STV GROUP 1999 Annual Report
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Table of Contents
01
Introduction
02
Financial Highlights
03
Message to Shareholders
07
STV Offices
08
Financial Report
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STV Group
1999 Annual Report
01 Introduction
The Firm
STV Group is a leading international firm recognized for delivering value and
excellence in engineering, architectural, planning, environmental and
construction services. Our staff of more than 1,100 professional, technical and
support personnel offers a wide range of expertise to an ever-expanding client
base.
Mission Statement
STV Group's mission is to create exceptional value for clients worldwide in the
planning, design, construction, operation, maintenance and finance of projects.
We commit to perform our services with a high level of vision, integrity,
innovation, quality and environmental sensitivity. We will provide a
challenging, rewarding and stable work environment that encourages professional
development and continuous improvements for our diverse workforce. We will be a
proactive, profitable firm providing improved financial performance for the
benefit of our employees and shareholders.
A Record-Setting Year
STV's unprecedented performance in fiscal 1999 is the result of planning and
business initiatives established earlier in the decade. Our firm has benefited
from proactive business practices and strategic marketing in today's strong
business climate. The approach that led to the financial results described in
this annual report serves as a model for future successes.
[GRAPHIC OMITTED - caption as follows:
Millennium Inorganic Chemicals Research Center -
Baltimore, Glen Burnie, Md.
Photo (c) Robert I. Faulkner]
Financial Highlights 02
(For Fiscal Years Ended September 30)
'99 '98 '97 '96 '95
Total Revenues $138,940,000 $105,178,000 $ 94,676,000 $ 94,073,000 $ 89,232,000
Operating Revenues 97,438,000 80,648,000 72,832,000 71,271,000 69,397,000
Net Income 5,184,000 2,194,000 860,000 595,000 394,000
*Net Income Per Common Share 1.24 .55 .23 .16 .11
Working Capital 17,593,000 12,341,000 10,099,000 8,721,000 8,220,000
Stockholders' Equity 18,767,000 13,472,000 11,202,000 10,342,000 9,872,000
Total Assets 60,734,000 46,488,000 41,825,000 39,995,000 41,626,000
Long-Term Obligations 3,864,000 3,061,000 2,612,000 1,795,000 2,033,000
Short-Term Bank Debt 0 0 10,228,000 9,448,000 13,251,000
* Net income per common share for prior years has been adjusted to reflect the
2-for-1 stock split effective April 13, 1998.
STV Group
1999 Annual Report
03 Message To Shareholders
Dear Shareholders:
STV has had another banner year. Clearly our strategic initiatives and
investments have paid off - in vital infrastructure enhancements, new management
teams, geographic expansion, a wider range of skills and better-trained
employees.
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The Can Company Baltimore, Md.
Photo (c) Jeffrey G. Katz]
However, the most dramatic improvements can be attributed to a heightened
company-wide focus on quality and profitability, as well as the importance of
cash management.
STV's increasingly strong financial performance in recent years carried through
fiscal 1999, culminating in a record-setting year for the company. Our revenues
were the highest ever at $138,940,000, marking a 32 percent increase over
$105,178,000 in fiscal 1998. Net income rose 136 percent, increasing to
$5,184,000 in fiscal 1999, compared with $2,194,000 in 1998. Earnings per share
increased 125 percent to $1.24, up from $0.55 in fiscal year 1998.
For the second consecutive year, STV has no short-term bank debt, and our cash
and cash equivalents are up 63 percent.
With a strong balance sheet, STV has never been in a better position to
effectively pursue an ever-expanding range of business opportunities. We are now
reaping the rewards of a proactive business approach, a strategic marketing
focus, key infrastructure investments, and employee benefit enhancements
initiated several years ago.
Achieving new heights
STV's financial strength reflects several factors. One is our growing
participation in major design-build contracts, which offer higher margins than
design-only contracts. The firm is currently involved with the country's first
rail-related design-build assignments.
While our major markets remain the same, STV has achieved greater market share
and profitability within these markets, particularly
[GRAPHS OMITTED - data as follows]
Operating Revenues (In Millions of Dollars)
1995 69.4
1996 71.3
1997 72.8
1998 80.6
1999 97.4
Net Income (In thousands of Dollars)
1995 394
1996 595
1997 860
1998 2,194
1999 5,184
Backlog (In Millions of Dollars)
1995 129
1996 130
1997 110
1998 150
1999 200
Short-Term Bank Debt (In Millions of Dollars)
1995 13.2
1996 9.4
1997 10.2
1998 NO DEBT
1999 NO DEBT
04
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P.S. 340 Bronx N.Y. for
New York City School
Construction Authority
Photo (c) Julian Olivas/Air-to-Ground]
Engineering
News-Record, a
highly respected
engineering
industry publication,
has ranked STV
among the top
20 firms in trans-
portation design,
and specifically
in the top five in
mass transit/light
rail design.
infrastructure design-build and educational facilities. We have accomplished
this by participating in larger projects and delivery methods with greater
potential for profit. Our strategic alliances with other major firms have also
been advantageous - a proven project team is an asset in securing work with our
clients.
STV's national prominence in the design and construction industry is growing.
