SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 0-3415
STV GROUP, INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1698231
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
205 West Welsh Drive, Douglassville, Pennsylvania 19518
(Address of principal executive offices) (Zip Code)
(610)385-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.50 par value
(Title of class)
As of December 31, 1998, there were 3,800,318 shares of common stock of the
registrant outstanding.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
<PAGE>
TABLE OF CONTENTS
Page
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS......................1
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements.......................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation...................................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.9
Part II: OTHER INFORMATION
Item 1. Legal Proceedings.........................................10
Item 2. Changes in Securities.....................................10
Item 3. Defaults Upon Senior Securities...........................10
Item 4. Submission of Matters to a Vote of Security Holders.......10
Item 5. Other Information.........................................10
Item 6. Exhibits and Reports on Form 8-K..........................10
SIGNATURES....................................................................11
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain oral statements made by management from time to time and certain
statements contained herein, including certain statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" such
as statements regarding the Company's ability to meet its liquidity needs and
control costs, certain statements in Notes to Condensed Consolidated Financial
Statements, and other statements contained herein regarding matters which are
not historical facts are forward looking statements (as such term is defined in
the Securities Act of 1933) and because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. Factors that could cause actual
results to differ materially include, but are not limited to those discussed
below:
1. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth.
2. The Company's continued ability to operate in a heavily regulated
government environment. The Company's government contracts are subject to
termination, reduction or modification as a result of changes in the
government's requirements or budgetary restrictions. In addition,
government contracts are subject to termination at the conveniences of the
government. Under certain circumstances, the government can also suspend or
debar individuals or firms from obtaining future contracts with the
government.
3. The level of competition in the Company's industry, including companies
with significantly larger operations and resources than the Company.
4. The Company's ability to identify and win suitable projects and to consummate
or complete any such projects.
5. The Company's ability to perform design/build projects which may include
the responsibility of ensuring the actual construction of a project for a
guaranteed price.
6. The Company's and its payors' and suppliers ability to implement a Year 2000
readiness program.
These and other factors have been discussed in more detail in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
1
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
STV GROUP, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $3,985,000 $4,444,000
Accounts Receivable 24,366,000 23,485,000
Costs and Estimated Profits of Uncompleted
Contracts in Excess of Related Billings 14,046,000 13,218,000
Prepaid Income Taxes 84,000 84,000
Other Current Assets 523,000 1,065,000
------- ---------
Total Current Assets 43,004,000 42,296,000
Property and Equipment 8,384,000 8,195,000
Less Accumulated Depreciation 6,805,000 6,642,000
--------- ---------
Net Property and Equipment 1,579,000 1,553,000
Deferred Income Taxes 1,882,000 1,882,000
Other Assets 848,000 757,000
------- -------
TOTAL $47,313,000 $46,488,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $6,712,000 $6,382,000
Accrued Expenses 7,643,000 7,772,000
Billings on Uncompleted Contracts in Excess of
Related Costs 13,094,000 13,375,000
Current portion of long term debt 304,000 564,000
Deferred income taxes 1,862,000 1,862,000
--------- ---------
Total Current Liabilities 29,615,000 29,955,000
Long-Term Debt 2,374,000 2,134,000
Post-retirement Benefits 940,000 927,000
Stockholders' Equity
Common Stock 2,025,000 2,025,000
Capital in Excess of Par 3,350,000 3,350,000
Retained Earnings 9,780,000 8,868,000
--------- ---------
Total 15,155,000 14,243,000
Less: Treasury Stock 771,000 771,000
------- -------
Total Stockholders' Equity 14,384,000 13,472,000
TOTAL $47,313,000 $46,488,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
STV GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
December 31
1998 1997
<S> <C> <C>
Revenue
Total Revenue $34,221,000 $24,127,000
Less Subcontract and Procurement Costs 11,362,000 4,969,000
---------- ---------
Operating Revenue $22,859,000 $19,158,000
Costs and Expenses
Costs of Services and Sales 19,402,000 16,583,000
General and Administrative 1,748,000 1,530,000
Interest Expense 74,000 259,000
Interest Income (73,000) (8,000)
------- ------
Total Costs and Expenses 21,151,000 18,364,000
Income Before Income Taxes 1,708,000 794,000
Income Taxes 796,000 382,000
------- -------
Net Income $912,000 $412,000
======== ========
Basic earnings per share: $.24 $.11
Diluted earnings per share: $.22 $.11
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
STV GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
December 31
1998 1997
<S> <C> <C>
Operating Activities
Net Income $912,000 $412,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and Amortization 189,000 185,000
Changes in Operating assets and liabilities
Accounts Receivable (881,000) (184,000)
Costs of uncompleted contracts in
excess of billings and other current assets (286,000) 3,103,000
Accounts Payable and accrued expenses 19,000 (843,000)
Billing in excess of related costs (281,000) 4,064,000
Current Income Taxes 435,000 371,000
------- -------
Net Cash provided by operating activities $107,000 $7,108,000
Investing Activities
Purchase of Property and Equipment (189,000) (69,000)
Purchase of Software (119,000) (7,000)
Decrease (Increase) in other assets 2,000 45,000
----- ------
Net Cash provided (used) by investing activities ($306,000) ($31,000)
Financing Activities
Proceeds from line of credit and long term
borrowings - 24,125,000
Principal payments on line of credit and long
term borrowings (260,000) (31,484,000)
-------- -----------
Net Cash used in financing activities ($260,000) ($7,359,000)
Increase (decrease) in cash and equivalents (459,000) (282,000)
Cash and equivalents at beginning of year 4,444,000 1,153,000
--------- ---------
Cash and equivalents at end of period $3,985,000 $871,000
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles require 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.
3. EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share," has been adopted by the Company. SFAS 128
replaces primary earnings per share (EPS) with basic EPS and fully diluted EPS
with diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
EPS recognizes the potential dilutive effects of the future exercise of common
stock options.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
Dec. 31, 1998 Dec. 31, 1997
<S> <C> <C>
Basic earnings per share $0.24 $0.11
Shares outstanding 3,800,318 3,642,492
Diluted earnings per share $0.22 $0.11
Shares outstanding 4,074,906 3,811,488
</TABLE>
Earnings per share and average common shares and equivalents for prior periods
were adjusted to reflect the 2-for-1 stock split effected April 13, 1998.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
4. RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to their
1999 presentation.
5. NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after December
15, 1997 (fiscal 1999 year end reporting for the Company). The Company is
evaluating the disclosure requirements of SFAS No. 131 and currently believes
that its adoption will have no material impact on its future disclosure
requirements.
6
<PAGE>
Item 2. Management Discussion and Analysis of Financial Condition and Results
of Operation
Results of Operations
Total revenues for the quarter ended December 31, 1998 (first quarter fiscal
1999) increased 42% as compared to the first quarter of fiscal 1998 and
increased 15.7% as compared to the previous quarter. Operating revenues (total
revenues excluding pass-through costs) increased 19.3% as compared to the first
quarter of fiscal 1998 and increased 5.6% as compared to the previous quarter
due to the magnitude of awarded contracts.
Pass-through costs increased 128.7% compared to the first quarter of fiscal 1998
and increased 43.5% from the previous quarter. Pass-through costs vary depending
on the need for specialty subconsultants and governmental subcontract
requirements.
Cost of services, expressed as a percentage of operating revenues, decreased to
84.9% for the first quarter of fiscal 1999 from 86.6% in the first quarter of
fiscal 1998 and from 85.4% in the previous quarter. While the decrease in the
percentage from the fourth quarter of fiscal 1998 was due to an increase in
operating revenues noted above, the costs of services also increased from the
previous quarter due to an increase in engineering services costs.
General and administrative expense, expressed as a percentage of operating
revenue, is 7.6% in the first quarter of fiscal 1999 and is lower than the 8.0%
recorded in the first quarter of fiscal 1998 and 8.1% in the previous quarter
again primarily due to an increase in operating revenues.
Interest expense, net of interest income, expressed as a percentage of operating
revenues, decreased to less than .1% for the first quarter of fiscal 1999 from
1.3% in the first quarter of fiscal 1998 and decreased from .5% in the previous
quarter. This decrease is due to the elimination in bank borrowings as a result
of continued improvement in cash position and interest earned from invested
cash.
7
<PAGE>
Income tax expense for the first quarter of fiscal 1999 was 46.6% of pre-tax
income compared to 48.1% in the first quarter of fiscal 1998 and 48.4% in the
previous quarter. The decrease is due to non-deductible expenses being lower as
a percentage of increased first quarter pre-tax income.
Diluted earnings per common share for the first quarter of fiscal 1999 was $.22
cents versus $.11 for the first quarter of fiscal 1998. A 2-for-1 stock split
was effective April 13, 1998 for stockholders of record as of March 31, 1998.
Prior period earnings per share and weighted average number of shares
outstanding have been adjusted to reflect this split.
