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, 1998 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 ($.50 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 (ss.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 27, 1998 is $17,925,648. (1)
The number of shares outstanding of the registrant's classes of common stock as
of November 27, 1998 is as follows:
Common Shares 3,800,318
DOCUMENTS INCORPORATED BY REFERENCE
Part I Part II Part III Part IV
(None) Annual Report Proxy Statement 1984, 1987, 1989, 1990, 1991,
to Shareholders and Annual Re- 1992, 1993, 1995, and 1996
for fiscal 1998 port to Share- Form 10-K; Registration
holders for Statement No. 2-88904
fiscal 1998
(1) Based on the last traded price on November 27, 1998. Excludes 812,710 shares
held by executive officers, directors and shareholders owning in excess of 10%
of the Company's common stock (other than the 2,541,456 shares held in trust by
the ESOP which are included). 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, construction management 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., STV Construction Services, Inc., STV Construction,
Inc., and STV/Silver & Ziskind. 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, 1998, the Company employed 1,014
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,
1998 1997 1996
Architectural Engineering 27% 24% 25%
Civil, Highway, Bridge, Airport
and Port Engineering 24 24 33
Defense Systems Engineering 3 4 4
Industrial Process Engineering 2 2 1
Transportation Engineering 39 39 35
Other Engineering Services and Design Build 5 7 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
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chemicals, 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.
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,
1998 1997 1996
U.S. Government Contracts .......... 14% 16% 14%
State and Local Government Contracts 56 56 56
Foreign Government Contracts ....... 0 1 2
Private Contracts .................. 30 27 28
______________
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.
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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.
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 79% and 84% of total assets
as of September 30, 1998 and 1997, 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
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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, 1998 and 1997 was
approximately $150,000,000 and $110,000,000, 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 23.4% in 1998, 23.1% in 1997,
and 24.2% in 1996.
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.
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
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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, 1998, the Company had 1,014 employees, of whom 890
were engaged in engineering and architectural services, 88 were engaged in
administration and 36 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.
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) 65 Chairman of the Board and Chief
Executive Officer of STV Group, Inc.
Dominick M. Servedio (2) 58 Director, President and Chief Operating
Officer of STV Group, Inc. and President
and Chief Operating Officer of STV
Incorporated
W. A. Sanders II (3) 51 Senior Vice President of STV
Incorporated
Peter W. Knipe (4) 49 Secretary/Treasurer of STV Group, Inc.
________________
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(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.
(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 involved in various litigation arising out of the
ordinary course of business. The Company's management believes that the final
resolution of this litigation will not have a material adverse effect on the
Company's financial statements.
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 a funded indemnity program and $2,700,000 by
the general liability insurer. As part of the settlement, the court had required
that the limits of the Company's professional insurance coverage be reserved to
pay this claim
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if the insurer is found liable. In connection with the lawsuit, a declaratory
judgment action was filed on or about February, 1991 by the general liability
insurer in the Supreme Court of New York pursuant to which the general liability
insurer is seeking a judgment that the professional liability insurer and the
Company are obligated to reimburse the general liability insurer for the
payments which it made, plus expenses. The Company had counterclaimed against
the general liability insurer, alleging breach of insurance contracts among
other issues. In January 1998, the court dismissed the claim by the general
liability carrier against the Company. This ruling has been appealed. The
Company and its professional liability insurer believe that this matter should
be covered under its general liability policy and that the professional
liability insurer should be repaid the funds it advanced.
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 judgment
was reversed on appeal in 1994. The plaintiffs in that action filed an action to
enforce the arbitration in the Supreme Court of New York in 1992 against the
Company. On March 3, 1994 the plaintiffs sought to garnish the proceeds of the
professional liability policy by commencing a proceeding in the Philadelphia
Court of Common Pleas against the Company's professional liability insurer. The
Company intervened in the garnishment proceeding and this proceeding has been
stayed.
