SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File Number
September 30, 1997 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
incorporation or organization) Identification No.)
205 West Welsh Drive, Douglassville, Pennsylvania 19518
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 385-8200
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
Common Shares ($1.00 par) NASDAQ
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, (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) 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.[ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 18, 1997 is $1,330,626. (1)
The number of shares outstanding of the registrant's classes of common stock as
of November 18, 1997 is as follows:
Common Shares 1,821,246
DOCUMENTS INCORPORATED BY REFERENCE
Part I Part II Part III Part IV
(None) Annual Report Proxy Statement 1984, 1987, 1989, 1990
to Shareholders and Annual Re- 1991, 1992, 1993, 1994, 1995, and
for fiscal 1997 port to Share- 1996 Form 10-K; Registration
holders for Statement No. 2-88904
fiscal 1997
(1) The rules of the Securities and Exchange Commission require that the
aggregate dollar amount of the voting stock set forth above equal the amount of
common shares outstanding, reduced by the amount of common shares held by
executive officers, directors and shareholders owning in excess of 10% of the
Company's common shares, multiplied by the last traded price on November 18,
1997. The information provided shall in no way be construed as an evaluation by
the Company of the market price of such common stock, nor shall it be construed
as an admission that any officer, director or 10% shareholder in the Company may
be deemed an affiliate of the Company and any such inference is hereby
disclaimed. The information provided is included solely for record keeping
purposes of the Securities Exchange Commission.
PART I
ITEM 1. BUSINESS
STV Group, Inc. provides engineering and architectural consulting and
design services on a variety of projects for the federal government, local,
state and foreign governments and private industry. The Company is also pursuing
and performing selected design/build projects. STV Group, Inc. consists of the
following wholly-owned subsidiaries: STV Incorporated, STV Architects, Inc., STV
Environmental, Inc., STV International, Inc., STV Surveying, Inc. and STV
Construction Services. STV and its subsidiaries are hereinafter collectively
referred to as the "Company".
The Company's projects frequently require the service of a firm with
diverse capabilities. For example, a particular project may require electrical
engineers, civil engineers, draftsmen and other professional personnel. Each of
STV Group, Inc.'s subsidiaries customarily staffs a particular project with
personnel from the respective firm's offices. Where appropriate, however,
multifirm project teams are formed with qualified professionals drawn from the
entire Company. Management believes that close cooperation among the STV Group,
Inc. subsidiaries, under its management, assures proper control and support for
all Company activities. As of September 30, 1997, the Company employed 924
people.
Services
The principal areas in which the Company provides services and the
approximate percentage of the Company's revenue attributable to each service
area are set forth below:*
Year Ended September 30,
1997 1996 1995
Architectural Engineering 24% 25% 27%
Civil, Highway, Bridge, Airport
and Port Engineering 24 33 35
Defense Systems Engineering 4 4 5
Industrial Process Engineering 2 1 2
Transportation Engineering 39 35 29
Other Engineering Services and Design Build 7 2 2
* The Company does not record revenue data according to each service area.
However, to provide an approximation of the revenue attributable to each
service area, the Company has analyzed contract revenue in the fiscal year
according to its principal service area. The aggregate revenue each year of
these contracts is at least 75% of the consolidated revenue for these fiscal
years.
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Architectural Engineering
Architectural engineering generally involves consulting and design
services, as well as construction inspection services, for the construction of
commercial, industrial and governmental buildings, medical and educational
facilities, laboratories, recreational, religious and cultural centers, military
installations, penal institutions, and public utility facilities. As part of its
services, the Company has designed and developed systems for heating,
ventilation, cooling, refrigeration, fire protection, lighting, power generation
and distribution and communications. In addition, the Company has performed
energy conservation audits and has recommended and designed programs, including
computerized control programs for multi-building complexes, for the conservation
of fuel and electrical energy.
Civil, Highway, Bridge, Airport and Port Engineering
This area of engineering generally involves consulting and design
services for the construction of highways (including interchange ramps and
secondary roads), bridges, airports and marine ports. Services performed by the
Company have included site selection and development (including economic
evaluations and feasibility reports), design and development of specifications,
and construction inspection. As part of these services, the Company has designed
lighting, toll and service facilities, drainage and erosion control systems, and
has performed mapping and landscaping, hydraulic and hydrologic studies, soils
engineering, traffic studies and surveys. In addition, the Company has designed
and inspected the construction of airport terminals, runways, aircraft
maintenance hangars, fuel systems, control towers and marine ports.
Defense Systems Engineering
Defense systems engineering involves consulting and design services for
the development of equipment and special hardware for the Department of Defense.
Services performed by the Company have included the design, development and
testing for systems relating to naval aircraft, weapons systems, aircraft
carriers, support ships, land-based operations and support missions. The Company
has prepared analytical support studies for aircraft carriers, support ships,
land-based operations and support missions, analytical support studies for
aircraft catapults and arresting systems, jet blast deflectors, shipboard
weapons, loading and transfer systems, ship-weapon compatibility, mobile weapon
loaders, munition trailers, launch and recovery television systems, lighting and
marking systems, parachutes, life rafts and personnel life-support systems. In
addition, the Company has prepared operation and maintenance manuals, technical
reports, specifications and other documents describing equipment and hardware.
The Company has the capacity to provide all of the services necessary to prepare
these publications, including layout, artwork composition, photography and
reproduction.
Industrial Process Engineering
This area involves consulting and design services for the development
of various manufacturing equipment and process systems. Services performed by
the Company have included technical analyses, feasibility studies, plant layouts
and machinery and construction inspection services. The Company has provided
these services in connection with systems for the manufacture of paper,
plastics, bulk chemicals,
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flooring, steel, rubber, telephone equipment, television sets, ammunition, foods
and automotive production equipment. In addition, the Company has provided
services for various waste-to-energy engineering projects such as municipal and
industrial incinerators designed to convert various forms of waste into
marketable energy and for various environments, sanitary and water pollution
control projects, including water supply systems, storm and sanitary sewage
collection systems.
Transportation Engineering
Transportation engineering involves consulting and design services, as
well as construction supervision services, for various transportation
facilities, including the planning and design of track, terminals, stations,
yards and shops for the railway industry. This area also involves evaluation and
inspection of rolling stock for intercity rail lines, light rail, commuter line
and urban mass transit systems and design and construction inspection of
maintenance and storage facilities.
Design Build
This area involves the joint and simultaneous design and construction
of a project under a single contract with an owner. Projects could be for
complex transportation facilities, building design or rehab, and/or industrial
projects. In order to perform these projects, the Company will join with a
construction firm in order to provide the services to a client. The arrangement
with a contractor could be as a subcontractor, a joint-venture partner, or as
the prime contractor. Depending upon the type of arrangement with the owner and
the contractor, the Company may be responsible for ensuring the actual
construction of a project for a guaranteed price.
In November, 1996 the Company entered into an agreement with Bombardier
Corporation to provide the design and installation of three maintenance
facilities for new trainsets to be purchased by Amtrak for its Northeast
Corridor fleet. The Company has entered into a joint venture with a major
construction company in order to perform the services required by contract. The
Company believes this arrangement greatly mitigates the risk on this contract;
however, these contracts involve a higher degree of risk than other areas.
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Customers
The following table sets forth the percentage of contract revenues derived
from each of the following customers for the periods indicated:
Year Ended September 30,
1997 1996 1995
U.S. Government Contracts.................... 16% 14% 19%
State and Local Government Contracts......... 56 56 50
Foreign Government Contracts................. 1 2 2
Private Contracts............................ 27 28 29
In fiscal year 1997 the Company sold the International Region which
accounted for 1.4% of total revenues in countries other than the United States
and 4% in 1996 and 1995. See legal proceedings.
