-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hi2KyFslpXSlDkjTYdIGE0WCwlnrL9HY3jEfaX2ttkD8rxqjsz7gMt/isKeQtZOa M2ay8hQeWoWuPYyl7YoukA== 0000094328-96-000003.txt : 19960426 0000094328-96-000003.hdr.sgml : 19960426 ACCESSION NUMBER: 0000094328-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960425 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: 96550580 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, 1996 ("Fiscal 1995") or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to________. Commission file number 0-8493 STEWART & STEVENSON SERVICES, INC. (Exact name of registrant as specified in its charter) Texas 74-1051605 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2707 North Loop West, Houston, Texas 77008 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 868-7700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Without Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting securities held by nonaffiliates as of February 29, 1996: $719,808,723 Number of shares outstanding of each of the issuer's classes of common stock, as of February 29, 1996: Common Stock, Without Par Value 33,050,088 Shares DOCUMENTS INCORPORATED BY REFERENCE Document Part of Form 10-K ________ _________________ Proxy Statement for the 1996 Annual Meeting of Shareholders Part III PART I Item 1. Business. Stewart & Stevenson Services, Inc. (together with its wholly-owned subsidiaries, the "Company" or "Stewart & Stevenson") was founded in Houston, Texas in 1902 and was incorporated under the laws of the State of Texas in 1947. Since its beginning, the Company has been primarily engaged in custom fabrication enterprises. Stewart & Stevenson consists of three business segments: the Engineered Power Systems segment, the Distribution segment and the Tactical Vehicle Systems segment. The Engineered Power Systems segment designs, engineers, services and markets engine-driven equipment principally utilizing diesel or gas turbine engines supplied by independent manufacturers. In addition, this segment offers operation and maintenance contracts for large gas turbine projects and petroleum production facilities. The Company's products include gas turbine generator sets for primary electrical power and diesel generator sets for primary, emergency or stand-by electrical power sources. Stewart & Stevenson is a leading packager of aeroderivative gas turbine engines for electrical power generation. A majority of the gas turbine engines used by the Company are manufactured by General Electric Corporation. The Company's engineered power systems and operations and maintenance services are marketed worldwide, particularly in developing countries where there has been growth in demand for electrical power. The Distribution segment markets industrial equipment and related parts manufactured by others and provides in-shop and on-site repair services for such products. This segment began operations in 1938 and currently markets Detroit Diesel engines, General Motors Electro-Motive diesel engines, Allison automatic transmissions, Waukesha natural gas engines, Deutz diesel engines, Hyster material handling equipment, Thermo King transport refrigeration units and John Deere construction, utility and forestry equipment. The Distribution segment markets primarily in the Southern and Western United States, as well as in Mexico, Venezuela and Central America. The Tactical Vehicle Systems segment has received contracts with the United States Department of Defense to manufacture the U.S. Army's next generation of medium tactical vehicles (the "Family of Medium Tactical Vehicles" or "FMTV"). The FMTV contracts call for the production of approximately 11,000 newly-designed 2 1/2-ton and 5-ton trucks in several configurations, including troop carriers, wreckers, cargo trucks, vans and dump trucks. All variants of the FMTV incorporate a high level of common parts. Manufacturing of the FMTV is being performed by the Company's Tactical Vehicle Systems segment at a facility located near Houston, Texas. The Company is also offering the FMTV for sale to other branches of the U.S. Armed Forces and to the armed forces of foreign countries. The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, "Fiscal 1995" commenced on February 1, 1995 and ended on January 31, 1996. Identifiable assets at the close of Fiscal 1995, 1994 and 1993 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 50.9%, 56.5% and 61.4%, respectively, of consolidated sales during Fiscal 1995, 1994 and 1993. Gas Turbine Driven Equipment. The Company packages gas turbine products based on turbine engines purchased from General Electric Corporation ("GE"), European Gas Turbines ("EGT") and the Garrett Corporation ("Garrett"). The table below lists the capacity of generator sets based on each model of gas turbine engine regularly packaged by the Company. Generator Set Capacity Engine Model in Megawatts ____________ ____________ GE LM6000 . . . . . . . 40.30 Mw GE LM5000 STIG . . . . 51.60 Mw GE LM5000 . . . . . . . 34.40 Mw GE LM2500+ . . . . . . 27.60 Mw GE LM2500 STIG . . . . 26.50 Mw GE LM2500 . . . . . . . 22.20 Mw GE LM1600 . . . . . . . 13.40 Mw EGT TEMPEST . . . . . . 7.49 Mw EGT TORNADO . . . . . 6.25 Mw EGT TYPHOON . . . . . . 4.91 Mw GARRETT IM831 . . . . . 0.50 Mw Gas turbine generator sets have a lower capital cost, higher efficiency and shorter lead times and are more environmentally acceptable than many alternative technologies. In addition, gas turbine generator sets may be used for the simultaneous production of electrical power and useful thermal energy ("cogeneration"). The gas turbine generator sets packaged by the Company in the 20 Mw to 52 Mw size incorporate GE gas turbine engines and are marketed primarily to independent power producers for prime power and cogeneration applications and to electrical utilities for base load capacity or additional capacity during peak demand periods. Generators in the 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 EGT gas turbine engines. The table below lists the output of each model of gas turbine engine offered by the Company for mechanical drive applications. Engine Model Output ____________ __________ GE LM6000. . . . . . . . . . 55,545 Shp GE LM2500+ . . . . . . . . . 37,000 Shp GE LM2500. . . . . . . . . . 31,235 Shp GE LM1600+ . . . . . . . . . 18,745 Shp EGT TORNADO. . . . . . . . . 8,900 Shp EGT TYPHOON. . . . . . . . . 6,500 Shp Like the Company's turbine-driven generator sets, gas compression packages are designed to be easily and quickly installed at the customer's location and can be full-load tested at the Company's facility before shipment. Gas compressor sets are marketed to gas production and pipeline operators for both offshore and onshore installation. Stewart & Stevenson 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 are derived from packaging gas turbine engines manufactured by GE and EGT. The Company believes that its relationship with these key suppliers is good and that its relationship with GE and EGT will continue. Any interruption of these relationships, however, would adversely affect the Company. Sales of gas turbine products accounted for approximately 30.5%, 40.1% and 42.4%, respectively, of consolidated sales in Fiscal 1995, 1994 and 1993. Gas Turbine Product Support Services. Stewart & Stevenson enters into operation and maintenance contracts under which the Company provides all labor, supervision and expertise necessary to operate, maintain and repair power generation, gas compression and petroleum production, processing and transportation facilities. Operation and maintenance contracts may have a term of up to 10 years and provide for a fixed fee out of which the Company must pay all costs incurred under the contract or for the payment of a fixed fee plus reimbursement of the costs incurred by the Company. The Company has provided operation and maintenance services for power generation facilities since 1986. Operation and maintenance services are provided on a worldwide basis. In addition, Stewart & Stevenson offers parts and repair services for turbine-driven equipment and is authorized to perform complete overhaul services on GE, EGT 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. Sales of Gas Turbine Product Support Services contributed approximately 12.6%, 7.6% and 6.5%, respectively of consolidated sales in Fiscal 1995, Fiscal 1994 and Fiscal 1993. Other Power Systems. Stewart & Stevenson is a leading manufacturer of well stimulation equipment and other diesel equipment for the oilfield service industries. These products are currently marketed primarily 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 also manufactures a complete line of aircraft ground support equipment, including gate tractors, air-start units, ground power equipment and air conditioning systems. Sales of other power systems and services accounted for 7.8%, 8.8% and 12.5%, respectively, of consolidated sales in Fiscal 1995, 1994 and 1993. DISTRIBUTION SEGMENT Distribution Operations: Stewart & Stevenson markets various industrial equipment, components, replacement parts, accessories and other material supplied by independent manufacturers and provides in-shop and on-site repair services for diesel-driven equipment. The following table contains the name of each manufacturer with whom the Company presently maintains a distribution contract, a description of the products and territories covered thereby and the expiration date thereof.
Expiration Manufacturer Products Territories Date ____________ ________ ___________ __________ Detroit Diesel Corporation Heavy Duty High Speed Texas, Colorado, New 1998 ("Detroit Diesel") Diesel Engines Mexico, Wyoming, Nebraska, Louisiana, Mississippi, Alabama and Venezuela Electro-Motive Division of Heavy Duty Medium Speed Texas, Colorado, New 1998 General Motors Corporation Diesel Engines Mexico, Nebraska, Oklahoma, ("EMD") Arkansas, Louisiana, Tennessee, Mississippi, Alabama, Mexico, Central America and most of South America Allison Transmission On- and Off-Highway Texas, Colorado, New 1997 Division of General Automatic Transmissions Mexico, Wyoming, Nebraska, Motors Corporation Power Shift Transmissions Louisiana, Mississippi, and Torque Converters Alabama and Venezuela Hyster Company Material Handling Equipment Texas * John Deere Industrial Construction, Utility and Southeast Texas and * Equipment Company Forestry Equipment Wyoming Thermo King Corporation Transport Refrigeration Southeast Texas and 1996 Equipment Southern Louisiana Waukesha Engine Division of Natural Gas Industrial Colorado, Montana, 1997 Dresser Industries, Inc. Engines North Dakota, Oklahoma, Wyoming, New Mexico, Utah, Oregon, Hawaii, Kansas, Arizona, California, Washington and Nevada KHD - Deutz Corporation Diesel Engines Colorado, Wyoming, Arizona, 1997 New Mexico, Washington and Alaska ________________________
*No expiration date. Agreements may be terminated by written notice of termination. Distribution agreements generally require the Company to purchase and stock the products and repair parts covered thereby for resale to end users, original equipment manufacturers or independent dealers within the franchise area of distribution. Such agreements also require the Company to provide after-sale service within its designated territory and may contain provisions prohibiting the sale of competitive products within the franchise territory. Distribution operations are conducted at branch facilities located in major cities within the Company's franchised area of distribution. New products are marketed primarily under the trademarks and the trade names of the original manufacturer. The Company's principal distribution agreements are subject to early termination by the suppliers for a variety of causes, including a change in control or a change in the principal management of the Company. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. Manufacturing Operations. The Distribution segment also manufactures and sells generator sets and mechanical drive packages using reciprocating engines fueled with diesel, natural gas, or both. Generator sets range in size from 20 kw to 12,700 kw and are based on engines supplied by companies with whom the Distribution segment has a distributor or packaging agreement. The Company undertakes the selection of the appropriate engine and generator based on the intended application and fabricates the completed package according to a design developed specifically to fit the needs of the customer. Reciprocating engine driven generator sets are marketed by the Company as both stand-by power sources for emergency use and as prime power sources to supply electricity at remote locations. In addition to reciprocating engine-driven power systems, the Distribution segment manufactures and sells snow removal equipment, 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 33.7%, 30.4% and 31.8%, respectively, of consolidated sales during Fiscal 1995, 1994 and 1993. 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. The Family of Medium Tactical Vehicles is the U.S. Army's next generation of basic transportation vehicle for personnel and materials. As such, the FMTV is produced in several variants to carry troops and cargo, including cargo beds, vans, troop carriers, wreckers, dump trucks and tractors. In addition, several of the vehicles are specially configured for airdrop operation. Although more than ten configurations of the FMTV are being produced, a high degree of common components is incorporated in the Stewart & Stevenson design. The Company also sells the FMTV to other government contractors as a platform for installation weapons systems and other equipment which is then resold to the Armed Forces. Stewart & Stevenson believes that there will be opportunities to sell additional vehicles to the U.S. Army, to other branches of the U.S. Armed Forces and to the armed forces of foreign countries. The FMTV contracts allow for such sales, and the Company's facility has capacity to produce vehicles for those additional sales. Operations of the Tactical Vehicle Systems segment accounted for approximately 15.3%, 13.0%, and 6.7%, respectively, of consolidated sales during Fiscal 1995, 1994 and 1993. COMPETITION The Company encounters strong competition in all segments of its business. Competition involves pricing, quality, availability, the range of products and services and other factors. Some of the Company's competitors have greater financial resources than Stewart & Stevenson. The Company believes that its reputation for quality engineering and after-sales service, and single-source responsibility, are important to its market position. The Engineered Power Systems segment competes with various entities, including certain suppliers of major components, for sale of its products. Manufacturers of gas turbine generator sets in the 20-52 Mw size include General Electric Corporation, Ruston Gas Turbines Ltd., Seimens, Westinghouse and ABB Energy Services, Inc., a subsidiary of Asea Brown Boveri. Competition in the market for the other products manufactured and services provided by the Engineered Power Systems segment is highly diversified with no single competitor participating in all of the markets of the Company. The Distribution segment competes with distributors for other manufacturers in the sale of original equipment, with the manufacturers and distributors of non-original equipment parts for the sale of spare parts and with independent repair shops for in-shop and on-site repair services. The Tactical Vehicle Systems segment competes with other domestic companies for incremental sales to the U.S. Armed Forces. Both domestic and foreign suppliers compete for the sale of vehicles to foreign governments. The Company's foreign competitors include Daimler-Benz, Steyr, and other vehicle manufacturers that have greater international recognition as vehicle manufacturers. INTERNATIONAL OPERATIONS International sales are subject to the risks of international political and economic changes, such as changes in foreign governmental policies, currency exchange rates and inflation. Generally, the Company accepts payments only in United States Dollars and makes most sales to customers outside the United States against letters of credit drawn on established international banks, thereby limiting the Company's exposure to the effects of exchange rate fluctuations and customer credit risks. In the limited circumstances in which the Company has entered into contracts in foreign currencies, it has hedged its exposure to fluctuations in such currencies. The profit margin on export sales is not materially different from that on domestic sales of the same or similar products with the same or similar delivery requirements. The performance of operation and maintenance contracts in some countries could be disrupted by political unrest, terrorist activity or government action. The Company believes that any such disruption would be temporary. UNFILLED ORDERS Stewart & Stevenson's unfilled orders consist of written purchase orders, letters of intent and oral commitments. These unfilled orders are generally subject to cancellation or modification due to customer relationships or other conditions. Purchase options are not included in unfilled orders until exercised. Unfilled orders at the close of Fiscal 1995 and Fiscal 1994 were as follows:
Estimated percentage to be recognized in Fiscal Fiscal Fiscal 1996 1995 1994 ____________________ ______ ______ (Dollars in millions) Engineered Power Systems Equipment 67.9% $ 208.9 $ 416.0 Operations and Maintenance 22.2% 321.8 311.6 ________ ________ 530.7 727.6 Distribution 100.0% 50.9 40.0 Tactical Vehicle Systems 30.8% 862.7 1,017.8 ________ ________ Total 36.7% $1,444.3 $1,785.4 ======== ======== /TABLE Although no assurance can be given, the Company expects sales of the Engineered Power Systems segment to continue to be weighted in favor of turbine-driven equipment based on the number of unfilled orders for these units, the number of proposals that are presently outstanding and the current worldwide need for additional electrical generating capacity. Unfilled orders of the Tactical Vehicle Systems segment consists principally of the contracts awarded in October 1991 by the United States Department of the Army to manufacture medium tactical vehicles, and options under the FMTV contract that have been exercised by the U.S. Army to purchase additional vehicles for the National Guard. EMPLOYEES At the end of Fiscal 1995, the Company employed approximately 4,511 persons. The Company considers its employee relations to be satisfactory. Item 2. Properties. The Company maintains its corporate and executive offices at 2707 North Loop West, Houston, Texas. The corporate office, which includes the executive offices, the national sales offices for the Engineered Power Systems segment and administrative offices for the Distribution segment, occupies about 109,000 square feet of space leased from a limited partnership in which the Company owns an 80% limited partnership interest. Stewart & Stevenson's Engineered Power Systems segment is headquartered in Houston, where the Company owns approximately 919,000 square feet and leases approximately 41,000 square feet of space at seven locations devoted to manufacturing, warehousing and administration. The Company leases gas turbine operations and maintenance facilities in Long Beach, California, and Anchorage, Alaska each totaling 5,000 square feet and maintains a sales office in Alexandria, Virginia and Fort Lauderdale, Florida. The Company also owns gas turbine parts, service, operations and maintenance facilities in Syracuse, New York (15,000 square feet) and Bakersfield, California (14,000 square feet) and a high pressure valve manufacturing facility in Jennings, Louisiana (89,000 square feet). Activities of the Distribution segment are coordinated from Houston, where the Company owns 293,000 square feet of space at three locations devoted to equipment and parts sales and service. To service its distribution territory (See "Item 1. Business -- Distribution Segment"), Stewart & Stevenson maintains Company-operated facilities occupying 607,000 square feet of owned space and 340,000 square feet of leased space in 25 cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah, North Dakota, Kansas, Washington and California. The Tactical Vehicle Systems segment is located in a 500,000 square foot Company-owned facility near Houston, Texas. The Tactical Vehicle Systems segment also leases 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 is a defendant in a federal criminal matter and certain related civil ligation arising from a 1987 subcontract to supply diesel generators to the Kingdom of Saudi Arabia. See Note 5 to the Consolidated Financial Statements which is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol: SSSS. There were 822 shareholders of record as of February 29, 1996. The following table sets forth the high and low sales prices relating to the Company's Common Stock and the dividends declared by the Company in each quarterly period within the last two fiscal years. TABLE Fiscal Fiscal 1995 1994 _______________________________ ______________________________ High Low Dividend High Low Dividend ______ _____ ________ ______ _____ ________ First Quarter $40 1/2 $28 3/4 $0.07 $53 3/4 $41 1/4 $0.06 Second Quarter 41 1/4 32 3/4 0.08 45 3/4 38 1/4 0.07 Third Quarter 38 3/4 21 1/2 0.08 40 3/4 33 3/4 0.07 Fourth Quarter 26 1/2 21 7/8 0.08 38 3/4 28 0.07
Item 6. Selected Financial Data. The Selected Financial Data set forth below should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Stewart & Stevenson Services, Inc. CONSOLIDATED FINANCIAL REVIEW
_________________________________________________________________________________________________ (Dollars in thousands, except per share data) Fiscal Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1992 1991 _________________________________________________________________________________________________ Financial Data: Sales $1,233,981 $1,138,336 $981,892 $812,526 $686,363 Earnings before income taxes and accounting change (a) 91,908 102,852 85,301 64,376 52,259 Earnings before accounting change (a) 61,803 67,558 56,780 43,958 35,703 Net earnings (a) 61,803 67,558 56,780 34,658 35,703 Total assets 1,040,583 875,616 692,624 573,348 477,858 Short-Term Debt (including current portion of Long-Term Debt) 66,100 43,344 7,219 3,252 4,582 Long-Term Debt 210,800 116,900 68,000 44,451 27,939 Per Share Data: Earnings before accounting change (a) 1.87 2.05 1.73 1.35 1.18 Net earnings (a) 1.87 2.05 1.73 1.06 1.18 Cash dividends declared 0.31 0.27 0.23 0.19 0.15
(a) The Company adopted Statement of Financial Accounting Standard No. 106 effective February 1, 1992, resulting in a cumulative charge to Fiscal 1992 earnings of $9,300, or $0.29 per share, after a deferred tax benefit of $4,790. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis, as well as the accompanying Consolidated Financial Statements and related footnotes, will aid in understanding the Company's results of operations as well as its financial position, cash flows, indebtedness and other key financial information. SUMMARY 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: TABLE Relationship to Consolidated Sales Growth Rate ______________________________________________________________________________________________________ Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 ====================================================================================================== Sales 100.0% 100.0% 100.0% 8.4% 15.9% Cost of sales 84.4 84.0 84.1 8.9 15.7 ______________________________ Gross profit 15.6 16.0 15.9 5.8 17.0 Selling and administrative expenses 7.5 6.6 7.0 22.0 10.1 Interest expense 1.1 .6 .3 102.2 107.2 Other income, net (.4) (.2) (.1) 85.0 161.4 ______________________________ 8.2 7.0 7.2 26.9 12.6 ______________________________ Earnings before income taxes 7.4 9.0 8.7 (10.6) 20.6 Income taxes 2.5 3.0 2.9 (11.2) 23.3 ______________________________ Earnings of consolidated companies 4.9 6.0 5.8 (10.4) 19.3 Equity in net earnings (loss) of unconsolidated affiliates .1 (.1) .0 172.4 N/A ______________________________ Net Earnings 5.0% 5.9% 5.8% (8.5) 19.0 ============================== RESULTS OF OPERATIONS Business Segment Highlights
