the plan is as follows:
______________________________________________________________________________________________ January 31, January 31, 1995 1994 ______________________________________________________________________________________________ Accrued Postretirement Benefits: Retirees $ 4,454 $ 6,201 Employees eligible to retire 1,978 2,561 Employees not eligible to retire 1,500 1,419 ________ ________ 7,932 10,181 Unrecognized prior service cost 5,328 5,954 Unrecognized net gain (loss) 1,992 (1,107) ________ ________ $15,252 $15,028 ======== ========
Postretirement medical benefit amounts were determined by applying health care costs trend rates of 9.5 to 11.5 percent for Fiscal 1994 and 10.5 to 13.0 percent for Fiscal 1993, gradually decreasing to 5.5 percent by 2012 to gross eligible medical claims, and using a discount rate of 8.75 percent for Fiscal 1994 and 7.75 percent for Fiscal 1993. Changing the health care cost trend rates by one percentage point would change the accumulated postretirement medical benefit obligation at January 31, 1995 by approximately $766 and the postretirement medical benefit costs for Fiscal 1994 by approximately $126. The Company made plan modifications during the fourth quarter of Fiscal 1992. The plan was amended for employees that retire on or after February 1, 1993, to modify the attribution period and the cost sharing provisions of the plan. Note 8: 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 1994 1993 ___________________________________________________________________________________________________________ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $34,096 in 1994 and $33,051 in 1993 $ 36,028 $ 34,714 ========= ========= Projected benefit obligation for service rendered to date $(43,764) $(44,421) Plan assets at fair value, primarily publicly traded stocks and bonds, including 70,956 and 120,956 shares of the Company's Common Stock at the end of Fiscal 1994 and 1993, respectively 60,686 56,099 _________ _________ Plan assets in excess of projected benefit obligations 16,922 11,678 Unrecognized net gain from past experience different from that assumed (9,114) (4,020) Unrecognized net asset at February 1, 1985 amortized over the average remaining service period -0- (194) _________ _________ Prepaid pension cost included in Other Assets $ 7,808 $ 7,464 ========= =========
Net pension credit includes the following components:
_________________________________________________________________________________________________________________________ Fiscal Fiscal Fiscal 1994 1993 1992 _________________________________________________________________________________________________________________________ Service cost -- benefits earned during the year $ 1,815 $ 2,012 $ 1,735 Interest cost on projected benefit obligation 3,541 3,108 3,126 Actual return on plan assets (5,494) (4,883) (4,550) Amortization of unrecognized net gain (406) (493) (810) Net amortization and deferrals 200 (540) (847) ________ ________ ________ Net periodic pension credit $ (344) $ (796) $(1,346) ======== ======== ========
The assumptions used are as follows:
_________________________________________________________________________________________________________________________ Fiscal Fiscal 1994 1993 _________________________________________________________________________________________________________________________ Discount Rate 8.75% 7.75% 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 Company has an unfunded defined benefit retirement plan for non-employee directors which provides for payments upon retirement, death, or disability. Retirement expense for this plan in Fiscal 1994, 1993 and 1992, respectively, was $68, $164 and $71. During Fiscal 1993, the Company adopted an unfunded supplemental retirement plan for certain corporate officers. Retirement expense for the plan in Fiscal 1994 and 1993 was $216 and $290, respectively. Prior service cost not yet recognized in periodic pension cost was $1,804 and $1,208 at January 31, 1995 and 1994, respectively. In January 1994, the Company adopted 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 $399 and $13 in Fiscal 1994 and 1993, respectively. Effective February 1, 1994, the Company adopted SFAS 112. The statement requires the accrual of the estimated costs of benefits provided by the employer to former or inactive employees after employment but prior to retirement. Adoption of SFAS 112 did not have a material impact upon the consolidated financial position or results of operations. 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 at the end of the fiscal year. Note 9: Common Stock Proposed issuance of common stock warrants: On January 10, 1995, the Company announced that an agreement in principle had been reached with GE Capital Corporation ("GE Capital"), a wholly owned subsidiary of General Electric Company, to offer for lease power plants and gas compression stations manufactured by the Company. Under the agreement, the Company will contribute 10% of the equity requirements for each lease transaction and GE Capital has agreed to purchase warrants for the Company's Common Stock to fund the Company's equity participation. Completion of this transaction is subject to due diligence, further negotiations and approval of a definitive agreement by the board of directors of both companies. Shareholder Rights Plan: On March 9, 1995, the Company announced that its Board of Directors adopted a shareholder rights plan. The Company adopted the plan to protect shareholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all shareholders. The rights will be issued to shareholders of record on March 20, 1995 and will expire on March 20, 2005. The plan provides for the issuance of one right for each outstanding share of the Company's Common Stock. The rights will become exercisable only if a person or group acquires 15% or more of the Company's outstanding voting stock or announces a tender or exchange offer that would result in ownership of 15% or more of the Company's stock. Each right will entitle the holder to buy one- third of a share of Common Stock at an exercise price of $30 per right, subject to antidilution adjustments. The Company's Board of Directors may, at its option, redeem all rights for $.01 per right at any time prior to the acquisition of 15% or more of the Company's stock by a person or group. If a person or group acquires 15% or more of the Company's outstanding voting stock, each right will entitle holders, other than the acquiring party, to purchase shares of the Company's Common Stock having a market value of twice the exercise price of the right. The plan also includes an exchange option. If a person or group acquires 15% or more, but less than 50%, of the outstanding voting stock, the Board of Directors may at its option exchange the rights in whole or in part for shares of the Company's stock for each two shares of Common Stock for which a right is then exercisable. This exchange would not apply to shares held by the person or group holding 15% or more of the Company's voting stock. If, after the rights have become exercisable, the Company merges or otherwise combines with another entity, or sells 50% or more of its assets or earning power, each right then outstanding will entitle its holder to purchase for $30, subject to antidilution adjustments, a number of the acquiring party's common shares having a market value of twice that amount. Stock Options: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan and the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock Option Plan authorize the grant of options to purchase an aggregate of up to 1,800,000 and 415,000 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 415,000 to 514,550 shares as of February 1, 1995. Stock option activity under the plan is as follows:
___________________________________________________________________________________________________ Shares Option Price under Range Option Per Share ___________________________________________________________________________________________________ Outstanding at end of Fiscal 1991 747,400 $4.75 - $18.75 Granted 58,800 $27.75 Exercised (335,000) $4.75 - $18.75 _________ Outstanding at end of Fiscal 1992 471,200 $4.75 - $27.75 Granted 178,000 $32.625 Exercised (171,100) $4.75 - $27.75 _________ Outstanding at end of Fiscal 1993 478,100 $13.125 - $32.625 Granted 180,050 $50.25 Exercised (60,750) $13.125 - $32.625 Cancelled (12,225) $18.75 - $50.25 _________ Outstanding at end of Fiscal 1994 585,175 $18.75 - $50.25 ========= Options exercisable at end of Fiscal 1994 170,150 $18.75 - $50.25 ========= Options available for future grants at the end of Fiscal 1994 639,975 =========
Note 10: Income Taxes Effective February 1, 1992, the Company adopted the method of accounting for income taxes promulgated by SFAS 109. The Company had previously accounted for income taxes under the method promulgated by Statement of Financial Accounting Standards No. 96 ("SFAS 96"). Under both SFAS 109 and SFAS 96, the deferred tax liability is determined under the liability method based on the difference between the financial statement and tax bases 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 principal types of differences between assets and liabilities for financial statement and tax return purposes are accumulated depreciation, pension accounting, contract accounting, and nondeductible accruals. Adoption of SFAS 109 did not have a material effect on Fiscal 1992 earnings before the accounting change for SFAS 106. The components of the income tax provision and the income tax payments are as follows:
__________________________________________________________________________________________ Fiscal Fiscal Fiscal 1994 1993 1992 __________________________________________________________________________________________ Current $ 2,194 $10,454 $17,917 Deferred 32,326 17,545 2,680 ________ ________ ________ Income tax provision $34,520 $27,999 $20,597 ======== ======== ======== Income tax payments (excluding refunds) $17,422 $11,965 $13,667 ======== ======== ========
A reconciliation between the provision for income taxes and income taxes computed by applying the statutory U. S. Federal income tax rates of 35% in both Fiscal 1994 and 1993 and 34% in Fiscal 1992 is as follows:
_________________________________________________________________________________________ Fiscal Fiscal Fiscal 1994 1993 1992 __________________________________________________________________________________________ Provision at statutory rates $35,998 $29,856 $21,888 Other (1,478) (1,857) (1,291) ________ ________ ________ $34,520 $27,999 $20,597 ======== ======== ========
The tax effects of the significant temporary differences which comprise the deferred tax liability at the end of Fiscal 1994 and 1993 are as follows:
