-----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, PVcBHuUzve5CDKv7lptSsJItXK/aM+ZlGqu9FZbOv7NusQJizCDmG4ptUOhKZoec FZJ/rhuK31w+/N6U83HzEg== 0000890566-99-000593.txt : 19990504 0000890566-99-000593.hdr.sgml : 19990504 ACCESSION NUMBER: 0000890566-99-000593 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990503 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-K405 SEC ACT: SEC FILE NUMBER: 001-11443 FILM NUMBER: 99608416 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-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 31, 1999 ("Fiscal 1998") 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. [X] AGGREGATE MARKET VALUE OF VOTING SECURITIES HELD BY NONAFFILIATES AS OF MARCH 2, 1999: $200,174,184 NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF MARCH 2, 1999: COMMON STOCK, WITHOUT PAR VALUE 27,984,035 SHARES DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT PART OF FORM 10-K Proxy Statement for the 1999 Annual Meeting of Shareholders Part III 1 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 the custom fabrication of engine driven products. Stewart & Stevenson consists of three major business segments: the Power Products segment, the Tactical Vehicle Systems segment, and the Petroleum Equipment segment. Effective as of January 31, 1998, the Company sold the net assets of its Gas Turbine Operations Division ("GTO") to the General Electric Company ("GE"). Accordingly, the operating results of GTO have been segregated from continuing operations and reported as a separate line item on the Consolidated Statement of Earnings. The Company has restated its prior financial statements to present the operating results of GTO as a discontinued operation and reorganized the remaining businesses into the current business segments. 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 1998" commenced on February 1, 1998 and ended on January 31, 1999. Identifiable assets at the close of Fiscal 1998, 1997 and 1996, net sales and operating profit for such fiscal years for the Company's business segments, export sales, and sales to customers representing 10% or more of consolidated sales are presented in "Note 4: Segment Data". POWER PRODUCTS SEGMENT The Power Products segment sells and rents various industrial equipment; sells components, replacement parts, accessories and other materials supplied by independent manufacturers; and provides in-shop and on-site repair services for industrial equipment. Some of the equipment sold or rented by the Power Products segment is acquired by the Company from independent manufacturers pursuant to distribution agreements. The following table contains the name of each significant 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 Heavy Duty High Speed Diesel Texas, Colorado, Northern California, New Mexico, 2001 Corporation Engines Wyoming, Nebraska, Louisiana, Mississippi, ("Detroit Diesel") Alabama, Venezuela and Colombia Electro-Motive Division Heavy Duty Medium Speed Texas, Colorado, New Mexico, Nebraska, Oklahoma, 1999 of General Motors Diesel Engines Arkansas, Louisiana, Tennessee, Mississippi, Corporation Kansas, Alabama, Mexico, Central America and most of ("EMD") South America Allison Transmission Division On- and Off-Highway Automatic Texas, Colorado , Northern California, New Mexico, 2001 of General Motors Transmissions, Power Shift Wyoming, Nebraska, Louisiana, Mississippi, Corporation ("Allison") Transmissions and Torque Converters Alabama, Venezuela and Colombia Hyster Company Material Handling Equipment Texas * John Deere Industrial Construction, Utility and Wyoming * Equipment Company Forestry Equipment Thermo King Transport Refrigeration Southeast Texas and Southern Louisiana 1999 Corporation Equipment Waukesha Engine Natural Gas Industrial Engines Colorado, Northern California, Montana, North 2001 Division of Dresser Dakota, Oklahoma, Wyoming, New Mexico, Utah, Industries, Inc. Oregon, Hawaii, Kansas, Arizona, California, Washington, Nevada, Colombia and China Kohler Company Spectrum Generator Sets Colorado, Southern Louisiana, New Mexico, Texas, * and Wyoming KHD - Deutz Corporation Diesel Engines Colorado, Wyoming, Arizona, New Mexico, * Washington and Alaska, Texas, Oklahoma, Kansas, Arkansas, Louisiana, Mississippi, Western Tennessee
- ------------------------ * No expiration date. Agreements may be terminated by written notice of termination. 2 Distribution agreements generally require the Company to purchase and stock the products for resale to end users, original equipment manufacturers, or independent dealers within the franchise area of distribution. Such agreements may contain provisions restricting sales of products outside of the franchised territory and prohibiting the sale of competitive products within the franchise territory. The Power Products segment also sells custom generator sets, pump packages, marine propulsion systems, and other engine-driven equipment. Generator sets fabricated by the Company range in size from 25 kw to 12,700 kw. Pump packages, marine propulsion systems and other engine-driven packaged equipment fabricated by the Company range in size from 35 hp to 7,000 hp. Most generator sets and other engine-driven packaged equipment are based upon diesel, dual fuel or natural gas fueled engines supplied by independent manufacturers with whom the Company has a distribution or packaging agreement. Such agreements do not usually restrict the sale of packaged equipment to a franchised territory and the products fabricated by the Company are sold on a world-wide basis. The Company's major distribution agreements also require the Company to stock repair parts, components, and accessories for resale to end users, either directly by the Company or through a dealer network; and to provide after market service support for distributed products within the franchised territory. The Company also offers in-shop and on-site repair services for related equipment manufactured by companies with whom it does not have a distribution agreement. Power Product segment operations are conducted at branch facilities located in major cities within the Company's franchised area of operations. New products manufactured by suppliers, repair parts, components and accessories are marketed under the trademarks and trade names of the original manufacturer. Products fabricated by the Company and after market service are marketed under the "Stewart & Stevenson" name and other trademarks, trade names, and service marks owned by the Company. 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. Any interruption in the supply of materials from the original manufacturers or a termination of a distributor agreement could have a material effect on the performance of the Power Products segment. Operations of the Power Products segment accounted for approximately 46%, 50% and 62%, respectively, of consolidated sales during Fiscal 1998, 1997 and 1996. TACTICAL VEHICLE SYSTEMS SEGMENT The Tactical Vehicle Systems segment assembles The Family of Medium Tactical Vehicles ("FMTV") under contracts with the U. S. Army. The initial FMTV contract was awarded in 1991 and called for the production of approximately 11,200 2 1/2-ton and 5-ton trucks in several configurations, including troop carriers, wreckers, cargo trucks, van and dump trucks. Most of the production pursuant to the original FMTV contract was completed as of January 31, 1999. During October 1998, the Company received a second set of multi-year contracts from the U.S. Army that provides for continued production of the FMTV through Fiscal 2002, with a one year option that would extend the contracts through Fiscal 2003. The second FMTV contract incorporates an environmentally compliant engine, improved diagnostics system, anti-lock brakes and other improvements. Production of approximately 7,800 trucks and 1,500 trailers under the second contract is expected to begin in the third quarter of Fiscal 1999. If all options are exercised, the second contract will have a total value of $1.36 billion. The U.S. Army has directed the Company to make certain changes in drive train components of all vehicles produced under the first FMTV contracts. The Company commenced the installation of the directed changes during the current fiscal year and, subject to availability of vehicles, expects to complete the changes by the end of Fiscal 2000. The financial responsibility for the cost of the drive train change, as well as claims filed by the Company for the costs of government caused delays and other government-directed changes under the first FMTV contract, have not been resolved. The Company also sells the FMTV to other government contractors as a platform for installation of other equipment which is then resold to the Armed Forces. Stewart & Stevenson believes that there will be opportunities to sell additional vehicles to the U.S. Army, to other branches of the U.S. Armed Forces, and to the armed forces of foreign countries. The FMTV contracts allow for such sales, and the Company's facility has the capacity to produce vehicles for those additional sales. The United States Government is the predominant customer of the Tactical Vehicle Systems segment, accounting for practically all of the sales of this segment. The FMTV contracts are subject to termination at the election of this customer. The loss of this customer would have a material adverse effect on the Company's consolidated future financial condition and results of operations. 3 The FMTV incorporates engines, transmissions, axles, and a number of other components specified by the U.S. Army and available only from the source selected by them. Interruption of the supply of any of these components could affect the ability of the Company to deliver vehicles under the contract. The Company believes that any delays arising from the unavailability of source-specified components would be fully compensated under the FMTV contracts. Operations of the Tactical Vehicle Systems segment accounted for approximately 38%, 36%, and 24%, respectively, of consolidated sales in Fiscal 1998, 1997, and 1996. PETROLEUM EQUIPMENT SEGMENT The Petroleum Equipment segment manufactures equipment for oil and gas exploration, production, and well stimulation industries. Its products include marine riser systems, blow-out preventers and controls, high pressure valves, coil tubing systems, acidizing and fracturing systems, and compression molded rubber products. Many of its products are manufactured according to proprietary designs and are covered by appropriate process and apparatus patents. Other products may be manufactured according to the designs or specifications of its customers. The Petroleum Equipment segment purchases many of the components incorporated into its products from independent suppliers. Some of these components are manufactured according to designs and specifications owned by the Company and protected from disclosure by confidentiality arrangements. Other components are standard commercial or oilfield products and may be acquired under the distribution or packaging agreements as discussed under "Power Products Segment" above. The Company believes that the Petroleum Equipment segment is not dependent on a single supplier of any critical component. The Company sells oilfield equipment under the "Stewart & Stevenson" trade name and compression molded rubber products under the "H & H Rubber" trade name. All of the Petroleum Equipment segment's products are sold world-wide. Demand for oilfield equipment is substantially dependent on the price trends for crude oil. Operations of the Petroleum Equipment segment represented 10%, 7%, and 7%, respectively, of consolidated sales during Fiscal 1998, 1997, and 1996. OTHER BUSINESS ACTIVITIES The Company is engaged in other business activities that are not included in any of its three major business segments. Other businesses include airline ground support equipment (including tow tractors, air start units, electrical ground power units, air conditioning units, and baggage handling equipment), fabrication of gas compression equipment, and operating gas compression equipment under maintenance or lease agreements. COMPETITION The Company encounters strong competition in all segments of its business. Competition involves pricing, quality, availability, range of products and services, and other factors. Some of the Company's competitors have greater financial resources than Stewart & Stevenson and manufacture some of the major components that the Company must buy from independent suppliers. The Company believes that its reputation for quality engineering and after-sales service, with single-source responsibility, are important to its market position. The Power Products 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. No single competitor competes against the Company's Power Products segment in all of its businesses, but certain competitors may have a dominant position in different product areas. Major competitors in the sale of packaged diesel and gas-fired reciprocating equipment include Caterpillar, Inc. and its distributors, and Waukesha Diesel Group and its distributors. The Tactical Vehicle Systems segment competes with domestic companies for incremental sales to the U.S. Armed Forces. Two other truck manufacturers have received government funding to qualify as a second potential source for the FMTV and may compete for incremental sales to the U.S. Army. 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 companies that have greater international recognition as vehicle manufacturers. The Petroleum Equipment segment competes primarily with other manufacturers of similar equipment. Products are differentiated by protected technology and no manufacturer has a dominant position in any product line. Major competitors include Cooper 4 Cameron Corporation in blow-out preventers and valves, ABB Vetco, Inc. in riser systems, Caterpillar, Inc. and Halliburton Corporation in fracturing and acidizing equipment, and Tuboscope Corporation in coil tubing systems. INTERNATIONAL OPERATIONS International operations are subject to the risks of international political and economic changes, such as changes in foreign governmental policies, currency exchange rates, and inflation. The Company maintains operations in various foreign jurisdictions, some of which may be considered politically or economically volatile. Where appropriate to avoid risk of loss of a material asset, the Company purchases insurance against political risks. International sales are also subject to changes in exchange rates, government policies, 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. 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 relating to continuing operations at the close of Fiscal 1998 and Fiscal 1997 were as follows: ESTIMATED PERCENTAGE TO BE UNFILLED ORDERS AT RECOGNIZED IN ------------------- FISCAL 1999 1/31/99 1/31/98 ----------------- -------- --------- (Dollars in millions) Tactical Vehicle Systems 17% $ 991.7 $ 487.0 Power Products 100 69.9 69.6 Petroleum Equipment 100 38.6 44.7 All Other 100 17.9 12.8 -------- --------- $1,118.1 $ 614.1 ======== ========= Unfilled orders of the Tactical Vehicle Systems segment at January 31, 1999 consisted principally of a follow-on contract awarded in October 1998 by the United States Department of Defense to manufacture medium tactical vehicles for the U.S. Army. EMPLOYEES At January 31, 1999, the Company employed approximately 4,240 persons. The Company considers its employee relations to be satisfactory. ITEM 2. PROPERTIES. The Company maintains its corporate executive and administrative offices at 2707 North Loop West, Houston, Texas, which occupy about 65,000 square feet of space leased from a limited partnership in which the Company owns an 80% interest. Activities of the Power Products segment are coordinated from Houston, where the Company owns 320,000 square feet of space at three locations and leases 44,900 square feet in two locations devoted to equipment and parts sales and service. To service its distribution territory (See "Item 1. Business -- Power Products Segment"), Stewart & Stevenson maintains Company-operated facilities occupying 656,000 square feet of owned space and 430,000 square feet of leased space in 28 cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah, North Dakota, Kansas, Washington, Georgia, California, Mississippi, Arizona and Arkansas. 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 123,000 square feet of warehousing facilities in Houston, Texas and leases 24,000 square feet in Sealy, Texas. The Petroleum Equipment segment is headquartered in Houston, where the Company owns approximately 300,000 square feet devoted to manufacturing, warehousing and administration. The Company also owns a high pressure valve manufacturing facility in Jennings, Louisiana (89,000 square feet) and has facilities in Scotland (20,000 sq. feet) and Abu Dhabi, U.A.E. (12,000 sq. feet). 5 The Company provides central manufacturing for power products and assembles airline, compression, and railcar movers in a 407,000 square foot company owned facility in Houston, Texas. Airline products are also assembled in an 89,000 square foot company-owned facility in Kennesaw, Georgia. The Company also leases an additional 59,300 square feet of office, warehouse and shop space to support its marketing department, corporate records, and a transportation department. 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. During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The Company has been advised that the U.S. Customs Service and the Department of Justice are investigating potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil, or administrative sanctions against the Company and/or individual employees and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury, and warranty matters normally incident to the Company's business. No individual case, or group of cases presenting substantially similar issues of law or fact, involve a claim for damages in excess of $5,000,000 or are expected to have a material effect on the manner in which the Company conducts its business. Although management has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases could have a material adverse impact on the results of operations in the period it occurs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 6 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 712 shareholders of record as of February 26, 1999. The following table sets forth the high and low sales prices relating to the Company's Common Stock and the dividends declared by the Company in each quarterly period within the last two fiscal years. FISCAL FISCAL 1998 1997 ------------------------------ ------------------------------ HIGH LOW DIVIDEND HIGH LOW DIVIDEND -------- -------- -------- -------- -------- -------- First Quarter $26 3/16 $22 1/4 $ 0.085 $27 1/2 $19 3/8 $ 0.085 Second Quarter 22 1/8 17 1/4 0.085 28 3/8 23 3/8 0.085 Third Quarter 17 1/4 9 3/4 0.085 29 1/4 21 0.085 Fourth Quarter 14 1/4 8 7/16 0.085 26 3/16 20 7/8 0.085 On December 8, 1998, the Board of Directors approved a dividend of $.085 per share for shareholders of record on January 31, 1999, payable on February 12, 1999. 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. Certain covenants in the Company's loan agreements may restrict the payment of future dividends. See "Note 9: Debt Arrangements". 7 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". The Company has restated its prior financial statements to present the operating results of the GTO as a discontinued operation. STEWART & STEVENSON SERVICES, INC. CONSOLIDATED FINANCIAL REVIEW
FISCAL FISCAL FISCAL FISCAL FISCAL (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- FINANCIAL DATA: Sales $ 1,206,772 $ 1,115,034 $ 825,187 $ 702,324 $ 596,003 Earnings (loss) from continuing operations before income taxes (61,711) (22,190) 6,651 32,892 27,323 Net earnings (loss) from continuing operations (1) (39,005) (14,505) 4,768 20,698 16,215 Net earnings (loss) from discontinued operations -- 5,424 12,083 41,105 51,343 Gain (loss) on discontinued operations (33,979) 61,344 -- -- -- Net earnings (loss) (72,984) 52,263 16,851 61,803 67,588 Total assets 705,777 1,252,647 1,079,159 948,626 786,520 Short-Term Debt (including current portion of Long-Term Debt) 86,956 261,000 29,100 66,100 43,344 Long-Term Debt 83,530 147,166 319,700 210,800 116,900 PER SHARE DATA: Earnings (loss) from continuing operations $ (1.34) $ (.44) $ .14 $ .63 $ .49 Earnings (loss) from discontinued operations -- .16 .37 1.24 1.56 Gain (loss) on discontinued operations (1.17) 1.85 -- -- -- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) per share - Basic and Diluted $ (2.51) $ 1.57 $ .51 $ 1.87 $ 2.05 Weighted average number of shares of common stock outstanding Basic 29,006 33,184 33,068 33,035 32,973 Diluted 29,006 33,250 33,090 33,101 33,123 Cash dividends declared $ .34 $ .34 $ .335 $ .31 $ .27
- ------------------ (1) The net earnings (loss) from continuing operations for Fiscal 1998, 1997 and 1996 includes special items, net of tax, of $50,632, $29,696 and $13,000, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 8 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. The following discussion may contain forward-looking statements. In connection therewith, please see the cautionary statements contained herein, which identify important factors that could cause actual results to differ materially from those in the forward-looking statements. BUSINESS SEGMENT HIGHLIGHTS (DOLLARS IN THOUSANDS) The following tables present the contribution to sales and operating profit from each of the Company's business segments. Business segment data for prior years have been restated to reflect the Company's current business segments as well as other items that comprise earnings (loss) from continuing operations before taxes. SALES ------------------------------------------ FISCAL FISCAL FISCAL 1998 1997 1996 ---------- ---------- ---------- Power Products $ 555,507 $ 558,393 $ 508,779 Tactical Vehicle Systems 455,399 396,734 200,916 Petroleum Equipment 115,800 83,096 57,406 Other Business Activities 80,066 76,811 58,086 ---------- ---------- ---------- Total Segment Sales $1,206,772 $1,115,034 $ 825,187 ========== ========== ========== OPERATING PROFIT ------------------------------------ FISCAL FISCAL FISCAL 1998 1997 1996 -------- -------- -------- Power Products $ 23,638 $ 34,120 $ 31,081 Tactical Vehicle Systems (77,717) (10,005) 10,597 Petroleum Equipment 10,245 5,695 2,419 Other Business Activities (5,106) (5,333) 3,018 -------- -------- -------- Total Operating Profits (48,940) 24,477 47,115 Corporate expenses, net (11,452) (9,816) (9,910) Non-operating interest income 10,925 1,941 1,920 Interest expense (12,244) (15,440) (12,474) Special items -- (23,352) (20,000) -------- -------- -------- Earnings (loss) from continuing operations before taxes $(61,711) $(22,190) $ 6,651 ======== ======== ======== OPERATING PROFIT AS A PERCENTAGE OF SALES ----------------------------------------- FISCAL FISCAL FISCAL 1998 1997 1996 ---------- ---------- ---------- Power Products 4.3% 6.1% 6.1% Tactical Vehicle Systems (17.1) (2.5) 5.3 Petroleum Equipment 8.8 6.9 4.2 Other Business Activities (6.4) (6.9) 5.2 Consolidated (5.1) 2.2 5.7 9 SPECIAL ITEMS Special items are infrequent transactions that may affect comparability of the results of continuing operations between years. The special items included in the Fiscal 1998, 1997, and 1996 results are shown below: PRETAX CHARGE (BENEFIT) (DOLLARS IN THOUSANDS) FISCAL FISCAL FISCAL 1998 1997 1996 -------- -------- -------- Tactical Vehicle Systems Estimated costs associated with a government directive $ 40,000 $ -- $ -- Charge related to a series of claims 36,849 -- -- Change in estimated profit at completion 9,700 26,703 -- Power Products Gain on sale of construction equipment franchise -- (4,369) -- Other Business Activities Interest income on proceeds from sale of gas turbine business (8,654) -- -- Litigation and special changes -- 23,352 20,000 -------- -------- -------- Pretax charge 77,895 45,686 20,000 Tax benefit (35% tax rate assumed) 27,263 15,990 7,000 -------- -------- -------- Special items net of tax $ 50,632 $ 29,696 $ 13,000 ======== ======== ======== RESULTS OF OPERATIONS FISCAL 1998 VS. FISCAL 1997 Sales for Fiscal 1998 totaled $1,207 million, an increase of 8% over Fiscal 1997 sales of $1,115 million. The Company reported a $49 million operating loss for Fiscal 1998 compared with a $24 million operating profit for Fiscal 1997. The Power Products segment recorded sales of $556 million during Fiscal 1998, virtually flat when compared with Fiscal 1997 sales of $558 million. Sales were affected by several factors. In particular, sales were higher as a result of recent business acquisitions, but such increase was offset by (1) lower equipment, parts, and services sales in branches supplying the petroleum industry (due primarily to depressed oil and gas prices) and (2) the sale of the Company's construction equipment business in Fiscal 1997. Operating profits in the Power Products segment for Fiscal 1998 totaled $24 million compared with $34 million for the prior year. Operating profits decreased as a result of weakness in the petroleum industry, increased reserves for exposures in accounts receivable and inventory from the decline in the financial condition of the petroleum industry, and increased costs arising out of recent business acquisitions. The Tactical Vehicle Systems segment recorded sales of $455 million in Fiscal 1998, an increase of $59 million (15%) over Fiscal 1997. An operating loss of $78 million was recorded for the current year and included: (1) a $40 million charge for estimated costs associated with a government directive to make certain changes in the drive train components of the FMTV; (2) a $37 million charge related to a series of claims for additional costs arising from government caused delays and changes; and (3) a $10 million charge to cost of sales relating to cost overruns and superseded materials on the original contract. The Tactical Vehicle Systems segment reported an operating loss of $10 million in Fiscal 1997. For further explanation, see "Factors That May Affect Future Results - Business Outlook". The Petroleum Equipment segment achieved sales and operating profits of $116 million and $10 million, respectively, for Fiscal 1998, which compared favorably with Fiscal 1997 sales of $83 million and profits of $6 million. This segment reported sustained quarter-to- 10 quarter improvement during Fiscal 1998, largely on the strength of new product introductions such as marine riser systems. Consequently, this segment was less vulnerable to the impact of depressed oil and gas prices because of its relatively strong position in deep water exploration products. All other business activities not defined as a specific segment included airline ground support equipment, leased gas compression equipment and related services, and other miscellaneous sales. Sales for these activities totaled $80 million for Fiscal 1998, compared to $77 million for Fiscal 1997. Net losses for both 1998 and 1997 totaled $5 million. Airline product sales continue to feel the effects of the weak Asian market, with an offsetting increase from the recent acquisition of Tug Manufacturing Corporation in late December 1998. Lower gas compression revenues were more than offset by higher miscellaneous sales. Both years were impacted by under-recovered costs associated with the restructuring of pooled manufacturing facilities. In addition, Fiscal 1998 included startup costs in the gas compression leasing and services business, and the airline ground support equipment business incurred substantial product development costs in Fiscal 1998, and asset write-offs and product warranty charges in Fiscal 1997. FISCAL 1997 VS. FISCAL 1996 Sales for Fiscal 1997 increased 35% to $1,115 million compared to sales of $825 million for Fiscal 1996. Operating profits decreased to $24 million in 1997 from $47 million in 1996. The Power Products segment sales increased $50 million or 10% to $558 million, which included $30 million in revenue from the acquisition of Sierra Detroit Diesel Allison, Inc. in California. The Power Products segment reported a $34 million operating profit in 1997 including a $4 million gain from the sale of the construction equipment franchise in Houston, Texas. The operating profit for Fiscal 1996 was $31 million. The Tactical Vehicle Systems segment had sales of $397 million in Fiscal 1997, a 97% increase from the prior year. This increase reflected the achievement of a high rate of truck production during Fiscal 1997. The Tactical Vehicle System segment recorded an operating loss of $10 million for Fiscal 1997, which included the impact of a change in the estimated profit at completion of its principle contract with the U.S. Army. The cumulative impact of this change was a charge to cost of sales of $27 million. Sales in the Petroleum Equipment segment amounted to $83 million in 1997 compared with $57 million in 1996. Operating profit for Fiscal 1997 was $6 million versus $2 million in 1996. Sales growth was largely attributable to the introduction of a new marine riser product. However, increased margins from the higher sales were offset by $2.4 million in asset write-downs in 1997. All other business activities not defined as a specific segment included airline ground support equipment, leased gas compression equipment and related services, and other miscellaneous sales. Sales for these activities totaled $77 million for 1997, compared with $58 million for 1996. Net loss for 1997 totaled $5 million compared with an operating profit of $3 million in 1996. Entrance into the gas compression business accounted for most of the sales increase in 1997. The restructuring of certain pooled manufacturing facilities and decreased profitability in airline ground support equipment accounted for the decline in profitability in 1997.
