United
States Securities and Exchange Commission


Washington,
D.C.  20549




FORM
10-K




þ      ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the
fiscal year ended January 31, 2009


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     001-33836




Stewart &
Stevenson LLC


(Exact
name of registrant as specified in its charter)




Delaware
            20-3974034(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification Number)1000
      Louisiana Street, Suite 5900, Houston, TX, 77002(Address
      of Principal Executive Offices)




(713)
751-2700


(Registrant’s
telephone number including area code)




None


(Securities
registered pursuant to Section 12(b) of the Act)




None


(Securities
registered pursuant to Section 12(g) of the Act)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes  ̈  No þ




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes þNo  ̈




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 if 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 þ       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.þ




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or if such shorter period that the
registrant was required to submit and post such files).Yes þ  No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):




Large
accelerated   ̈                  Accelerated
filer   ̈                                Non-accelerated
filer  þ                                              Smaller
reporting company filer   ̈


(Do not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2)Yes  ̈  No þ




There is
no market for the registrant’s equity.  As of January 31, 2009, there
were 100,005,000 common units outstanding.







TABLE OF CONTENTS




PART
      IItem 1.
                Business
                3Item 1A.
                Risk Factors
                10Item 1B.
                Unresolved Staff Comments
                18Item 2.
                Properties
                18Item 3.
                Legal Proceedings
                18Item 4.
                Submission of Matters to a Vote of
      Security Holders
                18PART
      IIItem 5.
                Market for Registrant’s Common Equity and Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
                18Item 6.
                Selected Financial Data
                19Item 7.
                Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                21Item 7A.
                Quantitative and Qualitative Disclosure about
      Market Risk
                33Item 8.
                Financial Statements and Supplementary
      Data
                33Item 9.
                Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
                33Item 9A.
                Controls and
      Procedures
                34Item 9A(T).
                Controls and Procedures
                34Item 9B.
                Other Information
                34PART
      IIIItem 10.
                Directors and Executive Officers of
      the Registrant
                35Item 11.
                Executive Compensation
                38Item 12.
                Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
                42Item 13.
                Certain Relationships and Related
      Transactions
                43Item 14.
                Principal Accountant Fees and
      Services
                43PART
      IVItem 15.
                Exhibits, Financial Statement
      Schedules
                44SignaturesCertifications





1


Cautionary
Note Regarding Forward-looking Statements




This
Annual Report on Form 10-K (this “Annual Report” or “Form 10-K”), including
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” contains certain “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be identified by words such as “expects,” “intends,”
“anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of
similar meaning and include, but are not limited to, statements regarding the
outlook for our future business and financial performance.




Forward-looking
statements are based on management’s current expectations and assumptions, which
are subject to inherent uncertainties, risks and changes in circumstances that
are difficult to predict. Actual outcomes and results may differ materially due
to global political, economic, business, competitive, market, regulatory and
other factors, including, but not limited to, the items identified under “Item
1A. Risk Factors.” We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new information, future
developments or otherwise.






2
 Table
of Contents


PART
I




Unless
otherwise indicated or the context otherwise requires, the terms “Stewart &
Stevenson,” the “Company,” “we,” “our” and “us” refer to Stewart &
Stevenson LLC and its subsidiaries. Our fiscal year begins on February 1 of the
year stated and ends on January 31 of the following year. For example, Fiscal
2008 commenced on February 1, 2008 and ended on January 31,
2009.




ITEM 1.  Business




Our
Company




Stewart &
Stevenson LLC, headquartered in Houston, Texas, was formed for the purpose of
acquiring from Stewart & Stevenson Services, Inc. (“SSSI” or the
“Predecessor”) and its affiliates on January 23, 2006 substantially all of
their equipment, aftermarket parts and service and rental businesses that
primarily served the oil and gas industry as well as the perpetual rights to the
Stewart & Stevenson name and logo for use worldwide (the “SSSI
Acquisition”).  Except as otherwise expressly noted, when we refer to
financial and other information about us on a historical basis prior to the date
of the SSSI Acquisition, that information reflects the operations we acquired
from SSSI prior to such acquisition.




We are a
leading designer, manufacturer and marketer of specialized equipment and provide
aftermarket parts and service to the oil and gas and other industries that we
have served for over 100 years. Our diversified product lines include
equipment for well stimulation, well servicing and workover rigs, drilling rigs,
coiled tubing, cementing, nitrogen pumping, power generation and electrical
systems as well as engines, transmissions and material handling equipment. We
have a substantial installed base of equipment, which provides us with
significant opportunities for recurring, higher-margin aftermarket parts and
service revenues and also provide rental equipment to our
customers.




Demand
for our products has been driven primarily by capital spending in the oil and
gas industry, which accounted for an estimated 82.3%of our equipment
revenues and an estimated 78.7% of our total revenues in Fiscal 2008. Our
extensive and diverse customer base includes many of the world’s leading
oilfield service companies, as well as customers in the power generation,
marine, mining, construction, commercial vehicle and material handling
industries.




We
operate our business through our equipment, aftermarket parts and service and
rental operating segments. In our equipment operating segment, which generated
approximately 65.2% of our Fiscal 2008 revenues, we design, manufacture and
market equipment for oilfield service providers, drilling and workover
contractors and major U.S. and international oil companies that require
integrated and customized product solutions. Our aftermarket parts and service
operating segment, which generated approximately 31.4% of our Fiscal 2008
revenues, provides aftermarket parts and service for products manufactured by
us, our seven key original equipment manufacturers (“OEMs”) and other
manufacturers.  Our rental operating segment, which generated
approximately 3.4% of our Fiscal 2008 revenues, rents equipment consisting
primarily of generators, material handling equipment and air compressors and
serves a wide range of end markets, principally on a short-term basis, as a
complementary solution to equipment sales.




Crown
Acquisition




On
February 26, 2007, we acquired substantially all of the net operating
assets of Crown Energy Technologies, Inc. (“Crown”) for total consideration of
approximately $70.5 million (the “Crown Acquisition”). Information relating
to our results of operations for Fiscal 2006 and prior periods does not include
the impact of the Crown Acquisition. Information relating to our results of
operations for Fiscal 2007 includes the impact of the Crown Acquisition from
February 26, 2007 to January 31, 2008.   Crown, which
was headquartered in Calgary, Alberta, Canada, with multiple
U.S. operations, manufactured well stimulation, drilling, workover and well
servicing rigs and provided related parts and service to the oil and gas
industry. The Crown Acquisition enhanced our position as a leading supplier of
well stimulation, coiled tubing, cementing and nitrogen pumping equipment and
expanded our product offerings to include drilling rigs and a full range of
workover and well servicing rigs. As a result of the Crown Acquisition, we
increased our manufacturing capabilities and broadened the markets we serve with
a manufacturing facility in Calgary, Alberta, Canada and five service facilities
in strategic locations in the United States.




3
 
 Table
of Contents
  Products
and Services




Through
our three segments, we design, manufacture, and market a wide-range of
equipment, provide aftermarket parts and service, and provide rental equipment
to a broad range of customers.




Equipment




We
design, manufacture and market equipment for well stimulation, drilling and well
servicing rigs, coiled tubing, cementing, nitrogen pumping, power generation and
electrical systems. We also sell engines, transmissions, utility, and material
handling equipment for well servicing, well workover, drilling rigs, pumping and
other applications outside the oil and gas industry. A substantial portion of
the products we sell includes components provided by our seven key OEMs. Our
relationships with these OEMs generally enable us to sell their products
globally as components of our engineered equipment and in specified territories
as stand-alone products. We have been the only factory-authorized provider of a
substantial portion of the stand-alone products of our seven key OEMs in these
territories, which principally cover major oil and gas fields in the United
States, for an average of approximately 40 years. For Fiscal 2008,
approximately 81.6% and 18.4% of our equipment sales revenues were derived from
sales of engineered products and stand-alone products,
respectively.   We use equipment supplied to us by these OEMs in
combination with our design, engineering, and manufacturing expertise to deliver
a value-added, integrated solution to our customers.




The
following table lists the equipment we provide:




Product
      line
            
            Product
      descriptionWell
      Stimulation
            
            Equipment
      that includes fracturing pumps, blenders, hydration, chemical additive
      systems and control systems and software used to enhance oil and gas
      productionEngines
            
            Internal
      combustion diesel and natural gas enginesPower
      Generation
            
            Standby,
      emergency backup, fire suppression and prime power in a variety of
      configurations and capacities using natural gas and diesel
      enginesDrilling,
      Workover and Well Servicing Rigs
            
            Various
      equipment used in drilling, workover and well servicing to find and/or
      enhance oil and gas productionTransmissions
            
            Automatic
      transmissions and related productsPrime
      Mover Packages
            
            Engineered
      packages; mating internal combustion engines to a transmission or torque
      converter to power specific customer applicationsMaterial
      Handling
            
            Forklift
      trucks and ancillary equipmentSeismic
            
            Contract
      manufacturing of seismic equipmentRail
      Car Movers
            
            Engine-driven
      equipment used in rail car switching operationsCoiled
      Tubing
            
            Well
      workover, stimulation and drilling equipment used on land and offshore
      applications which include patented products such as injector
      headsOther
            
            Various
      equipment utilized in the oil and gas services industry, such as
      cementing, nitrogen pumping and fluid
pumping




Aftermarket
Parts and Service




We
provide aftermarket parts and service to customers in the oil and gas industry,
as well as customers in the power generation, marine, mining, construction,
commercial vehicle and material handling industries. Our aftermarket parts and
service business supports equipment manufactured by approximately 100
manufacturers and, in certain cases, including for a substantial portion of our
product offerings from our seven key OEMs, we have been the only
factory-authorized parts and service provider for specified territories,
principally in major oil and gas fields in the United States. For Fiscal 2008,
51.3% of revenues derived from our aftermarket parts and service business were
related to parts and 48.7% were related to service. For Fiscal 2008,
approximately 63.9% of the aftermarket parts and service revenues pertained to
products sourced from our seven key OEMs with whom we have had long-standing
relationships.




4
 Table
of Contents




We
believe there are a number of factors which affect our customer’s decision when
choosing their supplier of aftermarket parts and service, including the
customer’s preference to use factory-authorized parts and service, price, parts
availability, level and number of experienced technicians, proximity to the
customer’s location, and flexibility to
service products in the field. As of January 31, 2009, we employed approximately
873highly skilled
service technicians utilizing approximately 580 service bays in the United
States, Canada and abroad. We also have significant capabilities to service the
customer at its site due to our large number of technicians and our close
proximity to the customer. Additionally, we maintain a substantial investment in
parts inventory managed by our experienced parts personnel and provide
aftermarket parts through our network of approximately 185 authorized
dealers. We believe that the broad installed base of our equipment, our
customers’ general preference to use factory-authorized parts and service, our
proximity to the customer, and our service capabilities provide us with a strong
foundation for a stable aftermarket parts and service revenue
stream.




Rental




Our
rental products primarily consist of generators, material handling equipment and
air compressors that are offered to a wide range of end markets and are
principally rented on a short-term basis as a complementary solution to
equipment sales. As of January 31, 2009, our rental fleet consisted of over
1,400 units. We are able to complement our equipment offering by providing
our customers the flexibility of renting certain equipment versus purchasing.
Our rental products generate our highest margins and provide us with a strong
return on our investment.




The
following table lists our rental products:




Product
      line
            
            Product
      descriptionMaterial
      Handling Equipment
            
            Forklift
      trucks, railcar movers, and ancillary equipmentGenerators
            
            Engines/generators
      ranging from 25 to 2,000 kilowattsAir
      Compressors
            
            Air
      compressors ranging from 375 to 1,600 cubic feet per
  minute





Our
utilization rate of our available rental fleet for Fiscal 2008 was approximately
58.3% and we generally recover our costs to acquire rental equipment over a
three-year period. The average useful life of our rental equipment is
approximately five years and our practice is to sell a unit out of the rental
fleet upon reaching its useful life. We closely monitor our utilization rate
before making capital investments used to replenish or grow the rental
fleet.




Customers and
Markets




We
maintain a broad customer base of more than 2,000 customers including leading
oil and gas service companies, drilling contractors, integrated oil companies,
and national oil companies, as well as customers in the power generation,
marine, mining, construction, commercial vehicles and material handling
industries. We are not dependent on any single customer and in Fiscal 2008 no
single customer accounted for more than 5.6% of our total revenues. Our top 10
customers, which include domestic and international businesses, generated
approximately 33.1% of our total revenues during Fiscal 2008. The demand of our
customers for the products we provide has not historically been characterized by
seasonality. During Fiscal 2008, customers in the oil and gas services market
accounted for approximately 78.7% of our total revenues, compared to 80.8% and
60.0% in Fiscal 2007 and 2006, respectively.




5
 Table
of Contents




The
following table lists the markets and types of customers we serve:




Market
            
            Types
      of customersOil
      and gas services
            
            Well
      stimulation providers, drilling contractors, well servicing companies,
      integrated oil companies and national oil companiesCommercial
      vehicles
            
            Freight
      transportation companies, emergency services, transit authorities and
      recreational vehicle users. Primarily aftermarket parts and
      serviceMaterial
      handling
            
            Warehouse
      /distribution companies, manufacturing companies, chemical companies and
      various others utilizing forklifts and rail car
spottersPower
      generation
            
            Providers
      of electricity for commercial and personal consumptionMarine
            
            Offshore
      work boat providers, tug boat operators and recreational boat
      usersConstruction
            
            Commercial
      building and home construction companies and highway construction
      companiesGovernment
            
            Federal
      agencies (such as the U.S. Department of Defense), state agencies
      (such as departments of transportation) and local agencies (such as
      departments of public works)Mining
            
            Companies
      involved in the extraction of raw materials through various mining
      methodsOther
            
            Primarily
      authorized dealers and distributors of our products in various markets
      including the primary markets we serve and various other
      industries





We
believe that our wide range of high-quality standard products, demonstrated by
our ISO 9001:2000 certifications, and our partnership based approach generate
high levels of customer satisfaction and result in repeat business.




Sales
and Marketing




We
primarily sell and market our products directly to our customers through our
sales and service centers in the United States and abroad with a direct sales
force of approximately 225 employees. We also utilize a network of approximately
185 authorized dealers and approximately 40 independent overseas sales
representatives to market and distribute our products. Our equipment product
lines are generally sold directly to the end users and in certain international
markets, we may use authorized sales representatives to help facilitate the
marketing of our products. Our aftermarket parts and service and rental product
lines are provided to our customers on a direct basis. We also utilize a network
of authorized dealers to market and distribute parts.




Backlog




As of
January 31, 2009 and January 31, 2008, our unfilled equipment order backlog was
$287.9 million and $498.9 million, respectively. We expect to recognize a
significant portion of the January 31, 2009 equipment order backlog as revenue
in Fiscal 2009. We have seen significant declines in demand for our well
stimulation and drilling rig products as a result of lower oil and gas prices,
the tightening of credit markets and the downturn of the global
economy.  An area of growth in our backlog during Fiscal 2008 relates
to our power generation product offerings for deep water drilling
applications.




Our
unfilled equipment orders that we include in equipment order backlog consist of
written purchase orders and signed contracts accompanied, where required by our
credit policies, by credit support (typically down payments or letters of
credit) determined in accordance with our credit policies. Historically,
cancellations are infrequent; however, these unfilled orders are generally
subject to cancellation. Purchase options are not included in equipment order
backlog until exercised.




6
 Table
of Contents




Competition




We
operate in highly fragmented and very competitive markets and as a result, we
compete against numerous businesses. Some of our competitors have achieved
substantially more market penetration with respect to certain products, such as
coiled tubing and generators, and some of our competitors are larger and have
greater financial and other resources.




Major
competitors for well stimulation equipment include Caterpillar, Inc. and
National Oilwell Varco, Inc. For our well servicing, drilling and coiled tubing
products, our major competitor is National Oilwell Varco, Inc. In our rail car
mover product line, we compete against Trackmobile, Inc. and Central
Manufacturing Inc. and we compete with Cummins Inc. and Caterpillar, Inc. and
their distributors for generators and other types of engine-driven products. ZF
Industries Inc. and Twin Disc Incorporated are our primary competitors for
transmissions. We believe that our customers base their decision to purchase
equipment based on price, lead time and delivery, quality and aftermarket parts
and service capabilities.




For
aftermarket parts sales, we compete with distributors of factory-authorized
genuine parts, with providers of non-genuine parts and remanufactured parts and
other distributors of genuine parts. For aftermarket service sales, the market
is highly fragmented and characterized by numerous small, independent providers.
We believe there are a number of factors that affect our customer’s decision
when choosing their supplier of aftermarket parts and service, including their
preference to use factory-authorized genuine parts and service. Customers also
consider price, parts availability, level and number of experienced technicians,
proximity to their location and flexibility to service products in the
field.




Our
rental business focuses on generators, material handling equipment and air
compressors and we compete with much larger companies, including United Rentals
Inc., NationsRent Companies Inc., Hertz Equipment Rental Corporation
and Aggreko plc. We believe our customers base their decision to rent equipment
based on price, availability and aftermarket parts, support and
service.




We
believe that the significant capital required to obtain and operate
manufacturing facilities, acquire and maintain adequate inventory levels and
hire and maintain an extensive and highly skilled labor force along with our
long-standing relationships with our seven key OEMs is a disincentive for new
market entrants.




Suppliers
and Raw Materials




In Fiscal
2008, approximately 77.3% of our cost of goods sold consisted of raw materials
and component parts, with the other 22.7% being labor and overhead.
Approximately 40.8% of the raw materials and component parts in cost of goods
sold were obtained from our seven key OEMs pursuant to long-standing
relationships and 59.2% were obtained from a variety of other
suppliers.






7
 Table
of Contents


Our
supply agreements with our seven key OEMs are non-exclusive, typically short
term and generally have historically been renewed on an ongoing basis, however
no assurances can be given that they will be renewed beyond their expiration
dates. We have been the only factory-authorized provider of a substantial
portion of our product offerings from these OEMs in the territories below for an
average of approximately 40 years. The following table lists our key OEMs,
the products they provide, the designated geographic territories that we serve
and the expiration date of our current supply agreements:




OEM
            
            Supplier
                Since
            
            Products
            
            Designated
      Geographic Territories
            
            Expiration
                DateDetroit
      Diesel Corporation
            
            1938
            
            High-speed
      diesel engines
            
            Texas,
      Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal
      Mississippi, Coastal Alabama and Colombia
            
            2010MTU
      Friedrichshafen
            
            1938
            
            Heavy-duty
      high-speed diesel and natural gas engines
            
            Texas,
      Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal
      Mississippi, Coastal Alabama and Colombia
            
            2010Electro-Motive
      Diesel, Inc.
            
            1956
            
            Heavy-duty
      medium speed diesel engines
            
            Texas,
      Colorado, New Mexico, Oklahoma, Arkansas, Louisiana, Tennessee,
      Mississippi, Alabama, Mexico, Central America and parts of South
      America
            
            2010Hyster
      Company
            
            1959
            
            Material
      handling equipment
            
            Texas
      and New Mexico
            
            No
      expiration dateAllison
      Transmission, Inc.
            
            1973
            
            Automatic
      transmissions, power shift transmissions and torque
    converters
            
            Texas,
      Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal
      Mississippi, Coastal Alabama, Venezuela and Colombia
            
            2008*Waukesha
      Engine, Dresser Inc.
            
            1994
            
            Natural
      gas industrial engines
            
            Colorado,
      Wyoming, Western New Mexico, Utah, Kansas, Arizona, Idaho and
      Nevada
            
            2009Deutz
      Corporation
            
            1996
            
            Diesel
      and natural gas engines
            
            Colorado,
      Eastern Wyoming, Arizona, New Mexico, Texas, Oklahoma, Kansas, Arkansas,
      Louisiana, Mississippi, Western Tennessee, Venezuela and
      Colombia
            
            No
      expiration date


* We
continue to operate under our prior agreement and are in the process of renewing
this agreement.




Our seven
key OEMs supply us with diesel engines, transmissions, material handling
equipment and natural gas engines, as well as the aftermarket parts used to
support those components. We also purchase large fluid pumps, generators,
hydraulic and electrical components, among many other items, from an extensive
supplier base.




Employees




As of
January 31, 2009, we had approximately 2,852 employees of whom approximately
2,535 were employed in the United States and Canada and approximately 317 were
employed abroad. We consider our current labor relations to be good and do not
have any employees in the United States and Canada that are represented by
labor unions. See “Item 1A. Risk Factors—Our success is dependent on our ability
to attract and retain qualified employees.”




8
 Table
of Contents




Manufacturing
and Engineering Design




Our
manufacturing processes generally consist of fabrication, machining, assembly
and testing. Many of our products are designed, manufactured and produced to
clients’ specifications, often for long-life and harsh environment applications.
To facilitate quality and productivity, we are continuing to implement a variety
of manufacturing strategies including inventory management, flow line
manufacturing, and integrated supply chain management. As a result of these
manufacturing strategies, we have increased our capacity throughput, reduced our
production costs and lowered manufacturing cycle times for our products. In
addition, we have been successful in outsourcing the fabrication of
subassemblies and components of our products, such as trailers, whenever costs
are significantly lower and quality is comparable to our own manufacturing. Our
manufacturing operations are principally conducted in 10 locations around
the United States and Canada.




We strive
to manufacture the highest quality products and are committed to improving the
quality and efficiency of our products and processes. We are certified in
compliance with ISO 9001:2000.




Although
we manufacture many of the components included in our products, the principal
raw materials required for the manufacture of our products are purchased from
our seven key OEMs, and we believe that available sources of supply will
generally be sufficient for our needs for the foreseeable future.




Trademarks
and Patents




We rely
on a combination of patent, trademark, copyright, unfair competition and trade
secret laws in the United States and other jurisdictions, as well as employee
and third party non-disclosure agreements, license arrangements and domain name
registrations, as well as unpatented proprietary know-how and other trade
secrets, to protect our products, components, processes and applications. We
acquired from SSSI an exclusive world-wide royalty-free irrevocable license to
use the “Stewart & Stevenson” trademark and logo in perpetuity in our
fields of use. In the Crown Acquisition, we purchased from Crown all rights to
the use of the “Crown” trademark and logo. With the exception of the
“Stewart & Stevenson” trademark and logo, we do not believe any single
patent, copyright, trademark or trade name is material to our business as a
whole. Any issued patents that cover our proprietary technology and any of our
other intellectual property rights may not provide us with adequate protection
or be commercially beneficial to us and, if applied for, may not be issued. The
issuance of a patent is not conclusive as to its validity or its enforceability.
Competitors may also be able to design around our patents. If we are unable to
protect our patented technologies, our competitors could commercialize
technologies or products which are substantially similar to ours.




With
respect to proprietary know-how and other proprietary information, we rely on
trade secret laws in the United States and other jurisdictions and
confidentiality agreements. Monitoring the unauthorized use of our technology is
difficult and the steps we have taken may not prevent unauthorized use of our
technology. The disclosure or misappropriation of our intellectual property
could harm our ability to protect our rights and our competitive
position.




Environmental
and Health and Safety Matters




We are
subject to a variety of federal, state, local, foreign and provincial
environmental laws and regulations, including those governing the discharge of
pollutants into the air or water, the management and disposal of hazardous
substances and wastes and the responsibility to investigate and cleanup
contaminated sites that are or were owned, leased, operated or used by us or our
predecessors. Many of our operations require environmental permits and controls
to prevent and limit air and water pollution. These permits contain terms and
conditions that impose limitations on our manufacturing activities, production
levels and associated activities and periodically may be
subject to modification, renewal and revocation by issuing authorities. Fines
and penalties may be imposed for non-compliance with applicable environmental
laws and regulations and the failure to have or to comply with the terms and
conditions of required permits. We believe that we are currently in compliance
in all material respects with the terms and conditions of our permits. We are
also subject to the federal Occupational Safety and Health Act and similar state
and foreign laws which impose requirements and standards of conduct on our
operations for the health and safety of our workers. We periodically review our
procedures and policies for compliance with environmental and health and safety
requirements. We believe that our operations are generally in compliance with
applicable environmental regulatory requirements or that any non-compliance will
not result in a material liability or cost to achieve compliance. Historically,
the costs of achieving and maintaining compliance with environmental and health
and safety requirements have not been material.




9
 Table
of Contents




Certain
environmental laws in the United States, such as the federal Superfund law and
similar state laws, impose liability for investigating and remediating
contaminated sites on “responsible parties.” These include, for example: current
owners and operators of the site; parties who owned or operated the site at the
time hazardous substances were released or spilled at the site; parties who
generated wastes and arranged to send them to the site for disposal and parties
who transported wastes to the site. Liability under such laws is strict,
meaning, for example, that current owners or operators can be liable even if all
releases of hazardous substances occurred before they owned or operated the
site, regardless of the lawfulness of the original disposal activities.
Liability under such laws is also joint and several, meaning that a responsible
party might be held liable for more than its fair share of investigation or
cleanup costs. As a practical matter, however, when more than one responsible
party is involved at a site, the costs of investigation and remediation are
often allocated among the viable responsible parties on some form of equitable
basis. In connection with each of the SSSI Acquisition and the Crown
Acquisition, the previous owner has retained environmental liabilities relating
to pre-closing conditions or occurrences, subject to certain dollar limitations
and caps.   As such, there is or could be contamination at some
of our current or formerly owned or operated facilities for which we could be
liable under applicable environmental laws.




Regulatory
Matters




Our
operations and the operations of our customers are subject to federal, state,
local and provincial as well as other foreign laws and regulations relating to
the protection of the environment and of human health and safety, including laws
and regulations governing the investigation and clean up of contaminated
properties, as well as air emissions, water discharges, waste management and
disposal. These laws and regulations affect the products and services we design,
market and sell, the facilities where we manufacture and service our products
and our customers’ exploration and production activities.




In
addition, the part of our business that consists of the sale, distribution,
installation and warranty repair of large engines and transmissions used in
commercial vehicle applications in Texas requires certain Texas state motor
vehicle licenses which are subject to annual renewal.




ITEM 1A.  Risk
Factors




Our
level of indebtedness could negatively affect our financial condition, adversely
affect our ability to raise additional capital to fund our operations and harm
our ability to react to changes to our business.




At
January 31, 2009, we had approximately $285.4 million of indebtedness,
consisting of $130.2 million outstanding under our asset-based revolving
credit facility, $150.0 million of our senior notes and $5.2 million of other
notes payable.  We may make additional borrowings under the revolving
credit facility, which provides for maximum borrowings of $250.0 million
(expandable, subject to certain conditions and commitments, to $325.0 million),
at any time.  Borrowings under our revolving credit facility accrue
interest at a floating rate and, accordingly, an increase in interest rates
would result in a corresponding increase in our debt servicing
requirements.  Subject to restrictions in the indenture governing our
senior notes and our senior credit facility, we may also incur additional
indebtedness.




Our
indebtedness could have important consequences to you, including the
following:




·
              our
      use of a substantial portion of our cash flow from operations to pay
      interest on our indebtedness will reduce the funds available to us for
      operations and other
purposes;




·
              our
      ability to obtain additional debt or equity financing for working capital,
      capital expenditures, product development, debt service requirements,
      acquisitions or general corporate purposes may be
  impaired;




·
              our
      indebtedness could place us at a competitive disadvantage compared to our
      competitors that may have proportionately less
  debt;




·
              our
      flexibility in planning for, or reacting to, changes in our business and
      the industry in which we operate may be limited;
  and




·
              our
      indebtedness makes us more vulnerable to economic downturns and adverse
      developments in our business.




10
 Table
of Contents




Our
revolving credit facility and the indenture governing our senior notes impose
significant operating and financial restrictions on us which may prevent us from
pursuing our business strategies or favorable business
opportunities.




Our
revolving credit facility and the indenture governing our senior notes impose
significant operating and financial restrictions on us.  These
restrictions limit or prohibit, among other things, our ability to:




·
              incur
      or assume indebtedness, or provide guarantees in respect of obligations of
      other persons;




·
              purchase,
      redeem or repay subordinated indebtedness prior to stated
      maturities;




·
              pay
      dividends on or redeem or repurchase our stock or make other
      distributions;




·
              issue
      redeemable stock and preferred
stock;




·
              make
      loans, investments or
acquisitions;




·
              incur
      liens;




·
              engage
      in sale/leaseback
transactions;




·
              restrict
      dividends, distributions, loans or other payments or asset transfers from
      our subsidiaries;




·
              sell
      or otherwise dispose of assets, including capital stock of our
      subsidiaries;




·
              enter
      into certain transactions with
affiliates;




·
              consolidate
      or merge with or into, or sell substantially all of our assets to, another
      person;




·
              enter
      into new lines of business;
and




·
              otherwise
      conduct necessary corporate
activities.




The
revolving credit facility and the senior notes contain financial and operating
covenants with which we must comply during the terms of the
agreements.  These covenants include the maintenance of certain
financial ratios, restrictions related to the incurrence of certain indebtedness
and investments, and prohibition of the creation of certain
liens.  The financial covenant for the revolving credit facility
requires a fixed charge coverage ratio, as defined in the underlying agreement,
of at least 1.1 to 1.0: however, this covenant does not take effect until our
available borrowing capacity is $30.0 million or less.  The financial
covenant for the senior notes is applicable were we to incur additional
indebtedness (subject to various exceptions set forth in the underlying
indenture) and requires that, after giving effect to the incurrence of such
additional indebtedness, we have a consolidated coverage ratio, as defined in
the underlying indenture, of at least 2.5 to 1.0.


A breach
of any of these covenants or the inability to comply with the required financial
ratios could result in a default under our revolving credit facility or our
senior notes.  If any such default occurs, the lenders under our
revolving credit facility and the holders of our senior notes may elect to
declare all outstanding borrowings, together with accrued interest and other
amounts payable thereunder, to be immediately due and payable.  The
lenders under our revolving credit facility also have the right in these
circumstances to terminate any commitments they have to provide further
financings.




Periodic
economic and industry downturns may adversely impact our operating
results.




Our
equipment sales business and, to a lesser extent, our aftermarket parts and
service business depend primarily on the level of activity in the oil and gas
industry. The oil and gas industry traditionally has been volatile, is highly
sensitive to supply and demand cycles and influenced by a combination of
long-term and cyclical trends including:




·
              oil
      and gas prices and industry perceptions of future price
      levels;




·
              the
      cost of exploring for, producing and delivering oil and
      gas; and




·
              the
      ability of oil and gas companies to generate capital for investment
      purposes.




Our
customers in the oil and gas industry historically have tended to delay capital
equipment projects, including maintenance and upgrades, during industry
downturns.  Accordingly, the current significant slowdown in the U.S.


and
worldwide economic activities which has followed the global financial crisis has
resulted in delays in capital equipment projects, impacting the activities of
the industries we serve.  Ongoing difficulty in accessing credit
markets has diminished product demand, adversely affecting activities in
manufacturing and putting downward pressure on selling prices.




11
 Table
of Contents




In the
United States, producers generally react to declining oil and gas prices by
reducing expenditures. This has in the past and may in the future, adversely
affect our business.




