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, 1999, the Company employed 1,143 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, 1999 1998 1997
Architectural Engineering 24% 27% 24% Civil, Highway, Bridge, Airport and Port Engineering 34 24 24 Defense Systems Engineering 1 3 4 Industrial Process Engineering 2 2 2 Transportation Engineering 31 39 39 Other Engineering Services and Design Build 8 5 7 ___________________ * 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.
Architectural Engineering
Architectural engineering generally involves consulting and design services, as well as construction inspection services, for the construction of commercial, industrial and governmental buildings, medical and educational facilities, laboratories, recreational, religious and cultural centers, military installations, penal institutions, and public utility facilities. As part of its services, the Company has designed and developed systems for heating, ventilation, cooling, refrigeration, fire protection, lighting, power generation and distribution, and communications. In addition, the Company has performed energy conservation audits and has recommended and designed programs, including computerized control programs for multi-building complexes, for the conservation of fuel and electrical energy.
Civil, Highway, Bridge, Airport and Port Engineering
This area of engineering generally involves consulting and design services for the construction of highways (including interchange ramps and secondary roads), bridges, airports and marine ports. Services performed by the Company have included site selection and development (including economic evaluations and feasibility reports), design and development of specifications, and construction inspection. As part of these services, the Company has designed lighting, toll and service facilities, drainage and erosion control systems, and has performed mapping and landscaping, hydraulic and hydrologic studies, soils engineering, traffic studies and surveys. In addition, the Company has designed and inspected the construction of airport terminals, runways, aircraft maintenance hangars, fuel systems, control towers and marine ports.
Defense Systems Engineering
Defense systems engineering involves consulting and design services for the development of equipment and special hardware for the Department of Defense. Services performed by the Company have included the design, development and testing for systems relating to naval aircraft, weapons systems, aircraft carriers, support ships, land-based operations and support missions. The Company has prepared analytical support studies for aircraft carriers, support ships, land-based operations and support missions, analytical support studies for aircraft catapults and arresting systems, jet blast deflectors, shipboard weapons, loading and transfer systems, ship-weapon compatibility, mobile weapon loaders, munition trailers, launch and recovery television systems, lighting and marking systems, parachutes, life rafts and personnel life-support systems. In addition, the Company has prepared operation and maintenance manuals, technical reports, specifications and other documents describing equipment and hardware. The Company has the capacity to provide all of the services necessary to prepare these publications, including layout, artwork composition, photography and reproduction.
Industrial Process Engineering
This area involves consulting and design services for the development of various manufacturing equipment and process systems. Services performed by the Company have included technical analyses, feasibility studies, plant layouts and machinery and construction inspection services. The Company has provided these services in connection with systems for the manufacture of paper, plastics, bulk
chemicals, 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, 1999 1998 1997 (1) U.S. Government Contracts.................... 9% 14 16% State and Local Government Contracts......... 66 56 56 Foreign Government Contracts................. 0 0 1 Private Contracts............................ 25 30 27 __________ (1) 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.
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 78% and 79% of total assets as of September 30, 1999 and 1998, respectively. Accounts receivable are comprised of billed receivables, while costs and estimated profits of uncompleted contracts in excess of related billings are essentially unbilled receivables. Unbilled receivables represent payment obligations for which invoices have not or cannot be presented until a later period. The reasons for which invoices are not presented may include normal invoice preparation lag, lack of billable documents to be supplied by the client, and excess of actual direct and indirect costs over amounts currently billable under cost reimbursement contracts to the extent they are expected to be billed and collected. The financing of receivables requires bank borrowings and the payment of
associated interest expense. Interest expense is a business expense not permitted as a reimbursable item of cost under any government contracts.
Backlog
Backlog represents the value of existing contracts less the portion of such contracts included in revenues on the basis of percentage-of-completion. The Company's backlog for services as of September 30, 1999 and 1998 was approximately $200,000,000 and $150,000,000, respectively. The Company's backlog includes anticipated pass through costs 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 29.9% in 1999, 23.3% in 1998, and 23.1% in 1997.
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
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, 1999, the Company had 1,143 employees, of whom 1,004 were engaged in engineering and architectural services, 101 were engaged in administration and 38 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.
ITEM 2.
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 in the United States at which it performs engineering and architectural consulting and design services, including a facility of approximately 69,000 square feet in New York, New York, pursuant to a 15 year lease which expires in May, 2014.
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.
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 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 of New York pursuant to which the general liability insurer sought 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 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 recovery, the litigation was settled in September, 1999 by the general liability insurer paying the Company $2,600,000 and reimbursing the Company's professional liability insurer $2,700,000.
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. This proceeding had been stayed pending resolution of the Skinner Litigation. 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 litigation is adverse to the Company and the Company is required to pay amounts in excess of the policy limits of its insurance policy, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
PART II
ITEM 5.
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, 1999, is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Financial Highlights for Fiscal Years Ended September 30, 1995 through 1999" in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1999 is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" from the Company's Annual Report to Shareholders for the fiscal year ended September 30,1999 is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk exposures to the Company are not material.
ITEM 8.
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, 1999, are included in Part IV, Item 14 of this Report.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the caption "Election of Directors" in the Company's 1999 Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" in the Company's 1999 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the caption "Security Ownership" in the Company's 1999 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS.
The information contained under the caption "Certain Transactions" in the Company's 1999 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
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, 1999 and 1998
Consolidated Statements of Income - Years ended September 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements - September 30, 1999
(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, 1999.
(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.
* 4.1 Specimen Common Stock Certificate of the Company.