Engineering News-Record, a highly respected engineering industry publication,
has ranked STV among the top 20 firms in transportation design, and specifically
in the top five in mass transit/light rail design.
As in previous years, the quality of our professionals' work has been recognized
with numerous awards. National, state and local agencies and professional
organizations have honored STV projects from coast to coast.
Our backlog stands at a record high of $200 million. Major projects reflected in
this number include the tunnel-engineering contract, awarded this year, for the
$2.3 billion extension of Long Island Rail Road service through Manhattan's East
Side into Grand Central Terminal. This project will save nearly 100,000
commuters more than 30 minutes each day. We also conducted the original major
investment study for this landmark project.
[GRAPHIC OMITTED - caption as follows:
Environmental projects for Sprint PCS
communication stations in five states
Photo (c) Jim Schafer Location Photography]
STV Group
1999 Annual Report
05 Message To Shareholders (continued)
Improvements in the way we do business have enabled STV to manage growth by
maximizing the use of our personnel and other resources while retaining a focus
on the bottom line. Strategic investments in information technology have
translated into improved efficiency and effectiveness in the services we
provide, and an enhanced work environment for our employees. To continue to
attract and retain the industry's most talented personnel, STV regularly reviews
and continues to implement enhanced employee benefits and training programs.
Looking ahead
Nearly two years ago, the six-year, $218 billion Transportation Equity Act for
the 21st Century (TEA-21) became the largest infrastructure funding bill in
U.S. history. As we anticipated, this legislation has had, and will continue to
have, a positive impact on STV's transportation business, contributing federal
dollars to many projects that would not exist without this funding. STV projects
benefiting from TEA-21 range from the commuter rail tunnel into Grand Central
Terminal and ongoing rail projects in St. Louis and Dallas to highways and
bridges for the various state transportation departments with which STV
regularly does business.
[GRAPHS OMITTED - Data as follows:]
Net Worth (In Millions of Dollars)
1995 9.9
1996 10.3
1997 11.2
1998 13.5
1999 18.7
Diluted Earnings Per Share* (In Dollars)
1995 .11
1996 .16
1997 .23
1998 .55
1999 1.24
Working Capital (In Millions of Dollars)
1995 8.2
1996 8.7
1997 10.1
1998 12.3
1999 17.6
Price Per Share* (In Dollars)
1995 2 1/2
1996 3 3/4
1997 3 7/8
1998 4 1/2
1999 7 11/16
* Numbers for prior years have been adjusted to reflect the 2-for-1 stock split
effective April 13, 1998.
[GRAPHIC OMITTED - caption as follows:
North End Access into Grand Central
Terminal, New York, N.Y.
Photo (c) Julian Olivas, Air-to-Ground]
06
[GRAPHIC OMITTED caption as follows:
Amtrak Northeast Corridor
High-Speed Rail, Ivy City Yard,
Washington, D.C.
Photo (c) Michael Goodman]
We are proud
that, under our
administration,
the firm's fiscal
1999 reached
record-breaking
revenues, with
profits that more
than doubled
from the previous
fiscal year.
As we write this message, the advent of the year 2000 is still ahead of us.
Begun over two years ago, long-term planning for Y2K compliance has been a
priority at STV. We have taken a proactive approach to identify and address
potential business issues that could result from the Y2K "bug" that affects
technology unable to read a date or time beyond two digits. We believe that, by
the time you read this, our substantial planning, technology replacement, and
testing efforts will have resulted in a smooth transition to the new millennium
for our company, clients and shareholders alike.
On a personal note, you probably know that we passed the responsibilities of
chief executive officer from one to the other as we entered calendar year 1999.
Because we worked together closely over the past 22 years we were able to ensure
a seamless transition of leadership to guide STV into the future. We are proud
that, under our administration, the firm's fiscal 1999 reached record-breaking
revenues, with profits that more than doubled from the previous fiscal year. We
look forward to sharing STV's future successes with you, our shareholders.
Sincerely,
/s/ Dominick M. Servedio
Dominick M. Servedio, P.E.
President and Chief Executive Officer
/s/ Michael Haratunian
Michael Haratunian, P.E.
Chairman
[GRAPHIC OMITTED - caption as follows:
Michael Haratunian, P.E., and Dominick M. Servedio, P.E.
Photo (c) Robert Essel Photography]
STV Group
1999 Annual Report
07 STV Offices
Corporate Headquarters
STV Group
205 West Welsh Drive
Douglassville, PA 19518
670-385-8200, Fax 610-385-8500
225 Park Avenue South
New York, NY 10003
212-777-4400, Fax 212-529-5237
Web site: www.stvinc.com
e-mail: info@stvinc.com
Dominick M. Servedio, P.E.
President and Chief Executive Officer
Peter W. Knipe
Chief Financial Officer
Board of Directors
Michael Haratunian, P.E., Chairman
Dominick M. Servedio, RE.
President and Chief Executive Officer
William J. Doyle, Director
Richard L. Holland, P.E., Director
Maurice L. Meier, P.E., Director
R.M. Monti, P.E., Director
G. Michael Stakias, Director
Corporate Management: Human Resources/
Information Technology/Strategic Planning
Ralph V. Locurcio, P.E.
