STEWART & STEVENSON 401(K) SAVINGS PLAN
Financial Statements
As of December 31, 1999
Together With Auditors' Report
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Administrative Committee of the
Stewart & Stevenson 401(k) Savings Plan:
We have audited the accompanying statements of net assets available for benefits
of the Stewart & Stevenson 401(k) Savings Plan as of December 31, 1999 and 1998,
and the related statement of changes in net assets available for benefits for
the year ended December 31, 1999. These financial statements and supplemental
schedule referred to below are the responsibility of the Plan's administrator.
Our responsibility is to express an opinion on these financial statements and
supplemental schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Stewart &
Stevenson 401(k) Savings Plan as of December 31, 1999 and 1998, and the changes
in net assets available for benefits for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets held
for investment purposes as of December 31, 1999, is presented for the purpose of
additional analysis and is not a required part of the basic financial statements
but is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ ARTHUR ANDERSON LLP
ARTHUR ANDERSEN LLP
Houston, Texas
June 14, 2000
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STEWART & STEVENSON 401(k) SAVINGS PLAN
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STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
-----------------------------------------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
ASSETS:
Investments, at fair value-
Merrill Lynch Global Allocation Fund, Inc. $ 6,464,984 $ 6,676,284
Merrill Lynch Corporate Bond Fund, Inc., Intermediate Term 3,285,131 2,733,894
Merrill Lynch Retirement Preservation Trust 3,948,076 3,929,727
AIM Value Fund 17,243,914 17,196,524
American Balanced Fund 3,821,829 5,033,648
Stewart & Stevenson Services, Inc., Common Stock 1,818,352 995,812
Franklin Small Cap Growth Fund 2,060,087 590,274
Hotchkis & Wiley International Fund 1,058,858 421,998
MFS - Massachusetts Investors Trust 2,377,072 1,145,066
Participant loans 1,518,875 1,449,798
------------ ------------
Total investments 43,597,178 40,173,025
Receivables-
Employer contributions 66,804 86,386
Participant contributions 218,146 269,644
Pending sale 32,696 -
Accrued income 10,064 -
------------ ------------
Total receivables 327,710 356,030
------------ ------------
Cash, noninterest-bearing 5,055 21,740
------------ ------------
NET ASSETS AVAILABLE FOR BENEFITS $43,929,943 $40,550,795
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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STEWART & STEVENSON 401(k) SAVINGS PLAN
---------------------------------------
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
---------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income-
Dividends $ 2,983,194
Interest 101,781
Net appreciation in fair value of common stock 313,024
Net appreciation in fair value of mutual funds 4,462,285
------------
Total investment income 7,860,284
Contributions-
Employer 2,234,696
Participant 7,346,429
Participant rollovers 782,784
------------
Total contributions and other additions 10,363,909
------------
Total additions 18,224,193
------------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Plan-to-plan transfers for participating GE Employers (Note 1) 11,686,276
Distributions and withdrawals 3,065,271
Administrative expenses 93,498
------------
Total deductions 14,845,045
------------
NET INCREASE 3,379,148
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 40,550,795
------------
End of year $43,929,943
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
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STEWART & STEVENSON 401(k) SAVINGS PLAN
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NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. DESCRIPTION OF THE PLAN:
------------------------
General
-------
The Stewart & Stevenson 401(k) Savings Plan (the Plan or the Stewart & Stevenson
Plan), adopted effective January 1, 1994, is a trusteed, defined contribution
plan established for the benefit of all eligible employees of Stewart &
Stevenson Services, Inc., and its adopting subsidiaries, (the Participating
Stewart & Stevenson Employers). In conjunction with the sale of Stewart &
Stevenson Services, Inc.'s gas turbine operations, the following entities became
additional participating employers of the Plan effective February 1, 1998:
Canyon East Wind, L.P., GE Packaged Power, Inc., GE Packaged Power Services,
Inc., GE Energy Plant Operations, Inc., and GE Packaged Power Sales, Inc., or
their successors (the Participating GE Employers). Eligible employees of the gas
turbine operations who became employees of the Participating GE Employers
continued to participate in the Plan. Employees of the Participating GE
Employers who were hired after the sale are eligible to participate in the Plan
after completing the eligibility requirements of the Plan.