Contracts
In recent years, many of the Company's contracts have been awarded on a
cost-plus, as opposed to a fixed-price, basis. Under cost-plus contracts, the
Company is reimbursed for its allowable costs (direct labor plus overhead rate)
and is paid a negotiated fixed fee. Under fixed-price contracts, the Company is
paid an agreed-upon price for services rendered. Under fixed-price contacts, the
Company bears any risk of increased or unexpected costs that may reduce its
profit or cause it to sustain a loss. The majority (approximately 75%) of the
Company's contracts are cost-plus contracts.
Government Contracts
Many of the government programs in which the Company participates as a
contractor may extend for several years but may be funded on an annual basis.
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 convenience of the government. If a contract were to be
terminated for convenience, the Company would be reimbursed for its allowable
costs to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed. To date,
no government agency has terminated for convenience any significant contracts
with the Company.
Under certain circumstances, the government can suspend or debar
individuals or firms from obtaining future contracts with the government. While
the Company has not experienced such a suspension or debarment and considers the
possibility of any suspension or debarment to be remote, any such suspension or
debarment would have a materially adverse effect upon the Company.
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The books and records of the Company are subject to audits by a number of
federal, state and local government agencies, including the Defense Contract
Audit Agency. Such audits could result in adjustments to contract costs and
fees. To date, no material audit adjustments have been made in the Company's
contracts, although no assurances can be given that future adjustments will not
be required. All contract revenues are recorded in amounts which are expected to
be realized upon final settlement and the Company does not anticipate material
audit adjustments.
Accounts Receivable and Costs and Estimated Profits of Uncompleted Contracts in
Excess of Related Billings
Accounts receivable and costs and estimated profits of uncompleted
contracts in excess of related billings represented 84% and 87% of total assets
as of September 30, 1997 and 1996, respectively. Accounts receivable are
comprised of billed receivables while costs and estimated profits of uncompleted
contracts in excess of related billings are essentially unbilled receivables.
Unbilled receivables represent payment obligations for which invoices have not
or cannot be presented until a later period. The reasons for which invoices are
not presented may include normal invoice preparation lag, lack of billable
documents to be supplied by the client, and excess of actual direct and indirect
costs over amounts currently billable under cost reimbursement contracts to the
extent they are expected to be billed and collected. The financing of
receivables requires bank borrowings and the payment of associated interest
expense. Interest expense is a business expense not permitted as a reimbursable
item of cost under any government contracts.
Backlog
Backlog represents the value of existing contracts less the portion of such
contracts included in revenues on the basis of percentage-of-completion. The
Company's backlog for services as of September 30, 1997 and 1996 was
approximately $110,000,000 and $130,000,000, respectively. The Company's backlog
includes anticipated pass through cost such as reimbursement for travel,
purchase of supplies and sub-contracts. Over the last three years, pass through
costs, as a percent of total revenues, have been 23.1% in 1997, 24.2% in 1996,
and 22.2% in 1995.
A majority of the Company's customer orders or contract awards and
additions to contracts previously awarded are received or occur at random during
the year and may have varying periods of performance. The comparison of backlog
amounts on the same date in successive years is not necessarily indicative of
trends in the Company's business or future revenues.
The major component of the Company's operating costs are payroll and
payroll-related costs. Since the Company's business is dependent upon the
reputation and experience of its personnel and adequate staffing, a reasonable
backlog is important for the scheduling of operations and for the maintenance of
a fully staffed level of operation.
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Competition
The Company has numerous competitors in all areas in which it does
business. Some of its competitors are large, diversified firms having
substantially greater financial resources and larger technical staffs than the
Company. It is not possible to predict the extent of competition which the
Company will encounter in the future because of changing customer requirements
in terms of types of projects and technological developments. It has been the
Company's experience that the principal competitive factors for the type of
service business in which the Company engages are a firm's demonstrated ability
to perform certain types of projects, the client's own previous experience with
the competing firms, a firm's size and financial condition, and the cost of the
particular proposal.
It is Management's belief that the diversified scope of the services
offered by the Company is a positive competitive factor. Among other things, the
wide range of expertise which the Company possesses permits it to remain
competitive in obtaining federal government contracts despite shifts in federal
spending emphasis. Management believes that the national and international scope
of the Company is a positive factor in attracting and retaining clients which
have the need for engineering services in different regions of the country and
the world.
Marketing
Marketing activities are conducted by key operating and executive
personnel, including specifically assigned sales personnel, as well as through
professional personnel who maintain existing and develop new client
relationships. The Company's ability to compete successfully in the industry is
largely dependent on aggressive marketing, the development of information
regarding client requirements, the submission of responsive cost-effective
proposals and the successful completion of contracts. Information concerning
private and governmental requirements is obtained during the course of contract
performance, from formal and informal briefings, from participation in
activities of professional organizations, and from literature published by the
government and other organizations.
Personnel
As of September 30, 1997, the Company had 924 employees, of whom 805
were engaged in engineering and architectural services, 86 were engaged in
administration and 33 in marketing.
Because of the nature of services provided, many employees are
professional or technical personnel having specialized training and skills,
including engineers, architects, analysts, management specialists, technical
writers and skilled technicians. Although many of the Company's personnel are
highly specialized in certain areas the Company is not currently experiencing
any material difficulty in obtaining the personnel it requires to perform under
its contracts. Management believes that the future growth and success of the
Company will depend, in part, upon its continued ability to retain and attract
highly qualified personnel. The Company believes its employee relations to be
good.
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Environmental Compliance
The Company's facilities are subject to federal, state and local
authorities environmental control regulations. The Company believes it is in
compliance with these numerous regulations and that it is not exposed to any
material liability as it relates to contamination of the environment. To date,
compliance with these environmental regulations has not had a material effect on
the Company's earnings nor has it required the Company to expend significant
capital expenditures.
Executive Officers of the Registrant
Position with STV Group, Inc. Business
Name Age Experience During the Past 5 Years
Michael Haratunian (1) 64 Chairman of the Board and Chief Executive Officer of
STV Group, Inc.
Dominick M. Servedio (2) 57 Director, President and Chief Operating Officer of STV Group,
Inc. and President and Chief Operating Officer of
STV Incorporated
W. A. Sanders II (3) 50 Senior Vice President of STV Incorporated
Peter W. Knipe (4) 48 Secretary/Treasurer of STV Group, Inc.
(1) Mr. Haratunian has been associated with the Company continuously since 1972
in various capacities and was appointed President of Seelye, Stevenson,
Value & Knecht, Inc. in 1977 and Director and Executive Vice-President of
Engineering of STV Group, Inc. in 1981 and assumed the Presidency of STV
Group, Inc. in 1988. He was appointed Chief Executive Officer in 1991 and
Chairman of the Board in 1993. Mr. Haratunian is a registered professional
engineer.
(2) Mr. Servedio joined the Company is 1977 as Vice President of Seelye,
Stevenson, Value & Knecht, Inc. and was appointed Executive Vice President
in 1982. He was appointed President of Seelye, Stevenson, Value & Knecht,
Inc. and Executive Vice President of STV Group, Inc. in 1988. Mr. Servedio
was elected President of STV Group, Inc. in 1993. Mr. Servedio is a
registered professional engineer.
(3) Mr. Sanders has been associated with the Company continuously since 1968 in
various capacities and was appointed Executive Vice President of Sanders &
Thomas in 1991. Mr. Sanders is a registered professional engineer.
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(4) Mr. Knipe joined the Company in 1979, was appointed Controller in 1983 and
was elected Treasurer in 1987 and Secretary in 1993. In addition to his
position with the Company, he serves as a director and officer of certain
subsidiaries of the Company.
ITEM 2. PROPERTIES
The Company's executive offices and a principal engineering office are
located in a modern 58,000 square foot building leased by the Company in
Douglassville, Pennsylvania, pursuant to a lease which expires in October 2011.
