-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LaHl44NtWBClByQZjmBTFmXHSKd+kgPF2MV36DDNaKIzkrpqWsedNBb3XFApsUzD rG89/xXQb1sLQHlL2JC3KQ== /in/edgar/work/20000609/0000094328-00-000016/0000094328-00-000016.txt : 20000919 0000094328-00-000016.hdr.sgml : 20000919 ACCESSION NUMBER: 0000094328-00-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000429 FILED AS OF DATE: 20000609 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART & STEVENSON SERVICES INC CENTRAL INDEX KEY: 0000094328 STANDARD INDUSTRIAL CLASSIFICATION: [3510 ] IRS NUMBER: 741051605 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11443 FILM NUMBER: 652720 BUSINESS ADDRESS: STREET 1: 2707 N LOOP W CITY: HOUSTON STATE: TX ZIP: 77008 BUSINESS PHONE: 7138687700 MAIL ADDRESS: STREET 1: P O BOX 1637 CITY: HOUSTON STATE: TX ZIP: 77251-1637 10-Q 1 0001.txt FIRST QUARTER REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________ COMMISSION FILE NUMBER 0-8493 STEWART & STEVENSON SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 74-1051605 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2707 NORTH LOOP WEST, HOUSTON, TEXAS 77008 (Address of principal executive offices) (Zip Code) (713) 868-7700 (Registrant's telephone number, including area code) not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, WITHOUT PAR VALUE 28,012,679 SHARES (Class) (Outstanding at May 31, 2000) PART I. FINANCIAL INFORMATION Item 1. Financial Statements. - ----------------------------- The following information required by Rule 10-01 of Regulation S-X is provided herein for Stewart & Stevenson Services, Inc. and Subsidiaries (the "Company"): Consolidated Condensed Statement of Financial Position - April 29, 2000 and January 31, 2000. Consolidated Condensed Statement of Earnings - Fiscal Quarters Ended April 29, 2000 and May 1, 1999. Consolidated Condensed Statement of Cash Flows - Fiscal Quarters Ended April 29, 2000 and May 1, 1999. Notes to Consolidated Condensed Financial Statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS) APRIL 29, 2000 JANUARY 31, 2000 ----------------- ----------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and equivalents $ 15,444 $ 11,715 Accounts and notes receivable, net 197,661 242,625 Recoverable costs and accrued profits not yet billed 14,134 8,151 Income tax receivable 22,508 26,255 Deferred tax asset 8,553 9,076 Inventories: Power Products 158,254 150,844 Petroleum Equipment 31,588 30,151 Airline Products 32,065 26,029 Other Business Activities 31,123 33,762 Excess of current cost over LIFO values (49,769) (49,839) ----------------- ----------------- 203,261 190,947 ----------------- ----------------- TOTAL CURRENT ASSETS 461,561 488,769 PROPERTY, PLANT AND EQUIPMENT 300,325 290,355 Allowances for depreciation and amortization (166,167) (160,821) ----------------- ----------------- 134,158 129,534 DEFERRED INCOME TAX ASSETS 89 166 INVESTMENTS AND OTHER ASSETS 25,239 23,881 ----------------- ----------------- $ 621,047 $ 642,350 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 15,779 $ 25,269 Accounts payable 80,134 90,163 Accrued payrolls and incentives 14,280 18,701 Income tax 3,278 3,257 Current portion of long-term debt 9,097 8,955 Other current liabilities 63,064 65,903 ----------------- ----------------- TOTAL CURRENT LIABILITIES 185,632 212,248 COMMITMENTS AND CONTINGENCIES (SEE NOTE B) LONG-TERM DEBT 78,157 78,281 DEFERRED INCOME TAX 917 958 ACCRUED POSTRETIREMENT BENEFITS 12,996 12,748 DEFERRED COMPENSATION 2,325 2,436 OTHER LONG-TERM LIABILITIES 600 600 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 28,012,203 and 27,992,203, shares issued at April 29, 2000 and January 31, 2000, respectively 47,944 47,722 Retained earnings 292,476 287,357 ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 340,420 335,079 ----------------- ----------------- $ 621,047 $ 642,350 ================= =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL QUARTER FISCAL QUARTER ENDED ENDED APRIL 29, 2000 MAY 1, 1999 ----------------- ----------------- (UNAUDITED) Sales $ 259,207 $ 188,911 Cost of sales 213,317 159,050 ----------------- ----------------- Gross profit 45,890 29,861 Selling and administrative expenses 36,091 25,491 Interest expense 2,309 3,451 Other income, net (4,434) (2,195) ----------------- ----------------- 33,966 26,747 ----------------- ----------------- Earnings before income taxes 11,924 3,114 Income tax provision 4,426 1,153 ----------------- ----------------- Earnings of consolidated companies 7,498 1,961 Equity in net earnings of unconsolidated affiliates - 159 ----------------- ----------------- Net earnings $ 7,498 $ 2,120 ================= ================= Weighted average number of shares of Common Stock outstanding - Basic 27,996 27,984 Diluted 28,075 27,984 Net earnings per share: Basic and Diluted $ .27 $ .08 ================= ================= Cash dividends per share $ .085 $ .085 ================= ================= SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS) FISCAL