_____________________________________________________________________________ Fiscal Fiscal 1994 1993 _____________________________________________________________________________ Deferred Tax Assets Postretirement benefit obligation $ 5,338 $ 5,260 Accrued expenses and other reserves 11,072 11,426 Other 54 1,316 ________ ________ Gross deferred tax assets 16,464 18,002 Deferred Tax Liabilities Property, plant and equipment 4,602 4,027 Pension accounting 2,449 2,412 Contract accounting 34,817 27,533 Prepaid expenses and deferred charges 37,563 16,997 Other 9,685 7,359 ________ ________ Gross deferred tax liabilities 89,116 58,328 ________ ________ Net deferred tax liability $72,652 $40,326 ======== ======== Current portion of deferred tax liability $64,614 $34,458 Non-current portion of deferred tax liability 8,038 5,868 ________ ________ Net deferred tax liability $72,652 $40,326 ======== ========
Note 11: Supplemental Financial Data Receivables consist of the following:
______________________________________________________________________________ Fiscal Fiscal 1994 1993 ______________________________________________________________________________ Accounts receivable $186,024 $145,433 Notes receivable 2,458 3,576 Allowance for doubtful accounts (1,668) (1,717) _________ _________ $186,814 $147,292 ========= =========
At January 31, 1995, the Company does not have significant credit risk concentrations. No single group or customer, other than the U. S. Government, represents greater than 10% of total accounts receivable. The U. S. Government accounted for approximately 12.7% and 10.2% of accounts receivable at January 31, 1995 and 1994, respectively. Components of property, plant and equipment are as follows:
______________________________________________________________________________ Fiscal Fiscal 1994 1993 ______________________________________________________________________________ Machinery and equipment $114,592 $107,405 Buildings and leasehold improvements 89,178 76,533 Revenue earning assets 10,556 10,154 Accumulated depreciation and amortization (98,355) (82,188) _________ _________ 115,971 111,904 Construction-in-progress 1,585 2,050 Land 14,304 12,519 _________ _________ $131,860 $126,473 ========= =========
Note 12: Consolidated Quarterly Data (unaudited)
____________________________________________________________________________________________________ Fiscal 1994 ____________________________________________________________________________________________________ Fourth Third Second First Quarter Quarter Quarter Quarter ____________________________________________________________________________________________________ Sales $287,815 $304,248 $287,118 $259,155 Gross profit 50,501 47,176 44,215 40,546 Net earnings 18,438 17,603 16,488 15,029 Net earnings per share .56 .53 .50 .46
Fiscal 1993 ____________________________________________________________________________________________________ Fourth Third Second First Quarter Quarter Quarter Quarter ____________________________________________________________________________________________________ Sales $244,662 $259,141 $257,936 $220,153 Gross profit 43,399 40,867 38,024 33,688 Net earnings 16,831 14,068 13,789 12,092 Net earnings per share .51 .43 .42 .37
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, 1995 and 1994. Consolidated Statements of Earnings--Years ended January 31, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity--Years ended January 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows--Years ended January 31, 1995, 1994 and 1993. 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, 4.2 and 4.3 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 25, 1995, 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 Second Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of April 20, 1992 (incorporated by reference to Exhibit 3.1 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 3.2 Third Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of December 8, 1992 (incorporated by reference to Exhibit 3.2 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). *4.1 Loan Agreement effective September 3, 1993, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and ABN AMRO Bank, N.V., Houston Agency and The Bank of New York, a New York Banking Corporation and NationsBank of Texas, National Association. *4.2 Agreement and First Amendment to Loan Agreement effective July 31, 1994, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and ABN AMRO Bank, N.V., Houston Agency and The Bank of New York, a New York Banking Corporation and NationsBank of Texas, National Association. *4.3 Agreement and Second Amendment to Loan Agreement effective December 23, 1994, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and ABN AMRO Bank, N.V., Houston Agency and The Bank of New York, a New York Banking Corporation and NationsBank of Texas, National Association and Bank of America Illinois, an Illinois Banking Association and PNC Bank, National Association, a National Banking Association. 4.4 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 1, 1990, between Joe Manning, Jr. and C. E. Ames, as Lessors, and the Company, as Lessee (incorporated by reference to Exhibit 10.1 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.2 Lease Agreement effective January 1, 1991, between Joe Manning, Jr., as Lessor, and the Company, as Lessee (incorporated by reference to Exhibit 10.2 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.3 Lease Agreement effective January 1, 1988, between Miles McInnes and Faye Manning Tosch, as Lessors, and the Company, as Lessee (incorporated by reference to Exhibit 10.3 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.4 Lease Agreement effective March 1, 1986, between Joe Manning, Jr. and Joe Manning, IV, as Lessors, and the Company, as Lessee (incorporated by reference to Exhibit 10.4 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.5 Distributor Sales and Service Agreement effective January 1, 1993, between the Company and Detroit Diesel Corporation (incorporated by reference to Exhibit 10.1 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1993 under the Commission File No. 0-8493). 10.6 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). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 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). *21.1 List of Subsidiaries. *23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. *27.1 Financial Data Schedules. __________ * Filed with this report. (b) Reports on Form 8-K.--No reports on Form 8-K were filed during the last quarter of the period covered by this report. 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 11th day of April, 1995. STEWART & STEVENSON SERVICES, INC. By /s/ Bob H. O'Neal Bob H. O'Neal President 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 11th day of April, 1995. /s/ Bob H. O'Neal /s/ Robert L. Hargrave Bob H. O'Neal Robert L. Hargrave Director and Principal Director, Principal Executive Officer 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
Filed with Incorporated by Reference Exhibit Number and Description this report Form Date File No. Exhibit ___________________________________ ____________ _____ _____ _______ ________ 3.1 Second Restated Articles of Incorporation, effective as of April 20, 1992. 10-K 1/31/94 0-8493 3.1 3.2 Third Restated Bylaws, effective as of December 8, 1992. 10-K 1/31/94 0-8493 3.2 4.1 Loan Agreement effective September 3, 1993, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and ABN AMRO Bank, N.V., Houston Agency and The Bank of New York, a New York Banking Corporation and NationsBank of Texas, National Association. * 4.2 Agreement and First Amendment to Loan Agreement effective July 31, 1994, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and ABN AMRO Bank, N.V., Houston Agency and The Bank of New York, a New York Banking Corporation and NationsBank of Texas, National Association. * 4.3 Agreement and Second Amendment to Loan Agreement effective December 23, 1994, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association and ABN AMRO Bank, N.V., Houston Agency and The Bank of New York, a New York Banking Corporation and NationsBank of Texas, National Association and Bank of America Illinois, an Illinois Banking Association and PNC Bank, a National Banking Association. * 4.4 Rights Agreement effective March 13, 1995, between Stewart & Stevenson Services, Inc. and The Bank of New York. 8-A 3/15/95 001-11443 1 10.1 Lease Agreement effective April 1, 1990, between Joe Manning, Jr. and C. E. Ames, as Lessors, and the Company, as Lessee. 10-K 1/31/94 0-8493 10.1 10.2 Lease Agreement effective January 1, 1991, between Joe Manning, Jr., as Lessor, and the Company, as Lessee. 10-K 1/31/94 0-8493 10.2 10.3 Lease Agreement effective January 1, 1988, between Miles McInnes and Faye Manning Tosch, as Lessors, and the Company, as Lessee. 10-K 1/31/94 0-8493 10.3 10.4 Lease Agreement effective March 1, 1986, between Joe Manning, Jr. and Joe Manning, IV, as Lessors, and the Company, as Lessee. 10-K 1/31/94 0-8493 10.4 10.5 Distributor Sales and Service Agreement effective January 1, 1993, between the Company and Detroit Diesel Corporation. 10-K 1/31/93 0-8493 10.1 10.6 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. S-3 12/28/91 33-44149 28.1 10.7 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. S-3 12/28/91 33-44149 28.2 10.8 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated as of December 31, 1979. 10-K 1/31/94 0-8493 10.8 10.9 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan. 10-K 1/31/94 0-8493 10.9 10.10 Amendment No. 1 to Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan, dated September 11, 1990. 10-K 1/31/94 0-8493 10.10 10.11 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan. 10-K 1/31/94 0-8493 10.11 21.1 List of subsidiaries. * 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. * 27.1 Financial Data Schedules. *
EX-4 2 EXHIBIT 4.1 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 and THE OTHER LENDERS NOW OR HEREAFTER A PARTY HERETO ______________ $55,000,000 Revolving Credit Facility and $55,000,000 Discretionary Letter of Credit Facility ______________ September 3, 1993 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 1 Alternate Rate Borrowing 2 Annual Financial Statements 2 Application 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 4 Code 4 Commitment 4 Compliance Certificate 5 Controlled Group 5 Cover 5 Credit Documents 5 Dealer Rate 5 Default 5 EBITDA 5 Eligible Assignee 6 Environmental Claim 6 Environmental Liabilities 6 Environmental Permit 6 ERISA 6 Eurodollar Business Day 6 Eurodollar Interbank Rate 6 Eurodollar Rate 6 Eurodollar Rate Borrowing 7 Eurodollar Reserve Requirement 7 Event of Default 7 Facility Debt 7 FDIC Percentage 7 Federal Funds Rate 7 FMTV Capital Expenditures 7 Funding Loss 7 GAAP 8 Governmental Authority 8 Hazardous Substance 8 Indebtedness 8 Interest Bearing Debt 9 Interest Bearing Debt to Total Capitalization 9 Interest Coverage Ratio 9 Interest Options 9 Interest Payment Dates 9 Interest Period 9 Investment 9 Legal Requirement 10 Letter of Credit 10 Letter of Credit Agreement 10 Letter of Credit Documents 10 Letter of Credit Liabilities 10 Lien 10 Loan Availability Period 10 Loans 10 MAC 10 Majority Lenders 10 Margin Percentage 10 Maturity Date 11 Maximum Commitment 11 Negotiated Base Rate 11 Negotiated Rate 11 Negotiated Rate Borrowing 11 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 12 Plan 12 Prime Rate 13 Proper Form 13 Property 13 Quarterly Financial Statements 13 Rate Designation Notice 13 Regulation D 13 Request for Credit 14 Requirements of Environmental Law 14 Subsidiary 14 Superseded Loan Agreement 14 Tangible Net Worth 14 Taxes 14 Termination Date 14 Texas Credit Code 14 Total Capitalization 14 Unfunded Liabilities 14 2. LOANS 15 3. INTEREST OPTIONS FOR LOANS 17 4. CONDITIONS PRECEDENT 21 5. REPRESENTATIONS AND WARRANTIES 22 6. AFFIRMATIVE COVENANTS 26 7. NEGATIVE COVENANTS 29 8. DEFAULT 32 9. LENDERS' RIGHT TO CURE 34 10. THE AGENT 34 11. PARTICIPATION; ASSIGNMENT 36 12. USURY NOT INTENDED; SAVINGS PROVISIONS 37 13. DOCUMENTATION REQUIREMENTS 37 14. SURVIVAL 38 15. BORROWER AGREES TO PAY OR REIMBURSE AGENT'S EXPENSES; INDEMNIFICATION 38 16. AMENDMENTS IN WRITING 39 17. NOTICES 39 18. "INCLUDING" IS NOT LIMITING; SECTION HEADINGS AND REFERENCES; EXHIBITS, ETC 39 19. OFFSET RIGHTS 40 20. VENUE 40 21. RIGHTS CUMULATIVE; DELAY NOT WAIVER 40 22. ENTIRE AGREEMENT; FORMER AGREEMENT SUPERSEDED 41 23. SEVERABILITY 41 24. DTPA WAIVER 41 25. RELEASE OF CLAIMS 42 26. COUNTERPARTS 42 27. ASSIGNMENT TO FEDERAL RESERVE BANK 42 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 September 3, 1993 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 and issue letters of credit for the account of Borrower in the following manner and subject to the following terms and conditions: 1. 