The Company leases office facilities in a number of other locations
both in the United States and overseas, at which it performs engineering and
architectural consulting and design services, including a facility of
approximately 55,000 square feet in New York, New York, pursuant to a 15 year
lease which expires in December, 2006.
The Company believes that its facilities are adequate to meet the
current and foreseeable needs of the Company. The Company does not expect to
experience any difficulty in securing additional space should that become
necessary.
ITEM 3. LEGAL PROCEEDINGS
The Company is the subject of various claims, legal actions and
complaints arising in the ordinary course of business. In most cases, the
Company is one of several named defendants or third-party defendants. In the
opinion of management, most of these matters are without merit or are of such a
nature or involve such amounts that an unfavorable disposition would not have a
material adverse effect on the financial condition of the Company.
For the policy year beginning March 4, 1997, the Company's professional
liability arrangement provides for an annual aggregate $5,000,000 of coverage
with a $350,000 deductible per occurrence on a claims-made basis. For policy
years beginning March 4, 1993 and ending on March 3, 1997, the Company's
professional liability insurance arrangement provided for an annual aggregate
$5,000,000 of coverage with a $250,000 deductible per occurrence on a
claims-made basis. For the policy year beginning March 4, 1992, the Company's
professional liability insurance arrangement provided for an aggregate
$5,000,000 of coverage. There was a $500,000 deductible and a requirement to
indemnify the insurer for an additional aggregate $1,000,000. The Company had a
similar arrangement for professional liability coverage for the period October
1, 1986, to March 3, 1992, providing an aggregate $5,000,000 of professional
liability coverage. The Company has recognized the indemnity obligation by
charges of $4,500,000 to operations in prior years and the posting of a
$1,000,000 letter of credit. In addition to the professional liability coverage,
the Company has general liability insurance in excess of $10,000,000 per
occurrence and in the aggregate.
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During 1992, the Company and its insurers settled a personal injury
lawsuit for $5,400,000, of which $2,700,000 was paid by the Company's
professional liability insurer from the funded indemnity and $2,700,000 by the
general liability insurer. There remains a declaratory judgement action pending
as to whether insurance coverage was to be provided under the previous general
liability policy or professional liability policy then in effect. In this
proceeding, the court has required that the limits of the Company's insured
coverage be reserved to pay this claim if the insurer is found liable. The
Company and its professional liability insurer believe that this matter should
be covered under its general liability policy in which case the $2,700,000 would
be repaid to the professional liability insurer to replenish the indemnity.
In addition, in 1992 the Company's former professional liability
insurer was found liable for approximately $4,000,000 due to a previous
arbitration proceeding allegedly relating to an asset acquisition. The judgement
was reversed on appeal in 1994. If the Company's professional liability insurer
is found ultimately liable under both of these actions, the Company may be
required to indemnify the professional liability insurer to the extent of the
policy limit of $5,000,000 as described above. Such payments would constitute a
charge to operations in the year the determination is made. The Company and the
Company's professional liability insurer continue to deny liability and intend
to vigorously pursue defenses available to them.
The Company is also involved in various other litigation arising out of
the ordinary course of business, which may require the payment of additional
amounts. The Company's management believes that the final resolution of the
above legal matters will not have a material adverse effect on the Company's
financial statements.
The Company sold its International Region as of March 13, 1997. No
material gain or loss is anticipated as a result of the sale, pending final
settlement. However, the Company does have contingent contractual liability to
complete those projects assigned to the purchaser, should the purchaser be
unable to complete them.
If the outcome of all of the aforementioned litigation is adverse to
the Company and the Company is required to pay additional amounts, it could have
a material adverse effect on the earnings and financial condition of the Company
in the year such determination is made; however, management believes that the
final resolution of these legal matters will not have a material adverse effect
on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information contained under the caption "Common Stock Market
Prices" from the Company's Annual Report to Shareholders for the fiscal year
ended September 30, 1997, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Financial Highlights for
Fiscal Years Ended September 30," 1993 through 1997 in the Company's Annual
Report to Shareholders for the fiscal year ended September 30, 1997 is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
Results of Operation
The Company's contracts have been awarded on a cost-plus or fixed-price
basis. See Part I, Item 1, "BUSINESS - Contracts". As a service business, the
Company's profitability is directly affected by the degree to which its
professional staff is fully utilized on existing contracts.
Fiscal Year 1997 Compared to Fiscal Year 1996
Total revenues for the fiscal year ended September 30, 1997, increased
.7 percent to $94,712,000. This is down from a 5.4 percent increase in fiscal
1996 and up from a .3 percent decrease in fiscal 1995. The increase in total
revenues in fiscal 1997 was mostly due to a 2.2 percent increase in operating
revenues mainly in the transportation area. Revenues from U.S. government
contracts increased 15.1 percent in fiscal 1997 as compared to fiscal 1996 and
decreased 21.5 percent as compared to fiscal 1995. This increase is attributable
to the government's spending increases, particularly in transportation projects.
Operating revenues (total revenues excluding pass-through costs) increased 2.2
percent to $72,832,000 compared to a 2.7 percent increase to $71,271,000 in
fiscal 1996 and a 5.6 percent increase in fiscal 1995. We continue to see an
increased demand for facilities and transportation engineering. United States
defense work has decreased slightly, but there is continued demand for services
in other areas of the U.S. government.
Pass-through costs, expressed as a percentage of total revenue,
decreased to 23.1 percent in fiscal 1997 compared to 24.2 percent in fiscal 1996
and increased from 22.2 percent in fiscal 1995. Costs will vary from year to
year depending on the need for specialty subconsultants and governmental
subcontract requirements.
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Cost of services, expressed as a percentage of operating revenues, was
88.4 percent in fiscal 1997, which is a decrease from the 89.2 percent in fiscal
1996, and 89.3 percent in fiscal 1995. This percentage decrease is due to
operating revenues increasing at a higher rate than did cost of services as
labor utilization increased. Costs increased from $63,557,000 in fiscal 1996 to
$64,362,000 in fiscal 1997. This increase is due primarily to increases in
office-related expenses for new and upgraded facilities.
General and administrative expense, expressed as a percentage of
operating revenues, increased to 7.3 percent in fiscal 1997 from 6.9 percent in
1996 and 7.1 percent in 1995. Total general and administrative costs increased
8.3 percent in fiscal 1997 from $4,912,000 in fiscal 1996 to $5,322,000. This
increase is due to higher facility costs and labor related expenses.
Interest expense, expressed as a percentage of operating revenues, was
1.9 percent in fiscal 1997 and 2.1 percent in fiscal 1996, and 2.2 percent in
fiscal 1995. This decrease is due to a lower average loan balance during the
year and higher operating revenue.
The Company had a pre-tax profit of $1,768,000. Income tax expense was
51 percent of pre-tax income compared to 54 percent in fiscal 1996 and 58
percent in fiscal 1995. The variance in the rate is due to reduction in
non-deductible expenses as a percent of pre-tax income.
In the fourth quarter, the Company had a pre-tax profit of $578,000 as
compared to $483,000 in fiscal 1996 and $286,000 in fiscal 1995. The increase in
pre-tax profit from fiscal 1996 is due primarily to a more efficient use of
labor which resulted in higher operating revenue.
Fiscal Year 1996 Compared to Fiscal Year 1995
Total revenues for the fiscal year ended September 30, 1996, increased
5.4 percent to $94,073,000. This is up from a .3 percent decrease in fiscal 1995
and up from a 2.4 percent increase in fiscal 1994. The increase in total
revenues in fiscal 1996 was mostly due to a 15.0 percent increase in subcontract
and procurement mainly in the transportation area. Revenues from U.S. government
contracts decreased 21.5 percent in fiscal 1996 as compared to fiscal 1995 and
13 percent as compared to fiscal 1994. This decrease is attributable to the
government's spending reduction, particularly in overseas infrastructure
projects. Operating revenues (total revenues excluding pass-through costs)
increased 2.7 percent to $71,271,000 compared to a 5.6 percent increase to
$69,397,000 in fiscal 1995 and a 4.9 percent increase in fiscal 1994. We
continue to see an increased demand for facilities and transportation
engineering. United States defense work has decreased slightly, but there is
continued demand for services in other areas of the U.S. government.