If the Company's professional liability insurer is found ultimately
liable under these actions, the Company may be required to indemnify the
professional liability insurer to the extent of the policy limits of $5,000,000.
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. The
Company and the Company's professional liability insurer continue to deny
liability and intend to vigorously pursue defenses available to them.
If the outcome 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 this litigation 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, 1998, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Financial Highlights for
Fiscal Years Ended September 30, 1994 through 1998" in the Company's Annual
Report to Shareholders for the fiscal year ended September 30, 1998 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 1998 Compared to Fiscal Year 1997
Total revenues for the fiscal year ended September 30, 1998, increased
11.1 percent to $105,256,000. This is up from a .7 percent increase in fiscal
1997. The increase in total revenues in fiscal 1998 was mostly due to a 10.7
percent increase in operating revenues mainly in the transportation and
infrastructure area. Revenues from U.S. government contracts decreased 6.1
percent in fiscal 1998 as compared to fiscal 1997 and increased 15.1 percent in
fiscal 1997 as compared to fiscal 1996. This decrease is attributable to the
government's reduced spending, particularly in defense systems projects.
Operating revenues (total revenues excluding pass-through costs) increased 10.7
percent to $80,648,000 compared to a 2.2 percent increase to $72,832,000 in
fiscal 1997. 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 23.4 percent in fiscal 1998 compared to 23.1 percent in fiscal
1997. 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
86.3 percent in fiscal 1998, which is a decrease from 88.4 percent in fiscal
1997. This percentage decrease is due to an increase in margins on design-build
projects and labor utilization improvements. Costs increased
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from $64,362,000 in fiscal 1997 to $69,580,000 in fiscal 1998. This increase is
due primarily to increases in engineering service costs and office-related
expenses.
General and administrative expense, expressed as a percentage of
operating revenues, increased to 7.8 percent in fiscal 1998 from 7.3 percent in
1997. Total general and administrative costs increased 18.5 percent in fiscal
1998 to $6,307,000 from $5,322,000 in fiscal 1997. This increase is due
primarily to higher labor and concomitant expenses.
Interest expense, expressed as a percentage of operating revenues, was
.6 percent in fiscal 1998, and 1.9 percent in fiscal 1997. This decrease is due
to STV's ability to pay off the loan balance during the year with efficient
advance billings and higher net income.
The Company had a pre-tax profit of $4,292,000. Income tax expense was
49 percent of pre-tax income compared to 51 percent in fiscal 1997. The variance
in the rate is due to a reduction in nondeductible expenses as a percent of
higher pre-tax income.
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. 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. 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. 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
88.4 percent in fiscal 1997, which is a decrease from the 89.2 percent in fiscal
1996. 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. 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.
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Interest expense, expressed as a percentage of operating revenues, was
1.9 percent in fiscal 1997 and 2.1 percent in fiscal 1996. 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. 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. 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. 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. 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. 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. 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
89.2 percent in fiscal 1996, which is a decrease from the 89.3 percent in fiscal
1995. 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.
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. 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. The variance
in the rate is due to reduction in non-deductible expenses as a percent of
pre-tax income.
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In the fourth quarter, the Company had a pre-tax profit of $483,000 as
compared to $286,000 in fiscal 1995. The increase in pre-tax profit from fiscal
1995 is due to a decrease in employee-related costs and interest expense.
Liquidity, Capital Resources and Financing Agreements.
Cash provided in operating activities was $14,509,000 in fiscal 1998
compared to $1,734,000 in fiscal 1997. This increase was due mainly to increases
in billings in excess of related costs and increases in accounts payable and
other current liabilities. Working capital increased $2,242,000 to $12,341,000
in fiscal 1998 compared to a $1,378,000 increase in 1997 and a $501,000 increase
in 1996. Investing activities increased, consisting of $1,097,000 for the
continued purchase of computer hardware and software compared to $831,000 in
1997. Financing activities included a $10,228,000 net decrease in short-term
borrowing due to the previously mentioned improved cash flow from operating
activities.