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 Eurodollar Interbank 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). Application shall have the meaning ascribed to such term in the Letter of Credit Agreement. 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 (a) the FMTV Capital Expenditures and (b) Capital Expenditures of up to $29,000,000 incurred on or before October 31, 1993. 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 4(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. 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). 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. Cover for Letter of Credit Liabilities shall be effected by paying to Agent immediately available funds or other collateral acceptable to Majority Lenders, in an amount equal to any required prepayment, to be held by Agent in a collateral account maintained by Agent and collaterally assigned as security by Borrower for the financial accommodations extended pursuant to this Agreement and the other Credit Documents using documentation in Proper Form. Such amount shall be retained by Agent in such collateral account until such time as the applicable Letters of Credit shall have expired and the Reimbursement Obligations, if any, with respect thereto shall have been fully satisfied; provided, however, that Agent shall not be required to release any amount in such collateral account if a Default or Event of Default has occurred and is continuing. 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, the Letter of Credit Documents, 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 the Letters of Credit or any commitment regarding the Loans or the Letters of Credit 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. 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 shall mean any third party (including any Governmental Authority) action, lawsuit, claim or proceeding which seeks to impose liability for violation of a Requirement of Environmental Law or of an Environmental Permit. 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 or otherwise, including: remedial, removal, response, abatement, restoration (including natural resources), investigative, monitoring, personal injury and damage to property, natural resources or injuries to Persons, and any other related costs, expenses, losses, damages, penalties, fines, liabilities and obligations. Environmental Permit shall mean any permit, license, approval or other authorization under any Requirement of Environmental Law relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or Hazardous Substances or toxic materials or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of, wastes, pollutants, contaminants or Hazardous Substances. 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 the Letter of Credit Liabilities 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. Section 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 respec- tive Property. Hazardous Substance shall mean petroleum products and any hazardous or toxic waste or substance defined or regulated as a hazardous substance from time to time by any law, rule, regulation or order described in the definition of "Requirements of Environmental Law". 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, (i) Indebtedness of such Person for borrowed money (other than Indebtedness which is non-recourse to such Person), (ii) Indebtedness of such Person for deferred compensation and (iii) 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 30 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 Requirements of Environmental Law. Letter of Credit shall have the meaning ascribed to such term in the Letter of Credit Agreement. Letter of Credit Agreement means the Letter of Credit Agreement dated concurrently herewith executed by and among Borrower, Agent, TCB and the other Lenders, as it may from time to time be amended, modified, restated or supplemented. Letter of Credit Documents means the Letter of Credit Agreement, the Letters of Credit, the Letter of Credit Requests and the Applications. Letter of Credit Liabilities shall have the meaning ascribed to such term in the Letter of Credit Agreement. Letter of Credit Request shall have the meaning assigned to it in Section 3 of the Letter of Credit Agreement. 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: (A) From the date hereof through and including July 31, 1994: Interest Bearing Debt Per Annum to Total Capitalization Ratio Percentage 35% or greater 1/2% 20% to, but not including, 35% 3/8% less than 20% 1/4% (B) From August 1, 1994 and at any time thereafter: Interest Bearing Debt Per Annum to Total Capitalization Ratio Percentage 35% or greater 1/2% 20% to, but not including, 35% 3/8% less than 20% 3/8% Provided, that with respect to (a) any Loan made on or after August 1, 1994 and which bears interest at either the CD Rate or the Eurodollar Rate and (b) any conversion of any portion of the Loans to a CD Rate Borrowing or a Eurodollar Rate Borrowing which occurs on or after August 1, 1994, if at the time that such Loan is made or conversion occurs the aggregate outstanding principal balance of the Notes (after giving effect to any Loan then being requested) is equal to or greater than one-third (1/3) of the Commitment, the Margin Percentage applicable to such Loan or conversion shall be the amount set forth above plus an additional one-eighth of one percent (1/8%) per annum during the entire Interest Period applicable to such Loan or conversion. Maturity Date means the maturity of the Notes, July 31, 1995, as the same may hereafter be accelerated pursuant to the provisions of any of the Credit Documents. Maximum Commitment means Fifty-Five Million Dollars ($55,000,000). 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 repur- chase 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, and (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. 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 and thereafter entered in the minutes of its Loan and Discount Committee. 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 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. 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. Requirements of Environmental Law means all requirements imposed by any law (including The Resource Conservation and Recovery Act and The Comprehensive Environmental Response, Compensation, and Liability Act), rule, regulation or order of any Governmental Authority in effect at the applicable time which relate to (i) pollution, protection or clean-up of the air, surface water, ground water or land; (ii) solid, gaseous or liquid waste generation, recycling, reclamation, treatment, storage, disposal or transportation; or (iii) regulation of the manufacture, processing, distribution in commerce, use, discharge, release, threatened release, emission or storage of Hazardous Substances. 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 a 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) of (1) twenty five (25) basis points per annum through and including July 31, 1994, and (2) eighteen and three-fourths (18.75) basis points per annum thereafter, in each case, on the daily average difference between the Commitment and the aggregate principal balance of the Notes, such 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 Date. 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 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, on any Letter of Credit Liabilities 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, Letter of Credit Liabilities 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, Letter of Credit Liabilities 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, Letter of Credit Liabilities 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 pro- posed 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. (v) all of the Credit Documents have been executed and delivered, and shall be valid, enforceable and in full force and effect. (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. (vii) 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 as of the date hereof fairly present the financial condition of Borrower and its Subsidiaries as of its date and for the period then ended in accordance with GAAP. No material adverse change has occurred in the financial conditions reflected in any such statements since their dates. (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 action, suit or proceeding 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 and no draws under Letters of Credit 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"). 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 in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Requirement of 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 are not subject to 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 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 Requirements of Environmental Law or Environmental Permit or any Environmental Claim in connection with their respective Property which could reasonably be expected to have a material adverse effect on Borrower and its Subsidiaries on a consolidated basis. (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 Requirements of 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, 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 0.40 to 1.00. (2) a Tangible Net Worth for Borrower of not less than $250,000,000. (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 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. (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, for which the disclosure requirements of Regulation Section 2615.3 promulgated by the PBGC have not been waived, 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. 