Pass-through costs, expressed as a percentage of total revenue,
increased to 24.2 percent in fiscal 1996 compared to 22.2 percent in fiscal 1995
compared to 26.5 percent in fiscal 1994. Costs will vary from year to year
depending on the need for specialty subconsultants and governmental subcontract
requirements.
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Cost of services, expressed as a percentage of operating revenues, was
89.2 percent in fiscal 1996, which is a decrease from the 89.3 percent in fiscal
1995, but is comparable to 89.2 percent in fiscal 1994. In fiscal 1996, costs
increased from $61,942,000 in fiscal 1995 to $63,557,000. This increase is due
primarily to increased labor expenses as a result of increased workload
commensurate with operating revenue increase.
General and administrative expense, expressed as a percentage of
operating revenues, decreased to 6.9 percent in fiscal 1996 from 7.1 in 1995 and
1994. Total general and administrative costs also decreased .8 percent in fiscal
1996 from $4,952,000 to $4,912,000.
Interest, expressed as a percentage of operating revenues, was 2.1
percent in fiscal 1996 and 2.2 percent in fiscal 1995 and 1994. Interest rates
decreased in fiscal 1996, and bank loans were lower due to a more efficient use
of cash.
The Company had a pre-tax profit of $1,301,000. Income tax expense was
54 percent of pre-tax income compared to 58 percent in fiscal 1995 and 45
percent in fiscal 1994. The variance in the rate is due to reduction in
non-deductible expenses as a percent of pre-tax income.
In the fourth quarter, the Company had a pre-tax profit of $483,000 as
compared to $286,000 in fiscal 1995 and $144,000 in fiscal 1994. The increase in
pre-tax profit from fiscal 1995 is due to a decrease in employee-related costs
and interest expense.
Fiscal Year 1995 Compared to Fiscal Year 1994
Total revenues for the fiscal year ended September 30, 1995 decreased
0.3% to $89,232,000. This is down from a 2.4% increase in fiscal 1994 and a
15.3% increase in fiscal 1993. The reduction in total revenues in fiscal 1995
was the result of a 16.4% reduction in subcontract and procurement mainly in the
transportation area. Revenues from U. S. Government contracts decreased 13% in
fiscal 1995 as compared to fiscal 1994 and 15.8% as compared to fiscal 1993.
This decrease is attributable to the Government's spending reduction,
particularly in overseas infrastructure projects. Operating revenues (total
revenues excluding pass-through costs) increased 5.6% to $69,397,000 compared to
a 4.9% increase in fiscal 1994 and a 13.5% increase in fiscal 1993. While there
was a reduction in the international region, we continue to see an increased
demand for facilities and transportation engineering. United States defense work
has decreased slightly but there is continued demand for services in other areas
of the U. S. Government.
Pass-through costs, expressed as a percentage of total revenue,
decreased to 22.2% in fiscal 1995 compared to 26.5% in fiscal 1994 and 28.2% in
fiscal 1993. Costs will vary from year to year depending on the need for
specialty subconsultants and governmental subcontract requirements.
Cost of services, expressed as a percentage of operating revenues, was
89.3% in fiscal 1995, which is comparable to the 89.2% in fiscal 1994, but is an
increase from the 88.0% in fiscal 1993. In fiscal 1995, costs increased from
$58,614,000 in fiscal 1994 to $61,942,000. This increase is due to increased
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international marketing efforts and increased labor and labor-related expenses
due to increased workload. The increase in fiscal 1994 was due in part to a
transfer of certain costs from general and administrative expense to cost of
services. Without this transfer, cost of services expressed as a percentage of
revenue was comparable to fiscal 1993 at 87.7%. Total costs in fiscal 1994
(excluding the transfer of $1.0 million) increased to $57,614,000 from
$55,173,000. This increase was due to increased post retirement benefit costs,
increased international marketing efforts and increased labor and labor-related
expenses due to an increased workload.
General and administrative expense, expressed as a percentage of
operating revenues, was 7.1% in fiscal 1995 and 1994 and decreased from 8.3% in
fiscal 1993. Total general and administrative costs increased 6.3% in fiscal
1995 from $4,657,000 to $4,952,000. This increase is due mainly to an increase
in legal fees. The decrease in fiscal 1994 was due to the above mentioned
reclassification of costs from general and administrative expense to cost of
services.
Interest, expressed as a percentage of operating revenues, was 2.2% in
fiscal 1995 and 1994 and decreased from 2.3% in fiscal 1993. While interest
rates increased in fiscal 1995, the average amount of the bank loan outstanding
decreased by 7% as compared to fiscal 1994.
The company had a pre-tax profit of $949,000. Income tax expense was
58% of pre-tax income compared to 45% in fiscal 1994 and 46% in fiscal 1993. The
variance in the rate is due to an increase in non-deductible expenses and the
recognition of income in the various states in which we do business and their
tax rates.
In the fourth quarter the Company had a pre-tax profit of $286,000 as
compared to $144,000 in fiscal 1994 and $152,000 in fiscal 1993.
Liquidity, Capital Resources and Financing Agreements.
Cash provided in operating activities was $1,734,000 in fiscal 1997
compared to cash provided in operating activities of $4,268,000 in fiscal 1996.
This decrease was due mainly to decreases in accounts payable and other current
liabilities, reduction in billings in excess of related costs, and an increase
in prepaid income taxes. Working capital increased $585,000 to $9,306,000 in
fiscal 1997 compared to a $501,000 increase in 1996 and a $1,036,000 increase in
1995. Investing activities increased to $831,000 for the continued purchase of
computer hardware and software compared to $357,000 in 1996. Financing
activities included a $780,000 net increase in short-term borrowing due to the
previously mentioned decrease in billings in excess, accounts payable and
increase in prepaid taxes.
Capital resources available to the Company include an existing line of
credit for working capital. The current line is a maximum of $16.5 million based
on accounts receivable and work-in-progress, of which approximately $5,039,000
is currently available. An agreement is being negotiated whereby the line of
credit may be reduced. The line of credit is also a demand note and requires the
Company to maintain certain financial covenants. To date, the Company has
maintained these covenants and believes that its working capital and existing or
reduced line of credit are adequate to meet current fiscal year
-13-
requirements. If the Company should fail to meet these covenants or should the
bank demand payment on the note, there would be a material adverse financial
impact. The Company is not aware of any reason for the bank to demand payment
and does not expect that it would do so in the future although the bank has
recently announced that they are being acquired. The Company is planning to
continue its program of purchasing computer-assisted design and drafting
equipment.
In the long term the Company relies on the ability to generate
sufficient cash flows from operating activities to fund investing and financing
requirements. If demand for services should increase sharply, additional sources
of financing may be required.
The Company is currently involved in two lawsuits, Skinner and American
Continental Properties. If the outcome of these lawsuits is adverse, the Company
may be required to pay substantial deductibles or indemnification. The Company
believes that it will be able to finance any adverse finding through the use of
an income tax carryback of the resulting loss in combination with the line of
credit and existing resources. The Company is vigorously pursuing its defenses,
and management believes the final resolution of these legal matters will not
have a material adverse effect on the Company's financial statements.