Financial Condition and Liquidity
Working capital increased to $13,389,000 from $12,341,000 in the previous
quarter. Capital resources available to the Company include an existing line of
credit for working capital. The current limit is a maximum of $15.5 million
based on accounts receivable and work-in-progress of which approximately $13.3
million is currently available. The Company believes that it and the lender will
maintain a line of credit adequate to meet the current and future financial
needs of the Company. The Company is planning to continue its program of
purchasing computer-assisted design and drafting equipment and has purchased a
new project management and accounting system.
The Company has been notified by NASDAQ that NASDAQ has determined that the
Company meets the listing requirements for inclusion in the National Market
System.
The Company's backlog at December 31, 1998 is approximately $145 million.
Year 2000
The Year 2000 issue, or "The Y2K Bug" as it is sometimes called, is the result
of computer programs and equipment that were written and manufactured using two
digits rather than four to define the applicable year. Date-sensitive computer
programs and equipment may recognize a date using only the last two digits. This
could result in the year 2000 being recognized as the year 1900.
8
<PAGE>
System failures or miscalculations can occur, which would cause disruptions in
operations and/or the inability to process normal business transactions.
STV has recently acquired new financial and project management systems that are
certified Year 2000-compliant. The Company is also continuing on a normal basis
to replace or upgrade other systems that may not be compliant. This process will
be completed in 1999. Costs of becoming 2000 compliant will not be materially
more than normal information technology (IT) purchases and associated IT costs.
However, STV has taken and will continue to take reasonable and prudent actions,
consistent with the standards of care prevalent in the industry, to comply with
Year 2000 standards and to prevent interruptions to STV operations. The Company
is taking action to obtain certification from its suppliers, including suppliers
of IT and non-IT systems, and its clients of their Year 2000 compliance, and to
test the Company's existing equipment and software under simulated Year 2000
conditions to further ensure that normal operation will continue beyond 2000. A
steering committee of senior managers has been formed to coordinate and manage
all Year 2000 issues, both internally and externally. The cost of this endeavor
is not believed to be material.
The maximum potential risk exposure to STV is as follows: (a) Disruptions could
occur with the failure of project-specific applications or unique computer
assisted design and drafting and other software products that are not
2000-compliant. This would halt or delay completion of engineering or
construction designs and could subject STV to litigation for failure to complete
designs according to contract timetables; and (b) There is the potential for a
governmental unit or other large client to have 2000 compliance problems in
remitting to the Company or otherwise interrupting collections or bank
processes. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time. The Company currently has a contingency plan
to immediately replace any defective computer or software system. This plan is
considered adequate because all STV systems are PC-based, and STV has sufficient
hardware and financial assets to make such corrections on a near real-time
basis.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
9
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to Part I of this Form 10Q:
Exhibit 10.38 - First Amendment To Employment Agreement with
Dominick M. Servedio
Exhibit 10.39 - First Amendment To Employment Agreement with
Michael Haratunian
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended
December 31, 1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
STV GROUP, INCORPORATED
(Registrant)
February 16, 1999 By: /s/ Dominick M. Servedio
- --------------------- -------------------------------------
Date Dominick M. Servedio
President and Chief Executive Officer
February 16, 1999 By: /s/ Peter W. Knipe
- --------------------- -------------------------------------
Date Peter W. Knipe
Secretary/Treasurer
11
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("Agreement") made on
December 31, 1998, but effective as of October 1, 1998 by and between Dominick
Servedio ("Employee") and STV Group, Inc., a Pennsylvania corporation
("Employer").
WHEREAS, Employer and Employee are parties to an Employment Agreement,
made as of October 29, 1998, effective October 1, 1998 (the "Employment
Agreement"), pursuant to which Employee has been re-employed by Employer; and
WHEREAS, the Employer and the Employee desire to amend the Employment
Agreement solely to the extent set forth herein and otherwise desire to, and
hereby do, ratify and affirm the Employment Agreement;
NOW THEREFORE, in consideration of the promises, covenants and
agreements of the parties contained herein and in the Employment Agreement, and
intending to be legally bound, the parties hereby covenant and agree as follows:
1. Supplemental Retirement Benefits. Paragraph 3.6.3 of the Employment
Agreement, entitled "Supplemental Retirement Benefits" is hereby deleted from
the Employment Agreement and the following paragraph enumerated as 3.6.3 and
entitled "Supplemental Retirement Benefits" is deemed substituted and
incorporated into the Employment Agreement as if originally and fully set forth
in its place and stead:
3.6.3(a) Supplemental Retirement Benefits. Commencing on the
first day of the month following termination of Employee's employment
with Employer, Employee shall be entitled to receive annual benefits
("Supplemental Retirement Benefits") from Employer under a Supplemental
Executive Retirement Plan ("SERP"), as described in this section in the
amount of Three Hundred and Twenty-five Thousand Dollars ($325,000.00)
per annum. The foregoing Supplemental Retirement Benefits shall be
payable monthly in equal installments for a total period of fifteen
(15) years of the lives
<PAGE>
of Employee and his spouse or of the survivor next following the
termination of Employee's employment with Employer. As of January 1 of
each year following the year in which payment of the SERP benefit
commences, the amount of the Supplemental Retirement Benefits shall be
increased by a cost-of-living factor based on the increase in the
Consumer Price Index-Urban Consumers for the immediately preceding
calendar year. The Supplemental Retirement Benefits shall be fully
vested and non-forfeitable in the event that Employee's employment
with Employer terminates after September 30, 2003 for any reason or if
such employment terminates prior to October 1, 2003 by reason of
death, disability (as described in Paragraph 4.2.2 of the Employment
Agreement) termination by Employer other than for cause (as described
in Paragraph 4.2.4 of the Employment Agreement) or termination by
Employee for good reason (as described in Paragraph 4.2.5 of the
Employment Agreement) other than retirement.