____________________________________________________________________________________________________________________ (Dollars in thousands) Sales Growth Rate ________________________________________________________________________________________ Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 ____________________________________________________________________________________________________________________ Engineered Power Systems $627,702 51% $642,804 57% $602,853 61% -2% +7% Distribution 416,229 34 346,564 30 311,983 32 +20 +11 Tactical Vehicle Systems 189,009 15 147,920 13 65,894 7 +28 +124 Corporate Services 1,041 - 1,048 - 1,162 - -1 -10 _________________________________________________________ $1,233,981 100% $1,138,336 100% $981,892 100% +8 +16 =========================================================
Operating Profit Growth Rate ________________________________________________________________________________________ Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 ____________________________________________________________________________________________________________________ Engineered Power Systems $73,449 65% $82,395 71% $70,292 75% -11% +17% Distribution 30,130 27 24,015 21 20,309 22 +25 +18 Tactical Vehicle Systems 9,703 8 8,782 8 2,886 3 +10 +204 Corporate Services 292 - 376 - 552 - -22 -32 _______________________________________________________ $113,574 100% $115,568 100% $94,039 100% -2 +23 =======================================================
Operating Profit as a Percentage of Sales ______________________________________________ Fiscal Fiscal Fiscal 1995 1994 1993 _____________________________________________________________________________ Engineered Power Systems 11.7% 12.8% 11.7% Distribution 7.2 6.9 6.5 Tactical Vehicle Systems 5.1 5.9 4.4 Corporate Services 28.1 35.9 47.5 Consolidated 9.2 10.2 9.6
Fiscal 1995 vs. Fiscal 1994 Sales for Fiscal 1995 increased 8% to $1.234 billion compared to sales of $1.138 billion for Fiscal 1994. This increase represents a new sales record for the ninth consecutive year. The Company's international sales increased 27% to $382 million in Fiscal 1995 as compared to $301 million in Fiscal 1994, representing 30% and 26% of consolidated sales for Fiscal 1995 and 1994, respectively. The Distribution segment was the primary contributor to the Company's sales growth with an increase in sales of $70 million (20%) in Fiscal 1995 compared to Fiscal 1994. This increase is primarily attributable to the acquisition of substantially all of the assets of Power Application & Mfg., Co. ("PAMCO"), a Waukesha distributor for the Western United States, during the fourth quarter of Fiscal 1994. The distribution of product lines acquired from PAMCO contributed sales of $49 million in Fiscal 1995 compared to $5 million in Fiscal 1994. Excluding sales relating to the PAMCO acquisition, the Distribution segment's sales increased 7% in Fiscal 1995 over Fiscal 1994 reflecting the continued economic growth in the territories serviced by the Company. The Tactical Vehicle Systems segment sales increased $41 million (28%) during Fiscal 1995 as compared to Fiscal 1994. The increase in TVS sales reflects the increase in truck production under the "Family of Medium Tactical Vehicles" (FMTV) contract to 1,560 trucks in Fiscal 1995 as compared to 1,130 trucks in Fiscal 1994. Although sales increased for the current fiscal year, the increase was less than anticipated. Sales for the year were adversely affected by the deployment of certain U.S. Army personnel to Haiti in Fiscal 1994 which delayed the completion of testing and certification of the FMTV program for high volume production until the fourth quarter of Fiscal 1995. The Engineered Power Systems segment of the Company experienced a 2% decreased in sales in Fiscal 1995. This decline in EPS sales was primarily within the Gas Turbine equipment product lines which experienced sharply reduced domestic activity, reflecting the U.S. utility market's response to deregulation proposals, and delays in contract awards in the international markets. Gas Turbine product support sales, consisting of the servicing of customers' equipment and the long-term contracting for operation and maintenance of power plants, continued to grow with Fiscal 1995 sales increasing more that 10% above Fiscal 1994. Operating profit decreased by approximately 2% during Fiscal 1995 to $114 million as compared to $116 million in Fiscal 1994. Both the Distribution and the Tactical Vehicle Systems segments' operating profits increased at a rate comparable to the growth in sales volumes. The Engineered Power Systems segment's operating profit of 12% in Fiscal 1995 declined from 13% in Fiscal 1994. This decline is primarily related to lower profits realized on the sale of certain compression equipment during Fiscal 1995, and to increased market competitiveness. Fiscal 1994 vs. Fiscal 1993 Sales increased to $1,138 million for Fiscal 1994 from $982 million for Fiscal 1993. 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'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. 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 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 the 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. Net Period Expense
(Dollars in thousands) _________________________________________________________________________________________________________ Percentage Change Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 _________________________________________________________________________________________________________ Selling and administrative expenses $91,814 $75,249 $68,331 + 22% + 10% Interest expense 13,884 6,865 3,313 +102 +107 Other income, net (4,676) (2,528) (967) + 85 +161 ______________________________ $101,022 $79,586 $70,677 + 27 +13 ============================== Net period expense as a percentage of sales 8.2% 7.0% 7.2% ==============================
Net period expenses increased significantly during Fiscal 1995 both in amount and in relation to sales, when compared to Fiscal 1994. The increase in net period expense as a percentage of sales is the first time in more than ten years for such an increase. Fiscal 1995 sales and administrative expense includes a full year of expenses related to certain acquisitions made during the second half of Fiscal 1994, which were not completely integrated into the Company for a significant portion of Fiscal 1995. Sales and administrative expense also grew rapidly within the Engineered Power System's operations and maintenance group, as the Company continued to expand these services into international markets. Interest expense grew significantly in both Fiscal 1995 and 1994 reflecting the increased borrowings required to fund the Company's operations; primarily gas turbine inventories relating to international contracts that do not contain substantial progress payments and inventories of vehicles under the FMTV contract that accumulated during delays in testing. The growth in other income during Fiscal 1995 is primarily attributable to both increased interest income and gains on the disposal of real estate. Income tax expense, relative to operational profits, was comparable for Fiscal 1995, 1994 and 1993. Net Earnings
_________________________________________________________________________________________________________ (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 _________________________________________________________________________________________________________ Amount $61,803 $67,558 $56,780 -9% +19% Percentage of sales 5.0% 5.9% 5.8% =============================================================================
Fiscal 1995 net earnings' decline from Fiscal 1994 is primarily reflective of the decrease in operational profits and the increase in interest expense. The increase in net earnings during Fiscal 1994 from Fiscal 1993 is attributable to the increase in operational profits. 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 Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in March 1995. SFAS 121 requires that long lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company anticipates adopting SFAS 121 in the first quarter of Fiscal 1996, and that such implementation will not have a material effect on the Company's consolidated results of operations or financial position. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" in October 1995. SFAS 123 establishes financial accounting and reporting standards for stock-based compensation plans and to transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. The new accounting standard prescribed by SFAS 123 is optional, and the Company may continue to account for its plans under previous accounting standards. The Company does not expect to adopt the new accounting standards, consequently, SFAS 123 will not have a material impact on the Company's consolidated results of operations or financial position. Pro forma disclosures of net earnings and earnings per share must be made as if the SFAS 123 had been adopted by the Company. Such disclosure will be required in Fiscal 1996. FINANCIAL CONDITION Company's Capital
____________________________________________________________________________________________________ (Dollars in thousands) Fiscal 1995 Fiscal 1994 Amount Percentage Amount Percentage ____________________________________________________________________________________________________ Long-Term Debt $210,800 30% $116,900 21% Other Long-Term Liabilities 27,788 4 28,559 5 Shareholders' Equity 471,915 66 419,003 74 ___________________________________________________ $710,503 100% $564,462 100% =================================================== /TABLE Shareholders' equity increased $52,912 during Fiscal 1995 and $60,345 during Fiscal 1994 primarily as a result of earnings retained after dividends. During Fiscal 1995, the Company increased its revolving credit facility with its banks from $105 million to $200 million. The Company had $65 million and $42 million in short-term borrowings at the end of Fiscal 1995 and 1994, respectively. Total debt increased during Fiscal 1995 and 1994 principally due to the timing of customer progress payments for contracts in process in Fiscal 1995 and 1994 and delays in testing and acceptance of vehicles under the FMTV program during Fiscal 1995. LIQUIDITY Cash Provided From Operations
_______________________________________________________________________________________________ (Dollars in thousands) Fiscal Fiscal Fiscal 1995 1994 1993 _______________________________________________________________________________________________ Net Earnings $ 61,803 $ 67,558 $ 56,780 Depreciation and amortization 24,732 23,954 21,175 Deferred income taxes (1,244) 2,170 413 _____________________________________ Funds from operations 85,291 93,682 78,368 Change in net operating assets and liabilities (171,433) (146,288) (86,395) _____________________________________ Net cash used in operating activities $ (86,142) $(52,606) $ (8,027) =====================================
Funds from operations decreased 9.0% during Fiscal 1995 versus a 20% increase during Fiscal 1994, reflecting primarily the relative change 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 1995 and Fiscal 1994. 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 by progress payments under government regulations which require that contractors retain a significant amount of the contract costs until government acceptance of the product. The Company has experienced cost increases and delivery delays under the FMTV contract, all of which have resulted in a build up in the unliquidated contract costs. The government began taking delivery of the FMTV in January 1996, with full liquidation of existing progress payments expected to occur in 1996. The Engineered Power Systems segment's gas turbine product line experienced a significant increase in the percentage of international contracts, which generally provide for lower customer contract funding requirements, and resulted 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 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 can be measured using several measures. The Company's current ratio (current assets divided by current liabilities) remained somewhat constant at 2.7:1 and 2.3:1 at the end of Fiscal 1995 and Fiscal 1994, respectively. The small increase is the result of replacing short-term debt incurred under uncommitted lines with long-term debt under the Company's revolving credit facility and increases in receivables and inventories. The long-term debt to equity ratio (long-term debt including the current portion divided by total shareholders' equity) was 45% at the end of Fiscal 1995 and 28% at the end of Fiscal 1994, reflecting the increase in long-term debt under the Company's revolving credit facility during Fiscal 1995. The Company's interest coverage (earnings before income taxes and interest expense divided by interest expense) decreased to 7.6 times interest for Fiscal 1995 versus 16.0 times interest for Fiscal 1994, primarily as a result of the increased debt outstanding and lower earnings. The Company engaged an agent to assist the Company in the private placement of at least $100 million in long-term indebtedness. The proceeds of such proposed private placement, if consummated, will be used primarily to retire other debt and for general corporate purposes. In the event that any acquisition of additional operations, growth in existing operations, changes in inventory levels, accounts receivable or other working capital items create a need for working capital or capital expenditures in excess of existing committed lines of credit, the Company may seek to convert uncommitted borrowing arrangements to committed credit facilities, to borrow under other long-term financing sources or to issue additional equity securities. Management believes that the Company's current credit facilities are adequate to meet its foreseeable cash requirements. CAPITAL EXPENDITURES AND COMMITMENTS Capital Expenditures By Industry Segment ______________________________________________________________________________________________ (Dollars in thousands) Percentage Change Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 ______________________________________________________________________________________________ Engineered Power Systems $ 9,495 $12,082 $14,502 -21% -17% Distribution 10,780 17,651 9,302 -39 +90 Tactical Vehicle Systems 2,111 2,929 6,061 -28 -52 Corporate Services 1,101 717 781 +60 -8 ____________________________ $23,487 $33,379 $30,646 -30 +9 ============================
Capital expenditures decreased significantly in Fiscal 1995 as compared to Fiscal 1994 and 1993. The Distribution segment's increase during Fiscal 1994 includes the capital assets acquired from 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. Cash Dividends
______________________________________________________________________________________________ (Dollars in thousands, except per share data) Growth Rate Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1994-1995 1993-1994 ______________________________________________________________________________________________ Amount of Cash Dividends $10,243 $8,904 $7,563 +15% +18% Annual Rate of Cash Dividends per Share $ 0.31 $ 0.27 $ 0.23 +15 +17 ===========================
The amount of cash dividends increased 15% and 18% during Fiscal 1995 and 1994, respectively. Cash dividends represented 17%, 13% and 13% of net earnings before accounting change for Fiscal 1995, 1994 and 1993, respectively. The Board of Directors of the Company intends to consider the payment of dividends on a quarterly basis, commensurate with the Company's earnings and financial needs. GOVERNMENT CONTRACTING Initial Operational Test and Evaluation under the FMTV contract was completed in the third quarter of Fiscal 1995 and the Company received approval for full rate production and type classification of the FMTV on August 25, 1995. Actual shipment of the vehicles to combat troops began in January 1996 at Ft. Bragg, North Carolina. Under the terms of the FMTV contract, all vehicles produced before the full rate production decision must be retrofitted with any changes required by test results or specification changes ordered by the government. The retrofit began during the fourth quarter of Fiscal 1995 and is expected to be completed in the second quarter of 1996. Full rate production is expected to commence after completion of the retrofit program. Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend not only upon the accuracy of the Company's cost projections, but also the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. The FMTV contract is a firm fixed-price multi-year contract whereby the price paid to the Company is not subject to adjustment to reflect the Company's actual costs, except costs incurred as a result of actions or inactions of the government. The Company has completed approximately 3,000 (of approximately 11,000 trucks) trucks at low rate initial production as of January 31, 1996. Full rate production has been approved and is expected to commence after completion of retrofit of the trucks produced to date to current specifications. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the FMTV contract which the Company believes are primarily due to the government's decision to delay the testing of trucks and other government directed changes to the contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments (REAs), under the FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused delays and changes. Additionally, the Company has entered into negotiations with the U.S. Army to modify the existing contract to provide for steady production at rates lower than originally anticipated through December 1998. However, the Company is not able to predict whether such modification will be forthcoming on terms acceptable to the Company and production of vehicles may be interrupted after February 1997. Revenues and profits realized on the FMTV contract are based on the Company's estimates of total contract sales value and costs at completion. Amounts in excess of agreed upon contract price for government caused delays, disruptions, unpriced change orders and government caused additional contract costs are recognized in contract value when the Company believes it is probable that the claim for such amounts will result in additional contract revenue and the amount can be reasonably estimated. At January 31, 1996, the Company's FMTV contract accounting position reflects the expected recovery of substantial amounts in excess of the contract price for government caused delays, disruptions, unpriced change orders and other government caused additional contract costs. These claims are in varying stages of negotiations. Although management believes that the contract provides a legal basis for the claims and its estimates are based on reasonable assumptions and on a reasonable analysis of contract costs, due to uncertainties inherent in the estimation and claims negotiations process, no assurances can be given that its estimates will be accurate, and variances between such estimates and actual results could be material. In the event that the Company is unable to recover a substantial portion of the additional costs, the Company may suffer a material adverse effect on its operations during the accounting period in which such contract issues are resolved. The funding of the contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contracts must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. The Company has received full funding for the production of approximately 7,364 vehicles through February 1997. Approximately 3,524 vehicles, scheduled for production after that date have not been funded due to reductions in the U.S. Army's budget for acquisitions. In the event that the FMTV contracts are terminated other than for default, the FMTV contracts provide for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. EFFECT OF CERTAIN LITIGATION On May 3, 1995, the Company and four employees, including the Company's President, were indicted by a federal Grand Jury on six counts arising out of a 1987 subcontract to supply diesel generator sets for installation in Saudi Arabia. See Note 5: Commitments and Contingencies to the Consolidated Financial Statements. On May 12, 1995, the U.S. Air Force suspended the Company from contracting with any agency of the U.S. Government and from receiving the benefit of federal assistance programs. This suspension was temporarily terminated on November 8, 1995, pending the resolution of the charges covered by the indictment, pursuant to an Interim Administrative Agreement between the Company and the U.S. Air Force. The Interim Administrative Agreement does not have any effect on the indictment. The Interim Administrative Agreement requires the Company to maintain various internal procedures and policies intended to assure the U.S. Government that the Company is a responsible contractor. In the event that the Company or any of the indicted employees are convicted of the charges contained in the indictment, the U.S. Air Force may re-evaluate whether the Company should be suspended or debarred based on all of the facts and circumstances then known. An acquittal of all parties of the charges does not terminate the Interim Administrative Agreement and any failure by the Company to perform its obligations thereunder may also be grounds for suspension or debarment. If the Company is suspended or debarred, either because of a conviction pursuant to the indictment or as a result of a breach of the Interim Administrative Agreement, it would be ineligible to enter into new contracts or subcontracts with agencies of the U.S. Government or receive the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could prevent the Company from receiving a modification to the FMTV to fund additional vehicles or extend the delivery schedule of funded vehicles unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders Stewart & Stevenson Services, Inc. We have audited the accompanying consolidated statements of financial position of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 9 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 14, 1996 Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ______________________________________________________________________________________ (Dollars in thousands) Fiscal Fiscal 1995 1994 ______________________________________________________________________________________ Assets Current Assets Cash and equivalents $ 6,325 $ 3,987 Accounts and notes receivable, net 196,548 186,814 Recoverable costs and accrued profits not yet billed 317,855 227,467 Inventories 360,718 295,867 Other 393 364 ____________ ___________ Total Current Assets 881,839 714,499 Property, Plant and Equipment, net 127,055 131,860 Other Assets 31,689 29,257 ____________ ___________ $ 1,040,583 $ 875,616 ============ =========== Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 65,000 $ 42,000 Accounts payable 134,562 164,474 Accrued payrolls and incentives 22,450 21,611 Billings on uncompleted contracts in excess of incurred costs 14,417 11,284 Current income taxes 68,650 42,240 Current portion of long-term debt 1,100 1,344 Other accrued liabilities 23,901 28,201 ____________ ___________ Total Current Liabilities 330,080 311,154 Long-Term Debt 210,800 116,900 Deferred Income Taxes 6,794 8,038 Accrued Postretirement Benefits 15,454 15,252 Deferred Compensation 5,540 5,269 Shareholders' Equity Common Stock, without par value, 100,000,000 and 50,000,000 shares authorized at January 31, 1996 and January 31, 1995, respectively; 33,061,908 and 33,009,635 shares issued at January 31, 1996 and 1995, respectively, including 11,820 shares held in treasury 163,409 162,057 Retained earnings 308,539 256,979 ____________ ____________ 471,948 419,036 Less cost of treasury stock (33) (33) ____________ ____________ Total Shareholders' Equity 471,915 419,003 ____________ ____________ $1,040,583 $875,616 ============ ============
The accompanying notes are an integral part of the consolidated financial statements Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF EARNINGS _______________________________________________________________________________________________________ (Dollars in thousands, except per share data) Fiscal Fiscal Fiscal 1995 1994 1993 _______________________________________________________________________________________________________ Sales $1,233,981 $1,138,336 $981,892 Cost of sales 1,041,051 955,898 825,914 ___________ ___________ _________ Gross profit 192,930 182,438 155,978 ___________ ___________ _________ Selling and administrative expenses 91,814 75,249 68,331 Interest expense 13,884 6,865 3,313 Other income, net (4,676) (2,528) (967) ___________ ___________ _________ 101,022 79,586 70,677 ___________ ___________ _________ Earnings before income taxes 91,908 102,852 85,301 Income taxes 30,665 34,520 27,999 ___________ ___________ _________ Earnings of consolidated companies 61,243 68,332 57,302 Equity in net earnings (loss) of unconsolidated affiliates 560 (774) (522) ___________ ___________ _________ Net earnings $ 61,803 $ 67,558 $ 56,780 =========== =========== ========= Weighted average number of shares of Common Stock outstanding 33,035 32,973 32,861 =========== =========== ========= Net earnings per share $ 1.87 $ 2.05 $ 1.73 =========== =========== =========