QUARTER FISCAL QUARTER ENDED ENDED APRIL 29, 2000 MAY 1, 1999 ----------------- ----------------- (UNAUDITED) OPERATING ACTIVITIES Net earnings $ 7,498 $ 2,120 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits 248 509 Depreciation and amortization 5,532 5,203 Deferred income taxes, net 36 (37) Change in operating assets and liabilities net of the effect of acquisition: Accounts and notes receivable, net 44,964 (13,482) Recoverable costs and accrued profits not yet billed (5,983) 30,009 Inventories (12,314) (6,814) Accounts payable (10,029) (37,409) Accrued payrolls and incentives (4,421) (7,844) Current income taxes 4,291 994 Other current liabilities (2,839) (829) Other--principally long-term assets and liabilities (1,469) (819) ----------------- ----------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 25,514 (28,399) INVESTING ACTIVITIES Expenditures for property, plant and equipment (10,279) (7,821) Disposal of property, plant and equipment, net 123 1,667 ----------------- ----------------- NET CASH USED IN INVESTING ACTIVITIES (10,156) (6,154) FINANCING ACTIVITIES Additions to long-term borrowings 20,047 16,234 Payments on long-term borrowings (20,029) (333) Net short-term borrowings (payments) (9,490) 9,724 Dividends paid (2,379) (2,379) Exercise of stock options 222 - ----------------- ----------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,629) 23,246 ----------------- ----------------- Increase (decrease) in cash and equivalents 3,729 (11,307) Cash and equivalents, February 1 11,715 12,959 ----------------- ----------------- Cash and equivalents, end of period $ 15,444 $ 1,652 ================= ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net cash paid during the period for: Interest payments $ 1,134 $ 986 Income tax payments $ 593 $ 419
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. STEWART & STEVENSON SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE A--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - ----------------------------------------------------------------- The accompanying consolidated condensed financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The results of operations for the quarter ended April 29, 2000 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2001. The accounting policies followed by the Company in preparing interim consolidated financial statements are similar to those described in the "Notes to Consolidated Financial Statements" in the Company's January 31, 2000 Form 10-K. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. Interim results are subject to the final year-end LIFO inventory valuation. The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, "Fiscal 2000" commenced on February 1, 2000 and ends on January 31, 2001. The Company reports results on the Fiscal Quarter method; each of the first three fiscal quarters are exactly 13 weeks long, with the fourth fiscal quarter covering the remaining part of the fiscal year. The accompanying consolidated financial statements for Fiscal 1999 contain certain reclassifications to conform with the presentation used in Fiscal 2000. NOTE B--COMMITMENTS AND CONTINGENCIES - ------------------------------------- As a custom packager of power systems, the Company issues bid and performance guarantees in the form of performance bonds or standby letters of credit. Performance type letters of credit totaled approximately $4.8 million at April 29, 2000. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In that event, the Company would also be unable to sell equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation, and similar government agencies during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains a program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The Company has been advised that the U.S. Customs Service and the Department of Justice are investigating potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil, or administrative sanctions against the Company and/or individual employees and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. It is presently impossible to determine the actual costs that may be incurred to resolve this matter or whether the resolution will have a material adverse effect on the Company's results of operations. The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury and warranty matters normally incident to the Company's business. No individual case, or group of cases presenting substantially similar issues of law or fact, involve a claim for damages in excess of $5 million or are expected to have a material effect on the manner in which the Company conducts its business. Although management has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases could have a material adverse impact on the results of operations in the period it occurs. The Company has provided certain guarantees in support of its customers' financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. The