NET PERIOD EXPENSES FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 --------- --------- --------- Selling and administrative expenses $ 90,857 $ 75,619 $ 67,163 Interest expense 12,244 15,440 12,474 Settlement of litigation and special charge -- 23,352 20,000 Gain on sale of construction equipment franchise -- (4,369) -- Other income, net (12,706) (4,867) (3,571) --------- --------- --------- $ 90,395 $ 105,175 $ 96,066 ========= ========= ========= Net period expenses as a percentage of sales 7.5% 9.4% 11.6% ========= ========= =========
11 Net period expenses for Fiscal 1998 totaled $90 million or 7.5% of sales compared with $105 million or 9.4% of sales in Fiscal 1997. Selling and administration expenses increased $15 million (20%) during 1998 largely due to recent business acquisitions and startups, as well as volume related costs associated with the Petroleum Equipment segment. The $3 million decrease in interest expense in 1998 resulted from a reduction in borrowings accomplished with funds received from sale of the GTO. Net period expenses increased 9% in Fiscal 1997 from 1996, which was substantially less than the 35% increase in sales. Selling and administrative growth was modest, reflecting the better utilization of existing infrastructure. Interest expense grew by 24% in Fiscal 1997 as additional borrowings were obtained to fund the growth in working capital needs. Special charges in Fiscal 1997 totaled over $23 million including (1) $10 million in expenses relating to the Company's resolution of certain litigation relating to a 1987 contract to supply diesel generator sets, and (2) $13 million associated with settling a claim by the Company for excessive costs incurred on a U.S. Government contract. On October 6, 1997, the Company sold its construction equipment franchise for $30 million and recognized a gain on the sale of $4 million. The construction equipment franchise operated in the gulf coast territory of Texas and primarily distributed, and provided services for, products manufactured by John Deere Construction Equipment Company and other companies engaged in the business of manufacturing earth moving equipment, forestry equipment, skidsteer equipment and utility equipment. Other income, net, for 1998 included approximately $9 million in interest income earned on proceeds from sale of GTO. NET EARNINGS (LOSS) FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 -------- -------- -------- Continuing operations $(39,005) $(14,505) $ 4,768 Discontinued operations (33,979) 66,768 12,083 -------- -------- -------- Total earnings (loss) $(72,984) $ 52,263 $ 16,851 ======== ======== ======== The loss from continuing operations for Fiscal 1998 was $39 million versus a loss of $15 million in Fiscal 1997 and a profit of $5 million in Fiscal 1996. All three years had special items which significantly impacted performance. See "Special Items". Excluding special charges, net of tax, after tax of $51 million in Fiscal 1998, $30 million Fiscal 1997, and $13 million in 1996, net profit of continuing operations for Fiscal 1998, 1997 and 1996 would have been $12 million, $15 million and $18 million, respectively. The total loss for Fiscal 1998 was $73 million or $2.51 per share versus profits of $52 million or $1.57 per share in Fiscal 1997 and $17 million or $.51 per share in 1996. DISCONTINUED OPERATIONS NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 -------- -------- -------- Net earnings (loss) $ -- 5,424 $ 12,083 Gain (loss) $(33,979) 61,344 -- -------- -------- -------- $(33,979) $ 66,768 $ 12,083 ======== ======== ======== During Fiscal 1997, the Company completed the sale of the net assets of GTO to GE for $600 million, with subsequent downward adjustments of $84 million in Fiscal 1998. The Company used these funds to retire $260 million of debt, repurchase $120 million of its outstanding stock, and acquire four businesses at a cost of approximately $34 million. In the fourth quarter of Fiscal 1998, it became probable that the Company would be required to perform under a debt guaranty related to a power generation facility in Argentina. Accordingly, the Company recorded an estimated obligation of $14.0 million, net of tax. The guaranty arose as part of the Company's GTO and the charge has been reflected in results from discontinued operations. Also in Fiscal 1998, the Company recorded an after tax charge, net of accruals, of $20 million relating to certain contractual purchase price adjustments. The net loss from discontinued operations in Fiscal 1998 totaled $34.0 million and represented the equivalent of $1.17 per share. 12 FINANCIAL CONDITION WORKING CAPITAL JANUARY 31, JANUARY 31, (DOLLARS IN THOUSANDS) 1999 1998 ----------- ----------- Current Assets Cash and equivalents $ 12,959 $ 18,987 Accounts and notes receivable, net 164,547 185,033 Recoverable costs and accrued profits not yet billed 99,097 138,208 Income tax receivable 48,596 -- Inventories 215,202 167,577 Receivable from sale of assets of Gas Turbine Operations -- 600,000 ----------- ----------- Total Current Assets 540,401 1,109,805 Current Liabilities Notes payable 17,468 35,000 Accounts payable 83,127 92,728 Accrued payrolls and incentives 17,123 18,693 Income tax 2,931 88,862 Current portion of long-term debt 69,488 226,000 Other accrued liabilities 95,349 100,819 ----------- ----------- Total Current Liabilities 285,486 562,102 ----------- ----------- Working Capital $ 254,915 $ 547,703 =========== =========== Current Ratio 1.89:1 1.97:1 Current assets of continuing operations, excluding the $600,000 receivable from the Fiscal 1997 sale of GTO, increased from $509,805 to $540,401. Accounts receivable decreased $20 million or 11% despite an increase in sales during the comparable period of 8%, reflecting management's effort to improve the cash collection cycle time. Recoverable costs declined $39 million or 28% primarily reflecting the liquidation of the Tactical Vehicle Systems contract which was substantially completed during Fiscal 1998. Current assets at the end of Fiscal 1998 included a $49 million income tax receivable which will be realized from the future tax benefits associated with certain accrued reserves discussed in the results of operation. Inventories grew by $48 million or 28%, reflecting both inventories obtained with acquired businesses and over-stocking in certain business units where planned sales growth did not materialize. The $600 million receivable from the sale of GTO was collected in February 1998. Current liabilities were reduced significantly at the end of Fiscal 1998 compared to Fiscal 1997 by the re-payment of notes payable and the current portion of long-term debt with proceeds from sale of the GTO. The decrease in current income taxes during Fiscal 1998 was primarily attributable to payment of taxes associated with the sale of GTO and contract tax accounting methods. Other accrued liabilities at the end of Fiscal 1998 were comprised primarily of the amounts accrued both to perform government directed changes under the FMTV program and to partially perform under a guarantee related to a retained obligation of the GTO. Other accrued liabilities at the end of Fiscal 1997 consisted primarily of amounts accrued for certain contractual obligations stipulated by the GTO sale agreement and estimated retained liabilities of GTO. The Company's current ratio remained relatively unchanged at 1.89 at the end of Fiscal 1998. 13 LONG LIVED ASSETS JANUARY 31, JANUARY 31, (DOLLARS IN THOUSANDS) 1999 1998 ----------- ----------- Property, plant, and equipment $ 101,029 $ 85,803 Revenue earning assets, net 27,716 11,941 Deferred income tax asset 7,904 -- Investments and other assets 28,727 45,098 ----------- ----------- $ 165,376 $ 142,842 =========== =========== The growth in property, plant and equipment during Fiscal 1998 included expenditures for plant enhancements, and property plant and equipment purchases in connection with certain businesses acquisitions. The change in revenue earning assets resulted primarily from the entry into and expansion of the gas compression rental business. At the end of Fiscal 1998, the Company recorded deferred tax assets representing the future tax benefits of certain accrued long-term reserves which will become deductible under the applicable tax regulations in a future period. The decline in investments and other assets during Fiscal 1998 was principally the result of a reduction in the long-term portion of notes receivable. CAPITAL STRUCTURE (DOLLARS IN THOUSANDS) JANUARY 31, 1999 JANUARY 31, 1998 ---------------------- ---------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE -------- ---------- -------- ---------- Long-Term Debt $ 83,530 20% $147,166 21% Other Long-Term Liabilities 16,398 4 21,672 3 Shareholders' Equity 320,363 76 521,707 76 -------- ---------- -------- ---------- $420,291 100% $690,545 100% ======== ========== ======== ========== The Company's capital structure consists primarily of shareholder's equity and long-term debt. During Fiscal 1998 the Company repurchased 5,265,120 shares of its common stock which resulted in a reduction of shareholder's equity of $120 million. The Company's capital was further reduced in Fiscal 1998 by both the Company's net loss of $73 million, and the current maturities of long-term debt during Fiscal 1999 totaling $69 million. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity included cash and equivalents, cash from operations, amounts available under credit facilities and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures, dividends and other financial commitments. During Fiscal 1999 the Company anticipates a reduction in current liabilities, due to the scheduled repayment of $60 million of senior debt, and the performance under a government directed change to previously produced FMTV trucks projected to cost approximately $40 million. The Company has provided $23 million, as a current liability, for its probable partial performance under a guarantee, although no demand for performance has been received. See Note 7 to the consolidated financial statements for additional information. The Company has in place an unsecured revolving debt facility that could provide up to approximately $150 million, all of which was unused at January 31, 1999, but subject to certain limitations as a result of modifications made effective January 31, 1999. See Note 9 to the consolidated financial statements for additional information. This revolving facility matures during Fiscal 2001. 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 the existing committed lines of credit, the Company may seek to borrow under other long-term financing sources or to curtail certain activities reducing the demand for such borrowings. See Note 7 to the consolidated financial statements for additional liquidity considerations. The following table summarizes the Company's cash flows from operating, investing and financing activities as reflected in the Consolidated Statement of Cash Flows. 14 SUMMARIZED STATEMENT OF CASH FLOWS FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 --------- -------- -------- Net cash provided by (used in): Operating activities $ 428,075 $(11,916) $(32,600) Investing activities (65,249) (14,236) (26,966) Financing activities (368,854) 36,033 62,369 --------- -------- -------- $ (6,028) $ 9,881 $ 2,803 ========= ======== ========
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 --------- -------- -------- Net earnings (loss) from continuing operations $ (39,005) $(14,505) $ 4,768 Depreciation and amortization 19,636 22,447 22,376 Accrued postretirement benefits (237) (1,835) (363) Deferred income taxes, net (10,760) (3,350) (1,667) (Gain) loss on sale of business assets 53 (4,369) -- --------- -------- -------- Funds provided by (used in) continuing operations (30,313) (1,612) 25,114 Change in net operating assets and liabilities (57,612) 70,639 27,653 Funds provided by (used in) discontinued operations 516,000 (80,943) (85,367) --------- -------- -------- Net cash provided by (used in) operating activities $ 428,075 $(11,916) $(32,600) ========= ======== ========
During both Fiscal 1998 and Fiscal 1997 the Company's continuing operations consumed funds. In both years this was primarily caused by both the net loss from continuing operations, as well as the payment of previously deferred income taxes. The change in net operating assets and liabilities during Fiscal 1998 was in large part caused by certain tax events, including the payment of income taxes associated with the sale of GTO and the accrual of certain reserves which under tax regulations were not deductible during Fiscal 1998. The cash consumed by discontinued operations in Fiscal 1997 and 1996 reflects the net results of the GTO activities, whereas in Fiscal 1998 cash provided by discontinued operations represents the net collection of the proceeds from the sale of the GTO business.
NET CASH USED IN INVESTING ACTIVITIES FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 -------- -------- -------- Expenditures for property, plant and equipment $(39,565) $(31,778) $(21,004) Proceeds from sale of business assets 4,597 22,773 -- Acquisition of business (33,659) (8,729) -- Disposal of property, plant and equipment 3,378 3,498 2,038 Investment -- -- (8,000) -------- -------- -------- Net cash used in investing activities $(65,249) $(14,236) $(26,966) ======== ======== ========
15 During Fiscal 1998, 1997 and 1996 the Company invested significant amounts into property, plant and equipment to expand its existing businesses. Fiscal 1998 includes the initial acquisition of $6.3 million of the Company's gas compression rental fleet, and additional expenditures of $12.2 million during the remainder of the year. The increase in net cash used in investing activities in Fiscal 1998 was primarily the result of several acquisitions made by the Company. In March 1998, the Company acquired substantially all of the assets of Compression Specialties, Inc., a Wyoming based gas compression leasing and service company, for approximately $9.45 million. In June 1998, the Company acquired the stock of IPSC Co., Inc., the Deutz engine distributor for Louisiana, Mississippi, Arkansas, and Western Tennessee, for approximately $4.2 million, and acquired the Deutz distributorship franchise for Texas, Oklahoma, and Kansas from Harley Equipment Company. Also in June 1998, the Company acquired H & H Rubber, Inc., a manufacturer of specialty rubber products, for $4 million. Finally, in December 1998, the Company acquired Tug Manufacturing Corporation, an airline ground support equipment manufacturer, for approximately $13 million in cash and $3 million in contingent purchase price to be paid ratably over three years if certain performance measures are met. During October 1998, the Company sold the net assets of Carson Cogeneration, LLP (discussed below). During Fiscal 1997, the Company transferred a gas turbine valued at approximately $5 million from its discontinued operations inventory to the property, plant and equipment of the Company's other operations, to support its interests and obligations associated with a retained investment in a power plant in Argentina. In April 1997, the Company acquired ownership of Sierra Detroit Diesel Allison, Inc., a Detroit Diesel and Allison Transmission distributor for Northern California. In September 1997, the Company also acquired Carson Cogeneration LLP, an independent power producer in California. In October 1997, the Company sold its Houston construction equipment distributorship. NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 --------- -------- --------- Additions to long-term debt $ 25,000 $ 76,153 $ 360,000 Payments on long-term debt (242,780) (37,329) (251,100) Net borrowings and payments on short-term notes payable (22,714) 7,000 (37,000) Dividends paid (9,758) (11,286) (11,081) Repurchase of common stock (120,000) -- -- Proceeds from exercise of stock options 1,398 1,495 1,550 --------- -------- --------- Net cash provided by (used in) financing activities $(368,854) $ 36,033 $ 62,369 ========= ======== =========
Effective as of January 31, 1999, the Company obtained certain modifications to its unsecured revolving line of credit, which among other things, adjusted its interest rate options and modified certain covenants dealing with debt levels, interest coverage, investments and levels of retained earnings. Under this amendment, the most commonly used interest rate option increased by approximately 150 basis points. See Note 9 to the consolidated financial statements for additional information. In addition to the revolving credit facility, the Company has $135 million in senior notes outstanding. The senior notes are unsecured and were issued pursuant to an agreement containing a covenant which imposes a debt to total capitalization requirement. Payment of cash dividends on common stock totaled $9.8 million and $11.3 million during Fiscal 1998 and 1997, respectively. There has been no change in the dividends per share during these years and the decline in total dividends results from the Company's repurchase of 5,265,120 shares of its outstanding stock. Cash dividends represented 82%, 75% and 61% of net earnings from continuing operations before special charges for Fiscal 1998, 1997 and 1996, respectively. The Company uses both funds from operations, along with borrowings, to pay dividends. ACCOUNTING DEVELOPMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In February 1998, SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST EMPLOYMENT BENEFITS was issued. Each of these statements became effective for years beginning after December 31, 1997. 16 SFAS No. 130 requires disclosure of comprehensive income, which consists of all changes in equity from non-shareholder sources. SFAS No. 131 requires that segment reporting for public reporting purposes be conformed to the segment reporting used by management for internal purposes. SFAS No. 132 standardizes the disclosure requirements of Statements No. 87 and No. 106. The adoption of these statements did not impact the Company's consolidated financial position, results of operations or cash flows, but is limited to the form and content of the Company's disclosures. Since most of the information required under these statements is currently disclosed, their adoption does not materially change the Company's current disclosures. FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this annual report contain forward-looking statements that are based on current expectations, estimates, and projections about the markets and industries in which the Company operates, management's beliefs, and assumptions made by management. These forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors include risks associated with newly acquired businesses; increasing price and product/service competition by foreign and domestic competitors; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost effective basis; the mix of products/services; the achievement of lower costs and expenses; reliance on large customers; technological, implementation and cost/financial risks in use of large, multi-year contracts; the cyclical nature of the markets served; the outcome of pending and future litigation and governmental proceedings and continued availability of financing, financial instruments and financial resources in the amount, at the times and on the terms required to support the Company's business; and the risk of cancellation or adjustments of specific orders and termination of significant government programs. These are representative of the future factors that could affect the outcome of forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international conditions including interest rates, rates of inflation and currency exchange rate fluctuations and other future factors. BUSINESS OUTLOOK During Fiscal 1998, both the Power Products segment and the Petroleum Equipment segment were adversely affected by depressed prices for oil and gas. The Company expects that low oil and gas prices will continue throughout Fiscal 1999 and has adopted programs to reduce costs associated with these business segments. These programs include disposition of several unprofitable branches, implementation of turnaround plans for under-performing branches, and better integration of recently acquired operations into the business segments. In addition, the Company is taking action to reduce working capital requirements by increasing inventory turnover and accelerating collection of accounts receivable. Performance measurements systems have been restructured to focus on these areas. The Company expects that these efforts will result in improved operating margins and return on assets in both segments despite the effect of depressed prices for oil and gas. During Fiscal 1998, the U.S. Army directed the Company to make certain changes in the drive train components of all vehicles produced under the first FMTV contracts. The Company made a decision to refit all fielded vehicles and to fund most of the $40 million estimated cost to perform that work. The Company commenced the installation of the directed changes during Fiscal 1999 and, subject to availability of vehicles, expects to complete the changes by the end of Fiscal 2000. Intensive efforts continue with the U.S. Army and certain vendors to reach an equitable settlement regarding this matter. The Company intends to submit Requests for Equitable Adjustments or claims under the FMTV contracts seeking compensation for the additional costs relating to this directive. In addition, the Company has filed a certified claim with the U.S. Army for $48 million seeking recovery of additional costs incurred under the initial FMTV contracts as a result of other changes and delays caused or directed by the government. Management believes that the FMTV contracts provide a legal basis for the claims, however, due to the inherent uncertainties in the claims resolution process, the Company has expensed the cost relating to these matters. Since the costs associated with these claims have been expensed, any future recovery of these amounts will be treated as income in the period in which this matter is resolved. The Company is presently in a production hiatus between the original FMTV contracts and the new FMTV contracts. During this period, the Company has undertaken several changes to the management and production processes intended to improve the performance of the Tactical Vehicle Systems segment. These changes included the reduction of both direct and indirect personnel, 17 improvements in materials management, and reductions in cash flow cycle times. The Company expects that these changes will result in improved operating margins, cash flow, and return on assets in the Tactical Vehicles Systems segment. GOVERNMENT CONTRACTING FACTORS 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. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. During Fiscal 1998, the Company was awarded a new multi-year contract that will extend production of the FMTV into 2002 (or 2003 if the government exercises its option to purchase additional vehicles). The funding of the new FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contract must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. As of January 31, 1999, funding in the amount of $315 million for the new FMTV contract had been authorized and appropriated by the U.S. Congress. If the new FMTV contract is 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. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or barred from government contract. 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, Overseas Private Investment Corporation, and similar government agencies during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains an effective program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. YEAR 2000 COMPLIANCE In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive computer software may recognize a date using "00" as the year 1900 rather than the year 2000. If this situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations. This is generally referred to as the Year 2000 issue. The Company has established a team to address the potential impacts of the year 2000 on each of its critical business functions. The team has concluded its assessment of the Company's critical date-sensitive technology, including its information systems, computer equipment and other systems used in its various operations, and is now in the process of making the required modifications to or replacing these systems to be year 2000 compliant. The modification costs are expected to be approximately $2 million. The majority of these costs are attributable to the purchase of new computer equipment. The required modifications and most related testings are expected to be completed by June 30, 1999. The Company's contingency plan for any non-compliant systems will be developed for each particular system if, and as, they are identified. Systems modification costs are being expensed as incurred. Costs associated with new equipment are being capitalized and will be amortized over the life of the product. 18 In addition to addressing the Company's internal systems, the team has identified key vendors that could be impacted by year 2000 issues, and communication has been made. The Company has evaluated the responses to this correspondence and has not identified any critical vendor systems whose timely remediation poses a material threat to the Company. The most likely worst case scenario would involve the interruption of supply of key materials necessary to timely complete production under outstanding contract commitments. In order to reduce this risk, the Company is developing a final contingency plan which may include having materials from sole-source suppliers that are necessary to fulfill outstanding contract commitments on hand prior to December 31, 1999. While the Company believes that its program is sufficient to identify the critical issues and associated costs necessary to address possible year 2000 problems in a timely manner, there can be no assurance that the program or underlying steps implemented, will be successful in resolving all such issues prior to the year 2000. If the steps taken by the Company (or critical third parties) are not made in a timely manner, or are not successful in identifying and remedying all significant year 2000 issues, business interruptions or delays could occur. Based on the information the Company has gathered to date and its expectation of its ability to remedy problems encountered, the Company believes that it will not experience significant business interruptions that would have a material adverse impact on its results of operations or financial condition. 19 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, 1999 and 1998, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas April 29, 1999 20 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION FISCAL FISCAL (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997 ---------- ----------- Assets Current Assets Cash and equivalents $ 12,959 $ 18,987 Accounts and notes receivable, net 164,547 185,033 Recoverable costs and accrued profits not yet billed 99,097 138,208 Income tax receivable 48,596 -- Inventories 215,202 167,577 Receivable from sale of assets of Gas Turbine Operations -- 600,000 ---------- ----------- Total Current Assets 540,401 1,109,805 Property, Plant and Equipment, net 128,745 97,744 Deferred Income Tax Asset 7,904 -- Investments and Other Assets 28,727 45,098 ---------- ----------- $ 705,777 $ 1,252,647 ========== =========== Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 17,468 $ 35,000 Accounts payable 83,127 92,728 Accrued payrolls and incentives 17,123 18,693 Income tax 2,931 88,862 Current portion of long-term debt 69,488 226,000 Other accrued liabilities 95,349 100,819 ---------- ----------- Total Current Liabilities 285,486 562,102 Commitments and Contingencies (See Note 7) Long-Term Debt 83,530 147,166 Deferred Income Tax 43 2,899 Accrued Postretirement Benefits 13,019 13,256 Deferred Compensation 3,336 5,517 Shareholders' Equity Common Stock, without par value, 100,000,000 shares authorized at January 31, 1999 and January 31, 1998; 27,984,035 and 33,205,688 shares issued at January 31, 1999 and 1998, respectively, including 11,820 shares held in treasury at January 31, 1998 47,819 166,454 Retained earnings 272,544 355,286 ---------- ----------- 320,363 521,740 Less cost of treasury stock -- (33) ---------- ----------- Total Shareholders' Equity 320,363 521,707 ---------- ----------- $ 705,777 $ 1,252,647 ========== =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 21 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED STATEMENTS OF EARNINGS
FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 ----------- ----------- --------- Sales $ 1,206,772 $ 1,115,034 $ 825,187 Cost of sales 1,178,088 1,032,049 722,470 ----------- ----------- --------- Gross profit 28,684 82,985 102,717 ----------- ----------- --------- Selling and administrative expenses 90,857 75,619 67,163 Interest expense 12,244 15,440 12,474 Special charges, net -- 18,983 20,000 Other income, net (12,706) (4,867) (3,571) ----------- ----------- --------- 90,395 105,175 96,066 ----------- ----------- --------- Earnings (loss) from continuing operations before income taxes (61,711) (22,190) 6,651 Income tax expense (benefit) (22,804) (8,075) 1,776 ----------- ----------- --------- Earnings (loss) from continuing operations of consolidated companies (38,907) (14,115) 4,875 Equity in net losses of unconsolidated affiliates (98) (390) (107) ----------- ----------- --------- Net earnings (loss) from continuing operations (39,005) (14,505) 4,768 Net earnings from discontinued operations, net of tax of $1,920 and $6,744 (See Note 2) -- 5,424 12,083 Gain (loss) on disposal of discontinued operations, net of tax of $(21,985) and $35,297 (See Note 2) (33,979) 61,344 -- ----------- ----------- --------- Net earnings (loss) $ (72,984) $ 52,263 $ 16,851 =========== =========== ========= Weighted average number of shares of Common Stock outstanding Basic 29,006 33,184 33,068 Diluted 29,006 33,250 33,090 Net earnings (loss) per share: Basic and Diluted Continuing operations $ (1.34) $ (.44) $ .14 Discontinued operations -- .16 .37 Gain (loss) on disposal (1.17) 1.85 -- ----------- ----------- --------- Net earnings (loss) per share $ (2.51) $ 1.57 $ .51 =========== =========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 22 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON RETAINED TREASURY (DOLLARS IN THOUSANDS) STOCK EARNINGS STOCK TOTAL --------- --------- --------- --------- Balance at end of Fiscal 1995 $ 163,409 $ 308,539 $ (33) $ 471,915 Net earnings -- 16,851 -- 16,851 Cash dividends -- (11,081) -- (11,081) Exercise of stock options 1,550 -- -- 1,550 --------- --------- --------- --------- Balance at end of Fiscal 1996 164,959 314,309 (33) 479,235 Net earnings -- 52,263 -- 52,263 Cash dividends -- (11,286) -- (11,286) Exercise of stock options 1,495 -- -- 1,495 --------- --------- --------- --------- Balance at end of Fiscal 1997 166,454 355,286 (33) 521,707 Net loss -- (72,984) -- (72,984) Cash dividends -- (9,758) -- (9,758) Issuance of common stock and exercise of stock options 1,398 -- -- 1,398 Repurchase and cancellation of shares (120,033) -- 33 (120,000) --------- --------- --------- --------- Balance at end of Fiscal 1998 $ 47,819 $ 272,544 $ -- $ 320,363 ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 23 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL FISCAL FISCAL (DOLLARS IN THOUSANDS) 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES Net earnings (loss) from continuing operations $ (39,005) $ (14,505) $ 4,768 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Accrued postretirement benefits (237) (1,835) (363) Depreciation and amortization 19,636 22,447 22,376 Deferred income taxes, net (10,760) (3,350) (1,667) (Gain) loss on sale of business assets 53 (4,369) -- Change in operating assets and liabilities net of the effect of acquisition, divestiture and discontinued operations: Accounts and notes receivable, net 31,318 (13,699) (37,495) Recoverable costs and accrued profits not yet billed 39,111 18,167 (30,335) Inventories (35,711) (17,596) 53,203 Accounts payable (14,465) (32,700) 49,196 Current income taxes, net (122,815) 23,043 (2,769) Other current liabilities 33,421 79,947 6,885 Other--principally long-term assets and liabilities 11,529 13,477 (11,032) --------- --------- --------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS (87,925) 69,027 52,767 NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 516,000 (80,943) (85,367) --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 428,075 (11,916) (32,600) INVESTING ACTIVITIES Expenditures for property, plant and equipment (39,565) (31,778) (21,004) Proceeds from sale of business assets (See Note 15) 4,597 22,773 -- Acquisition of businesses (See Note 15) (33,659) (8,729) -- Investment -- -- (8,000) Disposal of property, plant and equipment 3,378 3,498 2,038 --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (65,249) (14,236) (26,966) FINANCING ACTIVITIES Additions to long-term debt 25,000 76,153 360,000 Payments on long-term debt (242,780) (37,329) (251,100) Net borrowings and payments on short-term notes payable (22,714) 7,000 (37,000) Dividends paid (9,758) (11,286) (11,081) Repurchase of common stock (120,000) -- -- Proceeds from exercise of stock options 1,398 1,495 1,550 --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (368,854) 36,033 62,369 --------- --------- --------- Increase (decrease) in cash and equivalents (6,028) 9,881 2,803 Cash and equivalents, beginning of fiscal year 18,987 9,106 6,303 --------- --------- --------- Cash and equivalents, end of fiscal year $ 12,959 $ 18,987 $ 9,106 ========= ========= ========= Non-Cash Activities: Transfer of inventory to fixed assets - Continuing operations $ -- $ 4,712 $ -- Transfer of inventory to fixed assets - Discontinued operations $ -- $ 4,015 $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 24 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 1998" commenced on February 1, 1998 and ended on January 31, 1999. CONSOLIDATION: The consolidated financial statements include the accounts of Stewart & Stevenson Services, Inc. and all enterprises in which the company has a controlling financial interest. Investments in other partially-owned enterprises in which ownership ranges from 20 to 50 percent are generally accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated. STOCK-BASED COMPENSATION: The Company applies Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. Pro forma disclosure of the compensation expense determined under the fair-value provision of Statement of Financial Accounting Standard (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION has been provided. (See Note 11) CASH EQUIVALENTS: Interest-bearing deposits and other investments with original maturities of three months or less are considered cash equivalents. INVENTORIES: Inventories are generally stated at the lower of cost (using LIFO) or market (determined on the basis of estimated realizable values), less related customer deposits. Inventory costs include material, labor and overhead. The carrying values of these inventories are not in excess of their fair values. CAPITALIZED INTEREST: Interest costs associated with certain constructed assets are capitalized during the construction period. There was no capitalized interest in 1998, 1997 or 1996. Interest capitalized on assets developed for the Company's use is amortized over the depreciable life of the related assets. CONTRACT REVENUES AND COSTS: Revenues relating to contracts or contract changes that have not been completely priced, negotiated, documented, or funded are not recognized unless realization is considered probable. Generally, revenue is recognized when a product is shipped or accepted by the customer, except for certain Petroleum Equipment products, where revenue is recognized using the percentage-of-completion method. The revenues of the Tactical Vehicle Systems segment are generally recognized under the units-of-production method, whereby sales and estimated average cost of the units to be produced under the Family of Medium Tactical Vehicle ("FMTV") contracts are recognized as units are substantially completed. Profits expected to be realized on contracts are based on the Company's estimates of total revenue value and costs. Changes in estimates for revenues, 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 revenue values include amounts expected to be realized from contract adjustments when recovery of such amounts are probable. 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 both accelerated and straight-line methods. Expenditures for property, plant and equipment are capitalized and carried at cost. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred and replacements and betterments are capitalized. FOREIGN EXCHANGE CONTRACTS: The Company occasionally enters into forward exchange contracts only as a hedge against certain economic exposures and not for speculative or trading purposes. While the forward contracts affect the Company's results of operations, they do so only in connection with the underlying transactions. As a result, they do not subject the Company to risk from exchange rate movements, because gains and losses on these contracts offset losses and gains on the transactions being hedged. OTHER OFF-BALANCE SHEET RISKS: The Company has entered into certain contracts whereby it has guaranteed the repayment of a customer's debt to third party lenders. (See Note 7) 25 FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments consist primarily of cash and equivalents, trade receivables, trade payables and debt instruments. The book values of cash and equivalents, trade receivables and trade payables are considered to be representative of their respective fair values. Generally, the Company's notes receivable and payable have interest rates which are tied to current market rates. The fair market value of the senior notes is $140 million at January 31, 1999, which are recorded at a book value of $135 million. The Company estimates that the book value of all other of its financial instruments approximates market values. WARRANTY COSTS: Expected warranty and performance guarantee costs are accrued as revenue is recorded, based on both historical experience and contract terms. NET EARNINGS PER SHARE: As of January 31, 1998 the Company adopted, SFAS No. 128 EARNINGS PER SHARE, which specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if all securities or other contracts to issue common stock were exercised or converted into common stock. During Fiscal 1997 and 1996, 66,000 and 22,000 stock options, respectively, were deemed to be dilutive. There were no stock options during Fiscal 1998 which were deemed to be dilutive. Accordingly, all periods presented have been stated as basic and diluted EPS. There is no material difference between SFAS No. 128 presentation of EPS and the EPS presented in prior reporting periods. 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. Significant estimates have been made by management with respect to (1) future obligations associated with a government directive to change the FMTV truck configuration, (2) future obligations associated with guarantees and (3) the outcome of ongoing investigations and outstanding litigation. Actual results could differ from those estimates making it reasonably possible that a change in these estimates could occur in the near term. RECLASSIFICATIONS: The accompanying consolidated financial statements for prior Fiscal years contain certain reclassifications to conform with the presentation used in Fiscal 1998. The consolidated financial statements have been restated to reflect the Company's Gas Turbine Operations as a discontinued operation. NEW ACCOUNTING PRONOUNCEMENTS: In April, 1998 Statement of Position ("SOP") No. 98-5 REPORTING ON COSTS OF START UP ACTIVITIES was issued by the American Institute of Certified Public Accountants. The statement requires costs of start-up activities and organizational costs to be expensed as incurred. Initial application of the statement, which is effective for Fiscal 1999, is to be reported as a cumulative effect of a change in accounting principle. The Company is currently evaluating the impact of SOP No. 98-5 on its results of operations and financial position. In June 1997, SFAS No. 130, REPORTING COMPREHENSIVE INCOME was issued. SFAS No. 130 requires the presentation of comprehensive income in an entity's financial statements. Comprehensive income represents all changes in equity of an entity during the reporting period, including net income and charges directly to equity which are excluded from net income. This statement does not have any impact as the Company currently does not enter into any transactions which result in material charges (or credits) directly to equity (such as additional minimum pension liability charges, currency translation adjustments or unrealized gains and losses on available-for-sale securities, etc.). Effective January 31, 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement establishes new standards for segment reporting which are based on the way management organizes segments within a company for making operating decisions and assessing performance. In connection with the sale of the Gas Turbine Operations (GTO) and in response to these new standards, the Company reorganized its business segments. The Company's financial reporting segments consist of Power Products, Tactical Vehicle Systems, Petroleum Equipment and Other Business Activities. (See Note 4) In June 1998, SFAS No. 132 - EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST EMPLOYMENT BENEFITS was issued. This statement standardizes the disclosure requirements of SFAS No. 87 and No. 106, and the Company adopted the provisions of this statement for Fiscal 1998. (See Note 10) In June 1998, the FASB issued SFAS No. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards for 26 derivative instruments, including derivative instruments embedded in other contracts and hedging activities. The statement, which is to be applied prospectively, is effective for the Company's quarter ending January 31, 2000. The Company believes that the future adoption of SFAS No. 133 will not have a material effect on its results of operations or financial position. NOTE 2: DISCONTINUED OPERATIONS During Fiscal 1997, the Company completed the sale of the net assets of GTO to General Electric Company ("GE") for $600 million, with a subsequent downward adjustment of $84 million in Fiscal 1998. GTO manufactured and serviced gas turbine driven equipment and associated spare parts, provided contract operation and maintenance services for power generation and petrochemical processing facilities, and engaged in the development and turnkey construction of power generation projects. The results of the GTO have been classified as discontinued operations in the accompanying financial statements. Net earnings from discontinued operations for the eight months ended September 30, 1997 (the pre-measurement period) includes interest expense of approximately $9.9 million, which was allocated based on the ratio of net assets to be discontinued to the sum of the total net assets of the consolidated entity. The gain on disposal of discontinued operations includes interest expense of approximately $3.9 million, allocated using the same method. In the third quarter of Fiscal 1998, the Company reached an agreement with GE regarding certain contractual adjustments to the purchase price and other matters related to the sale of GTO. The agreement required the Company to pay GE $84 million, resulting in an after tax charge, net of accruals, of $20 million to net earnings (loss) from discontinued operations. Additionally, in the fourth quarter of Fiscal 1998, it became probable that the Company would be required to perform under a debt guaranty related to a power generation facility in Argentina. Accordingly, the Company recorded an estimated obligation of $14 million, net of tax. The guaranty arose as part of the Company's Gas Turbine Operations. Summarized operating results of discontinued operations are as follows: TWELVE MONTHS ENDED JANUARY 31 ------------------------------- 1999 1998 1997 -------- -------- -------- (Unaudited) Sales $ -- $404,172 $361,974 Gross profit -- 35,643 63,852 Income tax expense -- 1,920 6,744 Net earnings (loss) from discontinued operations, net of tax -- 5,424 12,083 Gain (loss) on disposal of discontinued operations, net of tax (33,979) 61,344 -- NOTE 3: SPECIAL ITEMS AND EVENTS Included in Fiscal 1998 net earnings (loss) from continuing operations are the effects of three significant nonrecurring events including (1) a $36.8 million charge related to a series of claims, (2) a $40 million charge for estimated costs associated with a government directive to make certain changes in the drive train components of the FMTV and (3) $8.6 million of interest income earned on the proceeds from the sale of the GTO. On December 17, 1998, following an extensive period of negotiations with the U.S. Army seeking to amicably resolve certain requests for equitable adjustments for additional costs incurred by the Company due to delays and changes caused by the government during the initial truck contract, the Company filed a certified claim with the U.S. Army seeking recovery of the additional costs. Management believes that the FMTV contract provides a legal basis for the claim, however, due to the inherent uncertainties in the claims resolution process, the Company has fully reserved all recoveries relating to the claim. The Company will continue to pursue recovery of all amounts claimed. Any compensation received from the U.S. Army related to this matter will be recorded in the period in which the additional compensation is awarded. In the fourth quarter of Fiscal 1998, the Company made a decision to refit all fielded vehicles at the Sealy facility and fund all or a significant portion of the $40 million estimated cost to perform that work. The Company will submit a claim under the FMTV contract, seeking compensation for those additional costs related to the directive. Any additional compensation received from the U.S. Army related to this matter will be recorded in the period in which the additional compensation is awarded. During Fiscal 1997 the Company incurred a $10 million charge relating to the resolution of litigation arising from a 1987 contract to 27 supply diesel generator sets for installation at long range radar sites in Saudi Arabia. Also during Fiscal 1997 the Company recorded a special charge of $13.4 million relative to the settlement of a government claim and special gain of $4.4 million related to the sale of the Company's John Deere franchise in Houston, Texas. (See Note 15) During Fiscal 1996, a jury in Houston, Texas returned a $43 million verdict against the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy agreement. The Company's liability in connection with this matter was limited pursuant to a pretrial agreement between the Company and Serv-Tech, Inc. The Company recognized a pre-tax charge against earnings of $20 million relating to this case in the second quarter of Fiscal 1996. The judgment based on this verdict was paid by the Company in September 1996. NOTE 4: SEGMENT DATA The Power Products segment includes the marketing of diesel engines, automatic transmissions, material handling equipment, transport refrigeration units and construction equipment and 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 Petroleum Equipment segment includes the design, manufacturing, and marketing of specialty equipment for the oilfield service market. Other business activities not included in a business segment for reporting purposes include airline ground support products, gas compression contract services, financial services, as well as development stage businesses. Corporate assets, consisting primarily of cash and cash equivalents and investments, are included in "Other Business Activities". 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. 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 in any of the last three fiscal years. Export sales, including sales to domestic customers for export, for Fiscal 1998, 1997 and 1996 were $84.7 million, $65.7 million and $83.2 million, respectively. Export sales to any single geographic region in Fiscal 1998, 1997 and 1996 were not material to consolidated sales. Financial information relating to industry segments is as follows:
DEPRECIATION OPERATING IDENTIFIABLE CAPITAL AND SALES PROFIT ASSETS EXPENDITURES AMORTIZATION ---------- --------- ------------ ------------ ------------ FISCAL 1998 Power Products $ 555,507 $ 23,638 $ 334,234 $ 17,409 $ 11,396 Tactical Vehicle Systems 455,399 (77,717) 113,721 1,434 3,120 Petroleum Equipment 115,800 10,245 96,874 4,771 2,634 Other Business Activities 80,066 (5,106) 160,948 15,951 2,486 ---------- --------- ------------ ------------ ------------ Total $1,206,772 $ (48,940) $ 705,777 $ 39,565 $ 19,636 ========== ========= ============ ============ ============ FISCAL 1997 Power Products $ 558,393 $ 34,120 $ 307,232 $ 17,308 $ 9,887 Tactical Vehicle Systems 396,734 (10,005) 179,260 1,509 8,312 Petroleum Equipment 83,096 5,695 60,214 7,358 1,428 Other Business Activities 76,811 (5,333) 105,941 5,603 2,820 Discontinued Operations -- -- 600,000 -- -- ---------- --------- ------------ ------------ ------------ Total $1,115,034 $ 24,477 $ 1,252,647 $ 31,778 $ 22,447 ========== ========= ============ ============ ============ FISCAL 1996 Power Products $ 508,779 $ 31,081 $ 267,471 $ 13,797 $ 8,077 Tactical Vehicle Systems 200,916 10,597 185,211 1,171 10,653 Petroleum Equipment 57,406 2,419 47,564 4,401 1,393 Other Business Activities 58,086 3,018 126,624 1,635 2,253 Discontinued Operations -- -- 452,289 -- -- ---------- --------- ------------ ------------ ------------ Total $ 825,187 $ 47,115 $ 1,079,159 $ 21,004 $ 22,376 ========== ========= ============ ============ ============
(1) Operating profit of Power Products for Fiscal 1997 includes the $4,369 gain on the sale of a construction equipment franchise. A reconciliation of Operating Profit to Earnings (Loss) from Continuing Operations before Income Taxes is as follows: 28 FISCAL FISCAL FISCAL 1998 1997 1996 -------- -------- -------- Operating profit $(48,940) $ 24,477 $ 47,115 Corporate expenses, net (11,452) (9,816) (9,910) Non-operating interest income 10,925 1,941 1,920 Interest expense (12,244) (15,440) (12,474) Settlement of litigation and special charge -- (23,352) (20,000) -------- -------- -------- Earnings (loss) from continuing operations before income taxes $(61,711) $(22,190) $ 6,651 ======== ======== ======== NOTE 5: 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 1998 1997 ----------- ----------- Costs incurred on uncompleted contracts $ 1,467,957 $ 1,137,220 Accrued profits 8,655 19,440 ----------- ----------- 1,476,612 1,156,660 Less: Customer progress payments (1,377,739) (1,018,892) ----------- ----------- $ 98,873 $ 137,768 =========== =========== Included in the statements of financial position: Recoverable costs and accrued profits not yet billed $ 99,097 $ 138,208 Billings on uncompleted contracts in excess of incurred costs (224) (440) =========== =========== $ 98,873 $ 137,768 =========== ===========
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 $0 and $13,992 at January 31, 1999 and 1998, respectively. The Company's total general and administrative expenses incurred, including amounts capitalized and charged to cost of sales under the FMTV contract, totaled $105,887, $88,235 and $83,092 in Fiscal 1998, 1997 and 1996, respectively. The United States Government has a security interest in unbilled amounts associated with contracts that provide for both progress payments and performance based 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. 29 NOTE 6: INVENTORIES Summarized below are the components of inventories: FISCAL FISCAL 1998 1997 --------- --------- Power Products $ 182,894 $ 163,143 Petroleum Equipment, net of customer deposits 40,560 28,717 Other Business Activities 40,222 21,609 Excess of current cost over LIFO values (48,474) (45,892) --------- --------- Total Inventories $ 215,202 $ 167,577 ========= ========= The Company's inventory classifications correspond to its reportable segments. The Power Products segment's inventory consists primarily of industrial equipment, equipment under modification and parts held in the Company's distribution network for resale. As a custom packager of power systems to customer specifications, the Petroleum Equipment and Other Business Activities segment's inventory consists primarily of work-in-process which includes purchased and manufactured components in various stages of assembly. NOTE 7: 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 approximately $5.8 million at the close of Fiscal 1998. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or barred from government contract. 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, Overseas Private Investment Corporation, and similar government agencies during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains an effective program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The Company has been advised that the U.S. Customs Service and the Department of Justice are investigating potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil, or administrative sanctions against the Company and/or individual employees and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury and warranty matters normally incident to the Company's business. No individual case, or group of cases presenting substantially similar issues of law or fact, involve a claim for damages in excess of $5 million or are expected to have a material effect on the manner in which the Company conducts its business. Although management has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases could have a material adverse impact on the results of operations in the period it occurs. The Company has guaranteed the project financing ($42,600 at January 31, 1999) of a power generation plant in Argentina (Note 2). Included in "Other accrued liabilities" at January 31, 1999 is a reserve of $22,600 for the anticipated loss related to such guarantee; this estimated loss is predicated on projections of future events and realization value of the underlying collateral. As a result of the Company's net loss for Fiscal 1998, the Company was unable to meet certain financial covenant requirements and is in default of the guarantee agreement. Presently, the lender has the right to demand payment of the entire $42,600. Such a demand, if made, would cause defaults under the majority of the Company's outstanding debt (approximately $151,000 at January 31, 1999), as well as the revolving credit facility, which would required the Company to negotiate waivers and amendments or seek additional financing or other sources of funds. In the event the Company is unable to successfully negotiate waivers and amendments or obtain additional financing or other sources of funds, liquidity would be adversely affected. Although management is of the opinion that a demand for payment is unlikely, no assurances can be given that such a demand will not be made. The Company has reached a written agreement in principle (the Proposed Agreement), subject to final documentation, to amend the guarantee agreement with the project lender that provides for, among other things, waivers of the financial covenant defaults and amends them to permit future compliance. The Proposed Agreement also requires that standby letters of credit (LOC's) be provided in varying amounts between May 31, 1999 and June 30, 2000 totaling the entire outstanding balance of the project financing. It is the Company's intention to comply with the Proposed Agreement and provide the LOC's. Such LOC's may be drawn and applied in payment of the $42,600 upon the earlier of an event of default or December 31, 2000. Certain provisions of the Proposed Agreement may require the concurrence of the senior noteholders. 30 The Company has provided certain other guarantees in support of its customer's financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. The maximum exposure of the Company related to guarantees at January 31, 1999 is $13 million, excluding the $42.6 million discussed above. The Company leases certain additional property and equipment under lease arrangements of varying terms whose annual rentals are less than 1% of consolidated sales. NOTE 8: 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. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. Most of the production under the original FMTV contract was completed as of January 31, 1999. Revenues and profits realized on the original FMTV contracts are based on the Company's estimates of total contract sales value and costs at completion. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the original FMTV contracts 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 contracts. In addition, the Company has been directed by the U.S. Army to undertake certain changes to the drive train of all vehicles produced under the first FMTV contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments or claims under the original FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused changes and delays amounts in excess of agreed upon contract price. It is not possible to estimate the amount, if any, that the Company will recover under such Requests for Equitable Adjustments or claims. The Company has expensed the costs associated with $48 million in claims relating to program delays and changes, and has fully reserved $40 million related to drive train changes. Any future recovery of these amounts will be treated as income in the period in which the matter is resolved. During Fiscal 1998, the Company was awarded a second set of multi-year contracts from the U.S. Army that provides for continued production of the FMTV through Fiscal 2002 with a one year option that would extend the new contract through 2003. The funding of the new FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the new FMTV contract must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. As of January 31, 1999, funding in the amount of $315 million for the new FMTV contract had been authorized and appropriated by the U.S. Congress. If the new FMTV contract is terminated other than for default, the FMTV contract provides for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. NOTE 9: 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, 1999 and 1998, the amounts outstanding under these arrangements were $16,000 and $35,000, respectively, with a weighted average interest rate of 5.48% and 6.11%, respectively. The Company has entered into an agreement to acquire up to $17 million of diesel engines. This agreement allows for vendor supported financing with payments due upon certain events, not to exceed three years. At the end of Fiscal 1998 there was not a material amount of this facility in place. The Company has also entered into a facility to finance computer hardware and software totaling up to approximately $7 million. 31 Long-Term Debt, which is generally unsecured, consists of the following: FISCAL FISCAL 1998 1997 --------- --------- Notes payable to insurance company: -10.20%, principal due $1,000 annually to 1998 $ -- $ 1,000 Debt of consolidated limited partnership: -note payable to a bank, principal due 2000 8,582 8,700 Revolving credit notes payable to banks -- 225,000 Senior Notes 6.72% principal due 1999 60,000 60,000 7.03% principal due 2001 20,000 20,000 7.29% principal due 2003 30,000 30,000 7.38% principal due 2006 25,000 25,000 Other 9,436 3,466 --------- --------- 153,018 373,166 Less current portion (See Note Below) (69,488) (226,000) --------- --------- Long-Term Debt $ 83,530 $ 147,166 ========= ========= At January 31, 1999, the Company had commitments of $150,000, limited by certain financial calculations, from banks under unsecured revolving credit notes which mature on December 20, 2001. Effective January 31, 1999, the Company obtained certain modifications to its revolving line of credit which, among other things, adjusted its interest rate options and modified certain covenants dealing with debt levels, interest coverage, investments and required tangible net worth. Additionally, the $150,000 commitment could be less if the involved banks, at their discretion, decide to limit the facility to a certain percentage of qualified receivables and inventory. Under these modifications, the Company pays interest and a commitment fee at various options. The maximum interest rate is the prime rate and the maximum commitment fee is 50 basis points per annum on the daily average unused balance. Pursuant to the amended covenants under the revolving credit facility, approximately $100,000 would have been available for the Company's use as of January 31, 1999, of which $76,000 would be required to pay current debt levels. The Company's unsecured long-term notes, which include the revolving credit notes and senior notes, were issued pursuant to agreements containing covenants that restrict indebtedness, guarantees, rentals and other items. Additional covenants in the revolving credit notes require the Company to maintain a minimum tangible net worth and interest coverage. See Note 7 for additional information regarding debt compliance. Since these requirements are calculated from earnings and cash flow, dividends could be restricted indirectly. Dividends at the current level are not restricted as of the date of this report. In December 1998, the Company entered into an agreement under which the Company has financed approximately $7 million of gas compression equipment. As a result of the ownership 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 parking garage. Interest is payable in monthly installments at various rates, the maximum rate being 9%. The amounts of long-term debt which will become due during Fiscal 1999 through 2003, and beyond are approximately: 1999--$69,500; 2000--$1,000; 2001--$21,100; 2002--$1,900; 2003-- $31,300 and beyond--$28,200. NOTE 10: 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 32 of the last ten years of employment. The Company funds pension costs in conformity with the funding requirements of applicable government regulations. In addition, 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. The following table includes pension benefits information for the noncontributory defined benefit pension plan discussed above as well as the unfunded supplemental retirement plan and the unfunded defined benefit retirement plan for non-employee directors.