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8500
STV Incorporated
North Atlantic Region
Gerald C. Gerletz, P.E.
80 Ferry Boulevard, Stratford, CT 06615
203-375-0521, Fax 203-377-2541
230 Congress Street, 9th Floor, Boston, MA 02110
617-482-7298, Fax 617-482-1837
Mid-Atlantic Region
Maher Labib, P.E., Facilities
Edward J. Petrou, P.E., Civil
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
75 Montgomery Street, Jersey City, NJ 07302
201-547-4150, Fax 201-547-4172
South Atlantic Region
Donald J. Wise, P.E.
21 Governor's Court, Baltimore, MD 21244-2722
410-944-9112, Fax 410-298-2794
Central Region
Whitney A. Sanders II, P.E.
20S West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
2105 West County Line Road, Jackson, NJ 08527-9852
732-370-2100, Fax 732-370-2051
44427 Airport Road, Suite 120, California, MD 20619
301-862-2344, Fax 301-863-9637
Four Gateway Center, Suite 325, Pittsburgh, PA 15222
412-392-3500, Fax 412-392-3501
820 Bear Tavern Road, Suite 105, Trenton, NJ 08628-1021
609-530-0300, Fax 609-530-0305
Midwest Region
William B. David, P.E.
70 West Madison Street, Suite 2840
Chicago, IL 60602-4207
312-553-0655, Fax 312-563-0661
2040 West Wisconsin Avenue, Suite 563
Milwaukee, WI 53233-2012
414-342-7799, Fax 414-342-7899
Western Region
David L. Borger, P.E.
1055 Wilshire Boulevard, Suite 1455
Los Angeles, CA 90017-2499
213-482-9444, Fax 213-482-5278
425 Market Street, Suite 2835, San Francisco, CA 94105
415-777-9206, Fax 415-777-9207
Transportation Systems Division
William F. Matts, P.E.
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
1101 Market Street, Suite 1410, Philadelphia, PA 19107
215-629-4004, Fax 215-629-3960
425 Market Street, Suite 2835, San Francisco, CA 94105
415-777-9206, Fax 415-777-9207
One Main Place, 1201 Main Street, Suite 1512
Dallas, TX 75202-3990
214-651-7337, Fax 214-651-7339
727 North First Street, Suite 210, St. Louis, MO 63102
314-436-2130, Fax 314-436-2530
5762 South Semoran Boulevard, Orlando, FL 32822
407-208-0385, Fax 407-208-0393
STV Environmental
Roger Zyma
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
STV Construction Services
James J, Fetterolf
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
Brian J. Flaherty
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
STV Architects
Robert W. Darlington, A.I.A.
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
David Miles Ziskind, A.I.A.
225 Park Avenue South, New York, NY 10003
272-777-4400, Fax 212-529-5237
STV International
Michael R. Santoro
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
Financial Report 08
1999 Annual Report for STV Group and Subsidiaries
Subsidiaries: STV Incorporated, STV Architects, Inc., STV Environmental,
Inc., STV International, Inc., STV Surveying, Inc., STV Construction, Inc.,
STV Construction Services, Inc., and STV/Silver & Ziskind
Management Discussion and Analysis of Financial Condition and Results of
Operations
STV Group and Subsidiaries
This discussion and analysis should be read in conjunction with the Message to
Shareholders and the information on pages 11 through 22 of this Annual Report.
Fiscal 1999 Compared to Fiscal 1998
Total revenues for the fiscal year ended September 30, 1999, increased 32.1
percent to $138,940,000. This is up from an 11.1 percent increase in fiscal 1998
and a .7 percent increase in fiscal 1997. The increase in total revenues in
fiscal 1999 was attributable to a 20.8 percent increase in operating revenues
mainly in the transportation and infrastructure areas, and an increase in
subcontractor and procurement revenue (pass-through cost reimbursement).
Revenues from U.S. government contracts decreased 4.2 percent in fiscal 1999 as
compared to fiscal 1998 and decreased 2.4 percent in fiscal 1998 as compared to
fiscal 1997. This continued decrease is attributable to the government's reduced
spending, particularly in defense systems projects. Operating revenues (total
revenues excluding pass-through costs) increased 20.8 percent to $97,438,000
compared to a 10.7 percent increase to $80,648,000 in fiscal 1998 and a 2.2
percent increase in fiscal 1997.
We continue to see an increased demand for facilities and transportation
engineering. In particular, the six-year, $218 billion Transportation Equity Act
for the 21st Century (TEA-21) is positively impacting STV's transportation
business, contributing federal dollars to many projects that would not exist
without this funding. When it passed two years ago, TEA-21 became the largest
infrastructure funding bill in U.S. history. At the same time, U.S. 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
29.9 percent in fiscal 1999 compared to 23.3 percent in fiscal 1998 and 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 84.3
percent in fiscal 1999, which is a decrease from 86.4 percent in fiscal 1998 and
88.4 percent in fiscal 1997. This percentage decrease is due to an increase in
margins on design-build projects and labor utilization improvements partially
offset by an increase in labor-related expenses. Costs increased from
$69,658,000 in fiscal 1998 to $82,185,000 in fiscal 1999. This increase is due
primarily to the growth in engineering service costs.