Impact of Inflation
Because the Company's business is essentially the supplying to
customers of the expertise of its employees, there are certain factors which
significantly reduce the impact of inflation. One such factor is that the
Company has a comparatively small investment in property and equipment as a
percentage of total assets. In addition, a substantial percentage of the
Company's contracts are under cost reimbursement contract provisions or
fixed-price contracts which include inflation assumptions when bid upon.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of the independent auditors and consolidated financial
statements included in the Company's Annual Report to Shareholders for the year
ended September 30, 1997, are included in Part IV, Item 14 of this Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
-14-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the caption "Election of Directors" in
the company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" in
the Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information contained under the caption "Security Ownership" in the
Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS.
The information contained under the caption "Certain Transactions" in
the Company's 1997 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(A) The following documents are filed as part of this report;
(1) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets - September 30, 1997 and 1996
Consolidated Statements of Income - Years ended September 30,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended September 30,
1997, 1996 and 1995
-15-
Notes to Consolidated Financial Statements - September 30, 1997
(2) Financial Statements schedules required by Item 8.
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(B) Reports on Form 8-K.
There were no reports on Form 8-K for the fiscal year ended September
30, 1997.
(C) Exhibits filed pursuant to Item 601 of Regulation S-K:
****** 3.1 Amended and restated Articles of Incorporation of the
Company.
****** 3.2 By-Laws of the Company, as amended.
*** 3.3 Amendment to Section 1.04 of the By-Laws of the Company.
* 4.0 Specimen Common Stock Certificate of the Company.
* 10.2 Loan Agreement, undated, between the Company and Richard
L. Holland, relating to the purchase of 48,779 shares of
Common Stock.
*** 10.3 Asset Acquisition Agreement, dated September 22, 1987,
between STV/WAI, Inc. and Michael Lynn Assoc., P.C.
relating to the acquisition by STV/Michael Lynn
Associates, Inc. of certain assets of Michael Lynn
Assoc., P.C.
* 10.4 Lease, dated October 3, 1980, between the Company and
Montco Investors Realty Company, relating to the
Company's executive and engineering offices in
Pottstown, Pennsylvania
* 10.5 Lease, dated August 30, 1983, between the Company and
Montco Investors Realty Company, relating to the
addition to the Company's offices in Pottstown,
Pennsylvania and granting the Company an option to
extend its lease for such facility for two additional
five-year periods.
-16-
* 10.6 Lease, dated November 22, 1983, accompanying Workletter,
dated October 12, 1983, and letters (2) dated November
22, 1983 between the Company and 225 Fourth Company,
providing for the renovation and use of office space at
225 Park Avenue South, New York, New York.
* 10.7 STV Engineers, Inc. Employee Stock Ownership Plan, dated
January 7, 1982, and STV Engineers Employee Stock
Ownership Plant Trust Agreement, dated January 7, 1982,
and Amendment No. 1 thereto, dated May 14, 1982.
* 10.8 STV Revised Pension Plan.
* 10.9 STV, Inc. Money Purchase Pension Plan.
10.10 Officers' and Directors' Liability Policy.
*** 10.11 Employment Agreement of Richard L. Holland
**** 10.12 Stipulation of Amendment to Employee Stock Ownership
Plan effective October 1, 1984.
*** 10.13 Loan Agreement, dated February 28, 1986, between the
Company and First Pennsylvania Bank, N.A., relating to
the Company's $13,000,000 line of credit.
*** 10.14 Amendment, dated November 26, 1986, to the Loan
Agreement between the company and First Pennsylvania
Bank, N.A., increasing the limit of standby letters of
credit in the Agreement to $3,500,000.
*** 10.15 STV Engineers, Inc. 1985 Stock Option Plan.
*** 10.16 Lease, dated January 27, 1986, and Amendments thereto,
between Company and 225 Fourth Company providing for the
use of office space at 233 Park Avenue, New York, New
York.
*** 10.17 Amendment, dated May 28, 1987, between the Company and
First Pennsylvania Bank, N.A., decreasing the interest
rate for short term borrowings and the creation of a
$1,500,000 term loan.
*** 10.18 Amendment, dated November 12, 1987, increasing the line
of credit to $17,000,000.
***** 10.22 Amendment, dated June 1, 1990 between the Company and
First Pennsylvania Bank, NA increasing the interest rate
for short term borrowings.
-17-
****** 10.26 Amendment dated September 30, 1991, between the company
and CoreStates Bank, N.A., decreasing the maximum amount
of the line of credit and increasing the charge for
issuing letters of credit.
******* 10.27 Lease extension dated March 13, 1992 between the Company
and 225 Fourth Company relating to an extension of seven
years, four months for use of office space at 225 Park
Avenue South, New York, New York.
******* 10.28 Agreement effective January 1, 1992 relating to ACEC
medical and life insurance.
******* 10.29 Agreement dated August 29, 1991 relating to U. S.
Healthcare medical insurance.
********* 10.31 Employment Agreement of Dominick M. Servedio.
********* 10.32 Employment Agreement of Michael Haratunian.
********** 10.33 Amendment to the STV Group Incorporated Employee Stock
Ownership Plan
*********** 10.34 Lease, dated August 21, 1995, and Addendums thereto,
between the Company and Dame Enterprises, relating to
the Company's executive and engineering offices in
Douglassville, Pennsylvania.
*********** 10.35 Agreement effective July 1, 1996 with Corporate Health
Insurance Company providing Group Health Insurance -
Custom Plan.
*********** 10.36 Agreement effective December 1, 1996 with U. S.
Healthcare providing medical insurance.
11 Statement Re: Computation of Per Share Earnings.
13.1 "Common Stock Market Prices" from Company's Annual
Report to Shareholders.
13.2 "Financial Highlights for Fiscal Years Ended September
30," 1993 through 1997 from Company's Annual Report to
Shareholders.
21.1 Subsidiaries of the Company from Company's Annual Report
to Shareholders.
-18-
* Incorporated by reference from the Annual Report and Form 10-K
for the year ended September 30, 1984.
** Incorporated by reference from Registration Statement No.
2-88904.
*** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1987.
**** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1989.
***** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1990.
****** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1991.
******* Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1992.
******** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1993.
********* Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1994.
********** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1995.
*********** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1996.
-19-
SIGNATURES
Pursuant to the requirements of Section 13 of 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.
Date: December 29, 1997 STV GROUP, INCORPORATED
(Registrant)
By: /s/ Michael Haratunian
MICHAEL HARATUNIAN,
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ Michael Haratunian Chairman of the Board, December 29, 1997
MICHAEL HARATUNIAN Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Dominick M. Servedio President, Chief December 29, 1997
DOMINICK M. SERVEDIO Operating Officer and
Director
/s/ Peter W. Knipe Secretary/Treasurer December 29, 1997
PETER W. KNIPE (Principal Accounting
and Financial Officer)
/s/ Richard L. Holland Director December 29, 1997
RICHARD L. HOLLAND
/s/ Harry Prystowsky Director December 29, 1997
HARRY PRYSTOWSKY
/s/ Ray M. Monti Director December 29, 1997
RAY M. MONTI
/s/ Maurice L. Meier Director December 29, 1997
MAURICE L. MEIER
/s/ William J. Doyle Director December 29, 1997
WILLIAM J. DOYLE
FINANCIAL STATEMENTS
Index
Report of Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
-21-
Report of Independent Auditors
Stockholders and Board of Directors
STV Group, Incorporated
We have audited the accompanying consolidated balance sheets of STV Group,
Incorporated and Subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of STV Group,
Incorporated and Subsidiaries as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Harrisburg, Pennsylvania
November 13, 1997
-22-
Consolidated Balance Sheets
STV Group and Subsidiaries.
