STV GROUP
Annual Report 2000
<PAGE>
Table of Contents
1 Introduction
2 Financial Highlights
3 Message To Shareholders
7 STV Offices
8 Financial Report
<PAGE>
1
Introduction
The Firm - STV Group is a leading international firm recognized for delivering
value and excellence in engineering, architectural, planning, environmental and
construction services. With 18 locations across the United States, STV's staff
of more than 1,200 professional, technical and support personnel offers a wide
range of expertise to an ever-expanding client base.
Mission Statement - STV Group's mission is to create exceptional value for
clients worldwide in the planning, design, construction, operation, maintenance
and finance of projects. We commit to perform our services with a high level of
vision, integrity, innovation, quality and environmental sensitivity. We will
provide a challenging, rewarding and stable work environment that encourages
professional development and continuous improvements for our diverse workforce.
We will be a proactive, profitable firm providing improved financial performance
for the benefit of our employees and shareholders.
Our Success Continues - STV's second consecutive year of record-setting results
is a product of strategic marketing and our proactive business practices, which
have focused on cash management and cost containment as well as the quality of
our service. In an industry where competition is keen for top talent, STV
attracts and retains distinguished professionals by offering challenging
assignments and enhancing the firm's benefit programs, work environments and
support systems. Our talented staff are the strength of our company. Looking
ahead, it is this successful combination of attracting and nurturing talented
professionals and providing high-quality service that will set the stage for STV
in 2001 and beyond.
<PAGE>
2
Financial Highlights (For Fiscal Years Ended September 30)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $149,680,000 $138,940,000 $105,178,000 $ 94,676,000 $ 94,073,000
----------------------------------------------------------------------------------------------------------------
Operating Revenues 113,450,000 97,438,000 80,648,000 72,832,000 71,271,000
----------------------------------------------------------------------------------------------------------------
Net Income 5,266,000 5,184,000 2,194,000 860,000 595,000
----------------------------------------------------------------------------------------------------------------
*Net Income Per Common Share 1.26 1.24 .55 .23 .16
----------------------------------------------------------------------------------------------------------------
Working Capital 22,589,000 17,593,000 12,341,000 10,099,000 8,721,000
----------------------------------------------------------------------------------------------------------------
Stockholders' Equity 24,146,000 18,767,000 13,472,000 11,202,000 10,342,000
----------------------------------------------------------------------------------------------------------------
Total Assets 65,626,000 60,734,000 46,488,000 41,825,000 39,995,000
----------------------------------------------------------------------------------------------------------------
Long-Term Obligations 5,086,000 3,864,000 3,061,000 2,612,000 1,795,000
----------------------------------------------------------------------------------------------------------------
Short-Term Bank Debt 0 0 0 10,228,000 9,448,000
----------------------------------------------------------------------------------------------------------------
<FN>
* Net income per common share for prior years has been adjusted to reflect the
2-for-1 stock split effective April 13, 1998.
</FN>
</TABLE>
[GRAPHIC OMITTED - Caption as follows:
Ivy City Yard maintenance facility,
Washington, D.C., for Amtrak's
Northeast Corridor Acela high-speed
rail line (Photo (c) Logo Studios)]
<PAGE>
3
Message to Shareholders
--------------------------------------------------------------------------------
Dear Shareholders:
While fiscal 1999 was a banner year, we are pleased to report that fiscal 2000
has exceeded last year's record-breaking results. STV reached its all-time high
in total revenues of $149,680,000, with operating revenues of $113,450,000, up
16 percent, and operating income at $8,731,000, an increase of 28 percent.
[GRAPHS OMITTED - data as follows:]
Operating Revenues (In millions of dollars)
96 71.3
97 72.8
98 80.6
99 97.4
00 113.5
Net Income (In thousands of dollars)
96 595
97 860
98 2,194
99 5,184
00 5,266
Backlog (In millions of dollars)
96 130
97 110
98 150
99 200
00 250
Short-Term Bank Debt (In millions of dollars)
96 9.4
97 10.2
98 NO DEBT
99 NO DEBT
00 NO DEBT
[GRAPHIC OMITTED - Caption as follows:
Brooklyn VA Hospital, Brooklyn, N.Y.