General and administrative expense, expressed as a percentage of operating
revenues, increased to 8.7 percent in fiscal 1999 from 7.8 percent in 1998 and
7.3 percent in 1997. Total general and administrative costs increased 33.8
percent in fiscal 1999 to $8,438,000 from $6,307,000 in fiscal 1998. This
increase is again due primarily to higher labor and concomitant expenses.
The 1999 operating results include a $2.6 million insurance and interest
settlement payment received in September. STV and its insurers had been involved
in protracted litigation concerning the settlement of a personal injury lawsuit
in 1992. In STV's fourth quarter, the Appellant Court found in favor of the
Company and its professional liability insurer which resulted in a favorable
settlement and a payment of $2.6 million to STV. Interest income, expressed as a
percentage of operating revenues, was .4 percent in fiscal 1999, .1 percent in
fiscal 1998, and .05 percent in fiscal 1997. Interest expense, expressed as a
percentage of operating revenues, was .2 percent in fiscal 1999, .6 percent in
fiscal 1998, and 1.9 percent in fiscal 1997. These results reflect STV's ability
to maintain a positive cash flow with efficient advance billings and higher net
income.
The Company had a pre-tax profit of $9,570,000. Income tax expense was 46
percent of pre-tax income compared to 49 percent in fiscal 1998 and 51 percent
in fiscal 1997. The variance in the rate is due to a reduction in nondeductible
expenses as a percent of significantly higher pre-tax income.
09 Management Discussion and Analysis of Financial Condition and Results of
Operations (continued)
STV Group and Subsidiaries
Fiscal 1998 Compared to Fiscal 1997
Total revenues for the fiscal year ended September 30, 1998, increased 11.1
percent to $105,178,000. 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
23.3 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.
Costs of services, expressed as a percentage of operating revenues, was 86.4
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 from $64,398,000 in
fiscal 1997 to $69,658,000 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.
Liquidity, Capital Resources and Financing Agreements
Cash provided in operating activities was $4,391,000 in fiscal 1999 compared to
$14,509,000 in fiscal 1998. This decrease was due mainly to decreases in
billings in excess of related costs and an increase in accounts receivable.
Working capital increased $5,252,000 to $17,593,000 in fiscal 1999 compared to a
$2,242,000 increase in 1998 and a $1,378,000 increase in 1997. Investing
activities decreased from $1,371,000 in 1998 to $1,172,000 in 1999, and
consisted primarily of $1,309,000 for the continued purchase of computer
hardware and software compared to $1,097,000 in 1998. The net decrease was due
to the absence of treasury stock purchases in fiscal 1999. Financing activities
included a $526,000 net decrease in short-term borrowing due to lower amount of
debt outstanding.
Capital resources available to STV include an existing line of credit for
working capital. The current line is a maximum of $15,500,000 based on accounts
receivable and work-in-progress, of which approximately $13,518,000 is currently
available. An agreement was signed last 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, STV 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.
STV is currently negotiating with other banks to obtain a revolving line of
credit at a lower level with more favorable terms.
In the long term, the Company relies on the ability to generate sufficient cash
flows from operating activities to fund investing and financing requirements.
Management Discussion and Analysis of Financial Condition and Results of 10
Operations (continued)
STV Group and Subsidiaries
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.
STV has recently acquired and installed new financial and project management
systems that are certified Year 2000-compliant. The Company also replaced or
upgraded other systems that may not have been compliant. Costs of becoming
2000-compliant were not materially more than normal information technology (IT)
purchases and associated IT costs. However, STV has taken and will continue to
take reasonable and prudent actions, consistent with the standards of care
prevalent in the industry, to comply with Year 2000 requirements and to prevent
interruptions to STV operations. The Company has taken action to obtain
certification from its suppliers, including suppliers of IT and non-IT systems.
These responses were analyzed and remedial action was taken with those suppliers
who were deemed non-compliant. In addition, STV has notified its clients of Year
2000 compliance actions and issues, and has completed the testing of the
Company's in-house equipment and software under simulated Year 2000 conditions
to attempt to ensure that normal operation will continue beyond 2000. Finally,
STV operations managers have informed all design personnel of Y2K requirements
to ensure that all STV design products meet Y2K standards. A steering committee
of senior managers meets monthly to coordinate and manage all Year 2000 issues,
both internally and externally. The cost of this endeavor is not believed to be
material.
The maximum potential risk exposure to STV is as follows: (a) Disruptions could
occur with the failure of project-specific applications or unique computer
assisted design and drafting and other software products that are not Year
2000-compliant. This would halt or delay completion of engineering or
construction designs and could subject STV to litigation for failure to complete
designs according to contract timetables; and (b) There is the potential for a
governmental unit or other large clients 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. Ongoing testing of equipment and software will
considerably lessen the risk of failure, and STV currently has a contingency
plan to immediately replace any defective computer or software system in the
event of problems. This plan is considered adequate because all STV systems are
PC-based, and the Company has sufficient hardware, software 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.
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.
These and other factors are discussed in more detail in STV's annual report on
Form 10-K for the fiscal year ended September 30, 1999.