* 10.1 Loan Agreement, undated, between the Company and Richard L. Holland, relating to the purchase of 48,779 shares of Common Stock. +
*** 10.2 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.
* 10.3 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.
* 10.4 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.
* 10.5 Lease, dated November 22, 1983, accompanying Workletter, dated October 12, 1983, and letters (2) dated November 22, 1983 between the Company and 225 Fourth Company, providing for the renovation and use of office space at 225 Park Avenue South, New York, New York.
* 10.6 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. +
* 10.7 STV Revised Pension Plan. +
* 10.8 STV, Inc. Money Purchase Pension Plan. +
10.9 Officers' and Directors' Liability Policy. +
*** 10.10 Employment Agreement of Richard L. Holland. +
**** 10.11 Stipulation of Amendment to Employee Stock Ownership Plan effective October 1, 1984. +
*** 10.12 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.
*** 10.13 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.
*** 10.14 STV Engineers, Inc. 1985 Stock Option Plan. +
*** 10.15 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.
*** 10.16 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.
*** 10.17 Amendment, dated November 12, 1987, increasing the line of credit to $17,000,000.
***** 10.18 Amendment, dated June 1, 1990 between the Company and First Pennsylvania Bank, NA increasing the interest rate for short term borrowings.
****** 10.19 Amendment dated September 30, 1991, between the company and CoreStates Bank, N.A., decreasing the maximum amount of the line of credit and increasing the charge for issuing letters of credit.
******* 10.20 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.
******* 10.21 Agreement effective January 1, 1992 relating to ACEC medical and life insurance. +
******* 10.22 Agreement dated August 29, 1991 relating to U. S. Healthcare medical insurance. +
*********** 10.23 Employment Agreement of Dominick M. Servedio. +
*********** 10.24 Employment Agreement of Michael Haratunian. +
********* 10.25 Amendment to the STV Group Incorporated Employee Stock Ownership Plan. +
********** 10.26 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.
********** 10.27 Agreement effective July 1, 1996 with Corporate Health Insurance Company providing Group Health Insurance - Custom Plan. +
********** 10.28 Agreement effective December 1, 1996 with U. S. Healthcare providing medical insurance.
*********** 10.29 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.
*********** 10.30 STV Group, Incorporated 1995 Stock Option Plan.
10.31 First Amendment To Employment Agreement with Dominick M. Servedio. +
10.32 First Amendment To Employment Agreement with Michael Haratunian. +
10.33 Employment Agreement for Peter W. Knipe. +
10.34 Lease dated July 28, 1999 between the Company and 225 Fourth LLC relating to the Company's executive and engineering offices at 225 Park Avenue, South, New York, New York.
13.1 The 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.
27.0 Financial Data Schedule
+ Management contract or compensatory plan. ____________
* 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.
*********** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1998.
************ Incorporated by reference from Proxy Statement for the year ended September 30, 1995.
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, 1999 STV GROUP, INCORPORATED -------------------------------- (Registrant)
By: /s/ Dominick M. Servedio ---------------------------- DOMINICK M. SERVEDIO, Chief Executive Officer, President, Chief Operating 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, 1999 MICHAEL HARATUNIAN and Director (Principal Executive Officer)
/s/ Dominick M. Servedio - ------------------------- Chief Executive Officer, December 29, 1999 DOMINICK M. SERVEDIO President, Chief Operating Officer and Director
/s/ Peter W. Knipe - ------------------------- Chief Financial Officer, December 29, 1999 PETER W. KNIPE Secretary/Treasurer (Principal Accounting and Financial Officer)
/s/ Richard L. Holland Director December 29, 1999 - ------------------------- RICHARD L. HOLLAND
/s/ G. Michael Stakias Director December 29, 1999 - ------------------------- G. MICHAEL STAKIAS
/s/ Ray M. Monti Director December 29, 1999 - ------------------------- RAY M. MONTI
/s/ Maurice L. Meier Director December 29, 1999 - ------------------------- MAURICE L. MEIER
/s/ William J. Doyle Director December 29, 1999 - ------------------------- WILLIAM J. DOYLE
FINANCIAL STATEMENTS
Index
Report of Independent Auditors 17
Consolidated Balance Sheets 18
Consolidated Statements of Income 19
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS STV Group, Incorporated
We have audited the accompanying consolidated balance sheets of STV Group, Incorporated and Subsidiaries as of September 30, 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
Consolidated Balance Sheets STV Group and Subsidiaries
See notes to consolidated financial statements.
Consolidated Statements of Income STV Group and Subsidiaries
Consolidated Statements of Stockholders' Equity STV Group and Subsidiaries
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows STV Group and Subsidiaries
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements 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.
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) 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.
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) 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.
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) STV Group and Subsidiaries
11. Long-Term Debt Long-term debt consists of the following:
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.
Notes to Consolidated Financial Statements (continued) STV Group and Subsidiaries
12. Quarterly Results (unaudited)
(All dollar amounts omit 000 except per share data.)
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.
EXHIBITS
Index
Exhibit 10.9 - Officers' and Directors' Liability Policy
Exhibit 10.31 - First Amendment To Employment Agreement with Dominick M. Servedio.
Exhibit 10.32 - First Amendment To Employment Agreement with Michael Haratunian.
Exhibit 10.33 - Employment Agreement for Peter W. Knipe.
Exhibit 10.34 - Lease dated July 28, 1999 between the Company and 225 Fourth LLC relating to the Company's executive and engineering offices at 225 Park Avenue, South, New York, New York.
Exhibit 13.1 - The 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
Exhibit 27.0 - Financial Data Schedule