Capital resources available to the Company include an existing line of
credit for working capital. The current line is a maximum of $15.5 million based
on accounts receivable and work-in-progress, of which approximately $12,881,000
is currently available. An agreement was signed this year which reduced the
borrowing rate to the bank's base rate and reduced the amount charged for
Letters of Credit. 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
line of credit are adequate to meet current fiscal year requirements. 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.
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 (see Note 7).
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.
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 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.
-12-
STV has recently acquired 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 standards and to prevent interruptions to STV
operations. The Company is taking action to obtain certification from its
suppliers, including suppliers of IT and non-IT systems, and its clients of
their Year 2000 compliance, and to test the Company's existing equipment and
software under simulated Year 2000 conditions to further ensure that normal
operation will continue beyond 2000. A steering committee of senior managers has
been formed 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 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. The Company currently has a contingency plan
to immediately replace any defective computer or software system. This plan is
considered adequate because all STV systems are PC-based, and STV has sufficient
hardware and financial assets to make such corrections on a near real-time
basis.
Cautionary Statement Regarding Forward-Looking Statements
Certain oral statements made by management from time to time and
certain statements contained herein, such as statements regarding STV's ability
to meet its liquidity needs and control costs, certain statements in Notes to
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). 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. STV'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. Under certain circumstances, the
government can also suspend or debar individuals or firms from obtaining future
contracts with the government.
-13-
3. The level of competition in the Company's industry, including
companies with significantly larger operations and resources than STV.
4. The Company's ability to identify and win suitable projects and to
consummate or complete any such projects.
5. STV's ability to perform design-build projects, which may include
the responsibility of ensuring the actual construction of a project for a
guaranteed price.
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 provision or
fixed-price contracts which include inflation assumptions when bid upon.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of independent auditors and consolidated financial
statements included in the Company's Annual Report to Shareholders for the year
ended September 30, 1998, 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 1998 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" in
the Company's 1998 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 1998 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 1998 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, 1998 and
1997
Consolidated Statements of Income - Years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -
Years ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements -
September 30, 1998
-15-
(2) Financial statement 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, 1998.
(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.
* 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.
-16-
* 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.
****** 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.
-17-
******* 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.
10.37 Amendment dated June 30, 1998, between the Company and First
Union Bank, decreasing the maximum amount of the line of
credit as well as reducing the borrowing rate and the amount
charged for Letters of Credit.
13.1 "Common Stock Market Prices" from Company's Annual Report to
Shareholders.
13.2 "Financial Highlights for Fiscal Years Ended September 30,"
1994 through 1998 from Company's Annual Report to
Shareholders.
21.1 Subsidiaries of the Company from Company's Annual Report to
Shareholders.
23.1 Consent of Ernst & Young LLP.
________________
-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, 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, 1998 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, 1998
MICHAEL HARATUNIAN Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Dominick M. Servedio President, Chief December 29, 1998
DOMINICK M. SERVEDIO Operating Officer and
Director
/s/ Peter W. Knipe Secretary/Treasurer December 29, 1998
PETER W. KNIPE (Principal Accounting
and Financial Officer)
/s/ Richard L. Holland Director December 29, 1998
RICHARD L. HOLLAND
/s/ Harry Prystowsky Director December 29, 1998
HARRY PRYSTOWSKY
/s/ Ray M. Monti Director December 29, 1998
RAY M. MONTI
/s/ Maurice L. Meier Director December 29, 1998
MAURICE L. MEIER
/s/ William J. Doyle Director December 29, 1998
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
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period then ended. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Harrisburg, Pennsylvania
November 12, 1998
-22-
CONSOLIDATED BALANCE SHEETS
STV Group and Subsidiaries.