(Photo (c) Julian Olivas/Air-to-Ground)]
Our net worth is up 29 percent, and our backlog reached a new high of $250
million. As a result of our cash management efforts, we also ended the third
consecutive year with no bank debt. This trend of record-setting results began
in fiscal 1998. Net income for fiscal 2000 of $5,266,000 is 140 percent higher
than two years ago on total revenues that are up 42 percent in the same two-year
period.
We can attribute STV's continued success to proactive business practices and
strategic marketing in today's strong business climate. Our focus on aggressive
cost management and quality service has played a major role in the company's
financial performance. Further, we continue to actively pursue opportunities in
the lucrative design-build arena.
<PAGE>
4
STV's financial success has been brought to the nation's attention. Forbes
magazine ranked STV among the 200 Best Small Companies in 2000. To compile the
ranking, which appeared in Forbes' October 30, 2000, issue, companies with sales
between $5 million and $350 million were measured against tough profitability
and growth benchmarks. STV was also among the firms recognized in the book, The
100 Best Stocks to Own for Under $25. Investment author Gene Walden ranked STV
56th among the "100 best stocks" and STV rated four stars each in earnings
growth and consistency and two stars for stock growth.
However, despite the good news, we believe STV stock remains under-priced
relative to our strong balance sheet and past earnings. Our goal is to improve
this situation.
Solid growth in traditional markets
This past year, we have been awarded major assignments in our strongest market
areas: transportation infrastructure and institutional facilities. We have
developed a strong portfolio of light rail projects in major cities such as
Dallas, St. Louis, Houston, Philadelphia and New York.
[GRAPHIC OMITTED - Caption as follows:
U.S. Route 30 Bridge over Sunfish Slough,
Whiteside County, Ill. (Photo (c)
Bob Harr/Hedrich Blessing)]
To prepare for the upcoming Winter Olympics, STV was recently selected as part
of a design-build team for the Utah Transit Authority's University Light Rail
Transit Line in Salt Lake City. This high-profile project will be designed in a
compressed time frame for the Winter Olympics in December 2001. The new line is
expected to alleviate traffic congestion and improve air quality in Salt Lake
City's central business district.
In addition to our continued success in transportation infrastructure, STV has
been obtaining major contracts for educational facilities from primary and
secondary schools to colleges and universities nationwide. This has proven to be
an exciting growth area as educational institutions expand to meet increased
capacity demands and update their facilities to accommodate new technologies.
<PAGE>
5
For example, we are designing hundreds of new schools and school renovations and
additions throughout the five New York City boroughs. And, we have worked at all
14 Pennsylvania state universities as part of our professional service contract
with the Pennsylvania State System of Higher Education.
[GRAPHS OMITTED - Data as follows:]
Net Worth (In millions of Dollars)
96 10.3
97 11.2
98 13.5
99 18.8
00 24.1
Diluted Earnings Per Share (In dollars)
96 0.16
97 0.23
98 0.55
99 1.24
00 1.26
Working Capital (In millions of dollars)
96 8.7
97 10.1
98 12.3
99 17.6
00 22.6
Price Per Share* (In dollars)
96 3 3/4
97 3 7/8
98 4 1/2
99 7 11/16
00 7 1/2
* Numbers for prior years have been adjusted to reflect the 2-for-1 stock split
effective April 13, 1998.
[GRAPHIC OMITTED - Caption as follows:
Environmental assessment for major artery extension,
Glen Cove, N.Y. (Photo (c) Julian Olivas/Air-to-Ground)]
This year for the first time, Engineering News-Record, the premier engineering
industry publication, ranked STV in the top 20 in five categories among the top
500 engineering firms in the country. Ranked 12th in transportation, we were
sixth in mass transit/light rail and 14th in bridges. Within the buildings
market, we were ranked seventh in correctional facilities and 13th in
educational facilities.