OTHER POST EMPLOYMENT PENSION BENEFITS BENEFITS -------------------- ---------------------- 1998 1997 1998 1997 -------- -------- --------- --------- (DOLLARS IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 74,468 $ 69,515 $ 7,058 $ 7,187 Service cost 3,175 3,937 421 457 Interest Cost 5,385 5,037 500 528 Participant contributions 180 171 Curtailment (gain) or loss -- (2,931) -- (824) Benefits paid (5,970) (2,377) (632) (500) Actuarial loss 7,888 1,287 449 39 -------- -------- --------- --------- Benefit Obligation at end of year $ 84,946 $ 74,468 $ 7,976 $ 7,058 ======== ======== ========= ========= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 76,323 $ 68,196 -- -- Actual return on plan assets 7,145 11,387 -- -- Employer contributions 205 60 $ 452 $ 329 Participant contributions 180 171 Benefits paid (5,970) (2,377) (632) (500) Administrative Expenses (981) (943) -- -- -------- -------- --------- --------- Fair value of plan assets at end of year $ 76,722 $ 76,323 $ -- $ -- ======== ======== ========= ========= RECONCILIATION OF FUNDED STATUS Funded status $ (8,224) $ 1,855 $ (7,976) $ (7,058) Unrecognized actuarial (gain) or loss 7,495 (796) (2,870) (3,543) Unrecognized prior service cost 1,723 2,033 (2,173) (2,655) -------- -------- --------- --------- Net amount recognized at year-end $ 994 $ 3,092 $ (13,019) $ (13,256) ======== ======== ========= ========= AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION Prepaid benefit cost $ 3,666 $ 5,401 -- -- Accrued benefit liability (3,820) (3,254) -- -- Intangible assets 1,110 925 -- -- Accumulated other comprehensive income 38 20 -------- -------- --------- --------- Net amount recognized at year-end $ 994 $ 3,092 -- -- ======== ======== ========= ========= Other comprehensive income attributable to change in additional minimum liability obligation $ 18 $ 1 -- -- ADDITIONAL YEAR-END INFORMATION FOR PLANS WITH BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS: Benefit obligation $ 84,946 $ 4,857 $ 7,976 $ 7,058 Fair Value of plan assets 76,722 -- -- --
33
OTHER POST EMPLOYMENT PENSION BENEFITS BENEFITS ----------------------- ----------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (DOLLARS IN THOUSANDS) ADDITIONAL YEAR-END INFORMATION FOR PENSION PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS Projected benefit obligation $ 5,419 $ 4,857 -- -- Accumulated benefit obligation 3,820 3,254 -- -- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 3,175 $ 3,937 $ 421 $ 457 Interest cost 5,385 5,037 500 528 Expected return on plan assets (6,616) (6,153) -- -- Amortization of prior service cost 311 372 (483) (1,419) Additional gain recognized due to curtailment -- (2,722) -- (824) Recognized actuarial (gain) or loss 48 24 (225) (247) --------- --------- --------- --------- Net periodic cost (benefit) $ 2,303 $ 495 $ 213 $ (1,505) ========= ========= ========= ========= WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.75% 7.25% 6.75% 7.25% Expected long-term rate of return on plan assets 9.50% 9.50% N/A N/A Rate of compensation increase 4.75% 4.75% N/A N/A
ASSUMED HEALTH CARE COST TREND For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for Fiscal 1998. The rate is assumed to decrease gradually to 6% for 2001 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: ONE-PERCENTAGE- ONE-PERCENTAGE- POINT INCREASE POINT DECREASE -------------- -------------- Effect on total service and interest cost components for Fiscal 1998 $ 103 $ (108) Effect on Fiscal 1998 postretirement benefit obligation 918 (870) The sale of GTO resulted in a curtailment as defined by SFAS No. 88, EMPLOYER'S ACCOUNTING FOR SETTLEMENTS AND CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS. The impact of the curtailment was a net gain of $2,722, which includes a decrease in the projected benefit obligation of $2,931 as of January 31, 1998. The Company has retained all liabilities and obligations of the GTO plan participants up to the date of sale. Effective June 1997, the Company terminated its unfunded defined benefit retirement plan for non-employee directors which had provided for payments upon retirement, death, or disability. Retirement expense for this plan in Fiscal 1998, 1997 and 1996, respectively, was $33, $47, and $59. The Company has an unfunded supplemental retirement plan for certain corporate officers. Retirement expense for the plan in Fiscal 1998, 1997 and 1996 was $535, $486 and $406, respectively. Prior service cost not yet recognized in periodic pension cost was $1,289, $1,418 and $1,547, at January 31, 1999, 1998 and 1997, respectively. 34 The Company has an employee savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may contribute up to 15% of their pre-tax salary, but not more than statutory limits. The Company contributes twenty-five cents for each dollar contributed by a participant, subject to certain limitations. The matching percentages were changed as of January 1, 1999 and now provide a matching payment equal to each dollar contributed by employees up to 1% of their annual income and twenty-five cents for each dollar contributed in excess of 1%, subject to certain limitations. The Company's matching contribution to the savings plan for continuing operations was $986, $817 and $670 in Fiscal 1998, 1997 and 1996, respectively. Under a nonqualified deferred compensation plan for certain employees, a portion of eligible employees' discretionary income can be deferred at the election of the employee. These deferred funds accrue interest payable to the employee at the prime rate in effect on specified dates. NOTE 11: COMMON STOCK STOCK REPURCHASE PROGRAM: In October, 1997 the Company's Board of Directors authorized the repurchase of up to $120 million in its common stock. During Fiscal 1998, the Company repurchased 5,265,120 shares of its outstanding stock for $120 million. SHAREHOLDER RIGHTS PLAN: The Company has a shareholders rights plan. The rights may be exercised by their holders to purchase one-third (1/3) of a share at $30.00 for each share owned by a shareholder upon the acquisition, or announcement of intended acquisition, of 15% or more of the Company's stock by a person or group. The rights are subject to antidilution adjustments and will expire on March 20, 2005, unless the plan is further extended or the rights are earlier redeemed. STOCK OPTION PLANS: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan, the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock Option Plan, the 1994 Director Stock Option Plan and the 1996 Director Stock Plan authorize the grant of options to purchase an aggregate of up to 3,300,000, 984,950, 150,000 and 150,000 shares of Common Stock, respectively, at not less than fair market value at the date of grant. The options have a term not exceeding ten years and vest over periods not exceeding four years. Under the amended terms of the 1988 Nonstatutory Stock Option Plan, the number of options available for grant increased from 1,800,000 to 3,300,000 shares as of June 10, 1997. Pursuant to an amendment adopted in Fiscal 1996, no future grants of options may be made pursuant to the 1994 Director Stock Option Plan. STOCK ISSUANCE: During Fiscal 1998, the Company issued 33,783 shares of common stock to acquire an additional interest in its Venezuela affiliate from a minority shareholder. The Company also issued under the 1996 Director Stock Plan 4,504 shares to certain directors of the Company for services rendered. A summary of the status of the Company's stock option plans during Fiscal 1996, 1997 and 1998 is presented in the tables below: SHARES OPTION PRICE UNDER RANGE OPTION PER SHARE ---------- ------------------ Outstanding at end of Fiscal 1995 898,075 $18.75 - $50.25 Granted 343,800 $24.25 and $24.375 Exercised (71,500) $18.75 Canceled (35,375) $24.25 - $50.25 ---------- Outstanding at end of Fiscal 1996 1,135,000 $18.75 - $50.25 Granted 375,900 $20.00 - $28.125 Exercised (70,000) $18.75 Canceled (73,175) $18.75 - $50.25 ---------- Outstanding at end of Fiscal 1997 1,367,725 $20.00 - $50.25 Granted 277,500 $21.3125 - $24.375 Exercised (17,000) $20.00 Canceled (85,250) $20.00 - $50.25 ---------- Outstanding at end of Fiscal 1998 1,542,975 $20.00 - $50.25 ========== Options available for future grants at the end of Fiscal 1998 2,094,275 ========== 35 During Fiscal 1997 the Company sold GTO. Those GTO employees holding stock options were granted a one year period, from the date of sale, in which to exercise vested options at the time of the sale. Effective February 2, 1999, 354,025 options held by employees of the Company's discontinued GTO were canceled. FISCAL FISCAL 1998 1997 ----------- ----------- Options exercisable at end of year 775,100 552,050 Weighted average exercise price of options exercisable $ 33.14 $ 35.61 Weighted average fair value of options granted $ 11.71 $ 12.23 REMAINING WEIGHTED AVERAGE OPTIONS OPTIONS CONTRACTUAL EXERCISE PRICE EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE (YEARS) --------------- ---------------- ----------- ----------- ------------ $20.00 - $35.125 $29.51 1,407,375 639,500 4 - 10 $50.25 $50.25 135,600 135,600 6 ----------- ----------- 1,542,975 775,100 =========== =========== The Company accounts for these plans under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost for these plans been determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: FISCAL FISCAL 1998 1997 -------- ------- Net earnings (loss) As Reported $(72,984) $52,263 Pro Forma (74,724) $49,869 Net earnings per share As Reported $ (2.51) $ 1.57 Pro Forma $ (2.58) $ 1.50 Because the Statement 123 method of accounting is not required to be applied to options granted prior to February 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in Fiscal 1998 and 1997: FISCAL FISCAL 1998 1997 -------- -------- 1988 Nonstatutory Stock Option Plan and 1993 Nonofficer Stock Option Plan Risk free interest rates 5.93% 6.61% Expected dividend yields 1.39% 0.34% Expected volatility 35.48% 39.21% Expected life (years) 10 10 1994 Director Stock Option Plan Risk free interest rates 6.79% 6.79% Expected dividend yields 1.30% 1.30% Expected volatility 35.24% 35.24% Expected life (years) 6 6 1996 Director Stock Plan Risk free interest rates 5.93% 6.93% Expected dividend yields 1.60% 0.50% Expected volatility 35.71% 39.28% Expected life (years) 10 10 36 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. NOTE 12: INCOME TAXES The components of the income tax provision (benefit) and the income tax payments are as follows: FISCAL FISCAL FISCAL 1998 1997 1996 --------- -------- -------- Current $ 84,335 $ 4,990 $ (6,083) Deferred (107,139) (13,065) 7,859 --------- -------- -------- Income tax provision (benefit) $ (22,804) $ (8,075) $ 1,776 ========= ======== ======== Income tax payments (excluding refunds) $ 100,153 $ 15,378 $ 15,320 ========= ======== ======== A reconciliation between the provision (benefit) for income taxes and income taxes computed by applying the statutory U.S. Federal income tax rate of 35% in Fiscal 1998, 1997 and 1996 is as follows: FISCAL FISCAL FISCAL 1998 1997 1996 -------- ------- ------- Provision (benefit) at statutory rates $(21,599) $(7,767) $ 2,328 Other (1,205) (308) (552) -------- ------- ------- $(22,804) $(8,075) $ 1,776 ======== ======= ======= 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 1998 and 1997 are as follows: FISCAL FISCAL 1998 1997 -------- -------- Deferred Tax Assets Postretirement benefit obligation $ 4,830 $ 4,640 Accrued expenses and other reserves 39,520 14,768 Property, plant and equipment 937 -- Other 3,354 33 -------- -------- Gross deferred tax assets 48,641 19,441 -------- -------- Deferred Tax Liabilities Property, plant and equipment -- 2,544 Pension accounting 422 1,273 Contract accounting 20,737 63,928 Prepaid expenses and deferred charges 5,649 50,999 Other 3,403 11,842 -------- -------- Gross deferred tax liabilities 30,211 130,586 -------- -------- Net deferred tax (asset) liability $(18,430) $111,145 ======== ======== Current portion of deferred tax (asset) liability $(10,569) $108,246 Non-current portion of deferred tax (asset) liability (7,861) 2,899 -------- -------- Net deferred tax (asset) liability $(18,430) $111,145 ======== ======== 37 The Company believes it is more likely than not that the net deferred income tax asset as of January 31, 1999 in the amount of $18.4 million will be realized, based primarily upon sufficient taxable income available in carryback years as permitted by the tax law. NOTE 13: SUPPLEMENTAL FINANCIAL DATA Accounts and notes receivables, net consist of the following: FISCAL FISCAL 1998 1997 --------- --------- Accounts receivable $ 162,219 $ 180,388 Notes receivable 13,509 26,119 Allowance for doubtful accounts (3,999) (2,236) Less non-current portion of notes receivable (7,182) (19,238) --------- --------- $ 164,547 $ 185,033 ========= ========= The U.S. Government accounted for approximately 15.7% and 22.5% of accounts receivable, exclusive of the receivable due from the sale of GTO, at January 31, 1999 and 1998, 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, net are as follows: FISCAL FISCAL 1998 1997 --------- --------- Machinery and equipment $ 127,947 $ 111,931 Buildings and leasehold improvements 93,868 80,511 Revenue earning assets 34,383 17,118 Accumulated depreciation and amortization (142,913) (129,408) --------- --------- 113,285 80,152 Construction-in-progress 105 3,607 Land 15,355 13,985 --------- --------- $ 128,745 $ 97,744 ========= ========= Other accrued liabilities consist of the following: FISCAL FISCAL 1998 1997 -------- -------- Estimated cost to perform under a government directive $ 40,000 -- Estimated obligation to perform under a debt guarantee 22,600 -- Estimated purchase price adjustment on sale of GTO -- $ 52,250 Estimated retained liabilities of GTO -- 28,026 Other 32,749 20,543 -------- -------- $ 95,349 $100,819 ======== ======== 38 NOTE 14: CONSOLIDATED QUARTERLY DATA (UNAUDITED)
FISCAL 1998 --------------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER --------- --------- -------- -------- Sales $ 257,102 $ 321,121 $323,539 $305,010 Gross profit (loss) (45,932) 11,842 31,740 31,034 Net earnings (loss) - Continuing (49,690) (6,917) 8,437 9,165 Net earnings (loss) - Discontinued (13,979) (20,000) -- -- Net earnings (loss) per share: Basic and Diluted Continuing operations (1.77) (.25) .30 .29 Discontinued operations (.50) (.71) -- -- --------- --------- -------- -------- Net earnings (loss) per share $ (2.27) $ (.96) $ .30 $ .29 ========= ========= ======== ======== FISCAL 1997 --------------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER --------- --------- -------- -------- Sales $ 334,297 $ 298,998 $248,778 $232,961 Gross profit (loss) (8,723) 33,693 30,238 27,777 Net earnings (loss) - Continuing (29,689) 3,524 6,390 5,270 Net earnings (loss) - Discontinued 356 (1,382) 1,838 4,612 Gain on disposal of discontinued operations, net of tax 61,344 -- -- -- Net earnings (loss) per share: Basic and Diluted Continuing operations (.90) .11 .19 .16 Discontinued operations .01 (.04) .06 .14 Gain on disposal 1.85 -- -- -- --------- --------- -------- -------- Net earnings per share $ .96 $ .07 $ .25 $ .30 ========= ========= ======== ========
NOTE 15: ACQUISITIONS AND DIVESTITURE On April 12, 1997, the Company acquired Sierra Detroit Diesel Allison, Inc., a Detroit Diesel distributor whose franchise covers northern California. The purchase price totaled approximately $5.0 million. On September 12, 1997, the Company acquired ownership of Carson Cogeneration, LLP, a California independent power producer. The purchase price totaled approximately $3.7 million. The assets and operating results of the plant prior to the acquisition are not material to the Company's consolidated assets or earnings. In October 1998, the Company sold the assets of Carson Cogeneration, LLP for approximately $4.6 million realizing an approximate loss of $53. On October 6, 1997, the Company sold its construction equipment franchise in Houston, Texas for $30.2 million. The construction equipment franchise operated in the gulf coast territory of Texas and primarily distributed, and provided services for, products manufactured by John Deere Construction Equipment Company and other companies engaged in the business of manufacturing earth moving equipment, forestry equipment, skidsteer equipment, and utility equipment. A gain of $4.4 million was recognized on the sale. On March 30, 1998, the Company acquired the assets of Compression Specialties, Inc., a compression equipment distributor in the 39 business of leasing and servicing compression equipment in the State of Wyoming and the surrounding Rocky Mountain area. The purchase price totaled approximately $9.5 million. On December 21, 1998 the Company acquired the assets and certain liabilities of Tug Manufacturing Corporation, a manufacturer of airline ground support equipment. The purchase price totaled approximately $13 million and is subject to an upward adjustment of up to $3 million to be paid ratably over three years if certain earnings and other performance measures are met. On June 30, 1998 the Company acquired IPSC Co., Inc. based in Stuttgard, Arkansas for approximately $4.2 million. IPSC Co., Inc. is the exclusive Deutz engine distributor for Louisiana, Mississippi, Arkansas and Western Tennessee. IPSC Co., Inc. also manufactures its own line of pumping equipment and generator sets for agriculture, industrial and marine markets utilizing the Deutz engines. It complements the existing engine distributorships owned by the Power Products segment. The Company acquired H & H Rubber on June 1, 1998 for approximately $4 million. Based in Houston, Texas, H & H Rubber manufactures molded rubber products utilized in the production of petroleum equipment and sells after market products. The Company has made other immaterial acquisitions which were included mainly in the petroleum equipment segment with a combined purchase price of approximately $2.9 million. The results of all businesses acquired in fiscal years 1998 and 1997 have been included in the consolidated financial statements from the date of acquisition. The assets and any operations of the businesses acquired are not material to the Company's consolidated assets or earnings. In allocating purchase price, the assets acquired and liabilities assumed have been initially assigned and recorded based upon preliminary estimates of fair value and may be reviewed as additional information becomes available. As a result, the financial information in the Company's consolidated financial statements is subject to adjustment prospectively as subsequent revisions in estimates of fair value, if any, are necessary. NOTE 16: VULNERABILITY DUE TO CERTAIN CONCENTRATIONS SOURCES OF SUPPLY: 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. Any interruption in the supply of materials from the original manufacturers or a termination of a distributor agreement could have a material adverse effect on the performance of the Power Products segment. Additionally, the FMTV incorporates components specified by the U.S. Army which are produced by specified sources. Interruption of the supply of any of these components could affect the Company's ability to deliver vehicles. CUSTOMERS: The U.S. Government is the predominant customer of the Tactical Vehicle Systems segment, accounting for practically all of the sales of this segment. The loss of this customer would have a material adverse effect on the Company's consolidated financial condition and results of operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 40 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 Election of Directors; Executive Officers of the Registrant Officers; Section 16(a) Beneficial Ownership Reporting Compliance 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 Voting Securities and Ownership Certain Beneficial Thereof by Certain Beneficial Owners and Management Owners and Management Item 13. Certain Relationships Transactions with Management and and Related Transactions Certain Business Relationships 41 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, 1999 and 1998. Consolidated Statements of Earnings--Years ended January 31, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity--Years ended January 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows--Years ended January 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. 2. Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto. 3. The Company has several instruments which define the rights of holders of long-term debt. Except for the instruments listed as exhibits 4.1 and 4.2 below, the total amount of securities authorized under any individual instrument with respect to long-term debt does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish upon request by the Securities and Exchange Commission any instruments not filed herewith relating to its long-term debt. The Company will furnish to any shareholder of record as of April 21, 1999, 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. *2.1 Transaction Agreement dated September 21, 1997 between General Electric Company and Stewart & Stevenson Services, Inc. (Exhibit 2.1 to 9/97 8-K). *3.1 Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (Exhibit 3(a) to 10/95 10-Q). 3.2 Fifth Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of April 14, 1998, as amended through April 13, 1999. *4.1 Revolving Credit Agreement effective December 20, 1996, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association, as Agent, and the other Banks named therein (Exhibit 4.1 to 1/97 10-K). 4.2 Amendment to Loan Agreement effective August 25, 1997, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association, as Agent, and the other Banks named therein. 4.3 Agreement and Second Amendment to Loan Agreement effective January 31, 1998, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein. 4.4 Agreement and Third Amendment to Loan Agreement effective May 13, 1998, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein. 4.5 Agreement and Fourth Amendment to Loan Agreement effective October 31, 1998, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein. 42 4.6 Agreement and Fifth Amendment to Loan Agreement effective April 23, 1999, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein. *4.7 Note Purchase Agreement effective May 30, 1996, between Stewart & Stevenson Services, Inc. and the Purchasers named therein (Exhibit 4 to 7/96 10-Q). *4.8 Rights Agreement effective March 13, 1995, between Stewart & Stevenson Services, Inc. and The Bank of New York (Exhibit 1 to Form 8-A Registration Statement under the Commission File No. 001-11443). *10.1 Lease Agreement effective April 15, 1997, between Miles McInnes and Faye Manning Tosch, as Lessors, and the Company, as Lessee (Exhibit 10.1 to 1/97 10-Q). *10.2 Distributor Sales and Service Agreement effective January 1, 1996, between the Company and Detroit Diesel Corporation (Exhibit 10.2 to 1/96 10-K). *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 (Exhibit 28.1 of the Form S-3 Registration Statement 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 (Exhibit 28.2 of the Form S-3 Registration Statement under the Commission File No. 33-44149). *10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated as of December 31, 1979 (Exhibit 10.8 to 1/94 10-K). *10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (as amended and restated effective as of June 10, 1997) (Exhibit B to 5/9/97 Proxy Statement). *10.7 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan (Exhibit 10.11 to 1/94 10-K). *10.8 Stewart & Stevenson Services, Inc. 1996 Director Stock Plan (Exhibit A to 5/9/97 Proxy Statement). *10.9 Contract Number DAAE07-98-C-M005 dated October 14, 1998 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive and Armaments Command (Exhibit 10.9 to 10/98 10-Q). 21.1 List of Subsidiaries. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 27.1 Financial Data Schedule. ---------- * Incorporated by reference. (b) Form 8-K Report Date - January 19, 1999 (Resignation of CEO) Items reported - Item 5. Other Events Item 7. Exhibits 43 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 13th day of April, 1999. STEWART & STEVENSON SERVICES, INC. By/S/ C. JIM STEWART II C. Jim Stewart, II 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 13th day of April, 1999. /s/ C. Jim Stewart II /s/ J. Carsey Manning C. Jim Stewart II J. Carsey Manning Director and Chief Executive Officer Director /s/ Donald E. Stevenson /s/ Jack T. Currie Donald E. Stevenson Jack T. Currie Director Director /s/ Jack W. Lander, Jr. /s/ Brian H. Rowe Jack W. Lander, Jr. Brian H. Rowe Director Director /s/ Robert S. Sullivan /s/ Khleber V. Attwell Robert S. Sullivan Khleber V. Attwell Director Director /s/ John H. Doster ______________________________ John H. Doster William R. Lummis Chief Financial Officer Director /s/ Darvin M. Winick ______________________________ Darvin M. Winick Howard Wolf Director Director /s/ Patrick G. O'Rourke Patrick G. O'Rourke Controller 44 EXHIBIT INDEX EXHIBIT NUMBER AND DESCRIPTION - ------------------------------------------- 3.2 Bylaws. 4.2 Amendment to Loan Agreement. 4.3 Agreement and Second Amendment to Loan Agreement. 4.4 Agreement and Third Amendment to Loan Agreement. 4.5 Agreement and Fourth Amendment to Loan Agreement 4.6 Agreement and Fifth Amendment to Loan Agreement. 21.1 List of subsidiaries. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 27.1 Financial Data Schedule. 45 EX-3.2 2 EXHIBIT 3.2 FIFTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. EFFECTIVE APRIL 14, 1998 ARTICLE I OFFICES SECTION 1.1. OFFICES. The principal business office of the Corporation shall be at Houston, Texas or at such other location within the State of Texas as the Board of Directors may, from time to time, establish by resolution. The Corporation may have such other business offices within or without the State of Texas as the Board of Directors may from time to time establish or the business of the Corporation may require. ARTICLE II CAPITAL STOCK SECTION 2.1. CERTIFICATES REPRESENTING SHARES. Certificates representing shares of stock of the Corporation shall be consecutively numbered and in such form or forms as comply with the requirements of law and the Restated Articles of Incorporation and as the Board of Directors shall approve. Such certificates shall be signed by the President or a Vice President, and the Secretary or an Assistant Secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the President or Vice President and the Secretary or Assistant Secretary may be facsimiles, engraved or printed, if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer or officers who have signed or whose facsimile signature or signatures have been placed upon such certificate shall have ceased to be such officer or officers before such certificate is issued, it may be adopted and issued by the Corporation with the same effect as if he or they had not ceased to be such officer or officers as of the date of its issuance, and the issuance and delivery thereof by the Corporation shall constitute adoption thereof by the Corporation. SECTION 2.2. STOCK CERTIFICATE REGISTER AND SHAREHOLDERS OF RECORD. The Secretary of the Corporation shall keep at the registered office of the Corporation, or cause a duly appointed transfer agent or registrar to keep at its principal office, a share register showing the names of the shareholders and their addresses, the number of shares held by each, the number and date of issue of all certificates representing shares of the Corporation, the number and date of cancellation of every certificate surrendered for cancellation and whether such certificates originated from original issue or transfer. Such information may be kept in any medium capable of reproducing the information in clearly legible form and shall be the official list of shareholders of record of the Corporation for all purposes. The Corporation shall be entitled to treat the holder of record of any shares of the Corporation as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares on the part of any other person, including (but without limitation) a purchaser, assignee, or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person. SECTION 2.3. TRANSFER OF STOCK. The shares represented by any share certificates of the Corporation are transferable only on the stock certificate register of the Corporation by the holder of record thereof in person or by a duly authorized attorney or legal representative upon surrender of the certificate for such shares properly endorsed or assigned. SECTION 2.4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer agents or registrars of the shares, or both, and may require all share certificates to bear the signature of a transfer agent or registrar or both. SECTION 2.5. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate for shares of stock in the place of any certificate theretofore issued and alleged to have been lost, stolen or destroyed, but the Board of Directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to furnish an affidavit as to such loss, theft, or destruction and to give a bond in such form and substance, and with such surety or sureties, with fixed or open penalty, as it may direct, to indemnify the Corporation, and the transfer agents and registrars, if any, against any claim that may be made on account of the alleged loss, theft or destruction of such certificate. Any such new certificate shall be plainly marked "Duplicate" on its face. ARTICLE III THE SHAREHOLDERS SECTION 3.1. ANNUAL MEETINGS. An annual meeting of the shareholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, within or without the State of Texas, as may be designated by the Board of Directors or officer calling the meeting at 10:00 in the morning of the second Tuesday in June, or on such other date and time as the Board of Directors or officer calling such meeting shall fix and set forth in the notice of the meeting. At the annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before the annual meeting of shareholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 3.1, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 2 3.1. For business to be properly brought before an annual meeting by a shareholder, the shareholder, in addition to any other applicable requirements, must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders of the Corporation. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of voting stock of the Corporation which are beneficially owned by the shareholder, (d) a representation that the shareholder intends to appear in person or by proxy at the meeting to bring the proposed business before the annual meeting, and (e) a description of any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 3.1. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 3.1, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 3.1, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3.1. SECTION 3.2. SPECIAL MEETINGS. Except as otherwise provided by law or by the Restated Articles of Incorporation, special meetings of the shareholders may be called by the Chairman of the Board, the President, the Board of Directors, or the holders of not less than one-tenth of all the shares having voting power at such meeting, and shall be held at the principal office of the Corporation, at such time as is stated in the notice calling such meeting, or at such other place as the person or body calling such meeting may determine and state in such notice. SECTION 3.3. NOTICE OF MEETINGS - WAIVER. Written or printed notice, stating the place, day and hour of any meeting and, in case of a special shareholders' meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President, or the officer, body or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock certificate register of the Corporation, with postage thereon prepaid. Such further or earlier notice shall be given as may be required by law. Waiver 3 by a shareholder of notice in writing of a shareholders' meeting, signed by him, whether before or after the time stated therein, shall be equivalent to the giving of such notice. No notice shall be necessary for any adjourned meeting. SECTION 3.4. CLOSING OF STOCK CERTIFICATE REGISTER AND FIXING RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock certificate register shall be closed for a stated period but not to exceed, in any case, fifty (50) days. If the stock certificate register shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such registers shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock certificate register, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock certificate register is not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made, as provided in this Section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock certificate register and the stated period of closing has expired. SECTION 3.5. VOTING LIST. The officer or agent having charge of the stock certificate register for shares of the Corporation shall make, at least ten (10) days before such meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. Failure to comply with this Section shall not effect the validity of any action taken at such meeting. SECTION 3.6. QUORUM AND OFFICERS. Except as otherwise provided by law, by the Restated Articles of Incorporation or by these Bylaws, the holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, but the shareholders present at any meeting, although less than a quorum, may from time to time adjourn the meeting to some other day and hour, without notice other than announcement at the meeting. The vote of the holders of a 4 majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the shareholders' meeting, unless the vote of a greater number is required by law, the Restated Articles of Incorporation or these Bylaws. The Chairman of the Board, or in his absence, the President, shall preside at and the Secretary, or in his absence, any Assistant Secretary shall keep the records of each meeting of shareholders, and in the absence of all such officers, their respective duties shall be performed by persons appointed by the meeting. SECTION 3.7. PROXIES. A shareholder may vote either in person or by proxy executed in writing by the shareholder, or by his duly authorized attorney-in-fact. Proxies shall be dated but need not be sealed, witnessed or acknowledged. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless provided expressly therein to be irrevocable, and unless otherwise made irrevocable by law. Proxies shall be filed with the Secretary of the Corporation before or at the time of the meeting. SECTION 3.8. BALLOTING. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. At each meeting inspectors of election may be appointed by the presiding officer of the meeting, and at any meeting for the election of directors, inspectors shall be so appointed on the demand of any shareholder present or represented by proxy and entitled to vote at the election of directors. No director or candidate for the office of directors shall be appointed as such inspector. SECTION 3.9. VOTING RIGHTS; VOTING FOR DIRECTORS. Each outstanding share of common stock shall be entitled to one (1) vote upon each matter submitted to a vote at a meeting of shareholders. No shareholder shall have the right to cumulate his votes for the election of directors, but each share shall be entitled to one vote in the election of each director. SECTION 3.10 NOMINATIONS FOR ELECTION AS A DIRECTOR. Only persons who are nominated in accordance with the procedures set forth in these Bylaws and qualify for nomination pursuant to Section 4.1 shall be eligible for election by shareholders as, and to serve as, directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or a duly constituted committee thereof or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 3.10, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 3.10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the shareholders of the Corporation, not less than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders of the Corporation, and (ii) with respect to an election to be held at a special meeting of shareholders of the Corporation for the election of 5 directors not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed to shareholders of the Corporation as provided in Section 3.3 or public disclosure of the date of the special meeting was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (x) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and (y) as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder and (ii) the class and number of shares of voting stock of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. In the event that a person is validly designated as a nominee to the Board of Directors in accordance with the procedures set forth in this Section 3.10 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. Other than directors chosen pursuant to the provisions of Section 4.3, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.10. The presiding officer of the meeting of shareholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3.10, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3.10. ARTICLE IV THE BOARD OF DIRECTORS SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of ten (10) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. No person shall be qualified for election or re-election as a director of the Corporation if: (i) he was originally elected as a director of the Corporation on or before June 19, 1981 and has attained the 6 age of 75 years prior to the date that such qualification is determined; or (ii) he was originally elected or nominated for election as a director for the Corporation after June 19, 1981, and has attained the age of 73 prior to the date that such qualification is determined; or (iii) he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year commencing after January 31, 1981, which such incumbent was entitled to attend as a director. SECTION 4.2. CLASSIFICATION AND TERM. The Board of Directors shall be divided into three classes, each class consisting as nearly as possible of one-third (1/3) of the number of directors that make up the full Board of Directors. At each annual meeting of shareholders, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of shareholders. SECTION 4.3. VACANCIES. Any vacancy on the Board of Directors may be filled by the vote of a majority of the remaining directors though less than a quorum of the Board of Directors; provided, that the Board of Directors may not fill more than two (2) vacancies caused by an increase in the number of directors during any period between two (2) successive annual meetings of shareholders. A director elected to fill a vacancy shall hold office for the unexpired portion of his predecessor's term if such vacancy was created by the death, resignation, disqualification or removal of a director or until the next annual meeting of shareholders if such vacancy was created by an increase in the size of the Board of Directors. SECTION 4.4. PLACE OF MEETING. Meetings of the Board of Directors may be held either within or without the State of Texas, at whatsoever place is specified by the officer or director calling the meeting. In the absence of other designation, the meeting shall be held at the principal business office of the Corporation. SECTION 4.5. REGULAR MEETINGS. The Board of Directors shall hold no fewer than four (4) regular meetings in each fiscal year. One such regular meeting (the "Annual Meeting of Directors") shall be held immediately following the annual meeting of shareholders, at the place of such shareholder meeting, and the other regular meetings shall be held at such times and places as the Board of Directors shall establish by resolution at the regular meeting following the annual meeting of shareholders. No notice of any kind of such regular meetings shall be necessary to either old or new members of the Board of Directors. SECTION 4.6. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held at any time by call of the Chairman of the Board, the President (if a director) or by a majority of the directors. The Secretary or officer performing his duties shall give notice of special meetings to each director at his usual business or residence address by mailing such notice at least five (5) days or one hundred twenty (120) hours before the meeting or by delivering the same at least one (1) day or twenty-four (24) hours before the meeting. No notice shall be necessary for any adjourned meeting. A waiver of notice of any special meeting, in writing, signed by the person or persons entitled to such notice, 7 whether before or after the time stated therein, shall be equivalent to the giving of such notice. Such notice or waiver thereof need not specify the business to be transacted at, or the purpose of, such meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express and announced purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. SECTION 4.7. QUORUM. Seven directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors unless a larger number is required by applicable law, the Restated Articles of Incorporation or these Bylaws, but any one or more directors, although less than a quorum, may adjourn the meeting to some other day or hour. SECTION 4.8. CHAIRMAN OF THE BOARD. At each Annual Meeting of Directors, the Board of Directors shall elect from its membership a Chairman of the Board who shall serve in such capacity until the next Annual Meeting of Directors or until his death, resignation, disqualification or removal if sooner. The Chairman of the Board shall preside at all meetings of the Board of Directors and at all meetings of the shareholders of the Company. SECTION 4.9. PROCEDURE AT MEETINGS. The Chairman of the Board shall preside at meetings of the Board of Directors. In his absence at any meeting, the President (if a director) shall preside, and in the absence of both the Chairman of the Board and the President, a member of the Board of Directors selected by the members present shall preside. The Secretary of the Corporation shall act as secretary at all meetings of the Board, or in his absence the presiding officer of the meeting may designate any person to act as secretary. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board of Directors may determine. SECTION 4.10. PRESUMPTION OF ASSENT. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 4.11. COMPENSATION. Directors as such shall not receive any stated salary for their service, but by resolution of the Board of Directors (a) an annual directors fee and (b) a fixed sum and expenses for attendance, if any, may be allowed to each director who is not an officer or employee of the Corporation for attendance at each regular or special meeting of the Board of Directors or of any Committee thereof; but nothing herein shall preclude any director from serving the Corporation in any other capacity or receiving compensation therefor. 8 SECTION 4.12. STANDING COMMITTEES. The Board of Directors by resolution adopted by a majority of the number of directors fixed by the Bylaws shall designate from their number an Executive Committee and an Audit Committee. The Executive Committee shall consist of five (5) persons. Each member shall serve until the next annual meeting of shareholders or until such director's retirement, removal, disqualification, or death. The Executive Committee shall meet upon the call of the chairman of such committee or any two (2) members thereof and shall have and may exercise all of the authority of the Board of Directors in the business and affairs of the Corporation except (a) the power to authorize or approve the sale or other transfer of any real property now owned or hereafter acquired by the Corporation; (b) the power to vote, direct the vote or grant proxies relating to any stock owned by the Corporation; (c) the power to authorize or approve purchases or commitments for goods or services with an aggregate market value in any single transaction or group of related transactions exceeding $5,000,000 except for goods and services purchased in the ordinary course of business for inventory or pursuant to capital expenditure budgets approved by the Board of Directors; (d) the power to authorize or approve the incurrence or guaranty of indebtedness with an original principal amount in excess of $1,000,000 and a maturity of longer than one (1) year; (e) the power to make loans, guaranties, investments, or other commitments outside the ordinary course of business in excess of $5,000,000 at any time outstanding to any one person or group of persons; and (f) where action of the Board of Directors is specified by the Texas Business Corporation Act or by other applicable law. The Audit Committee shall consist of four (4) persons, all of whom shall be independent of management and free of any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member. Each member shall serve until the next annual meeting of shareholders or until such director's retirement, removal, disqualification, or death. The Audit Committee shall meet no fewer than two (2) times in each fiscal year of the Corporation upon the call of the chairman of such committee or any two (2) members thereof and shall have and may exercise such responsibilities, authority and power as the Board of Directors specifies. The designation of Standing Committees and delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. SECTION 4.13. OTHER COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by the Bylaws, may designate from their number such compensation, nominating and other committees as they shall, from time to time, deem necessary and proper. Such committees shall be composed of not less than three members and shall have and exercise such of the Board of Directors' authority as shall by resolution, be delegated to it. The designation of such other committees and the delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. 9 SECTION 4.14. MEETINGS AND REPORTS OF THE COMMITTEES. The Committees shall meet from time to time as set forth in the Bylaws and on call of the Chairman or any two or more members thereof. Notice of each such meeting, stating the place, day and hour thereof, shall be served personally on each member of such Committee, or shall be mailed, delivered or telephoned to his address on the books of the Corporation, at least twenty-four (24) hours before the meeting. No such notice need state the business proposed to be transacted at the meeting. No notice of the time or place of any meeting of such Committee need be given to any member thereof who attends in person or who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. No notice need be given of an adjourned meeting of any Committee. Meetings of the Committees may be held at such place or places, either within or outside of the State of Texas, as such Committee shall determine, or as may be specified or fixed in the respective notices or waivers thereof. Each Committee may fix its own rules of procedure. They shall keep record of their proceedings and shall report these proceedings to the Board of Directors at the regular meetings thereof held next after they have been taken. SECTION 4.15. ADVISORY DIRECTORS. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by the Bylaws, may appoint from those persons who have previously served as a director of the Corporation, such advisory directors as the Board of Directors may, from time to time, determine to be desirable. Such advisory directors shall be ex-officio members of the Board of Directors, shall hold office from the date elected until the next following annual meeting of the Board of Directors unless sooner removed in the manner provided for the removal of Directors, shall be entitled to receive notice of and to attend all meetings of the Board of Directors and shall be reimbursed for all out-of-pocket expenses incurred to attend meetings of the Board of Directors. Advisory directors shall not be a member of any committee of the Board of Directors, vote on any matter brought before the Board of Directors for action or be counted for the purposes of determining whether a quorum exists. Failure to notify the advisory directors of any meeting shall not render any meeting or any action taken at such meeting void. ARTICLE V OFFICERS SECTION 5.1. NUMBER. The officers of the Corporation shall consist of the President, Secretary, Treasurer and Controller; and, in addition, such Vice Presidents, other officers and assistant officers and agents as may be deemed necessary and elected or appointed by the Board of Directors. The Board of Directors may by resolution designate any officer as the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, or other title. Any two or more offices may be held by the same person. 10 SECTION 5.2. ELECTION; TERM; QUALIFICATION. Officers shall be chosen by the Board of Directors at the Annual Meeting of the Directors and may be chosen at any other meeting of the Board of Directors. Each officer shall hold office until the next following Annual Meeting of Directors, or until his death, resignation, retirement or removal. SECTION 5.3. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors at its pleasure, but such removal shall be without prejudice to other contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create any contract rights. SECTION 5.4. RETIREMENT. No person may serve as an officer of the Corporation after the last day of the fiscal year in which such officer celebrates his sixty-fifth birthday or such later date as is necessary to comply with applicable laws. SECTION 5.5. VACANCIES. Any vacancy in any office for any cause may be filled by the Board of Directors at any meeting. SECTION 5.6. DUTIES. The officers of the Corporation shall have such powers and duties, except as modified by the Board of Directors, as generally pertain to their offices, respectively, as well as such powers and duties as from time to time shall be conferred by the Board of Directors and by these Bylaws. SECTION 5.7. THE PRESIDENT. The President shall, subject to the control of the Board of Directors, have general supervision and control over all of the business, assets and affairs of the Corporation. All other officers shall report as directed by the President. In the absence of the Chairman of the Board, the President shall perform all of the duties of the Chairman of the Board, and when so acting shall have all of the powers of, and be subject to all restrictions upon, the Chairman of the Board. SECTION 5.8. SECRETARY. The Secretary shall: (a) keep the minutes of all meetings of the shareholders, of the Board of Directors, and of all committees of the Board of Directors, in one or more books provided for that purpose and shall distribute a copy of all such minutes to the members of the Board of Directors immediately on receipt thereof, (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law, (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized, (d) have general charge of the stock certificate register, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, of the Corporation, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the Corporation during business hours, and (e) in general perform all duties and exercise all powers incident to the office of the Secretary and such other duties and powers as the Board of Directors or the President from time to time may assign to or confer on him. 11 SECTION 5.9. TREASURER. The Treasurer shall be legal custodian of all monies, notes, securities, and other valuables which may from time to time come into the possession of the Corporation and shall perform such other duties as the Bylaws may require or the Board of Directors may prescribe. The Treasurer shall have the power and authority to incur or guaranty indebtedness on behalf of the Corporation without the prior approval of the Board of Directors provided that the original principal amount thereof is less than $1,000,000 and the original maturity is less than one year. SECTION 5.10. CONTROLLER. The Controller shall keep complete and accurate books and records of account showing accurately at all times the financial condition of the Corporation. He shall furnish at meetings of the Board of Directors, or whenever requested, a statement of the financial condition of the Corporation, and shall perform such other duties as the Bylaws may require or the Board of Directors may prescribe. SECTION 5.11. THE VICE PRESIDENTS. The Board of Directors may from time to time elect such Vice Presidents as the Board of Directors deems appropriate and assign thereto such general or specific powers, authority and responsibility as the Board of Directors deems appropriate. The Board of Directors may specify the order in which the Vice Presidents may act in the absence of the President. Any action taken by a Vice President in the performance of the duties of President shall be conclusive evidence of the absence of the President. The Vice Presidents shall perform such other duties as may, from time to time, be assigned to them by the Board of Directors or the President. A Vice President may also sign with the Secretary or an Assistant Secretary certificates of stock of the Corporation. SECTION 5.12. ASSISTANT OFFICERS. Any Assistant Secretary, Assistant Treasurer or Assistant Controller appointed by the Board of Directors shall have power to perform, and shall perform, all duties incumbent upon the Secretary, the Treasurer or the Controller of the Corporation, respectively, subject to the general direction of such officers, and shall perform such other duties as the Bylaws may require or the Board of Directors may prescribe. SECTION 5.13. SALARIES. The salaries or other compensation of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director of the Corporation. SECTION 5.14. BONDS OF OFFICERS. The Board of Directors may secure the fidelity of any or all of such officers by bond or otherwise, in such terms and with such surety or sureties, conditions, penalties or securities as shall be required by the Board of Directors. SECTION 5.15. DELEGATION. The Board of Directors may delegate temporarily the powers and duties of any officer of the Corporation, in case of his absence or for any other reason, to any other officer, and may authorize the delegation by any officer of the Corporation of any of his powers and duties to any agent or employee subject to the general supervision of such officer. 12 ARTICLE VI MISCELLANEOUS SECTION 6.1. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, of the Corporation to enter into any contract or execute and deliver any instrument in the name of or on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board of Directors or by these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement, or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount. SECTION 6.2. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officers or employees of the Corporation as shall from time to time be authorized pursuant to these Bylaws or by resolution of the Board of Directors. SECTION 6.3. DEPOSITORIES. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may from time to time designate, upon such terms and conditions as shall be fixed by the Board of Directors. The Board of Directors may from time to time authorize the opening and keeping with any such depository as it may designate of general and special bank accounts, and may make such special rules and regulations with respect thereto, not inconsistent with the provisions of these Bylaws, as it may deem expedient. SECTION 6.4. ENDORSEMENT OF STOCK CERTIFICATES. Subject to the specific directions of the Board of Directors, any share or shares of stock issued by any corporation and owned by the Corporation (including reacquired shares of the Corporation) may, for sale or transfer, be endorsed in the name of the Corporation by the President or any Vice President, and attested or witnessed by the Secretary or any Assistant Secretary either with or without affixing the corporate seal. SECTION 6.5. VOTING OF SHARES OWNED BY THE CORPORATION. Subject to the direction of the Board of Directors, the President, the Secretary and the Treasurer, or any of them, shall have the power and authority on behalf of the Corporation to attend and to vote and to grant proxies to be used at any meeting of shareholders of any corporation in which the Corporation may hold stock. The Board of Directors may confer like powers upon any other person or persons. SECTION 6.6. CORPORATE SEAL. The corporate seal shall be in the form of a five pointed star surrounded by the words "Stewart & Stevenson Services, Inc.," and such seal, or a facsimile thereof, may be impressed on, affixed to, or in any manner 13 reproduced upon, instruments of any nature required to be executed by officers of the Corporation. SECTION 6.7. FISCAL YEAR. The fiscal year of the Corporation shall begin on February 1 and end on January 31 of the next following year, or on such other dates as the Board of Directors at any time shall determine. SECTION 6.8. RESIGNATIONS. Any director or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chairman of the Board, President or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. SECTION 6.9. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Corporation shall indemnify any person against any judgment, penalty, fine, settlement and reasonable expenses incurred by him in connection with any threatened, pending or completed action, suit or proceeding in which such person is or is threatened to be made a party because he is or was serving as an officer or director of the Corporation or at the request of the Corporation as an officer, director, partner, venturer, proprietor, trustee, employee, agent or other functionary of another entity and (i) such person is wholly successful in the defense thereof, or (ii) it is determined in the manner required by law that such person conducted himself in good faith, reasonably believed that his conduct was in the best interest of the Corporation and had no reasonable cause to believe that his conduct was unlawful; provided, however, that no person shall be indemnified if such indemnity is prohibited by applicable law. Any such indemnification shall be reported in writing to the shareholders of the Corporation on or before the notice or waiver of notice of the next shareholders' meeting and in any event within twelve (12) months of the indemnification. The right of indemnification under this Section 6.9 shall be in addition to any other rights to which such persons may be entitled and is intended to provide the broadest benefits permitted by law. SECTION 6.10. LOANS TO AND GUARANTIES FOR OFFICERS AND DIRECTORS. The Corporation shall not lend money to or guaranty the indebtedness of any of its officers or directors unless such loan or guaranty is approved by the number of directors equal to a majority of the full Board of Directors none of whom are then or will become as a result of such action indebted to the Corporation and on the express finding by such directors that such loan or guaranty is reasonably expected to directly or indirectly benefit the Corporation. ARTICLE VII AMENDMENTS SECTION 7.1. AMENDMENTS. The Board of Directors, by the affirmative vote of seven directors may alter, amend or repeal these Bylaws or adopt new Bylaws. The shareholders by affirmative vote of two-thirds (2/3) of the issued and outstanding shares entitled to vote may alter, amend or repeal these Bylaws or adopt new Bylaws, without notice at any regular meeting, or if notice of the proposed amendment be contained in the notice of any special meeting. 14 FIRST AMENDMENT TO THE FIFTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of June 9, 1998, the first sentence of the second paragraph in Section 4.12 of the Bylaws of Stewart & Stevenson Services, Inc. was amended to read as follows: "The Executive Committee shall consist of four (4) persons." 15 SECOND AMENDMENT TO THE FIFTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of December 8, 1998, Section 4.1 of the Fifth Restated Bylaws of Stewart & Stevenson Services, Inc. was amended in its entirety to read as follows: "SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of ten (10) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors shall retire as of the date of the annual meeting of shareholders first occurring following the Director's 73rd birthday; provided, that any Director who was originally elected on or before June 19, 1981 shall not be required to retire until the date of the annual meeting of shareholders first occurring following such Director's 75th birthday. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year commencing after January 31, 1981, which such incumbent was entitled to attend as a director." 16 THIRD AMENDMENT TO THE FIFTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of April 13, 1999, Section 4.1 of the Fifth Restated Bylaws of Stewart & Stevenson Services, Inc. was amended in its entirety to read as follows: "SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of eleven (11) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors shall retire as of the date of the annual meeting of shareholders first occurring following the Director's 73rd birthday; provided, that any Director who was originally elected on or before June 19, 1981 shall not be required to retire until the date of the annual meeting of shareholders first occurring following such Director's 75th birthday. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year commencing after January 31, 1981, which such incumbent was entitled to attend as a director." 17 EX-4.2 3 EXHIBIT 4.2 AMENDMENT TO LOAN AGREEMENT THIS AMENDMENT TO LOAN AGREEMENT (this "AMENDMENT"), dated as of August 25,1997, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "BORROWER"), a Texas corporation; the financial institutions listed on the signature pages hereto (collectively, the "LENDERS") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association domiciled in Houston, Harris County, Texas, acting in its capacity as agent for the Lenders (in such capacity, the "AGENT"). The Borrower, the Lenders and the Agent are herein sometimes called the "PARTIES". RECITALS: 1 . The Parties have entered into a Loan Agreement dated as of December 20, 1996 (which Loan Agreement, as amended to the date hereof, is herein called the "LOAN AGREEMENT"). 2. The Parties desire to amend the Loan Agreement in certain respects to (a) increase the Maximum Commitment and (b) provide for a new financial institution to become a Lender, all as is more fully described below. AGREEMENTS: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. MAXIMUM COMMITMENT. The definition of "Maximum Commitment" in Section 1 of the Loan Agreement is amended to provide in its entirety as follows: MAXIMUM COMMITMENT means Two Hundred Fifty Million Dollars ($250,000,000). 2. ADDITION OF LENDER. Credit Lyonnais New York Branch is hereby added as a Lender. The dollar amount of Credit Lyonnais New York Branch's interest in the Maximum Commitment as of the date hereof is set forth opposite its name on its signature page of this Amendment. 