maximum exposure of the Company related to guarantees at April 29, 2000 is $6.2 million. The Company leases certain additional property and equipment under lease arrangements of varying terms whose annual rentals are less than 1% of consolidated sales. NOTE C--SEGMENT INFORMATION - ---------------------------- Financial information relating to industry segment is as follows: OPERATING SALES PROFIT (LOSS) ----------------- ----------------- Fiscal quarter ended April 29, 2000 Power Products $ 127,091 $ (816) Tactical Vehicle Systems 78,673 14,636 Airline Products 28,271 4 Petroleum Equipment 14,927 (673) Other Business Activities 10,245 (634) ----------------- ----------------- Total $ 259,207 $ 12,517 ================= ================= Fiscal quarter ended May 1, 1999 Power Products $ 121,288 $ 3,090 Tactical Vehicle Systems 6,215 1,106 Airline Products 22,252 4 Petroleum Equipment 28,464 1,958 Other Business Activities 10,692 832 ----------------- ----------------- Total $ 188,911 $ 6,990 ================= ================= There have been no material changes in total assets by industry segment since January 31, 2000. A reconciliation of operating profit to earnings before income taxes is as follows: FISCAL QUARTER ENDING ------------------------- APRIL 29, 2000 MAY 1, 1999 -------------- ----------- Operating profit $ 12,517 $ 6,990 Corporate expenses, net (2,476) (452) Non-operating interest income 4,192 27 Interest expense (2,309) (3,451) ----------------- ----------------- Earnings before income taxes $ 11,924 $ 3,114 ================= ================= Item 2. Management's Discussion and Analysis of Financial Condition - ---------------------------------------------------------------------- and Results of Operations ------------------------- This discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with the Company's Form 10-K and notes thereto for the fiscal year ended January 31, 2000. The following discussion contains forward-looking statements which are based on assumptions such as timing, volume, and pricing of customers' orders. In connection therewith, please see the cautionary statements contained therein, which identify important factors that could cause actual results to differ materially from those in the forward-looking statements. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of sales represented by certain items reflected in the Company's Consolidated Condensed Statement of Earnings.
FISCAL QUARTER FISCAL QUARTER ENDED ENDED APRIL 29, 2000 MAY 1, 1999 ----------------- ----------------- Sales 100.0% 100.0% Cost of sales 82.3 84.2 ----------------- ----------------- Gross profit 17.7 15.8 Selling and administrative expenses 13.9 13.5 Interest expense 0.9 1.8 Other income, net (1.7) (1.1) ----------------- ----------------- 13.1 14.2 ----------------- ----------------- Earnings before income taxes 4.6 1.6 Income tax provision 1.7 0.6 ----------------- ----------------- Earnings of consolidated companies 2.9 1.0 Equity in net earnings of unconsolidated affiliates - 0.1 ----------------- ----------------- 2.9% 1.1% ================= =================
Sales for the Fiscal Quarter ending April 29, 2000, totaled $259 million compared to sales of $189 million for the same period a year ago, an increase of 37%. Net income from operations for the First Quarter totaled $7 million or $0.27 per share compared to net earnings of $2 million and $0.08 per share a year ago. The Power Products segment, which is responsible for marketing and aftermarket support of a wide range of industrial equipment, recorded First Quarter sales of $127 million compared to $121 million for the same period in 1999. The Power Products segment reported a $1 million loss for the quarter as the rebound in profitability was overshadowed by special items netting to a charge of $6 million, principally in connection with a potentially uncollectible account and note receivable. Excluding the special items, the segment would have reported an operating profit of $5 million or 4.4% of sales. A year ago the segment reported a $3 million operating profit or 2.6% of sales. Power Products is beginning to experience improved sales in domestic land-based oil and gas markets, and the rebound in profitability is expected to continue in subsequent quarters. The Tactical Vehicle Systems segment, which manufactures tactical vehicles for the U.S. Army and others, recorded sales of $79 million in the First Quarter compared to $6 million a year ago. Operating profit for the quarter totaled $15 million, compared with a $1 million profit in the First Quarter of Fiscal 1999. The segment continues to realize improved operating margins resulting from an effective cost reduction program. In addition, the current plan is to complete the driveline upgrade program by the end of May, three months ahead of schedule. The Army's latest shipment schedule has shifted some truck deliveries from the second quarter to the second half, but