September 30
1997 1996
Assets
Current Assets:
Cash $1,153,000 $28,000
Accounts receivable 20,154,000 20,504,000
Costs and estimated profits of uncompleted
contracts in excess of related billings 15,077,000 14,290,000
Deferred income taxes 0 180,000
Prepaid income taxes 503,000 0
Prepaid expenses and other current assets 1,223,000 1,577,000
----------- -----------
Total Current Assets 38,110,000 36,579,000
Property and equipment, net 1,339,000 1,314,000
Deferred income taxes 1,660,000 1,369,000
Other assets 716,000 733,000
----------- -----------
Total Assets $41,825,000 $39,995,000
Liabilities and Stockholders' Equity
Current Liabilities:
Note payable $10,228,000 $9,448,000
Current maturity of long-term debt 632,000 1,000,000
Accounts payable 5,707,000 5,603,000
Billings on uncompleted contracts in
excess of related costs and estimated profits 4,386,000 4,318,000
Accrued payroll and related expenses 5,547,000 5,775,000
Accrued expenses 1,608,000 1,522,000
Deferred income taxes 696,000 0
Income tax payable 0 192,000
----------- -----------
Total Current Liabilities 28,804,000 27,858,000
Long-Term Debt 1,819,000 1,795,000
----------- -----------
Total Liabilities 30,623,000 29,653,000
Commitments and contingencies
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares,
no par, no shares issued or outstanding 0 0
Convertible preferred stock, cumulative,
par $1, authorized 2,000,000 shares,
issuable in series, $1.50 series,
no shares issued or outstanding 0 0
Common stock, par $1, authorized 6,000,000 shares 1,921,000 1,921,000
Capital in excess of par 3,003,000 3,003,000
Retained earnings 6,674,000 5,814,000
----------- -----------
11,598,000 10,738,000
Less: Treasury stock 271,000 271,000
Loans receivable from officers 125,000 125,000
----------- -----------
Total Stockholders' Equity 11,202,000 10,342,000
Total Liabilities and Stockholders' Equity $41,825,000 $39,995,000
See notes to consolidated financial statements.
-23-
Consolidated Statements of Income
STV Group and Subsidiaries.
For the Fiscal Year Ended September 30
1997 1996 1995
Total revenues $94,712,000 $94,073,000 $89,232,000
Subcontract and procurement costs 21,880,000 22,802,000 19,835,000
----------- ----------- -----------
Operating revenue $72,832,000 $71,271,000 $69,397,000
Costs and expenses:
Costs of services $64,362,000 $63,557,000 $61,942,000
General and administrative 5,322,000 4,912,000 4,952,000
Interest 1,380,000 1,501,000 1,554,000
----------- ----------- -----------
$71,064,000 $69,970,000 $68,448,000
Income before income taxes $1,768,000 $1,301,000 $949,000
Income tax expense 908,000 706,000 555,000
----------- ----------- -----------
Net income $860,000 $595,000 $394,000
Earnings per common share $.45 $.32 $.22
See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity
STV Group and Subsidiaries.
Common Stock Treasury Stock
Capital in
Number excess of Retained Number
of shares Amount par earnings of shares Amount
Balance
September 30, 1994 1,842,972 $1,843,000 $2,681,000 $4,825,000 99,726 $271,000
Net income for the year 394,000
Issuance of stock 78,000 78,000 322,000
Balance
September 30, 1995 1,920,972 $1,921,000 $3,003,000 $5,219,000 99,726 $271,000
Net income for the year 595,000
Balance
September 30, 1996 1,920,972 $1,921,000 $3,003,000 $5,814,000 99,726 $271,000
Net income for the year 860,000
Balance
September 30, 1997 1,920,972 $1,921,000 $3,003,000 $6,674,000 99,726 $271,000
See notes to consolidated financial statements.
-24-
Consolidated Statements of Cash Flows
STV Group and Subsidiaries.
For the Fiscal Year Ended September 30
1997 1996 1995
Operating Activities
Net income $860,000 $595,000 $394,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 795,000 997,000 1,015,000
Deferred income taxes 585,000 (358,000) (165,000)
Stock contribution to Employee
Stock Ownership Program (ESOP) -- -- 400,000
Changes in operating assets and
liabilities
Accounts receivable 350,000 1,254,000 2,655,000
Costs and estimated profits of
uncompleted contracts in excess
of related billings and other current assets (487,000) (1,003,000) (1,000)
Accounts payable and other current liabilities 204,000 1,131,000 (2,533,000)
Billings on uncompleted contracts in excess
of related costs and estimated profits 68,000 974,000 (456,000
Current income taxes (641,000) 678,000 (200,000)
------------ ------------ ------------
Net cash provided by
operating activities $1,734,000 $4,268,000 $1,109,000
Investing Activities
Purchase of property and equipment $(724,000) $(338,000) $(727,000)
Purchase of software (107,000) (19,000) (224,000)
(Increase) decrease in other assets 28,000 (40,000) 9,000
Loans receivable from officers -- (125,000) --
------------ ------------ ------------
Net cash used in investing
activities $(803,000) $(522,000) $(942,000)
Financing Activities
Proceeds from line of credit and
long term borrowings $92,435,000 $85,797,000 $84,412,000
Principal payments on line of credit and
long term borrowings (92,241,000) (90,183,000) (84,551,000)
------------ ------------ ------------
Net cash provided by (used in)
financing activities $194,000 $(4,386,000) $(139,000)
Increase (decrease) in cash 1,125,000 (640,000) 28,000
Cash at beginning of year 28,000 668,000 640,000
Cash at end of year $1,153,000 $28,000 $668,000
See notes to consolidated financial statements.
-25-
Notes to Consolidated Financial Statements
STV Group and Subsidiaries.
1. Significant Accounting Policies
Basis of Presentation
The Company and its subsidiaries consider themselves in a single line of
business: consulting engineering, architectural, surveying and related services.
The Company's clients consist primarily of various governmental agencies, with
an increasing presence in the private sector in geographic regions throughout
the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires 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.
Revenue Recognition
The Company uses the percentage-of-completion method of accounting for contract
revenues. Progress toward completion is measured on a contract-by-contract basis
using direct labor costs incurred to date as compared with estimated total labor
costs at completion. The asset, "Cost and estimated profits of uncompleted
contracts in excess of related billings," represents revenues recognized in
excess of amounts billed. The liability, "Billings on uncompleted contracts in
excess of related costs and estimated profits," represents billings in excess of
revenues recognized. Significant changes in contract terms affecting the results
of operations are recorded and recognized in the period in which the revisions
are determined.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, investments in U.S. treasury bills, trade
payables, and debt instruments. The book value of cash and cash equivalents,
trade receivables, U.S. treasury bills, and trade payables are considered to be
representative of their respective fair values. The carrying value of the
Company's long-term debt approximates fair value. The fair value of the deferred
compensation plan liability is estimated to be $928,000.
Depreciation
Depreciation is primarily on the straight-line method over the estimated useful
lives of the assets. Depreciation of assets recorded under capital leases is
included in depreciation expense. For income tax purposes, accelerated
depreciation methods are used by certain subsidiaries and deferred income taxes
are provided, when applicable.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for
-26-
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The Company adopted SFAS 121 in the first quarter of fiscal
year 1997, and the effect of adoption was immaterial.
SFAS No. 123, "Accounting for Stock-Based Compensation," effective for fiscal
years beginning after December 15, 1995, provides companies with a choice to
follow the provisions of SFAS 123 in determining stock-based compensation
expense or to continue with the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company continues to follow APB 25 with respect to its
Stock Option Plan, and disclosures as required by SFAS 123 are included in Note
8 to the financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is required to be adopted for both interim and
annual periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share.
Under the new standard, the dilutive effect of stock options will be excluded
from basic earnings per share. If earnings per share had been calculated under
the new requirement, the effect would not have been material to the periods
presented.