3.6.3(b) Notwithstanding the foregoing Paragraph 3.6.3(a), in
the event that Employee's employment with Employer is terminated prior
to October 1, 2003 by Employer for cause (as described in Paragraph
4.2.3 of the Employment Agreement) or by Employee by retirement (as
described in Paragraph 4.2.5 of the Employment Agreement), then the
annual amount of the Supplemental Retirement Benefits payable to the
Employee shall equal the sum of (i) the annual amount of Supplemental
Retirement Benefits that was accrued under the terms of the Prior
Employment Agreement and (11) the product of (A) the excess of Three
Hundred and Twenty-five Thousand Dollars ($325,000.00) over the annual
amount described in clause (i) above times (B) a fraction the numerator
of which is the number of days Employee has remained employed by
Employer from the effective date of this Agreement to his date of
termination and the denominator of which is 1,825.
3.6.3(c) Notwithstanding the foregoing, if a change in control
(as defined in Appendix A) shall occur at any time during the term of
this Agreement or before the Supplemental Retirement Benefits have been
fully paid, the Supplemental Retirement Benefits shall immediately
become and be fully vested and non-forfeitable in the amount set forth
in Paragraph 3.6.3 (a) above and the Employer shall within thirty (30)
days following such change of control provide to the Employee and
Employee's spouse, or the survivor, security for the life of such
benefit in the form of a fully funded annuity payment or other
equivalent guarantee or the actuarial lump sum equivalent of the
remaining Supplemental Retirement Benefits shall be accelerated and
paid to Employee or his surviving spouse in a single lump sum in cash
within forty-five (45) days following such change of control. Any such
annuity contract or equivalent guarantee shall be issued by an
insurance company having an A.M. Best financial strength rating of at
least A+ and a Standard & Poor's claims paying ability rating of at
least AA. Actuarial equivalence shall be determined in accordance with
reasonable actuarial assumptions. The Employer, with the consent and
approval of the Employee, which consent and approval shall not
unreasonably be withheld, shall retain an independent third party
actuarial firm to determine the actuarial lump sum equivalent. In the
event that the Employer shall elect to make payment of the Supplemental
Retirement Benefits by annuity as provided above, upon the death of
Employee's surviving spouse within the 15-year term of the SERP, the
2
<PAGE>
balance of any remaining Supplemental Retirement Benefits which would
have become due and owing to Employee, or to Employee's surviving
spouse, shall be payable to such beneficiaries as may have been
designated by Employee or Employee's surviving spouse during their
respective lifetimes. In addition, in the event that, as a result of
the Employer's election to make payment of the Supplemental Retirement
Benefits by annuity as provided above, any taxable income is
recognized by Employee in advance of receipt of payment of the
Supplemental Retirement Benefits in whole or in part, Employer shall,
promptly upon its calculation, advance to Employee, in cash, an amount
sufficient to cover any of Employee's federal, state and local tax
liability with respect to any such taxable income recognized by
Employee as a consequence of Employer's election to make payment of
the Supplemental Retirement Benefits by annuity, as well as Employee's
federal, state and local tax liability with respect to such cash
payment, which advance shall be repaid without interest by the
employee pari pasu as Employee receives payment of such Supplemental
Retirement Benefits. (Collectively, the General Retirement Benefits,
Medical Retirement Benefits and Supplemental Retirement Benefits are
referred to as "Retirement Benefits").