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 dili- gently 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 in- terferes 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 (1) indicia of equity rights of Borrower's Subsidiaries; (2) Permitted Investments; (3) normal and reasonable travel advances in the ordinary course of business to employees; (4) stock of or additional capital contributions to Subsidiaries; (5) 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; (6) 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 of leases made by Borrower or any of its Subsidiaries in the ordinary course of business; (7) acquisitions of Indebtedness of Borrower or any Subsidiary by Borrower or any other Subsidiary, and (8) other Investments not to exceed an aggregate original cost amount of $30,000,000 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. 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. (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. (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 thirty (30) days from its date. Upon the occurrence of any Event of Default, and at any time thereafter, the obligation, if any, to make Loans or to consider issuing Letters of Credit shall cease and terminate, and Majority Lenders shall have the right, at their option, (1) 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, (2) to require Borrower to pay to Agent for the account of Lenders, in immediately available funds, an amount equal to the then aggregate amount available for drawings under all Letters of Credit (which funds shall be held by Agent as Cover), and (3) 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 perform them or cause them to be performed for Borrower's account and at Borrower's expense, but shall have no obligation to perform any of them or cause them to be performed. 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. (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, 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. (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 or interest in the Letter of Credit Liabilities or the Letter of Credit Documents 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, with the consent of Issuer (as defined in the Letter of Credit Agreement) 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. No Lender may assign its interest in the Loans and the Commitment without assigning a like interest in the assigning Lender's interest in the Letter of Credit Liabilities and the Letter of Credit Documents and vice versa. 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 pur- suant 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 or Letter of Credit issued 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 those relating to Hazardous Substances, petroleum, petroleum products or petroleum wastes; (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, petroleum, petroleum product or petroleum waste located in on or under such property, 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 and expiry of the Loans and all Letter of Credit Liabilities. 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. 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 October 11, 1991, by and among Borrower, TCB individually and as agent, NationsBank of Texas, National Association, a national banking association, and BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association, 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. DTPA WAIVER. Borrower hereby waives all rights, remedies, claims, demands and causes of action based upon or related to the Texas Deceptive Trade Practices-Consumer Protection Act as described in Sections 17.41 et seq. of the Texas Business & Commerce Code, as the same pertains or may pertain to any Credit Document or any of the transactions contemplated therein, to the maximum extent that such rights, etc. may lawfully and effectively be waived. In furtherance of this waiver, Borrower hereby represents and warrants to Agent and Lenders that (a) Borrower is represented by legal counsel in connection with the negotiations, execution and delivery of this Agreement and the other Credit Documents, (b) Borrower has a choice other than to enter into this waiver in that it can obtain the Loans from another institution or institutions and (c) Borrower does not consider itself to be in a significantly disparate bargaining position relative to Agent and Lenders with respect to this Agreement and the other Credit Documents. 25. 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. 26. 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. 27. 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 Document 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 SECTION 26.02 THIS AGREEMENT, THE LETTER OF CREDIT 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 /s/ Kyle J. Gideon By:______________________________ Name: Kyle J. Gideon Title: Assistant Treasurer 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 The undersigned legal counsel for Borrower signs this Agreement not as a party to it but solely for the purpose of complying with the provisions of Section 17.42(a)(3) of the Texas Deceptive Trade Practices-Consumer Protection Act described in Section 24. /s/ Lawrence E. Wilson ______________________________ LAWRENCE E. WILSON Title: Vice President & General Counsel Texas Bar No.: 21704000 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association acting in its individual capacity and as Agent for Lenders named herein /s/ Mona M. Foch By:______________________________ 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: $20,000,000 ABN AMRO BANK, N.V., HOUSTON AGENCY /s/ John H. Phelan By:______________________________ Name: John H. Phelan Title: Group Vice President /s/ David P. Orr By:______________________________ Name: David P. Orr Title: Vice President Address for Notices: ABN AMRO Bank N.V., Houston Agency Three Riverway, Suite 1600 Houston, Texas 77056 Attention: Belinda Rowell Telecopy No. (713) 629-7533 Interest in Maximum Commitment: $10,000,000 THE BANK OF NEW YORK, a New York banking corporation /s/ Jan K. Stewart By:______________________________ Name: Jan K. Stewart Title: Vice President Address for Notices: The Bank of New York One Wall Street, 19th Floor New York, New York 10286 Attention: Ms. Julie Brennan Telecopy No.: (212) 635-6434 Interest in Maximum Commitment: $10,000,000 NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association /s/ Frank T. Hundley By:______________________________ Name: Frank T. Hundley Title: Vice President Address for Notices: NationsBank of Texas, National Association 700 Louisiana P.O. Box 2518 Houston, Texas 77252-2518 Attention: Corporate Banking Group Telecopy No.: (713) 247-6719 Interest in Maximum Commitment: $15,000,000 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 NOTE Houston, Texas $_______________ _______________, 199__ FOR VALUE RECEIVED, STEWART & STEVENSON SERVICES, INC. ("Maker"), a Texas corporation, promises to pay to the order of _________________________________ ("Payee"), a _______________, at the principal office of Texas Commerce Bank National Association, a national banking association, 712 Main Street, Houston, Harris County, Texas 77002, in immediately available funds and in lawful money of the United States of America, the principal sum of ________________________________________ Dollars ($____________) (or the unpaid balance of all principal advanced against this note, if that amount is less), together with interest on the unpaid principal balance of this note from time to time outstanding at the rate or rates provided in the Loan Agreement (hereinafter defined); provided, that for the full term of this note the interest rate produced by the aggregate of all sums paid or agreed to be paid to the holder of this note for the use, forbearance or detention of the debt evidenced hereby (including, but not limited to, all interest on this note at the Stated Rate plus the Additional Interest) shall not exceed the Ceiling Rate. Any term defined in the Loan Agreement (as amended, supplemented, restated or replaced from time to time, the "Loan Agreement") dated as of September ___, 1993 among Maker, certain financial institutions named therein and Texas Commerce Bank National Association, individually and as agent for the financial institutions from time to time a party thereto, which is used in this note and which is not otherwise defined in this note shall have the meaning ascribed to it in the Loan Agreement. 1. Loan Agreement; Advances; Security. This note has been issued pursuant to the terms of the Loan Agreement, and is one of the Notes referred to in the Loan Agreement. Advances against this note by Payee or other holder hereof shall be governed by the terms and provisions of the Loan Agreement. Reference is hereby made to the Loan Agreement for all purposes. Payee is entitled to the benefits of the Loan Agreement. The unpaid principal balance of this note at any time shall be the total of all amounts lent or advanced against this note less the amount of all payments or permitted prepayments made on this note and by or for the account of Maker. All loans and advances and all payments and permitted prepayments made hereon may be endorsed by the holder of this note on a schedule which may be attached hereto (and thereby made a part hereof for all purposes) or otherwise recorded in the holder's records; provided, that any failure to make notation of (a) any advance shall not cancel, limit or otherwise affect Maker's obligations or any holder's rights with respect to that advance, or (b) any payment or permitted prepayment of principal shall not cancel, limit or otherwise affect Maker's entitlement to credit for that payment as of the date received by the holder. 2. Mandatory Payments of Principal and Interest. (a) Accrued and unpaid interest on the unpaid principal balance of this note shall be due and payable on the Interest Payment Dates. (b) The entire unpaid principal balance of this note shall be finally due and payable on the Maturity Date. (c) All payments hereon made pursuant to this Section shall be applied first to accrued interest, the balance to principal. (d) If any payment provided for in this 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 for 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 immedi- ately 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 this note. (e) The Loan Agreement provides for required prepayments of the Indebtedness evidenced hereby upon terms and conditions specified therein. 