11 Consolidated Balance Sheets
STV Group and Subsidiaries
September 30
1999 1998
Assets
Current Assets:
Cash and cash equivalents $ 7,248,000 $ 4,444,000
Accounts receivable 30,590,000 23,485,000
Costs and estimated profits of uncompleted contracts in
excess of related billings 17,029,000 13,218,000
Prepaid income taxes 0 84,000
Prepaid expenses and other current assets 829,000 1,065,000
----------- -----------
Total Current Assets 55,696,000 42,296,000
Property and equipment, net 1,813,000 1,553,000
Deferred income taxes 2,443,000 1,882,000
Other assets 782,000 757,000
----------- -----------
Total Assets $60,734,000 $46,488,000
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturity of long-term debt $ 110,000 $ 564,000
Accounts payable 7,675,000 6,382,000
Billings on uncompleted contracts in excess of related
costs and estimated profits 17,094,000 13,375,000
Accrued payroll and related expenses 8,174,000 5,812,000
Accrued expenses 2,037,000 1,864,000
Deferred income taxes 2,137,000 1,862,000
Income tax payable 876,000 96,000
----------- -----------
Total Current Liabilities 38,103,000 29,955,000
Long-term debt 2,794,000 2,134,000
Post-retirement benefits 1,070,000 927,000
----------- -----------
Total Liabilities 41,967,000 33,016,000
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 2,041,000 2,025,000
Capital in excess of par 3,445,000 3,350,000
Retained earnings 14,052,000 8,868,000
----------- -----------
19,538,000 14,243,000
Less: Treasury stock 771,000 771,000
----------- -----------
Total Stockholders' Equity 18,767,000 13,472,000
----------- -----------
Total Liabilities and Stockholders' Equity $60,734,000 $46,488,000
See notes to consolidated financial statements.
Consolidated Statements of Income 12
STV Group and Subsidiaries
For the Fiscal Year Ended September 30
1999 1998 1997
Total revenues $ 138,940,000 $ 105,178,000 $ 94,676,000
Subcontract and procurement costs 41,502,000 24,530,000 21,844,000
------------- ------------- -------------
Operating revenue 97,438,000 80,648,000 72,832,000
Costs and expenses:
Costs of services 82,185,000 69,658,000 64,398,000
General and administrative 8,438,000 6,307,000 5,322,000
------------- ------------- -------------
Total costs and expenses 90,623,000 75,965,000 69,720,000
Insurance settlement 2,600,000 0 0
Interest expense (195,000) (469,000)
(1,380,000)
Interest income 350,000 78,000 36,000
------------- ------------- -------------
Other income (expense) 2,755,000 (391,000) (1,344,000)
Income before income taxes 9,570,000 4,292,000 1,768,000
Income tax expense 4,386,000 2,098,000 908,000
------------- ------------- -------------
Net income $ 5,184,000 $ 2,194,000 $ 860,000
Basic earnings per share $ 1.36 $ .59 $ .24
Diluted earnings per share $ 1.24 $ .55 $ .23
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, 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
Exercise of options 32,500 16,000 95,000
Net income for the year 5,184,000
Balance, September 30, 1999 4,081,654 $ 2,041,000 $ 3,445,000 $14,052,000 248,836 $ 771,000
See notes to consolidated financial statements.
13 Consolidated Statements of Cash Flows
STV Group and Subsidiaries
For the Fiscal Year Ended September 30
1999 1998 1997
Operating Activities
Net income $ 5,184,000 $ 2,194,000 $ 860,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 887,000 741,000 795,000
Deferred income taxes (286,000) 944,000 585,000
Changes in operating assets and liabilities
Accounts receivable (7,105,000) (3,331,000) 350,000
Costs and estimated profits of uncompleted
contracts in excess of related billings and other
current assets (3,575,000) 2,017,000 (487,000)
Accounts payable and other liabilities 4,703,000 2,440,000 204,000
Billings on uncompleted contracts in excess of
related costs and estimated profits 3,719,000 8,989,000 68,000
Current income taxes 864,000 515,000 (641,000)
------------ ------------ ------------
Net cash provided by operating activities $ 4,391,000 $ 14,509,000 $ 1,734,000
Investing Activities
Purchase of property and equipment $ (961,000) $ (843,000) $ (724,000)
Purchase of software (348,000) (254,000) (107,000)
Decrease in other assets 137,000 68,000 28,000
Purchase of treasury stock 0 (342,000) 0
------------ ------------ ------------
Net cash used in investing activities $ (1,172,000) $ (1,371,000) $ (803,000)
Financing Activities
Proceeds from issuance of common stock $ 111,000 $ 451,000 $ 0
Proceeds from line of credit and long term borrowings 0 55,073,000 92,435,000
Principal payments on line of credit and long term
borrowings (526,000) (65,371,000) (92,241,000)
------------ ------------ ------------
Net cash (used in) provided by financing
activities $ (415,000) $ (9,847,000) $ 194,000
Increase in cash 2,804,000 3,291,000 1,125,000
Cash and cash equivalents at beginning of year 4,444,000 1,153,000 28,000
Cash and cash equivalents at end of year $ 7,248,000 $ 4,444,000 $ 1,153,000
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements 14
STV Group and Subsidiaries
1. Significant Accounting Policies
Basis of Presentation
STV 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 STV 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
STV 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
STV'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 values 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
$741,000.