Oil and
gas prices have declined significantly from previous levels.  We are
unable to predict future oil and gas prices or the level of oil and gas industry
activity. A prolonged low level of activity in the oil and gas industry now or
in the future would adversely affect the demand for our products and services
and our business, financial condition and results of operations.




We
face intense competition in each of our lines of business.




We
encounter competition in all areas of our business. The principal factors on
which we compete include performance, quality, customer service, timely delivery
of products, product lead times, global reach and presence, brand reputation,
breadth of product line, quality of aftermarket service and support and price.
In addition, our customers increasingly demand more technologically-advanced and
integrated products, and we must continue to develop our expertise and technical
capabilities in order to manufacture and market these products and associated
services successfully. To remain competitive, we must invest continuously in the
education of our workforce, manufacturing capabilities and efficiencies,
marketing, client service and support, distribution networks and research and
development.




In the
equipment sales business, where we experience our greatest levels of
competition, we compete with a number of large, well-known OEMs, manufacturers
and distributors that, in some cases, have greater financial and human
resources, as well as broader geographical presence, than us.




In our
aftermarket parts and service business, we compete with regional and local
non-genuine parts and service providers, our customers’ in-house service
providers, non-OEM and remanufactured parts and service providers and, for
certain product offerings, other factory-authorized providers.




In our
rental business, we compete against large, well-recognized companies.
Maintaining a rental fleet requires significant investment from year-to-year. If
our access to capital is substantially limited due to contractual restrictions
or otherwise or if capital becomes more costly, we may not be able to make the
investments necessary to remain competitive.




Our
international sales and aftermarket parts and service operations are subject to
factors that could have an adverse effect on our business, financial condition
and results of operations.




We have
significant sales to customers outside the United States and also maintain
aftermarket parts and service operations outside the United States. In
connection with the Crown Acquisition, we acquired significant manufacturing and
service facilities in the U.S. and Calgary, Canada.  As a result, for
Fiscal 2008, we derived approximately 35.4% of our revenues from sales of
products and services to customers outside the United States.  Subject
to normalization of the credit markets and the recovery of the global economic
activity, we intend to continue to expand our international sales and
operations.




Our
international sales, manufacturing and aftermarket parts and service activities
are subject to risks associated with the political, economic and other
uncertainties inherent in foreign operations, which include, but are not limited
to:




·
              the
      effect of exchange rates on purchasing decisions and power of our foreign
      customers;




·
            changes
      in exchange rates which could result in increases or decreases in our
      costs and earnings;


·
              foreign
      exchange risks resulting from changes in foreign exchange rates which
      could increase or decrease our costs and earnings and the implementation
      of exchange controls;




·
              limitations
      on our ability to reinvest earnings from operations in one country to fund
      the capital needs of our operations in another country;
  and




·
              government
      regulation and the imposition of, or unexpected adverse changes in,
      foreign laws or regulatory requirements, including those pertaining to
      import duties and quotas, taxes, trade and employment
      restrictions.




If we
successfully grow our international operations, our exposure to these and other
risks will increase. For example, to the extent we make significant investments
in foreign facilities or otherwise expand our overseas presence, the risk that
our assets and our income could be adversely affected by fluctuations in the
value of local currencies will increase.




12
 Table
of Contents




The
occurrence of any of the foregoing factors may have a material adverse effect on
our business, financial condition and results of operations.




In
addition, many of our customers and the end-users of our equipment operate in
international jurisdictions and so are subject to the foregoing risks as well as
other risks associated with international operations. The occurrence of any of
these factors may have a material adverse impact on the business and operations
of our customers and end-users, which in turn may have a material adverse effect
on us.




If
our arrangements with our suppliers, including our key OEMs, were to be
adversely affected, our equipment sales and aftermarket parts and service
businesses may suffer.




We
currently depend on a limited number of suppliers for certain important
components for our products, which include diesel engines, transmissions, fluid
pumps and material handling equipment. Our purchases from some of these
suppliers are not made pursuant to long-term contracts and our arrangements with
these suppliers may be terminated, in the case of certain arrangements, upon
certain notifications and, otherwise, upon the occurrence of certain events,
many of which may be beyond our control. The loss of any of these suppliers
could have a material adverse effect on our business, financial condition and
results of operations.




In
addition, a significant portion of the equipment that we sell is manufactured
by, or incorporates components manufactured by, our seven key OEMs:




·
              Detroit
      Diesel Corporation,




·
                MTU
      Friedrichshafen,




·
              Allison
      Transmission, Inc.,




·
              Electro-Motive
      Diesel, Inc.,




·
              Hyster
      Company,




·
              Waukesha
      Engine, Dresser
Inc., and




·
              Deutz
      Corporation.




In Fiscal
2008, approximately 40.8% of our cost of goods sold was attributable to products
purchased from these OEMs. In addition, in Fiscal 2008, a material portion of
our revenues was attributable to (i) sales of equipment that included
components manufactured by these suppliers and (ii) servicing and supplying
parts for certain products provided by these OEMs, including parts and products
that are components of the equipment we manufacture.




Our OEM
supplier arrangements, which are currently effective for varying periods of time
and are not exclusive, are subject to risks that include:




·
              the
      nonrenewal or termination, or material change in the terms, of such
      supplier contracts;




·
              the
      acquisition of one or more of our seven key OEMs by one of our competitors
      or another entity that could adversely affect our
      relationship;




·
              the
      inability of our suppliers to provide us with sufficient quantities of
      equipment and parts to meet the demands of our customers;
    and




·
                the
      appointment by our suppliers of additional providers in designated
      territories in which we are currently the only
  provider.




The
occurrence of any of these could have a material adverse effect on our business,
financial condition and results of operations. See “Item 1. Business—Suppliers
and Raw Materials.”






13
 
 The occurrence of an event not fully
covered by insurance could have a material adverse effect on our business,
financial condition and results of operations.


Our
insurance does not provide coverage for all risks, and we cannot assure you that
it will be adequate to cover all claims that may arise. The occurrence of an
event not fully covered by insurance could have a material adverse effect on our
business, financial condition and results of operations. Moreover, there can be
no assurance that any particular type of insurance coverage will continue to be
available to us in the future, that we will not accept retention of additional
risk through higher insurance deductibles or otherwise or that we will be able
to continue to purchase our desired level of insurance coverage at commercially
reasonable rates.




Because
many of our products are complex and utilize many components, processes and
techniques, undetected errors and design flaws may occur. Product defects result
in higher product service, warranty and replacement costs and may cause damage
to our customer relationships and industry reputation, all of which may
negatively impact our results of operations.




The
industries we serve are subject to inherent risks, including equipment defects,
malfunctions, failures and natural disasters. These risks may expose our
customers to liability for personal injury, wrongful death, property damage,
pollution and other environmental damage. We also may become involved in
litigation related to such matters. Any litigation arising from a catastrophic
occurrence involving our equipment or services could result in large claims for
damages. Any increase in the frequency or severity of such incidents or the
general level of compensation awards with respect to such incidents, could
affect our ability to obtain projects from our customers or insurance. In
addition to seeking compensation from us, customers who suffer losses as a
result of the occurrence of such events may also reduce or terminate their
business with us, which may further harm our results of operations.




Our
success is dependent on our ability to attract and retain qualified
employees.




There is
significant demand in our industry for skilled technicians and other experienced
qualified employees, including specialty servicing and material handling
technicians, direct manufacturing labor and engineers. This demand is more
pronounced in certain locations in which we operate where the demand for skilled
workers is high. The delivery of our products and services requires personnel
with specialized skills. A significant increase in the wages paid by competing
employers could result in a reduction of our skilled labor force, increases in
the wage rates that we must pay or both. If either of these events were to
occur, our capacity and profitability could be diminished and our growth
potential could be impaired.




Our
customers are generally quoted a fixed price for the equipment that we sell,
which exposes us to the risk of cost overruns if we do not accurately estimate
the costs associated with the product.




Most of
our equipment sales contracts are “fixed-price” contracts where the original
price may be set at an early stage of the process. The terms of these contracts
require us to guarantee the price of products and services we provide and to
assume the risk that the costs to provide such products and services will be
greater than anticipated. The profitability of these contracts is therefore
dependent on the ability to reasonably predict the costs associated with
performing the contracts. These costs may be affected by a variety of factors,
some of which are beyond our control. Our failure to accurately estimate the
resources required for a project or our failure to complete our contractual
obligations in a manner consistent with the project plan upon which our
fixed-price contract was based, could adversely affect our profitability and
could have a material adverse effect on our business, financial condition and
results of operations.




We
are susceptible to adverse weather conditions affecting the Gulf
Coast.




Certain
areas in and near the Gulf Coast experience hurricanes and other extreme weather
conditions on a relatively frequent basis. Our headquarters, manufacturing and
aftermarket parts and service facilities in Houston are susceptible to
significant damage and our New Orleans and other Gulf Coast facilities are
subject to significant damage or total loss by these storms. Damage caused by
high winds and floodwater could potentially cause us to curtail operations at
these facilities for a significant period of time until damage can be assessed
and repaired. Moreover, even if we do not experience direct damage from any of
these storms, we may experience disruptions in our operations because customers
may curtail their activities due to damage to their facilities in and near the
Gulf of Mexico.




14
 Table
of Contents




Due to
the losses as a consequence of the hurricanes that affected the Gulf Coast in
2005 and 2008 and that may occur again in the future, we may not be able to
obtain future insurance coverage comparable with that of prior years, thus
putting us at a greater risk of loss due to severe weather conditions. Our
premiums for hurricane insurance have increased
and future hurricanes in the region, particularly those of comparable magnitude,
may increase costs and deductibles further, or limit maximum aggregate
recoveries under available policies. Any significant uninsured losses could have
a material adverse effect on our business, financial condition and results of
operations.




We
may continue to expand through acquisitions of other companies, which may divert
our management’s attention, may result in dilution to our stockholders and may
consume resources that are necessary to sustain our business. We may not be able
to successfully integrate acquired businesses with our business and we may not
realize the anticipated benefits of such acquisitions.




Acquiring
complementary businesses from third parties is an important part of our growth
strategy. Our acquisition strategy depends on the availability of suitable
acquisition candidates at reasonable prices. This strategy also depends on our
ability to resolve challenges associated with integrating acquired businesses
into our existing business. These challenges include:




·
              integration
      of product lines, sales forces, customer lists and manufacturing
      facilities;




·
              development
      of expertise outside our existing
business;




·
              diversion
      of management time and
resources;




·
              harm
      to our existing business
relationships;




·
              the
      potential loss of key employees of the acquired
      business; and




·
              possible
      divestitures, inventory write-offs and other
  charges.




We cannot
be certain that we will find suitable acquisition candidates or that we will be
able to meet these challenges successfully.




An
acquisition could absorb substantial cash resources, require us to incur or
assume debt obligations, or issue additional common or preferred equity.
Restrictions in the agreements governing our indebtedness may prohibit us from
obtaining additional financing and if we are not able to obtain financing, we
may not be in a position to consummate acquisitions.




Negotiating
these transactions can be time-consuming, difficult and expensive, and our
ability to close these transactions may often be subject to approvals, such as
government regulation, which are beyond our control. Consequently, we can make
no assurances that these transactions, once undertaken and announced, will
close.




In
addition, the combined entity may have lower revenues or higher expenses and
therefore may not achieve the results that we anticipated at the time of the
acquisition. Acquired entities also may be highly leveraged, dilutive to our
earnings per share or may have unknown liabilities.




Our
operations and our customers’ operations are subject to a variety of
environmental, health and safety laws and regulations that may increase our
costs, limit the demand for our products and services or restrict our
operations.




Our
operations and the operations of our customers are subject to federal, state,
local, foreign and provincial laws and regulations relating to the protection of
the environment and of human health and safety, including laws and regulations
governing the investigation and clean up of contaminated properties, as well as
air emissions, water discharges, waste management and disposal. These laws and
regulations affect the products and services we design, market and sell, as well
as the facilities where we manufacture and service our products. In addition,
environmental laws and regulations could limit our customers’ activities in the
oil and gas sector and subsequently the demand for our products.




15
 Table
of Contents




Environmental
laws and regulations may provide for “strict liability” for damages to the
environment or natural resources or threats to public health and safety,
rendering a party liable without regard to negligence or fault on the part of
such party. Sanctions for noncompliance may include revocation of permits,
temporary or permanent shutdown of certain operations, corrective action orders,
administrative or civil penalties, and criminal prosecution. Some environmental
laws and regulations provide for joint and several strict liability for the
investigation or remediation of spills and releases of hazardous substances,
rendering a party potentially responsible for more than its fair share of, or
the entire, liability. In addition, we may become subject to claims alleging
personal injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. Pursuant to certain
environmental laws and regulations, we may become subject to liability
(including with respect to
off-site disposal matters or formerly owned or operated facilities) for the
conduct of or conditions caused by others, or for our own acts that were in
compliance with all applicable laws and regulations at the time such acts were
performed. Any of these laws and regulations could result in claims, fines,
expenditures or other requirements that could have a material adverse effect on
our business.




We invest
financial and managerial resources to comply with environmental laws and
regulations and anticipate that we will continue to do so in the future. We
cannot determine the future cost of compliance or the impact of environmental
regulation on our future operations. The modification of, or changes in the
enforcement of, existing laws or regulations, or the adoption of new laws or
regulations imposing more stringent environmental restrictions, could have a
material adverse effect on our business, financial condition and results of
operations.




Our
businesses are subject to a variety of other regulatory restrictions, such as
those governing workplace safety and health. The failure to comply with these
rules may result in civil penalties and criminal prosecution. Further, laws and
regulations in this and other areas are complex and change frequently. Changes
in laws or regulations, or their enforcement or interpretation, could subject us
to material costs. We cannot determine the extent to which our future operations
and earnings may be so affected.




Failure
to maintain key licenses could have a material impact on our
operations.




The part
of our business that consists of the sale, distribution, installation and
warranty repair of large engines and transmissions used in commercial vehicle
applications in Texas requires certain Texas state motor vehicle licenses which
are subject to annual renewal. While these licenses have historically been
renewed on a regular basis, there can be no assurance that any particular
license will be renewed in the future. The termination of, or failure to renew,
licenses could have a material adverse effect on our financial position, results
of operations and cash flows.




We
may be unable to adequately protect or enforce our own intellectual property
rights or the value thereof, including our rights to use the “Stewart &
Stevenson” and “Crown”  trademarks, which could have a material
adverse effect on our business.




The
protection of our patents, trademarks, service marks, copyrights, trade secrets,
domain names and other intellectual property rights, including know-how,
confidential or proprietary technical and business information, is important to
our businesses. In particular, our rights to the “Stewart & Stevenson”
and “Crown” trademarks and logos are important to our sales and marketing
efforts.




To
protect our intellectual property, including our know-how and other proprietary
information, we rely on a combination of copyright, patent, trademark, domain
name, trade secret and unfair competition laws, along with confidentiality
procedures, contractual provisions and other similar measures. We obtained from
SSSI an exclusive world-wide royalty-free irrevocable license to use, pursuant
to the terms of the license, the “Stewart & Stevenson” trademark and
logo, and we purchased from Crown all rights to the use of the “Crown” trademark
and logo. We have registrations for some of our trademarks in certain countries,
such as the United States. Nevertheless, protection for intellectual property
rights is territorial and protection may not be available or enforceable in
every country in which our intellectual property and technology is used.
Accordingly, we cannot ensure our ability to use, on an exclusive basis or
otherwise, without risk, our intellectual property, including the
“Stewart & Stevenson” and “Crown” trademarks and logos, particularly in
countries where we, or our licensors, do not have trademark registrations,
patents for our technology or copyright protection. The risks include, among
others, potentially being sued for infringement or other violations, paying
related damage awards or other fees and costs or having to redesign or cease use
of our intellectual property in a country where a third party has previously
established rights in such intellectual property.




16
 Table
of Contents




With
respect to intellectual property for which we or our licensors currently have
protection, there is also the risk that:




·
              the
      patents, copyrights, trademarks, domain names, intellectual property
      licenses and other intellectual property held by, used and/or licensed to
      us, may be challenged, rejected or determined to be
      invalid; and




·
              the
      confidentiality procedures we have in place for maintaining trade secrets
      and other proprietary information are not properly followed which may
      result in the loss of such
rights.




Policing
and enforcing our intellectual property rights, protecting our trade secrets and
other know-how, and determining the validity and scope of our intellectual
property and related rights, is essential, but requires significant resources,
particularly if litigation is necessary. Potential litigation could divert our
management’s time, attention and
resources, delay our product shipments or require us to enter into royalty or
license agreements. Moreover, the value of our intellectual property rights may
be impaired without infringement occurring. For example, if other entities that
have rights to use the “Stewart & Stevenson” or “Crown” trademark and logo
engage in activities that generate adverse publicity or otherwise harm the value
of the “Stewart & Stevenson” or “Crown” brand, we may be adversely
affected even though those activities may be unrelated to our businesses and we
have no control over them.




As
an SEC reporting company, we are subject to additional regulation and will incur
additional administrative costs relating to compliance with U.S. securities
laws.




We are
subject to reporting and other obligations under the Securities Exchange Act of
1934. These requirements include the preparation and filing of detailed annual,
quarterly and current reports. In addition, we are required to keep abreast of
and comply with material changes in the applicable rules and regulations
promulgated by the SEC, including the changes and requirements mandated by the
Sarbanes-Oxley Act of 2002. We expect these rules and regulations to result in
significant initial costs, as we continue to implement internal controls and
other procedures designed to comply with the requirements of the Sarbanes-Oxley
Act, in an ongoing increase in our legal, audit and financial compliance costs,
to divert management attention from operations and strategic opportunities and
to make legal, accounting and administrative activities more time-consuming and
costly. We may also incur higher costs to maintain insurance for directors and
officers. As a result, our general and administrative expenses in these areas
will likely increase in Fiscal 2009.




If
we fail to maintain an effective system of internal controls, we may not be able
to report our financial results accurately or prevent fraud.




We
produce our financial statements in accordance with the requirements of U.S.
generally accepted accounting principles (“GAAP”); however, while we have
performed our own attestation as to the effectiveness of our internal controls
over financial reporting, our independent registered public accounting firm has
not yet attested to the effectiveness of our internal accounting controls over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act
(“Section 404”). Effective internal controls are necessary for us to
provide reliable financial reports and to prevent fraud. Our efforts to maintain
an effective system of internal controls may not be successful, and we may be
unable to maintain adequate controls over our financial processes and reporting
in the future, including compliance with the obligations under Section 404.
Any failure to maintain effective controls, difficulties encountered in their
implementation or other effective improvement of our internal controls could
impact our operating results or cause us to fail to meet our reporting
obligations. Given the difficulties inherent in the design and operation of
internal controls over financial reporting, in the future, we or our independent
registered public accounting firm may not be able to conclude that our internal
controls are effective. Ineffective internal controls subject us to regulatory
scrutiny and a loss of confidence in our reported financial information, which
could have an adverse effect on our business.




The
interests of the controlling holder of our common equity may not be aligned with
your interests.




Mr. Hushang
Ansary, our Chairman of the Board of Directors, indirectly owns a majority of
our common equity. As a result, Mr. Ansary is in a position to control our
affairs, policies and decisions to enter into any transaction. In this context,
circumstances may occur in which the interests of Mr. Ansary as an equity
owner may conflict with the interests of holders of our senior notes. In
addition, Mr. Ansary may have an interest in pursuing acquisitions,
divestitures or other transactions that could enhance his equity investment in
us, even though such transactions might involve risks to holders of our senior
notes.




17
 Table
of Contents


ITEM 1B.  Unresolved Staff
      Comments




None.




ITEM
      2.  Properties




In
addition to our leased headquarters in the central business district of Houston,
Texas, we also maintain over 2.5 million square feet of manufacturing,
service and sales facilities throughout the central U.S., Canada, Venezuela and
Colombia, as well as sales offices in Beijing and Moscow. We have a total of
61 facilities, of which 51 are located in the United States and Canada,
consisting of 17 owned and 34 leased properties.  The
remaining 10, all of which are leased, are located abroad. Furthermore, the
facilities contain over 294 acres of land to be used for future
expansions.  We believe our properties are in good condition,
well-maintained and sufficient for our current operations.




Our
facilities are located close to major onshore and offshore petroleum fields in
the United States and in a number of the world’s energy producing nations. A
summary of our major locations is shown below:




Location
                  
                  Leased
      /Owned
                  
                  TypeDallas,
      TX
                  
                  Owned
                  
                  Manufacturing
      /Service /SalesHouston,
      TX (East)
                  
                  Owned
                  
                  Manufacturing
      /Service /SalesHouston,
      TX (Northwest)
                  
                  Owned
                  
                  Manufacturing
      /Service /SalesOdessa,
      TX
                  
                  Owned
                  
                  Manufacturing
      /Service /SalesDenver,
      CO
                  
                  Owned
                  
                  Manufacturing
      /Service /SalesSan Antonio,
      TX
                  
                  Owned
                  
                  Service
      /SalesNew
      Orleans, LA
                  
                  Owned/Leased
                  
                  Manufacturing
      /Service /SalesFarmington,
      NM
                  
                  Owned
                  
                  Service
      /SalesCorpus
      Christi, TX
                  
                  Owned
                  
                  Service
      /SalesOdessa,
      TX
                  
                  Leased
                  
                  Manufacturing
      /Service /SalesEdmond,
      OK
                  
                  Leased
                  
                  Manufacturing
      /Service /SalesVictoria,
      TX
                  
                  Leased
                  
                  Manufacturing
      /Service /SalesCalgary,
      Canada
                  
                  Leased
                  
                  Manufacturing
      /Service /Sales





ITEM 3.  Legal
      Proceedings




We are
defending an arbitration action brought against one of our suppliers and us. The
action against our supplier alleges basic defects in four gas compression
engines and a defective supply of spare parts. The claim against us alleges
defective installation of spare parts and related overhaul services. The
claimant seeks approximately $18 million in damages from our supplier and us. We
believe that the claimant’s allegations and its claim for damages against us are
without merit and that there are valid defenses thereto, and intend to defend
the action vigorously.




The State
of Texas has notified us that it will be conducting a sales and use tax audit
set to begin on or about the second quarter of Fiscal 2009.  We
consider our practices in this area to have been appropriate and we currently do
not believe the matter will have a material impact on our consolidated financial
statements.  While the outcome of such an audit cannot be reasonably
predicted at this time, there is the possibility of a material adverse
outcome.




We are
also a defendant in a number of lawsuits relating to matters normally incident
to our business.  No individual case, or group of cases presenting
substantially similar issues of law or fact, is expected to have a material
effect on the manner in which we conduct our business or on our consolidated
results of operations, financial position or liquidity.  We maintain
certain insurance policies that provide coverage for product liability and
personal injury cases.  We have established reserves that we believe
to be adequate based on current evaluations and our experience in these types of
claim situations.  Nevertheless, an unexpected outcome or adverse
development in any such case could have a material adverse impact on our
consolidated results of operations in the period in which it
occurs.




ITEM
      4.  Submission
      of Matters to a Vote of Security
  Holders




None.


PART
II
  ITEM 5.  Market for Registrant’s Common
      Equity and Related Stockholder Matters and Issuer Purchases of Equity
      Securities
  As of
January 31, 2009, there were six record holders of our outstanding
units.  There is no established public trading market for any class of
our common equity.
  Subsequent
to the SSSI Acquisition, our income is reported for federal and certain states
by our shareholders. We make quarterly distributions to them to fund these tax
obligations. During Fiscal 2008, 2007 and 2006, $33.6 million,
$20.3 million and $16.1 million, respectively was distributed to
shareholders for their tax obligations.


18
 Table
of Contents




ITEM6.  Selected
Financial Data




The
following table sets forth our selected historical consolidated financial data
as of and for the five years ended January 31, 2005, 2006, 2007, 2008 and
2009.  The selected historical consolidated financial data as of and
for each of the years ended January 31, 2007, 2008 and 2009 were derived
from our audited consolidated financial statements included elsewhere in this
Annual Report or in our previous filings. The data for the year ended January 31,
2006 has been derived by combining the results of the business acquired in the
SSSI Acquisition (the “SSSI Acquired Business”) for the period of
February 1, 2005 to January 22, 2006 and our results for the period of
January 23, 2006 to January 31, 2006, which are not included in this
Form 10-K. The selected historical consolidated financial data as of and for the
year ended January 31, 2005 was derived from audited financial statements
not included in this Form 10-K. You should read this information in conjunction
with the discussion under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes thereto included elsewhere in this Annual
Report.




Year
      ended January 31,Predecessor
                                    
                                    
                                    Combined
                                    
                                    
                                    Successor2005
                                    
                                    
                                    2006(2)
                                    
                                    
                                    2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009(In
      thousands, except per unit data)
                                    
                                    
                                    
                                    
                                    (Non-GAAP)Statement
      of operations data:Sales
                                    
                                    $
                                    548,476
                                    
                                    
                                    $
                                    690,673
                                    
                                    
                                    $
                                    942,148
                                    
                                    
                                    $
                                    1,335,427
                                    
                                    
                                    $
                                    1,217,142Cost
      of sales
                                    
                                    
                                    462,516
                                    
                                    
                                    
                                    582,750
                                    
                                    
                                    
                                    774,060
                                    
                                    
                                    
                                    1,070,396
                                    
                                    
                                    
                                    1,002,166Gross
      profit
                                    
                                    
                                    85,960
                                    
                                    
                                    
                                    107,923
                                    
                                    
                                    
                                    168,088
                                    
                                    
                                    
                                    265,031
                                    
                                    
                                    
                                    214,976Selling
      and administrative expenses
                                    
                                    
                                    81,691
                                    
                                    
                                    
                                    84,500
                                    
                                    
                                    
                                    108,005
                                    
                                    
                                    
                                    139,947
                                    
                                    
                                    
                                    138,141Other
      income, net
                                    
                                    
                                    (2,749
                                    )
                                    
                                    
                                    (2,427
                                    )
                                    
                                    
                                    (1,900
                                    )
                                    
                                    
                                    (989
                                    )
                                    
                                    
                                    (1,311
                                    )Operating
      profit
                                    
                                    
                                    7,018
                                    
                                    
                                    
                                    25,850
                                    
                                    
                                    
                                    61,983
                                    
                                    
                                    
                                    126,073
                                    
                                    
                                    
                                    78,146Interest
      expense, net
                                    
                                    
                                    155
                                    
                                    
                                    
                                    439
                                    
                                    
                                    
                                    19,756
                                    
                                    
                                    
                                    29,058
                                    
                                    
                                    
                                    24,931Earnings
      from continuingoperations
      before income taxes
                                    
                                    
                                    6,863
                                    
                                    
                                    
                                    25,411
                                    
                                    
                                    
                                    42,227
                                    
                                    
                                    
                                    97,015
                                    
                                    
                                    
                                    53,215Income
      tax expense (1)
                                    
                                    
                                    542
                                    
                                    
                                    
                                    10,255
                                    
                                    
                                    
                                    742
                                    
                                    
                                    
                                    5,192
                                    
                                    
                                    
                                    2,659Net
      earnings from continuingoperations
                                    
                                    
                                    6,321
                                    
                                    
                                    
                                    15,156
                                    
                                    
                                    
                                    41,485
                                    
                                    
                                    
                                    91,823
                                    
                                    
                                    
                                    50,556Loss
      from discontinued operationsnet
      of tax
                                    
                                    
                                    (559
                                    )
                                    
                                    
                                    (4,037
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Net
      earnings
                                    
                                    
                                    5,762
                                    
                                    
                                    
                                    11,119
                                    
                                    
                                    
                                    41,485
                                    
                                    
                                    
                                    91,823
                                    
                                    
                                    
                                    50,556Preferred
      dividends
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (128
                                    )
                                    
                                    
                                    (4,017
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Net
      earnings available for commonunit
      holders
                                    
                                    $
                                    5,762
                                    
                                    
                                    $
                                    10,991
                                    
                                    
                                    $
                                    37,468
                                    
                                    
                                    $
                                    91,823
                                    
                                    
                                    $
                                    50,556Net
      earnings from continuing operations per unit:Basic
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.20
                                    
                                    
                                    $
                                    0.51
                                    
                                    
                                    $
                                    0.92
                                    
                                    
                                    $
                                    0.51Diluted
                                    
                                    $
                                    0.06
                                    
                                    
                                    $
                                    0.15
                                    
                                    
                                    $
                                    0.41
                                    
                                    
                                    $
                                    0.92
                                    
                                    
                                    $
                                    0.51Net
      earnings available for common unit holders per common
unit:Basic
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.15
                                    
                                    
                                    $
                                    0.46
                                    
                                    
                                    $
                                    0.92
                                    
                                    
                                    $
                                    0.51Diluted
                                    
                                    $
                                    0.06
                                    
                                    
                                    $
                                    0.11
                                    
                                    
                                    $
                                    0.41
                                    
                                    
                                    $
                                    0.92
                                    
                                    
                                    $
                                    0.51Weighted
      average units outstanding:Basic
                                    
                                    
                                    75,000
                                    
                                    
                                    
                                    75,000
                                    
                                    
                                    
                                    80,745
                                    
                                    
                                    
                                    100,005
                                    
                                    
                                    
                                    100,005Diluted
                                    
                                    
                                    100,005
                                    
                                    
                                    
                                    100,005
                                    
                                    
                                    
                                    100,005
                                    
                                    
                                    
                                    100,005
                                    
                                    
                                    
                                    100,005Balance
      sheet data (end of period):Working
      capital
                                    
                                    $
                                    170,109
                                    
                                    
                                    $
                                    190,130
                                    
                                    
                                    $
                                    214,718
                                    
                                    
                                    $
                                    318,072
                                    
                                    
                                    $
                                    313,574Cash and
      cash equivalents
                                    
                                    
                                    1,838
                                    
                                    
                                    
                                    1,093
                                    
                                    
                                    
                                    5,852
                                    
                                    
                                    
                                    12,382
                                    
                                    
                                    
                                    2,006Property,
      plant and equipment, net
                                    
                                    
                                    61,907
                                    
                                    
                                    
                                    45,858
                                    
                                    
                                    
                                    61,303
                                    
                                    
                                    
                                    82,606
                                    
                                    
                                    
                                    93,170Total
      assets
                                    
                                    
                                    296,974
                                    
                                    
                                    
                                    395,822
                                    
                                    
                                    
                                    456,801
                                    
                                    
                                    
                                    673,621
                                    
                                    
                                    
                                    651,050Total
      debt
                                    
                                    
                                    1,671
                                    
                                    
                                    
                                    194,525
                                    
                                    
                                    
                                    204,474
                                    
                                    
                                    
                                    294,592
                                    
                                    
                                    
                                    285,370Total
      shareholders’ equity
                                    
                                    $
                                    237,274
                                    
                                    
                                    $
                                    69,814
                                    
                                    
                                    $
                                    94,872
                                    
                                    
                                    $
                                    174,941
                                    
                                    
                                    $
                                    179,944





(1)
            We
      conduct our operations as Stewart & Stevenson LLC, a limited
      liability company, and, as a result, U.S. federal and certain state
      income taxes are paid by the holders of our equity interests. Therefore,
      no U.S. federal income tax expense was recorded in our statements of
      operations for the period from January 23, 2006 to January 31,
      2006 and the years ended January 31, 2007, 2008 and 2009. The amounts
      shown reflect taxes paid to foreign jurisdictions and certain state
      taxes.(2)
            The
      statement of operations data for the year ended January 31, 2006 is a
      non-GAAP financial measurement. The data for the year ended
      January 31, 2006 has been derived by combining the SSSI Acquired
      Business’ results for the period of February 1, 2005 to
      January 22, 2006 and our results for the period of January 23,
      2006 to January 31, 2006. We have included the combined financial
      data for Fiscal 2005 because we believe that a full year measurement for
      Fiscal 2005 is more useful to investors to analyze our operating results.
      See below for a reconciliation of the audited financial statements to the
      Combined Fiscal 2005 Non-GAAP financial data included
    above.