September 30
1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 4,444,000 $ 1,153,000
Accounts receivable 23,485,000 20,154,000
Costs and estimated profits of uncompleted
contracts in excess of related billings 13,218,000 15,077,000
Prepaid income taxes 84,000 503,000
Prepaid expenses and other current assets 1,065,000 1,223,000
----------- -----------
Total Current Assets 42,296,000 38,110,000
Property and equipment, net 1,553,000 1,339,000
Deferred income taxes 1,882,000 1,660,000
Other assets 757,000 716,000
----------- -----------
Total Assets $46,488,000 $41,825,000
Liabilities and Stockholders' Equity
Current Liabilities:
Note payable $ 0 $10,228,000
Current maturity of long-term debt 564,000 632,000
Accounts payable 6,382,000 5,707,000
Billings on uncompleted contracts in
excess of related costs and estimated profits 13,375,000 4,386,000
Accrued payroll and related expenses 5,669,000 4,754,000
Accrued expenses 2,007,000 1,608,000
Deferred income taxes 1,862,000 696,000
Income tax payable 96,000 0
----------- -----------
Total Current Liabilities 29,955,000 28,011,000
Long-term debt 2,134,000 1,819,000
Post-retirement benefits 927,000 793,000
----------- -----------
Total Liabilities 33,016,000 30,623,000
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,
authorized 2,000,000 shares,
issuable in series, no shares issued or outstanding 0 0
Common stock, par $.50, authorized 12,000,000 shares
in 1998; par $1, authorized 6,000,000 shares in 1997 2,025,000 1,921,000
Capital in excess of par 3,350,000 3,003,000
Retained earnings 8,868,000 6,674,000
----------- -----------
14,243,000 11,598,000
Less: Treasury stock 771,000 271,000
Loans receivable from officers 0 125,000
----------- -----------
Total Stockholders' Equity 13,472,000 11,202,000
----------- -----------
Total Liabilities and Stockholders' Equity $46,488,000 $41,825,000
See notes to consolidated financial statements.
-23-
CONSOLIDATED STATEMENTS OF INCOME
STV Group and Subsidiaries.
For the Fiscal Year Ended September 30
1998 1997 1996
Total revenues $105,256,000 $ 94,712,000 $ 94,073,000
Subcontract and procurement costs 24,608,000 21,880,000 22,802,000
------------ ------------ ------------
Operating revenue $ 80,648,000 $ 72,832,000 $ 71,271,000
Costs and expenses:
Costs of services $ 69,580,000 $ 64,362,000 $ 63,557,000
General and administrative .. 6,307,000 5,322,000 4,912,000
Interest 469,000 1,380,000 1,501,000
------------ ------------ ------------
$ 76,356,000 $ 71,064,000 $ 69,970,000
Income before income taxes $ 4,292,000 $ 1,768,000 $ 1,301,000
Income tax expense 2,098,000 908,000 706,000
------------ ------------ ------------
Net income $ 2,194,000 $ 860,000 $ 595,000
Basic earnings per share $ .59 $ .24 $ .16
Diluted earnings per share $ .55 $ .23 $ .16
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, 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
Treasury stock purchases 28,992 500,000
Exercise of options 138,726 104,000 347,000
2-for-1 stock split 1,989,456 120,118
Net income for the year 2,194,000
Balance, September 30, 1998 4,049,154 $2,025,000 $3,350,000 $8,868,000 248,836 $ 771,000
See notes to consolidated financial statements.
-24-
CONSOLIDATED STATEMENTS OF CASH FLOWS
STV Group and Subsidiaries.