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
1999 presentation.
Long-lived Assets
The carrying amount of the long-lived assets is 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 STV adopted in 1998. All disclosures as
required by SFAS 128 are included in Note 6 to the financial statements.
15 Notes to Consolidated Financial Statements (continued)
STV Group and Subsidiaries
2. Costs and Estimated Profits of Uncompleted Contracts in Excess of Related
Billings
Costs and estimated profits of uncompleted contracts at September 30, 1999 and
1998, respectively, are as follows:
1999 1998
Costs and estimated earn-
ings on uncompleted
contracts $ 462,774,000 $ 350,044,000
Less billings to date 462,839,000 350,201,000
-------------- --------------
$ (65,000) $ (157,000)
Costs and estimated profits of uncompleted contracts are included in the
accompanying balance sheets under the following captions:
1999 1998
Costs and estimated
profits of uncompleted
contracts in excess of
related billings $ 17,029,000 $ 13,218,000
Billings on uncompleted
contracts in excess of
related costs and
estimated profits 17,094,000 13,375,000
------------ -------------
$ (65,000) $ (157,000)
Included in accounts receivable are retainages related to uncompleted contracts
in the amounts of $7,683,000 in 1999 and $7,225,000 in 1998. The collection of
retainages generally coincides with final project acceptance.
3. Property and Equipment
Property and equipment, at cost, are as follows:
1999 1998
Land $ 54,000 $ 54,000
Equipment 2,934,000 4,572,000
Furniture and fixtures 1,903,000 1,825,000
Leasehold
improvements 1,754,000 1,744,000
------------ -------------
$ 6,645,000 $ 8,195,000
Less:
Accumulated
depreciation and
amortization 4,832,000 6,642,000
------------ -------------
$ 1,813,000 $ 1,553,000
4. Note Payable
STV's current credit facility, as amended, includes a note payable on demand (no
borrowings outstanding during the year ended September 30, 1999) which bears
interest at the bank's base rate (9.5 percent at September 30, 1999) and is
secured by substantially all assets. The weighted average interest rate was 9.7
percent in fiscal 1998. The bank also provides letters of credit which incur a
charge of 1.5 percent of the face value. Currently, $1,982,000 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 covenants regarding additional debt and
stockholders' equity. The covenants 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
STV uses the liability method of accounting for income taxes required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
Notes to Consolidated Financial Statements (continued) 16
STV Group and Subsidiaries
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts 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, 1999 and
1998, are as follows:
1999 1998
Deferred tax assets:
Vacation accruals $ 827,000 $ 694,000
Depreciation 15,000 50,000
Deferred compensation 1,245,000 920,000
Litigation 613,000 479,000
International asset sale 34,000 107,000
Postemployment benefits 0 5,000
State taxes 178,000 0
Postretirement
medical benefits 507,000 427,000
---------- ----------
Total deferred
tax assets $3,419,000 $2,682,000
Deferred tax liabilities:
Retainage 3,113,000 2,662,000
---------- ----------
Total deferred tax
liabilities $3,113,000 $2,662,000
Net deferred
tax assets $ 306,000 $ 20,000
Significant components of the provision (benefit) for income taxes are as
follows:
1999 1998 1997
Current:
Federal 3,191,000 $ 798,000 $ 208,000
State 1,481,000 356,000 86,000
----------- ----------- -----------
Total current $ 4,672,000 $ 1,154,000 $ 294,000
Deferred:
Federal $ (242,000) $ 592,000 $ 427,000
State (44,000) 352,000 187,000
----------- ----------- -----------
Total deferred $ (286,000) $ 944,000 $ 614,000
Income tax
expense $ 4,386,000 $ 2,098,000 $ 908,000
A reconciliation of federal income taxes at the statutory rate to the Company's
income tax provision follows:
1999 1998 1997
Federal income tax rate 34.0% 34.0% 34.0%
Non-deductible expenses
and other 2.1 4.3 7.0
State taxes, net of federal
tax effect 9.9 10.7 10.0
------ ------ ------
46.0% 49.0% 51.0%
STV made income tax payments of $3,808,000, $639,000, and $971,000 in 1999, 1998
and 1997, respectively. The Company received $58,000 in income tax refunds in
1999 and $7,000 in 1997.
6. Earnings per Share
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
1999 1998 1997
Net income $5,184,000 $2,194,000 $ 860,000
Weighted average
shares for basic
earnings per share 3,813,000 3,719,000 3,642,000
Weighted average
shares for diluted
earnings per share 4,186,000 3,959,000 3,803,000
Basic earnings
per share 1.36 .59 .24
Diluted earnings
per share 1.24 .55 .23
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 adopting SFAS No. 128, "Earnings
Per Share," in 1998 are reflected in the earnings per share and weighted average
number of shares outstanding calculations above for all periods presented.
17 Notes to Consolidated Financial Statements (continued)
STV Group and Subsidiaries
7. Commitments and Contingencies
STV 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 STV's financial
statements.