The accompanying notes are an integral part of the consolidated financial statements Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
_________________________________________________________________________________________________ (Dollars in thousands) Common Retained Treasury Stock Earnings Stock Total _________________________________________________________________________________________________ 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 Net earnings 61,803 61,803 Cash dividends (10,243) (10,243) Exercise of stock options 1,352 1,352 __________ __________ __________ __________ Balance at end of Fiscal 1995 $163,409 $308,539 $ (33) $471,915 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements Stewart & Stevenson Services, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
_______________________________________________________________________________________________________________________ (Dollars in thousands) Fiscal Fiscal Fiscal 1995 1994 1993 _______________________________________________________________________________________________________________________ Operating Activities Net earnings $ 61,803 $ 67,558 $ 56,780 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits 202 224 (91) Depreciation and amortization 24,732 23,954 21,175 Deferred income taxes, net (1,244) 2,170 413 Change in operating assets and liabilities: Accounts and notes receivable, net (9,734) (39,522) (4,126) Recoverable costs and accrued profits not yet billed (90,388) (111,599) (59,175) Inventories (64,851) (26,262) (57,099) Accounts payable (29,912) 32,694 3,010 Billings on uncompleted contracts in excess of incurred costs 3,133 (19,804) 14,104 Current income taxes 26,410 14,309 14,081 Other current liabilities (3,776) 6,644 7,126 Other--principally long-term assets and liabilities (2,517) (2,972) (4,225) __________ __________ __________ Net Cash Used in Operating Activities (86,142) (52,606) (8,027) Investing Activities Expenditures for property, plant and equipment (23,487) (33,379) (30,646) Disposal of property, plant and equipment 3,887 4,372 796 __________ __________ __________ Net Cash Used in Investing Activities (19,600) (29,007) (29,850) Financing Activities Additions to long-term debt 200,071 85,000 192,918 Payments on long-term debt (106,100) (36,975) (170,402) Net borrowings and payments on short-term notes payable 23,000 37,000 5,000 Dividends paid (10,243) (8,904) (7,563) Exercise of stock options 1,352 1,691 3,773 __________ __________ __________ Net Cash Provided by Financing Activities 108,080 77,812 23,726 __________ __________ __________ Increase (decrease) in cash and equivalents 2,338 (3,801) (14,151) Cash and equivalents, beginning of fiscal year 3,987 7,788 21,939 __________ __________ __________ Cash and equivalents, end of fiscal year $ 6,325 $ 3,987 $ 7,788 ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements
Stewart & Stevenson Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Note 1: Summary of Principal Accounting Policies Fiscal Year: The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, "Fiscal 1995" commenced on February 1, 1995 and ended on January 31, 1996. 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. Post Employment Benefits: 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 9). Long-Lived Assets: The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in March 1995. The Company anticipates adopting SFAS 121 in the first quarter of Fiscal 1996, and that such implementation will not have a material effect on the Company's consolidated results of operations or financial position. 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: Revenues relating to contracts or contract changes that have not been completely priced, negotiated, documented, or funded are not recognized unless realization is considered probable. Generally, revenue is recognized when a product is shipped or accepted by the customer, except for 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 occasionally enters into forward exchange contracts only as a hedge against certain economic exposures and not for speculative or trading purposes. While the forward contracts affect the Company's results of operations, they do so only in connection with the underlying transactions. As a result, they do not subject the Company to risk from exchange rate movements, because gains and losses on these contracts offset losses and gains on the transactions being hedged. The Company limits exposure to foreign currency fluctuations in its operations and maintenance contracts through provisions that generally require customer payments in U.S. dollars or other currency corresponding to the currency in which the costs are incurred. 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. Use of Estimates and Assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: The accompanying consolidated financial statements for Fiscal 1994 and 1993 contain certain reclassifications to conform with the presentation used in Fiscal 1995. Note 2: Industry Segment Data The Engineered Power Systems segment includes the designing, packaging, manufacturing and marketing of diesel and gas turbine engine-driven equipment and the operations and maintenance of large gas turbine projects and petroleum production and processing facilities. The Distribution segment includes the marketing of diesel engines, automatic transmissions, material handling equipment, transport refrigeration units and construction equipment and the provision of related parts and service. The Tactical Vehicle Systems segment includes the designing, manufacturing and marketing of tactical vehicles, primarily 2 1/2-ton and 5-ton trucks under contract with the United States Army. The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. Corporate assets consist primarily of cash and equivalents and the assets of a limited partnership. The Company markets its products and services throughout the world and is not dependent upon any single geographic region or single customer. Other than the U.S. Government, no single group or customer represents greater than 10% of consolidated sales. Export sales, including sales to domestic customers for export, for Fiscal 1995, 1994 and 1993 were $382,452, $301,885 and $237,807 respectively. Export sales to any single geographic region in both Fiscal 1995 and 1994 were not material to consolidated sales. Export sales in Fiscal 1993 included $113,597 destined for Asia. Financial information relating to industry segments is as follows:
___________________________________________________________________________________________________ Operating Identifiable Capital Sales Profit Assets Expenditures Depreciation ___________________________________________________________________________________________________ Fiscal 1995 Engineered Power Systems $ 627,702 $ 73,449 $ 601,690 $ 9,495 $ 6,230 Distribution 416,229 30,130 240,390 10,780 6,900 Tactical Vehicle Systems 189,009 9,703 175,174 2,111 10,349 Corporate Services 1,041 292 23,329 1,101 926 ___________ __________ ___________ _________ _________ Total $1,233,981 $ 113,574 $1,040,583 $ 23,487 $ 24,405 =========== ========== =========== ========= ========= Fiscal 1994 Engineered Power Systems $ 642,804 $ 82,395 $ 478,354 $ 12,082 $ 6,759 Distribution 346,564 24,015 222,462 17,651 6,113 Tactical Vehicle Systems 147,920 8,782 152,772 2,929 9,943 Corporate Services 1,048 376 22,028 717 805 ___________ ___________ __________ _________ _________ Total $1,138,336 $ 115,568 $ 875,616 $ 33,379 $ 23,620 =========== =========== ========== ========= ========= 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 =========== =========== ========== ========= =========
A reconciliation of Operating profit to Earnings before income taxes is as follows: TABLE ________________________________________________________________________________________________________ Fiscal Fiscal Fiscal 1995 1994 1993 ________________________________________________________________________________________________________ Operating profit $113,574 $115,568 $94,039 Corporate expenses (7,782) (5,851) (5,425) Interest expense (13,884) (6,865) (3,313) __________ __________ _________ Earnings before income taxes $ 91,908 $102,852 $85,301 ========== ========== =========
Note 3: Contracts in Process Amounts included in the financial statements which relate to recoverable costs and accrued profits not yet billed on contracts in process are classified as current assets, billings on uncompleted contracts in excess of incurred cost and accrued profits are classified as current liabilities. Summarized below are the components of the amounts:
_________________________________________________________________________________________________ Fiscal Fiscal 1995 1994 _________________________________________________________________________________________________ Costs incurred on uncompleted contracts $913,108 $581,151 Accrued profits 83,824 47,627 _________ _________ 996,932 628,778 Less: Customer progress payments (693,494) (412,595) _________ _________ $303,438 $216,183 ========= ========= Included in the statements of financial position: Recoverable costs and accrued profits not yet billed $317,855 $227,467 Billings on uncompleted contracts in excess of incurred costs (14,417) (11,284) _________ _________ $303,438 $216,183 ========= =========
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 $26,640 and $22,582 at January 31, 1996 and 1995, respectively. The Company's total general and administrative expense incurred amounted to $103,999, $86,292 and $79,290 in Fiscal 1995, 1994 and 1993, respectively. The United States Government has a security interest in unbilled amounts associated with contracts that provide for progress payments. In accordance with industry practice, recoverable costs and accrued profits not yet billed include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year. Note 4: Inventories Summarized below are the components of inventories:
_________________________________________________________________________________ Fiscal Fiscal 1995 1994 _________________________________________________________________________________ Engineered Power Systems $273,200 $229,898 Customer deposits (4,081) (5,169) Total Engineered Power Systems 269,119 224,729 Distribution 145,179 121,273 Excess of current cost over LIFO values (53,580) (50,135) _________ _________ Total Inventories $360,718 $295,867 ========= =========
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, 1996 and 1995 includes approximately $19,022 and $14,789, respectively, of costs on a certain U.S. Government contract in excess of contractual authorization which will be billable upon either contractual amendment or approval of claims increasing contract funding. During Fiscal 1995, the Company recognized $3,500 of additional costs under such contract based upon preliminary settlement discussions. Management's position, supported by outside legal counsel which specializes in government procurement law, is that the Company will recover a substantial portion of the amount claimed which significantly exceeds the inventory carrying value. The Distribution segment's inventory consists primarily of industrial equipment, equipment under modification and parts held in the Company's distribution network for resale. During Fiscal 1994 certain inventories were reduced. The reduction resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior fiscal years as compared with the cost of Fiscal 1994 purchases, the effect of which increased pre-tax earnings in Fiscal 1994 by approximately $1,741. 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 $67,837 at the close of Fiscal 1995. On May 3, 1995, an indictment was returned by a federal Grand Jury in Houston, Texas, accusing the Company, a former consultant and four employees, including the Company's President, of one count of major fraud against the United States, four counts of false statements and one count of conspiracy to commit major fraud, make false statements and interfere with the administration of a foreign military sale. All of the counts arise from a 1987 subcontract to supply diesel generator sets for installation at long-range radar sites in Saudi Arabia (the "Peace Shield"). The indictment alleges that a former employee of the general contractor for the Peace Shield program, who later became a consultant to the Company, conspired with the Company and the other defendants to award the subcontract to the Company. The indictment also alleges that the government was defrauded out of approximately $5 million in connection with cost savings from a change order under the Peace Shield contract and that the Company made false statements relating to cost estimates in connection with such change order. The Company and each individual have denied all charges under the indictment and the case is pending in the United States District Court, Southern District of Texas, Houston Division. The Company is not able to make a reasonable estimate of the fines or penalties that could be imposed under the Federal Sentencing Guidelines in the event of a conviction under the indictment. Such fines and penalties could be substantial and adversely affect the Company's financial position and results of operations. If the Company or any of the individuals are convicted of any charges under the indictment, the Company could also be suspended or debarred from entering into new contracts or subcontracts with agencies of the U.S. Government or receiving the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could prevent the Company from receiving a modification to the FMTV to fund additional vehicles or extend the delivery schedule of funded vehicles unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. Also in connection with the Peace Shield contract, the Company has been advised that the former consultant of the Company referred to above filed a suit in the United States District Court, Southern District of Texas, Houston Division, for himself and the United States of America alleging that the Company supplied false information in violation of the False Claims Act (the "Act"), engaged in common law fraud and misapplied costs. Under the provisions of the Act, the suit has not been served upon the Company pending an investigation of the case by the U.S. Department of Justice and a determination as to whether the Department of Justice will intervene and pursue the matter on behalf of the United States. The suit alleges treble damages of $21 million plus unspecified penalties. Proceedings in this case have been stayed pending resolution of the criminal matter referred to above. The Company cannot predict the outcome of this action or the likelihood that substantial damages will result. However, the Company intends to vigorously defend this case if it is served upon the Company. On May 16, 1995, C. Daniel Chill filed a purported class action suit in the United States District Court, Southern District of Texas, Houston Division, against the Company and three of its officers and directors on behalf of himself and all persons that purchased shares of Common Stock between May 2, 1994 and May 3, 1995. An amended complaint was filed on June 7, 1995. The suit alleges that the Company violated various sections of and rules under the Securities Exchange Act of 1934 and common law by disseminating material false and misleading information, failing to disclose material information and failing to correct earlier statements that were no longer true, all relating to the Peace Shield investigation and indictment. The suit claims unspecified compensatory and punitive damages. The Company has reached an agreement in principle to settle this litigation on terms that would not be material to the Company. The agreement in principle is subject to the execution of definitive settlement agreements as well as approval by the court and the Company's board of directors. 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 has not established any reserves or accruals for any potential liability that may be subsequently found in any of the foregoing cases. The Company leases certain property and equipment under lease arrangements of varying terms. Annual rentals under terms of noncancelable leases are less than 1% of consolidated sales. Note 6: Government Contracts Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend not only upon the accuracy of the Company's cost projections, but also the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. The FMTV contract is a firm fixed-price multi-year contract whereby the price paid to the Company is not subject to adjustment to reflect the Company's actual costs, except costs incurred as a result of actions or inactions of the government. The Company has completed approximately 3,000 (of approximately 11,000 trucks) trucks at low rate initial production as of January 31, 1996. Full rate production has been approved and is expected to commence after completion of retrofit of the trucks produced to date to current specifications. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the FMTV contract which the Company believes are primarily due to the government's decision to delay the testing of trucks and other government directed changes to the contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments (REAs), under the FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused delays and changes. Additionally, the Company has entered into negotiations with the U.S. Army to modify the existing contract to provide for steady production at rates lower than originally anticipated through December 1998. However, the Company is not able to predict whether such modification will be forthcoming on terms acceptable to the Company and production of vehicles may be interrupted after February 1997. Revenues and profits realized on the FMTV contract are based on the Company's estimates of total contract sales value and costs at completion. Amounts in excess of agreed upon contract price for government caused delays, disruptions, unpriced change orders and government caused additional contract costs are recognized in contract value when the Company believes it is probable that the claim for such amounts will result in additional contract revenue and the amount can be reasonably estimated. At January 31, 1996, the Company's FMTV contract accounting position reflects the expected recovery of substantial amounts in excess of the contract price for government caused delays, disruptions, unpriced change orders and other government caused additional contract costs. These claims are in varying stages of negotiations. Although management believes that the contract provides a legal basis for the claims and its estimates are based on reasonable assumptions and on a reasonable analysis of contract costs, due to uncertainties inherent in the estimation and claims negotiations process, no assurances can be given that its estimates will be accurate, and variances between such estimates and actual results could be material. In the event that the Company is unable to recover a substantial portion of the additional costs, the Company may suffer a material adverse effect on its operations during the accounting period in which such contract issues are resolved. The funding of the contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contracts must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. The Company has received full funding for the production of approximately 7,364 vehicles through February 1997. Approximately 3,524 vehicles, scheduled for production after that date have not been funded due to reductions in the U.S. Army's budget for acquisitions. In the event that the FMTV contracts are terminated other than for default, the FMTV contracts provide for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. Note 7: Debt Arrangements The Company has informal borrowing arrangements with banks which may be withdrawn at the banks' option. Borrowings under these credit arrangements are unsecured, are due within 90 days and bear interest at varying bid and negotiated rates. On January 31, 1996 and 1995, the amounts outstanding under these arrangements were $65,000 and $42,000, respectively, with a weighted average interest rate of 5.95% and 6.30%, respectively. Long-Term Debt, which is generally unsecured, consists of the following:
______________________________________________________________________________________________ Fiscal Fiscal 1995 1994 ______________________________________________________________________________________________ Notes payable to insurance companies: -10.20%, principal due $1,000 annually to 1998 $ 3,000 $ 4,000 Debt of consolidated limited partnership: -note payable to a bank, principal due monthly to 1998 (see note 8,900 9,000 below) Revolving credit notes payable to banks (see note below) 200,000 105,000 Other 0 244 _________ _________ 211,900 118,244 Less current portion (1,100) (1,344) _________ _________ Long-Term Debt $210,800 $116,900 ========= =========
The Company has commitments of $200,000 from banks under revolving credit notes (subject to reduction at the Company's election) which mature on December 31, 2000. Under the terms of the revolving credit facility, the commitment fee is .125 of 1% on the daily average unused balance. 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 expired in Fiscal 1995, that converted $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 1995, approximately $160,894 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 1995, 1994 and 1993 was $13,261, $6,679 and $3,425, respectively. The amounts of long-term debt which will become due during Fiscal 1996 through 1999, are approximately: 1996--$1,100; 1997--$1,100; 1998--$9,700, 1999--$0 and beyond--$200,000. Note 8: Postretirement Medical Plan The Company has a postretirement medical plan which covers most of its employees and provides for the payment of medical costs of eligible employees and dependents upon retirement. The plan is currently not funded. The Company expects to continue financing postretirement medical costs as covered claims are incurred. Postretirement medical benefit costs includes the following components:
__________________________________________________________________________________________________________ Fiscal Fiscal Fiscal 1995 1994 1993 __________________________________________________________________________________________________________ Service costs - benefits attributed to service during the period $527 $418 $377 Interest cost on accumulated postretirement medical benefit obligations 620 678 768 Amortization of prior service costs (718) (718) (618) _____ _____ _____ Net postretirement medical benefit costs $429 $378 $527 ===== ===== =====
The status of the plan is as follows:
_____________________________________________________________________________________________________ January 31 January 31 1996 1995 _____________________________________________________________________________________________________ Accrued Postretirement Benefits Retirees $ 4,642 $ 4,454 Employees eligible to retire 2,073 1,978 Employees not eligible to retire 2,020 1,500 _________ _________ 8,735 7,932 Unrecognized prior service cost 4,701 5,328 Unrecognized net gain (loss) 2,018 1,992 _________ _________ $ 15,454 $ 15,252 ========= =========
The actuarial assumptions used are as follows:
____________________________________________________________________________________________________ Fiscal Fiscal 1995 1994 ____________________________________________________________________________________________________ S> Discount Rate 7.25% 8.75% Health Care Cost Trend 8.50% - 10.00% (a) 9.50% - 11.50% (b)
(a) Gradually declining to 5.00% by 2004 (b) Gradually declining to 5.50% by 2012 Changing the health care cost trend rates by one percentage point would change the accumulated postretirement medical benefit obligation at January 31, 1996 by approximately $1,151 and the postretirement medical benefit costs for Fiscal 1995 by approximately $183. Note 9: Employee Pension and Other Benefit Plans The Company has a noncontributory defined benefit pension plan covering substantially all of its full-time employees. The pension benefits are based on years of service, limited to 45 years, and the employee's highest consecutive five-year average compensation out of the last ten years of employment. The Company funds pension costs in conformity with the funding requirements of applicable government regulations. The following table sets forth the plan's funded status and amounts recognized in the Company's statements of financial position:
_____________________________________________________________________________________________ Fiscal Fiscal 1995 1994 _____________________________________________________________________________________________ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $45,809 in 1995 and $34,096 in 1994 $ 48,720 $ 36,028 ========= ========= Projected benefit obligation for service rendered to date $(59,767) $(43,764) Plan assets at market related value and fair value for Fiscal 1995 and 1994, respectively; primarily publicly traded stocks and bonds, including 70,956 shares of the Company's Common Stock at the end of both Fiscal 1995 and 1994 60,929 60,686 _________ _________ Plan assets in excess of projected benefit obligations 1,162 16,922 Unrecognized net (gain) loss from past experience different from 6,674 (9,114) that assumed _________ _________ Prepaid pension cost included in Other Assets $ 7,836 $ 7,808 ========= =========
Net pension credit includes the following components: _____________________________________________________________________________________________________ Fiscal Fiscal Fiscal 1995 1994 1993 _____________________________________________________________________________________________________ Service cost -- benefits earned during the year $ 2,187 $ 1,815 $ 2,012 Interest cost on projected benefit obligation 3,800 3,541 3,108 Actual return on plan assets (2,782) (5,494) (4,883) Amortization of unrecognized net gain (738) (406) (493) Net amortization and deferrals (2,494) 200 (540) _________ _________ ________ Net periodic pension credit $ (27) $ (344) $ (796) ========= ========= ========
The actuarial assumptions used are as follows:
____________________________________________________________________________________________________ Fiscal Fiscal 1995 1994 ____________________________________________________________________________________________________ Discount Rate 7.25% 8.75% 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 expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets. The market-related value of plan assets for Fiscal 1995 was determined using the calculated value and for Fiscal 1994 and 1993 using the fair value. There was no material impact to operating results as a result of the change. 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 1995, 1994 and 1993, respectively, was $141, $68 and $164. The Company has an unfunded supplemental retirement plan for certain corporate officers. Retirement expense for the plan in Fiscal 1995, 1994 and 1993 was $459, $216 and $290, respectively. Prior service cost not yet recognized in periodic pension cost was $1,676, $1,804, and $1,208 at January 31, 1996, 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 $788, $399 and $13 in Fiscal 1995, 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 10: Common Stock Shareholder Rights Plan: The Company has adopted a shareholders rights 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 were 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 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 entitles 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 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 entitles 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, the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock Option Plan and the 1994 Director Stock Option Plan authorize the grant of options to purchase an aggregate of up to 1,800,000, 514,550 and 150,000 shares of Common Stock, respectively, at not less than fair market value at the date of grant. The options have a term not exceeding ten years and vest over periods not exceeding four years. Under the terms of the 1993 Nonofficer Stock Option Plan, the number of options available for grant increased from 514,550 to 757,150 shares as of February 1, 1996. Stock option activity under the plans is as follows:
_____________________________________________________________________________________ Shares Option Price under Range Option Per Share ____________________________________________________________________________________ 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 Granted 386,300 $33.75 and $35.125 Exercised (52,750) $18.75 - $32.625 Cancelled (20,650) $32.625 - $50.25 ________ Outstanding at end of Fiscal 1995 898,075 $18.75 - $50.25 ======== Options exercisable at end of Fiscal 1995 299,421 $18.75 - $50.25 ======== Options available for future grants at the end of Fiscal 1995 523,875 ========
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock Based Compensation" in October, 1995. SFAS 123 establishes financial accounting and reporting standards for stock based compensation plans and to transactions in which an entity issues equity instruments to acquire goods or services from non-employees. The new accounting standards prescribed by SFAS 123 are optional and the Company does not expect to adopt the new accounting standards. Consequently, SFAS 123 will not have a material impact on the Company's consolidated results of operations or financial position. Pro Forma disclosures of net earnings and earnings per share must be made as if SFAS 123 accounting standards had been adopted by the Company. Such disclosure will be required in Fiscal 1996. Note 11: Income Taxes The components of the income tax provision and the income tax payments are as follows:
_________________________________________________________________________________________ Fiscal Fiscal Fiscal 1995 1994 1993 _________________________________________________________________________________________ Current $ 20,430 $ 2,194 $10,454 Deferred 10,235 32,326 17,545 _________ ________ ________ Income tax provision $ 30,665 $34,520 $27,999 ========= ======== ======== Income tax payments (excluding refunds) $ 13,337 $17,422 $11,965 ========= ======== ========
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 Fiscal 1995, 1994 and 1993 is as follows: TABLE _________________________________________________________________________________________ Fiscal Fiscal Fiscal 1995 1994 1993 _________________________________________________________________________________________ Provision at statutory rates $32,190 $35,998 $29,856 Other (1,525) (1,478) (1,857) ________ ________ ________ $30,665 $34,520 $27,999 ======== ======== ======== The deferred tax liability is determined under the liability method based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted statutory tax rates and deferred tax expense is the result of changes in the net liability for deferred taxes. The tax effects of the significant temporary differences which comprise the deferred tax liability at the end of Fiscal 1995 and 1994 are as follows:
__________________________________________________________________________________________ Fiscal Fiscal 1995 1994 __________________________________________________________________________________________ Deferred Tax Assets Postretirement benefit obligation $ 5,407 $ 5,338 Accrued expenses and other reserves 9,282 11,072 Other 33 54 _________ _________ Gross deferred tax assets 14,722 16,464 _________ _________ Deferred Tax Liabilities Property, plant and equipment 4,259 4,602 Pension accounting 2,233 2,449 Contract accounting 36,730 34,817 Prepaid expenses and deferred charges 44,485 37,563 Other 9,902 9,685 _________ _________ Gross deferred tax liabilities 97,609 89,116 _________ _________ Net deferred tax liability $ 82,887 $ 72,652 ========= ========= Current portion of deferred tax liability $ 76,093 $ 64,614 Non-current portion of deferred tax liability 6,794 8,038 _________ _________ Net deferred tax liability $ 82,887 $ 72,652 ========= =========
Note 12: Supplemental Financial Data Receivables consist of the following:
________________________________________________________________________________________ Fiscal Fiscal 1995 1994 ________________________________________________________________________________________ Accounts receivable $193,406 $186,024 Notes receivable 4,551 2,458 Allowance for doubtful accounts (1,409) (1,668) _________ _________ $196,548 $186,814 ========= =========
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 16.3% and 12.7% of accounts receivable at January 31, 1996 and 1995, respectively. Due to the large number of entities and diversity of the Company's customer base, concentration of credit risk with respect to trade receivables is limited. Components of property, plant and equipment are as follows:
_______________________________________________________________________________________ Fiscal Fiscal 1995 1994 _______________________________________________________________________________________ Machinery and equipment $126,306 $114,592 Buildings and leasehold improvements 91,298 89,178 Revenue earning assets 12,917 10,556 Accumulated depreciation and amortization (116,436) (98,355) _________ _________ 114,085 115,971 Construction-in-progress 6 1,585 Land 12,964 14,304 _________ _________ $127,055 $131,860 ========= =========
Note 13: Consolidated Quarterly Data (unaudited)
_______________________________________________________________________________________________ Fiscal 1995 _______________________________________________________________________________________________ Fourth Third Second First Quarter Quarter Quarter Quarter _______________________________________________________________________________________________ Sales $301,340 $323,779 $319,840 $289,022 Gross profit 46,482 47,957 49,949 48,542 Net earnings 13,861 15,000 16,927 16,015 Net earnings per share .42 .45 .51 .49
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
Note 14: Vulnerability Due To Certain Concentrations A majority of the Engineered Power Systems Segment sales is derived from packaging, operating and servicing gas turbine engines manufactured by General Electric Company ("GE") and European Gas Turbines ("EGT"). The Company has no reason to believe that its relationship with GE and EGT will not continue for the foreseeable future. Any interruption of these relationships, however, would adversely affect the Company. The Company's principal distribution agreements are subject to termination by the suppliers for a variety of causes. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III In accordance with General Instruction G(3) to Form 10-K, Items 10 through 13 have been omitted since the Company will file with the Commission a definitive proxy statement complying with Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. Such information is incorporated herein by reference. CROSS REFERENCE Form 10-K Item Caption in Definitive Number and Caption Proxy Statement __________________ _____________________ Item 10. Directors and Executive Officers of the Registrant . . . . Election of Directors; Executive Officers; Compliance with Securities Laws Item 11. Executive Compensation . . . . . . Election of Directors; Performance of Stewart & Stevenson Common Stock; Report of the Compensation and Management Development Committee; Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . Voting Securities and Ownership Thereof by Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions . . . . . Transactions with Management and Certain Business Relationships PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)1. The following financial statements for Stewart & Stevenson Services Inc. are filed as a part of this report: Consolidated Statements of Financial Position--January 31, 1996 and 1995. Consolidated Statements of Earnings--Years ended January 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity--Years ended January 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows--Years ended January 31, 1996, 1995 and 1994. 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, 4.3, 4.4 and 4.5 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 Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (incorporated by reference to Exhibit 3(a) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001-11443). 3.2 Fourth Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (incorporated by reference to Exhibit 3(b) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001-11443). 4.1 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. (incorporated by reference to Exhibit 4.1 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1995 under the Commission File No. 0-8493). 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. (incorporated by reference to Exhibit 4.2 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1995 under the Commission File No. 0-8493). 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. (incorporated by reference to Exhibit 4.3 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1995 under the Commission File No. 0-8493). 4.4 Agreement and Third Amendment to Loan Agreement effective August 1, 1995, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association, ABN AMRO Bank, N.V., Houston Agency, The Bank of New York, NationsBank of Texas, National Association, Bank of America Illinois and PNC Bank, National Association. (incorporated by reference to Exhibit 4(d) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001-11443). 4.5 Agreement and Fourth Amendment to Loan Agreement effective November 30, 1995, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association, ABN AMRO Bank, N.V., Houston Agency, The Bank of New York, NationsBank of Texas, National Association, Bank of America Illinois and PNC Bank, National Association. (incorporated by reference to Exhibit 4(e) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001-11443). 4.6 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 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). *10.2 Distributor Sales and Service Agreement effective January 1, 1996, between the Company and Detroit Diesel Corporation. 10.3 Contract Number DAAE07-92-R001 dated October 11, 1991 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive Command, as modified (incorporated by reference to Exhibit 28.1 of the Form S-3 Registration Statement of Stewart & Stevenson under the Commission File No. 33-44149). 10.4 Contract Number DAAE07-92-R002 dated October 15, 1991 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive Command, as Modified (incorporated by reference to Exhibit 28.2 of the Form S-3 Registration Statement of Stewart & Stevenson under the Commission File No. 33-44149). 10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated as of December 31, 1979 (incorporated by reference to Exhibit 10.8 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 10.9 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.7 Amendment No. 1 to Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan, dated September 11, 1990 (incorporated by reference to Exhibit 10.10 of the Form 10-K of Stewart & Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.8 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.11 of the Form 10-K of Stewart Stevenson for the fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.9 Stewart & Stevenson Services, Inc. 1994 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 of the Form S-8 Registration Statement of Stewart & Stevenson under the Commission File No. 33-58685). *21.1 List of Subsidiaries. *23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. *27.1 Financial Data Schedule. ____________ * Filed with this report. (b) The following reports on Form 8-K were filed during the three months ended January 31, 1996. Form 8-K Reporting Date November 8, 1995. Items Reported - Item 5. Other Events (Interim Agreement ending suspension). 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 9th day of April, 1996. STEWART & STEVENSON SERVICES, INC. By /s/ Robert L. Hargrave Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 9th day of April, 1996. /s/ Robert L. Hargrave Robert L. Hargrave Bob H. O'Neal Director, Principal Executive Officer Director and Principal Financial 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 From Date File Exhibit ______________________________ ___________ ____ ____ ____ _______ 10.2 Distributor Sales and Service Agreement effective January 1, 1996, between the Company and Detroit Diesel Corporation. * 21.1 List of subsidiaries. * 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. * 27.1 Financial Data Schedule. *
1 EX-10 2 DETROIT DIESEL DISTRIBUTOR AGREEMENT FORM No. DA 230 (6-16-95) DETROIT DIESEL CORPORATION Distributor Agreement AGREEMENT, effective the 1st day of January 1996 by and between Detroit Diesel Corporation, hereinafter called Company, and Stewart & Stevenson Services, Inc. of Houston, Harris, Texas, hereinafter called Distributor. GENERAL PURPOSE Company is in the business of manufacturing and marketing power products, including diesel engines, and parts for these products. Company sells its products principally to original equipment manufacturers and to Detroit Diesel Distributors. Company has established a system of independently owned and managed Detroit Diesel Distributors operating at approved locations to (a) sell directly the engines identified in the Products Addendum, herein called Products, and related Parts, (b) actively and effectively promote the purchase and use of Products and related Parts, (c) render prompt, efficient, and courteous service to owners and users of such Products and (d) complement Companys own direct sales activities. The purpose of this Distributor Agreement, herein called Agreement, is to appoint Distributor as an authorized Detroit Diesel Distributor to sell and service Products and Parts, to establish the location(s) from which Distributor will conduct Distributorship Operations, and to identify the principal management and principal owners of Distributor upon whom Company relies in entering into this Agreement. This Agreement sets forth the rights and responsibilities of Company and Distributor relating to the sale and servicing of Products and Parts and the circumstances in which the Agreement may be terminated. Accordingly, Distributor and Company hereby agree as follows: FIRST: Rights Granted by Company and Acceptance and Acknowledgments by Distributor A. Rights Granted by Company In reliance on Distributors agreement to fulfill the responsibilities and perform the functions described in Paragraph SECOND of this Agreement, Company hereby grants Distributor the non-exclusive rights to: (1) buy from Company the Products identified in the Products Addendum to this Agreement and related Parts for resale or use by Distributor in its Distributorship Operations; (2) identify itself as an authorized Detroit Diesel Distributor and to conduct, at the location(s) approved by Company, herein called Distributorship Locations, all of the Distributorship Operations contemplated by this Agreement; and (3) execute dealer agreements with Authorized Dealers approved by Company. B. Acceptance and Acknowledgments by Distributor Distributor hereby accepts from Company the rights specified in this Paragraph FIRST. In doing so, Distributor acknowledges that: (1) Company has reserved to itself the rights to select and authorize other businesses to conduct distributorship operations in connection with Products and Parts and to sell Products and Parts directly to any customer; (2) as an independently owned and managed business, Distributor's success and enjoyment of profitable operations will be determined substantially by how effectively its Distributorship Operations are conducted and managed; (3) Distributor has not paid any fee or other consideration for this Agreement. Neither this Agreement nor any right granted by this Agreement is a property right; and (4) neither this Agreement nor any right or responsibility under this Agreement may be transferred, assigned, delegated or sold by Distributor without the prior written approval of Company. SECOND: Assumption of Responsibilities by Distributor Distributor will establish, maintain and effectively conduct the complete Distributorship Operations contemplated by this Agreement in connection with each of the Products described in the Products Addendum. Distributor hereby assumes and will fulfill the functions and responsibilities reflected in this Agreement, including: (1) sales and sales promotion responsibilities; (2) service responsibilities on all Products that may at any time be located in the Area of Responsibility; and (3) performance of all of Distributor's other obligations under this Agreement. THIRD: Management and Ownership Company has selected Distributor and has entered into this Agreement in substantial reliance upon: (1) Distributor's representation to Company relating to its business organization and financial structure and to its ability to fulfill the functions and responsibilities assumed by Distributor under Paragraph SECOND of this Agreement; (2) the personal qualifications and business abilities of Distributor's Principal Manager(s) and Principal Owner(s) who are so designated by Distributor in the Management and Ownership Addendum furnished by Distributor to Company and accepted by Company by its endorsement thereon and whom Distributor represents will have and actively exercise full managerial authority for the operating management of Distributor; and (3) the agreement of Distributor and Company that the person(s) named in the Management and Ownership Addendum as Principal Owner(s) will continue to own both of record and beneficially the percentage of ownership interests in Distributor shown therein. Distributor shall provide, at the request of Company, a plan for the continuation of Distributor in the event of death, incapacity or withdrawal from the business of any person named as a Principal Manager(s) or Principal Owner(s). Distributor acknowledges that this Agreement is to be construed as a personal service agreement. Accordingly, Distributor agrees that continuation of the business relationship between Distributor and Company established by this Agreement is conditioned upon Distributor continuing to have principal management and principal owners acceptable to Company. If Distributor desires to make a change in its Principal Manager(s) or sell its principal assets or change its ownership, Distributor will give Company prior written notice of the proposed change or sale. Company will base its approval decision on whether the proposed change is likely to result in a successful distributorship operation with acceptable management and ownership which will provide satisfactory sales, service and facilities for users of Products at the approved location. FOURTH: Additional Provisions The additional provisions set forth in the Additional Provisions Applicable to Distributor Agreement, bearing Form No. DA230-A, are hereby incorporated as a part of this Agreement. FIFTH: Term This Agreement will expire without any action by either Distributor or Company on December 31, 1998. SIXTH: Execution on Behalf of Company and Distributor Neither this Agreement nor any related agreement shall be valid unless it bears the signature of a Vice-President, or alternatively the facsimile signature of a Vice President along with, if space is provided, the signature of another duly authorized representative of Company, and it is signed on behalf of Distributor by the duly authorized officer(s) of Distributor. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate as of the day and year first above written. Stewart & Stevenson Services, Inc. DETROIT DIESEL CORPORATION Distributor Firm Name By /s/ Garth C. Bates, Jr. By /s/ T. R. Terrell Vice President Vice President WITNESS:_________________________ By_________________________ DA 232 (6-95) MANAGEMENT AND OWNERSHIP ADDENDUM TO DISTRIBUTOR AGREEMENT This Management and Ownership Addendum is executed pursuant to Paragraph THIRD of the Distributor Agreement between Company and the undersigned Distributor. Stewart & Stevenson Services, Inc. a corporation incorporated on 1/31/47 in the State/Province of Texas hereby represents to Company that the following information pertaining to the management and the record and beneficial ownership status of the undersigned Distributor is true, accurate and complete as of January 1, 1993 and understands that any misrepresentation in connection therewith constitutes cause for termination under Article 7.1.2 (b) of the Distributor Agreement.