For the Fiscal Year Ended September 30
1998 1997 1996
Operating Activities
Net income $ 2,194,000 $ 860,000 $ 595,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 741,000 795,000 997,000
Deferred income taxes 944,000 585,000 (358,000)
Changes in operating assets and
liabilities
Accounts receivable (3,331,000) 350,000 1,254,000
Costs and estimated profits of
uncompleted contracts in excess of
related billings and other current assets 2,017,000 (487,000) (1,003,000)
Accounts payable and
other liabilities 2,440,000 204,000 1,131,000
Billings on uncompleted contracts in excess
of related costs and estimated profits 8,989,000 68,000 974,000
Current income taxes 515,000 (641,000) 678,000
------------ ------------ ------------
Net cash provided by
operating activities $ 14,509,000 $ 1,734,000 $ 4,268,000
Investing Activities
Purchase of property and equipment $ (843,000) $ (724,000) $ (338,000)
Purchase of software (254,000) (107,000) (19,000)
Decrease (increase) in other assets 68,000 28,000 (40,000)
Purchase of treasury stock (342,000) -- --
Loans receivable from officers -- -- (125,000)
------------ ------------ ------------
Net cash used in investing
activities $ (1,371,000) $ (803,000) $ (522,000)
Financing Activities
Proceeds from issuance of common stock $ 451,000 -- --
Proceeds from line of credit and
long term borrowings 55,073,000 92,435,000 85,797,000
Principal payments on line of credit and
long term borrowings (65,371,000) (92,241,000) (90,183,000)
------------ ------------ ------------
Net cash (used in) provided by
financing activities $ (9,847,000) $ 194,000 $ (4,386,000)
Increase (decrease) in cash 3,291,000 1,125,000 (640,000)
Cash and cash equivalents at beginning of year 1,153,000 28,000 668,000
Cash and cash equivalents at end of year $ 4,444,000 $ 1,153,000 $ 28,000
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 specialize in consulting engineering,
architectural, planning, environmental, construction management 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, which includes all highly liquid investments, 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 $851,000.
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
Depreciation
Depreciation is computed 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.
Reclassifications
Certain previously reported amounts have been reclassified to conform to their
1998 presentation.
Long-lived Assets
The carrying amount of the long-lived assets are reviewed if facts and
circumstances suggest that they may be impaired. If this review indicates that
book value of assets to be held or disposed of exceeds the undiscounted future
cash flows, an impairment loss would be recognized for the excess of book over
fair values.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which the Company adopted in 1998. All prior period
amounts have been restated, and disclosures as required by SFAS 128 are included
in Note 6 to the financial statements.
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. 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.
2. COSTS AND ESTIMATED PROFITS OF UNCOMPLETED CONTRACTS IN EXCESS OF RELATED
BILLINGS
Costs and estimated profits of uncompleted contracts at September 30, 1998 and
1997, respectively, are as follows:
1998 1997
Costs and estimated
earnings on
uncompleted contracts $ 350,044,000 $ 320,461,000
Less billings to date 350,201,000 309,770,000
------------- -------------
$ (157,000) $ 10,691,000
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
Costs and estimated profits of uncompleted contracts are included in the
accompanying balance sheets under the following captions:
1998 1997
Costs and estimated
profits of uncompleted
contracts in excess of
related billings $ 13,218,000 $ 15,077,000
Billings on uncompleted
contracts in excess of
related costs and
estimated profits 13,375,000 4,386,000
------------ ------------
$ (157,000) $ 10,691,000
Included in accounts receivable are retainages related to uncompleted contracts
in the amount of $7,225,000 in 1998 and $5,087,000 in 1997. The collection of
retainages generally coincides with final project acceptance.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, are as follows:
1998 1997
Land $ 54,000 $ 54,000
Equipment 4,572,000 4,212,000
Furniture and
fixtures 1,825,000 1,456,000
Leasehold
improvements 1,744,000 1,744,000
---------- ----------
$8,195,000 $7,466,000
Less:
Accumulated
depreciation and
amortization 6,642,000 6,127,000
---------- ----------
$1,553,000 $1,339,000
4. NOTE PAYABLE
The Company's current credit facility, as amended, includes a note payable on
demand ($0 borrowings outstanding at September 30, 1998) which bears interest at
the bank's base rate (8.25 percent at September 30, 1998) and is secured by
substantially all assets. The weighted average interest rate was 9.7 percent in
fiscal 1998 and 9.9 percent in fiscal 1997. The bank also provides letters of
credit which incur a charge of 1.5 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 $15,500,000 based on accounts
receivable and contracts in progress balances.
An agreement with the 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. To date, the Company has been in compliance with
these covenants.
