SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. 0-3415
STV GROUP, INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1698231
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
205 West Welsh Drive, Douglassville, Pennsylvania 19518
(Address of principal executive offices) (Zip Code)
(610) 385-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.50 par value
(Title of class)
As of June 30, 1999, there were 3,823,818 shares of common stock of the
registrant outstanding.
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 twelve 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
TABLE OF CONTENTS
Page
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.....................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements and Related Notes.......................2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.........................................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..10
Part II: OTHER INFORMATION
Item 1. Legal Proceedings...........................................11
Item 2. Changes in Securities.......................................11
Item 3. Defaults Upon Senior Securities.............................11
Item 4. Submission of Matters to a Vote of Security Holders.........11
Item 5. Other Information...........................................11
Item 6. Exhibits and Reports on Form 8-K............................11
SIGNATURES...................................................................12
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" such
as statements regarding the Company's ability to meet its liquidity needs,
control costs, backlog and potential revenue growth, certain statements in Notes
to Condensed Consolidated Financial Statements, and other statements contained
herein regarding matters which are not historical facts are forward looking
statements (as such term is defined in the Securities Act of 1933) and because
such statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to those discussed below:
1. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth.
2. The Company's continued ability to operate in a heavily regulated
government environment. The Company's government contracts are subject to
termination, reduction or modification as a result of changes in the
government's requirements or budgetary restrictions. In addition,
government contracts are subject to termination at the conveniences of the
government. Under certain circumstances, the government can also suspend or
debar individuals or firms from obtaining future contracts with the
government.
3. The level of competition in the Company's industry, including companies
with significantly larger operations and resources than the Company.
4. The Company's ability to identify and win suitable projects and to
consummate or complete any such projects.
5. The Company's ability to perform design/build projects which may include
the responsibility of ensuring the actual construction of a project for a
guaranteed price.
6. The Company's and its payors' and suppliers ability to implement a Year
2000 readiness program.
These and other factors have been discussed in more detail in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
1
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
STV GROUP, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 1999 September 30, 1998
ASSETS
Current Assets
Cash and Cash Equivalents $4,073,000 $4,444,000
Accounts Receivable 28,649,000 23,485,000
Costs and Estimated Profits of Uncompleted
Contracts in Excess of Related Billings 15,717,000 13,218,000
Prepaid Income Taxes 84,000 84,000
Other Current Assets 702,000 1,065,000
------- ---------
Total Current Assets 49,225,000 42,296,000
Property and Equipment 6,338,000 8,195,000
Less Accumulated Depreciation 4,636,000 6,642,000
--------- ---------
Net Property and Equipment 1,702,000 1,553,000
Deferred Income Taxes 1,882,000 1,882,000
Other Assets 797,000 757,000
------- -------
TOTAL $53,606,000 $46,488,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $6,716,000 $6,382,000
Accrued Expenses 8,235,000 7,772,000
Billings on Uncompleted Contracts in Excess of
Related Costs 16,844,000 13,375,000
Current portion of long term debt 43,000 564,000
Deferred income taxes 1,862,000 1,862,000
--------- ---------
Total Current Liabilities 33,700,000 29,955,000
Long-Term Debt 2,630,000 2,134,000
Post-retirement Benefits 995,000 927,000
Stockholders' Equity
Common Stock 2,036,000 2,025,000
Capital in Excess of Par 3,414,000 3,350,000
Retained Earnings 11,602,000 8,868,000
---------- ---------
Total 17,052,000 14,243,000
Less: Treasury Stock 771,000 771,000
------- -------
Total Stockholders' Equity 16,281,000 13,472,000
TOTAL $53,606,000 $46,488,000
=========== ===========
See notes to condensed consolidated financial statements.
2
STV GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
June 30 June 30
1999 1998 1999 1998
Revenues
Total Revenues $34,670,000 $25,550,000 $102,236,000 $75,682,000
Less Subcontract and Procurement Costs 9,813,000 5,510,000 30,762,000 16,688,000
--------- --------- ---------- ----------
Operating Revenue $24,857,000 $20,040,000 $71,474,000 $58,994,000
Costs and Expenses
Costs of Services and Sales 20,902,000 17,296,000 60,259,000 51,118,000
General and Administrative 2,228,000 1,535,000 6,091,000 4,557,000
Interest Expense 35,000 59,000 149,000 418,000
Interest Income (77,000) (31,000) (228,000) (64,000)
------- ------- -------- -------
Total Costs and Expenses 23,088,000 18,859,000 66,271,000 56,029,000
Income Before Income Taxes 1,769,000 1,181,000 5,203,000 2,965,000
Income Taxes 857,000 579,000 2,469,000 1,456,000
------- ------- --------- ---------
Net Income $912,000 $602,000 $2,734,000 $1,509,000
======== ======== ========== ==========
Basic earnings per share: $.24 $.16 $.72 $.41
Diluted earnings per share: $.22 $.15 $.65 $.38
See notes to condensed consolidated financial statements.