Names of persons having Management positions and/or Record or Beneficial Ownership interests in Distributor (Must show names of Officers, and Active in Signature of Principal Manager(s) Distributor- Principal Principal Owners regardless of any financial Title ship (Yes or Manager Principal Owner and Principal interest) if Any No) (Yes or No) (Yes or No) Managers C. Jim Stewart II Chman No No No Bob H. O'Neal Pr/CEO Yes Yes No Robert L. Hargrave VP/Tre. Yes No No Keith T. Stevenson V. Pres Yes Yes No Garth C. Bates, Jr. V. Pres Yes Yes No PUBLICLY TRADED Total (Table continued)
If a Corporation, show number of shares, class and percentage of ownership ______________________________________________________ If a partnership, show Number of % of Ownership Interest Number of % of non-voting % of of each person listed voting shares Total shares Total N/A * * N/A N/A N/A * * N/A N/A N/A * * N/A N/A N/A * * N/A N/A N/A * * N/A N/A N/A 4,587,336 100% None N/A
Ownership of record is the ownership reflected on Distributor's books of record (e.g., in the case of a corporation, the name of the trust or person entitled to receive dividends from Distributor). Beneficial owners are those persons that benefit from such an ownership situation (e.g., the beneficiary of a trust). Any beneficial ownership arrangement at Distributor must be explained on a separate sheet and attached to this Distributor Management and Ownership Addendum. APPROVED AS REPRESENTED BY DISTRIBUTOR Stewart & Stevenson Services,Inc. Detroit Diesel Corporation Company Distributor Firm Name By /s/ Garth C. Bates, Jr. By /s/ J.R. Terrell Signature and Title ADDITIONAL INFORMATION CONCERNING OWNER(S) List below any person named on the reverse side whose ownership interest in Distributor is encumbered. Nature and Amount Name Lender Name and Address of Encumbrance List below any person named on the reverse side that is now employed by Company, or Affiliated Companies. Name Name of Employer List below any person named on the reverse side that is related to a present employee of Company, or Affiliated Companies. Name of Employee Name and Relationship Name of Employer List below any person named on the reverse side that has any ownership in, or is active in the management of, any other entity that merchandises Products. Firm Name, Address and Name Position List below any person named on the reverse side that has any ownership in, or is active in the management of, any other entity that merchandises diesel engines or parts therefor other than those marketed by Company. Firm Name, Address Name Position and Product Line REMARKS: * Stewart & Stevenson Services, Inc., common stock is publicly traded over-the- counter. No individual is currently considered as Principal Owner. However, Detroit Diesel Corporation (DDC) will view any acquisition of 10% or more of the voting stock of Stewart & Stevenson Services, Inc., by any individual, or group of individuals acting in unison, as a change in Principal Ownership and as such subject to DDC approval as set forth in Article 7.12(d) of the DDC Distributor Agreement. DA 233 (10-1-95) PRODUCTS ADDENDUM TO DISTRIBUTOR AGREEMENT (Distributor Agreement) With Stewart & Stevenson Services, Inc. Distributor Firm Name Houston, Texas City, State Effective January 1, 1996, Distributor has a non-exclusive right to buy the following new Products and Parts for use in connection with such Products. A. Detroit Diesel engines of the Series and Models/Markets identified: Engine Series Models/Markets Marine All Others Series 53 (X) (X) Series 71 (X) (X) Series 92 (X) (X) Series 149 (X) (X) Series 50/60 (X) (X) Series 55 (X) (X) 8.2 Liter (X) (X) For service purposes, Products shall include similar products formerly marketed by Company or its predecessor, Detroit Diesel Allison Division of General Motors Corporation, of the same types or series for which Distributor has been approved above. B. Perkins Engines supplied to Company by Perkins International Limited. C. Detroit Diesel Series 30 / 30G and Series 40 Engines This right to buy Series 30, 30G and 40 Engines shall be effective only to the extent that Distributors sales of such Products are for applications into which Company has been authorized to market and promote. D. Volvo Penta Engines marketed by Company of the following series: Compact Collection Series 31 - 42 Series 61 - 163 For service purposes, Products shall include similar products currently or formerly marketed by A.B. Volvo Penta, of the same or similar types or series for which Distributor has been approved above. E. Mercedes-Benz Industrial Engines This right to buy Mercedes-Benz Industrial Engines shall be effective only to the extent that Distributor's sales of such Products are for applications into which Company has been authorized to market and promote. Further, this right to buy Mercedes-Benz Industrial Engines applies to exchange engines for direct replacement purposes only. Distributor does not acquire any rights to engage in the sale of such new Products for any other purpose. F. MTU diesel engines of the Series identified: Series 183 Series 396 This right to buy MTU engines shall be effective only to the extent that Distributor's sales of such Products are for applications into which Company has been authorized to market and promote. If Company's authorization to market any of the Products shown in Paragraphs B through F of this Products Addendum is terminated, such Products may be deleted from this Products Addendum by the issuance of a new Products Addendum. In the event of such deletion, the provisions of Article 8.2 regarding repurchase of such Products, Parts and related signs shall apply. This Products Addendum shall remain in effect unless and until superseded by a new Products Addendum furnished Distributor by Company. DETROIT DIESEL CORPORATION Company By /s/ T.R. Terrell Vice President By_________________________ Regional Vice President (Distributor should file this Products Addendum with current Distributor Agreement) DA 234 (6-95) AREA OF RESPONSIBILITY ADDENDUM TO DISTRIBUTOR AGREEMENT WITH Stewart & Stevenson Services, Inc. Distributor Firm Name Houston, Texas City, State/Province Effective January 1, 1996, the area described below shall be the Area of Responsibility. The counties east of and including the counties of Hardeman, Foard, Knox, Haskell, Throckmorton, Stephens, Eastland, Comanche, Jills, San Saba, McCulloch, Concho, Menard, Kimble, Edwards and Val Verde in the State of Texas; the parishes south of and including the parishes of Beauregard, Allen, Evangeline, Saint Landry, Pointe Coupee, West Feliciana, East Feliciana, Saint Helena, Tangipahoa and Washington in the State of Louisiana; the counties of Hancock, Harrison and Jackson in the State of Mississippi; the counties of Mobile and Baldwin in the State of Alabama; all in the United States of America. Such Area of Responsibility will be used by Company in making evaluations of the effectiveness of Distributor's performance of its responsibilities under the Distributor Agreement. The Area of Responsibility will also be used in the development of sales guides and other matters relating to Distributorship Operations. The Area of Responsibility described herein will continue to be used for the foregoing purposes until it is changed in accordance with the Distributor Agreement. Detroit Diesel Corporation Company By /s/ J.R. Terrell Vice President By__________________________ Regional Vice President (Distributor should file this Products Addendum with current Distributor Agreement) DA 235 (6-95) DISTRIBUTOR LOCATIONS AND PREMISES ADDENDUM TO DISTRIBUTOR AGREEMENT This Distributorship Locations and Premises Addendum is executed pursuant to Article 6.1 of the Distributor Agreement between Company and the undersigned Distributor. Distributor and Company hereby agree that as of the date specified, Page 2 hereof, entitled Description of Distributorship Premises, identifies the Distributorship Locations and describes the Distributorship Premises at which Distributor is authorized to conduct Distributorship Operations under the Distributor Agreement. Distributor also represents that Page 2 accurately reflects the terms under which it occupies the premises and the portion used for Distributorship Operations and other uses, if any.Changes in the Distributorship Premises may be effected during the term of the Distributor Agreement in accordance with the provisions of Article 2.3 or Article 6.1.4 and shall be reflected in a new Distributorship Locations and Premises Addendum executed by Distributor and Company. Stewart & Stevenson Services, Inc. Detroit Diesel Corporation Distributor Firm Name Company By /s/ Garth C. Bates, Jr., Group Vice President By /s/ J.R. Terrell Signature and Title Vice President January 31, 1996 2/28/96 Date Date The information set forth herein has been verified for Company by: __________________________________ Name Title as of_________________________, 19__ (Distributor should file this Addendum with current Distributor Agreement) DESCRIPTION OF DISTRIBUTORSHIP PREMISES Stewart & Stevenson Services, Inc. Houston, Texas January 1, 1996 Distributor Firm Name City, State/Province As of Date A. LOCATION AND OWNERSHIP OF PREMISES
Indicate by (X) Distributorship Asset Location Address Leased If Leased, Name and Address of Lessor Main 2707 North Loop West X Mischer Development Houston, TX Houston, TX 2 8631 East Freeway X Stewart & Stevenson Realty Houston, TX Houston, TX 3 3919 Irving Blvd. X Stewart & Stevenson Realty Dallas, TX Houston, TX 5 6530 Agnes X Stewart & Stevenson Realty Corpus Christi, TX Houston, TX 5 69 Highway South X Miles McInnis & Group Beaumont, TX Dallas, TX 6 5717 I-10 East X Stewart & Stevenson Realty San Antonio, TX Houston, TX 7 2301 Central Freeway East X Bowles Children Trust Wichita Falls, TX Wichita Falls, TX 8 12955 Emmett Road X Stewart & Stevenson Realty Houston, TX Houston, TX 9 1400 Destrehan Avenue X Detroit Diesel Realty Harvey, Louisiana Detroit, MI
B. DESCRIPTION OF PREMISES LISTED IN "A" ABOVE AND PURPOSE FOR WHICH EACH IS TO BE USED BY DISTRIBUTOR
Describe Use of Premises Area in Square Feet Distance for Distributorship Operations No. Building Lot From Specify: New Products Sales, of ________________________ ________________________ Main Location Service, etc. Floors *D.O. Use **Other Use *D.O. Use **Other Use Location Main Corporate Offices 4 25,000 53,000 25,000 25,000 XXXX 2 New Product Sales, Retail Parts, Service 2 140,000 0 435,600 0 20 3 New Product Sales, Retail Parts, Service 1 100,000 0 235,000 0 250 5 New Product Sales, Retail Parts, Service 1 33,000 0 261,000 0 210 5 New Product Sales, Retail Parts, Service 1 46,000 0 75,000 0 90 6 New Product Sales, Retail Parts, Service 1 37,000 0 190,575 0 200 7 New Product Sales, Retail Parts, Service 1 11,500 0 42,500 0 380 8 Training Center & Warehouse 1 117,500 0 300,000 0 15 9 New Product Sales, Retail Parts, Service 2 77,000 0 25,000 0 375
C. LEASED PREMISES - PROVIDE INFORMATION ON EACH LOCATION DESIGNATED AS LEASED IN "A" ABOVE
Term of Lease Annual Renewal Options Location From To Rental Term and Date Lessor to be Notified Annual Rent 1/1/89 2/28/05 $ 1,000,000 $ 5/1/90 4/30/95 $ 600,000 None $ 2/1/87 1/31/97 $ 152,964 None $ 5/1/90 4/30/00 $ 88,100 None $ 5 4/15/82 4/14/97 $ 37,000 Currently in 5 Year Option $ 6 2/1/87 1/31/97 $ 174,000 None $ 7 4/1/94 3/31/96 $ 60,000 $ 8 10/1/90 9/30/00 $ 69,600 None $ 9 4/1/88 12/31/98 $ 380,000 2-3 Year Options $
*D.O. Use means the portion of premises listed in "A" above used for Distributorship Operations. **Show the portion of the distributorship premises used for any purpose other than performance of Distributor's obligation under the Distributor Agreement, and briefly describe such other use or uses. ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ DA 236 (REV 12-95) DETROIT DIESEL CORPORATION* (Hereinafter referred to as Company) Product and Parts Terms of Sale Bulletin No. 1 Issued Under Detroit Diesel Distributor Agreement Effective As Of January 1, 1996 This Terms of Sale Bulletin is furnished Distributor in accordance with the current Detroit Diesel Distributor Agreement. The prices, charges, discounts, terms of sale and other provisions referred to or contained herein shall apply to Products and Parts sold by Company or Detroit Diesel Remanufacturing Centers ("DDR") to Distributor under the provisions of the Distributor Agreement. Such prices, charges, terms of sale and other provisions referred to or contained herein shall apply to all new Products and Parts sold and shipped to Distributor on or after January 1, 1996 and shall remain in effect unless and until suspended by action of Company. I. Product Terms of Sale A. Prices The list and/or net prices and discounts applicable to new Products shall be those at time of shipment and are furnished to Distributor in pricing publications announcing new prices, as published from time to time by Company or DDR. These prices do not include taxes. B. Discounts on Products The discount to Distributor from list prices of new Products will be in accordance with and subject to the provisions of pricing publications issued by Company or DDR. Additional discounts and or allowances may be granted Distributor in accordance with and subject to the provisions of pricing publications issued by Company or DDR. C. Optional and Extra Equipment All optional and extra equipment, whether installed on or shipped with Products as part of the Product shipment or shipped separately, will be invoiced to Distributor at the prices at time of shipment shown in pricing publications issued by Company or DDR. D. Transportation Shipments of Products to Distributor will be made F.O.B. shipping point with transportation charges thereon to be paid by Distributor to the carrier. If, for the convenience of Distributor, Company or DDR prepays such transportation charges, they shall be prepaid on Distributor's behalf and for Distributor's account. E. Terms of Payment Payment of the amount at which each Product sold by Company or DDR to Distributor is invoiced to Distributor shall be made as follows: 1. through the use of Electronic Funds Transfer to Company's or DDR's bank account, or such other medium of payment as Company or DDR may agree to accept, with such payment to be made on or prior to the 10th of the month following the month of shipment of such Product, or 2. in accordance with wholesale financing arrangements, at the time of shipment of such Product, which are in effect between Company or DDR, Distributor and a financing institution, with such payment to be made on or prior to the 10th of the month following the shipment of such Product. In addition, Company or DDR, reserves the right to assess, at its discretion, a late payment charge equal to the prevailing prime interest rate plus 3.0% (calculated on an annualized basis) on the past due balances owing Company or DDR upon failure of Distributor to meet the agreed-upon terms; provided, however, that in the event that applicable federal or state law sets a maximum rate for late payment fees which is less than prime interest rate plus 3.0% (calculated on an annualized basis), the late payment charge assessed hereunder shall be set at the maximum rate for such late payment charges permitted by law. II. Parts Terms of Sale A. Prices The prices applicable to new Parts shall be those at time of shipment and are furnished to Distributor in parts price schedules or supplements thereto published from time to time by Company or DDR. B. Prepaid Transportation Normal transportation charges from shipping point to Distributor's facilities will be prepaid by Company or DDR on all individual orders to Company for Parts as outlined in applicable parts bulletins published by Company. Company or DDR reserves the right to select the carrier and method of transporting shipments referred to in this paragraph. C. Terms of Payments The account of Distributor is due and payable, as per statement rendered, less adjustments authorized by Company or DDR, on or before the thirtieth (30th) day of the month (28th) for February) following the date of billing. Payment submission via an Electronic Funds Transfer method approved by Company or DDR or such other medium of payment as Company or DDR may agree to accept is required. If such account is not paid as specified above, further shipments of Parts to Distributor will be made on a Cash in Advance basis only. In addition, Company or DDR reserves the right to assess, at its discretion, a late payment charge equal to the prevailing prime interest rate plus 3.0% (calculated on an annualized basis) on the past due balances owing Commune or DDR upon failure of Distributor to meet the agreed-upon terms; provided, however, that in the event that applicable federal or state law sets a maximum rate for late payment fees which is less than prime interest rate plus 3.0%, (calculated on an annualized basis) the late payment charge assessed hereunder shall be set at the maximum rate for such late payment charges permitted by law. D. Parts Inventory Plans Distributor may elect to return Parts to Company, or may be granted other allowances, subject to the terms and provisions of applicable parts bulletins published by Company and furnished to Distributor. E. Parts Compensation Plans Company shall compensate Distributor as provided in appropriate parts bulletins and letters published by Company and furnished to Distributor for sale of new Parts purchased from Company and sold by Distributor from its Distributorship Premises. DETROIT DIESEL CORPORATION* By /s/ Thomas R. Terrell *(In Canada: Detroit Diesel of Canada, Ltd.) (Distributor should file this Terms of Sale Bulletin with current Distributor Agreement) DA 238-V (6-95) SALES ACTIVITY ADDENDUM In accordance with Article 3.1, effective 1 January 1996, it is hereby agreed that Distributor shall maintain minimum levels, as follows: 1 Qualified, full-time sales and application specialist(s) for Products $ 400,000 Minimum Product Inventory $ 50,000 Minimum Parts Inventory It is further agreed that, if at any time Distributor's personnel or inventory levels fall below the above minimums, Distributor will take immediate steps to hire qualified personnel or purchase sufficient inventory to meet such minimum levels, as the case may be, and that, without specific approval of Company, Distributor will not remain out-of-compliance for more than 30 days in any instance or 90 days total in any year. This Addendum is subject to review by Company and may be amended by Company based on a reasonable evaluation of the potential sales for Products and Parts and the needs of users of Products in the Area of Responsibility. Stewart & Stevenson Services, Inc. Detroit Diesel Corporation Distributor Firm Name Company By /s/ Garth C. Bates, Jr. By /s/ T.R. Terrell Vice President Date Date 2/28/96 DA 239 (6-95) QUALIFIED PRODUCTS AND OEM'S ADDENDUM TO DISTRIBUTOR AGREEMENT Effective January 1, 1996, the below listed qualified Products and OEMs are considered as Excluded Sales under the provisions of Article 3.6, and payment of a service commission by Distributor will not be required for sales of these qualified Products or to these qualified OEM's. I. Qualified Products A. Products installed by Distributor in Generator Sets fabricated by Distributor B. Products upon which substantial modification has been done by Distributor prior to sale (Modification is considered substantial when cost of modification, including tooling cost pro-rated over reasonable volume, exceeds 40% of Distributor's net price for Products as purchased from Company.) C. Other: None II. Qualified OEM's A. OEM's whose sole manufacturing and purchasing locations are within the Area of Responsibility. B. OEM's who have at least one manufacturing location within the Area of Responsibility. C. Other: Sea Ray Boats Inc.: Knoxville,TN; Sykes Creek, FL; Palm Coast, FL This Addendum will remain in effect until superseded by a new Qualified Products and OEM's Addendum issued by Company, which may become effective upon 90-day notice. Receipt Acknowledged: Stewart & Stevenson Services, Inc. Detroit Diesel Corporation Distributor Firm Name Company By /s/ Garth C. Bates, Jr. By /s/ T.R. Terrell Group Vice President Vice President ADDITIONAL PROVISIONS APPLICABLE TO DISTRIBUTOR AGREEMENT Article 1. Glossary of Terms Affiliated Company Any company in which Penske Corporation or Detroit Diesel Corporation has a direct or indirect ownership interest. Agreement The Distributor Agreement that is executed by Distributor and Company, the Additional Provisions, and all related Addenda. Area of Responsibility The area described in the Area of Responsibility Addendum to this Agreement as established by Company from time to time. Authorized Dealer A business entity with whom Distributor or Company has executed a form of dealer agreement provided or approved by Company, pursuant to Article 5 of this Agreement. Detroit Diesel Distributor A business entity which is a party to a Distributor Agreement with Company or an Affiliated Company for any or all of the Products described in the Products Addendum. Detroit Diesel Remanufacturing Center ("DDR") A company or facility which has been authorized by Company to remanufacture and market reliabilt Parts. Distributorship Location(s) The location(s) approved by Company for the conduct of Distributorship Operations as identified on the Distributorship Locations and Premises Addendum. Distributorship Operations The functions, responsibilities, operations, and activities that are contemplated by this Agreement, including any optional activities undertaken by Distributor in connection with Products and Parts. Distributorship Premises The facilities approved by Company at the Distributorship Location(s) for the conduct of the Distributorship Operations as identified on the Distributorship Locations and Premises Addendum. Marks The various trademarks, service marks, names and designs owned by or licensed to Company, or an Affiliated Company, and used in connection with Products and Parts. Parts New parts or reliabilt remanufactured parts which are marketed by or for Company for use in connection with Products and which are listed in current parts catalogs, price schedules and supplements thereto furnished by Company. Products The new engines that are described in the Products Addendum, plus reliabilt Products and all past products marketed under the same trade name. Principal Manager(s) The individual manager(s) of Distributor identified in the Management and Ownership Addendum approved by Company upon whose personal service Company relies in entering into this Agreement. Principal Owner(s) Owner(s) of Distributor upon whose stated record and beneficial ownership interests in Distributor, as set forth in the Management and Ownership Addendum, Company relies in entering into this Agreement. reliabilt Products and reliabilt Parts Used Products and Parts which have been remanufactured under license agreements executed by Company and which are marketed by Company, DDR or Detroit Diesel Distributors under the reliabilt trademark. Service Policy Manual The manual of that name furnished by Company to Distributor, as modified by change notices, letters or revision sheets. Terms of Sale Bulletins Bulletins furnished by Company to Distributor setting forth the terms of sale and other provisions that apply to sales of Products and Parts by Company to Distributors as issued from time to time or as modified by any change notices, letters or revision sheets. Article 2. Company Rights and Responsibilities 2.1 General Company is responsible for determining which products it will market and the methods it will use to sell those products to Detroit Diesel Distributors or other customers. 2.2 Products and Parts Company shall determine the Products and Parts it will sell to Distributor and other customers. Company will furnish Distributor with a Products Addendum identifying Products and Parts available for purchase by Distributor. The Products Addendum may be changed by Company by furnishing Distributor with a new Products Addendum. Company is under no obligation to include all products sold by Company in Distributor's Products Addendum. Certain Products applicable to the marine market, may require particular tools, analytical and engineering equipment, personnel with expertise and training in such Products, and/or complementary components. If Distributor fails to provide or have available any of these requirements, as determined by Company in its sole discretion, so that Company has reasonable cause to believe Distributor is unable or unwilling to adequately serve this market, Company may delete Products related to this market from Distributors Products Addendum and may assume the responsibility for this market and the ability to sell to purchasers of such deleted Products within the Area of Responsibility, or Company may assign the responsibility to another Detroit Diesel Distributor. 2.3 Distributors, Branches and Authorized Dealers 2.3.1 Number and Location Company is responsible for determining the number and location of Detroit Diesel Distributors, branches and Authorized Dealers. Distributor will not establish a branch or other location for the conduct of Distributorship Operations or appoint an Authorized Dealer without the prior written approval of Company. 