Effective January 1, 1999, Contract Employee Services, Inc. (CES), acquired
certain employees of GE Energy Plant Operations, Inc., and became a
Participating GE Employer under the Plan.
Effective April 1, 1999, the Participating GE Employers terminated their
participation in the Plan and transferred their participation in the Plan to new
plans established by the GE entities as plan-to-plan transfers.
For purposes of these financial statements, "the Employers" or "the Company"
refers to the Participating Stewart & Stevenson Employers and the Participating
GE Employers prior to April 1, 1999, and the Participating Stewart & Stevenson
Employers subsequent to April 1, 1999.
The following description of the Plan provides a summary of the Plan.
Participants should refer to the Plan document for a more complete description
of the Plan's provisions.
Plan Administration
-------------------
The Plan is administered by a committee (the Administrative Committee) which is
appointed by the board of directors of Stewart & Stevenson Services, Inc. This
committee is empowered to act on all matters affecting the Plan including, among
other things, interpreting the Plan's provisions, determining the eligibility of
employees to become participants in the Plan, selecting the funds to be made
available in the Plan and determining any person's right to a benefit under the
Plan. The members of the Administrative Committee do not receive compensation
for services rendered to the Plan.
Custodial safekeeping of Plan assets is performed by Merrill Lynch Trust Company
(the Trustee). Individual participant record keeping is performed under Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the Recordkeeper). Among other
duties, the Trustee is to receive contributions, collect the income from the
Plan's assets and make disbursements from the Plan's assets as directed by the
Administrative Committee. The Recordkeeper's duties include processing and
maintaining participant data, participant statements, and contributions and
distributions for purposes of recordkeeping.
Participation and Eligibility
-----------------------------
Employee participation in the Plan is voluntary. Effective January 1, 1999, all
employees are eligible to participate in the Plan after completion of 30 days of
service with no minimum age requirement.
<PAGE>
Investments
-----------
The Plan offers seven mutual funds and a common/collective trust fund, or the
option of one of three model fund portfolios comprised of mutual funds, as well
as Stewart & Stevenson Services, Inc., common stock (the S&S Services Stock
Fund).
Employees of the Participating GE Employers were not allowed to invest
contributions in the S&S Services Stock Fund or to transfer balances from other
investment funds into the S&S Services Stock Fund.
Contributions
-------------
Newly eligible employees hired on or after January 1, 1999, are automatically
enrolled for a 1 percent contribution unless otherwise elected. Participants may
elect to make an additional contribution from 2 percent to 20 percent of their
wages as reported to the Internal Revenue Service, subject to certain
limitations, as defined.
For employees of the Participating Stewart & Stevenson Employers, the 1 percent
employee contribution is matched by the Company dollar for dollar (Basic Match)
and employee contributions in excess of 1 percent of compensation but no more
than 6 percent are matched at 25 percent (Supplemental Match). For employees of
the Participating GE Employers, the matching employer contribution was 50
percent of the first 6 percent of the participant's contribution. Participants
may also make rollover contributions to the Plan representing distributions from
other qualified defined benefit or contribution plans. Participants can change
the allocation of their contributions in the investment funds or they can
discontinue, increase or decrease their contribution rate within the 1 percent
to 20 percent range as permitted by the Plan.