2. Termination for Cause. Paragraph 4.2.3 of the Employment Agreement,
entitled "Termination for Cause" is hereby deleted from the Employment Agreement
and the following paragraph enumerated as 4.2.3 and entitled "Termination for
Cause" is deemed substituted and incorporated into the Employment Agreement as
if originally and fully set forth in its place and stead:
4.2.3. Termination for Cause. At any time during the Term,
Employer may terminate Employee's employment hereunder for Cause (as
defined herein), effective immediately upon notice to Employee, if at a
duly convened meeting of the Board of Directors of which Employee was
given reasonable advance notice (30 days or more) and at which Employee
and his counsel had the opportunity to be heard, a resolution was duly
adopted by the affirmative vote of not less than two-thirds of the
Board finding that, in the good faith judgment of the Board, (1) an
event (which is described in the resolution in reasonable detail)
constituting Cause has occurred, and (2) the Employee was given
reasonable notice of the event and either Employee had a reasonable
opportunity of no less than one hundred and twenty (120) days duration
to take remedial action but failed or refused to do so, or an
opportunity to take remedial action would not have been meaningful or
appropriate under the circumstances.
For purposes of this Agreement, Cause shall mean:
(1) Employee is grossly negligent in the performance of his duties
under this Agreement resulting in a material impairment of Employer's
performance, and Employee continues to be grossly negligent after
demand for corrective action is delivered by the Employer that
specifically identifies the manner in which the employer believes the
Employee has been grossly
3
<PAGE>
negligent under this Agreement or (2) Employee is convicted of or
pleads guilty or nolo contendere to a felony. For purposes of this
Agreement "grossly negligent" means that Employee willfully breaches
or habitually neglects the duties which he is required to perform
under the terms of this Agreement. A termination of Employee's
employment shall not be deemed a termination for Cause if the notice
of termination is delivered to Employee more than thirty (30) days
after the Board of Directors knows or should know of the event or
action alleged to constitute Cause.
On termination of this Agreement pursuant to this
Section 4.2.3, with the exception of any benefits under the SERP which
survive such termination and except that Employee shall be entitled to
any unpaid portion of his Compensation and Benefits earned prior to the
date of termination, all rights to Compensation and Benefits of
Employee shall cease as of the Date of Termination.
3. Entire Understanding. This Agreement, together with the Employment
Agreement, all other documents, instruments, certificates and agreements
executed in connection herewith shall be read and construed together and sets
forth the entire understanding between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous, written, oral,
expressed or implied, communications, agreements and understandings with respect
to the subject matter hereof.
4. Modification. This Agreement shall not be amended, modified,
supplemented or terminated except in writing signed by both parties. No action
taken by Employer hereunder, including without limitation any waiver, consent or
approval, shall be effective unless approved by a majority of the Board.
5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.
4
<PAGE>
6. Controlling Law. This Agreement is made under, and shall be governed
by, construed and enforced in accordance with, the substantive laws of
Pennsylvania applicable to agreements made and to be performed entirely therein.
7. Ratification. Other than as amended by this Agreement, the
Employment Agreement is ratified, affirmed and remains in force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above mentioned, under Seal, intending to be legally bound
hereby.
EMPLOYEE: EMPLOYER:
/s/ Dominick M. Servedio
Attest: By: /s/ Harry Prystowsky, MD
(Authorized Officer)
/s/ Peter W. Knipe
Secretary
(Corporate Seal)
5
<PAGE>
APPENDIX A
Definition of Change in Control
For purposes of this Agreement, "change of control" shall mean the
occurrence of one or more of the following: (A) The acquisition, other than from
Employer, by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) (a "Person") of 30% or more of either (i)
the then outstanding shares of Common Stock of Employer (the "Outstanding
Employer Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of Employer entitled to vote generally in the
election of directors (the "Employer Voting Securities"), provided, however,
that any acquisition by (x) Employer or any of its subsidiaries, or any employee
benefit plan (or related trust) sponsored or maintained by Employer or any of
its subsidiaries or (y) any Person that is eligible, pursuant to Rule 13d-1(b)
under the Exchange Act, to file a statement on Schedule 13G with respect to its
beneficial ownership of Employer Voting Securities, whether or not such Person
shall have filed a statement on Schedule 13G, unless such Person shall have
filed a statement on Schedule 13D with respect to beneficial ownership of 30% or
more of Employer Voting Securities or (z) any corporation with respect to which,
following such acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Employer Common Stock
and Employer Voting Securities immediately prior to such acquisition in
substantially the same proportion as
<PAGE>
their ownership, immediately prior to such acquisition, of the Outstanding
Employer Common Stock and Employer Voting Securities, as the case may be, shall
not constitute a Change of Control; or (B) Individuals who, as of the date
hereof, constitute the Board of Directors of Employer (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board, provided
that any individual becoming a director subsequent to the date hereof whose
election or nomination for election by Employer's shareholders, was approved by
a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of Employer (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act); or (C) Approval by the shareholders of Employer of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with respect
to which all or substantially all of the individuals and entities who were the
respective beneficial owners of the Outstanding Employer Common Stock and
Employer Voting Securities immediately prior to such Business Combination do
not, following such Business Combination, beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of Employer resulting from Business Combination in substantially the
same proportion as their ownership immediately prior to such Business
Combination of the Outstanding Employer Common Stock and Employer Voting
Securities, as the case may be; or (D) (i) a complete liquidation or dissolution
of Employer or of (ii) sale or other disposition of all or substantially all of
the assets of Employer other than to a corporation
2
<PAGE>
with respect to which, following such sale or disposition, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors is then owned beneficially, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Employer Common Stock
and Employer Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding Employer
Common Stock and Employer Voting Securities, as the case may be, immediately
prior to such sale or disposition.