19
 Table
of Contents




Our
operating results for Fiscal 2004 and the period from February 1, 2005 to
January 22, 2006 reflect carved-out presentations of the SSSI Acquired
Business from the Predecessor’s financial statements presented on a stand-alone
basis. For the purposes of presenting Fiscal 2005 data, we have combined the
period of February 1, 2005 to January 22, 2006 from the carved-out
Predecessor financial statements with our operating results for the period of
January 23, 2006 to January 31, 2006. This combined presentation for
the year ending January 31, 2006 reflects a non-GAAP financial measurement
and the combined results are not intended to reflect pro forma results, as if
the businesses were combined for the entire fiscal year. However, the combined
Fiscal 2005 data is presented in order to provide a more meaningful measure of
our financial performance in Fiscal 2005 as it reflects an entire year of
operations. Although there were certain changes to the successor depreciation
and amortization expense as a result of purchase accounting adjustments, these
adjustments did not have a material impact in Fiscal 2005. The following table
provides a reconciliation of the audited financial statements to the combined
Fiscal 2005 results:




Predecessor
                
                
                SuccessorFebruary
      1,2005
      to
                  January
      22, 2006
                
                
                January
      23,2006
      to
                  January
      31, 2006
                
                
                CombinedFiscal2005(In
      thousands)
                
                
                
                
                
                
                
                (non-GAAP)Statement
      of operations data:Sales
                
                $
                673,175
                
                
                $
                17,498
                
                
                $
                690,673Cost
      of sales
                
                
                567,432
                
                
                
                15,318
                
                
                
                582,750Gross
      profit
                
                
                105,743
                
                
                
                2,180
                
                
                
                107,923Selling
      and administrative expenses
                
                
                82,472
                
                
                
                2,028
                
                
                
                84,500Other
      income, net
                
                
                (2,411
                )
                
                
                (16
                )
                
                
                (2,427
                )Operating
      profit
                
                
                25,682
                
                
                
                168
                
                
                
                25,850Interest
      expense, net
                
                
                109
                
                
                
                330
                
                
                
                439Earnings
      (loss) from continuing operations before income taxes
                
                
                25,573
                
                
                
                (162
                )
                
                
                25,411Income
      tax expense
                
                
                10,255
                
                
                
                —
                
                
                
                10,255Net
      earnings (loss) from continuing operations
                
                
                15,318
                
                
                
                (162
                )
                
                
                15,156Loss
      from discontinued operations, net of tax
                
                
                (4,037
                )
                
                
                —
                
                
                
                (4,037
                )Net
      earnings (loss)
                
                
                11,281
                
                
                
                (162
                )
                
                
                11,119Preferred
      dividends
                
                
                —
                
                
                
                (128
                )
                
                
                (128
                )Net
      earnings (loss) available for common unit holders
                
                $
                11,281
                
                
                $
                (290
                )
                
                $
                10,991Segment
      results data:SalesEquipment
                
                $
                348,736
                
                
                $
                10,822
                
                
                $
                359,558Aftermarket
      parts and service
                
                
                298,086
                
                
                
                5,999
                
                
                
                304,085Rental
                
                
                26,353
                
                
                
                677
                
                
                
                27,030Total
      sales
                
                $
                673,175
                
                
                $
                17,498
                
                
                $
                690,673Operating
      profit (loss)Equipment
                
                $
                10,117
                
                
                $
                248
                
                
                $
                10,365After
      market parts and service
                
                
                28,028
                
                
                
                277
                
                
                
                28,305Rental
                
                
                8,194
                
                
                
                63
                
                
                
                8,257Corporate
                
                
                (20,657
                )
                
                
                (420
                )
                
                
                (21,077
                )Total
      operating profit
                
                $
                25,682
                
                
                $
                168
                
                
                $
                25,850





The
presentation of the carved-out Predecessor financial statements requires certain
assumptions in order to reflect the business as a stand-alone entity. The
Predecessor financial statements also include 19 operating business units which
were exited by the Predecessor’s Power Products Segment prior to the
SSSI Acquisition. The results of these exited businesses were reflected as
discontinued operations in the Predecessor financial statements. The acquired
businesses were reflected as continuing operations in the Predecessor financial
statements.




20
 Table
of Contents


ITEM
      7.  Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations




The
following discussion should be read in conjunction with “Selected Financial
Data” and our consolidated financial statements and related notes thereto
included in this Annual Report. The following information contains
forward-looking statements, which are subject to risks and uncertainties. Should
one or more of these risks or uncertainties materialize, our actual results may
differ from those expressed or implied by the forward-looking
statements.




Overview




We are a
leading designer, manufacturer and marketer of specialized equipment and provide
aftermarket parts and service to the oil and gas and other industries that we
have served for over 100 years. Our diversified product lines include
equipment for well stimulation, well servicing and workover rigs, drilling rigs,
coiled tubing, cementing, nitrogen pumping, power generation and electrical
systems as well as engines, transmissions and material handling equipment. We
have a substantial installed base of equipment, which provides us with
significant opportunities for recurring, higher-margin aftermarket parts and
service revenues and also provide rental equipment to our
customers.




Earnings
before interest, taxes, depreciation and amortization (“EBITDA”) is a non-GAAP
financial measurement.  We use EBITDA because we believe that such a
measurement is a widely accepted financial indicator used by investors and
analysts to analyze and compare companies on the basis of operating performance
and to make informed investment decisions. You should not consider it in
isolation from or as a substitute for net earnings or cash flow measures
prepared in accordance with GAAP or as a measure of profitability or liquidity.
EBITDA calculations made by one company may not be comparable to EBITDA
calculations made by another company.




In Fiscal
2008, we generated revenues of $1,217.1 million, operating profit of
$78.1 million and EBITDA of $97.0 million, compared with revenues of
$1,335.4 million, operating profit of $126.1 million and EBITDA of
$145.3 million in Fiscal 2007, representing decreases of 8.9%, 38.1% and 33.2%,
respectively. Fiscal 2007 represented increases of 41.7%, 103.4% and 83.5%,
respectively when compared to revenues of $942.1 million, operating profit
of $62.0 million and EBITDA of $79.2 million in Fiscal 2006. The
following table provides a reconciliation of net earnings from continuing
operations (a GAAP financial measure) to EBITDA (a non-GAAP financial
measure):




Year
      Ended January 31,(In
      thousands)
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Net
      earnings from continuing operations
                                  
                                  $
                                  50,556
                                  
                                  
                                  $
                                  91,823
                                  
                                  
                                  $
                                  41,485Interest
      expense, net
                                  
                                  
                                  24,931
                                  
                                  
                                  
                                  29,058
                                  
                                  
                                  
                                  19,756Income
      tax expense
                                  
                                  
                                  2,659
                                  
                                  
                                  
                                  5,192
                                  
                                  
                                  
                                  742Depreciation
      and amortization
                                  
                                  
                                  18,869
                                  
                                  
                                  
                                  19,237
                                  
                                  
                                  
                                  17,256EBITDA
                                  
                                  $
                                  97,015
                                  
                                  
                                  $
                                  145,310
                                  
                                  
                                  $
                                  79,239




Sales of our equipment are significantly driven by the capital spending programs
of our customers. Due to the impacts of the downturn in the global economy,
lower oil and gas prices and the tightening of the credit markets, many of our
customers have curtailed their capital expenditures, resulting in decreased
revenues.




21
 Table
of Contents




On
February 26, 2007, we acquired substantially all of the operating assets
and assumed certain liabilities of Crown, a supplier of well stimulation,
drilling, workover, and well servicing rigs to the oil and gas industry. The
Crown Acquisition enhanced our position as a leading supplier of well
stimulation, coiled tubing, cementing and nitrogen pumping equipment and
expanded our product offerings to include drilling rigs, and a full range of
workover and well servicing rigs. As a result of the Crown Acquisition, we have
increased our manufacturing capabilities and broadened the markets we serve with
an extensive manufacturing facility in Calgary, Alberta, Canada and five service
facilities in strategic locations in the United States. Our results of
operations for Fiscal 2007 reflect the impact of the Crown Acquisition for the
period from February 26, 2007 to January 31, 2008, while prior periods do
not reflect the impact of the Crown Acquisition.




Our
Historical Financial Information




Our
fiscal year begins on February 1 of the stated year and ends on January 31 of
the following year. For example, Fiscal 2008 began on February 1, 2008 and
ended on January 31, 2009. We report results on the fiscal quarter method
with each quarter comprising approximately 13 weeks.




Stewart &
Stevenson LLC was formed for the purpose of acquiring from SSSI and its
affiliates substantially all of the equipment, aftermarket parts and service and
rental businesses that primarily serve the oil and gas industry as well as the
perpetual rights to the “Stewart & Stevenson” name and logo for use
worldwide.  We began operations on January 23, 2006 upon
consummation of the SSSI Acquisition pursuant to which we acquired substantially
all of the assets and operations of SSSI’s Power Products and Engineered
Products operating segments. Upon acquiring these businesses, these operations
were combined and restructured into three reportable operating segments:
Equipment, Aftermarket Parts and Service and Rental.




We
conduct our operations as Stewart & Stevenson LLC, a limited liability
company, and, as a result, U.S. federal and certain state income taxes are
paid by the holders of our equity interests. Therefore, no U.S. federal
income tax expense was recorded in our statement of operations for the years
ended January 31, 2007, January 31, 2008 and January 31, 2009.




Critical
Accounting Policies




Preparation
of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts and related disclosures. We
evaluate our estimates on an ongoing basis, based on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates. If actual market
conditions are less favorable than those projected by us, additional adjustments
to reserve items might be required. We consider the following policies to be the
most critical and pervasive accounting policies we use, and the areas most
sensitive to material change from external factors.




Revenue
Recognition:Revenue from equipment and
parts sales is recognized when the product is shipped, collection is reasonably
assured, risks of ownership have been transferred to and accepted by the
customer and contract terms are met.  Cash discounts or other
incentives to customers are recorded as a reduction of
revenue.  Revenue from service agreements is recognized as earned,
when services have been rendered.  Revenue from rental agreements is
recognized on a straight-line basis over the rental period. We report revenue
net of any revenue-based taxes assessed by governmental
authorities.




With
respect to long-term contracts that extend beyond two fiscal quarters, revenue
is recognized using the percentage-of-completion method.  The majority
of our long-term contracts are fixed-price contracts, and measurement of
progress toward completion is based on direct labor hours
incurred.  Changes in estimates for revenues, costs to complete and
profit margins are recognized in the period in which they are reasonably
determinable.  Any anticipated losses on uncompleted contracts are
recognized whenever evidence indicates that the estimated total cost of a
contract exceeds its estimated total revenue.  With respect to
cost-plus-fixed-fee contracts, we
recognize the fee ratably as the actual costs are incurred, based upon the total
fee amounts expected to be realized upon completion of the
contracts.  Bid and proposal costs are expensed as
incurred.




22
 Table
of Contents




Recoverable
costs and accrued profits not yet billed (“Unbilled Revenue”) represent the
cumulative revenue recognized less the cumulative billings to the customer.
Unbilled Revenue is reported as contracts in progress with costs and estimated
earnings exceeding related progress billings on the consolidated balance sheets.
Any billed revenue that has not been collected is reported as accounts
receivable. The timing of when we bill our customers is generally based upon
advance billing terms or contingent upon completion of certain phases of the
work, as stipulated in the contract. Billings in excess of incurred costs
represent progress billings in excess of Unbilled Revenue.





We
frequently sell equipment together with “start-up” services, which typically
involve adding fuel to the engine, starting the equipment for the first time,
and observing it to ensure that it is operating properly.  In cases
where start-up services are required on an equipment sale, the estimated
start-up costs are accrued when revenue from the equipment sale is
recognized.




Accounts Receivable:Accounts
receivable are recorded when billed and represent claims against third parties
that will be settled in cash.  The carrying value of our accounts
receivable, net of the allowance for doubtful accounts, represents the estimated
net realizable value.  We maintain an allowance for doubtful accounts
for estimated losses related to credit extended to our customers. We base such
estimates on our current accounts receivable aging and historical collections
and settlements experience, existing economic conditions and any specific
customer collection issues we have identified. Uncollectible accounts receivable
are written off when we determine that the balance cannot be
collected.





Inventories:Inventories
are stated at the lower of cost or market, with cost primarily determined on a
first-in, first-out (“FIFO”) basis less related customer deposits, and market
determined on the basis of estimated realizable values. Pursuant to distribution
agreements, we purchase a considerable amount of our inventory for resale from
independent manufacturers. For new items, cost represents invoice or production
cost and used equipment inventory cost is stated as original cost less allowance
for condition. Production cost includes material, labor and manufacturing
overhead. Shipping and handling costs are expensed as incurred in cost of sales.
Shipping and handling costs billed to customers are recorded as sales. We reduce
the carrying value of inventory to its estimated realizable value based upon our
historical usage experience, assumptions about future demand, technological
innovations, market conditions, plans for disposal and the physical condition of
products.




Business Combinations and Goodwill
and Indefinite-Lived Intangible Assets:Goodwill
and intangible assets acquired in connection with business combinations
represent the excess of consideration over the fair value of tangible net assets
acquired. Certain assumptions and estimates are employed in determining the fair
value of assets acquired and liabilities assumed, as well as in determining the
allocation of goodwill to the appropriate reporting unit.




We
perform an impairment test for goodwill and indefinite-lived intangible assets
annually during the fourth quarter, or earlier if indicators of potential
impairment exist. Our goodwill impairment test involves a comparison of the fair
value of each of our reporting units with their carrying value. Our impairment
test for indefinite-lived intangible assets involves the comparison of the fair
value of the intangible asset and its carrying value. The fair value is
determined using discounted cash flows and other market-related valuation
models, including earnings multiples and comparable asset market values. Certain
estimates and judgments are required in the application of these fair value
models. The discounted cash flow analysis consists of estimating the future cash
flows that are directly associated with each of our reporting units. These cash
flows, in addition to the earnings multiples and comparable asset market values,
are inherently subjective and require significant estimates based upon
historical experience and future expectations such as budgets and industry
projections. We have determined no impairment exists; however, if for any reason
the fair value of our goodwill or that of any of our reporting units or the fair
value of our intangible assets with indefinite lives declines below the carrying
value in the future, we may incur charges for the impairment. The amount of the
impairment, if any, is then determined based on an allocation of the reporting
unit fair values to individual assets and liabilities.




23
 Table
of Contents




Long-Lived
Assets:  Long-lived assets, which include property, plant and
equipment and definite-lived intangibles, comprise a significant amount of our
total assets. In accounting for long-lived assets, we must make estimates about
the expected useful lives of the assets and the potential for impairment based
on the fair value of the assets and the cash flows they are expected to
generate. The value of the long-lived assets is then amortized over their
expected useful lives. A change in the estimated useful lives of our long-lived
assets would have an impact on our results of operations. We estimate the useful
lives of our long-lived asset groups as follows:




Buildings
                    10-25 yearsLeasehold
      improvements
                    Lesser
      of lease term or asset lifeRental
      equipment
                    2-8 yearsMachinery
      and equipment
                    4-7 yearsComputer
      hardware and software
                    3-4 yearsIntangible
      assets
                    4
      months-27 years





In
estimating the useful lives of our property, plant and equipment, we rely
primarily on our actual experience with the same or similar assets. The useful
lives of our intangible assets are determined by the years over which we expect
the assets to generate a benefit based on legal, contractual or regulatory
terms.




We assess
the valuation of components of our property, plant and equipment and other
long-lived assets whenever events or circumstances dictate that the carrying
value might not be recoverable. We base our evaluation on indicators such as the
nature of the assets, the future economic benefit of the assets, any historical
or future profitability measurements and other external market conditions or
factors that may be present. If such factors indicate that the carrying amount
of an asset or asset group may not be recoverable, we determine whether
impairment has occurred by analyzing an estimate of undiscounted future cash
flows at the lowest level for which identifiable cash flows exist. If our
estimate of undiscounted future cash flows during the estimated useful life of
the asset is less than the carrying value of the asset, we recognize a loss for
the difference between the carrying value of the asset and its estimated fair
value, measured by the present value of estimated future cash flows or other
means, as appropriate under the circumstances.




Warranty Costs:We
generally provide product and service warranties for periods of six to
18 months. Based on historical experience and contract terms, we accrue the
estimated cost of product and service warranties at the time of sale or, in some
cases, when specific warranty problems are identified. Accrued warranty costs
are adjusted periodically to reflect actual experience. Certain warranty and
other related claims involve matters of dispute that ultimately are resolved by
negotiation, arbitration or litigation. Occasionally, a material warranty issue
can arise that is beyond our historical experience. We accrue for any such
warranty issues as they become known and estimable.




Customer
Deposits:  We sometimes
collect advance customer deposits to secure customers’ obligations to pay the
purchase price of ordered equipment.  For long-term construction
contracts, these customer deposits are recorded as current liabilities until
construction begins. During construction, the deposit liability is reclassified
into recoverable costs and accrued profits not yet billed or billings in excess
of incurred costs and, ultimately, recognized into revenue under the
percentage-of-completion method.  For all other sales, these deposits
are recorded as current liabilities until revenue is recognized on
delivery.




Insurance: We maintain a
variety of insurance for our operations that we believe to be customary and
reasonable. We are self-insured up to certain levels in the form of deductibles
and retentions for general liability, vehicle liability, group medical and
workers’ compensation claims. Other than normal business and contractual risks
that are not insurable, our risks are commonly insured against and the effect of
a loss occurrence is not expected to be significant. We accrue for estimated
self-insurance costs and uninsured exposures based on estimated development of
claims filed and an estimate of claims incurred but not reported as of each
balance sheet date. We regularly review estimates of reported and unreported
claims and provide for losses accordingly. Substantially all obligations related
to general liability, vehicle liability, group medical and workers’ compensation
claims related to the SSSI Acquisition and the Crown Acquisition were retained
by SSSI and Crown, respectively.




24
 Table
of Contents




Comparison
of the Results of Operations—Fiscal 2008 and Fiscal 2007




Sales—For Fiscal 2008, our
sales were $1,217.1 million, a decrease of $118.3 million, or 8.9%, compared to
Fiscal 2007 sales of $1,335.4 million. The decrease in equipment sales was
partially offset by increases in aftermarket parts and service and rental sales.
A breakdown of sales for these periods is as follows:




Fiscal
      2008
                                          
                                          
                                          Fiscal
      2007
                                          
                                          
                                          Change(In
      thousands)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          
                                          
                                          %SalesEquipment
                                          
                                          $
                                          792,919
                                          
                                          
                                          $
                                          930,357
                                          
                                          
                                          $
                                          (137,438
                                          )
                                          
                                          (14.8
                                          )
                                          %Aftermarket
      parts and service
                                          
                                          
                                          382,787
                                          
                                          
                                          
                                          376,327
                                          
                                          
                                          
                                          6,460
                                          
                                          
                                          1.7
                                          
                                          %Rental
                                          
                                          
                                          41,436
                                          
                                          
                                          
                                          28,743
                                          
                                          
                                          
                                          12,693
                                          
                                          
                                          44.2
                                          
                                          %Total
      sales
                                          
                                          $
                                          1,217,142
                                          
                                          
                                          $
                                          1,335,427
                                          
                                          
                                          $
                                          (118,285
                                          )
                                          
                                          (8.9
                                          )
                                          %





Sales of
equipment fell by 14.8%, or $137.4 million, during Fiscal 2008 compared to
Fiscal 2007. The decrease in sales was primarily attributable to lower sales
volumes in well stimulation, seismic, engines, transmissions, and other
equipment ($184.5 million) as a result of the weakening U.S. and global economy,
the tightening of credit markets and lower gas and oil prices.  This
was partially offset by increases in rigs, power generation and material
handling equipment ($47.1 million). The increased rig sales were primarily
attributable to the inclusion of an additional month of Crown sales in Fiscal
2008, which approximated $20.0 million, while the growth in power generation
sales is largely due to the higher demand associated with deepwater
drilling.




Aftermarket
parts and service sales grew by 1.7%, or $6.5 million, to $382.8 million during
Fiscal 2008 from $376.3 million in Fiscal 2007. The increase in aftermarket
parts and service sales was primarily attributable to an increased volume of
parts sales associated with our distributor agreements.




Rental
sales grew by 44.2%, or $12.7 million, during Fiscal 2008 when compared to
Fiscal 2007. The growth in rental sales was primarily attributable to compressor
and generator rentals associated with the effects of Hurricanes Gustav and
Ike.




Gross profit—Our gross profit
was $215.0 million for Fiscal 2008, a decrease of $50.0 million, compared to
$265.0 million in Fiscal 2007, reflecting a decline in gross profit margin from
19.8% to 17.7%, due to higher costs associated with product development,
increased material costs and higher indirect costs, such as freight, fuel and
utilities. The equipment segment gross profit margin declined from 19.3% to
16.9%, primarily driven by higher product development costs. The aftermarket
parts and service segment gross profit margin decreased from 19.6% to 17.6%, as
a result of increases in maintenance contract expense and indirect
costs such as freight and fuel. The rental segment gross profit margin
declined from 43.0% to 33.5%, primarily as the result of higher costs associated
with units we rented from third parties and re-rented to our customers,
fleet maintenance, depreciation and freight.




Selling and administrative
expenses—Selling and administrative expenses decreased by $1.8 million to
$138.1 million in Fiscal 2008 compared to $139.9 million in Fiscal 2007. Selling
and administrative expenses as a percentage of sales increased to 11.3% from
10.5% for Fiscal 2008, primarily as a result of lower sales volumes. During
Fiscal 2008, we incurred legal and professional expenses of approximately
$2.6 million associated with the pursuit of strategic alternatives,
$1.6 million related to SOX 404 implementation costs, and $3.2 million of
non-cash amortization of other intangible assets. Fiscal 2007 included $6.3
million of non-cash amortization of expense pertaining to acquired backlog and
other intangibles and $0.4 million of non-cash compensation charges associated
with the sale of common equity from our principal shareholder to our former
president and chief operating officer. There was no related amortization during
Fiscal 2008 as the acquired backlog and non-cash compensation were fully
amortized during Fiscal 2007.




25
 Table
of Contents




Other income, net—Other
income was $1.3 million in Fiscal 2008, an increase of $0.3 million compared to
other income of $1.0 million in Fiscal 2007 mainly as the result of foreign
currency translation gains associated with our Canadian subsidiary.




Operating profit—Our
operating profit decreased to $78.1 million, or 6.4% of sales, in Fiscal 2008,
from $126.1 million, or 9.4% of sales, in Fiscal 2007, primarily as the result
of lower sales and gross profit margins.




Interest expense, net—Net
interest expense was $24.9 million in Fiscal 2008, a decrease of $4.2 million
compared to net interest expense of $29.1 million in Fiscal 2007. The decrease
in interest expense is primarily a result of lower interest rates for our
revolving credit facility and lower outstanding balances.




Comparison
of the Results of Operations—Fiscal 2007 and Fiscal 2006




Sales—For Fiscal 2007, our
sales were $1,335.4 million, an increase of $393.3 million, or 41.7%, over
Fiscal 2006 sales of $942.1 million. This increase was primarily
attributable to strong demand for equipment from our customers in the oil and
gas industry and the impact of the inclusion of the Crown business from February
26, 2007 through January 31, 2008, which accounted for $205.5 million of the
increase in sales. A breakdown of sales for these periods is as
follows:




Fiscal
      2007
                                          
                                          
                                          Fiscal
      2006
                                          
                                          
                                          Change(In
      thousands)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          
                                          
                                          %SalesEquipment
                                          
                                          $
                                          930,357
                                          
                                          
                                          $
                                          583,459
                                          
                                          
                                          $
                                          346,898
                                          
                                          
                                          59.5
                                          %Aftermarket
      parts and service
                                          
                                          
                                          376,327
                                          
                                          
                                          
                                          332,434
                                          
                                          
                                          
                                          43,893
                                          
                                          
                                          13.2
                                          %Rental
                                          
                                          
                                          28,743
                                          
                                          
                                          
                                          26,255
                                          
                                          
                                          
                                          2,488
                                          
                                          
                                          9.5
                                          %Total
      sales
                                          
                                          $
                                          1,335,427
                                          
                                          
                                          $
                                          942,148
                                          
                                          
                                          $
                                          393,279
                                          
                                          
                                          41.7
                                          %




Sales of
equipment grew by 59.5%, or $346.9 million, during Fiscal 2007 compared to
Fiscal 2006. Organic growth in equipment sales accounted for $186.2 million as a
result of strong customer demand, primarily for our well stimulation and power
generation equipment, resulting in increased orders and higher sales prices,
with $160.7 million of the increase in sales related to the Crown
business.




Aftermarket
parts and service sales grew by $43.9 million to $376.3 million during Fiscal
2007 from $332.4 million in Fiscal 2006. Sales related to the Crown business
were $44.8 million during Fiscal 2007 with a decrease of $0.9 million in our
organic aftermarket parts and service sales.




Rental
sales grew by 9.5%, or $2.5 million, during Fiscal 2007 when compared to Fiscal
2006. The growth in rental sales was attributable to higher utilization and
improved pricing.




Gross profit—Our gross profit
was $265.0 million for Fiscal 2007, an increase of $96.9 million, compared to
$168.1 million in Fiscal 2006, reflecting an improvement in gross profit margin
from 17.8% to 19.8%. Gross profit margins improved in all segments in Fiscal
2007. The overall increase in gross profit was due primarily to improved pricing
in the strong market environment and improved efficiencies related to the
streamlining of our manufacturing processes in our equipment segment. Organic
growth accounted for $56.7 million of the increased gross profit with the Crown
business accounting for the remaining $40.2 million.




26
 Table
of Contents




Selling and administrative
expenses—Selling and administrative expenses increased by $31.9 million
to $139.9 million in Fiscal 2007 compared to $108.0 million in Fiscal 2006,
primarily as a result of the Crown business expenses of $24.1 million. Excluding
the Crown business expenses, selling and administrative expenses increased $7.8
million, primarily due to the higher sales expenses associated with the higher
sales volume. Selling and administrative expenses as a percentage of sales
decreased to 10.5% for Fiscal 2007 from 11.5% in Fiscal 2006, mainly as
a result of some costs being of a fixed nature. Fiscal 2007 results included a
$0.4 million non-cash compensation charge associated with the sale of common
equity from our principal shareholder to our president and chief operating
officer compared to Fiscal 2006 non-cash compensation charges of $3.7 million
associated with the sale of common equity from our principal shareholder to our
former president and chief operating officer and to our former vice chairman and
chief executive officer. Additionally, Fiscal 2007 and 2006 results included
$6.3 million and $7.0 million, respectively, of non-cash amortization
expense pertaining to acquired backlog and other intangible assets. To determine
the non-cash compensation charge relating to the sale of the equity interests
described above, we relied on a valuation prepared by a third party valuation
specialist that used a comprehensive valuation analysis for the purpose of
determining the fair value of a minority, non-marketable interest in our
company.




Other income, net—Other
income was $1.0 million in Fiscal 2007, a decrease of $0.9 million from Fiscal
2006. Fiscal 2006 included a $1.0 million gain related to the sale of a marginal
distribution territory. Other income in Fiscal 2007 consisted primarily of
foreign currency translation gains.




Operating profit—Our
operating profit improved to $126.1 million, or 9.4% of sales, in Fiscal 2007,
from $62.0 million, or 6.6% of sales, in Fiscal 2006, primarily as the result of
higher sales and gross profit margins. Organic growth generated $47.2 million of
the $64.1 million increase in operating profit, or 73.6%, when compared to
Fiscal 2006, with the Crown business accounting for the remaining $16.9 million
increase, or 26.4%.




Interest expense, net—Net
interest expense was $29.1 million in Fiscal 2007, an increase of $9.3 million
compared to net interest expense of $19.8 million in Fiscal 2006. The increase
in interest expense is due primarily to the higher amounts outstanding under our
credit facility and $150 million of senior notes issued in July 2006, along
with a $1.5 million non-cash charge for the amortization of deferred financing
costs related to the senior notes, refinancing of our credit facility, the Crown
Acquisition and higher working capital requirements in Fiscal 2007.




Segment
Data




Our
reportable operating segments are based on the types of products and services
offered and are aligned with our internal management structure. Inter-segment
and intra-segment revenues and costs are eliminated, and the operating profit
(loss) represents the earnings (loss) before interest and income
taxes.




Our
reportable segments include:




Equipment—This segment
designs, manufactures and markets equipment for well stimulation, drilling and
well servicing rigs, coiled tubing, cementing, nitrogen pumping, power
generation and electrical systems, serving the oil and gas industry. This
segment also sells engines, transmissions and material handling equipment for
well servicing, workover, drilling, pumping and other applications for a wide
range of other industries.




Aftermarket Parts and
Service—This segment provides aftermarket parts and service for products
we manufacture and products manufactured by others, to customers in the oil and
gas industry, as well as customers in the power generation, marine, mining,
construction, commercial vehicle and material handling industries.




Rental—This segment provides
equipment on a short-term rental basis, including generators, material handling
equipment and air compressors, to a wide range of end-markets.




27
 Table
of Contents




Corporate—Our corporate
segment includes administrative overhead normally not associated with the
specific activities within the operating segments. Such expenses include legal,
finance and accounting, internal audit, human resources, information technology
and other similar corporate office costs.