3. No Usury Intended; Spreading. Notwithstanding any provision to the contrary contained in this note or any of the other Credit Documents, it is expressly provided that in no case or event shall the aggregate of (i) all interest on the unpaid balance of this note, accrued or paid from the date hereof and (ii) the aggregate of any other amounts accrued or paid pursuant to this note or any of the other Credit Documents, which under applicable laws are or may be deemed to constitute interest upon the indebtedness evidenced by this note from the date hereof, ever exceed the Ceiling Rate. In this connection, Maker and Payee stipulate and agree that it is their common and overriding intent to contract in strict compliance with applicable federal and Texas usury laws (and the usury laws of any other jurisdiction whose usury laws are deemed to apply to this note or any of the other Credit Documents despite the intention and desire of the parties to apply the usury laws of the State of Texas). In furtherance thereof, none of the terms of this note or any of the other Credit Documents 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 Ceiling Rate. Maker or other parties now or hereafter becoming liable for payment of the indebtedness evidenced by this note shall never be liable for interest in excess of the Ceiling Rate. If, for any reason whatever, the interest paid or received on this note during its full term produces a rate which exceeds the Ceiling Rate, the holder of this note shall credit against the principal of this note (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 on this note to produce a rate equal to the Ceiling Rate. All sums paid or agreed to be paid to the holder of this note for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread in equal parts throughout the full term of this note, so that the interest rate is uniform throughout the full term of this note. The provisions of this Section shall control all agreements, whether now or hereafter existing and whether written or oral, between Maker and Payee. 4. Default. The Loan Agreement provides for the acceleration of the maturity of this note and other rights and remedies upon the occurrence of certain events specified therein. 5. Waivers by Maker and Others. Except to the extent, if any, that notice of default is expressly required herein or in any of the other Credit Documents, Maker and any and all co-makers, endorsers, guarantors and sureties severally WAIVE notice (including, but not limited to, notice of intent to accelerate and notice of acceleration, notice of protest and notice of dishonor), demand, presentment for payment, protest, diligence in collecting and the filing of suit for the purpose of fixing liability and consent that the time of payment hereof may be extended and re-extended from time to time without notice to any of them. Each such person agrees that his, her or its liability on or with respect to this note shall not be affected by any release of or change in any guaranty or security at any time existing or by any failure to perfect or to maintain perfection of any lien against or security interest in any such security or the partial or complete unenforceability of any guaranty or other surety obligation, in each case in whole or in part, with or without notice and before or after maturity. 6. Section Headings. Section headings appearing in this note are for convenient reference only and shall not be used to interpret or limit the meaning of any provision of this note. 7. Choice of Law. This note 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. 8. Successors and Assigns. This note and all the covenants and agreements contained herein shall be binding upon, and shall inure to the benefit of, the respective legal representatives, heirs, successors and assigns of Maker and Payee. 9. Records of Payments. The records of Payee shall be prima facie evidence of the amounts owing on this note. 10. Severability. If any provision of this note is held to be illegal, invalid or unenforceable under present or future laws, the legality, validity and enforceability of the remaining provisions of this note shall not be affected thereby, and this note shall be liberally construed so as to carry out the intent of the parties to it. 11. Revolving Loan. Subject to the terms and provisions of the Loan Agreement, Maker may use all or any part of the credit provided to be evidenced by this note at any time before the Maturity Date. Maker may borrow, repay and reborrow hereunder, and except as set forth in the Loan Agreement there is no limitation on the number of advances made hereunder. Pursuant to Article 15.10(b) of Chapter 15 ("Chapter 15") of the Texas Credit Code, as amended, Maker and Payee expressly agree that Chapter 15 shall not apply to this note or to any Loan evidenced by this note and that neither this note nor any such Loan shall be governed by or subject to the provisions of Chapter 15 in any manner whatsoever. 12. Business Loans. Maker warrants and represents to Payee and all other holders of this note that all loans evidenced by this note are and will be for business, commercial, investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in Chapter One. STEWART & STEVENSON SERVICES, INC., a Texas corporation By:______________________________ Name:____________________________ Title:___________________________ RATE DESIGNATION NOTICE The undersigned hereby certifies that (he) (she) is the ______________________________ of Stewart & Stevenson Services, Inc. ("Borrower"), a Texas corporation, and that as such is authorized to execute this Rate Designation Notice on behalf of Borrower pursuant to the Loan Agreement (as it may be amended, supplemented or restated from time to time, the "Loan Agreement") dated as of September ___, 1993, by and among Borrower and Texas Commerce Bank National Association, a national banking association, acting as agent (in such capacity, "Agent") and the financial institutions which are a party thereto from time to time. Any term used herein and not otherwise defined herein shall have the meaning herein ascribed to it in the Loan Agreement. In accordance with the Loan Agreement, Borrower hereby notifies Lender of the exercise of an Interest Option. Current borrowings A. 1. Amount of Interest Option now in effect: _______________ 2. Expiring Interest Period: _______________ B. Proposed conversion 1. Amount: $ _______________ 2. Date Interest Option is to be effective: _______________ 3. Interest Option to be applicable (check one): ( ) Base Rate ( ) Eurodollar Rate ( ) CD Rate ( ) Negotiated Rate _______________ Must be the President, a vice president, the Treasurer or an Assistant Treasurer of Borrower. 4. Interest Period (if an Alternate Rate is being selected): ____________________ (if available) Borrower represents and warrants that the Interest Option and Interest Period (if any) selected above comply with all provisions of the Loan Agreement and that there exists no Event of Default or any event which, with the passage of time, the giving of notice or both, would be an Event of Default. Date:_______________ STEWART & STEVENSON SERVICES, INC., a Texas corporation By:______________________________ Name:____________________________ Title:___________________________ REQUEST FOR CREDIT ______________ Texas Commerce Bank National Association, as Agent 712 Main Street Houston, Texas 77002 Attention:______________________________ Gentlemen: The undersigned hereby certifies that (he) (she) is the _________________________________ of Stewart & Stevenson Services, Inc. ("Borrower"), a Texas corporation, and that as such is authorized to execute this Request for Credit (the "Request") on behalf of Borrower pursuant to the Loan Agreement (as it may be amended, supplemented or restated from time to time, the "Loan Agreement") dated as of September ___, 1993, by and among Borrower and Texas Commerce Bank National Association, a national banking association, acting as agent (in such capacity, "Agent") and the financial institutions which are a party thereto from time to time. Capitalized terms used herein and not defined herein shall have the respective meanings assigned to them in the Loan Agreement. The Loan being requested hereby is to be in the amount set forth in (b) below and is requested to be made on ______________________________, which is a Business Day. On behalf of Borrower, the undersigned further certifies, represents and warrants as follows: a. As of the date hereof: (1) Aggregate outstanding amount of Loans is: $_______________ (2) The current Commitment is: $_______________ (3) The available Commitment (clause 2 - clause 1) is: $_______________ _______________ Must be the President, a vice president, the Treasurer or an Assistant Treasurer of Borrower. b. If and only if the available Commitment is positive, Borrower hereby requests a Loan in the amount of $____________ (which is no more than the available Commitment). c. The requested Loan is to be a (check one) ( ) Base Rate Borrowing ( ) CD Rate Borrowing ( ) Eurodollar Rate Borrowing ( ) Negotiated Rate Borrowing. If the Loan is to be an Alternate Borrowing, the applicable Interest Period is to be _______________. d. The representations and warranties made in each Credit Document are true and correct in all respects on and as of the time of delivery hereof, with the same force and effect as if made on and as of the time of delivery hereof. e. No Default has occurred and is continuing or will occur as a result of the requested Loan. Thank you for your attention to this matter. Very truly yours, STEWART & STEVENSON SERVICES, INC., a Texas corporation By:______________________________ Name:____________________________ Title:___________________________ COMPLIANCE CERTIFICATE The undersigned hereby certifies that (he) (she) is the ______________________________, of Stewart & Stevenson Services, Inc. ("Borrower"), a Texas corporation, and that as such is authorized to execute this certificate on behalf of Borrower pursuant to the Loan Agreement (as it may be amended, supplemented or restated from time to time, the "Loan Agreement") dated as of September ___, 1993, by and among Borrower and Texas Commerce Bank National Association, a national banking association, acting as agent (in such capacity, "Agent") and the financial institutions which are a party thereto from time to time; and that a review of Borrower and its Subsidiaries has been made under (his) (her) supervision with a view to determining whether Borrower has fulfilled all of its obligations under the Loan Agreement and the other Credit Documents; and on behalf of Borrower further certifies, represents and warrants as follows (each capitalized term used herein having the same meaning given to it in the Loan Agreement unless otherwise specified): (a) Borrower has fulfilled its respective obligations under the Credit Documents. (b) The representations and warranties made in each Credit Document are true and correct in all respects on and as of the time of delivery hereof, with the same force and effect as if made on and as of the time of delivery hereof. (c) The financial statements delivered to Agent and Lenders concurrently with this Compliance Certificate have been prepared in accordance with GAAP consistently followed throughout the period indicated and fairly present the financial condition and results of operations of the applicable Persons as at the end of, and for, the period indicated. (d) No Default has occurred and is continuing. In this regard, the compliance with the provisions of Section 6(c) of the Loan Agreement is as follows: Section 6(c)(1) -- Interest Bearing Debt to Total Capitalization Ratio actual Interest Bearing Debt to Total Capitalization Ratio for Borrower and its Subsidiaries as of the date hereof: __.____ : 1.00 required Interest Bearing Debt to Total Capitalization Ratio for Borrower and its Subsidiaries as of the date hereof: _______________ Must be the Chief Financial Officer, Treasurer or any Assistant Treasurer of Borrower. 0.40 : 1.00 Section 6(c)(2) -- Tangible Net Worth actual Tangible Net Worth for Borrower and its Subsidiaries as of the date hereof: $_______________ required Tangible Net Worth for Borrower and its Subsidiaries as of the date hereof: $250,000,000 Section 6(c)(3) -- Interest Coverage Ratio actual Interest Coverage Ratio for Borrower and its Subsidiaries as of the date hereof: __.