3
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("Agreement") made on
December 31, 1998, but effective as of January 1, 1999 by and between Michael
Haratunian ("Employee") and STV Group, Inc., a Pennsylvania corporation
("Employer").
WHEREAS, Employer and Employee are parties to an Employment Agreement,
made as of October 29, 1998, effective January 1, 1999 (the "Employment
Agreement"), pursuant to which Employee has been reemployed by Employer; and
WHEREAS, the Employer and the Employee desire to amend the Employment
Agreement solely to the extent set forth herein and otherwise desire to, and
hereby do, ratify and affirm the Employment Agreement;
NOW THEREFORE, in consideration of the promises, covenants and
agreements of the parties contained herein and in the Employment Agreement, and
intending to be legally bound, the parties hereby covenant and agree as follows:
1. Supplemental Retirement Benefits. Paragraph 3.6.3 of the Employment
Agreement, entitled "Supplemental Retirement Benefits" is hereby deleted from
the Employment Agreement and the following paragraph enumerated as 3.6.3 and
entitled "Supplemental Retirement Benefits" is deemed substituted and
incorporated into the Employment Agreement as if originally and fully set forth
in its place and stead:
3.6.3.(a) Supplemental Retirement Benefits. Commencing on the
first day of the month following termination of Employee's employment
with Employer, Employee shall be entitled to receive annual benefits
("Supplemental Retirement Benefits") from Employer under a Supplemental
Executive Retirement Plan ("SERP"), as described in this section in an
amount equal to Employee's salary in the final year of Employee's
employment, by Employer as adjusted during the term of this Agreement
per annum. The foregoing Supplemental Retirement Benefits shall be
payable monthly in equal
<PAGE>
installments for a total period of fifteen (15) years of the lives of
Employee and his spouse or of the survivor next following the
termination of Employee's employment with Employer. As of January 1 of
each year following the year in which payment of the Supplemental
Retirement Benefits commences, the amount of the Supplemental
Retirement Benefits shall be increased by a cost-of-living factor
based on the increase in the Consumer Price Index-Urban Consumers for
the immediately preceding calendar year. The Supplemental Retirement
Benefits shall be fully vested and non-forfeitable in the event that
Employee's employment with Employer terminates after September 30,
2003 for any reason or if such employment terminates prior to October
1, 2003 by reason of death, disability (as described in Paragraph
4.2.2 of the Employment Agreement) termination by Employer other than
for cause (as described in Paragraph 4.2.4 of the Employment
Agreement) or termination by Employee for good reason (as described in
Paragraph 4.2.5 of the Employment Agreement) other than retirement.
3.6.3(b) Notwithstanding the foregoing Paragraph 3.6.3(a), in
the event that Employee's employment with Employer is terminated prior
to October 1, 2003 by Employer for cause (as described in Paragraph
4.2.3 of the Employment Agreement) or by Employee by retirement (as
described in Paragraph 4.2.5 of the Employment Agreement), then the
annual amount of the Supplemental Retirement Benefits payable to the
Employee shall equal the sum of (i) the annual amount of Supplemental
Retirement Benefits that was accrued under the terms of the Prior
Employment Agreement and (11) the product of (A) the excess of Two
Hundred and Twelve Thousand Dollars ($212,000.00) over the annual
amount described in clause (i) above times (B) a fraction the numerator
of which is the number of days Employee has remained employed by
Employer from the effective date of this Agreement to his date of
termination and the denominator of which is 1,825.