5. INCOME TAXES
The Company uses the liability method of accounting for income taxes required by
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
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, 1998 and
1997, are as follows:
1998 1997
Deferred tax assets:
Vacation accruals $ 694,000 $ 607,000
Depreciation 50,000 98,000
Deferred compensation 920,000 789,000
Litigation 479,000 387,000
International asset sale 107,000 107,000
Postemployment benefits 5,000 12,000
Postretirement
medical benefits 427,000 374,000
---------- ----------
Total deferred
tax assets $2,682,000 $2,374,000
Deferred tax liabilities:
Retainage 2,662,000 1,410,000
---------- ----------
Total deferred tax
liabilities $2,662,000 $1,410,000
Net deferred
tax assets $ 20,000 $ 964,000
Significant components of the provision (benefit) for income taxes are as
follows:
1998 1997 1996
Current:
Federal $ 798,000 $ 208,000 $ 734,000
State 356,000 86,000 330,000
---------- ---------- ----------
Total current $1,154,000 $ 294,000 $1,064,000
Deferred:
Federal $ 592,000 $ 427,000 $ (239,000)
State 352,000 187,000 (119,000)
---------- ---------- ----------
Total deferred $ 944,000 $ 614,000 $ (358,000)
Income tax
expense $2,098,000 $ 908,000 $ 706,000
A reconciliation of federal income taxes at the statutory rate to the Company's
income tax provision follows:
1998 1997 1996
Federal income
tax rate 34.0% 34.0% 34.0%
Non-deductible
expenses and other 4.3 7.0 9.2
State taxes, net of
federal tax effect 10.7 10.0 10.8
------ ------ ------
49.0% 51.0% 54.0%
The Company made income tax payments of $618,000, $971,000, and $488,000 in
1998, 1997 and 1996, respectively. The Company received no income tax refunds in
1998, $7,000 in 1997 and $51,000 in 1996.
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
6. EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share," has been adopted by the Company. SFAS 128
replaces 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.
Years ended September 30
1998 1997 1996
Net income $2,194,000 $ 860,000 $ 595,000
Weighted average
shares for basic
earnings per share 3,719,000 3,642,000 3,642,000
Weighted average
shares for diluted
earnings per share 3,959,000 3,803,000 3,746,000
Basic earnings
per share .59 .24 .16
Diluted earnings
per share .55 .23 .16
A 2-for-1 split was effected April 13, 1998, for shareholders of record as of
March 31, 1998. This split and the effects of Statement 128 are reflected in the
earnings per share and weighted average number of shares outstanding
calculations above for all periods persented.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation arising out of the ordinary course
of business. The Company's management believes that the final resolution of this
litigation will not have a material adverse effect on the Company's financial
statements.
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 a funded indemnity program and $2,700,000 by the general liability
insurer. As part of the settlement, the court had required that the limits of
the Company's professional insurance coverage be reserved to pay this claim if
the insurer is found liable. In connection with the lawsuit, a declaratory
judgment action was filed on or about February, 1991 by the general liability
insurer in the Supreme Court of New York pursuant to which the general liability
insurer is seeking a judgment that the professional liability insurer and the
Company are obligated to reimburse the general liability insurer for the
payments which it made, plus expenses. The Company had counterclaimed against
the general liability insurer, alleging breach of insurance contracts among
other issues. In January 1998, the court dismissed the claim by the general
liability carrier against the Company. This ruling has been appealed. The
Company and its professional liability insurer believe that this matter should
be covered under its general liability policy and that the professional
liability insurer should be repaid the funds it advanced.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
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 judgment was reversed
on appeal in 1994. The plaintiffs in that action filed an action to enforce the
arbitration in the Supreme Court of New York in 1992 against the Company. On
March 3, 1994 the plaintiffs sought to garnish the proceeds of the professional
liability policy by commencing a proceeding in the Philadelphia Court of Common
Pleas against the Company's professional liability insurer. The Company
intervened in the garnishment proceeding and this proceeding has been stayed.