2.3.2 Character of Changes Company reserves the right to (a) reassign a portion of the Area of Responsibility to another Detroit Diesel Distributor; and/or (b) establish an additional Detroit Diesel Distributor in the Area of Responsibility. If Company believes any such changes are appropriate, Company and Distributor shall endeavor to reach agreement reflecting the changes to be effected, the manner in which they will be accomplished, and the time period for completing such changes. If Company determines in its sole discretion that agreement satisfactory to Company cannot be reached with Distributor, Company shall notify Distributor in writing of the changes that it will put into effect and the timing of such changes. As a result of any such changes effected by Company, Company shall furnish to Distributor a new Area of Responsibility Addendum, as required. 2.4 Sales to Distributor 2.4.1 Orders Distributor shall submit orders for Products and Parts in accordance with ordering procedures furnished Distributor by Company. Distributor's orders are not binding until accepted by Company and may be cancelled by Distributor until that time. After Company's acceptance of an order, Distributor may not modify or cancel such order without the written consent of Company, except in the case of a price increase as provided in this Article 2.4. Company may establish a reasonable cancellation charge to be paid by Distributor. If the productive capacity of Company manufacturing sources are insufficient at any time to meet the demand for Products or Parts, Company will endeavor to distribute Products and Parts in a fair and equitable manner. Company will not be liable for any delay or failure to deliver Products and Parts where caused, in whole or in part, by: (a) any strike or labor trouble affecting operations of Company, Affiliated Companies or their suppliers; (b) any shortage or curtailment of utilities, materials, transportation or labor or any shortage or damage to the facilities of Company, Affiliated Companies or their suppliers; (c) any act of government, including the enactment of laws or regulations or issuance of judicial or admin- istrative injunctions or orders; (d) any curtailment or discontinuance of production by Company, Affiliated Companies or their suppliers; (e) any cause beyond the control of Company, Affiliated Companies or their suppliers. 2.4.2 Prices and Terms of Sale Prices, charges, discounts, allowances and other terms of sale applicable to purchases of Products and Parts will be those established by Company in pricing publications and the Terms of Sale Bulletins in effect at the time of shipment to Distributor. Company has the right to change the prices, charges, discounts, allowances and other terms of sale for Products and Parts at any time. Company will give written notice to Distributor of any price increase before shipping any Products to which such increase applies. Distributor may cancel or modify the affected orders for Products by delivering a written notice of cancellation to Company within 20 days of receipt of Companys announcement of such price increase. 2.4.3 Shipments Unless otherwise agreed, Company shall arrange for shipment services on Distributor's behalf and account. Products and Parts will be shipped to Distributorship Locations or other locations authorized by Company. Company shall not be liable for any delays, losses or damages in shipment. If any Products or Parts ordered by Distributor are diverted or returned because of Distributor's delay or failure to accept delivery, Distributor will pay any additional costs incurred by Company as a result of such diversion or return. 2.4.4 Warranties on Products or Parts Company warrants new Products and Parts as set forth in documents containing those warranties that Company provides with such Products and as set forth in the Service Policy Manual. EXCEPT AS OTHERWISE PROVIDED BY LAW, THE WRITTEN COMPANY WARRANTIES ARE THE ONLY WARRANTIES APPLICABLE TO NEW PRODUCTS AND PARTS. WITH RESPECT TO DISTRIBUTOR, SUCH WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES OR LIABILITIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY LIABILITY FOR COMMERCIAL LOSSES BASED UPON NEGLIGENCE OR MANUFACTURER'S STRICT LIABILITY. EXCEPT AS MAY BE PROVIDED UNDER AN ESTABLISHED COMPANY PROGRAM OR PROCEDURE, COMPANY NEITHER ASSUMES NOR AUTHORIZES ANYONE TO ASSUME FOR IT ANY OTHER OBLIGATION OR LIABILITY IN CONNECTION WITH PRODUCTS AND PARTS, AND COMPANY'S MAXIMUM LIABILITY IS TO REPAIR OR REPLACE THE PRODUCT OR PART. 2.4.5 Change in or Discontinuance of Products or Parts Company may discontinue any Products or Parts or lines of Products or Parts or change the design or specifications of any Products or Parts at any time without notice and without incurring any obligation to Distributor. Company may install any equipment or accessories or incorporate any design features required by law on any Products or Parts ordered by Distributor, whether or not such items or features are included in Distributor's order. 2.5 Assistance to Distributors 2.5.1 Counseling Company shall counsel Distributor on sales, service and other related matters. 2.5.2 Manuals, Bulletins and Materials Company shall provide Distributor with manuals, bulletins and other materials considered appropriate by Company and will inform Distributor of any applicable charges. 2.5.3 Advertising and Sales Promotion Company shall make advertising and sales promotion programs and materials available to Distributor as considered appropriate by Company and will inform Distributor of any applicable charges. 2.5.4 Training Company shall provide training programs and materials considered appropriate by Company to assist Distributor in fulfilling its responsibilities to train personnel of Distributor, Authorized Dealer(s) and Product users. Company shall inform Distributor of any applicable charges. Company shall not be responsible for any compensation payable to personnel of Distributor, Authorized Dealer(s) or Product users while attending such courses or for related travel and living expenses. 2.5.5 Engineering Company may provide Product application guidelines and/or consulting engineering service to Distributor. Distributor's responsibility for proper installation and application shall remain the same as provided in Article 3.3. Company acknowledges that some third parties who acquire Products or Parts from Distributor may install or apply such Products or Parts independent of Distributor and that, in such instances, Distributor shall have no application or installation responsibility to such third parties or the owner/user of such Products and Parts. 2.6 Payment and Compensation for Performance of Specified Responsibilities 2.6.1 Payment for Performance of Service Responsibilities Company will pay Distributor for the replacement of Parts or will provide Distributor with the Parts required and pay for labor in accordance with the applicable provisions of the Service Policy Manual for all warranty repairs, special policy adjustments and campaign inspections or corrections performed directly by Distributor in its conduct of service operations. Company will pay Distributor in accordance with the Service Policy Manual for approved claims submitted by Distributor on behalf of Authorized Dealers in connection with their performance of warranty repairs, special policy adjustments and campaign inspections and corrections for Products and Parts for which such Authorized Dealers have service responsibilities. 2.6.2 Compensation for Performance of Specified Responsibilities Company will compensate Distributor, as provided in appropriate manuals, bulletins and letters furnished Distributor by Company, for the performance of specified service, sales, sales promotion and distribution functions. Article 3. Distributor Sales Responsibilities 3.1 Retail Sales, Wholesale Sales and Sales Promotion Activities Distributor shall aggressively and effectively perform the following sales activities in the Area of Responsibility: (a) retail sales of Products and Parts to users and prospective users. (b) wholesale sales of Products and Parts to original equipment manufacturers (OEM), and Authorized Dealers. (c) promote purchases by dealers, users and potential users of OEM products equipped with Products. Such purchases will significantly benefit Distributor and Authorized Dealers because all such expanded use of Products creates opportunities for the sale of additional Products, Parts and services. The ability of Company to sell to OEMs is substantially dependent upon such Distributor promotional activities. To clarify minimum levels of certain sales and sales promotion responsibilities, at the sole discretion of Company, Distributor and Company may periodically execute a Sales Activity Addendum applicable to selected Products which will establish the number of sales personnel assigned to such Products and the minimum inventories of such Products and Parts. Distributor acknowledges that Company has reserved the right to sell Products and Parts directly to any customers, including but not limited to, OEM's. However, nothing in this Agreement shall be construed to restrict the right of Distributor to sell any Product or Part to any customers within the Area of Responsibility, including OEM's. 3.2 Sales Efforts In furtherance of its responsibilities, Distributor shall: (a) employ a force of trained management and sales personnel considered adequate by Company; (b) build and maintain customer confidence and satis- faction; (c) establish and maintain regular contacts with prospec- tive purchasers of Products and Parts and equip- ment using Products and with others who influence purchases; (d) employ effective ethical sales, advertising and pro- motion programs and activities; and (e) actively participate in industry and trade associations and support programs for exhibiting and demonstrat- ing Products. 3.3 Application and Installation Distributor shall be responsible for proper application and installation, and for supervision of proper application and installation by a third party where appropriate, of all Products sold by Distributor. Company acknowledges that some third parties who acquire Products or Parts from Distributor may install or apply such Products or Parts independent of Distributor and that, in such instances, Distributor shall have no application or installation responsibility to such third parties or the owner/user of such Products and Parts. However, Company assumes no responsibility for the proper application or installation of any Products or Parts sold by Distributor. Distributor shall provide Company all information including End Product Questionnaires (EPQ) and Pilot Installation Descriptions (PID) requested concerning applications, modifications and installations of Products. Failures resulting from improper application, modification or installation are not the responsibility of Company. Distributor will reimburse Company for any expenses or other liabilities incurred by Company as a result of Distributors improper application, modification or installation of Products. 3.4 Sales Performance Evaluation Distributor's sales performance will be evaluated by Company based upon Distributor's sales achievement as compared to sales objectives established by Company for Distributor and to the sales achievement of other Detroit Diesel Distributors. In addition, Company will consider other relevant factors including, but not limited to: (a) the trend of Distributor's sales performance; (b) the manner in which Distributor has conducted sales operations, including advertising, sales promotion and treatment of customers; (c) sales resulting from Distributor's efforts to support Company sales to OEM's; (d) the manner in which Distributor has submitted orders for Products to Company; (e) availability of Products to Distributor; and (f) significant local conditions that may have affected Distributor's performance. 3.5 Distribution and Sale of Products and Parts In the distribution or sale of new, rebuilt or remanufactured engines, or new, rebuilt or remanufactured components or new service parts for engines or in the servicing of engines, Distributor and/or its Principal Owner(s) or Principal Manager(s) shall exclusively promote, sell, use and service Products and Parts, either in Distributorship Premises or in other locations owned, operated or managed by Distributor, Principal Owner(s), or Principal Manager(s) of Distributor, unless otherwise agreed by Company. Distributor may sell or promote products and parts which do not compete with Products and/or Parts marketed by Company if Distributor provides notice to Company of its intention to do so reasonably in advance of the commencement of such activity and if Distributor is otherwise in compliance with its responsibilities under this Agreement. 3.6 Sales Outside Area of Responsibility 3.6.1 Service Commission for Sales Outside Area of Responsibility Distributor agrees that on sales of any Products by Distributor, directly to customers outside the Area of Responsibility, or directly or indirectly to customers whose initial substantial use of the Products will be outside the Area of Responsibility including, but not limited to, sales outside the United States of America, it will pay or cause to be paid to the Detroit Diesel Distributor in whose area of responsibility the Products are sold, or where their initial substantial use occurs, a service commission as defined by and in accordance with applicable provisions of the Service Policy Manual. Distributor agrees to accept charges against its accounts with Company and other Detroit Diesel Distributors in implementing this Article 3.6. Distributor acknowledges that in actions taken by Company in implementing this Article 3.6 and remitting a service commission to the Detroit Diesel Distributor in whose area of responsibility a sale of a Product by a Detroit Diesel Distributor has taken place, or where the initial substantial use of the Product sold by Detroit Diesel Distributor occurs, Company shall act in the sole capacity of an accommodation transferor, but without liability to either party, except for its gross negligence, or assurance that such service commission, disputed or undisputed, shall be paid. Company shall effect such payment on behalf of Distributor by charging Distributor's account with Company with the amount of the service commission and crediting the other Detroit Diesel Distributor's account with Company with the amount so charged. 3.6.2 Excluded Sales In view of the active and effective efforts required of a Detroit Diesel Distributor to continuously promote and sell Products, and such sale, or the initial substantial use, of a Product may occur outside the selling Detroit Diesel Distributor's area of responsibility, a service commission on the sale of the Product shall not be paid if (i) the purchaser has a bona fide purchasing office, as solely determined by Company, in the selling Detroit Diesel Distributor's area of responsibility or (ii) if the Product is installed in a vehicle or end-product owned or operated by the customer and located in the selling Detroit Diesel Distributor's area of responsibility at time of installation, or (iii) the Product is a qualified product as listed on the selling Detroit Diesel Distributor's Qualified Products and OEM's Addendum, or (iv) the customer is a qualified OEM as listed on the selling Detroit Diesel Distributor's Qualified Products and OEM's Addendum or Company has specifically exempted a sales transaction from this provision prior to the execution of the sale. In addition, a service commission shall not be paid (i) on sales of Products to the governments or certain agencies of the United States of America or the Dominion of Canada or to certain governmental units thereof, as Company, from time to time, will delineate, for use by such government or agencies, or (ii) if the sale is to a customer who is an authorized Detroit Diesel Distributor and the selling Detroit Diesel Distributor is not in default under the distributor agreement. 3.6.3 Resolution of Disputes Distributor agrees to accept and abide by Company's decision in disputes arising with respect to service commissions payable pursuant to this section. Article 4. Distributor Service Responsibilities 4.1 General Responsibility Distributor agrees to perform directly and through Authorized Dealers, the service obligations of Company, Distributor and Authorized Dealers on all Products in the Area of Responsibility, regardless of origin of purchase. This work will be performed promptly, in a good and workmanlike manner and in accordance with the Service Policy Manual and other publications provided by Company. Except as authorized by Company, neither Distributor nor any Authorized Dealer shall charge a customer for parts or service for which Distributor or Authorized Dealer will be paid by Company or another Detroit Diesel Distributor. In furtherance of its service responsibilities, Distributor shall, at each Distributorship Location (a) employ a force of trained management and service technicians who are accredited and trained on all current Products for which Distributor is authorized by this Agreement to service; (b) establish and maintain service facilities satisfactory in appearance and size for the conduct of service operations; (c) maintain current applicable service information; (d) provide and maintain tools and equipment consid- ered necessary by Company, including at least those listed in the Special Service Tool and Equipment Lists, Distributor Training Standards Manual and other applicable bulletins for all Products for which Distributor is authorized by this Agreement to ser- vice; and (e) provide and maintain properly equipped service vehicles or other means of providing satisfactory customer service. 4.2 Warranties Distributor shall deliver, and shall require Authorized Dealers to deliver, a copy of the warranty applicable to Products or Parts to each customer purchasing a Product or Part and shall explain the provisions to any customer requesting such explanation. Such warranty shall be delivered at the time of sale, but not later than the time of delivery, of the Product or Part to the customer. Distributor shall use its best efforts to have other OEM dealers provide a copy of the warranty applicable to Products and Parts installed in OEM equipment purchased by OEM dealer's customer. Distributor shall explain and cause its Authorized Dealers to explain to customers the proper operation instructions and requirements for Products. 4.3 Warranty, Special Policy and Campaign Repairs Distributor shall perform and shall cause its Authorized Dealers to perform, in accordance with the Service Policy Manual, (a) warranty repairs on all Products and Parts qualifying for such repairs; (b) special policy adjustments approved by Company; and (c) campaign inspections and corrections that are directed by Company on Products and Parts. In performing the above work, Distributor will, unless otherwise authorized in writing by Company, use only Parts. Distributor shall provide and shall cause its Authorized Dealers to provide to each customer a copy of the repair order for the above work. 4.4 Representations as to Parts Distributor shall not, and shall assure that Authorized Dealers shall not, represent parts not marketed by Company as Parts marketed by Company. 4.5 Start-Up Inspections Distributor shall perform, or shall designate an Authorized Dealer to perform, start-up inspections on new Products qualifying for such services in accordance with provisions of the Service Policy Manual. Distributor will send to Company the required forms showing completion of such start-up inspections. 4.6 Service Performance Evaluation Distributor's service performance will be evaluated by Company based upon, but not limited to, the following factors: (a) customer confidence and satisfaction; (b) the manner and efficiency in which Distributor con- ducts service operations; (c) the adequacy of facilities, tools and equipment, and personnel; (d) the effectiveness of its Authorized Dealers; (e) accuracy of claims and processing of Applications for Adjustment ("AFA") or other payments to dealers and customers; and (f) availability of Parts for service operations. Article 5. Authorized Dealers 5.1 Appointments Distributor and Company recognize that for Distributor to properly fulfill its service, sales and promotional responsibilities relating to Products and Parts, it will be necessary for Distributor to appoint qualified dealers at locations selected by Company or proposed by Distributor in the Area of Responsibility. Each such dealer will be owned and operated independently of Distributor and its employees and owners and subject to approval by Company. When each such dealer has executed with Distributor a form of dealer agreement provided or approved by Company, Company will confirm its approval in writing to Distributor. 5.2 Failure to Appoint If Distributor fails to appoint a qualified dealer approved by Company or at a location requested by Company within ninety (90) days after receipt of such written request, Company may appoint a dealer directly. 5.3 Administration of Authorized Dealers Distributor shall provide an adequate number of capable employees to administer and advise Authorized Dealers in all phases of their operations. Distributor shall assure that the qualifications of each Authorized Dealer are maintained to adequately support customer needs for Products designated in the dealer agreement and for Parts. Distributor is responsible for training Authorized Dealer personnel in procedures and techniques applicable to the sales and service of such designated Products and Parts. Company personnel have the right to contact Authorized Dealers directly to determine the manner in which they perform their responsibilities and to provide assistance as appropriate. Article 6. Distributor Requirements 6.1 Distributorship Locations and Premises 6.1.1 Establishment of Distributorship Locations and Premises Distributor will establish and maintain Distributorship Premises at the Distributorship Location(s) approved by Company. Such Distributor Premises shall be acceptable to Company, in appearance, functionality, trademarks, cleanliness, and neatness, and adequate in size and properly equipped for the conduct of Distributorship Operations. Further, Distributor shall not, without prior written approval of Company, conduct, or allow any other person or entity to conduct, any activities in conflict with Distributor Operations at any Distributorship Location or within any building located on the property leased or owned by Distributor, Principal Owners or Principal Managers or any building contiguous to the Distributorship Premises. 6.1.2 Establishment of Distributor Branches Distributor will, upon written request by Company, establish Distributorship Premises at a branch location(s) selected by Company for the conduct of Distributorship Operations. Each such branch shall be owned and operated by Distributor. The appointment by Distributor of an Authorized Dealer will not fulfill Distributor's responsibility to establish a branch location requested by Company. If Distributor fails to establish a branch within six (6) months after receipt of a written request from Company, Company may change the Area of Responsibility, establish an additional Detroit Diesel Distributor or directly appoint a dealer at such location. 6.1.3 Execution of Distributorship Locations and Premises Addendum The Distributorship Locations and Distributorship Premises, including branch locations established by Distributor at the request of Company, and the purposes for which such Premises will be used, will be reflected in a Distributorship Locations and Premises Addendum executed by Distributor and Company. Distributor, or any of its owners, will not conduct any of the Distributorship Operations at any location that is not reflected in such Addendum. 6.1.4 Changes Proposed If Distributor desires to establish, change or eliminate any Distributorship Premises or change the use of any Distributorship Premises, it shall advise Company in writing and obtain prior written approval of any such change. Any such change approved by Company shall be reflected, when implemented, in a new and superseding Distributorship Locations and Premises Addendum. If Distributor does not obtain such prior written approval, Company may terminate this Agreement. In any event, Company may exercise its right under Article 2.3.2 to modify the Area of Responsibility or appoint an additional Distributor. 6.1.5 Business Hours Distributor shall maintain its Distributorship Premises open to serve customers during all days and hours which are customary in the trade and lawful and necessary to properly serve customers in the Area of Responsibility. Distributor shall provide emergency service in the Area of Responsibility on a seven (7) day per week, twenty-four (24) hour per day basis. 6.1.6 Signs Distributor shall install and maintain, at its own expense, only signs approved by Company at the Distributorship Premises and assure that the Authorized Dealers utilize signs approved by Company. 6.1.7 Distributor Name Distributor's business name must be approved in writing by Company. 