Distributions, Withdrawals and Loans
------------------------------------
Participants are fully vested in their participant contributions, rollovers,
Basic Match and earnings thereon at all times. Participants shall have a 100
percent vested interest in their Supplemental Match contributions upon attaining
age 65, the normal retirement age according to the Plan. Those participants who
terminate prior to normal retirement age are entitled to a benefit pursuant to
the value of their vested interests in their Supplemental Match contributions as
follows:
Vested
Years of Vesting Service Interest
------------------------ ----------
Less than 1 year 0%
1 years 20
2 years 40
3 years 60
4 years 80
5 or more years 100
Forfeited Supplemental Match contributions are used to pay Plan expenses or
applied as a reduction of future employer matching contributions. During 1999,
forfeitures were utilized to pay plan expenses.
Participant benefits are payable to participants or to a designated beneficiary
in the event of their retirement, death or termination of employment. In limited
circumstances, account withdrawals may be made for financial hardship in
accordance with the Plan. Benefit payments to withdrawing employees are made in
lump-sum payments.
A participant may borrow from his account up to a maximum equal to the lesser of
$50,000 or 50 percent of his vested account balance. Loan transactions are
treated as a transfer to (from) the investment fund from (to) the participant
loan fund. The minimum loan is $1,000 and will bear interest at a rate
established by the Administrative Committee to be commensurate with the interest
rates charged by persons in the business of lending money. The loans shall not
exceed five years, except for loans for the purpose of acquiring a principal
residence. The loans are secured by the balance in the participant's account.
Principal and interest are paid ratably through periodic payroll deductions.
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Plan Termination
----------------
The Administrative Committee anticipates and believes that the Plan will
continue without interruption but reserves the right to terminate the Plan. In
the event of termination, the assets of the Plan, less expenses of liquidation,
will be allocated to the participants in accordance with the terms of the Plan.
2. SUMMARY OF ACCOUNTING POLICIES:
-------------------------------
Basis of Accounting
-------------------
The financial statements of the Plan have been prepared on the accrual basis of
accounting.
Investment Valuation
--------------------
The Merrill Lynch Retirement Preservation Trust Fund is a common/collective
trust fund investing primarily in guaranteed investment contracts, synthetic
GICs (GICs), and U.S. Government securities. The guaranteed investment contracts
are fully benefit responsive and are recorded at contract value, which
approximates fair value. Contract value is determined based on contributions
made under the contract plus interest earned at the contract's rate less funds
used to pay investment fees and withdrawals. The total return for the Merrill
Lynch Retirement Preservation Trust Fund was 6.43 percent for the year ended
December 31, 1999. The Plan's investments in mutual funds and common stock are
recorded at cost when purchased but are adjusted to market value based upon
published market prices, by the Trustee, for financial reporting purposes.
Recognition of Income and Expenses
----------------------------------
The net change in the difference between market value of the investments on hand
at December 31, and the market value of the investments on hand as of the
beginning of the year, is recorded as unrealized appreciation (depreciation) of
investments. Realized gains or losses on the sale of investments and withdrawals
of investments are based on the value of the assets as of the beginning of the
year or the time of purchase during the year, if later. Unrealized appreciation
(depreciation) of investments and realized gains or losses are recorded in the
statement of changes in net assets available for benefits as net appreciation
(depreciation) in fair value of investments.
Interest and dividend income is recorded on the accrual basis by the Trustee.
Plan income or loss for each investment fund is allocated to the participants
daily in the ratio that each participant's account balance bears to all account
balances.
The Company may pay expenses incurred in the administration of the Plan, but it
shall not be obligated to do so. Any such expenses and fees not paid by the
Company during 1999 were paid from forfeited employer contributions.
Use of Estimates and Assumptions
--------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
changes therein and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
Adoption of SOP 99-3
--------------------
During 1999, the Plan adopted Statement of Position (SOP) 99-3, "Accounting for
and Reporting of Certain Defined Contribution Plan Investments and Other
Disclosure Matters," which eliminates the requirement for a defined contribution
plan to disclose participant-directed investment programs. As such, the 1998
financial statements have been reclassified to eliminate the
participant-directed fund investment program disclosures.