Record backlog
STV's backlog was a record $250 million at the end of fiscal 2000. Major
contracts contributing substantially to our backlog include our engineering
contract to extend Long Island Rail Road service into New York's Grand Central
Terminal at an
<PAGE>
6
overall construction cost of $4.3 billion, other major transportation
infrastructure projects, and significant new assignments in the education
market. These and the other major, long-term building and infrastructure
projects that we have been winning will continue to affect our backlog for years
to come.
Attracting, retaining top talent
Even in a tight labor market, STV continues to attract top talent to join our
firm. To retain these skilled professionals, the backbone of our business, we
have been investing in enhanced benefit programs and improved work environments
and support systems. We are expanding in-house training programs and improving
our computer system capabilities to enhance operational efficiency. These
investments will allow us to more effectively utilize our resources throughout
the country. Fiscal 2000 has proven to be a remarkable year for us at STV. Our
firm is growing and improving, and we welcome the new challenges that continue
to confront us.
[GRAPHIC OMITTED - Caption as follows:
Givaudan fragrance manufacturing facility, Mt. Olive, N.J.
(Photo (c) Shane Photography)]
With our fiscal 2001 business plan in place, we anticipate that, come September
30, 2001, we will celebrate another rewarding year.
Sincerely,
/s/ Dominick M. Servedio
Dominick M. Servedio, P.E.
President and Chief Executive Officer
/s/ Michael Haratunian
Michael Haratunian, P.E.
Chairman
[GRAPHIC OMITTED - Caption as follows:
Michael Haratunian, P.E., and Dominick M. Servedio, P.E.
(Photo (c) Robert Essel Photography)]
<PAGE>
7
STV Offices
CORPORATE HEADQUARTERS
STV Group
205 West Welsh Drive
Douglassville, PA 19518
610-385-8200, Fax 610-385-8500
225 Park Avenue South
New York, NY 10003
212-777-4400, Fax 212-529-5237
Web site: www.stvinc.com
e-mail: [email protected]
Dominick M. Servedio, P.E.
President and Chief Executive Officer
Peter W. Knipe
Chief Financial Officer
BOARD OF DIRECTORS
Michael Haratunian, P.E., Chairman
Dominick M. Servedio, P.E., President and Chief Executive Officer
William J. Doyle, Director
Richard L. Holland, P.E., Director
Maurice L. Meier, P.E., Director
R.M. Monti, P.E., Director
G. Michael Stakias, Director
Corporate Management: Human Resources/Information
Technology/Strategic Planning
Ralph V. Locurcio, P.E.
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8500
STV INCORPORATED
North Atlantic Region
Gerald C. Gerletz, P.E.
80 Ferry Boulevard, Stratford, CT 06615
203-375-0521, Fax 203-377-2541
230 Congress Street, 9th Floor, Boston, MA 02110
617-482-7298, Fax 617-482-1837
Mid-Atlantic Region
Maher Z. Labib, P.E., Facilities
Edward J. Petrou, P.E., Civil
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
550 Broad Street, 7th Floor, Newark, NJ 07102-4599
973-848-2340, Fax 973-848-2344
South Atlantic Region
Ronald E. Thompson, P.E.
21 Governor's Court, Baltimore, MD 21244-2722
410-944-9112, Fax 410-298-2794
Central Region
Michael D. Garz, A.I.A.
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
2105 West County Line Road, Jackson, NJ 08527-9852
732-370-2100, Fax 732-370-2051
44427 Airport Road, Suite 120, California, MD 20619
301-862-2344, Fax 301-863-9637
Four Gateway Center, Suite 325, Pittsburgh, PA 15222
412-392-3500, Fax 412-392-3501
820 Bear Tavern Road, Suite 105, Trenton, NJ 08628-1021
609-530-0300, Fax 609-530-0305
Midwest Region
William B. David, P.E.
Three First National Plaza, 70 West Madison Street,
Suite 2840, Chicago, IL 60602-4207
312-553-0655, Fax 312-553-0661
The Bockl Building, 2040 West Wisconsin Avenue, Suite 563,
Milwaukee, WI 53233-2012
414-342-7799, Fax 414-342-7899
Western Region
David L. Borger, P.E.