If the Company's professional liability insurer is found ultimately liable under
these actions, the Company may be required to indemnify the professional
liability insurer to the extent of the policy limits of $5,000,000. 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. The Company
and the Company's professional liability insurer continue to deny liability and
intend to vigorously pursue defenses available to them.
If the outcome 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 this litigation will not have a material adverse effect on the
Company's financial condition.
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. Management does not believe such contingency would have a
material impact on the Company's operating results.
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:
Operating Leases
1999 $ 4,460,000
2000 3,420,000
2001 2,892,000
2002 2,115,000
2003 1,944,000
Thereafter 9,012,000
Total minimum
lease payments $ 23,843,000
Rental expense under operating leases amounted to $4,314,000, $3,783,000 and
$2,892,000 in 1998, 1997 and 1996, respectively.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
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 1998, 1997 and 1996 was $1,144,000, $1,087,000 and
$1,002,000, 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 1998 contribution
with cash payments throughout 1998 and 1999. At September 30, 1998, 2,541,000
shares of Company stock are held by the ESOP and are included in the earnings
per share computations.
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 1995 Stock Option Plan was approved in fiscal
1996. 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 1998 and 1997: risk-free interest rates of 5 and 6
percent respectively, 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 five years.
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.
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
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:
1998 1997
Pro forma net income $ 1,849,000 $ 774,000
Pro forma earnings per share .50 .21
Pro forma diluted earnings
per share .47 .20
Outstanding options to purchase shares of common stock have been granted to
officers and employees at prices ranging from $2.06 to $4.38 per share. The
weighted-average remaining contractual life of those options is 8.29 years. A
summary of the option transactions is as follows:
Year ended September 30
1998 1997 1996
Options outstanding,
beginning of period 245,000 190,000 190,000
Granted 172,000 55,000 --
Effect of split 344,000 -- --
Exercised (139,000) -- --
Canceled (5,000) -- --
Options outstanding,
end of period 617,000 245,000 190,000
Options exercisable 273,000 190,000 190,000
Shares available for
future option grants 379,000 445,000 500,000
The weighted average fair value of options granted during fiscal 1998 and 1997
was $1.16 and $1.21 per share respectively. The weighted average exercise price
of options granted during fiscal 1998 and 1997 was $4.22 and $4.00 respectively.
The weighted average exercise price of options exercised in 1998 was $3.25. The
weighted average exercise price of options outstanding at September 30, 1998 and
1997, was $3.69 and $2.65 respectively, while the weighted average exercise
price of exercisable options at September 30, 1998, was $3.03.
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. These loans were satisfied in 1998, plus interest at the Company's bank
borrowing rate, by the Company acquiring shares of treasury stock from the
officers.
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.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
The following table presents the plan's status reconciled with amounts
recognized in the Company's balance sheet (current and long-term):
1998 1997
Accumulated postretirement
benefit obligation:
Retirees $ (575,000) $ (521,000)
Fully eligible active
plan participants (757,000) (536,000)
Other active
plan participants (352,000) (351,000)
----------- -----------
Accumulated
postretirement
benefit obligation $(1,684,000) $(1,408,000)
Unrecognized
net gain (222,000) (448,000)
Unrecognized prior
service costs 41,000 82,000
Unrecognized
transition obligation 839,000 895,000
----------- -----------
Accrued postretirement
benefit cost $(1,026,000) $ (879,000)
Net periodic postretirement benefit costs include the following components:
1998 1997 1996
Service cost $ 32,000 $ 36,000 $ 43,000
Interest cost 114,000 101,000 119,000
Amortization of
transition obligation
over 20 years 56,000 56,000 84,000
Unrecognized
(gain) loss 17,000 (3,000) (49,000)
--------- --------- ---------
Net periodic
postretirement
benefit cost $ 219,000 $ 190,000 $ 197,000
Effective December 1,1995, STV switched from an indemnity to a combination
indemnity and managed care program. The cost assumptions 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 10.5 percent for 1998 (11 percent in 1997
and 11.5 percent in 1996) 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, 1998, by $111,000, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1998,
1997 and 1996 by $17,000, $16,000 and $20,000, respectively.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0 percent at September 30, 1998, and
7.75 percent at September 30, 1997.