3. TRANSITION. (a) Certain Alternate Rate Borrowings are outstanding as of the date hereof, and the Parties do not wish to disturb such Alternate Rate Borrowings. Notwithstanding anything in the Loan Agreement as amended by this Amendment to the contrary, (1) a Lender with an Alternate Rate Borrowing (a "TRANSITION BORROWING") outstanding as of the date hereof shall retain such Transition Borrowing, with no change in its amount resulting from the change of such Lender's Percentage effected by this Amendment, and such Lender shall be entitled to the payment of the principal of and accrued interest on such Transition Borrowing; (2) new Loans made after the date hereof (including the renewal of any Transition Borrowing at the end of its Interest Period, if the Borrower elects to renew such Loan pursuant to the terms and conditions of the Loan Agreement, or the conversion of any Transition Borrowing) shall be made in accordance with the Lenders' new Percentages (PROVIDED that in no event shall any Lender have an obligation to make Loans at any one time outstanding in excess of such Lender's Percentage of the Commitment); (3) the Agent shall determine the maximum aggregate amount of Loans which may be outstanding for all of the Lenders and for each Lender--after giving effect to the proviso of the immediately preceding clause--for each day while there exists any Transition Borrowing, and such amounts shall be the "Commitment" and each Lender's interest in the Commitment for purposes of determining the commitment fee due under Section 2(c) of the Loan Agreement and for the allocation of that commitment fee; (4) if (A) an Event of Default occurs while any Transition Borrowing is outstanding and (B) the Agent or any Lender exercises any of its remedies for such Event of Default, then (but only for the purposes of allocating payments of principal and interest by or on the account of the Borrower) the Percentage of a Lender shall be such Lender's interest in all of the outstanding Loans, and (5) for all other purposes under the Credit Documents, the Percentages of the Lenders and the Commitment shall be determined without reference to this Section. (b) On the date this Amendment becomes effective, (1) Credit Lyonnais New York Branch shall fund its Percentage of all then-outstanding Base Rate Borrowings to the Agent and (2) the Agent shall allocate such fundings to all of the other Lenders, to reduce their share of all then-outstanding Base Rate Borrowings, in accordance with their respective Percentages. Notwithstanding anything in the Loan Agreement as amended by this Amendment or the other Credit Documents to the contrary, interest accruing on the Base Rate Borrowings through the effective date of this Amendment shall be allocated among the Lenders in accordance with their respective Percentages as in effect immediately before the effective date of this Amendment. (c) Notwithstanding anything in the Loan Agreement as amended by this Amendment to the contrary, commitment fees accruing under SECTION 2(C) of the Loan Agreement through the effective date of this Amendment shall be allocated among the Lenders in accordance with their respective Percentages as in effect immediately before the effective date of this Amendment. 4. CONDITIONS PRECEDENT. This Amendment shall be effective as of the date set forth above, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent: -2- (a) The Agent shall have received the following, each of which shall be in form and substance satisfactory to the Agent in its sole discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of the Borrower, dated as of the date hereof, as to (A) the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment (a copy of such resolutions to be attached to such certificate), such certificate to state that said copy is a true and correct copy of such resolutions and that such resolutions were duly adopted and have not been amended, superseded, revoked or modified in any respect and remain in full force and effect as of the date of such certificate and (B) the absence of any change since December 20, 1996, in any of (x) the incumbency and signatures of the officer or officers of the Borrower; (y) the Articles of Incorporation of the Borrower, or (z) the Bylaws of the Borrower; and (2) this Amendment, duly executed by the Borrower, the Lenders and the Agent. (b) Credit Lyonnais New York Branch shall have received a new Note, in the maximum principal amount of $25,000,000. (c) The Agent shall have received a legal opinion from the general counsel for the Borrower acceptable to the Agent and the Majority Lenders. (d) The Borrower shall have paid all accrued and unpaid fees and other amounts in connection with this Amendment. (e) No Default shall have occurred and be continuing. (f) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 5. REPRESENTATIONS TRUE; NO DEFAULT. The Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 6. RATIFICATION. Except as expressly amended hereby, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan -3- Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. The New Lenders hereby (a) acknowledges receipt of copies of all of the Credit Documents (including agreements exclusively among the Agent and the Lenders) and (b) acknowledges and agrees that (1) it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements of the Borrower delivered to such New Lender by the Borrower and such other documents and information as such New Lender has deemed appropriate, made its own credit analysis and decision to become a Lender and (2) it is a Lender for all purposes under the Credit Documents, with all of the liabilities and obligations of a Lender with its interest in the Maximum Commitment. 7. DEFINITIONS AND REFERENCES. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any Lender by or on behalf of the Borrower shall mean the Loan Agreement as hereby amended. 8. EXPENSES; ADDITIONAL INFORMATION. The Borrower shall pay to the Agent on demand all expenses (including reasonable counsel's fees) incurred in connection with the preparation, reproduction, execution and delivery of this Amendment and with respect to advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended. In addition, the Borrower shall pay all costs and expenses of the Agent and each Lender (including counsel's fees) in connection with the enforcement of this Amendment. 9. SEVERABILITY. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 10. INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE AGENT, THE LENDERS AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING ENVIRONMENTAL LIABILITIES), CLAIMS (INCLUDING ENVIRONMENTAL CLAIMS), EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, EXPENSES OR DAMAGES ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL -4- OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY LOAN MADE OR LETTER OF CREDIT ISSUED BY ANY LENDER OR GROWING OUT OF OR RESULTING FROM ANY CREDIT DOCUMENT OR ANY TRANSACTION OR EVENT CONTEMPLATED THEREIN; (B) VIOLATION BY THE BORROWER OR ANY OF ITS SUBSIDIARIES OF ANY LAW, RULE, REGULATION OR ORDER INCLUDING THOSE RELATING TO HAZARDOUS SUBSTANCES, PETROLEUM, PETROLEUM PRODUCTS OR PETROLEUM WASTES; (C) ANY LENDER OR THE AGENT BEING DEEMED AN OPERATOR OF ANY OF THE BORROWER'S REAL OR PERSONAL PROPERTY BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL OR OTHER THIRD PARTY, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES. ARISE OUT OF OR RESULT FROM ANY HAZARDOUS SUBSTANCE, PETROLEUM, PETROLEUM PRODUCT OR PETROLEUM WASTE LOCATED IN ON OR UNDER SUCH PROPERTY, OR (D) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION SHALL SURVIVE THE TERMINATION OF THE LOAN AGREEMENT (AS AMENDED BY THIS AMENDMENT AND AS IT MAY OTHERWISE BE AMENDED, RESTATED, MODIFIED AND SUPPLEMENTED FROM TIME TO TIME) AND THE REPAYMENT AND EXPIRY OF THE LOANS AND ALL LETTER OF CREDIT LIABILITIES. ANY AMOUNT TO BE PAID UNDER THIS SECTION BY THE BORROWER TO THE AGENT OR ANY LENDER SHALL BE A DEMAND OBLIGATION OWING BY THE BORROWER TO THE AGENT OR SUCH LENDER AND SHALL BEAR INTEREST FROM THE DATE OF EXPENDITURE UNTIL PAID AT THE PAST DUE RATE. 11. RELEASE OF CLAIMS. THE BORROWER HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER THE AGENT AND THE LENDERS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE, PAST, PRESENT OR FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION HEREOF BY THE BORROWER, IF LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER WHATSOEVER, INCLUDING CLAIMS FOR USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE. 12. MISCELLANEOUS. This Amendment (a) shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the express prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, -5- and all such separate counterparts shall constitute but one and the same agreement, and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. 13. THIS AMENDMENT TOGETHER WITH ALL OF THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. -6- IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of the date written above. STEWART & STEVENSON SERVICES, INC., a Texas corporation By:_________________________________ Name: ROBERT L. HARGRAVE Title: CHIEF EXECUTIVE OFFICER -7- TEXAS COMMERCE BANK NATIONAL ASSOCIATION, acting in its individual capacity and as the Agent for the Lenders named herein By:_____________________________________ Name: MONA M. FOCH Title: VICE PRESIDENT -8- BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION as successor to Bank of America Illinois by merger, as a Co-Agent and a Lender By:_______________________________________ Name: JAMES E. FLORCZAK Title: MANAGING DIRECTOR -9- NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION By:_____________________________________ Name: RICHARD L. NICHOLS, JR. Title: VICE PRESIDENT -10- ABN AMRO BANK N.V., HOUSTON AGENCY By: ____________________________________ Name: LILA JORDAN Title: VICE PRESIDENT By: ____________________________________ Name: DAVID P. ORR Title: VICE PRESIDENT -11- THE BANK OF NEW YORK By: __________________________ Name: JOHN YANCEY Title: VICE PRESIDENT -12- PNC BANK, NATIONAL ASSOCIATION By:_____________________________ Name: DAVID J. EGAN Title: SENIOR VICE PRESIDENT -13- FIRST NATIONAL BANK OF COMMERCE By: _________________________________ Name: JOSHUA C. CUMMINGS Title: ASSISTANT VICE PRESIDENT -14- CREDIT LYONNAIS NEW YORK BRANCH By: _______________________________ Name: ALAIN PAPIASSE Title: EXECUTIVE VICE PRESIDENT INTEREST IN MAXIMUM COMMITMENT: $25,000,000 -15- EX-4.3 4 EXHIBIT 4.3 AGREEMENT AND SECOND AMENDMENT TO LOAN AGREEMENT (January 31, 1998) THIS AGREEMENT AND SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of January 31, 1998, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "BORROWER"), a Texas corporation; the financial institutions listed on the signature pages hereto (collectively, the "LENDERS"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association), a national banking association domiciled in Houston, Harris County, Texas, acting in its individual capacity (in such capacity, "CHASE TEXAS") and its capacity as agent for the Lenders (in such capacity, the "AGENT"). The Borrower, the Lenders and the Agent are herein sometimes called the "PARTIES". RECITALS: 1. The Parties (except Credit Lyonnais New York Branch) have entered into a Loan Agreement dated as of December 20, 1996. Such Loan Agreement was amended by Amendment to Loan Agreement dated as of August 25, 1997, which added Credit Lyonnais New York Branch as a Lender, and, as so amended, is herein called the "LOAN AGREEMENT". 2. The Borrower has entered into a Transaction Agreement dated September 21, 1997 with General Electric Company ("GENERAL ELECTRIC") pursuant to which the Borrower has agreed to sell to General Electric certain of the Borrower's assets (or, additionally or alternatively, the stock of certain of its subsidiaries) constituting the Borrower's gas turbine division for approximately $600,000,000 in cash. Such sale is herein called the "TRANSACTION". 3. The Lenders desire to consent to the Transaction. The Parties desire to amend the Loan Agreement to reduce the Maximum Commitment and the Commitment Fee Percentage and to make other changes, all as is more fully described below. AGREEMENTS: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. CONSENT. Each of the Lenders hereby (a) consents to the execution, delivery and performance of the Transaction Agreement and the documents required thereby and to the consummation of the Transaction and (b) agrees that none of the foregoing shall constitute a Default or an Event of Default under the Loan Agreement. 2. TRANSACTION NOT AN "INVESTMENT". The term "Investment" as used in the Loan Agreement does not and shall not include the Transaction. 3. CONSENT TO STOCK REPURCHASE. Each of the Lenders hereby consents to the use of up to $120,000,000 of the proceeds of the Transaction to repurchase shares of the Borrower's common stock PROVIDED that such repurchase is made in compliance with all applicable Legal Requirements. 4. MAXIMUM COMMITMENT. The definition of "Maximum Commitment" in SECTION 1 of the Loan Agreement is amended, effective February 3, 1998, to provide in its entirety as follows: "MAXIMUM COMMITMENT means One Hundred Fifty Million Dollars ($150,000,000)." The dollar amount of each Lender's interest in the Maximum Commitment as of the date hereof is set forth opposite its name on the signature pages of this Amendment. 5. COMMITMENT FEE PERCENTAGE. The definition of "Commitment Fee Percentage" in SECTION 1 of the Loan Agreement is amended to provide in its entirety as follows: "COMMITMENT FEE PERCENTAGE means, on any day, the per annum percentage corresponding to the Interest Bearing Debt to Total Capitalization Ratio (determined as of the most recent Calculation Date) on such day as provided below: INTEREST BEARING DEBT PER ANNUM TO TOTAL CAPITALIZATION RATIO PERCENTAGE ----------------------------- ---------- 0.45 or more to 1.00 0.20% 0.40 or more to 1.00 but less than 0.45 to 1.00 0.175% 0.35 or more to 1.00 but less than 0.40 to 1.00 0.15% 0.30 or more to 1.00 but less than 0.35 to 1.00 0.125% less than 0.30 to 1.00 0.10%" 6. CEILING RATE. The definition of "Ceiling Rate" in SECTION 1 of the Loan Agreement is amended to provide in its entirety as follows: "CEILING RATE means, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that applicable Texas law establishes the Ceiling Rate, the Ceiling Rate shall be the "weekly ceiling" (as defined in ss.303 of -2- the Texas FinancE Code - the "TEXAS FINANCE CODE" - and Chapter 1D of Title 79, Texas Rev. Civ. Stats. 1925 -- "CHAPTER 1D", as amended, respectively) for that day. The Lenders may from time to time, as to current and future balances, implement any other ceiling under the Texas Finance Code or Chapter 1D by notice to Borrower if and to the extent permitted by the Texas Finance Code or Chapter 1D." The definitions of "Chapter One" and "Texas Credit Code" in SECTION 1 of the Loan Agreement are deleted. 7. TCB. All references to "TCB" in the Loan Agreement are amended to refer instead to "Chase Texas". 8. AMENDMENT OF SECTION 2(C). The last sentence of SECTION 2(C) of the Loan Agreement is deleted, and there is added to the end of SECTION 2(C) the following sentence: "Borrower and Lenders expressly agree, pursuant to Chapter 346 ("CHAPTER 346") of the Texas Finance Code, that Chapter 346 (which relates to open-end line of credit revolving loan accounts) shall not apply to any Loan and that neither this Agreement nor any such Loan shall be governed by Chapter 346 or subject to its provisions." 9. AMENDMENT OF SECTION 16. SECTION 16 of the Loan Agreement is amended to provide in its entirety as follows: "16. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement or any other Credit Document, and no consent with respect to any departure by Borrower or any of its Subsidiaries therefrom, shall be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver shall be effective only in the specific instance and for the specific purpose for which given; PROVIDED, HOWEVER, that no such waiver, amendment or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) increase the Maximum Commitment or the Commitment; (b) postpone or delay any date fixed for any payment of principal, interest, fee or other amount due under this Agreement or any other Credit Document; (c) reduce the principal of, or the rate of interest on, any Loan or any fee or other amount payable under this Agreement or any other Credit Document; -3- (d) change the percentage of the Lenders or of the aggregate unpaid principal amount of the Loans which shall be required for Agent, Lenders or any of them to take any action under this Agreement or any other Credit Document; or (e) amend this SECTION 16; and, PROVIDED FURTHER, that no amendment, waiver or consent shall, unless in writing and signed by Agent in addition to the Majority Lenders, affect the rights or duties of Agent under this Agreement or any other Credit Document. 10. CONDITIONS PRECEDENT. This Amendment shall be effective as of the date set forth above, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent: (a) The Agent shall have received the following, each of which shall be in form and substance satisfactory to the Agent in its sole discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of the Borrower, dated as of the date hereof, as to (A) the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment (a copy of such resolutions to be attached to such certificate), such certificate to state that said copy is a true and correct copy of such resolutions and that such resolutions were duly adopted and have not been amended, superseded, revoked or modified in any respect and remain in full force and effect as of the date of such certificate and (B) the absence of any change since December 20, 1996, in any of (x) the incumbency and signatures of the officer or officers of the Borrower; (y) the Articles of Incorporation of the Borrower, or (z) the Bylaws of the Borrower; and (2) this Amendment, duly executed by the Borrower, the Lenders and the Agent. (b) The Borrower shall have paid all accrued and unpaid fees and other amounts in connection with this Amendment. (c) No Default shall have occurred and be continuing. (d) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 11. REPRESENTATIONS TRUE; NO DEFAULT. The Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to -4- the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 12. RATIFICATION. Except as expressly amended hereby, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. 13. DEFINITIONS AND REFERENCES. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any Lender by or on behalf of the Borrower shall mean the Loan Agreement as hereby amended. 14. EXPENSES; ADDITIONAL INFORMATION. The Borrower shall pay to the Agent on demand all expenses (including reasonable counsel's fees) incurred in connection with the preparation, reproduction, execution and delivery of this Amendment and with respect to advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended. In addition, the Borrower shall pay all costs and expenses of the Agent and each Lender (including counsel's fees) in connection with the enforcement of this Amendment. 15. SEVERABILITY. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 16. INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE AGENT, THE LENDERS AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING ENVIRONMENTAL LIABILITIES), CLAIMS (INCLUDING ENVIRONMENTAL CLAIMS), EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) OR -5- DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, EXPENSES OR DAMAGES ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY LOAN MADE OR LETTER OF CREDIT ISSUED BY ANY LENDER OR GROWING OUT OF OR RESULTING FROM ANY CREDIT DOCUMENT OR ANY TRANSACTION OR EVENT CONTEMPLATED THEREIN; (B) VIOLATION BY THE BORROWER OR ANY OF ITS SUBSIDIARIES OF ANY LAW, RULE, REGULATION OR ORDER INCLUDING THOSE RELATING TO HAZARDOUS SUBSTANCES, PETROLEUM, PETROLEUM PRODUCTS OR PETROLEUM WASTES; (C) ANY LENDER OR THE AGENT BEING DEEMED AN OPERATOR OF ANY OF THE BORROWER'S REAL OR PERSONAL PROPERTY BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL OR OTHER THIRD PARTY, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY HAZARDOUS SUBSTANCE, PETROLEUM, PETROLEUM PRODUCT OR PETROLEUM WASTE LOCATED IN ON OR UNDER SUCH PROPERTY, OR (D) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION SHALL SURVIVE THE TERMINATION OF THE LOAN AGREEMENT (AS AMENDED BY THIS AMENDMENT AND AS IT MAY OTHERWISE BE AMENDED, RESTATED, MODIFIED AND SUPPLEMENTED FROM TIME TO TIME) AND THE REPAYMENT AND EXPIRY OF THE LOANS AND ALL LETTER OF CREDIT LIABILITIES. ANY AMOUNT TO BE PAID UNDER THIS SECTION BY THE BORROWER TO THE AGENT OR ANY LENDER SHALL BE A DEMAND OBLIGATION OWING BY THE BORROWER TO THE AGENT OR SUCH LENDER AND SHALL BEAR INTEREST FROM THE DATE OF EXPENDITURE UNTIL PAID AT THE PAST DUE RATE. 17. RELEASE OF CLAIMS. THE BORROWER HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER THE AGENT AND THE LENDERS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE, PAST, PRESENT OR FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION HEREOF BY THE BORROWER, IF LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER WHATSOEVER, INCLUDING CLAIMS FOR USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE. 18. MISCELLANEOUS. This Amendment (a) shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the express prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (C) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS -6- PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement, and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. 19. THIS AMENDMENT TOGETHER WITH ALL OF THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. -7- IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of January 31, 1998 (except for SECTION 4, which is effective February 3, 1998). STEWART & STEVENSON SERVICES, INC.,a Texas corporation By: ______________________________________ Name: KYLE J. GIDEON Title: ASSISTANT TREASURER -8- $30,000,000.00 CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association), acting in its individual capacity and as the Agent for the Lenders named herein By: _____________________________________ Name: MONA M. FOCH Title: MANAGING DIRECTOR -9- Bank of America NT & SA as survivor by way of $24,000,000.00 merger with BANK OF AMERICA ILLINOIS, as a Co-Agent and a Lender By: _____________________________________ Name: JAMES E. FLORCZAK Title: MANAGING DIRECTOR -10- $24,000,000.00 NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, as Co-Agent and a Lender By: ____________________________________ Name: JOHN J. O'NEILL Title: SENIOR VICE PRESIDENT -11- $18,000,000.00 ABN AMRO BANK N.V., HOUSTON AGENCY By: ________________________________ Name: DAVID P. ORR Title: VICE PRESIDENT By: ________________________________ Name: RONALD A. MAHLE Title: GROUP VICE PRESIDENT -12- $18,000,000.00 THE BANK OF NEW YORK By: ________________________________ Name: ALAN F. LYSTER, JR. Title: VICE PRESIDENT -13- $15,000,000.00 CREDIT LYONNAIS NEW YORK BRANCH By: ________________________________ Name: ALAIN PAPIASSE Title: EXECUTIVE VICE PRESIDENT -14- $12,000,000.00 PNC BANK, NATIONAL ASSOCIATION By: _______________________________ Name: ERIC C. JOHNSON Title: SENIOR VICE PRESIDENT -15- $9,000,000.00 FIRST NATIONAL BANK OF COMMERCE By: _______________________________ Name: NEMESIO J. VISO Title: VICE PRESIDENT -16- EX-4.4 5 EXHIBIT 4.4 AGREEMENT AND THIRD AMENDMENT TO LOAN AGREEMENT (May 13, 1998) THIS AGREEMENT AND THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of May 13, 1998, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "BORROWER"), a Texas corporation; the financial institutions listed on the signature pages hereto (collectively, the "LENDERS"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association), a national banking association domiciled in Houston, Harris County, Texas, acting in its individual capacity (in such capacity, "CHASE TEXAS") and its capacity as agent for the Lenders (in such capacity, the "AGENT"). The Borrower, the Lenders and the Agent are herein sometimes called the "PARTIES". RECITALS: 1. The Parties (except Credit Lyonnais New York Branch) have entered into a Loan Agreement dated as of December 20, 1996. Such Loan Agreement was amended by Amendment to Loan Agreement dated as of August 25, 1997, which added Credit Lyonnais New York Branch as a Lender, and by Agreement and Second Amendment to Loan Agreement dated as of January 31, 1998 and, as so amended, is herein called the "LOAN AGREEMENT". 2. The Parties desire to amend the Loan Agreement to permit the Borrower and its Subsidiaries to incur a limited amount of indebtedness secured by Liens on their property. AGREEMENTS: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. AMENDMENT OF SECTION 7(A). SECTION 7(A) of the Loan Agreement is hereby amended by deleting the word "and" before CLAUSE (10) thereof and adding after CLAUSE (10) thereof the following: "and (11) Liens not otherwise permitted by CLAUSES (1) THROUGH (10) above incurred subsequent to April 1, 1998 to secure indebtedness, PROVIDED that the aggregate amount of Indebtedness so secured shall not exceed $20,000,000 at any one time outstanding." 2. CONDITIONS PRECEDENT. This Amendment shall be effective as of the date set forth above, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent: (a) The Agent shall have received the following, each of which shall be in form and substance satisfactory to the Agent in its sole discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of the Borrower, dated as of the date hereof, as to the Bylaws of the Borrower (a copy of such Bylaws to be attached to such certificate) and as to the absence of any change since December 20, 1996, in any of (x) the incumbency and signatures of the officer or officers of the Borrower or (y) the Articles of Incorporation of the Borrower; and (2) this Amendment, duly executed by the Borrower, the Majority Lenders and the Agent. (b) The Borrower shall have paid all accrued and unpaid fees and other amounts in connection with this Amendment. (c) No Default shall have occurred and be continuing. (d) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 3. REPRESENTATIONS TRUE; NO DEFAULT. The Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 4. RATIFICATION. Except as expressly amended hereby, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. 5. DEFINITIONS AND REFERENCES. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any -2- Lender by or on behalf of the Borrower shall mean the Loan Agreement as hereby amended. 6. EXPENSES; ADDITIONAL INFORMATION. The Borrower shall pay to the Agent on demand all expenses (including reasonable counsel's fees) incurred in connection with the preparation, reproduction, execution and delivery of this Amendment and with respect to advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended. In addition, the Borrower shall pay all costs and expenses of the Agent and each Lender (including counsel's fees) in connection with the enforcement of this Amendment. 7. SEVERABILITY. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 8. INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE AGENT, THE LENDERS AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING ENVIRONMENTAL LIABILITIES), CLAIMS (INCLUDING ENVIRONMENTAL CLAIMS), EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, EXPENSES OR DAMAGES ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY LOAN MADE OR LETTER OF CREDIT ISSUED BY ANY LENDER OR GROWING OUT OF OR RESULTING FROM ANY CREDIT DOCUMENT OR ANY TRANSACTION OR EVENT CONTEMPLATED THEREIN; (B) VIOLATION BY THE BORROWER OR ANY OF ITS SUBSIDIARIES OF ANY LAW, RULE, REGULATION OR ORDER INCLUDING THOSE RELATING TO HAZARDOUS SUBSTANCES, PETROLEUM, PETROLEUM PRODUCTS OR PETROLEUM WASTES; (C) ANY LENDER OR THE AGENT BEING DEEMED AN OPERATOR OF ANY OF THE BORROWER'S REAL OR PERSONAL PROPERTY BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL OR OTHER THIRD PARTY, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY HAZARDOUS SUBSTANCE, PETROLEUM, PETROLEUM PRODUCT OR PETROLEUM WASTE LOCATED IN ON OR UNDER SUCH PROPERTY, OR (D) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION SHALL SURVIVE THE TERMINATION OF THE LOAN AGREEMENT (AS AMENDED BY THIS AMENDMENT AND AS IT MAY OTHERWISE BE AMENDED, RESTATED, MODIFIED AND SUPPLEMENTED FROM TIME TO TIME) AND THE REPAYMENT AND EXPIRY OF THE LOANS AND ALL LETTER OF CREDIT -3- LIABILITIES. ANY AMOUNT TO BE PAID UNDER THIS SECTION BY THE BORROWER TO THE AGENT OR ANY LENDER SHALL BE A DEMAND OBLIGATION OWING BY THE BORROWER TO THE AGENT OR SUCH LENDER AND SHALL BEAR INTEREST FROM THE DATE OF EXPENDITURE UNTIL PAID AT THE PAST DUE RATE. 9. RELEASE OF CLAIMS. THE BORROWER HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER THE AGENT AND THE LENDERS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE, PAST, PRESENT OR FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION HEREOF BY THE BORROWER, IF LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER WHATSOEVER, INCLUDING CLAIMS FOR USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE. 10. MISCELLANEOUS. This Amendment (a) shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the express prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement, and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. 11. THIS AMENDMENT TOGETHER WITH ALL OF THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. -4- IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of MAY 13, 1998. STEWART & STEVENSON SERVICES, INC., a Texas corporation By: ________________________________ Name: KYLE J. GIDEON Title: ASSISTANT TREASURER -5- CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, acting in its individual capacity and as the Agent for the Lenders named herein By: ________________________________ Name: MONA M. FOCH Title: MANAGING DIRECTOR -6- BANK OF AMERICA NT & SA AS SURVIVOR BY WAY OF MERGER WITH BANK OF AMERICA ILLINOIS, as a Co-Agent and a Lender By: ________________________________ Name: JAMES E. FLORCZAK Title: MANAGING DIRECTOR -7- NATIONSBANK OF TEXAS, NATIONALASSOCIATION, as Co-Agent and a Lender By: ________________________________ Name: JOHN J. O'NEILL Title: SENIOR VICE PRESIDENT -8- ABN AMRO BANK N.V., HOUSTON AGENCY By: ________________________________ Name: DIEGO PUIGGARI Title: VICE PRESIDENT By: ________________________________ Name: KEVIN P. COSTELLO Title: VICE PRESIDENT -9- THE BANK OF NEW YORK By: ________________________________ Name: ALAN F. LYSTER, JR. Title: VICE PRESIDENT -10- CREDIT LYONNAIS NEW YORK BRANCH By: ________________________________ Name: ROBERT IVOSEVICH Title: SENIOR VICE PRESIDENT -11- PNC BANK, NATIONAL ASSOCIATION By: ________________________________ Name: TIMOTHY J. MARCHANDO Title: VICE PRESIDENT -12- FIRST NATIONAL BANK OF COMMERCE By: ________________________________ Name: NEMESIO J. VISO Title: VICE PRESIDENT -13- EX-4.5 6 EXHIBIT 4.5 AGREEMENT AND FOURTH AMENDMENT TO LOAN AGREEMENT (October 31, 1998) THIS AGREEMENT AND FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of October 31, 1998, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "BORROWER"), a Texas corporation; the financial institutions listed on the signature pages hereto (collectively, the "LENDERS"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association), a national banking association domiciled in Houston, Harris County, Texas, acting in its individual capacity (in such capacity, "CHASE TEXAS") and its capacity as agent for the Lenders (in such capacity, the "AGENT"). The Borrower, the Lenders and the Agent are herein sometimes called the "PARTIES". RECITALS: 1 . The Parties (except Credit Lyonnais New York Branch) have entered into a Loan Agreement dated as of December 20, 1996. Such Loan Agreement was amended by Amendment to Loan Agreement dated as of August 25, 1997, which added Credit Lyonnais New York Branch as a Lender; by Agreement and Second Amendment to Loan Agreement dated as of January 31, 1998; by Agreement and Third Amendment to Loan Agreement dated as of May 13, 1998, and, as so amended, is herein called the "LOAN AGREEMENT". 