____ : 1.00 required Interest Coverage Ratio for Borrower and its Subsidiaries as of the date hereof: 2.00 : 1.00 (e) There has occurred no material adverse change in the assets, liabilities, financial condition, business or affairs of Borrower or any of its Subsidiaries since the date of the Loan Agreement. DATED as of_______________. STEWART & STEVENSON SERVICES, INC., a Texas corporation By:______________________________ Name:____________________________ Title:___________________________ ASSIGNMENT AND ACCEPTANCE Dated: _____________, 199__ Reference is made to the Loan Agreement dated as of September ___, 1993 (as restated, amended, modified, supplemented and in effect from time to time, the "Loan Agreement"), among Stewart & Stevenson Services, Inc. ("Borrower"), a Texas corporation, the financial institutions named therein, and Texas Commerce Bank National Association, individually and as agent (in such capacity, "Agent") for the financial institutions from time to time a party thereto. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Loan Agreement. This Assignment and Acceptance, between Assignor (as defined and set forth on Schedule I) and Assignee (as defined and set forth on Schedule I) is dated as of the Effective Date (as set forth on Schedule I). 1. Assignor hereby irrevocably sells and assigns to Assignee without recourse to Assignor, and Assignee hereby irrevocably purchases and assumes from Assignor without recourse to Assignor, as of the Effective Date, an undivided interest (the "Assigned Interest") in and to all Assignor's rights and obligations under the Loan Agreement and the Letter of Credit Agreement respecting the credit facilities provided for in the Loan Agreement and the Letter of Credit Agreement as are set forth on Schedule I (collectively, the "Assigned Facilities," individually, an "Assigned Facility"), in the amounts as set forth on Schedule I. 2. Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or any other Credit Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, any other Credit Document or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or its Subsidiaries or the performance or observance by Borrower or its Subsidiaries of any of Borrower's obligations under the Loan Agreement, the Letter of Credit Agreement, any other Credit Document or any other instrument or document furnished pursuant thereto; and (iii) attaches the Note held by it evidencing the Assigned Facility relating to Loans (the "Loan Facility"), and requests that Agent exchange such Note for a new Note payable to Assignor (if Assignor has retained any interest in the Loan Facility) and a new Note payable to Assignee in the respective amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Loan Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6(b) thereof, the Letter of Credit Agreement, the Negotiated Rate Quote Procedure dated concurrently herewith by and among Agent and Lenders, and any and all amendments and supplements thereto, and such other documents and information as it has deemed appropriate to make its own credit analysis; (iii) agrees that it will, independently and without reliance upon Agent, Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Agreement; (iv) appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Agreement as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will be bound by the provisions of the Loan Agreement and will perform in accordance with its terms all the obligations which by the terms of the Loan Agreement are required to be performed by it as a Lender; (vi) if Assignee is organized under the laws of a jurisdiction outside the United States, attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to Assignee's exemption from United States withholding taxes with respect to all payments to be made to Assignee under the Loan Agreement or such other documents as are necessary to indicate that all such payments are subject to such tax at a rate reduced by an applicable tax treaty, and (vii) has supplied the information requested on the administrative questionnaire attached hereto as Exhibit A. 4. Following the execution of this Assignment and Acceptance, it will be delivered to Agent for acceptance by it and Borrower and recording by Agent pursuant to Section 11 of the Loan Agreement, effective as of the Effective Date (which Effective Date shall, unless otherwise agreed to by Agent, be at least five Business Days after the execution of this Assignment and Acceptance). 5. Upon such acceptance and recording, from and after the Effective Date, Agent shall make all payments in respect of the Assigned Facilities (including payments of principal, interest, fees and other amounts) to Assignee, whether such amounts have accrued prior to the Effective Date or accrue subsequent to the Effective Date. Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to the Effective Date by Agent or with respect to the making of this assignment directly between themselves. 6. From and after the Effective Date, (i) Assignee shall be a party to the Loan Agreement, the Letter of Credit Agreement and the other Credit Documents to which Assignor is a party and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender under all of the Credit Documents, and (ii) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Agreement, the Letter of Credit Agreement and the other Credit Documents to which Assignor is a party. 7. The purchase price to be paid simultaneously herewith to Assignor is the principal amount together with all interest which has accrued but is unpaid, as of the Effective Date. 8. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Texas. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective duly authorized officers on Schedule I hereto. Schedule I to Assignment and Acceptance Legal Name of Assignor: ____________________________ Legal Name of Assignee: _________________________________________ Effective Date of Assignment: __________________, 199___ Percentage assigned of each Assigned Facility (to at least Principal 8 decimals) (Shown as a amount (or, percentage aggregate with respect original principal amount to Letters (or, with respect to Letters Assigned of Credit, face Credit, face amount) Facilities amount) assigned of all Lenders) Loans: $______________ ______% Letter of Credit participation interests $______________ ______% Accepted: TEXAS COMMERCE BANK NATIONAL ______________________________ ASSOCIATION, as Agent as Assignor By:_______________________________ By:______________________________ Name:_____________________________ Name:____________________________ Title:____________________________ Title:___________________________ STEWART & STEVENSON SERVICES, INC., a Texas corporation ____________________________ as Assignee By:_________________________________ By:______________________________ Name:_______________________________ Name:____________________________ Title:______________________________ Title:___________________________ SCHEDULE I LITIGATION The following list sets forth each case that individually or in the aggregate with all other similar cases involves the assertion of claims for damages in excess of $1,000,000. Regional Transportation District v. Stewart & Stevenson Services, Inc. In the District Court, Boulder County, Colorado $ 1,991,666 John Runion v. Stewart & Stevenson Services, Inc., CRS Sirrine, Inc., Metcalf & Eddy, Inc., CRS-Sirrine and Metcalf & Eddy Joint Venture Cause No. 89-038905 in the 152nd Judicial District Court of Harris County Texas $ 1,247,866 Serv-Tech, Inc. v. Stewart & Stevenson Services, Inc., Ohmstede, Inc., Ohmstede Mechanical Services, Inc., Robert G. Wetzel, Gene P. Livingston, James B. Jeffrey and Thomas B. Boisture, Civil Action No. 90-04285, in the 125th Judicial District Court of Harris County, Texas $ 17,500,000 Southwest Mobile Systems Corporation v. Stewart & Stevenson Services, Inc. C.A. No. H-92-0386, in the U.S. District Court for the Southern District of Texas, Houston Division $ 15,500,000 SCHEDULE II LIST OF 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 NAME ORGANIZATION % C. Jim Stewart & Stevenson, Inc. Delaware 100 Machinery Acceptance Corporation Texas 100 S&S International Sales, Inc. Barbados 100 Stewart & Stevenson MVO, Inc. Texas 100 Stewart & Stevenson Operations, Inc. Delaware 100 Stewart & Stevenson Overseas, Inc. Texas 100 Stewart & Stevenson Power, Inc. Delaware 100 Stewart & Stevenson Realty Corporation Texas 100 Stewart & Stevenson Transportation, Inc. Texas 100 Stewart & Stevenson de Venezuela, S.A. Venezuela 61.25 Thomassen Stewart & Stevenson International b.v. Netherlands 50 The Company has additional subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. SCHEDULE III INVESTMENTS ($000's omitted) EQUITY INVESTMENTS Thomassen Stewart & Stevenson International B.V. 50% ownership interest in Joint Venture $ 96 Stewart & Stevenson de Venezuela, S.A. Common Stock 46 Project Orange Limited Partnership interest 3,000 Thore, Inc. Preferred Stock 1 NOTES RECEIVABLE Gas Turbine Operations Centrais Electricas 563 Dunkirk Cogen 420 Florida Gas Transmission 10 CFR BIO-Gen Corporation 365 Besicorp Group Inc. 2,800 Kamine Development Corp. 2,800 Stewart & Stevenson Realty Corporation Mischer 300 Dodd Diesel 345 David James 108 CONTINGENT LIABILITIES Hyster - assignment of customer leases with recourse 310 Citicorp - assignment of customer installment sale contract with recourse 135 Banque de Suez - guarantee and repurchase agreement for TSSI 7,498 N.V. Nationale Borg-Maatschappij - counter guarantees for performance of TSSI 1,864 ABN*AMRO Bank - counter guarantees for performance of TSSI Comelco - assignment of customer installment sale contract with limited recourse 4 SCHEDULE IV LIENS None EX-4 3 EXHIBIT 4.2 AGREEMENT AND FIRST AMENDMENT TO LOAN AGREEMENT (July 31, 1994) THIS AGREEMENT AND FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of July 31, 1994, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "Borrower"), a Texas corporation; the financial institutions listed on the signature pages hereto (the "Lenders") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association domiciled in Houston, Harris County, Texas, acting in its capacity as agent for the Lenders (in such capacity, the "Agent"). The Borrower, the Lenders and the Agent are herein sometimes called the "Parties". Recitals: 1. The Parties have entered into a Loan Agreement dated as of September 3, 1993 (which Loan Agreement, as amended to the date hereof, is herein called the "Loan Agreement"). 2. The Parties desire to amend the Loan Agreement in certain respects to reduce the Margin Percentage, to reduce the commitment fees to be paid to the Lenders, to increase the minimum Tangible Net Worth requirement, to extend the maturity thereof, and to make certain other changes thereto, all as is more fully described below. Agreements: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. Margin Percentage Amended. The definition of "Margin Percentage" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: 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 35% or greater 45.0 basis points 20% to, but not including, 35% 32.5 basis points less than 20% 25.0 basis points 2. Maturity Date Extended. The definition of "Maturity Date" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: Maturity Date means the maturity of the Notes, July 31, 1997, as the same may hereafter be accelerated pursuant to the provisions of any of the Credit Documents. 