2. Costs and Estimated Profits of Uncompleted
Contracts in Excess of Related Billings
Costs and estimated profits of uncompleted contracts at September 30, 1997, and
1996, respectively, are as follows:
1997 1996
Costs and estimated earnings
on uncompleted contracts $320,461,000 $328,090,000
Less billings to date 309,770,000 318,118,000
------------ ------------
$10,691,000 $9,972,000
Costs and estimated profits of uncompleted contracts are included in the
accompanying balance sheet under the following captions:
1997 1996
Costs and estimated profits of
uncompleted contracts
in excess of related billings $15,077,000 $14,290,000
Billings on uncompleted
contracts in excess of related
costs and estimated profits 4,386,000 4,318,000
----------- -----------
$10,691,000 $9,972,000
Included in accounts receivable are retainages related to uncompleted contracts
in the amount of $5,087,000 in 1997 and $3,161,000 in 1996. The collection of
retainages generally coincides with final project acceptance.
-27-
3. Property and Equipment
Property and equipment, at cost, are as follows:
1997 1996
Land $54,000 $54,000
Equipment 3,408,000 5,895,000
Leased equipment 804,000 930,000
Furniture and
fixtures 1,236,000 2,673,000
Leased furniture
and fixtures 220,000 233,000
Leasehold
improvements 1,744,000 2,516,000
----------- -----------
$7,466,000 $12,301,000
Less: Accumulated
depreciation and
amortization 6,127,000 10,987,000
----------- -----------
$1,339,000 $1,314,000
4. Note Payable
The note payable on demand with the Company's bank is with interest at 1-1/2
percent above the prime rate (10 percent at September 30, 1997) and is secured
by substantially all assets. The weighted average interest rate was 9.9 percent
in both fiscal 1997 and 1996. The bank also provides letters of credit which
incur a charge of 2-1/2 percent of the face value. Currently, $1,232,000 letters
of credit are outstanding. The face value of the letters of credit and note
payable cannot exceed a maximum of $16,500,000 based on accounts receivable and
contracts in progress balances.
An agreement with this bank contains restrictive covenants regarding additional
debt and stockholders' equity. The restrictions include maintaining a minimum
tangible net worth, a maximum total debt to tangible net worth ratio, and a
minimum working capital amount.
5. Income Taxes
The Company uses the liability method of accounting for income taxes required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of September 30, 1997 and
1996, are as follows:
1997 1996
Deferred tax assets:
Vacation accruals $607,000 $574,000
Depreciation 98,000 88,000
Deferred compensation 789,000 662,000
Litigation 387,000 284,000
International asset sale 107,000 0
Postemployment benefits 12,000 18,000
Postretirement
medical benefits 374,000 314,000
---------- ----------
Total deferred
tax assets $2,374,000 $1,940,000
Deferred tax liabilities:
Retainage 1,410,000 391,000
---------- ----------
Total deferred tax
liabilities $1,410,000 $391,000
Net deferred
tax assets $964,000 $1,549,000
-28-
Significant components of the provision (benefit) for income taxes are as
follows:
1997 1996 1995
Current:
Federal $208,000 $734,000 $520,000
State 86,000 330,000 200,000
----------- ----------- -----------
Total current $294,000 $1,064,000 $720,000
Deferred:
Federal $427,000 $(239,000) $(100,000)
State 187,000 (119,000) (65,000)
----------- ----------- -----------
Total deferred $614,000 $(358,000) $(165,000)
Income tax
expense $908,000 $706,000 $555,000
A reconciliation of federal income taxes at the statutory rate to the Company's
income tax provision follows:
1997 1996 1995
Federal income
tax rate 34.0% 34.0% 34.0%
Non-deductible
expenses and other 7.0 9.2 14.6
State taxes, net of
federal tax effect 10.0 10.8 9.4
---- ---- ----
51.0% 54.0% 58.0%
The Company made income tax payments of $971,000, $488,000, and $1,014,000 in
1997, 1996, and 1995, respectively. The Company received income tax refunds of
$7,000 in 1997, $51,000 in 1996, and $92,000 in 1995.
6. Earnings per Common Share
Earnings per common share is based on the weighted-average number of shares
outstanding during the periods presented after giving effect to the potential
dilutive effect, if any, of the exercise of stock options. Earnings per common
share are based upon 1,901,000 shares in 1997, 1,873,000 shares in 1996, and
1,832,000 shares in 1995.
7. Commitments and Contingencies
For the policy year beginning March 4, 1997, the Company's professional
liability arrangement provides for an annual aggregate $5,000,000 of coverage
with a $350,000 deductible per occurrence on a claims-made basis. For policy
years beginning March 4, 1993, and ending on March 3, 1997, the Company's
professional liability insurance arrangement provided for an annual aggregate
$5,000,000 of coverage with a $250,000 deductible per occurrence on a
claims-made basis. For the policy year beginning March 4, 1992, the Company's
professional liability insurance arrangement provided for an aggregate
$5,000,000 of coverage. There was a $500,000 deductible and a requirement to
indemnify the insurer for an additional aggregate $1,000,000. The Company had a
similar arrangement for professional liability coverage for the period October
1, 1986, to March 3, 1992, providing an aggregate $5,000,000 of professional
liability coverage. The Company has recognized the indemnity obligation by
charges of $4,500,000 to operations in prior years and the posting of a
$1,000,000 letter of credit. In addition to the professional liability coverage,
the Company has general liability insurance in excess of $10,000,000 per
occurrence and in the aggregate.
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During 1992, the Company and its insurers settled a personal injury lawsuit for
$5,400,000, of which $2,700,000 was paid by the Company's professional liability
insurer from the funded indemnity and $2,700,000 by the general liability
insurer. There remains a declaratory judgement action pending as to whether
insurance coverage was to be provided under the previous general liability
policy or professional liability policy then in effect. In this proceeding, the
court has required that the limits of the Company's insured coverage be reserved
to pay this claim if the insurer is found liable. The Company and its
professional liability insurer believe that this matter should be covered under
its general liability policy in which case the $2,700,000 would be repaid to the
professional liability insurer to replenish the indemnity.
In addition, in 1992 the Company's former professional liability insurer was
found liable for approximately $4,000,000 due to a previous arbitration
proceeding allegedly relating to an asset acquisition. The judgement was
reversed on appeal in 1994. If the Company's professional liability insurer is
found ultimately liable under both of these actions, the Company may be required
to indemnify the professional liability insurer to the extent of the policy
limit of $5,000,000 as described above. Such payments would constitute a charge
to operations in the year the determination is made. The Company and the
Company's professional liability insurer continue to deny liability and intend
to vigorously pursue defenses available to them.
The Company is also involved in various other litigation arising out of the
ordinary course of business, which may require the payment of additional
amounts. The Company's management believes that the final resolution of the
above legal matters will not have a material adverse effect on the Company's
financial statements.
The Company sold its International Region as of March 13, 1997. No material gain
or loss is anticipated as a result of the sale, pending final settlement.
However, the Company does have contingent contractual liability to complete
those projects assigned to the purchaser, should the purchaser be unable to
complete them.
The Company has noncancellable lease agreements for the use of office space and
equipment. These agreements expire on varying dates and in some instances
contain renewal options. In addition to the base rental costs, occupancy lease
agreements generally provide for rent escalations resulting from increased
assessments for real estate taxes and other charges. Future minimum lease
payments under noncancellable leases (excluding automobile leases) with
remaining terms of more than one year are due as follows:
Capital Leases Operating Leases
1998 $ 228,000 $3,719,000
1999 $ -- $3,437,000
2000 $ -- $2,911,000
2001 $ -- $2,625,000
2002 $ -- $2,095,000
Thereafter $ -- $11,016,000
Total minimum
lease payments $228,000 $25,803,000
Less amount
representing interest $10,000
Present value of
net minimum
lease payments $218,000
Rental expense under operating leases amounted to $3,783,000, $2,892,000, and
$2,705,000 in 1997, 1996, and 1995, respectively.