3.6.3(c) Notwithstanding the foregoing, if a change in control
(as defined in Appendix A) shall occur at any time during the term of
this Agreement or before the Supplemental Retirement Benefits have been
fully paid, the Supplemental Retirement Benefits shall immediately
become and be fully vested and non-forfeitable in the amount set forth
in Paragraph 3.6.3 (a) above and the Employer shall within thirty (30)
days following such change of control provide to the Employee and
Employee's spouse, or the survivor, security for the life of such
benefit in the form of a fully funded annuity payment or other
equivalent guarantee or the actuarial lump sum equivalent of the
remaining Supplemental Retirement Benefits shall be accelerated and
paid to Employee or his surviving spouse in a single lump sum in cash
within forty-five (45) days following such change of control. Any such
annuity contract or equivalent guarantee shall be issued by an
insurance company having an A.M. Best financial strength rating of at
least A+ and a Standard & Poor's claims paying ability rating of at
least AA. Actuarial equivalence shall be determined in accordance with
reasonable actuarial assumptions. The Employer, with the consent and
approval of the Employee, which consent and approval shall not
unreasonably be withheld, shall retain an independent third party
actuarial firm to determine the actuarial lump sum equivalent. In the
event that the Employer shall elect to make payment of the Supplemental
Retirement Benefits by annuity as provided above,
2
<PAGE>
upon the death of Employee's surviving spouse within the 15-year term
of the SERP, the balance of any remaining Supplemental Retirement
Benefits which would have become due and owing to Employee, or to
Employee's surviving spouse, shall be payable to such beneficiaries as
may have been designated by Employee or Employee's surviving spouse
during their respective lifetimes. In addition, in the event that, as
a result of the Employer's election to make payment of the
Supplemental Retirement Benefits by annuity as provided above, any
taxable income is recognized by Employee in advance of receipt of
payment of the Supplemental Retirement Benefits in whole or in part,
Employer shall, promptly upon its calculation, advance to Employee, in
cash, an amount sufficient to cover any of Employee's federal, state
and local tax liability with respect to any such taxable income
recognized by Employee as a consequence of Employer's election to make
payment of the Supplemental Retirement Benefits by annuity, as well as
Employee's federal, state and local tax liability with respect to such
cash payment, which advance shall be repaid without interest by the
employee pari pasu as Employee receives payment of such Supplemental
Retirement Benefits. (Collectively, the General Retirement Benefits,
Medical Retirement Benefits and Supplemental Retirement Benefits are
referred to as "Retirement Benefits").
2. Termination for Cause. Paragraph 4.2.3 of the Employment Agreement,
entitled "Termination for Cause" is hereby deleted from the Employment Agreement
and the following paragraph enumerated as 4.2.3 and entitled "Termination for
Cause" is deemed substituted and incorporated into the Employment Agreement as
if originally and fully set forth in its place and stead:
4.2.3. Termination for Cause. At any time during the Term,
Employer may terminate Employee's employment hereunder for Cause (as
defined herein), effective immediately upon notice to Employee, if at a
duly convened meeting of the Board of Directors of which Employee was
given reasonable advance notice (30 days or more) and at which Employee
and his counsel had the opportunity to be heard, a resolution was duly
adopted by the affirmative vote of not less than two-thirds of the
Board finding that, in the good faith judgment of the Board, (1) an
event (which is described in the resolution in reasonable detail)
constituting Cause has occurred, and (2) the Employee was given
reasonable notice of the event and either Employee had a reasonable
opportunity of no less than one hundred and twenty (120) days duration
to take remedial action but failed or refused to do so, or an
opportunity to take remedial action would not have been meaningful or
appropriate under the circumstances.
For purposes of this Agreement, Cause shall mean:
(1) Employee is grossly negligent in the performance of his duties
under thisAgreement resulting in a
3
<PAGE>
material impairment of Employer's performance, and Employee continues
to be grossly negligent after demand for corrective action is
delivered by the Employer that specifically identifies the manner in
which the employer believes the Employee has been grossly negligent
under this Agreement or (2) Employee is convicted of or pleads guilty
or nolo contendere to a felony. For purposes of this Agreement
"grossly negligent" means that Employee willfully breaches or
habitually neglects the duties which he is required to perform under
the terms of this Agreement. A termination of Employee's employment
shall not be deemed a termination for Cause if the notice of
termination is delivered to Employee more than thirty (30) days after
the Board of Directors knows or should know of the event or action
alleged to constitute Cause.
On termination of this Agreement pursuant to this
Section 4.2.3, with the exception of any benefits under the SERP which
survive such termination and except that Employee shall be entitled to
any unpaid portion of his Compensation and Benefits earned prior to the
date of termination, all rights to Compensation and Benefits of
Employee shall cease as of the Date of Termination.