the expected total year volume remains intact. The Airline Products segment, known as S&S Tug, which manufactures airline ground support products and mobile railcar movers, recorded sales of $28 million in the First Quarter of Fiscal 2000, compared with $22 million in the same quarter last year. Operating results were breakeven in both years. First Quarter 2000 operations were impacted by higher costs associated with the startup of additional airport based service facilities and new products. The Petroleum Equipment segment manufactures equipment for oil and gas exploration, production, and well stimulation industries. Sales for this segment totaled $15 million for the First Quarter compared to $28 million last year. The operating loss for the First Quarter totaled $1 million compared to an operating profit of $2 million in the previous year. The decrease in sales and operating profit resulted from a depleted order backlog in the oil and gas markets. Other business activities not identified in a specific segment include predominantly the fabrication and leasing of gas compression equipment. Sales totaled $10 million for the First Quarter, compared to $11 million for the comparable period last year. A First Quarter operating loss of $1 million included $1 million in incentive bonus payments associated with the 1998 acquisition of Compression Specialties, Inc. An operating profit of $1 million was recorded during the First Quarter of 1999. The gross profit margin rate of 17.7% for the first quarter of 2000 was higher than the 15.8% gross profit margin rate for the same quarter of the previous year. The margin improvement is substantially related to the improvement in the operations of the Tactical Vehicle Systems segment. Corporate general and administrative expenses for the quarter totaled $3 million, versus $1 million for the comparable period of 1999. Last year's quarter was favorably impacted by harbor tax refunds and duty drawback recoveries, and the current year's quarterly expenses included technology and process improvement initiatives. Interest expense decreased from $3 million in the First Quarter of Fiscal 1999 to $2 million in the First Quarter of Fiscal 2000 as a direct result of asset management initiatives. The Company recorded $4 million in interest income in connection with tax refunds from the Internal Revenue Service for the years ended January 31, 1990, through January 31, 1993. Cash flow provided by operating activities during the First Quarter of Fiscal 2000 totaled $26 million or $0.91 per share, which compared favorably with usage of $28 million during the corresponding quarter of Fiscal 1999. UNFILLED ORDERS The Company's unfilled orders consist of written purchase orders, letters of intent, and oral commitments. These unfilled orders are generally subject to cancellation or modification due to customer relationships or other conditions. Purchase options are not included in unfilled orders until exercised. Unfilled orders at April 29, 2000 and at the close of Fiscal 1999 were as follows: April 29, 2000 January 31, 2000 ----------------- ----------------- (DOLLARS IN MILLIONS) Tactical Vehicle Systems $ 839.5 $ 914.5 Power Products 89.9 77.6 Airline 22.2 29.7 Petroleum Equipment 26.5 17.2 All Other 14.7 24.0 -------------- -------------- $ 992.8 $ 1,063.0 ============== ============== Unfilled orders of the Tactical Vehicle Systems segment at April 29, 2000 consisted principally of the follow-on contract awarded in October 1998 by the United States Army Tank-Automotive and Armanent Command (TACOM) to manufacture medium tactical vehicles. CAPITAL EXPENDITURES AND COMMITMENTS Capital spending for property, plant and equipment of $10 million for the period ended April 29, 2000 included $2 million in revenue earning assets, and increased from $8 million for the same period in Fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of cash liquidity included cash and cash equivalents, cash from operations, amounts available under credit facilities, and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures, dividends, and other financial commitments. The Company has in place an unsecured revolving debt facility that could provide up to approximately $150 million, including a $25 million letter of credit sub facility, of which approximately $82 million was available at April 29, 2000, due to certain limitations as a result of modifications made effective January 31, 1999. This revolving facility matures during Fiscal 2001. The Company has additional banking relationships which provide uncommitted borrowing arrangements. In the event that any acquisition of additional operations, growth in existing operations, settlements of other lawsuits or disputes, changes in inventory levels, accounts receivable, tax payments or other working capital items create a permanent need for working capital or capital expenditures in excess of the existing cash and cash equivalents and committed