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 also performs selected design/build, construction management projects. STV Group, Inc. consists of the following 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 Group, Inc. 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, 2000, the Company employed 1,228 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, ------------------------ 2000 1999 1998 ---- ---- ----
Architectural Engineering 22% 24% 27% Civil, Highway, Bridge, Airport and Port Engineering 27 34 24 Defense Systems Engineering 1 1 3 Industrial Process Engineering 1 2 2 Transportation Engineering 34 31 39 Other Engineering Services and Design Build 15 8 5 __________ * 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 joins 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. Thus 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, --------------------------- 2000 1999 1998 ---- ---- ---- U.S. Government Contracts.................... 8% 9% 14% State and Local Government Contracts......... 70 66 56 Private Contracts............................ 22 25 30 __________
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 83% and 78% of total assets as of September 30, 2000 and 1999, 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, 2000 and 1999 was approximately $250,000,000 and $200,000,000, 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 24.2% in 2000, 29.9% in 1999, and 23.3% in 1998.
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, 2000, the Company had 1,228 employees, of whom 1,004 were engaged in engineering and architectural services, 122 were engaged in administration and 45 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. 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.
A garnishment proceeding was commenced in March 1994 against the Company's professional liability carrier by American Continental Properties in Philadelphia Court of Common Pleas. In that proceeding, the plaintiff-creditor seeks to enforce an approximate $4,000,000 judgment it entered in New York against an entity whose assets and liabilities were partially acquired by the Company in 1987. The Company intervened in that proceeding, and along with its professional liability carrier, denies that there is any coverage for the loss under the professional liability policy. The Company and its professional liability insurer are vigorously pursuing 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, 2000, is incorporated herein by reference.
The Company has not paid any dividends in the last two fiscal years.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
The information contained under the caption "Financial Highlights for Fiscal Years Ended September 30, 1996 through 2000" in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 2000 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, 2000 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, 2000, 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 2000 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 2000 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 2000 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 2000 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, 2000 and 1999
Consolidated Statements of Income - Years ended September 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Years ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements - September 30, 2000
(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 last quarter of the fiscal year ended September 30, 2000.
(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. +
*** 10.14 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.
******* 10.20 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.
************ 10.30 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.
10.35 Letter Agreement with PNC Bank.
10.36 Committed Line of Credit Note with PNC Bank.
10.37 Security Agreement with PNC Bank
10.38 Reimbursement Agreement for Standby Letter(s) of Credit with PNC Bank.
10.39 STV Group, Incorporated Non-Qualified Management Savings Plan
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.
************* Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1999.
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, 2000 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, 2000 MICHAEL HARATUNIAN and Director (Principal Executive Officer)
/s/ DOMINICK M. SERVEDIO - ------------------------------- Chief Executive Officer, December 29, 2000 DOMINICK M. SERVEDIO President, Chief Operating Officer and Director
/s/ PETER W. KNIPE - ------------------------------- Chief Financial Officer, December 29, 2000 PETER W. KNIPE Secretary/Treasurer (Principal Accounting and Financial Officer)
/s/ RICHARD L. HOLLAND - ------------------------------- Director December 29, 2000 RICHARD L. HOLLAND
/s/ G. MICHAEL STAKIAS - ------------------------------- Director December 29, 2000 G. MICHAEL STAKIAS
/s/ RAY M. MONTI - ------------------------------- Director December 29, 2000 RAY M. MONTI
/s/ MAURICE L. MEIER - ------------------------------- Director December 29, 2000 MAURICE L. MEIER
/s/ WILLIAM J. DOYLE - ------------------------------- Director December 29, 2000 WILLIAM J. DOYLE
FINANCIAL STATEMENTS --------------------
Index -----
Report of Independent Auditors 16
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS STV Group, Incorporated
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of STV Group, Incorporated as of September 30, 2000 and 1999, 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 auditing standards generally accepted in the United States. 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 as of September 30, 2000 and 1999, 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 accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Harrisburg, Pennsylvania November 1, 2000
Consolidated Balance Sheets STV Group, Incorporated
See notes to consolidated financial statements.
Consolidated Statements of Income STV Group, Incorporated
Consolidated Statements of Stockholders' Equity STV Group, Incorporated
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows STV Group, Incorporated
Notes to Consolidated Financial Statements STV Group, Incorporated - -------------------------------------------------------------------------------- 1. Significant Accounting Policies
Basis of Presentation STV Group, Incorporated, (STV or the Company) and its subsidiaries specialize in consulting engineering, architectural, planning, environmental, construction management and related services. The Company's clients consist primarily of various federal, state and local 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 accounting principles generally accepted in the United States 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 and trade payables. The book values are considered to be representative of their respective fair values.