During 1992, STV 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
STV'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 (the "Skinner Litigation") was filed on or about February 1991 by the
general liability insurer in the Supreme Court. Pursuant to this, the general
liability insurer is seeking a judgment that the professional liability insurer
and STV are obligated to reimburse the general liability insurer for the
payments which it made, plus expenses. STV 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. Following an appellate court decision affirming the
Company's entitlement to recover, the litigation was settled in September 1999
by the general liability company paying the Company $2,600,000 and reimbursing
the Company's professional liability insurer $2,700,000. Diluted earnings per
share increased by approximately $ .37 per share in 1999 related to this
settlement.
In addition, in 1992, STV'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 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 STV's professional liability insurer. The Company intervened in the
garnishment proceeding. This proceeding had been stayed pending resolution of
the Skinner Litigation. The litigation is now moving forward.
If the outcome of this litigation is adverse to STV, and the Company is required
to pay amounts in addition to the policy limits of the insurance policy, it
could have a material adverse effect on STV's earnings and financial condition
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.
STV sold its International Region as of March 13, 1997. A gain of $170,000 was
recorded by the Company. 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.
STV 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
2000 $ 5,328,000
2001 4,607,000
2002 3,449,000
2003 3,051,000
2004 3,013,000
Thereafter 32,379,000
Total minimum
lease payments $51,827,000
Rental expense under operating leases amounted to $4,380,000, $4,314,000 and
$3,783,000 in 1999, 1998 and 1997, respectively.
8. Stock Plans
On October 1, 1981, STV 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
1999, 1998 and 1997 was $1,157,000, $1,144,000, and $1,087,000, 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
Notes to Consolidated Financial Statements (continued) 18
STV Group and Subsidiaries
payment for future stock purchases. The Company will fund the 1999 contribution
with cash payments throughout 1999 and 2000. At September 30, 1999, 2,466,229
shares of STV 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. No additional grants are available under this
plan.
STV 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 1999 and 1998: risk-free interest rates of 5 percent,
dividend yield of 0 percent, expected volatility of the market price of STV's
common stock of 44 and 18 percent, respectively, 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.
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. STV's pro forma information is as follows:
1999 1998
Pro forma net income $ 4,145,000 $ 1,849,000
Pro forma basic earnings per share $ 1.09 $ .50
Pro forma diluted earnings per share $ .99 $ .47
Outstanding options to purchase shares of common stock have been granted to
officers and employees at prices ranging from $2.06 to $7.79 per share. The
weighted-average remaining contractual life of those options is 8.01 years. A
summary of the option transactions is as follows:
Year ended September 30
1999 1998 1997
Options outstanding,
beginning of period 617,000 245,000 190,000
Granted 550,000 172,000 55,000
Effect of split -- 344,000 --
Exercised (32,500) (139,000) --
Canceled (4,000) (5,000) --
Options outstanding,
end of period 1,130,500 617,000 245,000
Options exercisable 582,000 273,000 190,000
Shares available for
future option grants 0 546,000 445,000
The weighted average fair value of options granted during fiscal 1999 and 1998
was $2.98 and $1.16 per share, respectively. The weighted average exercise price
of options granted during fiscal 1999 and 1998 was $6.49 and $4.22,
respectively. The weighted average exercise price of options exercised in 1999
and 1998 was $3.44 and $3.25, respectively. The weighted average exercise price
of options outstanding at September 30, 1999 and 1998, was $5.06 and $3.69,
respectively, while the weighted average exercise price of exercisable options
at September 30, 1999, was $3.70.
On October 20, 1995, certain STV officers borrowed $125,000 from the Company to
purchase 25,000 shares of common stock from an outside STV director. 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.
19 Notes to Consolidated Financial Statements (continued)
STV Group and Subsidiaries
9. Postretirement Benefit and Pension Plans
STV 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 (current and long-term):
1999 1998
Changes in plan assets:
Fair value of plan assets
at beginning of year 0 0
Employer contributions 70,000 73,000
Benefits paid (70,000) 73,000
----------- -----------
Fair value of plan assets
at year end 0 0
Accumulated
postretirement
benefit obligation $(1,612,000) $(1,684,000)
Unrecognized
net gain (356,000) (222,000)
Unrecognized prior
service costs 0 41,000
Unrecognized
transition obligation 783,000 839,000
----------- -----------
Accrued postretirement
benefit cost $(1,185,000) $(1,026,000)
Net periodic postretirement benefit costs include the following components:
1999 1998 1997
Service cost $ 32,000 $ 32,000 $ 36,000
Interest cost 112,000 114,000 101,000
Amortization of transition
obligation over 20 years 56,000 56,000 56,000
Amortization of unrecognized
prior service cost 41,000 41,000 41,000
Amortization of unrecognized
gain (12,000) (24,000) (44,000)
--------- --------- ---------
Net periodic postretirement
benefit cost $ 229,000 $ 219,000 $ 190,000
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.0 percent for 1999
(10.5 percent for 1998 and 11 percent in 1997) 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, 1999, by $180,000, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for 1999, 1998 and 1997 by $18,000, $17,000, and $16,000, respectively.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0 percent at September 30, 1999, and 7.0
percent at September 30, 1998.