3. Amendment of Section 2(c). Section 2(c) of the Loan Agreement is hereby amended to provide in its entirety as follows: (c) Commitment Fee. In consideration of the Commitment, Borrower agrees to pay a 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) of fifteen (15) basis points per annum on the daily average difference between the Commitment and the aggregate principal balance of the Notes, such 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. 4. Tangible Net Worth. Section 6(c)(2) of the Loan Agreement is hereby amended by deleting the amount "$250,000,000" where it appears therein and substituting therefor the amount "$350,000,000." 5. Conditions Precedent. This Amendment shall be effective July 31, 1994, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent: (a) The Agent shall have received the following, each of which shall be in form and substance satisfactory to the Agent in its sole discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of the Borrower, dated as of the date hereof, as to (1) the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment (a copy of such resolutions to be attached to such certificate), such certificate to state that said copy is a true and correct copy of such resolutions and that such resolutions were duly adopted and have not been amended, superseded, revoked or modified in any respect and remain in full force and effect as of the date of such certificate; (2) the absence of any change since September 3, 1993, in any of (i) the incumbency and signatures of the officer or officers of the Borrower; (ii) the Articles of Incorporation of the Borrower; or (iii) the Bylaws of the Borrower; and (2) this Amendment, duly executed by the Borrower, the Lenders and the Agent. (b) The Borrower shall have paid all accrued and unpaid fees and other amounts in connection with this Amendment. (c) No Default shall have occurred and be continuing. (d) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 6. Representations True; No Default. The Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 7. Ratification. Except as expressly amended hereby, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. 8. Definitions and References. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any Lender by or on behalf of the Borrower shall mean the Loan Agreement as hereby amended. 9. Expenses; Additional Information. The Borrower shall pay to the Agent on demand all expenses (including reasonable counsel's fees) incurred in connection with the preparation, reproduction, execution and delivery of this Amendment and with respect to advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended. In addition, the Borrower shall pay all costs and expenses of the Agent and each Lender (including counsel's fees) in connection with the enforcement of this Amendment. 10. Severability. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 11. INDEMNIFICATION. The Borrower shall indemnify the Agent, the 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 the Borrower of the proceeds of any Loan made or Letter of Credit issued by any Lender or growing out of or resulting from any Credit Document or any transaction or event contemplated therein; (b) violation by the Borrower or any of its Subsidiaries of any law, rule, regulation or order including those relating to Hazardous Substances, petroleum, petroleum products or petroleum wastes; (c) any Lender or the Agent being deemed an operator of any of the 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, petroleum, petroleum product or petroleum waste located in on or under such property, 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 the Loan Agreement (as amended by this Amendment and as it may otherwise be amended, restated, modified and supplemented from time to time) and the repayment and expiry of the Loans and all Letter of Credit Liabilities. Any amount to be paid under this Section by the Borrower to the Agent or any Lender shall be a demand obligation owing by the Borrower to the Agent or such Lender and shall bear interest from the date of expenditure until paid at the Past Due Rate. 12. DTPA WAIVER. The Borrower hereby waives all rights, remedies, claims, demands and causes of action based upon or related to the Texas Deceptive Trade Practices-Consumer Protection Act as described in Sections 17.41 et seq. of the Texas Business & Commerce Code, as the same pertains or may pertain to any Credit Document or any of the transactions contemplated therein, to the maximum extent that such rights, etc. may lawfully and effectively be waived. In furtherance of this waiver, the Borrower hereby represents and warrants to the Agent and the Lenders that (a) the Borrower is represented by legal counsel in connection with the negotiations, execution and delivery of this Amendment, (b) the Borrower has a choice other than to enter into this waiver in that it can obtain the Loans from another institution or institutions and (c) the Borrower does not consider itself to be in a significantly disparate bargaining position relative to the Agent and the Lenders with respect to this Amendment. 13. RELEASE OF CLAIMS. The Borrower hereby releases, discharges and acquits forever the Agent and the 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 the Borrower, if later). 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. 14. Miscellaneous. This Amendment (a) shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES); (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement; and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. 15. THIS AMENDMENT TOGETHER WITH ALL OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of the date written above. STEWART & STEVENSON SERVICES, INC., a Texas corporation /s/ Kyle J. Gideon By:______________________________ Name: Kyle J. Gideon Title: Assistant Treasurer The undersigned legal counsel for the Borrower signs this Amendment not as a party to it but solely for the purpose of complying with the provisions of Section 17.42(a)(3) of the Texas Deceptive Trade Practices-Consumer Protection Act described in Section 11. /s/ Lawrence E. Wilson ______________________________ LAWRENCE E. WILSON Title: Vice President and General Counsel Texas Bar No.: 21704000 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association acting in its individual capacity and as the Agent for the Lenders named herein /s/ Mona M. Foch By:______________________________ Name: Mona M. Foch Title: Vice President ABN AMRO BANK N.V., HOUSTON AGENCY /s/ David P. Orr By:______________________________ Name: David P. Orr Title: Vice President /s/ Lila Jordan By:______________________________ Name: Lila Jordan Title: Vice President THE BANK OF NEW YORK, a New York banking corporation /s/ Alan F. Lyster, Jr. By:______________________________ Name: Alan F. Lyster, Jr. Title: Vice President NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association /s/ Frank R. Hundley By:______________________________ Name: Frank R. Hundley Title: Vice President EX-4 4 EXHIBIT 4.3 AGREEMENT AND SECOND AMENDMENT TO LOAN AGREEMENT (December 23, 1994) THIS AGREEMENT AND SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of December 23, 1994, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "Borrower"), a Texas corporation; the financial institutions listed on the signature pages hereto (collectively, the "Lenders") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association domiciled in Houston, Harris County, Texas, acting in its capacity as agent for the Lenders (in such capacity, the "Agent"). The Borrower, the Lenders and the Agent are herein sometimes called the "Parties". Recitals: 1. The Parties have entered into a Loan Agreement dated as of September 3, 1993 (which Loan Agreement, as amended to the date hereof, is herein called the "Loan Agreement"). 2. The Parties desire to amend the Loan Agreement in certain respects to (a) increase the Maximum Commitment; (b) provide for new financial institutions to become Lenders; (c) allocate the Percentages of the Lenders; (d) extend the Maturity Date, and (e) make certain other changes thereto, all as is more fully described below. Agreements: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. Definitions Corrected. The following changes are made to correct certain definitions to reflect the original intent of the parties. (a) The last sentence of the definition of "CD Rate" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: The CD Rate is subject to adjustments for reserves, insurance assessments and other matters as provided for in Section 3(c). (b) Clause (c) in the first sentence of "Interest Period" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: (c) for each Negotiated Rate Borrowing, overnight or no less than seven but no more than 29 days thereafter, 2. Maturity Date Extended. The definition of "Maturity Date" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: Maturity Date means the maturity of the Notes, December 31, 1997, as the same may hereafter be accelerated pursuant to the provisions of any of the Credit Documents. 3. Maximum Commitment. The definition of "Maximum Commitment" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: Maximum Commitment means One Hundred Five Million Dollars ($105,000,000). 4. Percentages. 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 Amendment. As defined in the Loan Agreement, each Lender's Percentage is such Lender's interest in the Maximum Commitment. 