2. The Parties desire to amend the Loan Agreement to change the definition of the terms "Interest Coverage Ratio" and "Capital Expenditures". AGREEMENTS: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. AMENDMENT OF DEFINITIONS. (a) The definition of "Interest Charge Ratio" is hereby amended to provide in its entirety as follows: "INTEREST COVERAGE RATIO means, as of any day, the ratio of (a) the amount of EBITDA for the 12-month period ending on such date less cash taxes and Capital Expenditures for such period to (b) Cash Interest Expense for such period; PROVIDED, HOWEVER, that for the period beginning and including May 1, 1998 and ending and including January 31, 1999, in computing the Interest Coverage Ratio there shall be excluded (i) cash taxes paid on the gain from the sale of Borrower's gas turbine operations; (ii) cash taxes paid due to the completion of that certain contract between Borrower and the United States of America to assemble and furnish medium tactical vehicles; (iii) the one-time charge in the amount of $19,700,000 for profit margin adjustment and possible retrofit costs in connection with such contract; and (iv) the onetime charge in the quarter ended October 31, 1998 in the amount of $20,000,000 due to earnings from discontinued operations." (b) The definition of "Capital Expenditures" is hereby amended to provide in its entirety as follows: "CAPITAL EXPENDITURES means, as to any Person, expenditures in respect of fixed or capital assets by such Person, including the capital portion of lease payments made in respect of Capital Lease Obligations, but EXCLUDING expenditures for the restoration, repair or replacement of any fixed or capital asset which was destroyed or damaged, in whole or in part, to the extent financed by the proceeds of an insurance policy maintained by such Person and FURTHER EXCLUDING (i) the FMTV Capital Expenditures and (ii) expenditures classified as "Acquisition of Businesses" in Borrower's statement of cash flows. Expenditures in respect of replacements and maintenance consistent with the business practices of a Person in respect of plant facilities, machinery, fixtures and other like capital assets utilized in the ordinary course of business are not Capital Expenditures to the extent such expenditures are not capitalized in preparing a balance sheet of such Person in accordance with GAAP." 2. CONDITIONS PRECEDENT. This Amendment shall be effective as of the date set forth above, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent: (a) The Agent shall have received the following, each of which shall be in form and substance satisfactory to the Agent in its sole discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of the Borrower, dated as of the date hereof, as to the Bylaws of the Borrower (a copy of such Bylaws to be attached to such certificate) and as to the absence of any change since December 20, 1996, in any of (x) the incumbency and signatures of the officer or officers of the Borrower or (y) the Articles of Incorporation of the Borrower; and (2) this Amendment, duly executed by the Borrower, the Majority Lenders and the Agent. (b) No Default shall have occurred and be continuing. -2- (c) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 3. REPRESENTATIONS TRUE; NO DEFAULT. The Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 4. RATIFICATION. Except as expressly amended hereby, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. 5. DEFINITIONS AND REFERENCES. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any Lender by or on behalf of the Borrower shall mean the Loan Agreement as hereby amended. 6. EXPENSES; ADDITIONAL INFORMATION. The Borrower shall pay to the Agent on demand all expenses (including reasonable counsel's fees) incurred in connection with the preparation, reproduction, execution and delivery of this Amendment and with respect to advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended. In addition, the Borrower shall pay all costs and expenses of the Agent and each Lender (including counsel's fees) in connection with the enforcement of this Amendment. 7. SEVERABILITY. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or -3- enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 8. INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE AGENT, THE LENDERS AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING ENVIRONMENTAL LIABILITIES), CLAIMS (INCLUDING ENVIRONMENTAL CLAIMS), EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, EXPENSES OR DAMAGES ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY LOAN MADE OR LETTER OF CREDIT ISSUED BY ANY LENDER OR GROWING OUT OF OR RESULTING FROM ANY CREDIT DOCUMENT OR ANY TRANSACTION OR EVENT CONTEMPLATED THEREIN; (B) VIOLATION BY THE BORROWER OR ANY OF ITS SUBSIDIARIES OF ANY LAW, RULE, REGULATION OR ORDER INCLUDING THOSE RELATING TO HAZARDOUS SUBSTANCES, PETROLEUM, PETROLEUM PRODUCTS OR PETROLEUM WASTES; (C) ANY LENDER OR THE AGENT BEING DEEMED AN OPERATOR OF ANY OF THE BORROWER'S REAL OR PERSONAL PROPERTY BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL OR OTHER THIRD PARTY, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY HAZARDOUS SUBSTANCE, PETROLEUM, PETROLEUM PRODUCT OR PETROLEUM WASTE LOCATED IN ON OR UNDER SUCH PROPERTY, OR (D) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION SHALL SURVIVE THE TERMINATION OF THE LOAN AGREEMENT (AS AMENDED BY THIS AMENDMENT AND AS IT MAY OTHERWISE BE AMENDED, RESTATED, MODIFIED AND SUPPLEMENTED FROM TIME TO TIME) AND THE REPAYMENT AND EXPIRY OF THE LOANS AND ALL LETTER OF CREDIT LIABILITIES. ANY AMOUNT TO BE PAID UNDER THIS SECTION BY THE BORROWER TO THE AGENT OR ANY LENDER SHALL BE A DEMAND OBLIGATION OWING BY THE BORROWER TO THE AGENT OR SUCH LENDER AND SHALL BEAR INTEREST FROM THE DATE OF EXPENDITURE UNTIL PAID AT THE PAST DUE RATE. 9. RELEASE OF CLAIMS. THE BORROWER HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER THE AGENT AND THE LENDERS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE, PAST, PRESENT OR FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION HEREOF BY THE BORROWER, IF LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND CHARACTER WHATSOEVER, INCLUDING CLAIMS FOR USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE. -4- 10. MISCELLANEOUS. This Amendment (a) shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the express prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement, and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. 11. THIS AMENDMENT TOGETHER WITH ALL OF THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. -5- IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of October 31, 1998. STEWART & STEVENSON SERVICES, INC., a Texas corporation By: ________________________________ Name: KYLE J. GIDEON Title: ASSISTANT TREASURER -6- CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, acting in its individual capacity and as the Agent for the Lenders named herein By: ________________________________ Name: KI ALLEN Title: VICE PRESIDENT -7- BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, as a Co-Agent and a Lender By: ________________________________ Name: RICHARD L. NICHOLS, JR. Title: VICE PRESIDENT -8- NATIONSBANK, N.A., as Co-Agent and a Lender By: ________________________________ Name: RICHARD L. NICHOLS, JR. Title: VICE PRESIDENT -9- ABN AMRO BANK N.V., HOUSTON AGENCY By: ________________________________ Name: DIEGO PUIGGARI Title: GROUP VICE PRESIDENT By: ________________________________ Name: GLENN SROKA Title: CREDIT OFFICER -10- THE BANK OF NEW YORK By: ________________________________ Name: HELEN L. SARRO Title: ASSISTANT VICE PRESIDENT -11- CREDIT LYONNAIS NEW YORK BRANCH By: ________________________________ Name: ROBERT IVOSEVICH Title: SENIOR VICE PRESIDENT -12- PNC BANK, NATIONAL ASSOCIATION By: ________________________________ Name: ______________________________ Title: _____________________________ -13- BANK ONE, LOUISIANA, NA, as successor to First National Bank of Commerce By: ________________________________ Name: ______________________________ Title: _____________________________ -14- EX-4.6 7 EXHIBIT 4.6 AGREEMENT AND FIFTH AMENDMENT TO LOAN AGREEMENT (April 23, 1999) THIS AGREEMENT AND FIFTH AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of April 23, 1999, is made and entered into by and among STEWART & STEVENSON SERVICES, INC. (the "BORROWER"), a Texas corporation; the financial institutions listed on the signature pages hereto (collectively, the "LENDERS"), and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National Association), a national banking association domiciled in Houston, Harris County, Texas, acting in its individual capacity (in such capacity, "CHASE TEXAS") and its capacity as agent for the Lenders (in such capacity, the "AGENT"). Borrower, the Lenders and the Agent are herein sometimes called the "PARTIES". PRELIMINARY STATEMENTS: 1. The Parties (except Credit Lyonnais New York Branch) have entered into a Loan Agreement dated as of December 20, 1996. Such Loan Agreement was amended by Amendment to Loan Agreement dated as of August 25, 1997, which added Credit Lyonnais New York Branch as a Lender; by Agreement and Second Amendment to Loan Agreement dated as of January 31, 1998; by Agreement and Third Amendment to Loan Agreement dated as of May 13, 1998, and by Agreement and Fourth Amendment to Loan Agreement dated as of October 31, 1998, and, as so amended, is herein called the "LOAN AGREEMENT". 2. The Parties desire to amend the Loan Agreement to (a) change and add financial covenants; (b) add a new acquisition limitation; (c) create a $25,000,000 sub-limit for the issuance of letters of credit; (d) require an asset audit; (e) add provisions concerning the Year 2000; (f) modify the commitment fee rate and interest rate margins, and (g) make other changes, and they also desire to terminate that certain Forbearance Agreement (the "FORBEARANCE AGREEMENT") among the Parties and dated as of April 9, 1999. AGREEMENTS: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 1. AMENDMENT OF DEFINITIONS. Each of the following definitions contained in the Loan Agreement is hereby amended to read in its entirety as follows: BASE RATE means, for any day, a rate per annum (rounded upwards to the nearest 1/16 of 1%) equal to the lesser of (a) the sum of (x) the Base Rate Margin Percentage for such day plus (y) the greater of (1) the Prime Rate for that day, (2) the Base CD Rate for that day plus 1 1/4%, and (3) the Federal Funds Rate for that day plus 1/2 of 1% and (b) the Ceiling Rate. If for any reason the Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Rate, or both, for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall, until the circumstances giving rise to such inability no longer exist, be the lesser of (a) the Prime Rate plus the Base Rate Margin Percentage, in each case from time to time in effect, and (b) the Ceiling Rate. CAPITAL EXPENDITURES means, as to any Person, expenditures in respect of fixed or capital assets by such Person, including the capital portion of lease payments made in respect of Capital Lease Obligations, net of retirements of such assets (valued at depreciated historical cost on the date of retirement, determined in accordance with GAAP), but EXCLUDING expenditures for the restoration, repair or replacement of any fixed or capital asset which was destroyed or damaged, in whole or in part, to the extent financed by the proceeds of an insurance policy maintained by such Person and FURTHER EXCLUDING (i) the FMTV Capital Expenditures and (ii) expenditures classified as "Acquisition of Businesses" in Borrower's statement of cash flows. Expenditures in respect of replacements and maintenance consistent with the business practices of a Person in respect of plant facilities, machinery, fixtures and other like capital assets utilized in the ordinary course of business are not Capital Expenditures to the extent such expenditures are not capitalized in preparing a balance sheet of such Person in accordance with GAAP. CASH INTEREST EXPENSE means, for any period, the cash interest payments by a Person made during such period in connection with such Person's Interest Bearing Debt; PROVIDED, HOWEVER that if such period ends before January 31, 2000, then "Cash Interest Expense" with respect to the Indebtedness incurred pursuant to that certain Note Purchase Agreement dated as of May 30, 1996 shall mean the quotient of (a) $7,454,004 divided by (b) the Annualization Factor for such period, rather than any cash interest payment which may or may not have been made thereon during such period. COMMITMENT FEE PERCENTAGE means, on any day, the per annum percentage corresponding to the Leverage Ratio (determined as of the most recent Calculation Date, and "X" in the table below) on such day as provided below: PER ANNUM LEVERAGE RATIO PERCENTAGE -------------- ---------- X greater than or equal to 3.50 to 1 0.500% 3.50 to 1 greater than X greater than or equal to 2.50 to 1 0.375% 2.50 to 1 greater than X 0.250% -2- FACILITY DEBT means the Indebtedness evidenced by the Notes, the Letter of Credit Advances and any and all other Indebtedness arising pursuant to this Agreement or any other Credit Document from time to time. MARGIN PERCENTAGE means, on any day, the per annum percentage corresponding to the Leverage Ratio (determined as of the most recent Calculation Date, and "X" in the table below) on such day as provided below: PER ANNUM LEVERAGE RATIO PERCENTAGE -------------- ---------- X greater than or equal to 4.00 to 1 2.00% 4.00 to 1 greater than X greater than or equal to 3.50 to 1 1.75% 3.50 to 1 greater than X greater than or equal to 3.00 to 1 1.50% 3.00 to 1 greater than X greater than or equal to 2.50 to 1 1.25% 2.50 to 1 greater than X 1.00% PRIME RATE means, on any day, the prime rate for that day as determined from time to time by Chase Texas. Without notice to Borrower or any other Person, the Prime Rate shall automatically fluctuate upward and downward as and in the amount by which said prime rate fluctuates, with each change to be effective as of the date of each change in said prime rate. THE PRIME RATE IS A REFERENCE RATE AND DOES NOT NECESSARILY REPRESENT THE LOWEST OR BEST RATE OR A FAVORED RATE, AND AGENT AND LENDERS DISCLAIM ANY STATEMENT, REPRESENTATION OR WARRANTY TO THE CONTRARY. ANY LENDER MAY MAKE COMMERCIAL LOANS OR OTHER LOANS AT RATES OF INTEREST AT, ABOVE OR BELOW THE PRIME RATE. 2. ADDITIONAL DEFINITIONS. The following definitions are hereby added to the Loan Agreement: ANNUALIZATION FACTOR means, with respect to any period ending before January 31, 2000, the quotient of (a) 365 divided by (b) the number of days in such period. APPLICATION means an application for a letter of credit in Proper Form. AVAILABLE COMMITMENT means, for any day, the Commitment minus the Letter of Credit Exposure. BASE RATE MARGIN PERCENTAGE means, for any day, the Margin Percentage for such day minus 1%. COVER for the Letter of Credit Exposure Amount shall be effected by paying to the Agent on behalf of the Lenders immediately available funds, to be held by the Agent in a collateral account maintained by the Agent at Chase Texas and collaterally -3- assigned as security by Borrower for the financial accommodations extended pursuant to this Agreement using documentation in Proper Form, in an amount equal to any required repayment. Such amount shall be retained by the Agent in such collateral account until such time as the applicable Letters of Credit shall have expired and the Letter of Credit Advances, if any, with respect thereto shall have been fully satisfied; PROVIDED, HOWEVER, that at such time if a Default has occurred and is continuing at such time, the Agent shall not be required to release such amount until such Default shall have been cured. CURRENT SUM means, on any day, the sum of (a) the aggregate outstanding principal balance of the Notes on such day PLUS (b) the aggregate Letter of Credit Exposure Amount on such day. FIXED CHARGE COVERAGE RATIO means, for any day, the ratio of (a) the amount of EBITDA less the sum of (x) Capital Expenditures and (y) common and preferred stock dividends to (b) Cash Interest Expense, in each case determined with respect to Borrower on a consolidated basis and for the 12-month period ending on such date (PROVIDED, HOWEVER that for purposes of the computation of the Fixed Charge Coverage Ratio for the quarters ending May 1 and July 31, 1999, Capital Expenditures shall exclude up to $20,000,000 of Capital Expenditures related to the compression equipment business that were made or committed before April 23, 1999, and PROVIDED, FURTHER that if such date is before January 31, 2000, then (1) such determinations shall be made for the period from February 1, 1999 to such date and (2) both the numerator and the denominator of such ratio shall be multiplied by the relevant Annualization Factor. ISSUER means Chase Texas acting in its capacity as the issuer of a Letter of Credit. LETTER OF CREDIT ADVANCES means all sums which may from time to time be paid by the Issuer or any Lender pursuant to the Letters of Credit, or any of them, together with all other sums, fees, reimbursements or other obligations which may be due to the Issuer or any Lender pursuant to the Letters of Credit, or any of them. LETTER OF CREDIT EXPOSURE AMOUNT means at any time the sum of (a) the aggregate undrawn amount of all Letters of Credit outstanding at such time PLUS (b) the aggregate amount of all Letter of Credit Advances for which the Lenders have not been reimbursed and which remain unpaid at such time. LETTER OF CREDIT SUB-LIMIT means the lesser of (a) $25,000,000 or (b) the Commitment. LETTERS OF CREDIT means all irrevocable standby letters of credit issued pursuant to this Agreement. LEVERAGE RATIO means, for any day, the ratio of (a) Interest Bearing Debt on such date to (b) the amount of EBITDA for the 12-month period ending on such date -4- (PROVIDED, HOWEVER that if such date is before January 31, 2000, then such amount of EBITDA shall be the product of (x) the amount of EBITDA from February 1, 1999 to such date times (y) the appropriate Annualization Factor), all determined with respect to Borrower on a consolidated basis. MINIMUM TANGIBLE NET WORTH means, as of any date, the sum of (a) $262,449,000; (b) the net cash proceeds received by Borrower in connection with the issuance of any indicia of its equity ownership after January 31, 1999, and (c) 50% of the Net Income of Borrower for each fiscal quarter beginning after January 31, 1999 and completed by such date (but if the Net Income of Borrower is negative for any such fiscal quarter, then such Net Income shall not be used in computing the Minimum Tangible Net Worth). 3. LOANS. Sections 2(a), (b), (c), (d) and (e) of the Loan Agreement are hereby amended to read in their entirety as follows: (a) LOANS AND COMMITMENTS. Subject to the terms and conditions hereof, each Lender severally agrees to make Loans to Borrower from time to time during the Loan Availability Period, not to exceed at any time outstanding such Lender's Percentage of the Available Commitment, Borrower having the right to borrow, repay and reborrow. Each Request for Credit by Borrower shall be deemed a request for a Loan from each Lender equal to such Lender's Percentage of the aggregate amount so requested, and such aggregate amount shall be equal to the lesser of (1) an integral multiple of $1,000,000 and (2) the unused portion of the Available Commitment. Each repayment of the Loans shall be deemed a repayment of each Lender's Loans equal to such Lender's Percentage of the aggregate amount so repaid, and the aggregate amount so repaid shall be equal to the lesser of (i) an integral multiple of $1,000,000 and (ii) the aggregate unpaid principal balance of the Notes. The obligations of the Lenders hereunder are several and not joint, and the preceding two sentences will give rise to certain inappropriate results if special provisions are not made to accommodate the failure of a Lender to fund a Loan as and when required by this Agreement; therefore, notwithstanding anything herein to the contrary, (I) no Lender shall be required to make Loans at any one time outstanding in excess of such Lender's Percentage of the Available Commitment or of the requested Loan and (II) if a Lender fails to make a Loan as and when required hereunder and Borrower subsequently makes a repayment on the Loans, such repayment shall be split among the non-defaulting Lenders ratably in accordance with their respective Percentages until each Lender has its Percentage of all of the outstanding Loans, and the balance of such repayment shall be divided among all of Lenders in accordance with their respective Percentages. The Loans shall be evidenced by the Notes. (b) REDUCTION IN COMMITMENT. Borrower shall have the right to terminate or permanently reduce the unused portion of the Commitment at any time or from time to time, PROVIDED that Borrower may not decrease the Commitment to an amount less than the Current Sum. Each decrease in the Commitment pursuant to this Section shall be permanent and shall be an integral multiple of $1,000,000. -5- Each notice of a decrease in the Commitment shall be effective upon the date specified therein; PROVIDED that the Agent must receive such notice at least five (5) Business Days prior to its effective date. (c) COMMITMENT FEE. In consideration of the Commitment, Borrower agrees to pay commitment fee (computed on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be) computed by multiplying the Commitment Fee Percentage from time to time in effect times the daily average difference between the Commitment and the Current Sum, such commitment fee to be due and payable to the Agent for the account of the Lenders on each Interest Payment Date for Base Rate Borrowings before the Termination Date, and on the Termination Date, in addition to the installments of interest on the Notes. All past due commitment fees shall bear interest at the Past Due Rate. Borrower and the Lenders expressly agree, pursuant to Chapter 346 ("CHAPTER 346") of the Texas Finance Code, that Chapter 346 (which relates to open-end line of credit revolving loan accounts) shall not apply to any Loan and that neither this Agreement nor any such Loan shall be governed by Chapter 346 or subject to its provisions. (d) MANDATORY PAYMENTS OF PRINCIPAL AND INTEREST. Accrued and unpaid interest on the unpaid principal balance of the Notes shall be due and payable on the Interest Payment Dates. The entire unpaid principal balance of each Note shall be finally due and payable on the Maturity Date. All payments on the Notes and all payments on the Letter of Credit Advances shall be applied first to accrued interest, the balance to principal; all prepayments (whether voluntary or mandatory) on the Notes shall be applied first to principal, the balance to accrued interest. If any payment on the Facility Debt shall become due on a day other than a Business Day, such payment may be made on the next succeeding Business Day (unless the result of such extension of time would be to extend the date of such payment into another calendar month or beyond the Maturity Date, and in either such event such payment shall be made on the Business Day immediately preceding the day on which such payment would otherwise have been due), and such extension of time shall in such case be included in the computation of interest on such Facility Debt. (e) MANDATORY PREPAYMENTS. Borrower shall from time to time prepay the Loans in such amounts as shall be necessary so that at all times the aggregate principal amount of all Loans outstanding shall be less than or equal to the Available Commitment. 4. LETTERS OF CREDIT. There is hereby added to the Loan Agreement a new Section 2(h), which shall read in its entirety as follows: (h) LETTERS OF CREDIT. (1) Subject to the terms and conditions contained herein, Borrower shall have the right to utilize the Commitment from time to time, prior to the Termination Date, by obtaining from the Issuer Letters of Credit for the account of Borrower in such amounts and in favor of such -6- beneficiaries as Borrower from time to time shall request; PROVIDED, that in no event shall the Issuer have any obligation to issue any Letter of Credit if (i) the face amount of such Letter of Credit, PLUS the Letter of Credit Exposure Amount at such time, would exceed the Letter of Credit Sub-Limit, (ii) the face amount of such Letter of Credit, PLUS the Current Sum at such time, would exceed the Commitment then in effect, (iii) such Letter of Credit would have an expiry date later than the earlier of (x) one year from the date thereof or (y) the Termination Date, (iv) such Letter of Credit would not be in Proper Form, (v) Borrower has not executed and delivered such customary Applications and other instruments and agreements relating to such Letter of Credit as the Agent shall have requested; (vi) an event has occurred and is continuing which constitutes a Default; (vii) in the sole opinion of the Majority Lenders, there has been a material adverse change in the Property, liabilities, financial condition, business or affairs of Borrower or any of its Subsidiaries from those reflected in the financial statements of Borrower dated January 31, 1999 and delivered to the Lenders or in the facts warranted or represented in any Credit Document, or (vii) the issuance of such Letter of Credit shall be prohibited by, or subject the Agent, the Issuer or any Lender to any penalty or onerous condition under, any applicable Legal Requirement. Borrower promises to pay to the Agent for the account of each Lender, on demand, such Lender's Percentage of each Letter of Credit Advance, together with interest thereon at (1) prior to the third Business Day following each such Letter of Credit Advance, the Base Rate, and (2) on and after such third Business Day, the Past Due Rate. The Lenders may, but shall not be obligated to, at any time deem that Borrower has requested a Loan to satisfy any Letter of Credit Advance, and the Lenders may without further action by Borrower satisfy such Letter of Credit Advance (without regard to the conditions precedent to a Loan, the minimum size of a Loan or other matters) by making Loans. All rights, powers, benefits and privileges of this Agreement with respect to the Notes, all security therefor and guaranties thereof (if any) and all restrictions, provisions for repayment or acceleration and all other covenants, warranties, representations and agreements of Borrower contained in this Agreement with respect to the Notes shall apply to each Letter of Credit Advance. Upon the date of the issuance of a Letter of Credit, the Issuer shall be deemed, without further action by any party to this Agreement, to have sold to each Lender, and each Lender shall be deemed, without further action by any party to this Agreement, to have purchased from the Issuer, a participation, to the extent of such Lender's Percentage, in such Letter of Credit and the related Letter of Credit Exposure Amount. Should the Lenders in their sole and absolute discretion approve, contrary to SECTION 2(H)(1)(III)(Y), the issuance of a Letter of Credit with an expiry date after the Termination Date, such Letter of Credit shall be fully Covered or, in the alternative, if Borrower chooses, shall be backed by a letter of credit in Proper Form issued by an issuer acceptable to the Issuer in its sole and absolute discretion. -7- (2) The following additional provisions shall apply to each Letter of Credit: (A) Borrower shall give the Agent at least three Business Days' irrevocable prior notice (effective upon receipt) specifying the date such Letter of Credit is to be issued, describing the proposed terms of such Letter of Credit and the nature of the transaction proposed to be supported thereby, and shall furnish such additional information regarding such transaction as the Agent may reasonably request. Upon receipt of such notice the Agent shall promptly provide each Lender with a copy thereof and with notice of such Lender's Percentage of the amount of such proposed Letter of Credit. (B) On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Lender shall be deemed to be utilized for all purposes of this Agreement in an amount equal to such Lender's Percentage of the sum of (i) the undrawn amount of such Letter of Credit PLUS (ii) the unpaid amount of all Letter of Credit Advances with respect to such Letter of Credit. (C) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the Issuer shall promptly notify Borrower and each Lender as to the amount to be paid as a result of such demand and the payment date. If at any time the Issuer shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing or in respect of an acceptance created in connection with a drawing under such Letter of Credit, each Lender will pay to the Agent immediately upon demand by the Agent at any time during the period commencing after such payment until reimbursement thereof in full by Borrower, an amount equal to such Lender's Percentage of such payment, together with interest on such amount for each day from the date of demand for such payment (or, if such demand is made after 12:00 noon, Houston time, on such date, from the next succeeding Business Day) to the date of payment by such Lender of such amount at a rate of interest per annum equal to the Federal Funds Rate for such day. (D) Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuer for the account of each Lender for any amount paid by the Issuer upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by Borrower to the extent not prohibited by law. (3) Borrower will pay to the Issuer for the account of each Lender a letter of credit fee equal to such Lender's Percentage of the face amount of -8- each Letter of Credit, for the period from and including the date of issuance of such Letter of Credit to and including its date of expiry, at a rate per annum equal to the Margin Percentage on the date of issuance, such fee to be due and payable on the date of issuance (and a condition to the issuance of such Letter of Credit); PROVIDED, HOWEVER, that the aggregate of all letter of credit fees payable to the Lenders with respect to a Letter of Credit pursuant to this sentence shall be at least $600. Borrower will pay to the Issuer for the account of the Issuer, as a condition precedent to the issuance of each Letter of Credit, an issuance fee of $300 for such Letter of Credit. (4) Borrower shall pay to the Agent for the account of the Issuer, in advance (and as a condition of issuance of the Letter of Credit), a fronting fee for each Letter of Credit equal to 1/8 of 1% per annum times the face amount of such Letter of Credit, for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof. (5) Each Letter of Credit shall be subject to (A) either (i) the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (and any subsequent revision thereof approved by a Congress of the International Chamber of Commerce) or (ii) the International Standby Practices 1998, as appropriate, and, (B) to the extent not inconsistent therewith, the laws of the State of Texas. (6) The obligations of Borrower under this Agreement in respect of the Letters of Credit and Letter of Credit Advances shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever. (7) If as a result of any change in any Legal Requirement, or the interpretation thereof by any Governmental Authority, there shall be imposed, modified or deemed applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or participations in such Letters of Credit, and the result shall be to increase the cost to the Issuer or any other Lender of issuing or maintaining any Letter of Credit or any participation therein, or reduce any amount receivable by the Issuer or any other Lender hereunder in respect of any Letter of Credit or any participation therein (which increase in cost, or reduction in amount receivable, shall be the result of the reasonable allocation by the Issuer or such other Lender, as the case may be, of the aggregate of such increases or reductions resulting from such event; the determination of such amount by the Issuer or such other Lender, as the case may be, shall be conclusive and binding, absent manifest error), then the Issuer or such other Lender shall notify Borrower or the Agent, as the case may be, and upon demand therefor by the Agent, Borrower (subject to SECTION 12) shall pay to the Issuer or such other Lender, -9- from time to time as specified by the Issuer or such other Lender through the Agent, such additional amounts as shall be sufficient to compensate the Issuer or such other Lender for such increased costs or reductions in amount; . 