6.2 Capital Distributor shall provide working and equity capital as mutually agreed upon by Company and Distributor to adequately fulfill Distributor's responsibilities under this Agreement. 6.3 Personnel Distributor shall provide competent management and a sufficient staff of personnel who are adequately trained to perform the Distributor's responsibilities under this Agreement. 6.4 Inventory Distributor shall maintain an inventory of Products and Parts adequate to meet the needs of Authorized Dealers and other customers located in the Area of Responsibility. Distributor will assure that Authorized Dealers maintain an inventory of Parts considered adequate by Distributor to meet the needs of Dealers' customers. 6.5 Government Regulations Distributor and Company will provide each other with such information and assistance as reasonably requested to facilitate compliance with government laws, regulations and orders relating to Products and Parts. Distributor shall be responsible for complying with applicable laws, regulations and orders. Company and its suppliers shall not be required to change their materials, designs, or production processes in any way to meet such regulations, but shall endeavor to achieve Product and Part conformance where, in their sole judgment, such conformance is practical and is economically justified. 6.6 Training In order to maintain and develop qualified personnel, Distributor shall send appropriate personnel, at its own expense, to conferences and training programs provided by Company. Distributor shall establish and maintain training programs recommended by Company devoted to training personnel of Distributor, Authorized Dealer(s) and Product users. 6.7 Accounting System, Records, Reports and Audits Distributor agrees to maintain accounting systems in a manner approved by Company. Distributor further agrees to furnish to Company complete and accurate financial statements on a periodic basis as required by Company in a form satisfactory to Company, including upon request, an annual audited financial statement for Distributorship, and if applicable, subsidiary or parent companies. Distributor shall maintain complete and accurate sales, service, parts, training and other appropriate records designated by Company in a form satisfactory to Company and shall cause its Authorized Dealers to maintain similar records. Distributor agrees to maintain such records and to cause its Authorized Dealers to maintain similar records for a minimum period of two (2) years in a form satisfactory to Company. Distributor authorizes, and will cause each Authorized Dealer to permit, any designated representative of Company to examine, audit, reproduce and take copies of any Distributor or Authorized Dealer accounts and records required under this Agreement or under the authorized dealer agreement provided or approved by Company. Company will not furnish any data submitted by Distributor to any third party unless authorized by Distributor or required by law, or pertinent to judicial or government administrative proceedings. Distributor agrees to furnish, upon reasonable notice during regular business hours, when requested by Company, accurate information covering Distributor's sales of Products and Parts and reliable forecasts of Distributor's requirements for Products and Parts. 6.8 Distributor Business Plans Using the outline furnished by Company, Distributor shall submit to Company a distributor business plan covering the items specified in such outline. A distributor business plan shall be prepared and submitted for each calendar year or for such other period as may be specified by Company. Company will advise Distributor in writing of any recommended changes in such plan. Distributor's performance will be evaluated by Company on the basis of how effectively it has met the goals and objectives set forth in the distributor business plan, including any recommendations made thereon in writing by Company. Additionally, consideration will be given to the manner in which Distributor has fulfilled its sales, service and premises responsibilities. Such evaluation will also consider performance of Authorized Dealers. 6.9 Trademarks and Service Marks 6.9.1 Ownership Distributor acknowledges and will cause each Authorized Dealer to acknowledge that Company, or an Affiliated Company is the exclusive owner or the authorized licensee of the various trademarks, service marks, names and designs used in connection with Products and Parts (herein called Marks). 6.9.2 Display and Use of Marks Distributor is granted and Distributor will grant each Authorized Dealer the non-exclusive right to display such Marks in the conduct of Distributorship Operations by Distributor and sales and service operations relating to Products and Parts by Authorized Dealers. Distributor will discontinue and will cause an Authorized Dealer to discontinue the display or use of any such Mark or change the manner in which any such Mark is displayed or used when requested to do so by Company. Distributor will not use or permit Authorized Dealers to use any Mark as part of the name under which the business of Distributor or an Authorized Dealer, or any company affiliated with Distributor or an Authorized Dealer, is conducted without the prior written approval of Company. Any such approval by Company shall be automatically rescinded upon the expiration or termination of this Agreement. During the term of this Agreement, Distributor will not use and will not permit an Authorized Dealer to use any mark or name so resembling such Marks as to be likely to confuse or deceive. Distributor shall not remove or alter Marks or other identifications used on or in connection with any Product or add any Marks or other identification without Company's prior approval. 6.9.3 Discontinuance of Use Upon Termination Upon the expiration or termination of this Agreement, Distributor will immediately discontinue and cause each Authorized Dealer to discontinue, at Distributor's and each Authorized Dealer's expense, all use and display of Marks. Thereafter, Distributor will not use, either directly or indirectly, any Marks or any other marks so resembling such Marks as to be likely to confuse or deceive. Failure of Company and Distributor to complete the purchase and sale of signs under the provisions of Article 8.2.1 of this Agreement shall not relieve Distributor of its obligation to discontinue the use of such Marks on such signs. 6.9.4 Not to be Registered by Distributor Distributor will not take any action, directly or indirectly, to register or cause to be registered any Marks in its favor or in the favor of any third party. 6.9.5 Liability for Failure to Discontinue Use Distributor shall reimburse Company, or Affiliated Companies, for all costs, legal fees and other expenses incurred by any of them in connection with legal action to require Distributor to comply with this Article 6.9. Article 7. Termination 7.1 Termination of Agreement 7.1.1 Termination by Distributor Distributor may terminate this Agreement by written notice to Company. Termination will be effective ninety (90) days after Company's receipt of such notice unless another date is agreed upon in writing. 7.1.2 Termination Due to Certain Acts or Events Each of the following represents an act or event that is within the control of Distributor or its management or owners and which is so contrary to the spirit and objectives of this Agreement as to warrant its termination: (a) the removal, resignation, withdrawal or elimination from Distributor, for any reason, of any Principal Manager or Principal Owner without the prior written approval of Company; (b) any misrepresentation to Company by Distributor or by any Principal Manager or Principal Owner in applying for this Agreement or as to the record or beneficial ownership or management of Distributor or other related business interest; (c) any attempted or actual sale, transfer or assignment by Distributor of this Agreement or any of the rights granted Distributor hereunder, or any attempted or actual transfer, assignment or delegation by Distributor of any of the responsibilities assumed by it under this Agreement, without the prior written approval of Company; (d) any change, whether voluntary or involuntary, in the record or beneficial ownership of Distributor held by the Principal Owners as set forth in the current Management and Ownership Addendum, or any acquisition, of record or beneficially, of ten percent (10%) or more of the ownership interest in Distributor by any person or persons, without the prior written approval of Company; (e) any undertaking by Distributor or any of its Principal Owners or Principal Managers to conduct, either directly or indirectly, any of the Distributorship Operations at any unapproved location; (f) any sale or other transfer, by operation of law or otherwise, or any relinquishment or discontinuance of use by Distributor, of any of the Distributorship Premises or other principal assets required or used in the conduct of the Distributorship Operations, without the prior written approval of Company; (g) any dispute or disagreement between or among the owners or management personnel of Distributor which, in the opinion of Company, may adversely affect the Distributorship Operations or the interests of Distributor or Company; (h) failure to pay accounts due to Company in accor- dance with provisions of the Terms of Sale Bulletin, if such failure occurs repetitively or if an undisputed balance is not paid within 90 days of the due date and/or failure to maintain lines of credit adequate to fulfill Distributor's responsibilities under this Agreement; (i) insolvency of Distributor; filing of a voluntary petition in bankruptcy by Distributor; filing of an involuntary petition to have Distributor declared bankrupt provided that it is not vacated within thirty (30) days from date of filing; or the appointment of a receiver or trustee for Distributor provided that it is not vacated within thirty (30) days from date of filing; or execution by Distributor of an assignment for the benefit of creditors of any foreclosure or other due process of law whereby a third party acquires rights to the oper- ation, ownership or assets of Distributor; or execu- tion by Distributor of an assignment for the benefit of creditors; (j) failure of Distributor to conduct its customary Distributorship Operations during its customary busi- ness hours for seven (7) consecutive business days; (k) conviction in a court of original jurisdiction of Distributor or any Principal Manager, Principal Owner or principal officer of Distributor of any crime which is punishable by imprisonment; or any finding by a government agency or court of original jurisdic- tion that Distributor had committed any unfair busi- ness practices which, in the opinion of Company, may adversely affect the reputation or interest of Distributor or Company; (l) any submission by Distributor to Company of false applications or claims for any payment, credit, dis- count or allowance whether or not Distributor offers or makes restitution; (m) the distribution or sale of new engines, new engine components or new service parts for engines or the servicing of engines, other than Products and Parts, except as permitted by Article 3.5 of this Agreement. (n) refusal by Distributor to furnish timely sales or finan- cial information and related supporting data, or to permit Company to make an examination or audit of Distributor's accounts and records, provided such failure or refusal continues after receipt by Distributor from Company of a written request for such informa- tion or permission; (o) willful failure of Distributor to comply with the provi- sions of any laws or regulations relating to the sale or service of Products and Parts. When Company learns that any of the foregoing acts or events has occurred, Company will endeavor to discuss it with Distributor. Thereafter, Company may terminate this Agreement by giving Distributor written notice of termination, such termination to be effective upon receipt by Distributor of such notice or at such later date as may be specified in the notice. 7.1.3 Termination for Failure of Performance If Company determines that Distributor has failed to perform any of its responsibilities under the Agreement, Company will review such failure with Distributor. As soon as practicable thereafter, Company will notify Distributor in writing of the nature of Distributor's failure of performance and of the period of time during which Distributor will be expected to remedy such failure, which shall be a minimum of three (3) months, or longer at the sole determination of Company, based on the facts. Distributor shall submit a plan to remedy the failure within 30 days of notice. If such plan has not been received in 30 days or the plan is found to be unacceptable to Company, Company may prepare a plan for Distributor setting forth the minimum remedial actions which must be implemented within a reasonable period established by Company, which shall be a least 30 days duration. In the event Distributor fails to remedy the failure of performance or to comply with the above, Company may terminate this Agreement by giving Distributor Thirty (30) days advance written notice. 7.1.4 Termination Due to Death or Incapacity Because this is a personal service contract, Company may terminate this Agreement by written notice to Distributor in the event of the death of a Principal Manager or Principal Owner or in the event Company determines that any Principal Manager is physically or mentally incapacitated so as to be unable to actively exercise full managerial authority for Distributor. The effective date of termination will be stated in such written notice and will be not less than ninety (90) days after receipt of such notice. Company shall waive its right to terminate under this provision if a plan for continuation of the Distributorship Operations has been submitted to, and approved by, Company pursuant to Article 9 of this Agreement and no substantial changes in circumstances have occurred subsequent to the approval of such plan. 7.1.5 Termination for Failure to be Licensed If Company or Distributor fails to secure or maintain any license required for the performance of its obligations under this Agreement, or such license is suspended or revoked, irrespective of the cause, either party may immediately terminate this Agreement by giving the other party written notice. 7.1.6 Termination by Agreement This Agreement may be terminated at any time by written agreement between Company and Distributor. The provisions of Article 8, relating to termination assistance, will be applicable only to the extent set forth in the written termination agreement. 7.1.7 Reliance on Any Applicable Termination Provision The terminating party may select the termination provision under which it elects to terminate without reference in its notice of termination to any other provision that may also be applicable. The terminating party may also subsequently assert other grounds for termination. 7.2 Transactions After Termination 7.2.1 Effect of Termination on Orders If Company and Distributor do not enter into a new Distributor Agreement when this Agreement expires or is terminated, all orders of Distributor shall be automatically cancelled, except as provided in this Article 7.2. Termination or expiration of this Agreement will not release Distributor or Company from the obligation to pay any amounts owing the other, or which may become due. 7.2.2 Termination Deliveries If this Agreement is terminated by Distributor, or is terminated because of the death of a Principal Manager or Principal Owner or incapacity of a Principal Manager without a termination deferral date, or if this Agreement expires and Company or an Affiliated Company or a successor company does not offer a new agreement to Distributor or to any replacement distributor that has substantially the same ownership (including total family ownership), Company will exert its best efforts to furnish Distributor with current Products to fill Distributor's bona fide customer orders on hand on the effective date of termination or expiration, not to exceed the total number of Products delivered to Distributor by Company during the ninety (90) days immediately preceding the effective date of termination or expiration, subject to the following conditions and limitations: (a) Within ten (10) days following the effective date of termination or expiration, Distributor shall deliver to Company a written schedule of Distributor's bona fide customer orders on hand on the effective date of termination or expiration. Such schedule shall show the name and address of each customer and the details with respect to each Product ordered and shall specify each bona fide order against which Distributor desires Company to make delivery up to the total number of Products required to be delivered by Company as above described. Those orders for which delivery is thus specified by Distributor, and which are approved by Company, shall constitute Distributor's schedule of termination deliveries. No change or substitution may be made by Distributor in such schedule of termination deliveries, and Company will not be obligated to make delivery of any Product to Distributor except as specified there in. In the event of Distributor's failure to deliver to Company the detailed schedule above required, Distributor shall have no further right to receive ter- mination deliveries. (b) Company may impose terms of payment different from those published in Terms of Sale Bulletins for such deliveries, based upon the business conditions at the time, and to require partial or complete pre- payment or other financial coverage by Distributor, prior to acceptance of the orders by Company. (c) Distributor shall accept any Product required to be delivered by Company under this subsection. In the event of its failure to do so, Distributor shall have no further right to receive such Product or any other Product in lieu of it. (d) Products shall be delivered by Company hereunder in substantial accordance with the schedules and basis of delivery in effect with respect to other Detroit Diesel Distributors as of the effective date of termi- nation. (e) Distributor shall give Company notice immediately of cancellation, for any reason, of any order set forth in Distributor's schedule of termination deliveries. (f) In the event of the cancellation, for any reason, of any order set forth in Distributor's schedule of termi- nation deliveries before delivery by Company of Product to apply against such order, Company shall be released from any obligation to make delivery of such Product. 7.2.3 Effect of Transactions After Termination Neither Company's sale of Products or Parts to Distributor nor any other act by Company or Distributor after termination of this Agreement will be construed as a waiver of the termination. Article 8. Termination Assistance 8.1 Deferral of Effective Date of Termination If this Agreement is scheduled to terminate because of the death of a Principal Manager or Principal Owner or incapacity of a Principal Manager and Distributor requests an extension of the effective date of termination thirty (30) days prior to such date, Company may defer the effective date for up to 18 months after such death or incapacity occurs in order to assist Distributor in concluding its Distributorship Operations. 8.2 Purchase of Personal Property 8.2.1 Company's Obligations If this Agreement expires or is terminated by either party, and Company or an Affiliated Company or a successor company does not offer a new agreement to Distributor or any replacement distributor that has substantially the same ownership (including total family ownership), Company will purchase the following items of personal property (herein called "Eligible items") from Distributor at the prices indicated: (a) New model Products which are unused, undam- aged, unmodified and not deteriorated and that are owned by Distributor on the effective date of termi- nation or expiration and purchased from Company or from another source approved by Company dur- ing the twelve (12) month period immediately pre- ceding the effective date of termination and were not purchased from Company under any special non- returnable sales conditions, at Company's net price to Detroit Diesel, Distributors in effect when Distributor purchased such Products, including transportation charges which Distributor paid for shipment of such Products to its place of business, plus reimbursement for transportation charges to the destination specified by Company, less charges for any component originally furnished on or with any such product but not included when received by Company. If requested by Company, prior to the expiration or termination date of this Agreement, Distributor shall supply Company with a complete listing of and supporting documents for products covered in this subparagraph (a), including purchase price plus the cost of inbound transportation, the nature of purchase and purchase source. (b) Unused and undamaged Parts that: (i) are still in the original, resalable merchandising packages and in unbroken lots; (ii) are listed for sale in Company's current parts price schedules (except Parts listed as obsolete or superseded); and (iii) were purchased by Distributor either directly from Company, or from a predecessor distributor as part of a stock or asset purchase approved by Company. (iv) are within reasonable stocking quantities, based on Company's ability to sell. The total amount of any specific Part number subject to such repur- chase will not exceed the amount of such Part number purchased by Distributor from Company during the 18-month period immediately prior to the date of termination or expiration of the Agreement. Distributor may be required to sup- port such purchase quantities from business records. The prices for such Parts will be Company's distributor prices as listed in the current parts price schedules in effect on the date of termination or expiration, less any applicable allowances, whether or not any such allowances were made to Distributor, when the Parts were purchased by Distributor, plus reimbursement for transportation charges to the destination specified by Company. (c) Distributor's core account with all DDR centers shall be settled prior to any purchases of reliabilt Products or reliabilt Parts, unless otherwise approved by Company. After such settlement, following policies for purchase will apply: Unused, undamaged, non-obsolete and non-super seded reliabilt Products and reliabilt Parts, which are owned by Distributor on the effective date of termi- nation or expiration at a price equal to current net price to Distributor as published by Company or DDR exclusive of refundable core charge, plus a core value equal to the fair market value of such a core as determined by DDR. If Distributor has paid a refundable core charge of a reliabilt Part or Product and had the right to return an acceptable core at the time of termination to Company for refund of the core deposit, then the core value portion of the price will be replaced with the core deposit and Distributor's right to secure such core will cease. In no event shall the price (excluding core charges) set for any reliabilt Product or reliabilt Part exceed fifty (50) percent of the distributor price as listed in Company's current price schedules for a compar- able new Product or Part on the effective date of termination. (d) Any signs owned by Distributor of a type currently recommended in writing by Company and bearing Marks, at a price based on fair market value agreed upon by Company and Distributor. If Company and Distributor cannot agree on a price, they will select a third party, who will set the price. 8.2.2 Responsibilities of Distributor Company's obligation to purchase Eligible Items is subject to Distributor fulfilling its responsibility under this Article 8.2.2. Within fifteen (15) days following the effective date of termination or expiration of this Agreement, Distributor will furnish Company with a list of unit or identification numbers of Products and such other information as Company may request pertaining to eligible Products to be purchased by Company. Distributor will deliver all such eligible Products to a destination determined by Company. Within thirty (30) days following the effective date of termination or expiration of this Agreement, Distributor will mail or deliver to Company, a complete and separate list of each of the Eligible Items, other than Products. Company will provide written shipping instructions thirty (30) days after receipt of such lists. Within thirty (30) days after receipt of instructions, Distributor will ship such Eligible Items, transportation charges prepaid, to the destination specified in the instructions. Distributor will take such action and execute and deliver such instruments as may be necessary to (1) convey to Company good and marketable title to all Eligible Items to be purchased; (2) comply with the requirements of any applicable law relating to bulk sales or transfer; and (3) satisfy and discharge any liens or encumbrances on Eligible Items prior to their delivery to Company. If Company provides termination assistance under both Articles 8.2 and 8.3, within thirty (30) days following the effective date of termination or expiration of this Agreement, Distributor or Distributor representatives will be responsible for the removal of all parts, products or other material not purchased by Company from the affected Distributorship Premises, subject to reasonable conditions as Company or assignee shall impose regarding access to the facilities. 