1055 West Seventh Street, Suite 3150, Los Angeles, CA 90017
213-482-9444, Fax 213-482-5278
100 Spear Street, Suites 505 & 540, San Francisco, CA 94111
415-777-9206, Fax 415-777-9207
Transportation Systems Division
William F. Matts, P.E.
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
1818 Market Street, Suite 1410, Philadelphia, PA 19103
215-832-3500, Fax 215-832-3599
100 Spear Street, Suites 505 & 540, San Francisco, CA 94111
415-777-9206, Fax 415-777-9207
One Main Place, 1201 Main Street, Suite 1512, Dallas, TX 75202-3990
214-651-7337, Fax 214-651-7339
727 North First Street, Suite 210, St. Louis, MO 63102
314-436-2130, Fax 314-436-2530
5762 South Semoran Boulevard, Orlando, FL 32822
407-208-0385, Fax 407-208-0393
STV ENVIRONMENTAL
Roger Zyma
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
STV CONSTRUCTION
James J. Fetterolf
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
STV CONSTRUCTION SERVICES
Brian J. Flaherty
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
STV ARCHITECTS
Robert W. Darlington, A.I.A.
205 West Welsh Drive, Douglassville, PA 19518
610-385-8200, Fax 610-385-8501
David M. Ziskind, A.I.A.
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
STV INTERNATIONAL
Michael R. Santoro
225 Park Avenue South, New York, NY 10003
212-777-4400, Fax 212-529-5237
<PAGE>
8
Financial Report
2000 Annual Report for STV Group, Incorporated
Subsidiaries: STV Incorporated, STV Architects, Inc., STV Environmental,
Inc., STV International, Inc., STV Surveying, Inc., STV Construction, Inc.,
STV Construction Services, Inc., and STV/Silver & Ziskind
Management Discussion and Analysis of Financial Condition and Results of
Operations
STV Group, Incorporated
--------------------------------------------------------------------------------
This discussion and analysis should be read in conjunction with the Message to
Shareholders and the information on pages 11 through 24 of this Annual Report.
Fiscal 2000 Compared to Fiscal 1999
Total revenues for the fiscal year ended September 30, 2000, increased 7.7
percent to $149,680,000, as compared to a 32.1 percent increase in fiscal 1999
and an 11.1 percent increase in fiscal 1998. The increase in total revenues in
fiscal 2000 was attributable to a 16.4 percent increase in operating revenues
mainly in the transportation and infrastructure areas, partially offset by a
decrease in subcontractor and procurement revenue (pass-through cost
reimbursement). Revenues from U.S. government contracts decreased 1.3 percent in
fiscal 2000 as compared to fiscal 1999 and decreased 4.2 percent in fiscal 1999
as compared to fiscal 1998. This continued decrease is attributable to the
government's reduced spending, particularly in defense systems projects.
Operating revenues (total revenues excluding pass-through costs) increased 16.4
percent to $113,450,000 compared to a 20.8 percent increase to $97,438,000 in
fiscal 1999 and a 10.7 percent increase in fiscal 1998.
We continue to see an increased demand for facilities and transportation
engineering. In particular, the six-year, $218 billion Transportation Equity Act
for the 21st Century (TEA-21) is positively impacting STV's transportation
business, contributing federal dollars to many projects that would not exist
without this funding. When it passed three years ago, TEA-21 became the largest
infrastructure funding bill in U.S. history. At the same time, U.S. defense work
has decreased slightly, but there is continued demand for services in other
areas of the U.S. government.
Pass-through costs, expressed as a percentage of total revenue, decreased to
24.2 percent in fiscal 2000 compared to 29.9 percent in fiscal 1999 and 23.3
percent in fiscal 1998. Costs will vary from year to year depending on the need
for specialty subconsultants and governmental subcontract requirements.
Cost of services, expressed as a percentage of operating revenues, was 84.6
percent in fiscal 2000, which is comparable to 84.3 percent in fiscal 1999 and a
decrease from 86.4 percent in fiscal 1998. Costs increased from $82,185,000 in
fiscal 1999 to $95,934,000 in fiscal 2000. This increase is due primarily to the
growth in engineering service costs and escalating information technology (IT)
expenses.