Certain
general and administrative costs which are incurred to support all operating
segments are allocated to the segment operating results presented. Operating
results by segment are as follows:




Fiscal
      Year Ended January 31,2009
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007(In
      thousands)SalesEquipment
                                                                        
                                                                        $
                                                                        792,919
                                                                        
                                                                        
                                                                        $
                                                                        930,357
                                                                        
                                                                        
                                                                        $
                                                                        583,459Aftermarket
      parts and service
                                                                        
                                                                        
                                                                        382,787
                                                                        
                                                                        
                                                                        
                                                                        376,327
                                                                        
                                                                        
                                                                        
                                                                        332,434Rental
                                                                        
                                                                        
                                                                        41,436
                                                                        
                                                                        
                                                                        
                                                                        28,743
                                                                        
                                                                        
                                                                        
                                                                        26,255Total
      sales
                                                                        
                                                                        $
                                                                        1,217,142
                                                                        
                                                                        
                                                                        $
                                                                        1,335,427
                                                                        
                                                                        
                                                                        $
                                                                        942,148Operating
      profit (loss)Equipment
                                                                        
                                                                        $
                                                                        65,049
                                                                        
                                                                        
                                                                        $
                                                                        101,350
                                                                        
                                                                        
                                                                        $
                                                                        38,622Aftermarket
      parts and service
                                                                        
                                                                        
                                                                        38,637
                                                                        
                                                                        
                                                                        
                                                                        44,909
                                                                        
                                                                        
                                                                        
                                                                        43,069Rental
                                                                        
                                                                        
                                                                        9,420
                                                                        
                                                                        
                                                                        
                                                                        9,078
                                                                        
                                                                        
                                                                        
                                                                        8,051Corporate
                                                                        
                                                                        
                                                                        (34,960
                                                                        )
                                                                        
                                                                        
                                                                        (29,264
                                                                        )
                                                                        
                                                                        
                                                                        (27,759
                                                                        )Total
      operating profit
                                                                        
                                                                        $
                                                                        78,146
                                                                        
                                                                        
                                                                        $
                                                                        126,073
                                                                        
                                                                        
                                                                        $
                                                                        61,983Operating
      profit percentageEquipment
                                                                        
                                                                        
                                                                        8.2
                                                                        %
                                                                        
                                                                        
                                                                        10.9
                                                                        %
                                                                        
                                                                        
                                                                        6.6
                                                                        %Aftermarket
      parts and service
                                                                        
                                                                        
                                                                        10.1
                                                                        
                                                                        
                                                                        
                                                                        11.9
                                                                        
                                                                        
                                                                        
                                                                        13.0Rental
                                                                        
                                                                        
                                                                        22.7
                                                                        
                                                                        
                                                                        
                                                                        31.6
                                                                        
                                                                        
                                                                        
                                                                        30.7Consolidated
                                                                        
                                                                        
                                                                        6.4
                                                                        %
                                                                        
                                                                        
                                                                        9.4
                                                                        %
                                                                        
                                                                        
                                                                        6.6
                                                                        %





Segment
Results Comparison —Fiscal 2008 and Fiscal 2007




Equipment—Operating profit
generated by the equipment segment decreased to $65.1 million in Fiscal
2008 from $101.3 million in Fiscal 2007, a decrease in operating profit
margin from 10.9% to 8.2%, primarily due to higher costs and lower sales
volumes. The $36.3 million decrease in operating profit was attributable to
$26.6 million in decreased sales volumes and $9.7 million relating to lower
pricing and productivity.




Our
equipment order backlog as of January 31, 2009 was $287.9 million
compared to $498.9 million as of January 31, 2008, a decrease of 42.3%. We have
seen significant declines in demand for our well stimulation and drilling rig
products as a result of lower oil and gas prices, the tightening of the credit
markets and the downturn of the global economy. An area of growth in our backlog
during Fiscal 2008 relates to our power generation product offerings for deep
water drilling applications. We expect to recognize a significant portion of
this equipment order backlog as revenue during Fiscal 2009.




Aftermarket Parts and
Service—Operating profit generated by the aftermarket parts and service
segment decreased to $38.6 million in Fiscal 2008 from $44.9 million
in Fiscal 2007, while operating profit margin decreased from 11.9% to 10.1%.
Operating profit margin decreased $7.5 million due to lower pricing and
productivity, which was partially offset by an increase of $1.2 million of
incremental operating profit generated by increased sales.




28
 Table
of Contents




Rental—Operating profit
generated by the rental segment increased to $9.4 million in Fiscal 2008
from $9.1 million in Fiscal 2007. Operating profit margin decreased to
22.7% for Fiscal 2008 from 31.6% in Fiscal 2007, mainly as a result of higher
costs associated with units we rented from third parties and re-rented to our
customers and increased depreciation associated with purchases of new equipment.
During Fiscal 2008, our rental fleet utilization was approximately
58.3%.





Corporate—Corporate and
administrative expenses increased to $35.0 million in Fiscal 2008 compared
to $29.3 million in Fiscal 2007 and increased as a percentage of sales from
2.2% to 2.9%. The $5.7 million increase in expenses is primarily due to legal
and professional expenses, including $2.6 million associated with the
pursuit of strategic
alternatives, $1.6 million related to SOX 404 implementation costs, and
$2.0 million in foreign currency differences associated with our foreign
subsidiaries.




Segment
Results Comparison —Fiscal 2007 and Fiscal 2006




Equipment—Operating profit
generated by the equipment segment increased to $101.3 million in Fiscal
2007 from $38.6 million in Fiscal 2006, an improvement in operating profit
margin from 6.6% to 10.9%, primarily due to the increased demand and the
inclusion of the Crown business, which accounted for $16.2 million. The
incremental operating profit generated by higher sales volume in Fiscal 2007 was
partially offset by higher selling expenses and general and administrative
expense allocations resulting from the higher proportion of equipment sales to
total sales in Fiscal 2007, which included $3.4 million of amortization expense
recorded in Fiscal 2007 associated with the acquired order backlog. The $62.7
million increase in operating profit was attributable to $14.5 million relating
to improved pricing, $32.0 million related to the increase in organic sales
volume and $16.2 million of incremental operating profit generated as a result
of the inclusion of the results of the Crown business.




Our
equipment order backlog as of January 31, 2008 was $498.9 million
compared to $533.4 million as of January 31, 2007, a decrease of 6.5%. We
recognized a significant portion of this equipment order backlog as revenue
during Fiscal 2008.




Aftermarket Parts and
Service—Operating profit generated by the aftermarket parts and service
segment increased to $44.9 million in Fiscal 2007 from $43.1 million
in Fiscal 2006, representing an improvement in operating profit of $1.8 million
with a decline in operating profit margin from 13.0% to 11.9%. This reflected
$1.2 million of incremental operating profit generated by organic growth via
improved pricing and $0.6 million of incremental operating profit generated by
the Crown business.




Rental—Operating profit
generated by the rental segment increased to $9.1 million in Fiscal 2007
from  $8.1 million in Fiscal 2006. Operating profit percentage
increased to 31.6% for Fiscal 2007 from 30.7% in Fiscal 2006, mainly as a result
of increased sales volumes.




During
Fiscal 2007, we focused our efforts on implementing higher prices and increasing
our overall rental fleet through selected expenditures. During Fiscal 2007, our
rental fleet utilization was approximately 65.7%.




Corporate—Corporate and
administrative expenses increased to $29.3 million in Fiscal 2007 compared
to $27.8 million in Fiscal 2006 and decreased as a percentage of sales from
2.9% to 2.2%. The $1.5 million increase in expenses is primarily due to the ramp
up of corporate and administrative operations following the SSSI Acquisition.
The Fiscal 2006 results included a $3.7 million non-cash compensation
charge associated with the sale of common equity by our principal shareholder to
our former president and chief operating officer and our former vice chairman
and chief executive officer.




Corporate
and administrative expenses in the near-term are expected to increase compared
to levels incurred during Fiscal 2007 due to increased compliance expenses
associated with implementation of Sarbanes-Oxley requirements.




29
 Table
of Contents




Liquidity
and Capital Resources




Our
principal source of liquidity is cash generated by operations. We also have a
$250 million asset-based revolving credit facility which we draw upon when
necessary to satisfy our working capital needs and generally pay down with
available cash. Our liquidity needs are primarily driven by changes in working
capital associated with execution of large manufacturing projects. While many of
our contracts include advance customer deposits and progress billings, some
international contracts provide for substantial portions of funding under
confirmed letters of credit upon delivery of the products. In Fiscal 2009, our
working capital may decrease as certain large contracts are
completed.




During
Fiscal 2008, we generated net cash from operating activities of
$58.5 million compared to net cash generated from operating activities of
$39.1 million during Fiscal 2007. The cash generated by operating activities during
Fiscal 2008 consisted of $50.6 million of cash generated by net
earnings and depreciation and amortization of $20.8 million, partially
offset by changes in operating assets and liabilities of $12.9 million.
Changes in operating assets and liabilities were the result of decreases in
accounts receivable and recoverable costs not yet billed and increases in
customer deposits, which in aggregate totaled $17.2 million and which were
offset by increases in inventories and decreases in accounts payable,
accrued payrolls, billings in excess of incurred costs and other which in
aggregate totaled $30.1 million.




During
Fiscal 2007, we generated net cash from operating activities of
$39.1 million compared to net cash generated from operating activities of
$58.2 million during Fiscal 2006. The cash provided by operating activities
consisted of $74.2 million as a result of changes in operating assets and
liabilities, primarily due to the increasing working capital needs driven by
increasing sales volumes, offset by $113.3 million of cash generated by net
earnings, adjusted for non-cash items. The change in operating assets and
liabilities is the result of increases in recoverable costs and accrued profits
not yet billed, accounts receivable, inventory,  and customer
deposits, which in aggregate totaled $107.9 million and were partially offset by
higher accounts payable,  billings in excess of incurred costs and
other, which in aggregate totaled $33.7 million.




Net cash
used in investing activities was $27.8 million during Fiscal 2008. This
included $27.8 million of capital expenditures, of which $22.3 million
related to additions to our rental fleet. Net cash used in investing activities
was $96.8 million during Fiscal 2007. This included $70.5 million incurred
in connection with the Crown Acquisition and $26.3 million of capital
expenditures, of which $10.3 million related to additions to our rental
fleet.




Net cash
used in financing activities was $42.4 million during Fiscal 2008. This
includes $8.4 million in net payments on our outstanding debt, tax
distributions to holders of common units of $33.6 million and deferred financing
costs of $0.4 million.  Net cash provided by financing activities was
$64.1 million during Fiscal 2007. This includes $88.7 million in net
borrowings from our revolving credit facility which was offset by tax
distributions to holders of common units of $20.3 million and deferred financing
and equity issuance costs of $4.3 million.




As of
January 31, 2009, our cash and cash equivalent balance was $2.0 million,
reflecting timing of cash receipts, disbursements and borrowings under our
revolving credit facility.




Current
Resources




In
connection with the SSSI Acquisition, a $70.0 million capital contribution
was made by the holders of our equity interests. The contribution included
$5.0 million of common interests, along with $65.0 million of
preferred interests. The preferred interests were converted into common
interests during the fourth quarter of Fiscal 2006, constituting 25.0% of the
total common equity interest, after giving effect to such conversion. A dividend
payment with respect to the preferred units of $4.1 million was paid during
the fourth quarter of Fiscal 2006, representing an 8.0% preferential profit
distribution accrued by the preferred units prior to conversion.




We have
an asset-based revolving credit facility in the amount of $250.0 million
with a $25.0 million sub-facility to be used by our Canadian subsidiary.
The $250.0 million revolving credit facility, which matures in
February 2012, is secured by substantially all accounts receivable,
inventory and property, plant and equipment and provides for borrowings at
LIBOR, plus a margin ranging from 1.25% to 2.00% per annum, based on our
leverage ratios, as specified in the credit agreement.




30
 Table
of Contents




As of
January 31, 2009, borrowings under the facility bear interest at LIBOR plus
1.5%, or 2.7%. A commitment fee of 0.3% to 0.375% per annum is payable on all
unused portions of the revolving credit facility based on our leverage ratios.
Interest payments are due monthly, or as LIBOR contracts expire. The revolving
credit facility also has a $30.0 million sub-facility which may be used for
letters of credit. As of January 31, 2009, there were $19.9 million of
letters of credit outstanding. Based on the outstanding borrowings, letters of
credit issued and the terms of the asset-based revolving credit facility, our
available borrowing capacity was approximately $83.1 million at January 31,
2009.




As of
January 31, 2009, borrowings under our senior credit facility and our senior
notes were as follows:




(In
      thousands)
                                      
                                      AmountRevolving
      credit facility
                                      
                                      $
                                      130,219Senior
      notes
                                      
                                      
                                      150,000Total
                                      
                                      $
                                      280,219




We
incurred $3.3 million of capitalized legal and financing charges associated with
establishing the original $250.0 million senior credit facility, which are being
amortized over the five year term of the facility.  We also incurred
$5.1 million of capitalized legal and financing charges associated with the
issuance of our senior notes during the second quarter of Fiscal
2006.  These costs are being amortized over the eight year term of the
notes.  During the years ended January 31, 2009 and January 31, 2008,
we incurred an additional $0.4 million and $2.9 million, respectively, of
capitalized legal and financing costs associated with the credit facility, which
are being amortized over twelve months and its remaining term, respectively. As
of January 31, 2009, $7.2 million of unamortized costs were included in the
balance sheet.





In
February 2007, we acquired substantially all of the operating assets and assumed
certain liabilities of Crown Energy Technologies, Inc., for cash consideration
of approximately $70.5 million. The Crown Acquisition was financed with
borrowings under our revolving credit facility.




We
currently believe that we will make approximately $15.0 million of capital
expenditures during Fiscal 2009.




The
revolving credit facility and the senior notes contain financial and operating
covenants with which we must comply during the terms of the
agreements.  These covenants include the maintenance of certain
financial ratios, restrictions related to the incurrence of certain indebtedness
and investments, and prohibition of the creation of certain
liens.  The financial covenant for the revolving credit facility
requires a fixed charge coverage ratio, as defined in the underlying agreement,
of at least 1.1 to 1.0; however, this covenant does not take effect until our
available borrowing capacity is $30.0 million or less.  The financial
covenant for the senior notes is applicable were we to incur additional
indebtedness (subject to various exceptions set forth in the underlying
indenture) and requires that, after giving effect to the incurrence of such
additional indebtedness, we have a consolidated coverage ratio, as defined in
the underlying indenture, of at least 2.5 to 1.0. We were in compliance with all
covenants as of January 31, 2009.


Scheduled
maturities under the revolving credit facility, our senior notes and other
operating lease commitments as of January 31, 2009, are as follows:


(In
      thousands)Description
                    
                    Fiscal
      2009
                    
                    
                    Fiscal
      2010
                    
                    
                    Fiscal
      2011
                    
                    
                    Fiscal
      2012
                    
                    
                    Fiscal
      2013
                    
                    
                    Thereafter
                    
                    
                    TotalSenior
      notes
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    150,000
                    
                    
                    $
                    150,000Revolving
      credit facility
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    130,219
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    130,219Notes
      payable (1)
                    
                    
                    5,151
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,151Interest
      on senior notes (1)
                    
                    
                    23,262
                    
                    
                    
                    23,262
                    
                    
                    
                    23,262
                    
                    
                    
                    15,345
                    
                    
                    
                    15,000
                    
                    
                    
                    7,500
                    
                    
                    
                    107,631Operating
      leases:Property
                    
                    
                    3,758
                    
                    
                    
                    3,004
                    
                    
                    
                    1,738
                    
                    
                    
                    1,163
                    
                    
                    
                    663
                    
                    
                    
                    612
                    
                    
                    
                    10,938Vehicles
                    
                    
                    3,482
                    
                    
                    
                    2,708
                    
                    
                    
                    1,955
                    
                    
                    
                    766
                    
                    
                    
                    111
                    
                    
                    
                    —
                    
                    
                    
                    9,022$
                    7,240
                    
                    
                    $
                    5,712
                    
                    
                    $
                    3,693
                    
                    
                    $
                    1,929
                    
                    
                    $
                    774
                    
                    
                    $
                    612
                    
                    
                    $
                    19,960Total
                    
                    $
                    35,653
                    
                    
                    $
                    28,974
                    
                    
                    $
                    26,955
                    
                    
                    $
                    147,493
                    
                    
                    $
                    15,774
                    
                    
                    $
                    158,112
                    
                    
                    $
                    412,961


(1)  Interest
in respect of our revolving credit facility and notes payable is calculated
assuming the outstanding balance and the current average borrowing rate at
January 31, 2009 remain unchanged over the term of the
agreements.




31
 Table
of Contents




Recent
Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued its
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 establishes a framework for fair value measurements
in the financial statements by providing a single definition of fair value,
provides guidance on the methods used to estimate fair value and increases
disclosures about estimates of fair value. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. The adoption of SFAS 157 on
February 1, 2008 did not have a material impact on our consolidated
financial position, cash flows or results of operations.




In
February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial
Assets and Financial Liabilities–Including an amendment of FASB
Statement No.115” (“SFAS 159”). This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This statement is
expected to expand the use of fair value measurement, which is consistent with
the Board’s long-term measurement objectives for financial instruments. This
statement is effective for fiscal years beginning after November 15, 2007.
As we have not elected the fair value option for any of our assets or
liabilities, the adoption of SFAS 159 on February 1, 2008 did not have an
impact on our consolidated financial position, cash flows or results of
operations.




In
December 2007, the FASB issued SFAS No. 141R,“Business Combinations” (“SFAS
141R”). SFAS 141R provides guidance on how acquirers recognize and measure the
consideration transferred, identifiable assets acquired, liabilities assumed,
non-controlling interests and goodwill acquired in a business combination. SFAS
141R also expands required disclosures surrounding the nature and financial
effects of business combinations. SFAS 141R is effective prospectively for
fiscal years beginning after December 15, 2008. The adoption of SFAS 141R
on February 1, 2009 is expected to impact certain aspects of our accounting
for any future acquisitions or other business combinations which may be
consummated, including the accounting for acquisition costs and determination of
fair values assigned to certain purchased assets and liabilities.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”(“SFAS 161”). This statement requires qualitative disclosures about a
company’s objectives and strategies with respect to its use of derivative
instruments, quantitative disclosures about the fair value, gains and losses of
its derivative contracts and details of credit-risk-related contingent features
in hedged positions. SFAS 161 also requires disclosure of how and why a company
uses and accounts for derivative instruments and their related hedged items and
their effects on its financial position, financial performance and cash flows.
SFAS 161 is effective prospectively for fiscal years beginning on or after
November 15, 2008. The adoption of SFAS 161 on February 1, 2009 is not expected
to have a material impact on the notes and disclosures to our consolidated
financial statements.




In
April 2008, the FASB issued FASB Staff Position (“FSP”) SFAS 142-3, “Determination of the Useful Life of
Intangible Assets”(“SFAS 142-3”). This statement revises the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and
Other Intangible Assets. The goal of SFAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, Business Combinations,and
other U.S. GAAP. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008. The adoption of SFAS 142-3 on February 1, 2009 may
impact certain aspects of our accounting for intangible assets and the
determination of useful lives assigned to them in any future acquisitions or
other business combinations.




32
 Table
of Contents




In July
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with U.S. GAAP.   The levels of
authority of the accounting principles available for the preparation of
financial statements were previously issued by the American Institute of
Certified Public Accountants. The FASB decided that accounting principles
applicable to GAAP should be adopted as a FASB Statement.  SFAS 162
does not set an effective date. It will become effective 60 days following
approval by the Securities and Exchange Commission of amendments made by the
Public Accounting Oversight Board to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” Effects of
applying the provisions of SFAS 162 must be reported as changes in accounting
principle in accordance with SFAS No. 154, “Accounting Changes and Error
Corrections”(“SFAS 154”).  A company must follow the
disclosure requirements of SFAS 154 and additionally disclose the accounting
principles that were used before and after the application of the provisions of
SFAS 162 and the reasons why applying this Statement resulted in a change in
accounting principle.  The adoption of SFAS 162 on February 1, 2009 is
not expected to have a material impact on our consolidated results of operations
and financial position.




ITEM 7A. Quantitive
and Qualitative Disclosure about Market Risk




We are
exposed to certain market risks as part of our ongoing business operations,
including risks from changes in interest rates and commodity prices, which could
impact our financial condition, results of operations and cash
flows.  We plan to manage our exposure to these and other market risks
through regular operating and financing activities and on a limited basis, the
use of derivative financial instruments.  We intend to use such
derivative financial instruments as risk management tools and not for
speculative investment purposes.


Foreign
Exchange Risk




Our
international subsidiaries in Colombia and Venezuela transact most of their
business in their respective local currencies, while our Canadian subsidiary
conducts its business in both Canadian and U.S. dollars. While local currency
transactions arising from our Canadian operations represented approximately 6.6%
of our revenue stream during Fiscal 2008, our results of operations were not
significantly impacted by changes in currency exchange rates. A short-term
foreign currency exchange rate derivative instrument was entered in January 2009
to manage our exposure to fluctuations in foreign currency exchange rates for
certain contracts of our Canadian subsidiary that are not denominated in its
functional currency.  The fair value of this derivative was a $0.1
million liability as of January 31, 2009. Transactions denominated in local
currencies generated by our Colombian and Venezuelan subsidiaries comprised less
than 3.7% of our revenue, resulting in insignificant impacts to our results of
operations from fluctuation of these foreign currencies against the
U.S. dollar.




Interest
Rate Risk




We use
variable-rate debt to finance certain of our operations and capital
expenditures. Assuming the entire $250.0 million revolving credit facility
was drawn, each quarter point change in interest rates would result in a
$0.6 million change in annual interest expense.




ITEM
8.  Financial Statements and
Supplementary Data




The
information required by this item is incorporated by reference to the
Consolidated Financial Statements beginning on Page F-1.




ITEM
      9.  Changes in
      and Disagreements with Accountants on Accounting and Financial
      Disclosure




None.




33
 Table
of Contents


ITEM
      9A.  Controls
      and Procedures




Effectiveness ofDisclosureControls and
Procedures


We
maintain a set of disclosure controls and procedures designed to ensure that
information we are required to disclose in reports that we file or submit with
the SEC is recorded, processed, summarized and reported within the time periods
specified by the SEC. An evaluation was carried out under the supervision and
with the participation of the Company’s management, including the Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the CEO and CFO have
concluded that the Company’s disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed by us in
reports we file with the SEC is recorded, processed, summarized and reported
within the time periods required by the SEC, and is accumulated and communicated
to management including our CEO and CFO, as appropriate, to allow timely
decisions regarding disclosure.







Management’s Report on
Internal Control Over Financial Reporting


Management
of the Company, including the CEO and the CFO, is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as
amended. Our internal controls were designed to provide reasonable assurance as to
(i) the reliability of our financial reporting and (ii) the
reliability of the preparation and presentation of the consolidated financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States.




We
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of January 31, 2009 based on the framework in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. There are inherent limitations in the
effectiveness of any system of internal control over financial reporting;
however, based on our evaluation, we have concluded that our internal control
over financial reporting was effective as of January 31, 2009.







Changes in
Internal Control over Financial Reporting





Management,
together with our CEO and CFO, evaluated the changes in our internal control
over financial reporting during the quarter ended January 31, 2009. We
determined that there were no changes in our internal control over financial
reporting during the quarter ended January 31, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




ITEM 9A(T). Controls and Procedures




This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in the Annual
Report. See “Item 9A. Controls and Procedures” for a description of our controls
and procedures and management’s report on internal control over financial
reporting.




ITEM
9B.  Other
Information





None.




34
 Table
of Contents


PART
III




ITEM
      10.  Directors
      and Executive Officers of the
  Registrant




Executive Officers and Directors




The
following table sets forth information with respect to our directors and
executive officers as of April 30, 2009.




Name
                  Age
                  Position(s)Hushang
      Ansary
                  81
                  Chairman
      of the Board of DirectorsFrank
      C. Carlucci
                  78
                  Director
      and Vice ChairmanNina
      Ansary
                  42
                  DirectorJames
      W. Crystal
                  71
                  DirectorRobert
      L. Hargrave
                  67
                  Director
      and Chief Executive OfficerJack
      F. Kemp
                  73
                  DirectorJohn
      D. Macomber
                  81
                  DirectorStephen
      Solarz
                  68
                  DirectorJeffery
      W. Merecka
                  42
                  Vice
      President, Chief Financial Officer and SecretaryAndrew
      M. Cannon
                  35
                  Chief
      Accounting OfficerKenneth
      W. Simmons
                  53
                  Vice
      President—Domestic Sales and
Aftermarket





Hushang Ansary(Chairman).
Mr. Ansary is a Houston oil industry entrepreneur and philanthropist. He has
been our Chairman of the Board since January 2006. He has served as Chairman of
the Board of Parman Capital Group LLC since December 2005 and is our
principal shareholder. From June 2000 to November 2005, Mr. Ansary was
a private investor. From March 1995 to June 2000, Mr. Ansary was Chairman
and Chief Executive Officer of IRI International Corporation (IRI), a New York
Stock Exchange oilfield equipment company. From June 2000 to March 2005, after
the merger of IRI with National Oilwell, Inc., Mr. Ansary served on the
board of directors of National
Oilwell, Inc. Mr. Ansary is a former Economic and Finance Minister of Iran,
Iranian Ambassador to the United States and Chairman/CEO of National Iranian Oil
Company.




Frank C. Carlucci(Director
and Vice Chairman). Mr. Carlucci has been a member of our board of
directors since January 2006 and our Vice Chairman of the board of directors
since March 2006. From 1993 to January 2003, Mr. Carlucci was Chairman, and from
2003 to 2005, Chairman Emeritus, of The Carlyle Group, a private equity firm.
From 2003 to 2006, Mr. Carlucci was a private investor. From June 2000 to
November 2005, he was a member of the board of directors of IRI.
Mr. Carlucci served as National Security Advisor to the President and
Secretary of Defense. Mr. Carlucci currently serves on the board of
directors of Collexis Holdings, Inc. and is a Trustee of the RAND
Corporation.




Nina Ansary(Director). Ms. Ansary has been a member of our board of
directors since January 2006. Since April 1997, she has served as President of
The Ansary Foundation, an organization dedicated to philanthropic activities.
She is also a member of the board of trustees of the Pacific Region of the Boys
and Girls Clubs of America. Ms. Ansary is the daughter of Mr. Ansary,
our Chairman of the Board of Directors.




James W. Crystal(Director). Mr. Crystal has been a member of our board of
directors since March 2006. Since 1958, Mr. Crystal has been Chairman and
Chief Executive Officer of Frank Crystal & Company, an insurance
brokerage firm. He is Vice Chairman and Trustee of Mount Sinai Medical Center,
Inc., a medical service provider. Mr. Crystal also serves on the board of
directors of Blockbuster LLC, an in-home movie and game entertainment
provider.




Robert L. Hargrave(Director
and Chief Executive Officer). Mr. Hargrave has been our Chief Executive Officer
since January 2007. From 1999 to 2007, he was a private entrepreneur. He served
as President and Chief Executive Officer of Stewart & Stevenson Services,
Inc. from 1997 to 1999 and the Chief Financial Officer from 1983 to 1997. Mr.
Hargrave served as Vice Chairman and Chief Financial Officer at IRI from 1999 to
2000.




35
 Table
of Contents




Jack F. Kemp(Director). Mr. Kemp has been a member of our board of
directors since January 2006. He is Chairman of Kemp Partners, a strategic
consulting firm. From July 2004 to February 2005, Mr. Kemp was Co-Chairman
of FreedomWorks Empower America, a non-profit, grassroots advocacy organization.
Mr. Kemp served as a member of Congress for 18 years and as Secretary
of the Department of Housing and Urban Development from February 1989 to January
1993. Mr. Kemp serves on the boards of directors of Oracle Corporation,
Sports Properties Acquisition Corp. and Six Flags, Inc.




John D. Macomber(Director). Mr. Macomber has been a member of our board of
directors since January 2006. He has been a Principal of JDM Investment Group, a
private investment firm, since 1992. From June 2000 to November 2005, he was a
member of the board of directors of IRI. He was Chairman and Chief Executive
Officer of Celanese Corporation from 1973 to 1986 and a Senior Partner at
McKinsey & Company from 1954 to 1973. Mr. Macomber is Chairman of
The Council for Excellence in Government and Vice Chairman of The Atlantic
Council. He has been a Director of Lehman Brothers Holdings Inc. since 1994 and
is a member of the board of directors of Collexis Holdings. He was Chairman and
President of the Export-Import Bank of the U.S. from 1989 to
1992.




Stephen Solarz(Director). Mr. Solarz has been a member of our board of
directors since January 2006. He has been the President of Solarz Associates, an
international consulting firm, since January 1993 and since 1994, also serves as
a Senior Counselor to APCO Associates, a public affairs firm. Mr. Solarz
was elected to the U.S. Congress in 1974 and was re-elected eight
times.




Jeffery W. Merecka(Vice
President, Chief Financial Officer and Secretary). Mr. Merecka has
been our Vice President and Chief Financial Officer since October 2006. Mr.
Merecka was also Chief Accounting Officer from January 2008 to January 2009. Mr.
Merecka has also been our Secretary since January 2007. From November 2001
to January 2006, Mr. Merecka was Vice President of Finance for the
Engineered Products Division of Stewart & Stevenson Services, Inc. From
April 2001 to October 2001 Mr. Merecka was General Manager of the Oiltool
Products Division of Stewart & Stevenson Services, Inc. and from May 1993 to
March 2001, Mr. Merecka was Controller of the Petroleum Equipment Division of
Stewart & Stevenson Services, Inc.




Andrew M. Cannon (Chief Accounting
Officer).Mr. Cannon has been our Chief Accounting Officer since
January 2009. Mr. Cannon is a Certified Public Accountant with over
13 years of experience, most recently with Ernst
& Young LLP from November 2002 through December 2008, and has worked
primarily with the oilfield services, energy, and related supporting
industries.




Kenneth W. Simmons, Jr. (Vice
President, Domestic Sales and Aftermarket).  Mr. Simmons has been
our Vice President of Domestic Sales and Aftermarket since November
2006.  From January 2006 to October 2006, he served as Vice President
of North Region Distribution and Rental Operations.  From January 2005
to January 2006, Mr. Simmons was Vice President of North Region Distribution
Rental Operations and from August 2003 to December 2004, Regional Operations
Manager at Stewart & Stevenson & Stevenson Services, Inc.  Mr.
Simmons was Chief Operating Officer of USA Compression from March 2001 to March
2003.




Director
Independence




Our board
of directors has determined that each of Messrs. Carlucci, Crystal, Kemp,
Macomber and Solarz  is an “independent” director within the meaning
of the applicable rules of the SEC.




Board
Committees




Executive
Committee




Our
executive committee consists of Mr. Hushang Ansary, as Chairman,
Ms. Nina Ansary, Mr. Frank C. Carlucci, and Mr. John D. Macomber.
Except as limited by Delaware law, the executive committee will exercise the
authority of our board of directors when the full board of directors is not in
session.




36
 Table
of Contents




Audit
Committee




The
members of the audit committee are Mr. James W. Crystal, who serves as the
audit committee financial expert and as the Chairman of the committee,
Mr. Frank C. Carlucci and Mr. Stephen Solarz. This committee is
concerned primarily with the accuracy and effectiveness of the audits of our
financial statements by our internal audit staff and by our independent
auditors. Its duties include:




·
              selecting
      independent auditors;




·
              reviewing
      the scope of the audit to be conducted by them, as well as the results of
      their audit;




·
              approving
      non-audit services provided to us by the independent
    auditor;




·
              reviewing
      the organization and scope of our internal system of audit, financial and
      disclosure controls;




·
              appraising
      our financial reporting activities, including our annual report, and the
      accounting standards and principles
  followed; and




·
              conducting
      other reviews relating to compliance by our employees with our policies
      and applicable laws.