<PAGE>
3. RISKS AND UNCERTAINTIES:
------------------------
The Plan provides for various investments in a common/collective trust fund,
mutual funds and common stock. Investment securities, in general, are exposed to
various risks, such as interest rate, credit and overall market volatility
risks. Due to the level of risk associated with certain investment securities,
it is reasonably possible that changes in the values of investment securities
will occur in the near term.
4. FEDERAL INCOME TAXES:
---------------------
The Plan obtained its latest determination letter on January 20, 2000, in which
the Internal Revenue Service stated that the Plan, as originally established,
was in compliance with the applicable requirements of the Internal Revenue Code
(the Code). The Administrative Committee believes that the Plan is currently
designed and being operated in compliance with the applicable requirements of
the Code. Therefore, the Administrative Committee believes that the Plan is
qualified and is tax-exempt as of December 31, 1999 and 1998.
5. RECONCILIATION OF FINANCIAL
STATEMENTS TO FORM 5500:
---------------------------
The following is a reconciliation of net assets available for benefits per the
financial statements to the Form 5500 as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------------ ------------
Net assets available for benefits per the financial statements $43,929,943 $40,550,795
Less- Amounts allocated to withdrawing participants - (231,295)
------------ ------------
Net assets available for benefits per the Form 5500 $43,929,943 $40,319,500
============ ============
</TABLE>
The following is a reconciliation of distributions and withdrawals per the
financial statements to the Form 5500 for the year ended December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Distributions and withdrawals per the financial statements $ 3,065,271
Add- Amounts allocated to withdrawing participants at December 31, 1999 -
Less- Amounts allocated to withdrawing participants at December 31, 1998 (231,295)
-----------
Distributions and withdrawals per the Form 5500 $ 2,833,976
===========
</TABLE>
Amounts allocated to withdrawing participants are recorded on the Form 5500 for
distributions that have been processed and approved for payment prior to
December 31 but not yet paid as of that date.
6. PARTY-IN-INTEREST TRANSACTIONS:
-------------------------------
The Plan invests in certain shares of a common/collective trust fund and mutual
funds managed by Merrill Lynch Trust Company. As Merrill Lynch Trust Company
serves as Trustee to the Plan, these transactions qualify as party-in-interest
transactions.
In addition, the Plan invests in shares of Stewart & Stevenson Services, Inc.,
common stock. As Stewart & Stevenson Services, Inc., is the sponsor of the
Plan, these transactions qualify as party-in-interest transactions.
<PAGE>
<TABLE>
<CAPTION> SCHEDULE I
STEWART & STEVENSON 401(k) SAVINGS PLAN
---------------------------------------
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
-----------------------------------------------
AS OF DECEMBER 31, 1999
-----------------------
<S> <C> <C>
Number of
Shares or
Principal Current
Identity of Issue Description of Asset Amount Value
----------------- -------------------- --------------- -------------
Merrill Lynch Trust Company* Merrill Lynch Global Allocation Fund, Inc. 461,126 $ 6,464,984
Merrill Lynch Trust Company* Merrill Lynch Corporate Bond Fund, Inc., 300,286 3,285,131
Intermediate Term
Merrill Lynch Trust Company* Merrill Lynch Retirement Preservation Trust 3,948,076 3,948,076
AIM Family of Funds AIM Value Fund 353,142 17,243,914
American Funds Group American Balanced Fund 265,037 3,821,829
Stewart & Stevenson Services, Inc.* Common stock 153,538 1,818,352
Franklin Franklin Small Cap Growth Fund 46,682 2,060,087
Olympic Trust Hotchkis & Wiley International Fund 40,108 1,058,858
Massachusetts Financial Services Massachusetts Investors Trust 113,464 2,377,072
Stewart & Stevenson 401(k) Savings Plan* Participant loans (interest rates $1,518,875 1,518,875
ranging from 8.25% to 10%) ------------
Total assets held for investment purposes $43,597,178
============
</TABLE>
*Identified party in interest.
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