Depreciation and Amortization Depreciation and amortization is computed primarily on the straight-line method over the estimated useful lives of the assets. For income tax purposes, accelerated depreciation methods are used by certain subsidiaries and deferred income taxes are provided, when applicable.
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.
Notes to Consolidated Financial Statements (continued) STV Group, Incorporated - --------------------------------------------------------------------------------
2. Costs and Estimated Profits of Uncompleted Contracts in Excess of Related Billings
Costs and estimated profits of uncompleted contracts at September 30, 2000 and 1999, respectively, are as follows:
- --------------------------------------------------------------- 2000 1999 =============================================================== Costs and estimated earn- ings on uncompleted contracts $ 475,516,000 $ 462,774,000 Less billings to date 469,626,000 462,839,000 ------------- ------------- $ 5,890,000 $ (65,000) - ---------------------------------------------------------------
Costs and estimated profits of uncompleted contracts are included in the accompanying balance sheets under the following captions:
- ------------------------------------------------------------ 2000 1999 ============================================================ Costs and estimated profits of uncompleted contracts in excess of related billings $ 18,404,000 $ 17,029,000 Billings on uncompleted contracts in excess of related costs and estimated profits 12,514,000 17,094,000 ------------ ------------ $ 5,890,000 $ (65,000) - ------------------------------------------------------------
Included in accounts receivable are retainages related to uncompleted contracts in the amounts of $6,808,000 and $7,683,000 at September 30, 2000 and 1999, respectively. The collection of retainages generally coincides with final project acceptance.
3. Property and Equipment
Property and equipment, at cost, are as follows:
- ---------------------------------------------------- 2000 1999 ==================================================== Land $ 54,000 $ 54,000 Equipment 2,652,000 2,934,000 Furniture and fixtures 2,790,000 1,903,000 Leasehold improvements 2,159,000 1,754,000 ---------- ---------- $7,655,000 $6,645,000 Less: Accumulated depreciation and amortization 4,767,000 4,832,000 ---------- ---------- $2,888,000 $1,813,000 - ----------------------------------------------------
4. Note Payable
In 2000, the Company obtained a $12,000,000 line of credit, replacing the previously existing line of credit. The agreement provides that the Company may borrow $10,000,000 and issue letters of credit for $2,000,000 and requires the Company to meet certain financial covenants. The Company's borrowing rate is LIBOR plus 2 percent at September 30, 2000 (8.63 percent at September 30, 2000). There are no borrowings outstanding as of September 30, 2000. The bank also provides letters of credit that incur a charge of 1.5 percent of the face value. Currently, $1,217,000 letters of credit are outstanding. The Company incurs a loan commitment fee at the rate of .375 percent per annum on the average daily balance of the line of credit that is unused.
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, Incorporated - --------------------------------------------------------------------------------
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, 2000 and 1999, are as follows:
- ---------------------------------------------------------- 2000 1999 ========================================================== Deferred tax assets: Vacation accruals $ 930,000 $ 827,000 Depreciation 47,000 15,000 Deferred compensation 1,754,000 1,245,000 Litigation 518,000 613,000 International asset sale 35,000 34,000 State taxes 188,000 178,000 Postretirement medical benefits 560,000 507,000 ------------ ------------ Total deferred tax assets $ 4,032,000 $ 3,419,000
Deferred tax liabilities: Retainage 2,949,000 3,113,000 Other 214,000 0 ------------ ------------ Total deferred tax liabilities $ 3,163,000 $ 3,113,000
Net deferred tax assets $ 869,000 $ 306,000 - ----------------------------------------------------------
Significant components of the provision (benefit) for income taxes are as follows:
- ---------------------------------------------------------------- 2000 1999 1998 ================================================================ Current: Federal $ 3,549,000 $ 3,191,000 $ 798,000 State 1,569,000 1,481,000 356,000 ----------- ----------- ----------- Total current $ 5,118,000 $ 4,672,000 $ 1,154,000
Deferred: Federal $ (390,000) $ (242,000) $ 592,000 State (173,000) (44,000) 352,000 ----------- ----------- ----------- Total deferred $ (563,000) $ (286,000) $ 944,000
Income tax expense $ 4,555,000 $ 4,386,000 $ 2,098,000 - ----------------------------------------------------------------
A reconciliation of federal income taxes at the statutory rate to the Company's income tax provision follows:
- ----------------------------------------------------------------- 2000 1999 1998 ================================================================= Federal income tax rate 34.0% 34.0% 34.0% Non-deductible expenses and other 2.6 2.1 4.3 State taxes, net of federal tax effect 9.8 9.7 10.6 -------- -------- -------- 46.4% 45.8% 48.9% - -----------------------------------------------------------------
STV made income tax payments of $5,101,000, $3,808,000 and $639,000 in 2000, 1999 and 1998, respectively. The Company received $40,000 and $58,000 in income tax refunds in 2000 and 1999, respectively.