3
STV GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
June 30
1999 1998
Operating Activities
Net Income $2,734,000 $1,509,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and Amortization 632,000 512,000
Changes in Operating assets and liabilities
Accounts Receivable (5,164,000) (3,042,000)
Costs of uncompleted contracts in
excess of billings and other current assets (2,136,000) 1,302,000
Accounts Payable and accrued expenses 1,364,000 2,642,000
Billing in excess of related costs 3,469,000 6,666,000
Current Income Taxes (3,000) 1,051,000
------ ---------
Net Cash provided by operating activities $896,000 $10,640,000
Investing Activities
Purchase of Property and Equipment (653,000) (461,000)
Purchase of Software (272,000) (203,000)
Decrease in other assets 104,000 51,000
------- ------
Net Cash used in investing activities ($821,000) ($613,000)
Financing Activities
Proceeds from issuance of common stock 75,000 84,000
Proceeds from line of credit and long term
borrowings 0 55,261,000
Principal payments on line of credit and long
term borrowings (521,000) (65,303,000)
-------- -----------
Net Cash used in financing activities ($446,000) ($9,958,000)
(Decrease) increase in cash and cash equivalents (371,000) 69,000
Cash and cash equivalents at beginning of year 4,444,000 1,153,000
--------- ---------
Cash and cash equivalents at end of period $4,073,000 $1,222,000
========== ==========
See notes to condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share," replaced primary earnings per share (EPS)
with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS recognizes the potential dilutive
effects of the future exercise of common stock options.
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
Basic earnings per share $0.24 $0.16 $0.72 $0.41
Shares outstanding 3,815,686 3,744,740 3,807,517 3,691,946
Diluted earnings per share $0.22 $0.15 $0.65 $0.38
Shares outstanding 4,231,841 4,102,795 4,175,114 3,943,723
Earnings per share and average common shares and equivalents for prior periods
were adjusted to reflect the 2-for-1 stock split effected April 13, 1998.
5
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
4. RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to their
1999 presentation.
5. NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after December
15, 1997 (fiscal 1999 year end reporting for the Company). The Company is
evaluating the disclosure requirements of SFAS No. 131 and currently believes
that its adoption will have no material impact on its future disclosure
requirements.
6
Item 2. Management Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations
Total revenues for the quarter ended June 30, 1999 (third quarter fiscal 1999)
increased 35.7% as compared to the third quarter of fiscal 1998 and increased
4.0% as compared to the previous quarter. Operating revenues (total revenues
excluding pass-through costs) increased 24.0% as compared to the third quarter
of fiscal 1998 and increased 4.6% as compared to the previous quarter.
Pass-through costs, expressed as a percentage of total revenues, increased to
28.3% as compared to 21.6% in the third quarter of fiscal 1998 and decreased
from 28.8% in the previous quarter. Pass-through costs will vary depending on
the need for specialty subconsultants and governmental subcontract requirements.
Cost of services, expressed as a percentage of operating revenues, decreased to
84.1% for the third quarter of fiscal 1999 from 86.3% in the third quarter of
fiscal 1998 and increased from 84.0% in the previous quarter. The decrease in
the percentage from the third quarter of fiscal 1998 was due mainly to operating
revenues increasing faster than costs. The costs of services as a percentage of
revenues remained comparable to the previous quarter.
General and administrative expense, expressed as a percentage of operating
revenue, increased to 9.0% in the third quarter of fiscal 1999 from 7.7% in the
third quarter of fiscal 1998 and is comparable to 8.9% recorded in the previous
quarter. The increase from the third quarter of fiscal 1998 is due to increases
in labor, labor related expenses and legal costs.
Interest income, net of interest expense, expressed as a percentage of operating
revenues, is a positive .2% in the third quarter of fiscal 1999 compared to a
negative .1% in the third quarter of fiscal 1998 and comparable to a positive
.2% in the previous quarter. This improvement from last year is due to the
elimination of bank borrowings as a result of a continued improvement in cash
position and interest earned from invested cash.