lines of credit, the Company may seek to borrow from other long-term financing sources or to curtail certain activities. FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain forward-looking statements that are based on current expectations, estimates, and projections about the markets and industries in which the Company operates, management's beliefs, and assumptions made by management. These forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors include risks associated with newly acquired businesses; increasing price and product/service competition by foreign and domestic competitors; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost effective basis; the mix of products/services; the achievement of lower costs and expenses; reliance on large customers; technological, implementation and cost/financial risks in use of large, multi-year contracts; the cyclical nature of the markets served; the outcome of pending and future litigation and governmental proceedings and continued availability of financing, financial instruments, and financial resources in the amount, at the times and on the terms required to support the Company's business; the assessment of unanticipated taxes by foreign or domestic governmental authorities; and the risk of cancellation or adjustments of specific orders and termination of significant government programs. These are representative of the future factors that could affect the outcome of forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international conditions including interest rates, rates of inflation, and currency exchange rate fluctuations and other future factors. GOVERNMENT CONTRACTING FACTORS Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims, including claims for additional taxes, often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend on the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. During Fiscal 1998, the Company was awarded a new multi-year contract that will extend production of the FMTV into 2002 (or 2003 if the government exercises its option to purchase additional vehicles). The funding of the new FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contract must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. As of January 31, 2000, funding in the amount of $342 million for the new FMTV contract had been authorized and appropriated by the U.S. Congress. If the new FMTV contract is terminated other than for default, the FMTV contracts provide for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In this event, the Company would also be unable to sell equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation, and similar government agencies, or otherwise receive the benefits of federal assistance payments during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains an effective program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. PART II. OTHER INFORMATION Item 1. Legal Proceedings. - -------------------------- During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The Company has been advised that the U.S. Customs Service and the Department of Justice are investigating potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil, or administrative sanctions against the Company and/or individual employees and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury, and warranty matters normally incident to the Company's business. No individual case, or group of cases presenting substantially similar issues of law or fact, involve a claim for damages in excess of $5 million or are expected to have a material effect on the manner in which the Company conducts its business. Although management has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases could have a material adverse impact on the results of operations in the period it occurs. Item 6. Exhibits and Reports on Form 8-K. - ----------------------------------------- (a) Exhibits: None (b) Form 8-K Report Date - March 23, 2000 (Fourth Quarter and Fiscal 1999 Year-End Results) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - April 12, 2000 (Dividend Announcement) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - April 19, 2000 (National Guard Contract to Build Five-Ton Tractors) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - April 25, 2000 (New Vice President of Strategic Operations Announced) Items reported - Item 5. Other Events Item 7. Exhibits SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 9th day of June, 2000. STEWART & STEVENSON SERVICES, INC. By: /s/ MICHAEL L. GRIMES Michael L. Grimes President and Chief Executive Officer (principal executive officer) By: /s/ JOHN H. DOSTER John H. Doster Senior Vice President and Chief Financial Officer (principal financial officer) By: /s/ PATRICK G. O'ROURKE Patrick G. O'Rourke Controller and Chief Accounting Officer (chief accounting officer) EXHIBIT INDEX Exhibit Number and Description - ------------------------------ None. -----END PRIVACY-ENHANCED MESSAGE-----