3. Entire Understanding. This Agreement, together with the Employment
Agreement, all other documents, instruments, certificates and agreements
executed in connection herewith shall be read and construed together and sets
forth the entire understanding between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous, written, oral,
expressed or implied, communications, agreements and understandings with respect
to the subject matter hereof.
4. Modification. This Agreement shall not be amended, modified,
supplemented or terminated except in writing signed by both parties. No action
taken by Employer hereunder, including without limitation any waiver, consent or
approval, shall be effective unless approved by a majority of the Board.
5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.
4
<PAGE>
6. Controlling Law. This Agreement is made under, and shall be governed
by, construed and enforced in accordance with, the substantive laws of
Pennsylvania applicable to agreements made and to be performed entirely therein.
7. Ratification. Other than as amended by this Agreement, the
Employment Agreement is ratified, affirmed and remains in force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above mentioned, under Seal, intending to be legally bound
hereby.
EMPLOYEE: EMPLOYER:
/s/ Michael Haratunian
Attest: By: /s/ Harry Prystowsky, MD
(Authorized Officer)
/s/ Peter W. Knipe
Secretary
(Corporate Seal)
5
<PAGE>
APPENDIX A
Definition of Change in Control
For purposes of this Agreement, "change of control" shall mean
the occurrence of one or more of the following: (A) The acquisition, other than
from Employer, by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) (a "Person") of 30% or more of either (i)
the then outstanding shares of Common Stock of Employer (the "Outstanding
Employer Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of Employer entitled to vote generally in the
election of directors (the "Employer Voting Securities"), provided, however,
that any acquisition by (x) Employer or any of its subsidiaries, or any employee
benefit plan (or related trust) sponsored or maintained by Employer or any of
its subsidiaries or (y) any Person that is eligible, pursuant to Rule 13d-1(b)
under the Exchange Act, to file a statement on Schedule 13G with respect to its
beneficial ownership of Employer Voting Securities, whether or not such Person
shall have filed a statement on Schedule 13G, unless such Person shall have
filed a statement on Schedule 13D with respect to beneficial ownership of 30% or
more of Employer Voting Securities or (z) any corporation with respect to which,
following such acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Employer Common Stock
and Employer
<PAGE>
Voting Securities immediately prior to such acquisition in substantially the
same proportion as their ownership, immediately prior to such acquisition, of
the Outstanding Employer Common Stock and Employer Voting Securities, as the
case may be, shall not constitute a Change of Control; or (B) Individuals who,
as of the date hereof, constitute the Board of Directors of Employer (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to the date
hereof whose election or nomination for election by Employer's shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of Employer (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act); or (C) Approval by the shareholders of Employer of a reorganization,
merger or consolidation (a "Business Combination"), in each case, with respect
to which all or substantially all of the individuals and entities who were the
respective beneficial owners of the Outstanding Employer Common Stock and
Employer Voting Securities immediately prior to such Business Combination do
not, following such Business Combination, beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of Employer resulting from Business Combination in substantially the
same proportion as their ownership immediately prior to such Business
Combination of the Outstanding Employer Common Stock and Employer Voting
Securities, as the case may be; or (D) (i) a complete liquidation or dissolution
of Employer or of (ii) sale or
2
<PAGE>
other disposition of all or substantially all of the assets of Employer other
than to a corporation with respect to which, following such sale or disposition,
more than 60% of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors is then owned beneficially, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Employer Common
Stock and Employer Voting Securities immediately prior to such sale or
disposition in substantially the same proportion as their ownership of the
Outstanding Employer Common Stock and Employer Voting Securities, as the case
may be, immediately prior to such sale or disposition.
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TRANSMITTING STV GROUP'S FISCAL 1999 FIRST QUARTER 10Q.
</LEGEND>
<CIK> 0000095045
<NAME> STV GROUP, INC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,985,000
<SECURITIES> 15,000
<RECEIVABLES> 24,816,000
<ALLOWANCES> 450,000
<INVENTORY> 14,046,000
<CURRENT-ASSETS> 43,004,000
<PP&E> 8,384,000
<DEPRECIATION> 6,805,000
<TOTAL-ASSETS> 47,313,000
<CURRENT-LIABILITIES> 29,615,000
<BONDS> 0
0
0
<COMMON> 2,025,000
<OTHER-SE> 12,359,000
<TOTAL-LIABILITY-AND-EQUITY> 47,313,000
<SALES> 34,221,000
<TOTAL-REVENUES> 34,221,000
<CGS> 19,402,000
<TOTAL-COSTS> 21,150,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,000
<INCOME-PRETAX> 1,708,000
<INCOME-TAX> 796,000
<INCOME-CONTINUING> 912,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 912,000
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.22
</TABLE>