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8. Stock Plans
On October 1, 1981, the Company initiated an Employee Stock Ownership Plan
(ESOP) which covers substantially all of its employees. Contributions to the
plan are based on a percentage of eligible salaries. The total retirement
expense for the years 1997, 1996, and 1995 was $1,087,000, $1,002,000, and
$989,000, respectively. The liability is funded through either the issuance of
shares of Company stock (at fair market value on date of issuance) or a cash
payment for future stock purchases. The Company will fund the 1997 contribution
with cash payments throughout 1997 and 1998. At September 30, 1997, 1,288,000
shares of Company stock are held by the ESOP and are included in the earnings
per share computation.
The Company's 1985 Stock Option Plan, for grants of options to officers and key
employees, required that option prices be at least equal to the fair market
value of the common stock at the date of grant. No additional grants are
available under this plan. A new Stock Option Plan was approved in fiscal 1997.
Options are exercisable one year from the date of grant and expire 10 years from
the date of grant.
The company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per common share is
required by Statement 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997: risk-free interest rates of 6 percent, dividend
yield of 0 percent, expected volatility of the market price of the Company's
common stock of 18 percent, and a weighted -average expected life of the option
of 10 years. There were no options granted in 1996.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Pro forma results are
not likely to be representative of the effects on reported or pro forma results
of operations for future years. The Company's pro forma information is as
follows:
1997
Pro forma net income $ 774,000
Pro forma earnings per share $ .41
Outstanding options to purchase shares of common stock have been granted to
officers and employees at prices ranging from $4.13 to $8.00 per share.
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The weighted-average remaining contractual life of those options is 7.14 years.
A summary of the option transactions is as follows:
Year ended September 30
1997 1996 1995
Options outstanding,
beginning of period 190,000 190,000 155,000
Granted 55,000 -- 80,000
Exercised -- -- --
Canceled -- -- (45,000)
Options outstanding,
end of period 245,000 190,000 190,000
Options exercisable 190,000 190,000 110,000
Shares available for
future option grants 445,000 500,000 500,000
The weighted average fair value of options granted during fiscal 1997 was $3.81
per share. The weighted average exercise price of options outstanding at
September 30, 1997, was $5.30, while the weighted average exercise price of
exercisable options at September 30, 1997, was $4.52.
On October 20, 1995, certain Company officers borrowed $125,000 from the Company
to purchase 25,000 shares of common stock from an outside director of the
Company. The five-year term loan, secured by a stock pledge agreement, is
payable at the term with interest at the Company bank borrowing rate currently
at 1-1/2 percent above prime rate. These loans have been recorded as a reduction
to stockholders' equity.
9. Postretirement Benefit Plan
The Company sponsors a defined benefit health care plan that provides
postretirement medical benefits to all current and retired officers and their
spouses upon attaining age 65, or age 55 with 10 years of service. The plan is
contributory, with retiree contributions adjusted annually, and contains other
cost-sharing features such as deductibles and coinsurance. The accounting for
the plan anticipates future cost-sharing changes to the written plan that are
consistent with the Company's expressed intent to increase the retiree
contribution rate annually for the expected general inflation rate for that
year.
The following table presents the plan's status reconciled with amounts
recognized in the Company's balance sheet:
1997 1996
Accumulated postretirement benefit obligation:
Retirees $(521,000) $(305,000)
Fully eligible active
plan participants (536,000) (489,000)
Other active
plan participants (351,000) (375,000)
----------- -----------
Accumulated
postretirement
benefit obligation $(1,408,000) $(1,169,000)
Unrecognized
net gain (448,000) (536,000)
Unrecognized prior
service costs 82,000 0
Unrecognized
transition obligation 895,000 951,000
----------- -----------
Accrued postretirement
benefit cost $(879,000) $(754,000)
Net periodic postretirement benefit costs include the following components:
1997 1996 1995
Service cost $36,000 $43,000 $67,000
Interest cost 101,000 119,000 185,000
Amortization of
transition obligation
over 20 years 56,000 84,000 124,000
Unrecognized
(gain) loss (3,000) (49,000) --
--------- --------- ---------
Net periodic
postretirement
benefit cost $190,000 $197,000 $376,000
Effective December 1,1995, STV switched from an indemnity to a combination
indemnity and managed care program. The cost assumptions
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associated with a managed care plan are less than with an indemnity program. The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 11 percent for 1997
(11.5 percent in 1996, 12 percent in 1995) and is assumed to decrease gradually
to 6 percent in 2008 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated post retirement benefit
obligation as of September 30, 1997, by $153,000, and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for 1997, 1996 and 1995 by $16,000, $20,000 and $34,000 respectively.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75 percent at September 30, 1997 and
1996.
10. Major Customers
The percentage of total revenues derived from contracts with the United States
government for fiscal years 1997, 1996 and 1995 were 16 percent, 14 percent, and
19 percent, respectively.
11. Long-Term Debt
Long-term debt consists of the following:
1997 1996
Capital leases with various maturities through
September 1998, rates ranging from 8 percent to
11 percent, and monthly installments ranging
from $974 to $15,897 $218,000 $727,000
Deferred compensation liability payable in fixed
monthly installments of $12,000 through September
2006 with interest imputed at 16 percent 659,000 689,000
Executive deferred compensation liability for
certain executives with annual interest at 1
percent above prime rate as of November 1 payable
upon the termination of employment or approval of
the Board of Directors 634,000 558,000
Supplemental executive retirement agreements for
two current executives payable in monthly
installments upon retirement with interest
imputed at 7 percent. (1) 562,000 360,000
Other 378,000 461,000
---------- ----------
2,451,000 2,795,000
Less: Current portion 632,000 1,000,000
---------- ----------
$1,819,000 $1,795,000
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(1) These agreements for two current executives provide for future cash payments
of $141,000 and $261,000 annually, based on salary at retirement commencing
September 2003 and September 2005, respectively. If maximum Company performance
goals are achieved, these amounts would be increased 20 percent starting in
September 2003, or at a prorated rate based on the levels of performance
achieved.
Interest paid during 1997, 1996, and 1995 amounted to $1,310,000, $1,472,000,
and $1,517,000, respectively.
Annual maturities of long-term debt are as follows:
Year ending September 30
1998 $ 632,000
1999 $ 42,000
2000 $ 49,000
2001 $ 57,000
2002 $ 67,000
Thereafter $ 1,604,000
12. Quarterly Results (unaudited)
(All dollar amounts omit 000 except per share data.)
Quarter Year
First Second Third Fourth
Revenue from services:
1997 $ 22,736 $ 22,311 $ 24,637 $ 25,028 $ 94,712
1996 $ 22,983 $ 23,502 $ 24,949 $ 22,639 $ 94,073
Operating revenue:
1997 $ 18,123 $ 18,181 $ 18,113 $ 18,415 $ 72,832
1996 $ 18,004 $ 17,788 $ 17,982 $ 17,497 $ 71,271
Gross profit:
1997 $ 1,918 $ 2,092 $ 2,138 $ 2,322 $ 8,470
1996 $ 1,883 $ 1,781 $ 1,979 $ 2,071 $ 7,714
Net income:
1997 $ 158 $ 183 $ 228 $ 291 $ 860
1996 $ 103 $ 71 $ 159 $ 262 $ 595
Earnings per share:
1997 $ .08 $ .10 $ .12 $ .15 $ .45
1996 $ .06 $ .04 $ .08 $ .14 $ .32
In the fourth quarter of 1996, STV revised its estimate of certain expenses. The
impact of these adjustments on fourth quarter earnings was an increase of $.05
per share.
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EXHIBITS
Index
Exhibit 10.10 - Officers' and Directors' Liability Policy
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 13.1 - "Common Stock Market Prices" from Company's Annual Report
to Shareholders
Exhibit 13.2 - "Financial Highlights for Fiscal Years Ended September
30," 1993 through 1997 from Company's Annual Report to
Shareholders.
Exhibit 21.1 - Subsidiaries of the Company from Company's Annual Report
to Shareholders