Compensation
Committee




Our
compensation committee consists of Mr. John D. Macomber, as Chairman,
Mr. Hushang Ansary and Mr. Jack F. Kemp. Our compensation committee
reviews and recommends policy relating to compensation and benefits of our
directors and executive officers, including evaluating executive officer
performance, reviewing and approving executive officer compensation, reviewing
director compensation, making recommendations to the board with respect to the
approval, adoption and amendment of incentive compensation plans, administering
equity-based incentive compensation and other plans and reviewing executive
officer employment agreements and severance arrangements.




Compensation
Committee Interlocks and Insider Participation




None of
our executive officers has served as a member of a compensation committee (or if
no committee performs that function, the board of directors) of any other entity
that has an executive officer serving as a member of our compensation
committee.




Director
Compensation




Directors
who are also full-time officers or employees of our company receive no
additional compensation for serving as directors. All other directors receive an
annual retainer of $60,000. Each non-employee director also receives an
annual fee of $10,000 for serving as the chair of a standing committee, with the
exception of the chair of the audit committee, who receives an annual fee of
$15,000. In addition, each director who otherwise serves on a committee receives
an annual fee of $5,000. For a discussion of equity awards made to our
non-executive directors in anticipation of our initial public offering, see See
“Item 11. Executive Compensation – Director Compensation.”




Code
of Ethics




In Fiscal
2007, we adopted our corporate code of business conduct and ethics which
describes the basic principles of conduct of our officers, directors and
employees. We will provide to any person without charge, upon written request, a
copy of our corporate code of business conduct and ethics.  In
addition, copies of our Annual Report on Form 10-K may also be requested.
Requests should be directed to Stewart & Stevenson LLC, 1000 Louisiana,
Suite 5900, Houston, TX 77002, Attention Jeffery Merecka.




37
 Table
of Contents


ITEM 11.  Executive
      Compensation




The primary objectives of our compensation policies with
respect to executive compensation are to attract and retain the best possible
executives to lead us and to properly motivate these executives to perform at
the highest levels of which they are capable. Compensation levels established
for our executives are designed to promote loyalty and long-term commitment to
us and the achievement of our goals, to motivate the best possible performance
and to award achievement of budgetary goals to the extent such responsibility is
within the executive’s job description. We have a written employment agreement
with Mr. Ansary. However, none of our other executive officers are party to
written or unwritten employment agreements or severance or change in control
arrangements with us.




Our
compensation committee is responsible for reviewing, and modifying when
appropriate, the overall goals and objectives of our executive compensation
programs, as well as our levels of compensation. In addition, our compensation
committee is responsible for evaluating the performance and approving the
compensation level of each of our executive officers.




Compensation
Components




Executive
compensation consists of the following:




Base
Salary




The
primary component of compensation of our executives is base
salary.  We believe that the base salary element is required in order
to provide our executive officers with a stable income stream that is
commensurate with their responsibilities and the competitive market
conditions.  The base salary levels of our executives with respect to
Fiscal 2008 were established based upon: (i) the individual’s particular
background and circumstances, including experience and skills, (ii) our
knowledge of competitive factors within the industry in which we operate, (iii)
the job responsibilities of the individual, (iv) our expectations as to the
performance and contribution of the individual and our judgment as to the
individual’s potential future value to us and (v) existing base salary
levels.  In establishing the current base salary levels, we did not
engage in any particular benchmarking activities or engage any outside
compensation advisors.  Base salaries remained unchanged from the end
of Fiscal 2007 through Fiscal 2008. We expect that in future years, base salary
levels will be established based upon these factors as well as additional
factors including prior year’s performance, the individual’s length of service
to us and other elements.  For Fiscal 2008, as in Fiscal 2007, the
base salary for Mr. Ansary, our chairman of the board of directors and of the
executive committee and our founder, was significantly higher than that of our
other executive officers.  Mr. Ansary determines our overall strategy
and direction.  Mr. Ansary has a major role in the creation of our
organic and acquisitive growth opportunities, expanding our international
presence, enhancing our productivity and the overall achievement of our global
strategic objectives.  Mr. Ansary’s base compensation for Fiscal 2008
of $2.5 million was established in light of his unique role in our company and
that level of compensation was agreed to as part of the terms of our senior
credit facility. Pursuant to the terms of our senior credit facility, Mr.
Ansary’s total compensation for any fiscal year commencing in Fiscal 2007 may
not exceed $5 million, provided that after consummation of an initial public
equity offering, any change in Mr. Ansary’s total compensation will be subject
only to the approval of our board
of directors.  On November 6, 2007, we entered into an employment
agreement with Mr. Ansary pursuant to which Mr. Ansary’s annual base salary will
continue to be not less than $2.5 million.




Bonus




In the
face of the global financial turmoil and economic downturn, the Company has
discontinued its previously reported bonus practice of awarding our executives
discretionary cash bonuses.  Accordingly, no cash bonuses were awarded
to the named executives for Fiscal 2008.  Discretionary cash bonus
awards for Fiscal 2007 were determined and paid on December 29,
2008.  Fiscal 2007 bonus amounts are set forth in the Summary
Compensation Table.  No bonus provisions were made for Fiscal 2007 for
Mr. Robert L. Hargrave or Mr. Gary W. Stratulate.




The
Company has not made any determination of its practice with respect to executive
bonuses for Fiscal 2009 and future years.




38
 Table
of Contents




401(k)
Plan




We
maintain a retirement savings plan, or a 401(k) Plan, for the benefit of all
eligible employees. Currently, employees may elect to defer their compensation
up to the statutorily prescribed limit. During Fiscal 2008, we matched 50% of
employee contributions to the 401(k) Plan, capped at 6% of the employee’s
salary. During Fiscal 2009, we will match employee contributions at 35%, capped
at 6% of salary. An employee’s interests in his or her deferrals are 100% vested
when contributed. The 401(k) Plan is intended to qualify under
Sections 401(a) and 501(a) of the Internal Revenue Code. As such,
contributions to the 401(k) Plan and earnings on those contributions are not
taxable to the employees until distributed from the 401(k) Plan, and all
contributions are deductible by us when made. We provide this benefit to our
executive officers because it is a benefit we provide to all of our eligible
employees and it is provided to our executive officers on the same basis as all
other eligible employees.




Executive
Officer Benefits




We also
currently provide our executive officers with the following benefits:
(i) payment of life insurance premiums, (ii) payment of medical
insurance premiums, (iii) accidental death and dismemberment insurance,
(iv) long term disability insurance and (v) payment of parking
expenses at our headquarters. We provide these benefits as we feel they are
appropriate for executives providing the level of service our executive officers
provide to us and are consistent with, and comparable to, the types and levels
of benefits generally provided in the marketplace.




2007
Incentive Compensation Plan




On
September 5, 2007, our board of directors adopted the 2007 Incentive
Compensation Plan (“incentive plan”), The incentive plan received the required
approval of a majority of our unit holders and became effective on
September 27, 2007. The purpose of the incentive plan is to attract, reward
and retain qualified personnel, and to provide incentives for our directors,
officers and employees to set forth maximum efforts for the success of our
business. Our incentive plan permits the granting of awards in the form of
options to purchase common stock, stock appreciation rights, restricted shares
of common stock, restricted stock units, performance shares, performance units
and senior executive plan bonuses (which may be in shares of common stock and/or
cash).




Subject
to certain adjustments that may be required from time to time to prevent
dilution or enlargement of the rights of participants in the incentive plan, a
maximum of 2,500,000 shares (which may be in the form of units prior to our
conversion to a corporation) will be available for grants of all equity awards
under the incentive plan. The shares of common stock to be issued under the
incentive plan consist of authorized but unissued shares of our common stock. If
any shares are subject to an award that expires or are forfeited, then such
shares will, to the extent of any forfeiture or termination, again be available
for making awards under the incentive plan. To the extent any awards granted are
subject to the achievement of a performance goal in respect of a fiscal year or
other period, upon the occurrence of a change of control during the period, the
performance goal shall be deemed satisfied.




The
performance goals applicable to any award under the incentive plan in respect of
any participant who is or is likely to become a “covered employee” within the
meaning of Section 162(m) of the Internal Revenue Code will be based on
specified levels of, growth in, or performance relative to peer company or peer
company group performance in one or more of the following categories (excluding
extraordinary or non-recurring items unless otherwise specified): (a)
profitability measures; (b) revenue, sales and same store sales measures;
(c) business unit performance; (d) leverage measures;
(e) stockholder return; (f) expense management; (g) asset and
liability measures; (h) individual performance; (i) supply chain
efficiency; (j) customer satisfaction; (k) productivity measures;
(l) cash flow measures; (m) return measures; and (n) product
development and/or performance.




39
 Table
of Contents




Awards
under the incentive plan are subject to the following limitations: (A) the
maximum number of shares of common stock that (i) may be subject to stock
options or appreciation rights granted to a participant during any calendar year
is 400,000 shares plus an additional 100,000 shares in respect of a
participant who has not previously been employed by us and (ii) may be
subject to performance shares, restricted shares or restricted stock units
granted to a participant during any calendar year is 200,000 shares plus an
additional 50,000 shares in respect of a participant who has not previously
been employed by us and (B) the maximum aggregate cash value of payments to
any participant for any performance period pursuant to an award of performance
units and the payment of a senior executive plan bonus to any participant in
respect of any fiscal year may not in either case exceed 2% of EBITDA (excluding
the effects of discontinued operations or extraordinary or non-recurring
items).




Our
compensation committee administers the incentive plan. The compensation
committee has the ability to: select individuals to receive awards; select the
types of awards to be granted; determine the terms and conditions of the awards,
including the number of shares, the purchase price or exercise price of the
awards, if any, and restrictions and performance goals, if any, relating to any
award; establish the time when the awards and/or restrictions become
exercisable, vest or lapse; and make all other determinations deemed necessary
or advisable for the administration of the plan.




While our
board of directors may terminate or amend the incentive plan at any time, no
amendment may adversely impair the rights of grantees with respect to
outstanding awards. In addition, an amendment will be contingent on approval of
our stockholders to the extent required by law. Unless terminated earlier, the
incentive plan will terminate on the tenth anniversary of the date on which it
was approved by our stockholders, after which no further awards may be made
under the incentive plan, but will continue to govern unexpired
awards.




Summary
Compensation Table




The
following table sets forth the compensation of our most highly compensated
executive officers, which include our chief executive officer, for Fiscal 2008,
2007 and 2006. We refer to these individuals as our named executive
officers.




Equity
                                        
                                        
                                        All
      OtherName
      and Principal Position
                                        
                                        Year
                                        
                                        Salary
                                        
                                        
                                        
                                        Bonus
                                        
                                        
                                        Awards
                                        
                                        
                                        Compensation
      (1)
                                        
                                        
                                        TotalHushang
      Ansary
                                        
                                        2008
                                        
                                        $
                                        2,500,000
                                        
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        42,982
                                        
                                        
                                        $
                                        2,542,982Chairman of the Board of Directors
                                        
                                        2007
                                        
                                        
                                        2,500,000
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        19,372
                                        
                                        
                                        
                                        2,519,372and of the Executive Committee
                                        
                                        2006
                                        
                                        
                                        2,500,000
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        8,604
                                        
                                        
                                        
                                        2,508,604Robert
      L. Hargrave
                                        
                                        2008
                                        
                                        
                                        600,000
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        33,976
                                        
                                        
                                        
                                        633,976Chief Executive Officer
                                        
                                        2007
                                        
                                        
                                        600,000
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        18,679
                                        
                                        
                                        
                                        618,679and Director
                                        
                                        2006
                                        
                                        
                                        43,846
                                        
                                        (2
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        913
                                        
                                        
                                        
                                        44,759Jeffery
      W. Merecka
                                        
                                        2008
                                        
                                        
                                        225,000
                                        
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        28,835
                                        
                                        
                                        
                                        253,835Vice President, Chief Financial
                                        
                                        2007
                                        
                                        
                                        225,000
                                        
                                        
                                        
                                        
                                        
                                        175,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        19,217
                                        
                                        
                                        
                                        419,217Officer and Secretary
                                        
                                        2006
                                        
                                        
                                        188,462
                                        
                                        
                                        
                                        
                                        
                                        300,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        10,934
                                        
                                        
                                        
                                        499,396Kenneth
      W. Simmons
                                        
                                        2008
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        18,526
                                        
                                        
                                        
                                        218,526Vice President - Domestic Sales
                                        
                                        2007
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        
                                        
                                        120,000
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        12,882
                                        
                                        
                                        
                                        332,882& Aftermarket
                                        
                                        2006
                                        
                                        
                                        164,885
                                        
                                        
                                        
                                        
                                        
                                        168,852
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        20,305
                                        
                                        
                                        
                                        354,042Gary
      W. Stratulate (3)
                                        
                                        2008
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        30,922
                                        
                                        
                                        
                                        530,922President, Chief Operating
                                        
                                        2007
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,122,000
                                        
                                        
                                        
                                        25,482
                                        
                                        
                                        
                                        1,647,482Officer and Director
                                        
                                        2006
                                        
                                        
                                        461,538
                                        
                                        
                                        
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        2,224,000
                                        
                                        
                                        
                                        20,009
                                        
                                        
                                        
                                        3,205,547




(1)
                Consists
      of executive officer benefits listed above and 401(k) matching
      contributions.




(2)
                  Mr.
      Hargrave became our chief executive officer on January 21, 2007 and, prior
      to such time, was not employed by
us.




(3)
              Mr.
      Stratulate was terminated as President, Chief Operating Officer and
      Director effective January 23,
2009.




40
 Table
of Contents




Equity
Awards




On
September 5, 2007, as described above, our board of directors adopted the
incentive plan. The incentive plan received the required approval of a majority
of our unit holders and became effective on September 27, 2007.  In
connection with the adoption and approval of the incentive plan, the
compensation committee of the board, which has the responsibility to administer
the incentive plan, made certain grants of restricted shares to our
non-executive directors and certain members of our senior executive management.
The grants to our six non-executive directors totaled 360,000 restricted shares
vesting in five (5) 72,000 share tranches, with each such tranche vesting
upon board service for a complete fiscal year. In addition, approximately 15,000
of the restricted shares granted to Mr. Zarb were earned prior to the date of
his resignation as a director with the balance of his grant being forfeited. The
grants to senior executive management totaled 110,000 restricted shares vesting
in five (5) 22,000 share tranches, with each tranche vesting upon employment for
a complete fiscal year.  The executive grants are subject to the
achievement of net pre-tax income growth in the relevant fiscal year that
exceeds the median net pre-tax income growth of a peer group of companies
consisting of Schlumberger, Ltd., National Oilwell Varco, Inc., Weatherford
International Ltd., Cameron International Corp. and BJ Services Company and are
subject to acceleration in the case of an executive’s death or disability. For
the year ended January 31, 2009, our net pre-tax income growth did not exceed
the median net pre-tax income of the peer group of companies.  All
grants are subject to (i) the completion of an initial public equity
offering, and (ii) accelerated vesting upon a change-in-control of the
Company. No expense has been recognized for these grants because the contingent
condition has not occurred and as of January 31, 2009, diluted earnings per
share excludes the approximately 485,000 contingent unvested restricted
shares.




Units
Vested During Fiscal 2008





None.




Director
Compensation




Directors
who are also full-time officers or employees of our company receive no
additional compensation for serving as directors. All other directors receive an
annual retainer of $60,000. For a discussion of equity awards made to our
non-executive directors in anticipation of our initial public offering, see
Equity Awards above. Each non-employee director also receives an annual fee of
$10,000 for serving as the chair of a standing committee, with the exception of
the chair of the audit committee, who receives an annual fee of $15,000. In
addition, each director who otherwise serves on a committee receives an annual
fee of $5,000. The following table sets forth compensation earned by our
non-employee directors in Fiscal 2008, 2007 and 2006.




Fees
      Earned orName
      of Director
                                    
                                    Year
                                    
                                    
                                    Paid
      in Cash
                                    
                                    
                                    TotalNina
      Ansary
                                    
                                    2008
                                    
                                    $
                                    65,000
                                    
                                    $
                                    65,0002007
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002006
                                    
                                    
                                    61,250
                                    
                                    
                                    61,250Frank
      C. Carlucci
                                    
                                    2008
                                    
                                    
                                    70,000
                                    
                                    
                                    70,0002007
                                    
                                    
                                    70,000
                                    
                                    
                                    70,0002006
                                    
                                    
                                    62,500
                                    
                                    
                                    62,500James
      W. Crystal
                                    
                                    2008
                                    
                                    
                                    75,000
                                    
                                    
                                    75,0002007
                                    
                                    
                                    75,000
                                    
                                    
                                    75,0002006
                                    
                                    
                                    63,750
                                    
                                    
                                    63,750Jack
      F. Kemp
                                    
                                    2008
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002007
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002006
                                    
                                    
                                    61,250
                                    
                                    
                                    61,250John
      Macomber
                                    
                                    2008
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002007
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002006
                                    
                                    
                                    61,250
                                    
                                    
                                    61,250Stephen
      Solarz
                                    
                                    2008
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002007
                                    
                                    
                                    65,000
                                    
                                    
                                    65,0002006
                                    
                                    
                                    61,250
                                    
                                    
                                    61,250Frank
      G. Zarb (1)
                                    
                                    2008
                                    
                                    
                                    17,500
                                    
                                    
                                    17,5002007
                                    
                                    
                                    70,000
                                    
                                    
                                    70,0002006
                                    
                                    
                                    17,500
                                    
                                    
                                    17,500




(1)
              Mr. Zarb
      joined our board of directors in October 2006 and resigned effective April
      25, 2008.





41
 Table
of Contents


ITEM 12.  Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters




The
following table sets forth certain information as of April 30, 2009
regarding the beneficial ownership of our outstanding common equity,
by:




·
              each
      person or entity known by us to beneficially own more than 5% of our
      outstanding common stock;




·
              each
      of our directors and named executive officers;
  and




·
              all
      of our directors and executive officers as a
  group.




Beneficial
ownership of shares is determined under rules of the SEC and generally includes
any shares over which a person exercises sole or shared voting or investment
power. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within
60 days of April 30, 2009 are deemed outstanding. These shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and as provided pursuant to applicable community property laws, the
stockholders named in the table have sole voting and investment power with
respect to the shares set forth opposite each stockholder’s name. Unless
otherwise indicated, the address for each of the individuals listed below is:
c/o Stewart & Stevenson LLC, 1000 Louisiana St., Suite 5900,
Houston, Texas 77002.




Number
      of units beneficiallyownedName and address of beneficial
      owner
              Number
      ofunits
              PercentageParman
      Capital Group LLC(1)(2)
              51,750,000
              51.75%EC
      Investments B.V.(3)
              40,005,000
              40.00%Ennia
      Caribe Holding N.V.(4)
              40,005,000
              40.00%Hushang
      Ansary(2)(4)(5)
              51,750,000
              51.75%Robert
      L. Hargrave
              —
              —Gary
      W. Stratulate (8)
              —
              —Jeffery
      W. Merecka
              —
              —Nina
      Ansary(6)
              4,300,000
              4.30%Frank
      C. Carlucci(4)(7)
              3,950,000
              3.95%James
      W. Crystal(4)
              —
              —Jack
      F. Kemp(4)
              —
              —John
      D. Macomber(4)
              —
              —Stephen
      Solarz
              —
              —All
      directors and executive officers as a group
    (11 persons)
              60,000,000
              60.00%




(1)
              Mr. Hushang
      Ansary is the sole member of Parman Capital Group LLC and has sole voting
      and dispositive power with respect to the units held by Parman Capital
      Group LLC.(2)
              Excludes
      12,000,000 units which Parman Capital Group LLC has the right to reacquire
      from EC Investments B.V. until April 2011. Includes 1,000,050 units which
      Parman Capital Group LLC has agreed to sell to Mr.Gary Stratulate and for
      which payment has not been received.(3)
              EC
      Investments B.V. is a wholly owned subsidiary of Ennia Caribe Holding N.V.
      Mr. Steven C. Graybill, the Managing Director of EC Investments B.V.,
      has sole voting and dispositive power with respect to the units held by EC
      Investments B.V.(4)
              Units
      beneficially owned by Ennia Caribe Holding N.V. reflect beneficial
      ownership of units held by EC Investments B.V. Mr. Hushang Ansary is
      Chairman of the Supervisory Board of Ennia Caribe Holding N.V. and is
      Chairman of the Supervisory Board of, and owns a majority equity interest
      in a private investment company that holds a majority equity interest in,
      Ennia Caribe Holding N.V. Messrs. Carlucci, Crystal, Kemp and
      Macomber are also members of the Supervisory Board of Ennia Caribe Holding
      N.V. Each of Messrs. Ansary, Carlucci, Crystal, Kemp and Macomber
      disclaim beneficial ownership of such units.(5)
              Reflects
      beneficial ownership of units held by Parman Capital Group
      LLC.(6)
              Excludes
      1,700,000 units which Ms. Ansary has the right to reacquire from EC
      Investments B.V. until April 2011.(7)
              Reflects
      units held by Frank C. Carlucci III Revocable Trust. Excludes 1,300,000
      units which the Frank C. Carlucci III Revocable Trust has the right to
      reacquire from EC Investments B.V. until April 2011.(8)
              Mr.
      Stratulate was terminated as President, Chief Operating Officer and
      Director effective January 23, 2009. Excludes 1,000,050 units which Parman
      Capital Group LLC has agreed to sell to Mr. Gary Stratulate and for which
      payment has not been made.





42
 Table
of Contents




ITEM13.
            Certain Relationships and
      Related Transactions




James W.
Crystal, a member of our board of directors, is also the Chairman and Chief
Executive Officer of Frank Crystal & Company, Inc., an insurance
brokerage firm. In Fiscal 2008, 2007 and 2006, we purchased insurance coverage
through Frank Crystal & Company, Inc., generating commissions to Frank
Crystal and Company, Inc. of $360,662, $535,568 and $491,507, respectively. The
purchase of this coverage was negotiated on an arm’s length basis and we believe
that the premium was within the range of market prices for similar types of
insurance coverage. We currently anticipate that we will continue to procure
insurance from Frank Crystal & Company, Inc.




In 2006,
we paid ESI Properties LLC, an affiliate of Mr. Ansary, $931,000 as
reimbursement for expenses incurred by us in connection with the SSSI
Acquisition, consisting of $110,000 for air travel, at cost, $21,000 for other
travel expenses, at cost, and $800,000 for legal expenses paid. In addition, we
also paid ESI Properties LLC $1,750,000 to acquire from it, at cost, fractional
ownership of aircraft and $600,000 to acquire from it, at net book value, office
furnishings and equipment. The reimbursed amounts reflect costs actually
incurred for services provided by third parties. We believe the price paid for
the assets acquired was comparable to the price that would have been obtained
from third parties. As ESI Properties LLC is wholly-owned by Mr. Ansary,
the dollar value to Mr. Ansary of the amount paid to ESI Properties LLC is
equal to the entire amount paid. We do not currently anticipate that we will
engage in similar transactions with Mr. Ansary or his affiliates in the
future.




The
Company’s current practice with respect to related party transactions is as
follows: (i) transactions with a value not exceeding $10,000 are subject to
approval by our Chairman (other than transactions in which our Chairman is
party), (ii) transactions in which our Chairman is party or transactions with a
value in excess of $10,000 and not exceeding $100,000 are subject to approval by
our Executive Committee (excluding, as appropriate, the participation of the
member of the Executive Committee party to such transactions) and (iii) all
other transactions are subject to approval of our board of
directors.




ITEM
      14.
            Principal Accountant Fees and
      Services




Ernst and
Young LLP, an independent registered public accounting firm, served as our
auditors for Fiscal 2008 and 2007.




Year
      Ended
                              January
      31, 2009
                            
                            
                            Year
      Ended
                              January
      31, 2008Audit
      fees
                            
                            $
                            2,240,677
                            
                            
                            $
                            2,508,503Audit-related
      fees
                            
                            
                            640,184
                            
                            
                            
                            110,000Tax
      fees
                            
                            
                            12,810
                            
                            
                            
                            11,110All
      other fees
                            
                            
                            43,579
                            
                            
                            
                            —Total
                            
                            $
                            2,937,250
                            
                            
                            $
                            2,629,613





The
nature of each category of fees is described below:





Audit
Fees





Audit
fees relate to the audit of our consolidated financial statements, the reviews
of quarterly reports on Form 10-Q, the review of the annual report on Form 10-K
and assistance with SEC filings including consent and comfort
letters.




Audit-Related
Fees




Audit-related
fees include fees for due diligence related to acquisition transactions and
accounting consultations.




Tax
Fees




Tax
fees relate to tax compliance, tax advice and tax planning
services.




All
Other Fees
  All other
fees principally include risk management advisory services.
  Our audit
committee appoints our independent auditors.  The audit committee is solely
and directly responsible for the approval of the appointment, re-appointment,
compensation and oversight of our independent auditors.  The audit
committee approves in advance all work to be performed by the independent
auditors. Our audit committee has determined that the services provided by Ernst
& Young LLP do not impair its independence from us.


43
 Table of Contents






PART
IV




ITEM15.  Exhibits and Financial
      Statement Schedules




(1) Financial
Statements




The
Consolidated Financial Statements of Stewart & Stevenson LLC and its
subsidiaries and the Report of Independent Registered Public Accounting Firm are
included in this Form 10-K beginning on page F-1:




Description
                Page
      No.Report of Independent Registered Public
      Accounting Firm
                F-1Consolidated Balance
      Sheets
                F-2Consolidated Statements of
      Operations
                F-3Consolidated Statements of
      Stockholders’ Equity
                F-4Consolidated Statements of Cash
      Flows
                F-5Notes to Consolidated Financial
      Statements
                F-6
 (2) Financial Statement
Schedules


All
schedules required by Regulation S-X have been omitted as not applicable or not
required, or the information required has been included in the Notes to the
financial statements.
  (3) Index
to Exhibits


Number
                
                Description3.1
                
                Stewart
      & Stevenson LLC’s Certificate of Formation. (Filed as Exhibit 3.1 to
      the Registrant’s Registration Statement on Form S-4 filed on February 2,
      2007 (File No. 333-140441) and incorporated herein by
      reference.)3.2
                
                Stewart
      & Stevenson LLC’s Operating Agreement. (Filed as Exhibit 3.7 to the
      Registrant’s Registration Statement on Form S-4 filed on February 2, 2007
      (File No. 333-140441) and incorporated herein by
    reference.)10.1
                
                Indenture
      dated as of July 6, 2006, among Stewart & Stevenson LLC, Stewart &
      Stevenson Corp., the Subsidiary Guarantors (as defined therein) and Wells
      Fargo Bank, National Association. (Filed as Exhibit 10.1 to Amendment No.
      1 to the Registrant’s Registration Statement on Form S-1 filed on February
      1, 2007 (File No. 333-138952) and incorporated herein by
      reference.)10.2
                
                Second
      Amended and Restated Credit Agreement dated as of February 13, 2007 by and
      among, Stewart & Stevenson LLC, Stewart & Stevenson Distributor
      Holdings LLC, Stewart & Stevenson Power Products LLC, Stewart &
      Stevenson Petroleum Services LLC, Stewart & Stevenson Funding Corp.,
      S&S Agent LLC, the Canadian Borrowers party thereto, the lenders party
      thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and as U.S.
      Collateral Agent, JPMorgan Chase Bank, NA, Toronto Branch as Canadian
      Administrative Agent and as Canadian Collateral Agent and JPMorgan Chase
      Bank, N.A., as Export-Related Lender. (Filed as Exhibit 10.1 to Amendment
      No. 1 to the Registrant’s Registration Statement of Form S-4 filed on
      February 28, 2007 (File No. 333-140441) and incorporated herein by
      reference.)10.3
                
                Asset
      Purchase Agreement, dated as of October 24, 2005, by and among Stewart
      & Stevenson Services, Inc., IPSC Co. Inc., Stewart & Stevenson
      Holdings, Inc., Stewart & Stevenson De Las Americas, Inc., Stewart
      & Stevenson International, Inc., Stewart & Stevenson Power, Inc.,
      S&S Trust and Hushang Ansary. (Filed as Exhibit 10.3 to Amendment No.
      1 to the Registrant’s Registration Statement on Form S-1 filed on February
      1, 2007 (File No. 333-138952) and incorporated herein by
      reference.)10.4
                
                Asset
      Purchase Agreement, dated as of September 27, 2005, by and among Stewart
      & Stevenson Services, Inc., Stewart & Stevenson Petroleum
      Services, Inc., Stewart & Stevenson International, Inc., Sierra
      Detroit Diesel Allison, Inc., S&S Trust and Hushang
      Ansary.  (Filed as Exhibit 10.4 to Amendment No. 1 to the
      Registrant’s Registration Statement on Form S-1 filed on February 1, 2007
      (File No. 333-138952) and incorporated herein by
    reference.)10.5
                
                Asset
      Purchase Agreement dated February 25, 2007 by and among Stewart &
      Stevenson LLC, Crown Energy Technologies Inc., Crown Energy Technologies,
      Inc., Crown Energy Technologies (Oklahoma) Inc., Crown Energy Technologies
      (Odessa) Inc., Crown Energy Technologies (Victoria) Inc., Crown Energy
      Technologies (Casper) Inc., Crown Energy Technologies (Bakersfield), Inc.,
      Rance E. Fisher, and Todd E. Fisher. (Filed as Exhibit 10.4 to Amendment
      No. 1 to the Registrant’s Registration Statement on Form S-4 filed on
      February 28, 2007 (File No. 333-140441) and incorporated herein by
      reference.)10.6
                
                Stewart
      & Stevenson 2007 Incentive Compensation Plan.  (Filed as
      Exhibit 10.7 to Amendment No. 3 to the Registrant’s Registration Statement
      on Form S-1 filed on September 28, 2007 (File No. 333-138952) and
      incorporated herein by reference.)10.7
                
                Employment
      Agreement, dated as of November 6, 2007, between Stewart & Stevenson
      LLC and Hushang Ansary. (Filed as Exhibit 10.1 to the Registrant’s Current
      Report on Form 8-K filed on November 13, 2007 and incorporated herein by
      reference.)21.1
                
                Subsidiaries
      of the Registrant. (Filed as Exhibit 21.1 to Amendment No. 1 to the
      Registrant’s Registration Statement on Form S-4 filed on February 28, 2007
      (File No. 333-140441) and incorporated herein by
    reference.)31.1
                
                Rule 13a-14(a)/15d-14(a)
      certification of the Principal Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2
                
                Rule 13a-14(a)/15d-14(a)
      certification of the Principal Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1
                
                Section 1350
      certification of the Principal Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                
                Section 1350
      certification of the Principal Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.


44
 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.