8.2.3 Payment by Company Company will pay Distributor for the Eligible Items purchased by it as soon as practicable following delivery to the destination specified by Company. Company may make any payment for such Eligible Items directly to anyone claiming a security or ownership interest in such Eligible Items. If Company has not paid Distributor the purchase price of the Eligible Items within sixty (60) days after delivery Company will, at Distributor's written request, estimate the purchase price of the unpaid Eligible Items and all other amounts owed Distributor by Company. After deducting the amounts estimated to be owing Company by Distributor, Company will advance Distributor seventy-five percent (75%) of the net amount owed Distributor and will pay the balance, if any, as soon as practicable thereafter. Company may withhold payment or final payment until Distributor fulfills its obligations relating to discontinuance of use of Company Marks upon termination as set forth in Article 6.9.3. Company shall be relieved of any obligation to purchase Eligible Items pursuant to this Article 8.2 if Company is prohibited for any reason from exercising its rights under Article 10.8. 8.2.4 Assignment of Rights If Company decides to appoint a replacement distributor at Distributor's location, Distributor may sell its Eligible Items and, if approved in writing by Company, assign its rights under this Article 8.2 to Company's designated replacement distributor, provided the replacement distributor assumes Distributor's obligations under this Article 8.2. 8.3 Assistance on Distributorship Premises 8.3.1 Company's Obligation Company agrees to give Distributor the assistance provided by this Article 8.3 with regard to Distributorship Premises if (a) this Agreement is terminated by Company for failure of performance of Distributor or because of the death of a Principal Manager or Principal Owner or incapacity of a Principal Manager without a termination deferral date, or if this Agreement expires; and (b) Company or an Affiliated Company or a successor company does not offer a new distributor agreement to Distributor or to any replacement distributor that has substantially the same ownership (including total family ownership). Such assistance shall be given only on Distributorship Premises that are described in the Distributorship Locations and Premises Addendum and to the extent that such Premises are used solely for Distributorship Operations. Company shall be relieved of any obligation to provide the assistance pursuant to this Article 8.3 if Company is prohibited for any reason from exercising its rights under Article 10.8. Any request by Distributor for such assistance must be in writing and received by Company within thirty (30) days of the expiration or termination of this Agreement. Distributorship Premises that consist of more than one parcel of property or more than one building, each of which is separately usable, distinct and apart from the whole or any other part with appropriate ingress or egress, shall be considered separately under this Article 8.3. 8.3.2 Owned Distributorship Premises Company will provide assistance on owned Distributorship Premises by either: (a) locating a purchaser who will offer to purchase at a reasonable price that portion of the Distributorship Premises used in the promotion or sale and servicing of Products and Parts; or (b) locating a lessee who will offer to lease the premises for a reasonable term at a reasonable rent. If Company does not locate a purchaser or lessee within a reasonable time, Company will itself either purchase for a reasonable price or, at its option, lease, at a reasonable rent, for a reasonable term equal to the lesser of the remaining term of the current lease or the remaining term of the current Agreement, but in no case less than 12 months, that portion of the Distributorship premises used solely in the promotion, sale or servicing of Products and Parts. Rather than purchase or lease, at its election, Company may pay a Distributor a sum equal to the amount which would be due under this Article 8.3.2 (as determined by the above paragraph) immediately following the effective date of termination of this Agreement on that portion of the Distributorship Premises used solely for Distributorship Operations. 8.3.3 Leased Distributorship Premises Company will provide assistance on leased Distributor- ship Premises by either: (a) locating a tenant(s) satisfactory to the lessor, who will sublet for the balance of the lease or assume the lease; or (b) arranging with the lessor for the cancellation of the lease without penalty to Distributor; or (c) reimbursing Distributor for the rent specified in the lease or settlement agreement for the lesser of the remaining term of the current lease or the remaining term of the current Agreement, but in no case less than 12 months. Upon request, Distributor will use its best efforts to effect a settlement of the lease with the lessor, subject to Company's prior approval of the terms of such settlement. Company is not obligated to reimburse Distributor for rent for any month during which the Distributorship Premises are occupied by Distributor or anyone else after the first (1st) month following the effective date of termination or expiration. 8.3.4 Reasonable Rent and Reasonable Price Company and Distributor will fix the amount of a reasonable rent and a reasonable price for the Distributorship Premises by agreement at the time Distributor requests assistance. The factors to be considered in fixing those amounts are: (a) the adequacy and desirability of the Distributorship Premises for an authorized power products distribu- torship operation; and (b) the fair market value of the Distributorship Premises. If Company and Distributor cannot agree, the fair market value shall be that determined by the median appraisal of three qualified real estate appraisers, of whom Distributor and Company shall each select one, and the two selected shall select a third. The cost of required appraisals shall be shared equally by Distributor and Company. 8.3.5 Limitations on Obligation to Provide Assistance Prior to any assistance under Articles 8.3.2 and/or 8.3.3 related to the real property of a specific Distributorship Location, Distributorship will provide a recent phase I environmental report, or other customary report, acceptable to Company, which indicates compliance with all applicable environmental laws and regulations. Company shall not provide assistance under either Article 8.3.2 or 8.3.3 unless Distributor shall, prior to Company or its assignees taking possession of the facility, have remedied to Company's satisfaction, any violations of such laws and regulations, whether determined under such prior assessments or assessments conducted by Company prior to execution of termination assistance under this Article. In addition, Company shall not be olbigated to provide assistance on Distibutorship Premises if Distributor: (a) fails to accept a bona fide offer from a prospective purchaser, sublessee or assignee; (b) refuses to execute a settlement agreement with the lessor if such agreement would be without cost to Distributor; (c) refuses to use its best efforts to effect a settlement when requested by Company; (d) refuses to permit Company to examine Distributor's books and records, if necessary, to verify claims of Distributor under this Article 8.3. Any amount payable by Company as rental reimbursement or reasonable rent shall be proportionately reduced if the Distributorship Premises are leased or sold to another party during the period for which such amount is payable. Payment of any such rental reimbursement or reasonable rent shall be waived by Distributor if it does not file its claim therefor within sixty (60) days after the expiration of the period covered by the payment. Upon request, Distributor will support its claim with satisfactory evidence of its accuracy and reasonableness. 8.4 Company's Right of First Refusal At any time that Distributor has received a bona fide written buy/sell agreement for the sale or other disposition of any portion or all of any of its Distributorship Operations, it shall give written notice to Company, setting forth the price, terms and conditions thereof. As soon as possible, but no later than forty-five (45) days after receipt of such notice, Company may elect to purchase the Distributorship Operations at the same terms and conditions as set forth in the written buy/sell agreement. Upon written notice to Distributor of its election hereunder, Company shall assume the buyer's rights and obligations under such agreement. After being exercised, Company's rights may be assigned to any party and Company hereby agrees to guarantee the full payment of the purchase price by such assignee. Article 9. Successor and Replacement Distributor 9.1 Rights of Company 9.1.1 Selection of Distributors Company has the right to select each successor and replacement distributor and to approve its principal manager(s) and principal owner(s) and the location of its distributorship facilities. Company shall endeavor to select the most suitable candidate in each circumstance. 9.1.2 Review of Applications In selecting replacement distributors, Company may process applications for a replacement distributor agreement, and may consult with applicants on any aspect of the proposal or Company requirements, at any time after a notice of termination or expiration has been served or Distributor has proposed a sale of assets or change of ownership or management. Any such replacement distributor agreement shall not become effective prior to the effective date of termination or expiration of this Agreement. 9.2 Succession Rights Upon Death or Incapacity 9.2.1 Rights Under Successor Addendum Upon request, Company will execute with Distributor a Successor Addendum designating proposed principal manager(s) and/or principal owner(s) of a successor distributorship to be established if this Agreement expires or is terminated because of death or incapacity. The Successor Addendum must be executed by all owners and Principal Managers. To be named in the Successor Addendum, a proposed principal manager must be, and must continue to be, employed on a full-time basis by Distributor or a comparable distributorship and be already qualified or be in training to qualify as Principal Manager. All proposed owners must be acceptable to Company. Company will, upon request, execute a new Successor Addendum upon the expiration of this Agreement provided a new and superseding distributor agreement is executed with Distributor, and the proposed principal manager complies with the current requirements to be considered as a successor. 9.2.2 Rights of Remaining Distributor Principal Managers and Owners If this Agreement expires or is terminated because of death or incapacity and Distributor and Company have not executed a Successor Addendum, the remaining Principal Manager(s) or if there is no remaining Principal Manager, the remaining owners may propose a successor distributor entity to continue the Distributorship Operations at the Distributorship Location. The proposal must be made at least sixty (60) days prior to the expiration or termination of this Agreement by submitting a written proposal to Company. The proposal shall be accepted by Company if it complies with the requirements of Article 9.2.3 and Distributor has not been previously notified by Company that it may discontinue Distributorship Operations at the Distributorship Location. 9.2.3 Successor Distributor Requirements Company will give first consideration to, and will not arbitrarily refuse to accept, a proposal to establish a successor distributor submitted under this Article 9.2, provided: (a) the proposed successor owner and the proposed principal manager are ready, willing and able to com- ply with the requirements of a new distributor agree- ment at an approved location; (b) Company approves the proposed principal manager and all proposed owners not previously approved in connection with the existing Distributorship Operations; and (c) the proposed principal manager will own an unen- cumbered ownership interest of at least ten percent (10%) (or less if approved by Company) in the pro- posed distributor. 9.2.4 New Successor Addendum Distributor may cancel an executed Successor Addendum at any time prior to the death of any party named as Principal Manager. Company may cancel an executed Successor Addendum only if the proposed principal manager no longer complies with the requirements of Article 9.2.1. The parties may execute a new and superseding Successor Addendum by mutual agreement. 9.3 Other Changes in Management and Ownership or Sale of Assets Distributor shall give Company prior written notice of any proposed change in its Principal Manager(s) or Principal Owner(s) or any proposed disposition of its principal assets. In turn, Company agrees to consider Distributor's proposal under the standards identified in this Agreement and not to arbitrarily refuse to agree to such proposal. In determining whether the proposal is acceptable to it, Company will take into account factors such as the personal, business and financial qualifications of the proposed principal manager and principal owner, as well as Company's interest in promoting and preserving competition. Distributor shall be notified in writing of Company's agreement or disagreement to Distributor's proposal within sixty (60) days after Distributor has furnished all applications and information reasonably requested by Company to evaluate such proposal. Any proposed change in management and/or ownership that is acceptable to Company will be reflected by the execution of a new and superseding Management and Ownership Addendum or a new Distributor Agreement. Distributor acknowledges that the occurrence of any such change or disposition without prior written agreement by Company is cause for termination of this Agreement. Any material change in Distributor's proposal shall be treated as a new proposal for purposes of this Article 9. Prior written approval is not required where the transfer of ownership to an individual is not more than ten (10) percent in a calendar year and (a) pursuant to a Company approved agreement; or (b) between existing owners of Distributor previously approved by Company where there is no resulting change in majority ownership or voting control, and provided the Principal Manager's ownership interest will not be reduced below ten (10) percent (unless approved otherwise by Company). Distributor agrees to notify Company within thirty (30) days of the date of the change and to execute a new Management and Ownership Addendum. Article 10. General Provisions 10.1 No Agent or Legal Representative This Agreement does not make either party the agent or legal representative of the other for any purpose whatsoever, nor does it grant either party any authority to assume or to create any obligation on behalf of or in the name of the other. Neither party owes the other any fiduciary obligation. 10.2 Distributor's Responsibility for Its Operations Except as provided otherwise in this Agreement, Company has no liability in connection with the establishment or conduct of the Distributorship operations, and Distributor will be solely responsible for all expenditures, liabilities and obligations incurred or assumed by Distributor in connection with Distributor's responsibilities under this Agreement. 10.3 Taxes Distributor will pay all local, state, federal or other applicable taxes and file required tax returns related to its Distributorship operations and will hold Company harmless from any claims or demands made by any taxing authority with respect thereto. 10.4 Indemnification by Company Upon prior written request, Company will assume the defense of Distributor and indemnify Distributor against any judgment for monetary damages, less any offset recovered by Distributor, in any lawsuit naming Distributor as a defendant and relating to any Product or Part that has not been altered when the lawsuit concerns: (a) breach of the Company warranty related to the Product or Part, bodily injury or property damage claimed to have been caused solely by a defect in the design, manufacture or assembly of a Product or Part by Company (other than a defect which should have been detected by Distributor in a reasonable inspection of the Product or Part); (b) failure of the Product or Part to conform to the description set forth in advertisements or product brochures distributed by Company because of changes in standard equipment or material compo- nent parts unless Distributor received notice of the changes prior to retail delivery of the affected Product or Part by Distributor; or (c) any substantial damage to a Product or Part pur- chased by Distributor from Company which has been repaired by Company unless Distributor has been notified of the repair in writing prior to retail delivery of the affected Product. If Company reasonably concludes that allegations other than those set forth in Article 10.4(a) through 10.4(c) above are being pursued in the lawsuit, Company shall have the right to decline to accept the defense or indemnify Distributor or, after accepting the defense, to transfer the defense back to Distributor and withdraw its agreement to indemnify Distributor. Procedures for requesting indemnification, administrative details, and limitations are contained in the Service Policy Manual. The obligations assumed by Company are limited to those specifically described in this Article 10.4 and in the Service Policy Manual and are conditioned upon compliance by Distributor with the procedures described in the Service Policy Manual. This Article 10.4 shall not affect any right either party may have to seek indemnification or contribution under any other contract or by law and such rights are hereby expressly preserved. 10.5 Notices Any notice required to be given by either party to the other in connection with this Agreement will be in writing and delivered personally or by mail. Except as otherwise specifically set forth in Article 10.4, notices to Distributor will be directed to Distributor or its representatives at Distributor's principal place of business and notices by Distributor will be directed to the Company at its headquarters address. Notices in respect of matters other than termination or modification of this Agreement may instead be transmitted by means of cable, telex, or facsimile transmission. 10.6 No Implied Waivers The failure of either party to require performance by the other party of any provision hereof will in no way affect the right to require such performance at any time thereafter. The waiver by either party of a breach of any provision hereof shall not constitute a waiver of any succeeding breach of the same or any other provision nor constitute a waiver of the provision itself. 10.7 Assignment of Rights Except as provided in this Agreement, neither this Agreement nor the rights or obligations of the Distributor hereunder may be sold, assigned, delegated or otherwise transferred without the written approval of Company. Company may assign this Agreement, assign any rights or obligations under this Agreement, or delegate any performance obligations under this Agreement to any Affiliated Company or successor company and will provide written notice of any such assignment or delegation to Distributor. 10.8 Accounts Payable In addition to any right of set off provided by law, all monies or accounts due Distributor shall be considered net of indebtedness of Distributor to Company (including indebtedness arising from the chargeback to Distributor of any claims previously credited to Distributor and subsequently found to have been not properly payable) and Company may deduct any amounts due or to become due from Distributor to Company or any amounts held by Company from any sums or accounts due or to become due from Company to Distributor. 10.9 Applicable Law This Agreement is governed by the laws of the State of Michigan. However, if performance under this Agreement is illegal under a valid law of any jurisdiction where such performance is to take place, the performance will be modified to the minimum extent necessary to comply with such law if it was effective on the date of execution of this Agreement. 10.10 Sole Agreement of Parties Except as otherwise provided or referred to herein, Company has made no promises to Distributor or any Principal Manager or Principal owner and there are no other agreements or understandings, either oral or in writing, between the parties affecting this Agreement or relating to any of the subject matters covered by this Agreement. Except as otherwise provided herein, this Agreement cancels and supersedes all previous agreements between the parties that relate to any matters covered herein. No agreement between Company and Distributor which relates to matters covered herein, and no change in, addition to (except the filling in of blank lines) or erasure of any printed portion of this Agreement, will be binding unless it is approved in writing in accordance with Paragraph SIXTH of this Agreement. 10.11 New and Superseding Agreements In the event a new and superseding form of distributor agreement is offered by Company to Detroit Diesel Distributors generally at any time prior to the expiration of the term of this Agreement, Company may terminate this Agreement by prior written notice to Distributor, provided Company offers Distributor a new agreement in the new and superseding form for a term of not less than the then unexpired term of this Agreement. Unless otherwise agreed in writing, the rights and obligations of Distributor that may become applicable upon any termination or expiration of the term of this Agreement shall not be applicable in the event of the execution by Company and Distributor of any new and superseding agreement. The matured rights and obligations of the parties hereunder shall continue under the new agreement. Distributor's performance under any prior agreements may be considered in an evaluation of Distributor's performance under this, or any succeeding, agreement. 10.12 Captions The captions in this Agreement are for convenience of reference only and will not otherwise affect the meaning hereof. 10.13 Severability The provisions of this Agreement shall be severable, and the invalidity or the unenforceability of any provisions hereof shall not affect the validity or enforceability of the remaining provisions. 10.14 Language The parties hereto acknowledge that they have requested that this Agreement and any and all documents in any way related thereto or in any way evidencing contractual relationships between the parties hereto be drawn up in the English language only. Les parties aux presentes reconnaissent avoir demande que cette entente ainsi que tous les documents de quelque nature que ce soit s'y rapportant ou constatant les relations contractuelles entre les parties aux presentes, ne soient rediges qu'en anglais seulement. EX-21 3 EXHIBIT 21.1 SUBSIDIARIES OF STEWART & STEVENSON SERVICES, INC. The following list sets forth the name of each subsidiary of the Company, which is also the name under which such subsidiary does business: Jurisdiction of Names under which Incorporation business is Or Organization conducted __________________ _______________ C. Jim Stewart & Stevenson, Inc. Delaware Stewart & Stevenson CPS International, Inc. Panama None Creole Stewart & Stevenson, Inc. Delaware None 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 Tokumei Kumiai Holdings, Inc. Delaware None The Company has additional subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. /TABLE EX-23 4 EXHIBIT 23-1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in Registration Statement No. 33-21515 on Form S-8 dated April 28, 1988, Registration Statement No. 33-22463 on Form S-8 dated June 13, 1988, Registration Statement No. 33-65404 on Form S-8 dated July 1, 1993, Registration Statement No. 33-52881 on Form S-8 dated March 30, 1994, Registration Statement No. 33-52903 on Form S-8 dated March 30, 1994, Registration Statement No. 33-54389 on Form S-4 dated June 30, 1994, Registration Statement No. 33-58679 on Form S-8 dated April 18, 1995 and Registration Statement No. 33-58685 on Form S-8 dated April 18, 1995 of our report dated March 14, 1996 included in Stewart & Stevenson Services, Inc.'s Form 10-K for the fiscal year ended January 31, 1996. /s/ Arthur Andersen LLP Houston, Texas April 25, 1996 EX-27 5
5 THIS SCHEDULE CONTAINS 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-31-1996 JAN-31-1996 6,325 0 197,957 (1,409) 678,573 881,839 243,491 (116,436) 1,040,583 330,080 210,800 163,409 0 0 308,506 1,040,583 1,233,981 1,233,981 1,041,051 1,041,051 101,022 0 13,884 91,908 30,665 61,803 0 0 0 61,803 1.87 1.87
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