Notes to Consolidated Financial Statements (continued) STV Group, Incorporated - --------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------- Year ended September 30 2000 1999 1998 ================================================================= Net income $5,266,000 $5,184,000 $2,194,000
Weighted average shares for basic earnings per share 3,844,000 3,813,000 3,719,000
Weighted average shares for diluted earnings per share 4,188,000 4,186,000 3,959,000
Basic earnings per share $ 1.37 $ 1.36 $ .59
Diluted earnings per share $ 1.26 $ 1.24 $ .55 - -----------------------------------------------------------------
A 2-for-1 split was effected April 13, 1998, for shareholders of record as of March 31, 1998. This split is reflected in the earnings per share and weighted average number of shares for all periods presented.
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 was 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 sought 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 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 September 2000, the Company discontinued a legal malpractice action it had commenced in 1995 upon its receipt of a payment of $1,000,000 (the consequential damages incurred by the Company). Diluted earnings per share increased by approximately $ .14 per share in 2000 related to this settlement.
In addition, a garnishment proceeding was commenced in March 1994 against the Company's professional liability carrier. In that proceeding, the plaintiff-creditor seeks to enforce an approximate $4,000,000 judgement it entered in New York against an entity whose assets and liabilities were partially acquired by the Company in 1987. The Company intervened in that proceeding, and along with its professional liability carrier, denies that there is any coverage for the loss under the professional liability policy. The Company and its professional liability insurer intend to vigorously pursue defenses available to them.
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
Notes to Consolidated Financial Statements (continued) STV Group, Incorporated - --------------------------------------------------------------------------------
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. 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 ====================================== 2001 $ 5,865,000 2002 4,639,000 2003 3,770,000 2004 3,483,000 2005 3,317,000 Thereafter 25,203,000
Total minimum lease payments $ 46,277,000 --------------------------------------
Rental expense under operating leases amounted to $5,488,000, $4,380,000 and $4,314,000 in 2000, 1999 and 1998, respectively.
8. Stock Plans
On October 1, 1981, STV initiated an Employee Stock Ownership Plan (ESOP) that 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 2000, 1999 and 1998 was $1,436,000, $1,157,000 and $1,144,000, respectively. The liability is funded through either the issuance of shares of Company stock (at fair market value on date of issuance) or a cash payment for future stock purchases. The Company will fund the 2000 contribution with cash payments throughout 2000 and 2001. At September 30, 2000, 2,435,843 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. There were no grants in 2000.
Notes to Consolidated Financial Statements (continued) STV Group, Incorporated - --------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that 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:
- -------------------------------------------------------------------------- Year ended September 30 2000 1999 1998 ========================================================================== Pro forma net income $ 4,594,000 $ 4,145,000 $ 1,849,000 Pro forma basic earnings per share $ 1.20 $ 1.09 .50 Pro forma diluted earnings per share $ 1.10 $ .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 7.01 years. A summary of the option transactions is as follows:
- --------------------------------------------------------------------- Year ended September 30 2000 1999 1998 ===================================================================== Options outstanding, beginning of period 1,130,500 617,000 245,000 Granted -- 550,000 172,000 Effect of split -- -- 344,000 Exercised (24,500) (32,500) (139,000) Canceled -- (4,000) (5,000) Options outstanding, end of period 1,106,000 1,130,500 617,000 Options exercisable 1,106,000 582,000 273,000 Shares available for future option grants 0 0 546,000 - ---------------------------------------------------------------------
- ---------------------------------------------------------------- Year ended September 30 2000 1999 1998 ================================================================ (Weighted Average Exercise Price)
Options outstanding, beginning of period $ 5.06 $ 3.69 $ 2.65 Granted -- 6.49 4.22 Exercised 4.60 3.44 3.25 Canceled -- 4.38 4.38 Options outstanding, end of period 5.09 5.06 3.69 Options exercisable 5.09 3.70 3.03 Weighted average fair value of options granted during the year -- $ 2.98 $ 1.16 - ----------------------------------------------------------------
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, Incorporated - --------------------------------------------------------------------------------
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):
- ------------------------------------------------------------------ 2000 1999 ================================================================== Changes in plan assets: Fair value of plan assets at beginning of year $ 0 $ 0 Employer contributions 93,000 70,000 Benefits paid (93,000) (70,000) ----------- ----------- Fair value of plan assets at year end $ 0 $ 0
Accumulated postretirement benefit obligation $(1,439,000) $(1,612,000) Unrecognized net gain (517,000) (356,000) Unrecognized prior service costs 0 0 Unrecognized transition obligation 727,000 783,000 ----------- ----------- Accrued postretirement benefit cost $(1,229,000) $(1,185,000) - ------------------------------------------------------------------
Net periodic postretirement benefit costs include the following components:
- --------------------------------------------------------------------------- 2000 1999 1998 =========================================================================== Service cost $ 17,000 $ 32,000 $ 32,000 Interest cost 112,000 112,000 114,000 Amortization of transition obligation over 20 years 56,000 56,000 56,000 Amortization of unrecognized prior service cost 0 41,000 41,000 Amortization of unrecognized gain (49,000) (12,000) (24,000) --------- --------- --------- Net periodic postretirement benefit cost $ 136,000 $ 229,000 $ 219,000 - ---------------------------------------------------------------------------
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 9.5 percent for 2000 (10.0 percent for 1999 and 10.5 percent in 1998) 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, 2000 by $230,000, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 2000, 1999 and 1998 by $21,000, $18,000, and $17,000, respectively.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.25 percent at September 30, 2000, and 8.0 percent at September 30, 1999.