STEWART
      & STEVENSON LLCBy:
                /s/
      JEFFERY W. MERECKAVice
      President, Chief Financial Officer and
Secretary





Date: May
1, 2009


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 and on the dates indicated:


Signature
                                                              Title
                                                              Date/s/ HUSHANG
      ANSARY
                                                              Chairman
      of the Board of Directors
                                                              May
      1, 2009Hushang
      Ansary/s/ ROBERT L.
      HARGRAVE
                                                              Chief
      Executive Officer and Director
                                                              May
      1, 2009Robert
      L. Hargrave/s/ JEFFERY W.
      MERECKA
                                                              Vice
      President, Chief Financial Officer and Secretary
                                                              May
      1, 2009Jeffery
      W. Merecka/s/ ANDREW M.
      CANNON
                                                              Chief
      Accounting Officer
                                                              May
      1, 2009Andrew M. Cannon/s/ NINA
      ANSARY
                                                              Director
                                                              May
      1, 2009Nina
      Ansary/s/ FRANK C.
      CARLUCCI
                                                              Director
                                                              May
      1, 2009Frank
      C. Carlucci/s/ JAMES W.
      CRYSTAL
                                                              Director
                                                              May
      1, 2009James
      W. Crystal/s/ JACK F.
      KEMP___________________
                                                              Director
                                                              May
      1, 2009Jack
      F. Kemp/s/ JOHN D.
      MACOMBER
                                                              Director
                                                              May
      1, 2009John
      D. Macomber/s/ STEPHEN
      SOLARZ____________________
                                                              Director
                                                              May
      1, 2009Stephen
      Solarz





45





Report of Independent Registered Public Accounting
Firm





The Board
of Directors and Shareholders


Stewart
& Stevenson LLC





We have
audited the accompanying consolidated balance sheets of Stewart & Stevenson
LLC and subsidiaries as of January 31, 2009 and 2008, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended January 31,
2009.  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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting.  Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and 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 consolidated financial position of Stewart &
Stevenson LLC and subsidiaries at January 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 2009, in conformity with U.S.
generally accepted accounting principles.











/s/ ERNST & YOUNG LLP


Houston,
Texas


May 1,
2009





F-1
 Table
of Contents




Stewart
      & Stevenson LLC and SubsidiariesConsolidated Balance Sheets(In
      thousands, except units)
                                                        
                                                        January
      31, 2009
                                                        
                                                        
                                                        January
      31, 2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                                        
                                                        $
                                                        2,006
                                                        
                                                        
                                                        $
                                                        12,382Restricted
      cash
                                                        
                                                        
                                                        3,000
                                                        
                                                        
                                                        
                                                        3,000Accounts
      receivable, net
                                                        
                                                        
                                                        148,330
                                                        
                                                        
                                                        
                                                        158,338Recoverable
      costs and accrued profits not yet billed
                                                        
                                                        
                                                        54,975
                                                        
                                                        
                                                        
                                                        59,360Inventories,
      net
                                                        
                                                        
                                                        290,294
                                                        
                                                        
                                                        
                                                        289,444Other
      current assets
                                                        
                                                        
                                                        5,651
                                                        
                                                        
                                                        
                                                        3,390Total
      current assets
                                                        
                                                        
                                                        504,256
                                                        
                                                        
                                                        
                                                        525,914Property,
      plant and equipment, net
                                                        
                                                        
                                                        93,170
                                                        
                                                        
                                                        
                                                        82,606Goodwill
      and intangibles, net
                                                        
                                                        
                                                        44,622
                                                        
                                                        
                                                        
                                                        54,659Deferred
      financing costs and other assets
                                                        
                                                        
                                                        9,002
                                                        
                                                        
                                                        
                                                        10,442Total
      assets
                                                        
                                                        $
                                                        651,050
                                                        
                                                        
                                                        $
                                                        673,621Liabilities
      and shareholders' equityCurrent
      liabilities:Bank
      notes payable
                                                        
                                                        $
                                                        4,921
                                                        
                                                        
                                                        $
                                                        3,812Current
      portion of long-term debt
                                                        
                                                        
                                                        212
                                                        
                                                        
                                                        
                                                        259Accounts
      payable
                                                        
                                                        
                                                        103,602
                                                        
                                                        
                                                        
                                                        119,103Accrued
      payrolls and incentives
                                                        
                                                        
                                                        10,854
                                                        
                                                        
                                                        
                                                        12,835Billings
      in excess of incurred costs
                                                        
                                                        
                                                        27,960
                                                        
                                                        
                                                        
                                                        31,958Customer
      deposits
                                                        
                                                        
                                                        20,547
                                                        
                                                        
                                                        
                                                        15,916Other
      current liabilities
                                                        
                                                        
                                                        22,586
                                                        
                                                        
                                                        
                                                        23,959Total
      current liabilities
                                                        
                                                        
                                                        190,682
                                                        
                                                        
                                                        
                                                        207,842Long-term
      debt, net of current portion
                                                        
                                                        
                                                        280,237
                                                        
                                                        
                                                        
                                                        290,521Other
      long-term liabilities
                                                        
                                                        
                                                        187
                                                        
                                                        
                                                        
                                                        317Total
      liabilities
                                                        
                                                        
                                                        471,106
                                                        
                                                        
                                                        
                                                        498,680Commitments
      and contingenciesShareholders'
      equity:Common
      units, 100,005,000 units issued and outstanding
                                                        
                                                        
                                                        74,113
                                                        
                                                        
                                                        
                                                        74,113Accumulated
      other comprehensive income (loss)
                                                        
                                                        
                                                        (3,762
                                                        )
                                                        
                                                        
                                                        8,233Retained
      earnings
                                                        
                                                        
                                                        109,593
                                                        
                                                        
                                                        
                                                        92,595Total
      shareholders' equity
                                                        
                                                        
                                                        179,944
                                                        
                                                        
                                                        
                                                        174,941Total
      liabilities and shareholders' equity
                                                        
                                                        $
                                                        651,050
                                                        
                                                        
                                                        $
                                                        673,621See
      accompanying Notes to Consolidated Financial
  Statements





F-2
 Table
of Contents





Stewart
      & Stevenson LLC and SubsidiariesConsolidated Statements of
      OperationsFiscal
      Year Ended
                      
                      
                      Fiscal
      Year Ended
                      
                      
                      Fiscal
      Year Ended(In
      thousands, except per unit data)
                      
                      January
      31, 2009
                      
                      
                      January
      31, 2008
                      
                      
                      January
      31, 2007Sales
                      
                      $
                      1,217,142
                      
                      
                      $
                      1,335,427
                      
                      
                      $
                      942,148Cost
      of sales
                      
                      
                      1,002,166
                      
                      
                      
                      1,070,396
                      
                      
                      
                      774,060Gross
      profit
                      
                      
                      214,976
                      
                      
                      
                      265,031
                      
                      
                      
                      168,088Selling
      and administrative expenses
                      
                      
                      138,141
                      
                      
                      
                      139,947
                      
                      
                      
                      108,005Other
      income, net
                      
                      
                      (1,311
                      )
                      
                      
                      (989
                      )
                      
                      
                      (1,900
                      )Operating
      profit
                      
                      
                      78,146
                      
                      
                      
                      126,073
                      
                      
                      
                      61,983Interest
      expense, net
                      
                      
                      24,931
                      
                      
                      
                      29,058
                      
                      
                      
                      19,756Earnings
      from continuing operationsbefore
      income taxes
                      
                      
                      53,215
                      
                      
                      
                      97,015
                      
                      
                      
                      42,227Income
      tax expense
                      
                      
                      2,659
                      
                      
                      
                      5,192
                      
                      
                      
                      742Net
      earnings from continuing operations
                      
                      
                      50,556
                      
                      
                      
                      91,823
                      
                      
                      
                      41,485Preferred
      units dividend
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (4,017
                      )Net
      earnings available for common unit holders
                      
                      $
                      50,556
                      
                      
                      $
                      91,823
                      
                      
                      $
                      37,468Weighted
      average units outstanding:Basic
                      
                      
                      100,005
                      
                      
                      
                      100,005
                      
                      
                      
                      80,745Diluted
                      
                      
                      100,005
                      
                      
                      
                      100,005
                      
                      
                      
                      100,005Net
      earnings available for common unitper
      common unitBasic
                      
                      $
                      0.51
                      
                      
                      $
                      0.92
                      
                      
                      $
                      0.46Diluted
                      
                      $
                      0.51
                      
                      
                      $
                      0.92
                      
                      
                      $
                      0.41See
      accompanying Notes to Consolidated Financial Statements





F-3
 Table
of Contents


Stewart
      & Stevenson LLC and SubsidiariesConsolidated Statements of Shareholders'
      Equity(In
      thousands)Preferred
      Units
                    
                    
                    Common
      Units
                    
                    
                    Accumulated
      Other Comprehensive Income (Loss)
                    
                    
                    Retained
      Earnings
                    
                    
                    TotalBalance,
      January 31, 2006
                    
                    $
                    65,128
                    
                    
                    $
                    5,000
                    
                    
                    $
                    (24
                    )
                    
                    $
                    (290
                    )
                    
                    $
                    69,814Net
      earnings
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    41,485
                    
                    
                    
                    41,485Conversion
      of preferred units to common units
                    
                    
                    (65,000
                    )
                    
                    
                    65,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      comprehensive income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    149
                    
                    
                    
                    —
                    
                    
                    
                    149Share-based
      compensation
                    
                    
                    —
                    
                    
                    
                    3,669
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,669Distribution
      to unit holders for tax obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (16,100
                    )
                    
                    
                    (16,100
                    )Preferred
      dividend distributions
                    
                    
                    (128
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (4,017
                    )
                    
                    
                    (4,145
                    )Balance,
      January 31, 2007
                    
                    $
                    —
                    
                    
                    $
                    73,669
                    
                    
                    $
                    125
                    
                    
                    $
                    21,078
                    
                    
                    $
                    94,872Net
      earnings
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    91,823
                    
                    
                    
                    91,823Other
      comprehensive income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8,108
                    
                    
                    
                    —
                    
                    
                    
                    8,108Share-based
      compensation
                    
                    
                    —
                    
                    
                    
                    444
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    444Distributions
      to unit holders for tax obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (20,306
                    )
                    
                    
                    (20,306
                    )Balance,
      January 31, 2008
                    
                    $
                    —
                    
                    
                    $
                    74,113
                    
                    
                    $
                    8,233
                    
                    
                    $
                    92,595
                    
                    
                    $
                    174,941Net
      earnings
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    50,556
                    
                    
                    
                    50,556Other
      comprehensive loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (11,995
                    )
                    
                    
                    —
                    
                    
                    
                    (11,995
                    )Distributions
      to unit holders for tax obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (33,558
                    )
                    
                    
                    (33,558
                    )Balance,
      January 31, 2009
                    
                    $
                    —
                    
                    
                    $
                    74,113
                    
                    
                    $
                    (3,762
                    )
                    
                    $
                    109,593
                    
                    
                    $
                    179,944


See accompanying Notes to Consolidated
Financial Statements




F-4
 Table
of Contents





Stewart & Stevenson LLC and
      SubsidiariesConsolidated Statements of Cash
      FlowsFiscal
      Year Ended
                                                                                                
                                                                                                
                                                                                                Fiscal
      Year Ended
                                                                                                
                                                                                                
                                                                                                Fiscal
      Year Ended(In
      thousands)
                                                                                                
                                                                                                January
      31, 2009
                                                                                                
                                                                                                
                                                                                                January
      31, 2008
                                                                                                
                                                                                                
                                                                                                January
      31, 2007Operating
      activitiesNet
      earnings
                                                                                                
                                                                                                $
                                                                                                50,556
                                                                                                
                                                                                                
                                                                                                $
                                                                                                91,823
                                                                                                
                                                                                                
                                                                                                $
                                                                                                41,485Adjustments
      to reconcile net earnings to net cashprovided
      by operating activities:Amortization
      of deferred financing costs
                                                                                                
                                                                                                
                                                                                                1,980
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,807
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,347Share-based
      compensation expense
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                444
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,669Depreciation
      and amortization
                                                                                                
                                                                                                
                                                                                                18,869
                                                                                                
                                                                                                
                                                                                                
                                                                                                19,237
                                                                                                
                                                                                                
                                                                                                
                                                                                                17,256Non-cash foreign exchange gains, net
                                                                                                
                                                                                                
                                                                                                (3,017
                                                                                                )
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                —Change
      in operating assets and liabilities net of the effectof
      acquisitions:Accounts
      receivable, net
                                                                                                
                                                                                                
                                                                                                7,879
                                                                                                
                                                                                                
                                                                                                
                                                                                                (20,176
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (23,378
                                                                                                )Recoverable
      costs and accrued profits not yet billed
                                                                                                
                                                                                                
                                                                                                4,182
                                                                                                
                                                                                                
                                                                                                
                                                                                                (28,040
                                                                                                )
                                                                                                
                                                                                                
                                                                                                33,314Inventories,
      net
                                                                                                
                                                                                                
                                                                                                (4,387
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (18,142
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (48,424
                                                                                                )Accounts
      payable
                                                                                                
                                                                                                
                                                                                                (12,826
                                                                                                )
                                                                                                
                                                                                                
                                                                                                6,767
                                                                                                
                                                                                                
                                                                                                
                                                                                                13,921Accrued
      payrolls and incentives
                                                                                                
                                                                                                
                                                                                                (1,755
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (4,941
                                                                                                )
                                                                                                
                                                                                                
                                                                                                8,484Billings
      in excess of incurred costs
                                                                                                
                                                                                                
                                                                                                (3,370
                                                                                                )
                                                                                                
                                                                                                
                                                                                                22,765
                                                                                                
                                                                                                
                                                                                                
                                                                                                (2,651
                                                                                                )Customer
      deposits
                                                                                                
                                                                                                
                                                                                                5,143
                                                                                                
                                                                                                
                                                                                                
                                                                                                (41,499
                                                                                                )
                                                                                                
                                                                                                
                                                                                                9,238Other
      current assets and liabilities
                                                                                                
                                                                                                
                                                                                                (1,906
                                                                                                )
                                                                                                
                                                                                                
                                                                                                9,417
                                                                                                
                                                                                                
                                                                                                
                                                                                                (1,553
                                                                                                )Other,
      net
                                                                                                
                                                                                                
                                                                                                (2,878
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (324
                                                                                                )
                                                                                                
                                                                                                
                                                                                                4,469Net
      cash provided by operating activities
                                                                                                
                                                                                                
                                                                                                58,470
                                                                                                
                                                                                                
                                                                                                
                                                                                                39,138
                                                                                                
                                                                                                
                                                                                                
                                                                                                58,177Investing
      activitiesCapital
      expenditures
                                                                                                
                                                                                                
                                                                                                (5,469
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (15,967
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (9,469
                                                                                                )Additions
      to rental equipment
                                                                                                
                                                                                                
                                                                                                (22,333
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (10,294
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (17,321
                                                                                                )Increase
      in restricted cash
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (3,000
                                                                                                )Acquisition
      of businesses
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (70,507
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (8,622
                                                                                                )Disposal
      of property, plant and equipment, net
                                                                                                
                                                                                                
                                                                                                26
                                                                                                
                                                                                                
                                                                                                
                                                                                                1
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,045Net
      cash used in investing activities
                                                                                                
                                                                                                
                                                                                                (27,776
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (96,767
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (36,367
                                                                                                )Financing
      activitiesChange
      in short-term notes payable
                                                                                                
                                                                                                
                                                                                                1,836
                                                                                                
                                                                                                
                                                                                                
                                                                                                377
                                                                                                
                                                                                                
                                                                                                
                                                                                                (560
                                                                                                )Deferred
      financing costs
                                                                                                
                                                                                                
                                                                                                (375
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (2,926
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (5,245
                                                                                                )Issuance
      of senior notes
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                150,000Payments
      on long-term loans
                                                                                                
                                                                                                
                                                                                                (180
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (212
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (56,000
                                                                                                )Changes
      in long-term revolving loans
                                                                                                
                                                                                                
                                                                                                (10,087
                                                                                                )
                                                                                                
                                                                                                
                                                                                                88,520
                                                                                                
                                                                                                
                                                                                                
                                                                                                (83,491
                                                                                                )Distributions
      to shareholders for tax obligations
                                                                                                
                                                                                                
                                                                                                (33,558
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (20,306
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (16,100
                                                                                                )Preferred
      units dividend
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (4,145
                                                                                                )Deferred equity issuance
      costs
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (1,378
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (1,510
                                                                                                )Net cash provided by (used in)
      financing activities
                                                                                                
                                                                                                
                                                                                                (42,364
                                                                                                )
                                                                                                
                                                                                                
                                                                                                64,075
                                                                                                
                                                                                                
                                                                                                
                                                                                                (17,051
                                                                                                )Effect
      of exchange rate on cash
                                                                                                
                                                                                                
                                                                                                1,294
                                                                                                
                                                                                                
                                                                                                
                                                                                                84
                                                                                                
                                                                                                
                                                                                                
                                                                                                —Increase
      (decrease) in cash and cash equivalents
                                                                                                
                                                                                                
                                                                                                (10,376
                                                                                                )
                                                                                                
                                                                                                
                                                                                                6,530
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,759Cash
      and cash equivalents, beginning of fiscal period
                                                                                                
                                                                                                
                                                                                                12,382
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,852
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,093Cash
      and cash equivalents, end of fiscal period
                                                                                                
                                                                                                $
                                                                                                2,006
                                                                                                
                                                                                                
                                                                                                $
                                                                                                12,382
                                                                                                
                                                                                                
                                                                                                $
                                                                                                5,852Cash
      paid for:Interest
                                                                                                
                                                                                                $
                                                                                                22,883
                                                                                                
                                                                                                
                                                                                                $
                                                                                                27,269
                                                                                                
                                                                                                
                                                                                                $
                                                                                                16,775Income
      taxes
                                                                                                
                                                                                                $
                                                                                                4,346
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1,991
                                                                                                
                                                                                                
                                                                                                $
                                                                                                700







See accompanying Notes to Consolidated
Financial Statements




F-5
 Table
of Contents


STEWART
& STEVENSON LLC AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS





Note
1. Company Overview




Stewart &
Stevenson LLC, headquartered in Houston, Texas, was formed in November 2005 for
the purpose of acquiring from Stewart & Stevenson Services, Inc.
(“SSSI”) and its affiliates on January 23, 2006 substantially all of their
equipment, aftermarket parts and service and rental businesses that primarily
served the oil and gas industry as well as the perpetual rights to the
Stewart & Stevenson name and logo for use worldwide (the “SSSI
Acquisition”). Unless otherwise indicated or the context otherwise
requires, the terms “Stewart & Stevenson,” the “Company,” “we,” “our” and
“us” refer to Stewart & Stevenson LLC and its
subsidiaries.




We are a
leading designer, manufacturer and marketer of specialized equipment and provide
aftermarket parts and service to the oil and gas and other industries. Our
diversified product lines include equipment for well stimulation, well servicing
and workover rigs, drilling rigs, coiled tubing, cementing, nitrogen pumping,
power generation and electrical systems as well as engines, transmissions and
material handling equipment. We have a substantial installed base of equipment,
which provides us with significant opportunities for recurring, higher-margin
aftermarket parts and service revenues and also provide rental equipment to our
customers.




On
February 26, 2007 we acquired substantially all of the operating assets and
assumed certain liabilities of Crown Energy Technologies, Inc. and certain of
its affiliates (“Crown”) for cash consideration of approximately
$70.5 million (the “Crown Acquisition”). Crown, which was headquartered in
Calgary, Alberta, Canada and had multiple U.S. operations, manufactured
drilling, well servicing and workover rigs, stimulation equipment and provided
related parts and services. As a result of the Crown Acquisition, we
increased our manufacturing capabilities and broadened the markets we serve with
an extensive manufacturing facility in Calgary, Alberta, Canada and five service
facilities in strategic locations in the United States.





Note
2. Summary of Significant Accounting Policies




Use of Estimates and
Assumptions: The preparation of financial statements in conformity with
generally accepted accounting principles in the United States (“GAAP”) requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses
during the reporting period.  Actual results may differ from these
estimates.




Fiscal Year: Our fiscal year
begins on February 1 of the year stated and ends on January 31 of the following
year.  For example, our “Fiscal 2008” commenced on February 1, 2008
and ended on January 31, 2009.  We report results on the fiscal
quarter method with each quarter comprising approximately 13 weeks.




Consolidation:  The
consolidated financial statements include the accounts of Stewart &
Stevenson LLC and all enterprises in which we have a controlling
interest.  All intercompany accounts and transactions have been
eliminated. We do not have any variable-interest entities.




Cash
Equivalents:  Interest-bearing deposits, investments in
government securities, commercial paper, money market funds and other highly
liquid investments with original maturities of three months or less are
considered cash equivalents.




Accounts Receivable:Accounts
receivable are recorded when billed and represent claims against third parties
that will be settled in cash.  The carrying value of our accounts
receivable, net of the allowance for doubtful accounts, represents the estimated
net realizable value.  We maintain an allowance for doubtful accounts
for estimated losses related to credit extended to our customers. We base such
estimates on our current accounts receivable aging and historical collections
and settlements experience, existing economic conditions and any specific
customer collection issues we have identified. Uncollectible accounts receivable
are written off when we determine that the balance cannot be
collected.




F-6
 Table
of Contents




Derivative financial instrumentsA short-term foreign currency exchange rate derivative instrument was
entered in January 2009 to manage our exposure to fluctuations in foreign
currency exchange rates for certain contracts of our Canadian subsidiary that
are not denominated in its functional currency.  We have obtained a
current valuation for this foreign currency derivative instrument from a
third-party pricing model using observable inputs (Level 2).  The
estimated fair values of a derivative fluctuate over time and should be viewed
in relation to the underlying transaction and the overall management of our
exposure to fluctuations in the underlying risks. The fair value of this
derivative as of January 31, 2009 is a liability of $0.1 million and is included
in other current liabilities within our consolidated balance
sheets.  Hedge accounting for our foreign currency derivative has not
been pursued.  Changes in fair value of the derivative instrument are
recorded in other income, net within our consolidated statements of operations
and amounted to a $0.1 million unrealized loss for Fiscal 2008.




Inventories:  Inventories
are stated at the lower of cost or market, with cost determined on a first-in,
first-out (“FIFO”) basis and market determined on the basis of estimated
realizable values. We purchase a considerable amount of our inventory for resale
from independent manufacturers pursuant to distribution
agreements.  Cost represents invoice or production cost for new items
and original cost less allowance for condition for used equipment
inventory.  Production cost includes material, labor and manufacturing
overhead.  When circumstances dictate, we write inventory down to its
estimated realizable value based upon assumptions about future demand,
technological innovations, market conditions, plans for disposal and the
physical condition of products.  Shipping and handling costs are
expensed as incurred in cost of sales.  Shipping and handling costs
billed to customers are recorded as sales.




Revenue
Recognition:  Revenue from equipment and parts sales is
recognized when the product is shipped, collection is reasonably assured, risks
of ownership have been transferred to and accepted by the customer and contract
terms are met.  Cash discounts or other incentives to customers are
recorded as a reduction of revenue.  Revenue from service agreements
is recognized as earned, when services have been rendered.  Revenue
from rental agreements is recognized on a straight-line basis over the rental
period. We report revenue net of any revenue-based taxes assessed by
governmental authorities.




With
respect to long-term contracts that extend into two or more fiscal quarters,
which accounted for approximately 35.2% of total sales in Fiscal 2008, revenue
is recognized using the percentage-of-completion method.  The majority
of our long-term contracts are fixed-price contracts, and measurement of
progress toward completion is based on direct labor hours
incurred.  Changes in estimates for revenues, costs to complete and
profit margins are recognized in the period in which they are reasonably
determinable.  Any anticipated losses on uncompleted contracts are
recognized whenever evidence indicates that the estimated total cost of a
contract exceeds its estimated total revenue.  With respect to
cost-plus-fixed-fee contracts, we recognize the fee ratably as the actual costs
are incurred, based upon the total fee amounts expected to be realized upon
completion of the contracts.  Bid and proposal costs are expensed as
incurred.




Recoverable
costs and accrued profits not yet billed (“Unbilled Revenue”) represent the
cumulative revenue recognized less the cumulative billings to the customer.
Unbilled Revenue is reported as contracts in progress with costs and estimated
earnings exceeding related progress billings on the consolidated balance sheets.
Any billed revenue that has not been collected is reported as accounts
receivable. The timing of when we bill our customers is generally based upon
advance billing terms or contingent upon completion of certain phases of the
work, as stipulated in the contract. Progress billings in accounts receivable at
January 31, 2009 and 2008 included contract retentions totaling $17.5 million
and $6.3 million, respectively, which are anticipated to be collected
within one year.  Billings in excess of incurred costs represent
progress billings in excess of Unbilled Revenue.




We
frequently sell equipment together with “start-up” services, which typically
involve adding fuel to the engine, starting the equipment for the first time,
and observing it to ensure that it is operating properly.  In cases
where start-up services are required on an equipment sale, the estimated
start-up costs are accrued when revenue from the equipment sale is
recognized.  We had approximately $2.4 million and $1.0 million of
accrued start-up costs that had not yet been performed as of January 31, 2009
and January 31, 2008, respectively.




F-7
 Table
of Contents




Customer
Deposits:  We sometimes collect advance customer deposits to
secure customers’ obligations to pay the purchase price of ordered
equipment.  For long-term construction contracts, these customer
deposits are recorded as current liabilities until construction begins. During
construction, the deposit liability is reclassified into recoverable costs and
accrued profits not yet billed or billings in excess of incurred costs and,
ultimately, recognized into revenue under the percentage-of-completion
method.  For all other sales, these deposits are recorded as current
liabilities until revenue is recognized on delivery.




Property, Plant and
Equipment:  Property, plant and equipment is stated at
historical cost.  Depreciation is computed over the estimated useful
lives of the assets, using the straight-line method.  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 betterment are capitalized. Assets acquired
through acquisitions are depreciated over their remaining useful
lives.  The range of estimated service lives used to calculate
depreciation for new items of property, plant and equipment is as
follows:





Buildings
                      10-25 yearsLeasehold
      improvements
                      Lesser
      of lease term or asset lifeRental
      equipment
                      2-8 yearsMachinery
      and equipment
                      4-7 yearsComputer
      hardware and software
                      3-4 yearsIntangible
      assets
                      4
      months-27 years




We assess
the valuation of components of our property, plant and equipment and other
long-lived assets whenever events or circumstances dictate that the carrying
value might not be recoverable.  We base our evaluation on indicators
such as the nature of the assets, the future economic benefit of the assets, any
historical or future profitability measurements and other external market
conditions or factors that may be present.  If such factors indicate
that the carrying amount of an asset or asset group may not be recoverable, we
determine whether impairment has occurred by analyzing an estimate of
undiscounted future cash flows at the lowest level for which identifiable cash
flows exist.  If the estimate of undiscounted future cash flows during
the estimated useful life of the asset is less than the carrying value of the
asset, we recognize a loss for the difference between the carrying value of the
asset and its estimated fair value, measured by the present value of estimated
future cash flows or third party appraisal, as appropriate under the
circumstances.




Goodwill and Intangible
Assets: We
perform an impairment test for goodwill and indefinite-lived intangible assets
annually during the fourth quarter, or earlier if indicators of potential
impairment exist. Our goodwill impairment test involves a comparison of the fair
value of each of our reporting units with their carrying value. Our impairment
test for indefinite-lived intangible assets involves the comparison of the fair
value of the intangible asset and its carrying value. The fair value is
determined using discounted cash flows and other market-related valuation
models, including earnings multiples and comparable asset market values. Certain
estimates and judgments are required in the application of these fair value
models. The discounted cash flow analysis consists of estimating the future cash
flows that are directly associated with each of our reporting units. These cash
flows, in addition to the earnings multiples and comparable asset market values,
are inherently subjective and require significant estimates based upon
historical experience and future expectations such as budgets and industry
projections. We performed our annual impairment test during the fourth quarter
and determined that no impairment exists.




Insurance:  We
maintain a variety of insurance for our operations that we believe to be
customary and reasonable.  We are self-insured up to certain levels in
the form of deductibles and retentions for general liability, vehicle liability,
group medical and workers compensation claims.  Other than normal
business and contractual risks that are not insurable, our risk is commonly
insured and the effect of a loss occurrence is not expected to be
significant.  We accrue for estimated self-insurance costs and
uninsured exposures based on estimated development of claims filed and an
estimate of claims incurred but not reported.  We regularly review
estimates of reported and unreported claims and provide for losses
accordingly.  Substantially all obligations related to general
liability, vehicle liability, group medical and workers compensation claims
related to the SSSI Acquisition and Crown Acquisition were retained by SSSI and
Crown, respectively.




Advertising:Advertising costs are included in
selling and administrative expenses and are expensed as
incurred.  These expenses totaled $2.8 million, $2.0 million and $1.4
million for Fiscal 2008, 2007 and 2006, respectively.


F-8
 Table
of Contents
  Research and
Development — Expenditures for research and development activities
are charged to expense as incurred and were $3.3 million, $1.8 million and $0.2
million in Fiscal 2008, 2007 and 2006, respectively.
  Translation of Foreign
Currency:  The local currency is the functional currency for
our South American and Canadian subsidiaries and, as such, assets and
liabilities are translated into U.S. dollars at year-end exchange
rates.  Income and expense items are translated at average exchange
rates during the year.  Translation adjustments resulting from changes
in exchange rates are reported in other comprehensive income.  Gains
or losses from foreign currency transactions are recognized in current earnings
as a component of other income, net in our consolidated statements of
operations.




Fair Value of Financial
Instruments:  Our financial instruments consist primarily of
cash equivalents, trade receivables, trade payables and debt
instruments.  The recorded values of cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values.  Generally, our notes payable and revolving
credit facility have interest rates which are tied to current market rates, and
thus, their fair value is consistent with their recorded amounts. The estimated
fair value of our senior notes is based on quoted market prices (Level 1). At
January 31, 2009, our senior notes with a carrying value of $150.0 million had a
fair value of $94.1 million.




Warranty Costs:  We
generally provide product and service warranties for periods of six months to 18
months.  Based on historical experience and contract terms, we provide
for the estimated cost of product and service warranties at the time of sale or,
in some cases, when specific warranty problems are
identified.  Accrued warranty costs are adjusted periodically to
reflect actual experience.  Certain warranty and other related claims
involve matters of dispute that ultimately may be resolved by negotiation,
arbitration or litigation.  Occasionally, a material warranty issue
can arise that is beyond our historical experience.  We provide for
any such warranty issues as they become known and estimable.  See Note
8 – Significant Balance Sheet
Accounts.




Income Taxes: As a limited liability company, income
is reported for federal and state income tax purposes by our unit
holders.Generally, we make quarterly
distributions to our unit holders to fund their tax obligations.  We
are responsible, however, for paying taxes such as Texas Margins tax and other
foreign income taxes.





Note
3. Income Taxes




Our
effective tax rate for Fiscal 2008 was approximately 5.0%, which excludes our
tax distributions to the unit holders of our limited liability company. As a
limited liability company, income is reported for federal and state income tax
purposes (except for the Texas Margins tax and foreign taxes reported at the
entity level) by our unit holders. During Fiscal 2008, we recorded $1.6 million
of Texas Margins tax and $1.1 million of income tax associated with foreign
jurisdictions. Generally, we make quarterly distributions to the unit holders to
fund their tax obligations.  During Fiscal 2008, 2007 and 2006, we
made tax distributions of $33.6 million, $20.3 million and $16.1 million to unit
holders.