General and administrative expense, expressed as a percentage of operating
revenues, decreased to 7.7 percent in fiscal 2000 from 8.7 percent in 1999 and
7.8 percent in 1998. Total general and administrative costs increased 4.1
percent in fiscal 2000 to $8,785,000 from $8,438,000 in fiscal 1999. This
increase is due primarily to higher IT and insurance expenses.
The 2000 operating results include a $1 million insurance settlement received
for consequential damages and interest losses. The 1999 operating results
include a $2.6 million insurance and interest settlement payment received.
Interest income, expressed as a percentage of operating revenues, was .2 percent
in fiscal 2000, .4 percent in fiscal 1999, and .1 percent in fiscal 1998.
Interest expense, expressed as a percentage of operating revenues, was .2
percent in fiscal 2000, .2 percent in fiscal 1999, and .6 percent in fiscal
1998.
The Company had a pre-tax profit of $9,821,000. Income tax expense was 46
percent of pre-tax income in fiscal 2000 and 1999 and 49 percent in fiscal 1998.
The favorable variance in the rate in 2000 and 1999 is due to a reduction in
nondeductible expenses as a percent of significantly higher pre-tax income in
these years.
<PAGE>
9
Management Discussion and Analysis of Financial Condition and Results of
Operations (continued)
STV Group, Incorporated
--------------------------------------------------------------------------------
Fiscal 1999 Compared to Fiscal 1998
Total revenues for the fiscal year ended September 30, 1999, increased 32.1
percent to $138,940,000. This is up from an 11.1 percent increase in fiscal
1998. The increase in total revenues in fiscal 1999 was attributable to a 20.8
percent increase in operating revenues mainly in the transportation and
infrastructure areas, and an increase in subcontractor and procurement revenue
(pass-through cost reimbursement). Revenues from U.S. government contracts
decreased 4.2 percent in fiscal 1999 as compared to fiscal 1998. This continued
decrease is attributable to the government's reduced spending, particularly in
defense systems projects. Operating revenues (total revenues excluding
pass-through costs) increased 20.8 percent to $97,438,000 compared to a 10.7
percent increase to $80,648,000 in fiscal 1998.
Pass-through costs, expressed as a percentage of total revenue, increased to
29.9 percent in fiscal 1999 compared to 23.3 percent in fiscal 1998. Costs will
vary from year to year depending on the need for specialty subconsultants and
governmental subcontract requirements.
Costs of services, expressed as a percentage of operating revenues, was 84.3
percent in fiscal 1999, which is a decrease from 86.4 percent in fiscal 1998.
This percentage decrease is due to an increase in margins on design-build
projects and labor utilization improvements partially offset by an increase in
labor-related expenses. Costs increased from $69,658,000 in fiscal 1998 to
$82,185,000 in fiscal 1999. This increase is due primarily to increases in
engineering service costs.
General and administrative expense, expressed as a percentage of operating
revenues, increased to 8.7 percent in fiscal 1999 from 7.8 percent in 1998.
Total general and administrative costs increased 33.8 percent in fiscal 1999 to
$8,438,000 from $6,307,000 in fiscal 1998. This increase is again due primarily
to higher labor and concomitant expenses.
The 1999 operating results include a $2.6 million insurance and interest
settlement payment received in September 1999. STV and its insurers had been
involved in protracted litigation concerning the settlement of a personal injury
lawsuit in 1992. The Appellant Court found in favor of the Company and its
professional liability insurer, which resulted in a favorable settlement and a
payment of $2.6 million to STV.
Interest income, expressed as a percentage of operating revenues, was .4 percent
in fiscal 1999, and .1 percent in fiscal 1998. Interest expense, expressed as a
percentage of operating revenues, was .2 percent in fiscal 1999, and .6 percent
in fiscal 1998. These results reflect STV's ability to maintain a positive cash
flow with efficient advance billings and higher net income.
The Company had a pre-tax profit of $9,570,000. Income tax expense was 46
percent of pre-tax income compared to 49 percent in fiscal 1998. The variance in
the rate is due to a reduction in nondeductible expenses as a percent of
significantly higher pre-tax income.