5. Transition. (a) Certain Alternate Rate Borrowings are outstanding as of the date hereof, and the Parties do not wish to disturb such Alternate Rate Borrowings. Notwithstanding anything in the Loan Agreement as amended by this Amendment to the contrary, (1) a Lender with an Alternate Rate Borrowing (a "Transition Borrowing") outstanding as of the date hereof shall retain such Transition Borrowing, with no change in its amount resulting from the change of such Lender's Percentage or the addition of Bank of America Illinois and PNC Bank, National Association (collectively, the "New Lenders") effected by this Amendment, and such Lender shall be entitled to the payment of the principal of and accrued interest on such Transition Borrowing; (2) new Loans made after the date hereof (including the renewal of any Transition Borrowing at the end of its Interest Period, if the Borrower elects to renew such Loan pursuant to the terms and conditions of the Loan Agreement, or the conversion of any Transition Borrowing) shall be made in accordance with the Lenders' new Percentages (provided that in no event shall any Lender have an obligation to make Loans at any one time outstanding in excess of such Lender's Percentage of the Commitment); (3) the Agent shall determine the maximum aggregate amount of Loans which may be outstanding for all of the Lenders and for each Lender--after giving effect to the proviso of the immediately preceding clause--for each day while there exists any Transition Borrowing, and such amounts shall be the "Commitment" and each Lender's interest in the Commitment for purposes of determining the commitment fee due under Section 2(c) of the Loan Agreement and for the allocation of that commitment fee; (4) if (A) an Event of Default occurs while any Transition Borrowing is outstanding and (B) the Agent or any Lender exercises any of its remedies for such Event of Default, then (but only for the purposes of allocating payments of principal and interest by or on the account of the Borrower) the Percentage of a Lender shall be such Lender's interest in all of the outstanding Loans, and (5) for all other purposes under the Credit Documents, the Percentages of the Lenders and the Commitment shall be determined without reference to this Section. (b) On the date this Amendment becomes effective, (1) each New Lender shall fund its Percentage of all then-outstanding Base Rate Borrowings to the Agent and (2) the Agent shall allocate such fundings to all of the Lenders (including the New Lenders) in accordance with their respective Percentages. Notwithstanding anything in the Loan Agreement as amended by this Amendment or the other Credit Documents to the contrary, interest accruing on the Base Rate Borrowings from October 31, 1994 to the effective date of this Amendment shall be allocated among the Lenders (other than the New Lenders) in accordance with their respective Percentages as in effect immediately before the effective date of this Amendment. (c) Notwithstanding anything in the Loan Agreement as amended by this Amendment to the contrary, commitment fees accruing under Section 2(c) of the Loan Agreement through the effective date of this Amendment shall be allocated among the Lenders (other than the New Lenders) in accordance with their respective Percentages as in effect immediately before the effective date of this Amendment. 6. Conditions Precedent. This Amendment shall be effective December 23, 1994, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent: (a) The Agent shall have received the following, each of which shall be in form and substance satisfactory to the Agent in its sole discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of the Borrower, dated as of the date hereof, as to (A) the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment (a copy of such resolutions to be attached to such certificate), such certificate to state that said copy is a true and correct copy of such resolutions and that such resolutions were duly adopted and have not been amended, superseded, revoked or modified in any respect and remain in full force and effect as of the date of such certificate and (B) the absence of any change since September 3, 1993, in any of (x) the incumbency and signatures of the officer or officers of the Borrower; (y) the Articles of Incorporation of the Borrower, or (z) the Bylaws of the Borrower; and (2) this Amendment, duly executed by the Borrower, the Lenders and the Agent. (b) Each Lender shall have received a new Note, in the maximum principal amount of its Percentage of the Maximum Commitment. (c) The Agent shall have received a legal opinion from the general counsel for the Borrower acceptable to the Agent and the Majority Lenders. (d) The Borrower shall have paid all accrued and unpaid fees and other amounts in connection with this Amendment. (e) No Default shall have occurred and be continuing. (f) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 7. Representations True; No Default. The Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 8. Ratification. Except as expressly amended hereby, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. Each of the New Lenders hereby (a) acknowledges receipt of copies of all of the Credit Documents (including agreements exclusively among the Agent and the Lenders) and (b) acknowledges and agrees that (1) it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements of the Borrower delivered to such New Lender by the Borrower and such other documents and information as such New Lender has deemed appropriate, made its own credit analysis and decision to become a Lender and (2) it is a Lender for all purposes under the Credit Documents, with all of the liabilities and obligations of a Lender with its interest in the Maximum Commitment. 9. Definitions and References. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any Lender by or on behalf of the Borrower shall mean the Loan Agreement as hereby amended. 10. Expenses; Additional Information. The Borrower shall pay to the Agent on demand all expenses (including reasonable counsel's fees) incurred in connection with the preparation, reproduction, execution and delivery of this Amendment and with respect to advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended. In addition, the Borrower shall pay all costs and expenses of the Agent and each Lender (including counsel's fees) in connection with the enforcement of this Amendment. 11. Severability. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 12. INDEMNIFICATION. The Borrower shall indemnify the Agent, the 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 the Borrower of the proceeds of any Loan made or Letter of Credit issued by any Lender or growing out of or resulting from any Credit Document or any transaction or event contemplated therein; (b) violation by the Borrower or any of its Subsidiaries of any law, rule, regulation or order including those relating to Hazardous Substances, petroleum, petroleum products or petroleum wastes; (c) any Lender or the Agent being deemed an operator of any of the 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, petroleum, petroleum product or petroleum waste located in on or under such property, 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 the Loan Agreement (as amended by this Amendment and as it may otherwise be amended, restated, modified and supplemented from time to time) and the repayment and expiry of the Loans and all Letter of Credit Liabilities. Any amount to be paid under this Section by the Borrower to the Agent or any Lender shall be a demand obligation owing by the Borrower to the Agent or such Lender and shall bear interest from the date of expenditure until paid at the Past Due Rate. 13. DTPA WAIVER. The Borrower hereby waives all rights, remedies, claims, demands and causes of action based upon or related to the Texas Deceptive Trade Practices Consumer Protection Act as described in Sections 17.41 et seq. of the Texas Business & Commerce Code, as the same pertains or may pertain to any Credit Document or any of the transactions contemplated therein, to the maximum extent that such rights, etc. may lawfully and effectively be waived. In furtherance of this waiver, the Borrower hereby represents and warrants to the Agent and the Lenders that (a) the Borrower is represented by legal counsel in connection with the negotiations, execution and delivery of this Amendment; (b) the Borrower has a choice other than to enter into this waiver in that it can obtain the Loans from another institution or institutions, and (c) the Borrower does not consider itself to be in a significantly disparate bargaining position relative to the Agent and the Lenders with respect to this Amendment. 14. RELEASE OF CLAIMS. The Borrower hereby releases, discharges and acquits forever the Agent and the 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 the Borrower, if later). 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. 15. Miscellaneous. This Amendment (a) shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the express prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement, and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. 15. THIS AMENDMENT TOGETHER WITH ALL OF THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of the date written above. STEWART & STEVENSON SERVICES, INC., a Texas corporation /s/ Robert L.Hargrave By:______________________________ Robert L. Hargrave Vice President & Treasurer The undersigned legal counsel for the Borrower signs this Amendment not as a party to it but solely for the purpose of complying with the provisions of Section 17.42(a)(3) of the Texas Deceptive Trade Practices-Consumer Protection Act described in Section 11. /s/ Lawrence E. Wilson ______________________________ Lawrence E. Wilson Vice President and General Counsel Texas Bar No.: 21704000 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, acting in its individual capacity and as the Agent for the Lenders named herein /s/ Mona M. Foch By:______________________________ Mona M. Foch Vice President Interest in Maximum Commitment: $30,000,000 NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association /s/ Paula Cizik By:______________________________ Paula J. Cizik Senior Vice President Interest in Maximum Commitment: $25,000,000 ABN AMRO BANK N.V., HOUSTON AGENCY /s/ David P. Orr By:______________________________ David P. Orr Vice President /s/ Ronald A. Mahle By:______________________________ Ronald A. Mahle Group Vice President Interest in Maximum Commitment: $15,000,000 THE BANK OF NEW YORK, a New York banking corporation /s/ Alan F. Lyster, Jr. By:______________________________ Alan F. Lyster, Jr. Vice President Interest in Maximum Commitment: $15,000,000 BANK OF AMERICA ILLINOIS, an Illinois banking association /s/ J. Stephen Mernick By:______________________________ J. Stephen Mernick Senior Vice President Address for notices: Bank of America Illinois 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Kenneth Bell Telecopy No. (312) 987-0303 Interest in Maximum Commitment: $10,000,000 PNC BANK, NATIONAL ASSOCIATION, a national banking association /s/ Tamara R. O'Connor By:______________________________ Tamara R. O'Connor Vice President Address for notices: PNC Bank, National Association 2525 Lincoln Plaza Dallas, Texas 75201 Attention: Tamara O'Connor Telecopy No. (214) 740-2525 Interest in Maximum Commitment: $10,000,000 EX-21 5 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 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 Machinery Acceptance Corporation Texas None S&S International Sales, Inc. Barbados None Stewart & Stevenson International, Inc. Delaware Stewart & Stevenson Stewart & Stevenson Operations, Inc. Delaware Stewart & Stevenson Stewart & Stevenson Overseas, Inc. Texas None Stewart & Stevenson Power, Inc. Delaware Pamco-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 The Company has additional subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
EX-23 6 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, and Registration Statement No. 33-54389 on Form S-4 dated June 30, 1994 of our report dated March 13, 1995 included in Stewart & Stevenson Services, Inc.'s Form 10-K for the fiscal year ended January 31, 1995. ARTHUR ANDERSEN LLP Houston, Texas April 18, 1995 EX-27 7
5 THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-31-1995 JAN-31-1995 3,987 0 188,482 (1,668) 523,334 714,499 230,215 (98,355) 875,616 311,154 116,900 162,057 0 0 256,946 875,616 1,138,336 1,138,336 955,898 955,898 79,586 0 6,865 102,852 34,520 67,558 0 0 0 67,558 2.05 2.05
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