The
following table lists the pre-tax earnings by geographic area:





(In
      thousands)
                          
                          Fiscal
      2008
                          
                          
                          Fiscal
      2007
                          
                          
                          Fiscal
      2006Net
      earnings from continuing operations before income taxes:U.S.
                          
                          $
                          52,970
                          
                          
                          $
                          92,305
                          
                          
                          $
                          40,500Foreign
                          
                          
                          245
                          
                          
                          
                          4,710
                          
                          
                          
                          1,727Total
                          
                          $
                          53,215
                          
                          
                          $
                          97,015
                          
                          
                          $
                          42,227




F-9
 Table
of Contents




The
provision for income taxes consisted of the following:




For
      the Fiscal Year EndedJanuary
      31, 2009
                              
                              
                              January
      31, 2008
                              
                              
                              January
      31, 2007(In
      thousands)Current
      expenseU.S.Federal
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —State
                              
                              
                              1,684
                              
                              
                              
                              2,246
                              
                              
                              
                              —Total U.S.
                              
                              
                              1,684
                              
                              
                              
                              2,246
                              
                              
                              
                              —Foreign
                              
                              
                              1,502
                              
                              
                              
                              2,533
                              
                              
                              
                              742Total
      current
                              
                              
                              3,186
                              
                              
                              
                              4,779
                              
                              
                              
                              742Deferred
      expenseU.S.Federal
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —State
                              
                              
                              (104
                              )
                              
                              
                              227
                              
                              
                              
                              —Total U.S.
                              
                              
                              (104
                              )
                              
                              
                              227
                              
                              
                              
                              —Foreign
                              
                              
                              (423
                              )
                              
                              
                              186
                              
                              
                              
                              —Total
      deferred
                              
                              
                              (527
                              )
                              
                              
                              413
                              
                              
                              
                              —Total
      provision for income taxes
                              
                              $
                              2,659
                              
                              
                              $
                              5,192
                              
                              
                              $
                              742


A
reconciliation between the provision for income taxes and income taxes computed
by applying the statutory rate is as follows:




Fiscal
      Year Ended January 31,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007(In
      thousands)Tax
      provision at statutory rate
                                            
                                            $
                                            18,625
                                            
                                            
                                            $
                                            33,955
                                            
                                            
                                            $
                                            14,779Add
      (deduct):State
      income tax
                                            
                                            
                                            1,580
                                            
                                            
                                            
                                            2,473
                                            
                                            
                                            
                                            —Foreign
      credits
                                            
                                            
                                            7
                                            
                                            
                                            
                                            (19
                                            )
                                            
                                            
                                            67LLC
      income not subject to taxation at the statutory rate
                                            
                                            
                                            (17,553
                                            )
                                            
                                            
                                            (31,217
                                            )
                                            
                                            
                                            (14,104
                                            )Total
                                            
                                            
                                            $
                                            2,659
                                            
                                            
                                            $
                                            5,192
                                            
                                            
                                            $
                                            742





Note
4.  Net Earnings Per Share




Statement
of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”requires
dual presentation of earnings per share (“EPS”): Basic EPS and Diluted EPS.
Basic EPS is computed by dividing net earnings or loss available to common unit
holders by the weighted average number of common units outstanding for the
period. For purposes of EPS, one unit is equivalent to one share. Diluted EPS
excludes 485,000 contingent dilutive unvested restricted shares that would be
considered common stock equivalents using the treasury stock method because as
of January 31, 2009, the contingent condition had not occurred.  See
“Item 11 - Equity
Awards” for a discussion of the outstanding restricted share
grants.




F-10
 Table
of Contents




The
following table sets forth the computation of basic and diluted earnings per
common unit:




Fiscal
      Year Ended January 31,2009
                            
                            
                            2008
                            
                            
                            2007(In
      thousands, except per unit data)Numerator:Net
      earnings available for common unit holders
                            
                            $
                            50,556
                            
                            
                            $
                            91,823
                            
                            
                            $
                            37,468Denominator:Basic
      weighted average units outstanding
                            
                            
                            100,005
                            
                            
                            
                            100,005
                            
                            
                            
                            80,745Effect
      of dilutive securities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            19,260Diluted
      weighted average units outstanding
                            
                            
                            100,005
                            
                            
                            
                            100,005
                            
                            
                            
                            100,005Basic
      earnings per unit
                            
                            $
                            0.51
                            
                            
                            $
                            0.92
                            
                            
                            $
                            0.46Diluted
      earnings per unit
                            
                            $
                            0.51
                            
                            
                            $
                            0.92
                            
                            
                            $
                            0.41





Note
5.  Comprehensive Income




Total
comprehensive income is as follows:




Fiscal
      Year Ended January 31,(In
      thousands)
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007Net
      earnings
                        
                        $
                        50,556
                        
                        
                        $
                        91,823
                        
                        
                        $
                        41,485Currency
      translation gain (loss)
                        
                        
                        (11,995
                        )
                        
                        
                        8,108
                        
                        
                        
                        149Comprehensive
      income
                        
                        $
                        38,561
                        
                        
                        $
                        99,931
                        
                        
                        $
                        41,634




Translation adjustments resulting from
changes in exchange rates are reported in other comprehensive
income.  As of January 31, 2009, 2008 and 2007, the entire accumulated
and other comprehensive gain loss balance consisted of currency translation
adjustments.Net foreign currency exchange gains are recorded in other
income, net in the consolidated statements of operations and were $1.3 million,
$0.7 million and $0.1 million during Fiscal 2008, 2007 and 2006,
respectively.





Note
6. Segment Data




Our
reportable operating segments are based on the types of products and services
offered and are aligned with our internal management
structure.  Inter-segment and intra-segment revenues and costs are
eliminated, and the operating profit (loss) represents the earnings (loss)
before interest and income taxes.  The Crown results have been
integrated into our existing segments and aligned with our internal management
structure.  As of February 26, 2007, total assets related to the Crown
Acquisition, including goodwill, were $122.5 million, and were primarily
identified as part of our equipment segment.




F-11
 Table
of Contents




Our
reportable segments include:




Equipment –This segment
designs, manufactures and markets equipment for well stimulation, coiled tubing,
cementing, nitrogen pumping, power generation and electrical systems as well as
workover rigs, drilling rigs, service rigs and related equipment, serving the
oil and gas industry.  This segment also sells engines, transmissions
and material
handling equipment for well servicing, workover, drilling, pumping and other
applications for a wide range of other industries.




Aftermarket Parts and Service –This segment provides aftermarket parts and service for products
manufactured by the Company, and others, to customers in the oil and gas
industry as well as customers in the power generation, marine, mining,
construction, commercial vehicle and material handling industries.




Rental –This segment
provides equipment on a short-term rental basis, including generators, material
handling equipment and air compressors, to a wide range of
end-markets.




Corporate – This segment
includes administrative overhead normally not associated with the specific
activities within the operating segments.  Such expenses include
legal, finance and accounting, internal audit, human resources, information
technology and other similar corporate office costs.




Certain
general and administrative costs which are incurred to support all operating
segments are allocated to the segment operating results presented. Operating
results by segment are as follows:





Fiscal
      Year Ended January 31,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2007(In
      thousands)SalesEquipment
                                                
                                                $
                                                792,919
                                                
                                                
                                                $
                                                930,357
                                                
                                                
                                                $
                                                583,459Aftermarket
      parts and service
                                                
                                                
                                                382,787
                                                
                                                
                                                
                                                376,327
                                                
                                                
                                                
                                                332,434Rental
                                                
                                                
                                                41,436
                                                
                                                
                                                
                                                28,743
                                                
                                                
                                                
                                                26,255Total
      sales
                                                
                                                $
                                                1,217,142
                                                
                                                
                                                $
                                                1,335,427
                                                
                                                
                                                $
                                                942,148Operating
      profit (loss)Equipment
                                                
                                                $
                                                65,049
                                                
                                                
                                                $
                                                101,350
                                                
                                                
                                                $
                                                38,622Aftermarket
      parts and service
                                                
                                                
                                                38,637
                                                
                                                
                                                
                                                44,909
                                                
                                                
                                                
                                                43,069Rental
                                                
                                                
                                                9,420
                                                
                                                
                                                
                                                9,078
                                                
                                                
                                                
                                                8,051Corporate
                                                
                                                
                                                (34,960
                                                )
                                                
                                                
                                                (29,264
                                                )
                                                
                                                
                                                (27,759
                                                )Total
      operating profit
                                                
                                                $
                                                78,146
                                                
                                                
                                                $
                                                126,073
                                                
                                                
                                                $
                                                61,983Operating
      profit percentageEquipment
                                                
                                                
                                                8.2
                                                %
                                                
                                                
                                                10.9
                                                %
                                                
                                                
                                                6.6
                                                %Aftermarket
      parts and service
                                                
                                                
                                                10.1
                                                
                                                
                                                
                                                11.9
                                                
                                                
                                                
                                                13.0Rental
                                                
                                                
                                                22.7
                                                
                                                
                                                
                                                31.6
                                                
                                                
                                                
                                                30.7Consolidated
                                                
                                                
                                                6.4
                                                %
                                                
                                                
                                                9.4
                                                %
                                                
                                                
                                                6.6
                                                %




F-12
 Table
of Contents





Fiscal
      Year Ended January 31,2009
                                
                                
                                2008
                                
                                
                                2007(In
      thousands)AssetsEquipment
                                
                                $
                                238,796
                                
                                
                                $
                                260,899
                                
                                
                                $
                                171,115Aftermarket
      parts and service
                                
                                
                                122,895
                                
                                
                                
                                104,665
                                
                                
                                
                                77,932Rental
                                
                                
                                48,217
                                
                                
                                
                                32,311
                                
                                
                                
                                35,364Corporate
                                
                                
                                241,142
                                
                                
                                
                                275,746
                                
                                
                                
                                172,390Total
      assets
                                
                                $
                                651,050
                                
                                
                                $
                                673,621
                                
                                
                                $
                                456,801








Fiscal
      Year Ended January 31,(In
      thousands)
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007Capital
      ExpendituresEquipment
                                
                                $
                                945
                                
                                
                                $
                                9,867
                                
                                
                                $
                                2,938Aftermarket parts and service
                                
                                
                                2,759
                                
                                
                                
                                5,099
                                
                                
                                
                                1,737Rental
                                
                                
                                22,333
                                
                                
                                
                                10,294
                                
                                
                                
                                17,321Corporate
                                
                                
                                1,765
                                
                                
                                
                                1,001
                                
                                
                                
                                4,794Total
      capital expenditures
                                
                                $
                                27,802
                                
                                
                                $
                                26,261
                                
                                
                                $
                                26,790











Fiscal
      Year Ended January 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007(In
      thousands)Depreciation
      and AmortizationEquipment
                                      
                                      $
                                      6,389
                                      
                                      
                                      $
                                      7,821
                                      
                                      
                                      $
                                      6,718Aftermarket
      parts and service
                                      
                                      
                                      3,925
                                      
                                      
                                      
                                      4,036
                                      
                                      
                                      
                                      1,567Rental
                                      
                                      
                                      7,383
                                      
                                      
                                      
                                      6,027
                                      
                                      
                                      
                                      6,016Corporate
                                      
                                      
                                      1,172
                                      
                                      
                                      
                                      1,353
                                      
                                      
                                      
                                      2,955Total
      depreciation & amortization
                                      
                                      $
                                      18,869
                                      
                                      
                                      $
                                      19,237
                                      
                                      
                                      $
                                      17,256











Geographic
Information:








Fiscal
      Year Ended January 31,(In
      thousands)
                                                                      
                                                                      2009
                                                                      
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      2007SalesUnited
      States
                                                                      
                                                                      $
                                                                      786,641
                                                                      
                                                                      
                                                                      $
                                                                      1,020,036
                                                                      
                                                                      
                                                                      $
                                                                      825,548International
                                                                      
                                                                      
                                                                      430,501
                                                                      
                                                                      
                                                                      
                                                                      315,391
                                                                      
                                                                      
                                                                      
                                                                      116,600Total
                                                                      
                                                                      $
                                                                      1,217,142
                                                                      
                                                                      
                                                                      $
                                                                      1,335,427
                                                                      
                                                                      
                                                                      $
                                                                      942,148As
      of January 31,2009
                                                                      
                                                                      
                                                                      2008AssetsUnited
      States
                                                                      
                                                                      $
                                                                      546,697
                                                                      
                                                                      
                                                                      $
                                                                      553,404International
                                                                      
                                                                      
                                                                      104,353
                                                                      
                                                                      
                                                                      
                                                                      120,217Total
                                                                      
                                                                      $
                                                                      651,050
                                                                      
                                                                      
                                                                      $
                                                                      673,621








F-13
 Table
of Contents




Note 7.  Long-Term
Debt





January
      31, 2009
                            
                            
                            January
      31, 2008(In
      thousands)Other
      debt
                            
                            $
                            5,151
                            
                            
                            $
                            4,286Revolving
      credit facility
                            
                            
                            130,219
                            
                            
                            
                            140,306Unsecured
      senior notes
                            
                            
                            150,000
                            
                            
                            
                            150,000Total
                            
                            
                            285,370
                            
                            
                            
                            294,592Less:  current
      portion of other debt
                            
                            
                            (5,133
                            )
                            
                            
                            (4,071
                            )Long-term
      debt, net of current portion
                            
                            $
                            280,237
                            
                            
                            $
                            290,521





Other debt:Other debt includes
certain secured loans from our South American operations, a floor plan financing
agreement and other equipment loans.  The restricted cash on our
balance sheet relates to collateral securing certain of this
debt. The interest rate for the floor plan financing agreement was
3.3%, 6.0% and 8.2% in Fiscal 2008, 2007 and 2006, respectively.  The
weighted average interest rate for the South American operations debt was
11.7%, 12.1% and 9.6% in Fiscal 2008, 2007 and 2006, respectively.




Revolving Credit Facility: In
February 2007, we amended our senior credit facility, increased the revolving
credit facility to $250.0 million and added a $25.0 million sub-facility to be
used by our Canadian subsidiary which we established as part of the Crown
Acquisition.  The amended $250.0 million revolving credit facility,
which matures in February 2012, is an asset-based revolving credit facility
which is secured by substantially all accounts receivable, inventory and
property, plant and equipment and provides for borrowings at LIBOR plus a margin
ranging from 1.25% to 2.00% per annum, based on our leverage ratios, as
specified in the credit agreement.  As of January 31, 2009, borrowings
under the revolving credit facility bear interest at LIBOR plus 1.5%, or
2.7%.  A commitment fee of 0.30% to 0.375% per annum is payable on all
unused portions of the revolving credit facility based on our leverage
ratios.  Interest payments are due monthly, or as LIBOR contracts
expire.  The revolving credit facility also has a $30.0 million
sub-facility which may be used for letters of credit.  The credit
agreement limits available borrowings to certain percentages of our assets as
specified by the lenders.  As of January 31, 2009, there were $19.9
million of letters of credit outstanding.  Based on the outstanding
borrowings, letters of credit issued and the terms of the asset-based revolving
credit facility, our available borrowing capacity was approximately $83.1
million at January 31, 2009.




Unsecured Senior Notes:
During the second quarter of Fiscal 2006, we issued $150.0 million of senior
unsecured notes, bearing interest at 10.0% per annum and maturing in July
2014.  The net proceeds from the issuance of the notes were applied to
pay off the outstanding term loans and reduce the borrowings under the revolving
credit facility.  In connection with the senior notes issuance, we
entered into a registration rights agreement which required us to make
reasonable best efforts to file a registration statement with the Securities and
Exchange Commission and effect a registered exchange offer in respect of the
senior notes.  We filed a registration statement with the Securities
and Exchange Commission on February 2, 2007 and received clearance to effect the
exchange offer on July 25, 2007.  As per the terms of the indenture,
the senior notes became subject to an escalated rate of 10.5% as of July 1,
2007, which remained in effect until August 22, 2007 when the registration of
the notes and the related exchange were completed. On August 22, 2007 the senior
notes reverted back to an interest rate of 10.0%.  The escalated
interest rate did not have a material impact on Fiscal 2007
results.




F-14
 Table
of Contents




The
revolving credit facility and the senior notes contain financial and operating
covenants with which we must comply during the terms of the
agreements.  These covenants include the maintenance of certain
financial ratios, restrictions related to the incurrence of certain indebtedness
and investments, and prohibition of the creation of certain
liens.  The financial covenant for the revolving credit facility
requires a fixed charge coverage ratio, as defined in the underlying agreement,
of at least 1.1 to 1.0; however, this covenant does not take effect until our
available borrowing capacity is $30.0 million or less.  The financial
covenant for the senior notes is applicable were we to incur additional
indebtedness (subject to various exceptions set forth in the underlying
indenture) and requires that, after giving effect to the incurrence of such
additional indebtedness, we have a consolidated coverage ratio, as defined in
the underlying indenture, of at least 2.5 to 1.0. We were in compliance with all
covenants as of January 31, 2009.




We
incurred $3.3 million of capitalized legal and financing charges associated with
establishing the original $250.0 million senior credit facility, which are being
amortized over the five year term of the facility.  As a result of the
amendment reducing the facility to $125.0 million in June 2006, we recorded a
$1.5 million non-cash charge during the second quarter of Fiscal 2006 as
interest expense.  We also incurred $5.1 million of capitalized legal
and financing charges associated with the issuance of the $150.0 million senior
unsecured notes during the second quarter of Fiscal 2006.  These costs
are being amortized over the eight year term of the notes.  During the
first quarter of Fiscal 2007, we incurred $2.2 million of capitalized legal and
financing costs associated with the February 2007 amendment to the senior credit
facility.  As of January 31, 2009, $7.2 million of unamortized costs
are included in the balance sheet.




Guarantor
entities:  The senior notes were co-issued by Stewart &
Stevenson, LLC and Stewart & Stevenson Funding Corp. and are guaranteed by
all of our subsidiaries except one domestic subsidiary, one subsidiary in Canada
and two subsidiaries in South America.  Stewart & Stevenson LLC and all
of its subsidiaries except one domestic subsidiary, one subsidiary in Canada and
two subsidiaries in South America are co-borrowers on the $250.0 million
revolving credit facility.




The
following condensed consolidated financial statements present separately the
financial position, results of operations and cash flows of the
co-issuers/guarantors (“Guarantor Entities”), and all non-guarantor subsidiaries
of the Company based on the equity method of accounting.








Condensed
      Consolidating Balance SheetAs
      of January 31, 2009Guarantor
      Entities
                                                                  
                                                                  
                                                                  Non-Guarantor
      Entities
                                                                  
                                                                  
                                                                  Eliminations
                                                                  
                                                                  
                                                                  Total(In
      thousands)Current
      assets
                                                                  
                                                                  $
                                                                  431,156
                                                                  
                                                                  
                                                                  $
                                                                  73,100
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  504,256Property,
      plant and equipment
                                                                  
                                                                  
                                                                  89,472
                                                                  
                                                                  
                                                                  
                                                                  3,698
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  93,170Other
      assets
                                                                  
                                                                  
                                                                  48,254
                                                                  
                                                                  
                                                                  
                                                                  31,311
                                                                  
                                                                  
                                                                  
                                                                  (25,941
                                                                  )
                                                                  
                                                                  
                                                                  53,624Total
      assets
                                                                  
                                                                  $
                                                                  568,882
                                                                  
                                                                  
                                                                  $
                                                                  108,109
                                                                  
                                                                  
                                                                  $
                                                                  (25,941
                                                                  )
                                                                  
                                                                  $
                                                                  651,050Current
      liabilities
                                                                  
                                                                  $
                                                                  167,028
                                                                  
                                                                  
                                                                  $
                                                                  23,654
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  190,682Intercompany
      payables (receivables)
                                                                  
                                                                  
                                                                  (58,310
                                                                  )
                                                                  
                                                                  
                                                                  58,310
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Long-term
      liabilities
                                                                  
                                                                  
                                                                  280,220
                                                                  
                                                                  
                                                                  
                                                                  204
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  280,424Shareholders'
      equity
                                                                  
                                                                  
                                                                  179,944
                                                                  
                                                                  
                                                                  
                                                                  25,941
                                                                  
                                                                  
                                                                  
                                                                  (25,941
                                                                  )
                                                                  
                                                                  
                                                                  179,944Total
      liabilities and shareholders' equity
                                                                  
                                                                  $
                                                                  568,882
                                                                  
                                                                  
                                                                  $
                                                                  108,109
                                                                  
                                                                  
                                                                  $
                                                                  (25,941
                                                                  )
                                                                  
                                                                  $
                                                                  651,050  F-15
 Table
of Contents
  Condensed Consolidating Balance
      SheetAs
      of January 31, 2008Guarantor
      Entities
                                                                    
                                                                    
                                                                    Non-Guarantor
      Entities
                                                                    
                                                                    
                                                                    Eliminations
                                                                    
                                                                    
                                                                    TotalCurrent
      assets
                                                                    
                                                                    $
                                                                    446,151
                                                                    
                                                                    
                                                                    $
                                                                    79,763
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    525,914Property,
      plant and equipment
                                                                    
                                                                    
                                                                    76,642
                                                                    
                                                                    
                                                                    
                                                                    5,964
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    82,606Other
      assets
                                                                    
                                                                    
                                                                    62,346
                                                                    
                                                                    
                                                                    
                                                                    39,918
                                                                    
                                                                    
                                                                    
                                                                    (37,163
                                                                    )
                                                                    
                                                                    
                                                                    65,101Total
      Assets
                                                                    
                                                                    $
                                                                    585,139
                                                                    
                                                                    
                                                                    $
                                                                    125,645
                                                                    
                                                                    
                                                                    $
                                                                    (37,163
                                                                    )
                                                                    
                                                                    $
                                                                    673,621Current
      liabilities
                                                                    
                                                                    $
                                                                    159,944
                                                                    
                                                                    
                                                                    $
                                                                    47,898
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    207,842Intercompany
      payables (receivables)
                                                                    
                                                                    
                                                                    (40,053
                                                                    )
                                                                    
                                                                    
                                                                    40,053
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Long-term
      liabilities
                                                                    
                                                                    
                                                                    290,307
                                                                    
                                                                    
                                                                    
                                                                    531
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    290,838Shareholders'
      equity
                                                                    
                                                                    
                                                                    174,941
                                                                    
                                                                    
                                                                    
                                                                    37,163
                                                                    
                                                                    
                                                                    
                                                                    (37,163
                                                                    )
                                                                    
                                                                    
                                                                    174,941Total
      liabilities and shareholders' equity
                                                                    
                                                                    $
                                                                    585,139
                                                                    
                                                                    
                                                                    $
                                                                    125,645
                                                                    
                                                                    
                                                                    $
                                                                    (37,163
                                                                    )
                                                                    
                                                                    $
                                                                    673,621








Condensed Consolidated Results of
      OperationsFiscal
      Year Ended January 31, 2009(In
      thousands)
                                          
                                          Guarantor
      Entities
                                          
                                          
                                          Non-Guarantor
      Entities
                                          
                                          
                                          Eliminations
                                          
                                          
                                          Consolidated
      TotalsSales
                                          
                                          $
                                          1,080,120
                                          
                                          
                                          $
                                          137,022
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          1,217,142Cost
      of sales
                                          
                                          
                                          885,866
                                          
                                          
                                          
                                          116,300
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,002,166Gross
      profit
                                          
                                          
                                          194,254
                                          
                                          
                                          
                                          20,722
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          214,976Selling
      and administrative expenses
                                          
                                          
                                          118,844
                                          
                                          
                                          
                                          19,297
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          138,141Equity
      in earnings of subsidiaries
                                          
                                          
                                          (759
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          759
                                          
                                          
                                          
                                          —Other
      (income) expense, net
                                          
                                          
                                          1,809
                                          
                                          
                                          
                                          (3,120
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,311
                                          )Operating
      profit (loss)
                                          
                                          
                                          74,360
                                          
                                          
                                          
                                          4,545
                                          
                                          
                                          
                                          (759
                                          )
                                          
                                          
                                          78,146Interest
      expense, net
                                          
                                          
                                          22,021
                                          
                                          
                                          
                                          2,910
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          24,931Earnings
      before income taxes
                                          
                                          
                                          52,339
                                          
                                          
                                          
                                          1,635
                                          
                                          
                                          
                                          (759
                                          )
                                          
                                          
                                          53,215Income
      tax provision
                                          
                                          
                                          1,783
                                          
                                          
                                          
                                          876
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          2,659Net
      earnings
                                          
                                          $
                                          50,556
                                          
                                          
                                          $
                                          759
                                          
                                          
                                          $
                                          (759
                                          )
                                          
                                          $
                                          50,556Fiscal
      Year Ended January 31, 2008Guarantor
      Entities
                                          
                                          
                                          Non-Guarantor
      Entities
                                          
                                          
                                          Eliminations
                                          
                                          
                                          Consolidated
      TotalsSales
                                          
                                          $
                                          1,177,294
                                          
                                          
                                          $
                                          158,133
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          1,335,427Cost
      of sales
                                          
                                          
                                          939,376
                                          
                                          
                                          
                                          131,020
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          1,070,396Gross
      profit
                                          
                                          
                                          237,918
                                          
                                          
                                          
                                          27,113
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          265,031Selling
      and administrative expenses
                                          
                                          
                                          121,073
                                          
                                          
                                          
                                          18,874
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          139,947Equity
      in earnings of subsidiaries
                                          
                                          
                                          (3,489
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          3,489
                                          
                                          
                                          
                                          —Other
      income, net
                                          
                                          
                                          (219
                                          )
                                          
                                          
                                          (770
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (989
                                          )Operating
      profit (loss)
                                          
                                          
                                          120,553
                                          
                                          
                                          
                                          9,009
                                          
                                          
                                          
                                          (3,489
                                          )
                                          
                                          
                                          126,073Interest
      expense, net
                                          
                                          
                                          26,300
                                          
                                          
                                          
                                          2,758
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          29,058Earnings
      before income taxes
                                          
                                          
                                          94,253
                                          
                                          
                                          
                                          6,251
                                          
                                          
                                          
                                          (3,489
                                          )
                                          
                                          
                                          97,015Income
      tax provision
                                          
                                          
                                          2,430
                                          
                                          
                                          
                                          2,762
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          5,192Net
      earnings
                                          
                                          $
                                          91,823
                                          
                                          
                                          $
                                          3,489
                                          
                                          
                                          $
                                          (3,489
                                          )
                                          
                                          $
                                          91,823  F-16
 Table
of Contents
  Condensed Consolidated Results of
      OperationsFiscal
      Year Ended January 31, 2007Guarantor
      Entities
                                            
                                            
                                            Non-Guarantor
      Entities
                                            
                                            
                                            Eliminations
                                            
                                            
                                            Consolidated
      TotalsSales
                                            
                                            $
                                            891,727
                                            
                                            
                                            $
                                            50,421
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            942,148Cost
      of sales
                                            
                                            
                                            729,789
                                            
                                            
                                            
                                            44,271
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            774,060Gross
      profit
                                            
                                            
                                            161,938
                                            
                                            
                                            
                                            6,150
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            168,088Selling
      and administrative expenses
                                            
                                            
                                            103,201
                                            
                                            
                                            
                                            4,804
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            108,005Equity
      in earnings of subsidiaries
                                            
                                            
                                            (399
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            399
                                            
                                            
                                            
                                            —Other
      income, net
                                            
                                            
                                            (1,814
                                            )
                                            
                                            
                                            (86
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (1,900
                                            )Operating
      profit (loss)
                                            
                                            
                                            60,950
                                            
                                            
                                            
                                            1,432
                                            
                                            
                                            
                                            (399
                                            )
                                            
                                            
                                            61,983Interest
      expense, net
                                            
                                            
                                            19,465
                                            
                                            
                                            
                                            291
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            19,756Earnings
      before income taxes
                                            
                                            
                                            41,485
                                            
                                            
                                            
                                            1,141
                                            
                                            
                                            
                                            (399
                                            )
                                            
                                            
                                            42,227Income
      tax provision
                                            
                                            
                                            —
                                            
                                            
                                            
                                            742
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            742Net
      earnings
                                            
                                            $
                                            41,485
                                            
                                            
                                            $
                                            399
                                            
                                            
                                            $
                                            (399
                                            )
                                            
                                            $
                                            41,485








Condensed
      Consolidated Cash FlowsFiscal
      Year Ended January 31, 2009(In
      thousands)
                                                                      
                                                                      Guarantor
      Entities
                                                                      
                                                                      
                                                                      Non-Guarantor
      Entities
                                                                      
                                                                      
                                                                      Eliminations
                                                                      
                                                                      
                                                                      Consolidated
      TotalsNet
      cash provided by (used for):Operating
      activities:Net
      income
                                                                      
                                                                      $
                                                                      50,556
                                                                      
                                                                      
                                                                      $
                                                                      759
                                                                      
                                                                      
                                                                      $
                                                                      (759
                                                                      )
                                                                      
                                                                      $
                                                                      50,556Equity
      in earnings of subsidiaries
                                                                      
                                                                      
                                                                      (759
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      759
                                                                      
                                                                      
                                                                      
                                                                      —Other
      adjustments
                                                                      
                                                                      
                                                                      34,180
                                                                      
                                                                      
                                                                      
                                                                      (26,266
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      7,914Total
      operating activities
                                                                      
                                                                      
                                                                      83,977
                                                                      
                                                                      
                                                                      
                                                                      (25,507
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      58,470Investing
      activities
                                                                      
                                                                      
                                                                      (27,971
                                                                      )
                                                                      
                                                                      
                                                                      195
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (27,776
                                                                      )Financing
      activities
                                                                      
                                                                      
                                                                      (61,937
                                                                      )
                                                                      
                                                                      
                                                                      19,573
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (42,364
                                                                      )Effect
      of exchange rate on cash
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,294
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      1,294Net
      increase (decrease) in cash
                                                                      
                                                                      
                                                                      (5,931
                                                                      )
                                                                      
                                                                      
                                                                      (4,445
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (10,376
                                                                      )Cash
      at the beginning of the period
                                                                      
                                                                      
                                                                      5,957
                                                                      
                                                                      
                                                                      
                                                                      6,425
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      12,382Cash
      at the end of the period
                                                                      
                                                                      $
                                                                      26
                                                                      
                                                                      
                                                                      $
                                                                      1,980
                                                                      
                                                                      
                                                                      $
                                                                      —
                                                                      
                                                                      
                                                                      $
                                                                      2,006Fiscal
      Year Ended January 31, 2008Guarantor
      Entities
                                                                      
                                                                      
                                                                      Non-Guarantor
      Entities
                                                                      
                                                                      
                                                                      Eliminations
                                                                      
                                                                      
                                                                      Consolidated
      TotalsNet
      cash provided by (used for):Operating
      activities:Net
      income
                                                                      