Liquidity, Capital Resources and Financing Agreements
Cash used in operating activities was $1,523,000 in fiscal 2000 compared to cash
provided of $4,391,000 in fiscal 1999. This decrease was due mainly to an
increase in accounts receivable and a decrease in billings in excess of related
costs. Working capital increased $4,996,000 to $22,589,000 in fiscal 2000
compared to a $5,252,000 increase in 1999 and a $2,242,000 increase in 1998.
Investing activities increased from $1,172,000 in 1999 to $2,456,000 in 2000,
and consisted primarily of $2,406,000 for the continued purchase of computer
hardware and software compared to $1,309,000 in 1999. Financing activities
consisted solely of proceeds from the exercise of stock options and short-term
borrowing activity.
<PAGE>
10
Management Discussion and Analysis of Financial Condition and Results of
Operations (continued)
STV Group, Incorporated
--------------------------------------------------------------------------------
Capital resources available to STV include a new $12,000,000 committed 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. Of the total $12,000,000 line, approximately $10,783,000 was
available as of September 30, 2000. 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.
In the long term, the Company relies on the ability to generate sufficient cash
flows from operating activities to fund investing and financing requirements.
Year 2000
The Year 2000 issue, or "The Y2K Bug" as it is sometimes called, is the result
of computer programs and equipment that were written and manufactured using two
digits rather than four to define the applicable year. Date-sensitive computer
programs and equipment may recognize a date using only the last two digits. This
could result in the year 2000 being recognized as the year 1900. System failures
or miscalculations can occur, which would cause disruptions in operations and/or
the inability to process normal business transactions. The Company is not aware
of any significant adverse effects of year 2000 on its systems and operations.
Cautionary Statement Regarding Forward-Looking Statements
Certain oral statements made by management from time to time and certain
statements contained herein, such as statements regarding STV's ability to meet
its liquidity needs and control costs, certain statements in Notes to
Consolidated Financial Statements, and other statements contained herein
regarding matters which are not historical facts, are forward-looking statements
(as such term is defined in the Securities Act of 1933). Because such statements
involve risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to those
discussed below:
1. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth.
2. STV's continued ability to operate in a heavily regulated government
environment. The Company's government contracts are subject to termination,
reduction or modification as a result of changes in the government's
requirements or budgetary restrictions. Under certain circumstances, the
government can also suspend or debar individuals or firms from obtaining future
contracts with the government.
3. The level of competition in the Company's industry, including companies with
significantly larger operations and resources than STV.
4. The Company's ability to identify and win suitable projects and to consummate
or complete any such projects.
5. STV's ability to perform design-build projects, which may include the
responsibility of ensuring the actual construction of a project for a guaranteed
price.
These and other factors are discussed in more detail in STV's annual report on
Form 10-K for the fiscal year ended September 30, 2000.
<PAGE>
11
Consolidated Balance Sheets
STV Group, Incorporated
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
September 30
2000 1999
===============================================================================================
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,382,000 $ 7,248,000
Accounts receivable 36,282,000 30,590,000
Costs and estimated profits of uncompleted contracts in
excess of related billings 18,404,000 17,029,000
Prepaid expenses and other current assets 915,000 829,000
----------- -----------
Total Current Assets 58,983,000 55,696,000
Property and equipment, net 2,888,000 1,813,000
Deferred income taxes 2,852,000 2,443,000
Other assets 903,000 782,000
----------- -----------
Total Assets $65,626,000 $60,734,000
-----------------------------------------------------------------------------------------------
===============================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Deferred compensation $ 100,000 $ 110,000
Accounts payable 9,025,000 7,675,000
Billings on uncompleted contracts in excess of related
costs and estimated profits 12,514,000 17,094,000
Accrued payroll and related expenses 9,468,000 8,174,000
Accrued expenses 2,371,000 2,037,000
Deferred income taxes 1,983,000 2,137,000
Income tax payable 933,000 876,000
----------- -----------
Total Current Liabilities 36,394,000 38,103,000
Deferred compensation 3,886,000 2,794,000
Post-retirement benefits 1,200,000 1,070,000
----------- -----------
Total Liabilities 41,480,000 41,967,000
Commitments and contingencies