STV has a defined contribution savings and investment plan covering
substantially all employees. Employees may contribute up to 15 percent of base
salary to the plan, excluding highly compensated employees, which are limited to
8 percent. The plan was amended to include a discretionary company match in
1999. Plan provisions have established a company match of $ .25 for each $1
contributed on the first 4 percent of employee contributions, with an additional
match at the discretion of the Board of Directors. In 1999, the Company's Board
of Directors elected to increase the match by 50 percent. The Company's cost for
this plan was $468,000 in 1999.
10. Major Customers
The percentage of total revenues derived from contracts with the United States
government for fiscal years 1999, 1998 and 1997 was 9 percent, 14 percent and 16
percent, respectively.
Notes to Consolidated Financial Statements (continued) 20
STV Group and Subsidiaries
11. Long-Term Debt
Long-term debt consists of the following:
1999 1998
Deferred compensation liability payable in fixed monthly installments of
$11,542 through September 2006 with interest imputed at 16 percent $ 581,000 $ 623,000
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 490,000 699,000
Supplemental executive retirement agreements for two current executives payable
in monthly installments upon retirement with interest imputed
at 7 percent. (1) 1,833,000 850,000
Other, including capital leases in 1998 0 526,000
---------- ----------
2,904,000 2,698,000
Less: Current portion 110,000 564,000
---------- ----------
$2,794,000 $2,134,000
Interest paid during 1999, 1998 and 1997 amounted to $147,000, $505,000 and
$1,310,000, respectively.
Annual maturities of long-term debt are as follows:
Year ending September 30
2000 $ 110,000
2001 57,000
2002 67,000
2003 79,000
2004 93,000
Thereafter 2,498,000
(1) These agreements for two current executives provide for annual future cash
payments at retirement commencing October 2003 and January 2004, respectively.
These agreements provide for cash payments of $325,000 and $234,000 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.
21 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:
1999 $ 34,221 $ 33,345 $ 34,670 $ 36,704 $ 138,940
1998 $ 24,127 $ 25,986 $ 25,525 $ 29,540 $ 105,178
Operating revenue:
1999 $ 22,859 $ 23,758 $ 24,857 $ 25,964 $ 97,438
1998 $ 19,158 $ 19,796 $ 20,040 $ 21,654 $ 80,648
Gross profit:
1999 $ 3,457 $ 3,803 $ 3,955 $ 4,038 $ 15,253
1998 $ 2,575 $ 2,571 $ 2,750 $ 3,094 $ 10,990
Net income:
1999 $ 912 $ 910 $ 912 $ 2,450 $ 5,184
1998 $ 412 $ 495 $ 602 $ 685 $ 2,194
Basic earnings per share:
1999 $ .24 $ .24 $ .24 $ .64 $ 1.36
1998 $ .11 $ .14 $ .16 $ .18 $ .59
Diluted earnings per share:
1999 $ .22 $ .22 $ .22 $ .58 $ 1.24
1998 $ .11 $ .13 $ .15 $ .17 $ .55
In the fourth quarter of 1999, STV was paid $2,600,000 as settlement of a
litigation claim. This settlement increased net income by approximately
$1,500,000, or $ .37 per diluted share.
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.
22
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, 1999 and 1998, 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, 1999 and 1998, 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
October 29, 1999
23 Shareholder Information
STV Group Managing Officers
Dominick M. Servedio, P.E., President & Chief
Executive Officer
Peter W. Knipe, Chief Financial Officer
Board of Directors
Michael Haratunian, P.E., Chairman
Dominick M. Servedio, P.E., President & Chief
Executive Officer
William J. Doyle, Director
Richard L. Holland, P.E., Director
Maurice L. Meier, P.E., Director
R.M. Monti, P.E., Director
G. Michael Stakias, Director
Transfer Agent and Registrar
Continental Stock Transfer & Trust Co.
2 Broadway
New York, NY 10004-2207
Counsel
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Auditors
Ernst & Young LLP
Commerce Court, Suite 200
2601 Market Place
Harrisburg, PA 17110-9359
Shareholders of Record
There were 1,022 shareholders of record as of September 30, 1999.
Annual Meeting
The annual meeting of stockholders of STV Group, Inc., will be held at 10:00
a.m., Wednesday, March 29, 2000, at 225 Park Avenue South, New York, N.Y.
Common Stock Market Prices
The common stock of STV Group, Inc., is traded in the over-the-counter market
under the symbol STVI. The following table sets forth the reported high and low
bid prices for the periods indicated. Such quotations, supplied by NASDAQ,
represent interdealer prices without retail mark-up, mark-down or commission.
1999 High Ask Low Bid
4th Quarter 8 7/16 7
3rd Quarter 8 11/16 6 3/4
2nd Quarter 9 6 1/2
1st Quarter 9 4
1998 High Ask Low Bid
4th Quarter 7 9/16 3 5/8
3rd Quarter 13 1/4 7
2nd Quarter 11 1/2 7 1/2
1st Quarter 8 7/16 7 3/4
Form 10K Available
Copies of the STV Group, Inc., Form 10K report to the Securities and Exchange
Commission may be obtained without charge by contacting:
Peter W. Knipe, Chief Financial Officer
STV Group, Inc.
205 West Welsh Drive
Douglassville, PA 19518
(610) 385-8200, fax (610) 385-8500
info@stvinc.com