                                                                      $
                                                                      91,823
                                                                      
                                                                      
                                                                      $
                                                                      3,489
                                                                      
                                                                      
                                                                      $
                                                                      (3,489
                                                                      )
                                                                      
                                                                      $
                                                                      91,823Equity
      in earnings of subsidiaries
                                                                      
                                                                      
                                                                      (3,489
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      3,489
                                                                      
                                                                      
                                                                      
                                                                      —Other
      adjustments
                                                                      
                                                                      
                                                                      (48,640
                                                                      )
                                                                      
                                                                      
                                                                      (4,045
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (52,685
                                                                      )Total
      operating activities
                                                                      
                                                                      
                                                                      39,694
                                                                      
                                                                      
                                                                      
                                                                      (556
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      39,138Investing
      activities
                                                                      
                                                                      
                                                                      (64,461
                                                                      )
                                                                      
                                                                      
                                                                      (32,306
                                                                      )
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      (96,767
                                                                      )Financing
      activities
                                                                      
                                                                      
                                                                      27,375
                                                                      
                                                                      
                                                                      
                                                                      36,700
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      64,075Effect
      of exchange rate on cash
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      84
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      84Net
      increase (decrease) in cash
                                                                      
                                                                      
                                                                      2,608
                                                                      
                                                                      
                                                                      
                                                                      3,922
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      6,530Cash
      at the beginning of the period
                                                                      
                                                                      
                                                                      3,349
                                                                      
                                                                      
                                                                      
                                                                      2,503
                                                                      
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      5,852Cash
      at the end of the period
                                                                      
                                                                      $
                                                                      5,957
                                                                      
                                                                      
                                                                      $
                                                                      6,425
                                                                      
                                                                      
                                                                      $
                                                                      —
                                                                      
                                                                      
                                                                      $
                                                                      12,382
  F-17
 Table
of Contents
 Condensed Consolidated Cash
      FlowsFiscal
      Year Ended January 31, 2007Guarantor
      Entities
                                                
                                                
                                                Non-Guarantor
      Entities
                                                
                                                
                                                Eliminations
                                                
                                                
                                                Consolidated
      TotalsNet
      cash provided by (used for):Operating
      activities:Net
      income
                                                
                                                $
                                                41,485
                                                
                                                
                                                $
                                                399
                                                
                                                
                                                $
                                                (399
                                                )
                                                
                                                $
                                                41,485Equity
      in earnings of subsidiaries
                                                
                                                
                                                (399
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                399
                                                
                                                
                                                
                                                —Other
      adjustments
                                                
                                                
                                                17,037
                                                
                                                
                                                
                                                (345
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                16,692Total
      operating activities
                                                
                                                
                                                58,123
                                                
                                                
                                                
                                                54
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                58,177Investing
      activities
                                                
                                                
                                                (35,880
                                                )
                                                
                                                
                                                (487
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (36,367
                                                )Financing
      activities
                                                
                                                
                                                (18,916
                                                )
                                                
                                                
                                                1,865
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (17,051
                                                )Net
      increase (decrease) in cash
                                                
                                                
                                                3,327
                                                
                                                
                                                
                                                1,432
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                4,759Cash
      at the beginning of the period
                                                
                                                
                                                22
                                                
                                                
                                                
                                                1,071
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,093Cash
      at the end of the period
                                                
                                                $
                                                3,349
                                                
                                                
                                                $
                                                2,503
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                5,852





Note
8.  Significant Balance Sheet Accounts





Allowance for Doubtful
Accounts:Activity in the allowance for doubtful accounts was
as follows:




Fiscal
      Year Ended January 31,(In
      thousands)
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007Allowance
      for doubtful accounts at beginning of period
                            
                            $
                            3,140
                            
                            
                            $
                            1,725
                            
                            
                            $
                            1,627Acquired
      reserves
                            
                            
                            —
                            
                            
                            
                            1,359
                            
                            
                            
                            —Accruals
      to bad debt expense
                            
                            
                            1,281
                            
                            
                            
                            1,048
                            
                            
                            
                            1,830Write-offs
      against allowance for doubtful accounts
                            
                            
                            (1,189
                            )
                            
                            
                            (1,205
                            )
                            
                            
                            (1,732
                            )Collections
      of previously reserved items
                            
                            
                            367
                            
                            
                            
                            213
                            
                            
                            
                            —Allowance
      for doubtful accounts at end of period
                            
                            $
                            3,599
                            
                            
                            $
                            3,140
                            
                            
                            $
                            1,725




Inventories:  Summarized
below are the components of inventories:




As
      of January 31,2009
                            
                            
                            2008(In
      thousands)Inventory
      purchased under distributor agreements
                            
                            $
                            124,844
                            
                            
                            $
                            125,062Raw
      materials and spare parts
                            
                            
                            111,848
                            
                            
                            
                            125,732Work
      in process
                            
                            
                            53,602
                            
                            
                            
                            38,650Total
      Inventories
                            
                            $
                            290,294
                            
                            
                            $
                            289,444




Raw
materials and spare parts include OEM equipment and components used in the
equipment segment.  The inventory balances above are net of inventory
valuation allowances of $13.0 million and $12.3 million at January 31, 2009 and
January 31, 2008, respectively.




F-18
 Table
of Contents




Contracts in
Process:Recoverable costs and accrued profits not yet billed primarily
relate to oilfield service equipment projects which extend beyond two fiscal
quarters.  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 costs are classified as current
liabilities.  Progress billings on contracts are made in accordance
with the terms and conditions of the contracts, which often differ from the
revenue recognition process.  A summary of the status of uncompleted
contracts is as follows:





As
      of January 31,(In
      thousands)
                                    
                                    2009
                                    
                                    
                                    2008Costs
      incurred on uncompleted contracts
                                    
                                    $
                                    143,882
                                    
                                    
                                    $
                                    221,732Accrued
      profits
                                    
                                    
                                    39,893
                                    
                                    
                                    
                                    58,359$
                                    183,775
                                    
                                    
                                    $
                                    280,091Less
      Billings to Date
                                    
                                    
                                    (156,760
                                    )
                                    
                                    
                                    (252,689
                                    )$
                                    27,015
                                    
                                    
                                    $
                                    27,402Recoverable
      costs and accrued profits not yet billed
                                    
                                    $
                                    54,975
                                    
                                    
                                    $
                                    59,360Billings
      in excess of incurred costs
                                    
                                    
                                    (27,960
                                    )
                                    
                                    
                                    (31,958
                                    )$
                                    27,015
                                    
                                    
                                    $
                                    27,402




Property, Plant and
Equipment:Components of property, plant and equipment, net,
were as follows:




As
      of January 31,2009
                              
                              
                              2008(In thousands)Machinery
      and equipment
                              
                              $
                              25,841
                              
                              
                              $
                              23,031Buildings
      and leasehold improvements
                              
                              
                              27,082
                              
                              
                              
                              25,705Rental
      equipment
                              
                              
                              63,947
                              
                              
                              
                              42,615Computer
      hardware and software
                              
                              
                              3,043
                              
                              
                              
                              2,861Accumulated
      depreciation
                              
                              
                              (35,420
                              )
                              
                              
                              (21,954
                              )Net
      depreciable assets
                              
                              
                              84,493
                              
                              
                              
                              72,258Construction
      in progress
                              
                              
                              1,629
                              
                              
                              
                              3,576Land
                              
                              
                              7,048
                              
                              
                              
                              6,772Property,
      plant and equipment, net
                              
                              $
                              93,170
                              
                              
                              $
                              82,606





Depreciation
expense was $15.7 million, $11.4 million and $10.2 million in Fiscal 2008, 2007
and 2006, respectively.




Rental
equipment includes forklift equipment, generator sets and other equipment that
is leased to customers under operating lease arrangements with terms ranging
from one month up to three years. Rental equipment is depreciated over its
estimated useful life, and is occasionally transferred into finished goods
inventory for resale to customers.




F-19
 Table
of Contents




Intangible Assets and Goodwill:Amounts allocated to intangible assets are amortized on a straight-line
basis over their estimated useful lives. Intangible assets include the
following:





As
      of January 31, 2009(In
      thousands)
                                                    
                                                    Estimated
      Useful Life
                                                    
                                                    
                                                    Gross
      Carrying Value
                                                    
                                                    
                                                    Accumulated
      Amortization
                                                    
                                                    
                                                    Currency
      Translation
                                                    
                                                    
                                                    NetNon-current
      amortizable intangible assets:Engineering
      drawings
                                                    
                                                    2.5-10
      Yrs.
                                                    
                                                    
                                                    $
                                                    6,346
                                                    
                                                    
                                                    $
                                                    (3,824
                                                    )
                                                    
                                                    $
                                                    157
                                                    
                                                    
                                                    $
                                                    2,679Distribution
      contracts
                                                    
                                                    27
      Yrs.
                                                    
                                                    
                                                    
                                                    3,384
                                                    
                                                    
                                                    
                                                    (373
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    3,011Customer
      relationships
                                                    
                                                    6-11
      Yrs.
                                                    
                                                    
                                                    
                                                    7,409
                                                    
                                                    
                                                    
                                                    (1,587
                                                    )
                                                    
                                                    
                                                    (140
                                                    )
                                                    
                                                    
                                                    5,682Patents
                                                    
                                                    4
      Yrs.
                                                    
                                                    
                                                    
                                                    209
                                                    
                                                    
                                                    
                                                    (135
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    74Non-compete
      covenant
                                                    
                                                    5
      Yrs.
                                                    
                                                    
                                                    
                                                    1,420
                                                    
                                                    
                                                    
                                                    (580
                                                    )
                                                    
                                                    
                                                    2
                                                    
                                                    
                                                    
                                                    842Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    18,768
                                                    
                                                    
                                                    
                                                    (6,499
                                                    )
                                                    
                                                    
                                                    19
                                                    
                                                    
                                                    
                                                    12,288Indefinite-lived
      intangible assets:Trademarks
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    9,130
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (125
                                                    )
                                                    
                                                    
                                                    9,005Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    27,898
                                                    
                                                    
                                                    $
                                                    (6,499
                                                    )
                                                    
                                                    $
                                                    (106
                                                    )
                                                    
                                                    $
                                                    21,293As
      of January 31, 2008(In
      thousands)
                                                    
                                                    Estimated
      Useful Life
                                                    
                                                    
                                                    Gross
      Carrying Value
                                                    
                                                    
                                                    Accumulated
      Amortization
                                                    
                                                    
                                                    Currency
      Translation
                                                    
                                                    
                                                    NetNon-current
      amortizable intangible assets:Engineering
      drawings
                                                    
                                                    2.5-10
      Yrs.
                                                    
                                                    
                                                    $
                                                    6,346
                                                    
                                                    
                                                    $
                                                    (1,984
                                                    )
                                                    
                                                    $
                                                    399
                                                    
                                                    
                                                    $
                                                    4,761Distribution
      contracts
                                                    
                                                    27
      Yrs.
                                                    
                                                    
                                                    
                                                    3,384
                                                    
                                                    
                                                    
                                                    (248
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    3,136Customer
      relationships
                                                    
                                                    6-11
      Yrs.
                                                    
                                                    
                                                    
                                                    7,409
                                                    
                                                    
                                                    
                                                    (713
                                                    )
                                                    
                                                    
                                                    741
                                                    
                                                    
                                                    
                                                    7,437Patents
                                                    
                                                    4
      Yrs.
                                                    
                                                    
                                                    
                                                    209
                                                    
                                                    
                                                    
                                                    (93
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    116Non-compete
      covenant
                                                    
                                                    5
      Yrs.
                                                    
                                                    
                                                    
                                                    1,420
                                                    
                                                    
                                                    
                                                    (280
                                                    )
                                                    
                                                    
                                                    150
                                                    
                                                    
                                                    
                                                    1,290Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    18,768
                                                    
                                                    
                                                    
                                                    (3,318
                                                    )
                                                    
                                                    
                                                    1,290
                                                    
                                                    
                                                    
                                                    16,740Indefinite-lived
      intangible assets:Trademarks
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    9,130
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    357
                                                    
                                                    
                                                    
                                                    9,487Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    27,898
                                                    
                                                    
                                                    $
                                                    (3,318
                                                    )
                                                    
                                                    $
                                                    1,647
                                                    
                                                    
                                                    $
                                                    26,227





Amortization
expense for the next 5 years is expected to be as follows:





(In
      thousands)
                                      
                                      AmountFiscal
      2009
                                      
                                      $
                                      2,110Fiscal
      2010
                                      
                                      
                                      1,430Fiscal
      2011
                                      
                                      
                                      1,379Fiscal
      2012
                                      
                                      
                                      1,010Fiscal
      2013
                                      
                                      
                                      1,001Total
                                      
                                      $
                                      6,930




The
following table presents goodwill, which resulted from the Crown Acquisition, as
of the dates indicated, as well as changes in the account during the period
shown.




(In
      thousands)
                        
                        AmountCarrying
      amount as of January 31, 2008
                        
                        $
                        28,431Goodwill
      acquired during the year
                        
                        
                        —Currency
      translation
                        
                        
                        (5,102
                        )Carrying
      amount as of January 31, 2009
                        
                        $
                        23,329





For
Canadian tax purposes, 75% of goodwill is expected to be deductible.
Substantially all of the goodwill relates to the equipment segment.




F-20
 Table
of Contents




A summary
of warranty activity associated with continuing operations for the periods ended
January 31, 2009, 2008 and 2007 follows:





Fiscal
      Year Ended January 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007(In
      thousands)Accrued
      warranty costs at beginning of period
                                    
                                    $
                                    5,982
                                    
                                    
                                    $
                                    2,673
                                    
                                    
                                    $
                                    2,457Acquired
      reserves
                                    
                                    
                                    —
                                    
                                    
                                    
                                    714
                                    
                                    
                                    
                                    —Payments
      for warranty obligations
                                    
                                    
                                    (6,222
                                    )
                                    
                                    
                                    (4,616
                                    )
                                    
                                    
                                    (2,483
                                    )Warranty
      accrual for current period sales
                                    
                                    
                                    5,230
                                    
                                    
                                    
                                    7,211
                                    
                                    
                                    
                                    2,699Accrued
      warranty costs at end of period
                                    
                                    $
                                    4,990
                                    
                                    
                                    $
                                    5,982
                                    
                                    
                                    $
                                    2,673


Note
9. Equity


On
September 5, 2007, we completed a 15,000 to 1 split of our 6,667 common units
into 100,005,000 common units.  The financial statements give a
retroactive effect to this split.


Stewart
& Stevenson LLC is a limited liability company, therefore, U.S. federal and
certain state taxes are paid by the holders of our common units.  As a
limited liability company, the common interest holders’ liability is limited to
the capital invested in the Company.




Share-Based Compensation: 
During Fiscal 2006, our principal shareholder sold common units equal to 1% of
common equity to our former president and chief operating officer and 3.25% of
common equity to our former vice chairman and chief executive officer, subject
to repurchase rights that expired over established vesting periods beginning
January 23, 2006.  In accordance with SFAS No. 123R, we recorded
$444,000 and $3.7 million of non-cash charges in Fiscal 2007 and Fiscal 2006,
respectively, reflecting the difference between the grant date fair market value
of the common units sold and their sales price to our executive.  The
estimated fair market value of the common units was determined based on a
valuation provided by a third party valuation firm.  No unrecognized
compensation exists in respect of these transactions.




On
September 5, 2007, our board of directors adopted the 2007 Incentive
Compensation Plan (“Incentive Plan”). The Incentive Plan received the required
approval of a majority of our unit holders and became effective on September 27,
2007.  In connection with the adoption and approval of the Incentive
Plan, the compensation committee of the board, which has the responsibility to
administer the Incentive Plan, made certain grants of restricted shares to our
non-executive directors and certain members of our senior executive management.
The grants to our six non-executive directors totaled 360,000 restricted shares
vesting in five (5) 72,000 share tranches, with each such tranche vesting
upon board service for a complete fiscal year. In addition, approximately 15,000
of the restricted shares granted to a former director were earned prior to the
date of his resignation as a director with the balance of his grant being
forfeited. The grants to senior executive management total 110,000 restricted
shares vesting in five (5) 22,000 share tranches, with each tranche vesting upon
employment for a complete fiscal year.  The executive grants are
subject to the achievement of net pre-tax income growth in the relevant fiscal
year that exceeds the median net pre-tax income growth of a peer group of
companies consisting of Schlumberger, Ltd., National Oilwell Varco, Inc.,
Weatherford International Ltd., Cameron International Corp. and BJ Services
Company and are subject to acceleration in the case of an executive’s death or
disability. For the year ended January 31, 2009, our net pre-tax income growth
did not exceed the median net pre-tax income of the peer group of
companies.   All grants are subject to (i) the completion of
an initial public equity offering and (ii) accelerated vesting upon a
change-in-control of the Company. No expense has been recognized for these
grants because the contingent condition has not occurred and as of January 31,
2009, diluted earnings per share excluded the approximately 485,000 contingent
unvested restricted shares.




F-21
 Table
of Contents




Note
10. Crown Acquisition




On
February 26, 2007 we acquired substantially all of the operating assets and
assumed certain liabilities of Crown for cash consideration of approximately
$70.5 million.  Crown, which was headquartered in Calgary, Alberta,
Canada, and had multiple U.S. operations, manufactured drilling, well servicing
and workover rigs, stimulation equipment and provided related parts and
services.  The acquisition enhanced our position as a leading supplier
of well stimulation, coiled tubing, cementing, and nitrogen pumping equipment
and expanded our product offerings to include drilling rigs and well workover
and service rigs. Information relating to our results of operations for Fiscal
2006 does not include the impact of the Crown
Acquisition.  Information relating to our results of operations for
Fiscal 2007 includes the impact of the Crown Acquisition from February 26, 2007
to January 31, 2008.




The
following table summarizes the fair value of the assets acquired and liabilities
assumed at the date of the acquisition:





(In
      thousands)
                        
                        February
      26, 2007Cash
      & cash equivalents
                        
                        $
                        81Receivables,
      net
                        
                        
                        19,213Recoverable
      costs and accrued profit not yet billed
                        
                        
                        8,785Inventory
                        
                        
                        41,941Property,
      plant and equipment
                        
                        
                        8,353IntangiblesBacklog  (0.5
      years)
                        
                        
                        3,370Trademarks
      (Indefinite)
                        
                        
                        3,710Drawings  (2.5
      years)
                        
                        
                        3,710Non-compete
      covenant  (5 years)
                        
                        
                        1,420Customer
      relationships  (11 years)
                        
                        
                        6,730Goodwill
                        
                        
                        24,648Total
      intangibles
                        
                        
                        43,588Other
      Assets
                        
                        
                        554Total
      assets acquired
                        
                        
                        122,515Notes
      payable
                        
                        
                        630Current
      portion of long term debt
                        
                        
                        225Accounts
      payable
                        
                        
                        27,994Billings
      in excess of incurred costs
                        
                        
                        7,915Customer
      deposits
                        
                        
                        10,479Long
      term debt
                        
                        
                        379Other
      liabilities assumed
                        
                        
                        4,386Total
      liabilities assumed
                        
                        
                        52,008Purchase
      price allocated
                        
                        $
                        70,507





The
unaudited pro forma information for the fiscal years ended January 31, 2008 and
January 31, 2007 gives effect to the February 26, 2007 consummation of the Crown
Acquisition as if the transaction occurred on February 1, 2007 and 2006,
respectively.  The unaudited pro forma information is presented for
illustration purposes only and is not necessarily indicative of results of
operations which would actually have been reported had the combination been in
effect during this period or which we might expect to report in the
future.




F-22
 Table
of Contents


Pro
      Forma results including Crown EnergyFiscal
      Year endedJanuary 31, 2008
                                                
                                                January 31, 2007(In thousands, except per unit
      data)
                                                
                                                (Unaudited)
                                                
                                                (Unaudited)Sales
                                                
                                                $
                                                1,355,162
                                                
                                                $
                                                1,159,763Net
      earnings
                                                
                                                
                                                94,741
                                                
                                                
                                                46,593Preferred
      stock dividends
                                                
                                                
                                                —
                                                
                                                
                                                4,017Net
      earnings available for common unit holders
                                                
                                                $
                                                94,741
                                                
                                                $
                                                42,576Weighted
      average units outstanding:Basic
                                                
                                                
                                                100,005
                                                
                                                
                                                80,745Diluted
                                                
                                                
                                                100,005
                                                
                                                
                                                100,005Net
      earnings available for common unit holders per common unitBasic
                                                
                                                $
                                                0.95
                                                
                                                $
                                                0.53Diluted
                                                
                                                $
                                                0.95
                                                
                                                $
                                                0.47




Note
11. Employee Retirement Savings Plan




We
sponsor an employee retirement savings plan which qualifies under Section 401(k)
of the Internal Revenue Code.  The savings pan is designed to provide
eligible employees with an opportunity to make regular contributions into a
long-term investment and savings program. Substantially all U.S. employees are
eligible to participate in the savings plan beginning on the first full pay
period after employment. During Fiscal 2008, we matched employee contributions
at the rate of 50% up to 6% of eligible earnings.  We incurred
expenses of $3.5 million, $3.1 million and $2.2 million for Fiscal 2008, 2007
and 2006, respectively. During Fiscal 2009, we will match employee contributions
at the rate of 35% up to 6% of eligible earnings.




Note
12. Recent Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued its
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 establishes a framework for fair value measurements
in the financial statements by providing a single definition of fair value,
provides guidance on the methods used to estimate fair value and increases
disclosures about estimates of fair value. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. The adoption of SFAS 157 on
February 1, 2008 did not have a material impact on our consolidated
financial position, cash flows or results of operations.




In
February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial
Assets and Financial Liabilities–Including an amendment of FASB
Statement
No.115”
(“SFAS 159”). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for financial instruments. This statement is effective for fiscal
years beginning after November 15, 2007. As we have not elected the fair
value option for any of our assets or liabilities, the adoption of SFAS 159 on
February 1, 2008 did not have an impact on our consolidated financial
position, cash flows or results of operations.




In
December 2007, the FASB issued SFAS No. 141R,“Business Combinations” (“SFAS
141R”). SFAS 141R provides guidance on how acquirers recognize and measure the
consideration transferred, identifiable assets acquired, liabilities assumed,
non-controlling interests and goodwill acquired in a business combination. SFAS
141R also expands required disclosures surrounding the nature and financial
effects of business combinations. SFAS 141R is effective prospectively for
fiscal years beginning after December 15, 2008. The adoption of SFAS 141R
on February 1, 2009 is expected to impact certain aspects of our accounting
for any future acquisitions or other business combinations
which may be consummated, including the accounting for acquisition costs and
determination of fair values assigned to certain purchased assets and
liabilities.




F-23
 Table
of Contents




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”(“SFAS 161”). This statement requires qualitative disclosures about a
company’s objectives and strategies with respect to its use of derivative
instruments, quantitative disclosures about the fair value, gains and losses of
its derivative contracts and details of credit-risk-related contingent features
in hedged positions. SFAS 161 also requires disclosure of how and why a company
uses and accounts for derivative instruments and their related hedged items and
their effects on its financial position, financial performance and cash flows.
SFAS 161 is effective prospectively for fiscal years beginning on or after
November 15, 2008. The adoption of SFAS 161 on February 1, 2009 is not expected
to have a material impact on the notes and disclosures to our consolidated
financial statements.




In
April 2008, the FASB issued FASB Staff Position (“FSP”) SFAS 142-3, “Determination of the Useful Life of
Intangible Assets”(“SFAS 142-3”). This statement revises the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and
Other Intangible Assets. The goal of SFAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, Business Combinations,and
other GAAP. FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008. The adoption of SFAS 142-3 on February 1, 2009 may
impact certain aspects of our accounting for intangible assets and the
determination of useful lives assigned to them in any future acquisitions or
other business combinations.




In July
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP.   The levels of authority
of the accounting principles available for the preparation of financial
statements were previously issued by the American Institute of Certified Public
Accountants. The FASB decided that accounting principles applicable to GAAP
should be adopted as a FASB Statement.  SFAS 162 does not set an
effective date. It will become effective 60 days following approval by the
Securities and Exchange Commission of amendments made by the Public Accounting
Oversight Board to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” Effects of
applying the provisions of SFAS 162 must be reported as changes in accounting
principle in accordance with SFAS No. 154, “Accounting Changes and Error
Corrections”(“SFAS 154”).  A company must follow the
disclosure requirements of SFAS 154 and additionally disclose the accounting
principles that were used before and after the application of the provisions of
SFAS 162 and the reasons why applying this Statement resulted in a change in
accounting principle.  The adoption of SFAS 162 on February 1, 2009 is
not expected to have a material impact on our consolidated results of operations
and financial position.




Note
13. Leases




Operating Lease
Commitments:  We lease certain facilities and equipment from
third parties under operating lease arrangements of varying
terms.  Under the terms of these operating lease arrangements, we are
generally obligated to make monthly rental payments to the lessors, and include
no further obligations at the end of the lease terms.  If we elect to
cancel or terminate a lease prior to the end of its term, we are typically
obligated to make all remaining lease payments.  In certain cases,
however, we are allowed to sublet the assets to another party.  Total
rent expense was $10.4 million, $9.8 million, and $4.7 million in Fiscal 2008,
2007 and 2006, respectively.




Operating
lease obligations as of January 31, 2009, with noncancelable lease terms in
excess of one year are as follows for the period ending January 31:




(In
thousands)


Amount2010
                                
                                $
                                6,8272011
                                
                                
                                5,7102012
                                
                                
                                3,6912013
                                
                                
                                1,9272014
      and thereafter
                                
                                
                                1,385Total
                                
                                $
                                19,540





F-24
 Table
of Contents




Note
14. Litigation and Contingencies




We are
defending an arbitration action brought against one of our suppliers and us. The
action against our supplier alleges basic defects in four gas compression
engines and a defective supply of spare parts. The claim against us alleges
defective installation of spare parts and related overhaul services. The
claimant seeks approximately $18 million in damages from our supplier and us. We
believe that the claimant’s allegations and its claim for damages against us are
without merit and that there are valid defenses thereto, and intend to defend
the action vigorously.




The State
of Texas has notified us that it will be conducting a sales and use tax audit
set to begin on or about the second quarter of Fiscal 2009.  We
consider our practices in this area to have been appropriate and we currently do
not believe the matter will have a material impact on our consolidated financial
statements.  While the outcome of such an audit cannot be reasonably
predicted at this time, there is the possibility of a material adverse
outcome.


We are
also a defendant in a number of lawsuits relating to matters normally incident
to our business.  No individual case, or group of cases presenting
substantially similar issues of law or fact, is expected to have a material
effect on the manner in which we conduct our business or on our consolidated
results of operations, financial position or liquidity.  We maintain
certain insurance policies that provide coverage for product liability and
personal injury cases.  We have established reserves that we believe
to be adequate based on current evaluations and our experience in these types of
claim situations.  Nevertheless, an unexpected outcome or adverse
development in any such case could have a material adverse impact on our
consolidated results of operations in the period in which it
occurs.





Note
15. Concentrations




Our
principal distribution agreements, which account for a significant portion of
total purchases, are generally non-exclusive agreements and are subject to early
termination by either party for a variety of causes.  No assurance can
be given that such distribution agreements will be renewed beyond their
expiration dates.  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 results of operations.




We market
our products and services throughout the world and are not dependent upon any
single geographic region outside the United States.  Substantially all
of our long-lived assets are located in the United States.  Our sales
to countries outside the United States, including sales to U.S. customers for
export, totaled $430.5 million, $315.4 million and $116.6 million in Fiscal
2008, 2007 and 2006, respectively. We are not dependent on any single customer
and in Fiscal 2008, no single customer accounted for more than 5.6% of our total
revenues. Our top 10 customers generated approximately 33.1% of our total
revenues during Fiscal 2008.





F-25
 Table
of Contents




Note
16. Quarterly Financial Information – Unaudited






Fiscal
      year ended January 31, 2009Quarter
      Ended
                                                  
                                                  TotalMay
      3, 2008
                                                  
                                                  August
      2, 2008
                                                  
                                                  November
      1, 2008
                                                  
                                                  January
      31, 2009
                                                  
                                                  Year(In
      thousands)Sales
                                                  
                                                  $
                                                  318,272
                                                  
                                                  $
                                                  334,195
                                                  
                                                  $
                                                  307,739
                                                  
                                                  $
                                                  256,936
                                                  
                                                  $
                                                  1,217,142Gross
      profit
                                                  
                                                  
                                                  62,098
                                                  
                                                  
                                                  57,400
                                                  
                                                  
                                                  57,609
                                                  
                                                  
                                                  37,869
                                                  
                                                  
                                                  214,976Net
      earnings available for common unit holders
                                                  
                                                  $
                                                  20,554
                                                  
                                                  $
                                                  13,078
                                                  
                                                  $
                                                  15,798
                                                  
                                                  $
                                                  1,126
                                                  
                                                  $
                                                  50,556Net
      earnings available for common unit holders per unit:Basic
                                                  
                                                  $
                                                  0.21
                                                  
                                                  $
                                                  0.13
                                                  
                                                  $
                                                  0.16
                                                  
                                                  $
                                                  0.01
                                                  
                                                  $
                                                  0.51Diluted
                                                  
                                                  $
                                                  0.21
                                                  
                                                  $
                                                  0.13
                                                  
                                                  $
                                                  0.16
                                                  
                                                  $
                                                  0.01
                                                  
                                                  $
                                                  0.51







Sales and
general administrative expenses for the quarter ended November 1, 2008 included
$2.4 million in legal and professional expenses associated with the pursuit of
strategic alternatives.









Fiscal
      year ended January 31, 2008Quarter
      Ended
                                            
                                            TotalMay
      5, 2007
                                            
                                            August
      4, 2007
                                            
                                            November
      3, 2007
                                            
                                            January
      31, 2008
                                            
                                            Year(In
      thousands)Sales
                                            
                                            $
                                            294,285
                                            
                                            $
                                            341,310
                                            
                                            $
                                            355,097
                                            
                                            $
                                            344,735
                                            
                                            $
                                            1,335,427Gross
      profit
                                            
                                            
                                            60,252
                                            
                                            
                                            69,664
                                            
                                            
                                            73,293
                                            
                                            
                                            61,822
                                            
                                            
                                            265,031Net
      earnings available for common unit holders
                                            
                                            $
                                            17,189
                                            
                                            $
                                            24,835
                                            
                                            $
                                            30,063
                                            
                                            $
                                            19,736
                                            
                                            $
                                            91,823Net
      earnings available for common unit holders per unit:Basic
                                            
                                            $
                                            0.17
                                            
                                            $
                                            0.25
                                            
                                            $
                                            0.30
                                            
                                            $
                                            0.20
                                            
                                            $
                                            0.92Diluted
                                            
                                            $
                                            0.17
                                            
                                            $
                                            0.25
                                            
                                            $
                                            0.30
                                            
                                            $
                                            0.20
                                            
                                            $
                                            0.92







Sales and
general administrative expenses for the quarter ended January 31, 2008 included
$1.3 million in legal and professional expenses related to our proposed initial
public offering.