5. REGULATION U. Section 5(m) of the Loan Agreement is hereby amended to read in its entirety as follows: (m) None of the proceeds of any Note, and no Letter of Credit, will be used for the purpose of purchasing or carrying, directly or indirectly, any margin stock or for any other purpose which would make such credit a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. 6. NEW REPRESENTATION. There is hereby added to the Loan Agreement a new Section 5(bb), which shall read in its entirety as follows: (bb) Any reprogramming required to permit the proper functioning, in and following the year 2000, of (1) the computer systems of Borrower and its Subsidiaries and (2) the computer systems and equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrower's systems interface) of Borrower and its Subsidiaries will be completed by June 30, 1999, and the testing of all such systems and equipment, as so reprogrammed, will be completed by September 30, 1999. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of Borrower and its Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit Borrower to conduct its business without resulting in a material adverse change in the Property, liabilities, financial condition, business or affairs of Borrower or any of its Subsidiaries. The cost to Borrower and its Subsidiaries of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to Borrower and its Subsidiaries (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or have a material adverse change in the Property, liabilities, financial condition, business or affairs of Borrower or any of its Subsidiaries. 7. REVISED FINANCIAL COVENANTS. Section 6(c) of the Loan Agreement is hereby amended to read in its entirety as follows: (c) Borrower and its Subsidiaries shall have and maintain, on a consolidated basis, at all times on and after May 1, 1999: (1) a Leverage Ratio for Borrower of no more than (A) 4.25 to 1 until July 31, 1999; (B) 4.00 to 1 on and after July 31, 1999; (C) 3.50 to 1 on and after October 30, 1999, and (D) 3.00 to 1 on and after January 31, 2000; -10- (2) a Tangible Net Worth for Borrower of not less than the Minimum Tangible Net Worth; and (3) a Fixed Charge Coverage Ratio for Borrower of at least (A) 1.75 to 1 until July 31, 1999; (B) 1.65 on and after July 31, 1999 until October 30, 1999; (C) 2.25 to 1 on and after October 30, 1999, and (D) 2.50 to 1 on and after January 31, 2000. 8. PURPOSES OF LOANS AND LETTERS OF CREDIT. Section 6(k) of the Loan Agreement is hereby amended to read in its entirety as follows: (k) The proceeds of the Loans will be used for general corporate purposes and working capital for Borrower and its Subsidiaries; the Letters of Credit will be used for general corporate purposes of Borrower and its Subsidiaries. 9. NEW ACQUISITION LIMITATION. There is hereby added to the Loan Agreement a new Section 7(f), which shall read in its entirety as follows: (f) Borrower will not (and will not permit any of its Subsidiaries to), in any single transaction or series of related transactions, make any Investment or acquire any Property which (1) would be classified as "Acquisition of Businesses" in Borrower's statement of cash flows and (2) involves net cash consideration in excess of $10,000,000. 10 REMEDIES. The last sentence of Section 8 of the Loan Agreement is hereby amended to read in its entirety as follows: Upon the occurrence of any Event of Default, and at any time thereafter, the Majority Lenders shall have the right, at their option, to do any or all of the following: (1) to declare the Commitment terminated (whereupon the Commitment shall be terminated); (2) to declare the unpaid balance of the Indebtedness evidenced by the Notes to be immediately due and payable without further notice (including notice of intent to accelerate and notice of acceleration), protest or demand or presentment for payment, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY BORROWER; PROVIDED, that in the case of the occurrence of an Event of Default referred to in SECTION 8(D) or 8(E), the Commitment shall be automatically terminated and the unpaid balance of the Indebtedness evidenced by the Notes (principal and accrued and unpaid interest) shall be and become automatically due and payable, without notice (including notice of intent to accelerate and notice of acceleration) and without presentment, demand or other formalities of any kind, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY BORROWER; (3) by notice to Borrower, require Cover for all outstanding Letters of Credit, and (4) acting through the Agent, to enforce or exercise any and all powers, rights and remedies available at law or provided in this Agreement, the Notes, the other Credit Documents or any other document executed pursuant hereto or in connection herewith. -11- 11 LIABILITY OF ISSUER. There is hereby added to Section 10(b) of the Loan Agreement a new sentence, which shall appear at the end of such Section and shall read in its entirety as follows: Without in any way limiting any of the foregoing, each Lender acknowledges that the Issuer shall have no greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice of Documentary Credits (1993 Revision, International Chamber of Commerce Publication No. 500) or International Standby Practices 1998, as the case may be. 12 ISSUER INDEMNIFICATION. There is hereby added to Section 15 of the Loan Agreement a new sentence, which shall be inserted immediately before the penultimate sentence of that Section and shall read in its entirety as follows: TO THE FULLEST EXTENT NOT PROHIBITED BY LAW, BORROWER SHALL INDEMNIFY THE AGENT (INCLUDING THE AGENT WHEN ACTING AS ISSUER OF LETTERS OF CREDIT), EACH LENDER AND EACH OF THEIR RESPECTIVE AFFILIATES FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS AND DAMAGES ARISING FROM THE SOLE, ORDINARY OR CONTRIBUTORY NEGLIGENCE OF THE AGENT, ANY LENDER OR ANY OTHER INDEMNIFIED PERSON, IN CONNECTION WITH THE EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS OR EXPENSES WHICH THE AGENT, OR SUCH OTHER INDEMNIFIED PERSON, AS THE CASE MAY BE, MAY INCUR (WHETHER INCURRED AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) BY REASON OF OR IN CONNECTION WITH THE FAILURE OF ANY OTHER LENDER (WHETHER AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) TO FULFILL OR COMPLY WITH ITS OBLIGATIONS TO THE AGENT OR ANY LENDER, AS THE CASE MAY BE, WITH RESPECT TO SUCH LETTER OF CREDIT HEREUNDER (BUT NOTHING HEREIN CONTAINED SHALL AFFECT THE RIGHTS THE COMPANY MAY HAVE AGAINST SUCH DEFAULTING LENDER); BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, COSTS OR EXPENSES INCURRED BY SUCH INDEMNIFIED PERSON BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE INDEMNIFIED. 13 EXHIBITS. Exhibits C and D to the Loan Agreement are hereby deleted and there are hereby substituted therefor new Exhibits C and D, which shall be identical to EXHIBITS C and D, respectively, attached hereto and hereby made a part hereof. -12- 14 EFFECTIVE RATES. Notwithstanding anything in the Loan Agreement as hereby amended, from the date hereof to the first Calculation Date after the date hereof, the Margin shall be 1.50% (with respect to all Loans outstanding on the date hereof and all Loans made thereafter before such Calculation Date) and the Commitment Fee Percentage shall be 0.375%. 15 ASSET AUDIT. Borrower has permitted the Agent to perform the field work in connection with an asset audit (the "ASSET AUDIT") of Borrower and its Subsidiaries. Promptly after completion of the Asset Audit, the Agent shall discuss the same with Borrower and then provide a report thereof (the "AUDIT REPORT") to the Lenders. Borrower agrees to provide such additional information to any Lender as such Lender may reasonably request with respect to any matter related to the Asset Audit, and Borrower may provide each Lender with such additional information (at such time and in such manner as is reasonably convenient for Borrower and the Lenders) as Borrower believes may be useful to the Lenders in their evaluation of the Audit Report. Within ten Business Days after receipt of the Audit Report, each Lender shall provide notice to the Agent as to whether such Lender, in its sole and absolute discretion, determines that the results of the Asset Audit are satisfactory to such Lender; if, by the end of such period, the Agent does not receive notices from Lenders with Commitment Percentages aggregating at least 66-_% stating that the results of the Asset Audit are satisfactory to such Lenders, then (a) Borrower and each Lender agrees to use its best efforts to come to an agreement as to (1) the frequency and method of the reporting of Borrower's calculation of the Borrowing Base; (2) the X% and Y% appearing in the definitions below, and (3) the definitions of the terms "Eligible Accounts" and "Eligible Inventory" (together with such additional definitions as may be used in the definitions of those terms); (b) immediately upon the agreement by Borrower and the Majority Lenders as to the foregoing, the same shall be added to the amendments to the Loan Agreement appearing below, and (c) the Loan Agreement shall thereupon automatically, and without any further action by any Party, be amended as follows (after giving effect to the additions to such amendments of clause (b) of this Section): (x) The following definition contained in the Loan Agreement will be amended to read in its entirety as follows: AVAILABLE COMMITMENT means, for any day, the difference of (a) the lesser of the Commitment or the Borrowing Base minus (b) the Letter of Credit Exposure. (y) The following definition will be added to the Loan Agreement: BORROWING BASE means, on any day, the sum of (a) X% of the Eligible Accounts plus (b) Y% of the Eligible Inventory as set forth on the most recent calculation of the Borrowing Base delivered to the Agent, subject to arithmetic correction. (z) Section 2(h)(1)(ii) of the Loan Agreement will be amended to read in its entirety as follows: (ii) the face amount of such Letter of Credit, PLUS the Current Sum at such time, would exceed the lesser of the Commitment or the Borrowing Base, in each case as then in effect, -13- 16 WAIVER. All breaches of Section 6(c) of the Loan Agreement as in effect before the effectiveness of this Amendment are hereby waived; PROVIDED, HOWEVER that such waiver (a) is conditioned upon the accuracy of all information heretofore furnished to the Agent and the Lenders and (b) is not a waiver of any similar or dissimilar Default or Event of Default occurring after the date hereof. 17 FORBEARANCE AGREEMENT. Upon the effectiveness of this Amendment, the Forbearance Agreement shall be terminated and of no further force or effect. 18 CONDITIONS PRECEDENT. This Amendment shall be effective as of the date set forth above, subject to the satisfaction, in a manner satisfactory to the Agent, of each of the following conditions precedent on or before April 30, 1999: (a) The Agent shall have received the following (the "AMENDMENT DOCUMENTS"), each of which shall be in form and substance satisfactory to the Agent in its sole and absolute discretion and duly and validly executed: (1) A certificate of the Secretary or any Assistant Secretary of Borrower, dated as of the date hereof, as to (1) the resolutions of the Board of Directors of Borrower authorizing the execution, delivery and performance of this Amendment and of each of the other Amendment Documents (a copy of such resolutions to be attached to such certificate), such certificate to state that said copy is a true and correct copy of such resolutions and that such resolutions were duly adopted and have not been amended, superseded, revoked or modified in any respect and remain in full force and effect as of the date of such certificate, and (2) as to the absence of any change since (i) October 31, 1998 in the Bylaws of Borrower and (ii) December 20, 1996 in any of (x) the incumbency and signatures of the officer or officers of the Borrower or (y) the Articles of Incorporation of the Borrower; (2) this Amendment, duly executed by Borrower, the Majority Lenders and the Agent. (3) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender; and (4) a fee for the account of each Lender which had given written notice to the Agent by April 23, 1999 of such Lender's agreement (subject to review of documentation) to the modifications of the Loan Agreement contained in this Amendment, in an amount equal to 0.25% of such Lender's Commitment. (b) Borrower shall have paid to the Agent on behalf of the Lenders all accrued and unpaid fees and other amounts in connection with the Loan Agreement and all amounts accrued under this Amendment and the other Amendment Documents. (c) The Agent on behalf of the Lenders shall have received in writing all such information respecting the business, operations, condition (financial and otherwise), properties and prospects of Borrower and its financial and credit arrangements, as any Lender through the Agent may from time to time have reasonably requested. -14- (d) After giving effect to this Amendment, no Default shall have occurred and be continuing. (e) No event, circumstance or condition shall have occurred since January 31, 1999 which has had, or which could have, a material adverse effect on the business, operations, condition (financial or otherwise), properties or prospects of Borrower. (f) Such effectiveness shall not violate any legal requirement applicable to the Agent or any Lender. 19 REPRESENTATIONS TRUE; NO DEFAULT. Borrower represents and warrants to the Agent and each Lender that (a) the representations and warranties contained in the Loan Agreement and in the other Credit Documents are true and correct on and as of the date hereof as though made on and as of such date (except to the extent such representations and warranties are expressly stated to be made solely as of an earlier date) and (b) except for the "Existing Defaults" (as such term is defined in the Forbearance Agreement) no event has occurred and is continuing which constitutes an Event of Default under the Loan Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. 20 RATIFICATION. Except as expressly amended hereby and by the other Amendment Documents, the Loan Agreement, as hereby amended, and the other Credit Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Loan Agreement, the other Credit Documents, or otherwise, remain in full force and effect as of the date of this Amendment. 21 DEFINITIONS AND REFERENCES. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Loan Agreement and the term "Loan Agreement" as used in the other Credit Documents or any other instrument, document or writing furnished to the Agent or any Lender by or on behalf of Borrower shall mean the Loan Agreement as hereby amended. 22 EXPENSES; ADDITIONAL INFORMATION. Whether or not this Amendment becomes effective, Borrower shall pay or reimburse on demand each of the Lenders and the Agent for paying: (a) the reasonable fees and expenses of Locke Liddell & Sapp LLP, special counsel to the Agent, in connection with (1) the preparation, execution and delivery of this Amendment (including its exhibits and appendix) and the other Amendment Documents and (2) advising the Agent as to its rights and responsibilities under the Loan Agreement, as hereby amended; (b) all costs and expenses of the Lenders and the Agent (including costs of reasonable counsels' fees) in connection with any Event of Default or the enforcement of any Credit Document; (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any Credit Document or any other document referred to therein; (d) all costs, expenses, taxes, assessments and other charges incurred in connection with any filing or registration contemplated by any Credit Document or any document referred to therein; and (e) reasonable expenses of due diligence and syndication, and mutually agreed advertising and marketing costs. -15- 23 SEVERABILITY. If any term or provision of this Amendment or any of the other Amendment Documents or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment or such Amendment Document, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment or such Amendment Document shall be valid and enforced to the fullest extent permitted by applicable law. Any provision of this Amendment or of any other Amendment Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment and each of the other Amendment Documents are severable. 24 INDEMNIFICATION. BORROWER SHALL INDEMNIFY ON DEMAND THE AGENT (INCLUDING THE AGENT WHEN ACTING AS THE ISSUER), THE LENDERS AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND ADVISORS (COLLECTIVELY, THE "INDEMNITEES" AND INDIVIDUALLY AN "INDEMNITEE") FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES (INCLUDING ENVIRONMENTAL LIABILITIES), CLAIMS (INCLUDING ENVIRONMENTAL CLAIMS), EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, EXPENSES OR DAMAGES ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL OR PROPOSED USE BY BORROWER OF THE PROCEEDS OF ANY LOAN MADE BY ANY LENDER OR GROWING OUT OF OR RESULTING FROM ANY CREDIT DOCUMENT OR ANY TRANSACTION OR EVENT CONTEMPLATED THEREIN; (B) VIOLATION BY BORROWER OR ANY OF ITS SUBSIDIARIES OF ANY CREDIT DOCUMENT OR ANY LEGAL REQUIREMENT, INCLUDING THOSE RELATING TO HAZARDOUS SUBSTANCES, PETROLEUM, PETROLEUM PRODUCTS OR PETROLEUM WASTES; (C) ANY LENDER'S OR THE AGENT'S BEING DEEMED AN OPERATOR OF ANY OF BORROWER'S REAL OR PERSONAL PROPERTY BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL OR OTHER THIRD PARTY, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY HAZARDOUS SUBSTANCE, PETROLEUM, PETROLEUM PRODUCT OR PETROLEUM WASTE LOCATED IN ON OR UNDER SUCH PROPERTY, (D) THE SOLE, ORDINARY OR CONTRIBUTORY NEGLIGENCE OF ANY INDEMNITEE, OR (E) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING, AND BORROWER SHALL REIMBURSE EACH INDEMNITEE UPON DEMAND FOR ANY EXPENSES (INCLUDING LEGAL FEES) INCURRED IN CONNECTION WITH ANY OF THE FOREGOING, BUT EXCLUDING ANY SUCH LOSSES BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNITEE TO BE INDEMNIFIED. THE OBLIGATIONS OF BORROWER UNDER THIS SECTION SHALL SURVIVE THE TERMINATION OF THE LOAN AGREEMENT (AS AMENDED BY THIS AMENDMENT AND AS IT MAY OTHERWISE BE AMENDED, RESTATED, MODIFIED AND SUPPLEMENTED FROM TIME TO TIME) AND THE REPAYMENT AND EXPIRY OF THE LOANS. ANY AMOUNT TO BE PAID UNDER THIS SECTION BY BORROWER TO THE AGENT OR ANY LENDER SHALL BE A DEMAND OBLIGATION OWING BY BORROWER TO THE AGENT OR SUCH LENDER AND SHALL BEAR INTEREST FROM THE DATE OF EXPENDITURE UNTIL PAID AT THE PAST DUE RATE. 25 RELEASE OF CLAIMS. BORROWER HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER THE AGENT AND THE LENDERS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, TRUSTEES, AGENTS, EMPLOYEES AND COUNSEL (IN EACH CASE, PAST, PRESENT OR FUTURE) FROM ANY AND ALL CLAIMS EXISTING AS OF THE DATE HEREOF (OR THE DATE OF ACTUAL EXECUTION HEREOF BY BORROWER, IF LATER). AS USED HEREIN, THE TERM "CLAIM" SHALL MEAN ANY AND ALL LIABILITIES, CLAIMS, DEFENSES, DEMANDS, ACTIONS, CAUSES OF ACTION, JUDGMENTS, DEFICIENCIES, INTEREST, LIENS, COSTS OR EXPENSES (INCLUDING COURT COSTS, PENALTIES, ATTORNEYS' FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY -16- KIND AND CHARACTER WHATSOEVER, INCLUDING CLAIMS FOR USURY, BREACH OF CONTRACT, BREACH OF COMMITMENT, NEGLIGENT MISREPRESENTATION OR FAILURE TO ACT IN GOOD FAITH, IN EACH CASE WHETHER NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS, COURSE OF CONDUCT, TORT, VIOLATIONS OF LAWS OR REGULATIONS OR OTHERWISE. 26 MISCELLANEOUS. This Amendment and the other Amendment Documents (a) shall be binding upon and inure to the benefit of Borrower, the Agent and the Lenders and their respective successors, assigns, receivers and trustees (however, Borrower may not assign its rights hereunder without the express prior written consent of the Lenders); (b) may be modified or amended only by a writing signed by each party; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement, and (e) embodies the entire agreement and understanding between the Parties with respect to the subject matter hereof and thereof and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. Unless otherwise defined herein, terms used herein which are defined in the Loan Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. Time is of the essence in the performance of this Amendment and the other Amendment Documents. This Amendment and the other Amendment Documents are Credit Documents. 27 THIS AMENDMENT AND THE OTHER AMENDMENT DOCUMENTS, TOGETHER WITH ALL OF THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AS TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly authorized officers effective as of the date first above written. STEWART & STEVENSON SERVICES, INC., a Texas corporation By: _______________________________ Name: _____________________________ Title: ____________________________ -17- CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, acting in its individual capacity and as the Agent for the Lenders named herein By: _______________________________ Name: _____________________________ Title: ____________________________ BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, as a Co-Agent and a Lender By: _______________________________ Name: _____________________________ Title: ____________________________ NATIONSBANK, N.A., d/b/a Bank of America, N.A., as Co-Agent and a Lender By: _______________________________ Name: _____________________________ Title: ____________________________ ABN AMRO BANK N.V., HOUSTON AGENCY By: _______________________________ Name: _____________________________ Title: ____________________________ By: _______________________________ Name: _____________________________ Title: ____________________________ THE BANK OF NEW YORK By: _______________________________ Name: _____________________________ Title: ____________________________ CREDIT LYONNAIS NEW YORK BRANCH By: _______________________________ Name: _____________________________ Title: ____________________________ PNC BANK, NATIONAL ASSOCIATION By: _______________________________ Name: _____________________________ Title: ____________________________ BANK ONE, LOUISIANA, NA, as successor to First National Bank of Commerce By: _______________________________ Name: _____________________________ Title: ____________________________ Exhibit C - Request for Credit Exhibit D - Compliance Certificate REQUEST FOR CREDIT [Date] Chase Bank of Texas, National Association, as Agent 712 Main Street Houston, Texas 77002 Attention: Manager, Manufacturing and Oilfield Services Division Ladies and Gentlemen: The undersigned hereby certifies that [he] [she] is the ______________________________1 of Stewart & Stevenson Services, Inc. ("BORROWER"), a Texas corporation, and that as such is authorized to execute this Request for Credit (the "REQUEST") on behalf of Borrower pursuant to the Loan Agreement (as it may be amended, supplemented or restated from time to time, the "LOAN AGREEMENT") dated as of December 20, 1996, by and among Borrower, Chase Bank of Texas, National Association, a national banking association then known as Texas Commerce Bank National Association, acting as agent, and the financial institutions which are a party thereto from time to time. Capitalized terms used herein and not defined herein shall have the respective meanings assigned to them in the Loan Agreement. The Loan being requested hereby is to be in the amount set forth in (b) below and is requested to be made on , which is a Business Day. On behalf of Borrower, the undersigned further certifies, represents and warrants as follows: a. As of the date hereof: (1) Aggregate outstanding amount of Loans is: $_______________ (2) Letter of Credit Exposure is: $_______________ (3) Current Sum (clause (1) + clause (2) is: $_______________ (4) The current Commitment is: $_______________ (5) The Available Commitment (clause 4 - clause 3) is: $_______________ - -------- 1 Must be the President, a vice president, the Treasurer or an Assistant Treasurer of Borrower. EXHIBIT C - Page 1 b. If and only if the Available Commitment is positive, Borrower hereby requests a Loan in the amount of $____________ (which is no more than the Available Commitment). c. The requested Loan is to be a (CHECK ONE) [ ] Base Rate Borrowing [ ] CD Rate Borrowing [ ] Eurodollar Rate Borrowing [ ] Negotiated Rate Borrowing. If the Loan is to be an Alternate Rate Borrowing, the applicable Interest Period is to be . d. The representations and warranties made in each Credit Document are true and correct in all respects on and as of the time of delivery hereof, with the same force and effect as if made on and as of the time of delivery hereof. e. No Default has occurred and is continuing or will occur as a result of the requested Loan. Thank you for your attention to this matter. Very truly yours, STEWART & STEVENSON SERVICES, INC., a Texas corporation By:_______________________________ Name:_____________________________ Title:____________________________ EXHIBIT C - Page 2 COMPLIANCE CERTIFICATE The undersigned hereby certifies that [he] [she] is the _____________________________2 of Stewart & Stevenson Services, Inc. ("BORROWER"), a Texas corporation, and that as such is authorized to execute this certificate on behalf of Borrower pursuant to the Loan Agreement (as it may be amended, supplemented or restated from time to time, the "LOAN AGREEMENT") dated as of December 20, 1996, by and among Borrower and Chase Bank of Texas, National Association, a national banking association then known as Texas Commerce Bank National Association, acting as agent (in such capacity, the "AGENT") and the financial institutions which are a party thereto from time to time; and that a review of Borrower and its Subsidiaries has been made under [his] [her] supervision with a view to determining whether Borrower has fulfilled all of its obligations under the Loan Agreement and the other Credit Documents; and on behalf of Borrower further certifies, represents and warrants as follows (each capitalized term used herein having the same meaning given to it in the Loan Agreement unless otherwise specified): (a) Borrower has fulfilled its respective obligations under the Credit Documents. (b) Except for those made only as of a specific date, the representations and warranties made in each Credit Document are true and correct in all respects on and as of the time of delivery hereof, with the same force and effect as if made on and as of the time of delivery hereof. (c) The financial statements delivered to the Agent and the Lenders concurrently with this Compliance Certificate have been prepared in accordance with GAAP consistently followed throughout the period indicated and fairly present the financial condition and results of operations of the applicable Persons as at the end of, and for, the period indicated. (d) No Default has occurred and is continuing. In this regard, Borrower is in compliance with the provisions of SECTION 6(C) of the Loan Agreement, as follows: SECTION 6(C)(1) -- LEVERAGE RATIO actual Leverage Ratio for Borrower and its Subsidiaries as of the date hereof: __.____ : 1.00 maximum Leverage Ratio for Borrower and its Subsidiaries as of the date hereof: - ---------- 2 Must be the Chief Financial Officer, Treasurer or any Assistant Treasurer of Borrower. EXHIBIT D - Page 1 __.____ : 1.00 SECTION 6(C)(2) -- TANGIBLE NET WORTH actual Tangible Net Worth for Borrower and its Subsidiaries as of the date hereof: $_______________ Minimum Tangible Net Worth for Borrower and its Subsidiaries as of the date hereof: $_______________ SECTION 6(C)(3) -- FIXED CHARGE COVERAGE RATIO actual Fixed Charge Coverage Ratio for Borrower and its Subsidiaries as of the date hereof: __.____ : 1.00 minimum Fixed Charge Coverage Ratio for Borrower and its Subsidiaries as of the date hereof: __.____ : 1.00 (e) There has occurred no material adverse change in the assets, liabilities, financial condition, business or affairs of Borrower or any of its Subsidiaries since the date of the Loan Agreement. DATED as of ___________. STEWART & STEVENSON SERVICES, INC., a Texas corporation By:_________________________________ Name:_______________________________ Title:______________________________ EXHIBIT D - Page 2 EX-21.1 8 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 INCORPORATION OR ORGANIZATION --------------- C. Jim Stewart & Stevenson, Inc. Delaware CPS International, Inc. Panama Creole Stewart & Stevenson, Inc. Delaware IPSC Co., Inc. Arkansas PAMCO Services International, Inc. Delaware S&S Cogen, Inc. Delaware Sierra Detroit Diesel Allison, Inc. Nevada Stewart & Stevenson Capital Corporation Texas Stewart & Stevenson Carson, Inc. Texas Stewart & Stevenson Development Services, Inc. Delaware Stewart & Stevenson International, Inc. Delaware Stewart & Stevenson International Sales, Inc. Barbados Stewart & Stevenson Operations, Inc. Delaware Stewart & Stevenson Overseas, Inc. Texas Stewart & Stevenson Petroleum Services, Inc. Delaware Stewart & Stevenson Power, Inc. Delaware Stewart & Stevenson Project Services, Inc. Delaware Stewart & Stevenson Realty Corporation Delaware Stewart & Stevenson Technical Services, Inc. Delaware Stewart & Stevenson Transportation, Inc. Texas Stewart & Stevenson Tug, LLC Delaware Stewart & Stevenson TVS, Inc. Delaware Stewart & Stevenson (U.K.) Limited Scotland Stewart & Stevenson Vehicle Services, Inc. Delaware Tokumei Kumiai Holdings, Inc. Delaware The Company has additional subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23.1 9 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in Registration Statement No. 33-21515 on Form S-8 dated April 28, 1988, Registration Statement No. 33-22463 on Form S-8 dated June 13, 1988, Registration Statement No. 33-65404 on Form S-8 dated July 1, 1993, Registration Statement No. 33-52881 on Form S-8 dated March 30, 1994, Registration Statement No. 33-52903 on Form S-8 dated March 30, 1994, Registration Statement No. 33-54389 on Form S-4 dated June 30, 1994, Registration Statement No. 33-58679 on Form S-8 dated April 18, 1995, Registration Statement No. 33-58685 on Form S-8 dated April 18, 1995, Registration Statement No. 333-02817 on Form S-8 dated April 25, 1996, Registration Statement No. 333-15271 on Form S-8 dated October 31, 1996, Registration Statement No. 333-26089 on Form S-8 dated April 29, 1997, Registration Statement No. 333-35617 dated September 15, 1997, and Registration Statement No. 333-51567 on Form S-8 dated May 1, 1998 of our report dated April 29, 1999 included in Stewart & Stevenson Services, Inc.'s Form 10-K for the fiscal year ended January 31, 1999. /s/ Arthur Andersen LLP Houston, Texas April 29, 1999 EX-27.1 10
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 12-MOS JAN-31-1999 JAN-31-1999 12,959 0 168,546 (3,999) 215,202 540,401 271,658 (142,913) 705,777 285,486 178,879 47,819 0 0 272,544 705,777 1,206,772 1,206,772 1,178,088 1,178,088 90,395 0 12,244 (61,711) (22,804) (38,907) (33,979) 0 0 (72,984) (2.51) (2.51)
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