10. MAJOR CUSTOMERS
The percentage of total revenues derived from contracts with the United States
government for fiscal years 1998, 1997 and 1996 were 14 percent, 16 percent and
14 percent, respectively.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
11. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
Deferred compensation liability payable in fixed monthly installments of
$11,542 through September 2006 with interest imputed at 16 percent $ 623,000 $ 659,000
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 699,000 634,000
Supplemental executive retirement agreements for two current executives payable
in monthly installments upon retirement with interest imputed at 7 percent. (1) 850,000 562,000
Other, including capital leases in 1997 526,000 596,000
---------- ----------
2,698,000 2,451,000
Less: Current portion 564,000 632,000
---------- ----------
$2,134,000 $1,819,000
<FN>
1) These agreements for two current executives provide for annual future cash
payments based on salary at retirement commencing September 2003 and September
2005, respectively. Subsequent to September 30, 1998, these agreements were
superceded to provide for cash payments of $212,000 and $325,000 annually for a
period of 15 years. The benefit will be accrued over the term of the employment
agreements which extend through 2003. These payments would be increased should
the cost of living index increase.
</FN>
Interest paid during 1998, 1997 and 1996 amounted to $505,000, $1,310,000 and
$1,472,000, respectively,
Annual maturities of long-term debt are as follows:
Year ending September 30
1999 $ 564,000
2000 49,000
2001 57,000
2002 67,000
2003 79,000
Thereafter 1,882,000
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STV Group and Subsidiaries.
12. QUARTERLY RESULTS (UNAUDITED) (All dollar amounts omit 000 except per share
data.)
Quarter Year
First Second Third Fourth
Revenue from services:
1998 $ 24,135 $ 25,997 $ 25,550 $ 29,574 $ 105,256
1997 $ 22,736 $ 22,311 $ 24,637 $ 25,028 $ 94,712
Operating revenue:
1998 $ 19,158 $ 19,796 $ 20,040 $ 21,654 $ 80,648
1997 $ 18,123 $ 18,181 $ 18,113 $ 18,415 $ 72,832
Gross profit:
1998 $ 2,583 $ 2,582 $ 2,744 $ 3,159 $ 11,068
1997 $ 1,918 $ 2,092 $ 2,138 $ 2,322 $ 8,470
Net income:
1998 $ 412 $ 495 $ 602 $ 685 $ 2,194
1997 $ 158 $ 183 $ 228 $ 291 $ 860
Basic earnings per share:
1998 $ .11 $ .14 $ .16 $ .18 $ .59
1997 $ .04 $ .05 $ .07 $ .08 $ .24
Diluted earnings per share:
1998 $ .11 $ .12 $ .15 $ .17 $ .55
1997 $ .04 $ .05 $ .06 $ .08 $ .23
A 2-for-1 stock split was effected at the close of business on April 13, 1998,
for shareholders of record as of March 31, 1998. Earnings-per-share amounts have
been restated to reflect this split.
-36-
EXHIBITS
Index
Exhibit 10.10 - Officers' and Directors' Liability Policy
Exhibit 10.31 - Employment Agreement of Dominick M. Servedio
Exhibit 10.32 - Employment Agreement of Michael Haratunian
Exhibit 10.37 - Amendment dated June 30, 1998, between the Company and
First Union Bank, decreasing the maximum amount of the
line of credit as well as the borrowing rate and the
amount charged for Letters of Credit.
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," 1994 through 1998 from Company's Annual Report to
Shareholders.
Exhibit 21.1 - Subsidiaries of the Company from Company's Annual Report
to Shareholders
Exhibit 23.1 - Consent of Ernst & Young LLP