7
Income tax expense for the third quarter of fiscal 1999 was 48.4% of pre-tax
income compared to 47.3% in the second quarter of fiscal 1999 and 49.0% of
pre-tax income for the same period last year. The slightly higher rate from the
second quarter is due to a slightly higher effective tax rate.
Diluted earnings per common share for the third quarter of fiscal 1999 was $.22
cents versus $.15 cents for the third quarter of fiscal 1998. A 2-for-1 stock
split was effective April 13, 1998 for stockholders of record as of March 31,
1998. Prior period earnings per share and weighted average number of shares
outstanding have been adjusted to reflect this split.
Financial Condition and Liquidity
Working capital increased to $15,525,000 at June 30,1999 from $14,525,000 at
March 31, 1999. Capital resources available to the Company include an existing
line of credit for working capital. The current limit is a maximum of $15.5
million based on accounts receivable and work-in-progress of which approximately
$14.2 million is currently available. The Company believes that it and the
lender will maintain a line of credit adequate to meet the current and future
financial needs of the Company. The Company is planning to continue its program
of purchasing computer-assisted design and drafting equipment and has purchased
and converted to a new project management and accounting system.
The Company's backlog at June 30, 1999 is approximately $200 million, in
principal part, reflecting STV's award, in a joint venture, of the tunnel
engineering contract for the New York Metropolitan Transportation Authority's
East Side Access project. This $2.3 billion project extends Long Island Rail
Road service to Manhattan's East Side into Grand Central Terminal. The Company
expects that the magnitude of this project will provide the impetus for future
revenue growth.
Year 2000
The Year 2000 issue, or "The Y2K Bug" as it is sometimes called, is the result
of computer programs and equipment that were written and manufactured using two
digits rather than four to define the applicable year. Date-sensitive computer
programs and equipment may recognize a date
8
using only the last two digits. This could result in the year 2000 being
recognized as the year 1900. System failures or miscalculations can occur, which
would cause disruptions in operations and/or the inability to process normal
business transactions.
STV has recently acquired and installed new financial and project management
systems that are certified Year 2000-compliant. The Company is also continuing
on a normal basis to replace or upgrade other systems that may not be compliant.
This process will be completed in 1999. Costs of becoming 2000 compliant will
not be materially more than normal information technology (IT) purchases and
associated IT costs. However, STV has taken and will continue to take reasonable
and prudent actions, consistent with the standards of care prevalent in the
industry, to comply with Year 2000 requirements and to prevent interruptions to
STV operations. The Company has taken action to obtain certification from its
suppliers, including suppliers of IT and non-IT systems. These responses are
currently being analyzed and remedial action is currently being taken with those
suppliers who are deemed non-compliant. In addition, STV has notified its
clients of Year 2000 compliance actions and issues, and is now completing the
testing of the Company's in-house equipment and software under simulated Year
2000 conditions to further ensure that normal operation will continue beyond
2000. Finally, STV operations managers have informed all design personnel of Y2K
requirements to ensure that all STV design products meet Y2K standards. A
steering committee of senior managers meets monthly to coordinate and manage all
Year 2000 issues, both internally and externally. The cost of this endeavor is
not believed to be material.
The maximum potential risk exposure to STV is as follows: (a) Disruptions could
occur with the failure of project-specific applications or unique computer
assisted design and drafting and other software products that are not Year
2000-compliant. This would halt or delay completion of engineering or
construction designs and could subject STV to litigation for failure to complete
designs according to contract timetables; and (b) There is the potential for a
governmental unit or other large client to have 2000 compliance problems in
remitting to the Company or otherwise interrupting collections or bank
processes. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time. Ongoing testing of equipment and software
will considerably lessen the risk of failure, and the Company currently has a
contingency plan to
9
immediately replace any defective computer or software system in the event of
problems. This plan is considered adequate because all STV systems are PC-based,
and STV has sufficient hardware, software and financial assets to make such
corrections on a near real-time basis.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to Part I of this Form 10Q:
Exhibit 10.40 - Employment Agreement for Peter W. Knipe
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended
June 30, 1999.
11
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.
STV GROUP, INCORPORATED
(Registrant)
August 13, 1999 By: /s/ Dominick M. Servedio
- ------------------ -------------------------------------
Date Dominick M. Servedio
President and Chief Executive Officer
August 13, 1999 By: /s/ Peter W. Knipe
- ------------------ -------------------------------------
Date Peter W. Knipe
Secretary/Treasurer
12