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 9 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. The Company's cost for this plan was $491,000 in 2000 and $468,000 in 1999.
Notes to Consolidated Financial Statements (continued) STV Group, Incorporated - --------------------------------------------------------------------------------
10. Major Customers
The percentage of total revenues derived from contracts with the United States government for fiscal years 2000, 1999 and 1998 was 8 percent, 9 percent and 14 percent, respectively.
11. Deferred Compensation
Deferred compensation consists of the following:
The fair value of the Company's deferred compensation liability payable through September 2006 is $658,000. The Company has funded $88,000 of the total deferred compensation liability. Such funded amounts are included in other assets on the accompanying balance sheet.
Interest paid during 2000, 1999 and 1998 amounted to $133,000, $147,000 and $505,000, respectively.
Future annual cash payments, including interest, of the deferred compensation arrangements are as follows:
------------------------------------ Year ending September 30 ==================================== 2001 $ 139,000 2002 139,000 2003 139,000 2004 640,000 2005 698,000 Thereafter 7,932,000 ------------------------------------
(1) These agreements for two current executives provide for annual future cash payments upon retirement of $325,000 and $234,000 annually for a period of 15 years commencing October 2003 and January 2004, respectively. The benefit is being accrued over the term of the employment agreements that extend through 2003. These payments would be increased should the cost of living index increase.
Notes to Consolidated Financial Statements (continued) STV Group, Incorporated - --------------------------------------------------------------------------------
12. Quarterly Results (unaudited)
(All dollar amounts omit 000 except per share data.)
- -------------------------------------------------------------------------------- Quarter Year First Second Third Fourth ================================================================================ Revenue from services: 2000 $ 34,246 $ 36,538 $ 39,806 $ 39,090 $149,680 1999 $ 34,221 $ 33,345 $ 34,670 $ 36,704 $138,940
Operating revenue: 2000 $ 27,400 $ 28,508 $ 28,402 $ 29,140 $113,450 1999 $ 22,859 $ 23,758 $ 24,857 $ 25,964 $ 97,438
Gross profit: 2000 $ 4,498 $ 4,680 $ 4,283 $ 4,055 $ 17,516 1999 $ 3,457 $ 3,803 $ 3,955 $ 4,038 $ 15,253
Net income: 2000 $ 1,305 $ 1,313 $ 1,120 $ 1,528 $ 5,266 1999 $ 912 $ 910 $ 912 $ 2,450 $ 5,184
Basic earnings per share: 2000 $ .34 $ .34 $ .29 $ .40 $ 1.37 1999 $ .24 $ .24 $ .24 $ .64 $ 1.36
Diluted earnings per share: 2000 $ .31 $ .31 $ .27 $ .36 $ 1.26 1999 $ .22 $ .22 $ .22 $ .58 $ 1.24 - --------------------------------------------------------------------------------
In the fourth quarters of 2000 and 1999, STV was paid $1,000,000 and $2,600,000, respectively, as settlement of litigation claims. These settlements increased net income by approximately $562,000, or $ .14 per diluted share, and $1,500,000, or $ .37 per diluted share in 2000 and 1999, respectively.
EXHIBITS --------
Index -----
Exhibit 10.9 - Officers' and Directors' Liability Policy
Exhibit 10.35 - Letter Agreement with PNC Bank.
Exhibit 10.36 - Committed Line of Credit Note with PNC Bank.
Exhibit 10.37 - Security Agreement with PNC Bank
Exhibit 10.38 - Reimbursement Agreement for Standby Letter(s) of Credit with PNC Bank.
Exhibit 10.39 - STV Group, Incorporated Non-Qualified Management Savings Plan.
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