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares, no par,
no shares issued or outstanding 0 0
Convertible preferred stock, cumulative, authorized
2,000,000 shares, issuable in series, no shares issued
or outstanding 0 0
Common stock, par $ .50, authorized 12,000,000 shares 2,053,000 2,041,000
Capital in excess of par 3,546,000 3,445,000
Retained earnings 19,318,000 14,052,000
----------- -----------
24,917,000 19,538,000
Less: Treasury stock 771,000 771,000
----------- -----------
Total Stockholders' Equity 24,146,000 18,767,000
----------- -----------
Total Liabilities and Stockholders' Equity $65,626,000 $60,734,000
-----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
12
Consolidated Statements of Income
STV Group, Incorporated
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
For the Fiscal Year Ended September 30
2000 1999 1998
==================================================================================================
<S> <C> <C> <C>
Total revenues $ 149,680,000 $ 138,940,000 $ 105,178,000
Subcontract and procurement costs 36,230,000 41,502,000 24,530,000
------------- ------------- -------------
Operating revenue 113,450,000 97,438,000 80,648,000
Costs and expenses:
Costs of services 95,934,000 82,185,000 69,658,000
General and administrative 8,785,000 8,438,000 6,307,000
------------- ------------- -------------
Total costs and expenses 104,719,000 90,623,000 75,965,000
Insurance settlements 1,000,000 2,600,000 0
Interest expense (182,000) (195,000) (469,000)
Interest income 272,000 350,000 78,000
------------- ------------- -------------
Other income (expense) 1,090,000 2,755,000 (391,000)
Income before income taxes 9,821,000 9,570,000 4,292,000
Income tax expense 4,555,000 4,386,000 2,098,000
------------- ------------- -------------
Net income $ 5,266,000 $ 5,184,000 $ 2,194,000
Basic earnings per share $ 1.37 $ 1.36 $ .59
Diluted earnings per share $ 1.26 $ 1.24 $ .55
--------------------------------------------------------------------------------------------------
</TABLE>
Consolidated Statements of Stockholders' Equity
STV Group, Incorporated
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock
Capital in
Number excess of Retained Number
of shares Amount par earnings of shares Amount
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 1,920,972 $ 1,921,000 $3,003,000 $ 6,674,000 99,726 $ 271,000
Treasury stock purchases 28,992 500,000
Exercise of options 138,726 104,000 347,000
2-for-1 stock split 1,989,456 120,118
Net income for the year 2,194,000
Balance, September 30, 1998 4,049,154 $ 2,025,000 $3,350,000 $ 8,868,000 248,836 $ 771,000
Exercise of options 32,500 16,000 95,000
Net income for the year 5,184,000
Balance, September 30, 1999 4,081,654 $ 2,041,000 $3,445,000 $ 14,052,000 248,836 $ 771,000
Exercise of options 24,500 12,000 101,000
Net income for the year 5,266,000
Balance, September 30, 2000 4,106,154 $ 2,053,000 $3,546,000 $ 19,318,000 248,836 $ 771,000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
13
Consolidated Statements of Cash Flows
STV Group, Incorporated
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
For the Fiscal Year Ended September 30
2000 1999 1998
============================================================================================================================
<S> <C> <C> <C>
Operating Activities
Net income $ 5,266,000 $ 5,184,000 $ 2,194,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 1,250,000 887,000 741,000
Deferred income taxes (563,000) (286,000) 944,000
Loss on disposal of property and equipment 10,000 0 0
Changes in operating assets and liabilities
Accounts receivable (5,692,000) (7,105,000) (3,331,000)
Costs and estimated profits of uncompleted contracts
in excess of related billings and other current assets (1,461,000) (3,575,000) 2,017,000
Accounts payable and other liabilities 4,190,000 4,703,000 2,440,000
Billings on uncompleted contracts in excess of related
costs and estimated profits (4,580,000) 3,719,000 8,989,000
Current income taxes 57,000 864,000 515,000
------------ ----------- ------------
Net cash (used in) provided by operating activities $ (1,523,000) $ 4,391,000 $ 14,509,000
Investing Activities
Purchase of property and equipment $ (2,022,000) $ (961,000) $ (843,000)
Purchase of software (384,000) (348,000) (254,000)
(Increase) decrease in other assets (50,000) 137,000 68,000
Purchase of treasury stock 0 0 (342,000)
-------------- ------------- ------------
Net cash used in investing activities $ (2,456,000) $(1,172,000) $ (1,371,000)
Financing Activities
Proceeds from issuance of common stock $ 113,000 $ 111,000 $ 451,000
Proceeds from line of credit and long term borrowings 5,050,000 0 55,073,000
Principal payments on line of credit and long term borrowings (5,050,000) (526,000) (65,371,000)
--------- ------- ----------
Net cash provided by (used in) financing activities $ 113,000 $ (415,000) $ (9,847,000)
(Decrease) increase in cash (3,866,000) 2,804,000 3,291,000
Cash and cash equivalents at beginning of year 7,248,000 4,444,000 1,153,000
Cash and cash equivalents at end of year $ 3,382,000 $ 7,248,000 $ 4,444,000
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
14
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.
<PAGE>
15
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."
<PAGE>
16
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.
<PAGE>
17
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
<PAGE>
18
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.
<PAGE>
19
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.
<PAGE>
20
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.
<PAGE>
21
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
2000 1999
===============================================================================================================
<S> <C> <C>
Deferred compensation liability payable in fixed monthly installments of
$11,542 through September 2006 with interest imputed at 16 percent $ 532,000 $ 581,000
Executive deferred compensation liability for certain executives, with annual
interest at 1 percent above prime rate as of November 1, payable upon the
termination of employment or approval of the Board of Directors 512,000 490,000
Non-qualified deferred compensation plan liability 95,000 0
Supplemental executive retirement agreements for two current executives payable
in monthly installments upon retirement with interest imputed
at 8.25 percent (1) 2,847,000 1,833,000
---------- ----------
3,986,000 2,904,000
Less: Current portion 100,000 110,000
---------- ----------
$3,886,000 $2,794,000
---------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
22
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.
<PAGE>
23
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
<PAGE>
24
Shareholder Information
--------------------------------------------------------------------------------
STV Group Managing Officers
Dominick M. Servedio, P.E., President & Chief
Executive Officer
Peter W. Knipe, Chief Financial Officer
Board of Directors
Michael Haratunian, P.E., Chairman
Dominick M. Servedio, P.E., President & Chief
Executive Officer
William J. Doyle, Director
Richard L. Holland, P.E., Director
Maurice L. Meier, P.E., Director
R.M. Monti, P.E., Director
G. Michael Stakias, Director
Transfer Agent and Registrar
Continental Stock Transfer & Trust Co.
2 Broadway
New York, NY 10004-2207
Counsel
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Auditors
Ernst & Young LLP
Commerce Court, Suite 200
2601 Market Place
Harrisburg, PA 17110-9359
Shareholders of Record
There were 1,210 shareholders of record as of September 30, 2000.
Common Stock Market Prices
The common stock of STV Group, Incorporated, is traded on the NASDAQ (National
Market System) under the symbol STVI. The following table sets forth the
reported high and low bid prices for the periods indicated. Such quotations,
supplied by NASDAQ, represent interdealer prices without retail markup, markdown
or commission.
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2000 High Ask Low Bid
============================================
4th Quarter 9 1/2 6 13/16
3rd Quarter 7 1/2 6
2nd Quarter 8 1/8 6
1st Quarter 8 7/8 6 3/8
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1999 High Ask Low Bid
============================================
4th Quarter 8 7/16 7
3rd Quarter 8 11/16 6 3/4
2nd Quarter 9 6 1/2
1st Quarter 9 4
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Form 10K Available
Copies of the STV Group, Incorporated, Form 10K report to
the Securities and Exchange Commission may be obtained
without charge by contacting:
Peter W. Knipe, Chief Financial Officer
STV Group, Incorporated
205 West Welsh Drive
Douglassville, PA 19518
(610) 385-8200, fax (610) 385-8500
[email protected]
