SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File Number
September 30, 2000 0-3415
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STV GROUP, INCORPORATED
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1698231
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 West Welsh Drive, Douglassville, Pennsylvania 19518
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 385-8200
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Shares ($.50 par)
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 12 months, (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of November 29, 2000 is $24,263,820. (1)
The number of shares outstanding of the registrant's classes of common stock as
of November 29, 2000 is as follows:
Common Shares 3,873,938
DOCUMENTS INCORPORATED BY REFERENCE
Part II Part III
Annual Report Proxy Statement
to Shareholders for fiscal 2000
for fiscal 2000
<PAGE>
(1) Based on the last traded price on November 29, 2000. Excludes 717,874
shares held by executive officers, directors and shareholders owning in
excess of 10% of the Company's common stock (other than the 2,435,843
shares held in trust by the ESOP which are included). The information
provided shall in no way be construed as an evaluation by the Company of
the market price of such common stock, nor shall it be construed as an
admission that any officer, director or 10% shareholder in the Company may
be deemed an affiliate of the Company and any such inference is hereby
disclaimed. The information provided is included solely for record keeping
purposes of the Securities Exchange Commission.
<PAGE>
Cautionary Statement Regarding Forward-Looking Statements
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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.
<PAGE>
PART I
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ITEM 1. BUSINESS
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STV Group, Inc. provides engineering and architectural consulting and
design services on a variety of projects for the federal government, local,
state and foreign governments and private industry. The Company also performs
selected design/build, construction management projects. STV Group, Inc.
consists of the following subsidiaries: STV Incorporated, STV Architects, Inc.,
STV Environmental, Inc., STV International, Inc., STV Surveying, Inc., STV
Construction Services, Inc., STV Construction, Inc., and STV/Silver & Ziskind.
STV Group, Inc. and its subsidiaries are hereinafter collectively referred to as
the "Company".
The Company's projects frequently require the service of a firm with
diverse capabilities. For example, a particular project may require electrical
engineers, civil engineers, draftsmen and other professional personnel. Each of
STV Group, Inc.'s subsidiaries customarily staffs a particular project with
personnel from the respective firm's offices. Where appropriate, however,
multifirm project teams are formed with qualified professionals drawn from the
entire Company. Management believes that close cooperation among the STV Group,
Inc. subsidiaries, under its management, assures proper control and support for
all Company activities. As of September 30, 2000, the Company employed 1,228
people.
Services
--------
The principal areas in which the Company provides services and the
approximate percentage of the Company's revenue attributable to each service
area are set forth below:*
Year Ended September 30,
------------------------
2000 1999 1998
---- ---- ----
Architectural Engineering 22% 24% 27%
Civil, Highway, Bridge, Airport
and Port Engineering 27 34 24
Defense Systems Engineering 1 1 3
Industrial Process Engineering 1 2 2
Transportation Engineering 34 31 39
Other Engineering Services and Design Build 15 8 5
__________
* The Company does not record revenue data according to each service area.
However, to provide an approximation of the revenue attributable to each
service area, the Company has analyzed contract revenue in the fiscal year
according to its principal service area. The aggregate revenue each year of
these contracts is at least 75% of the consolidated revenue for these
fiscal years.
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Architectural Engineering
-------------------------
Architectural engineering generally involves consulting and design
services, as well as construction inspection services, for the construction of
commercial, industrial and governmental buildings, medical and educational
facilities, laboratories, recreational, religious and cultural centers, military
installations, penal institutions, and public utility facilities. As part of its
services, the Company has designed and developed systems for heating,
ventilation, cooling, refrigeration, fire protection, lighting, power generation
and distribution, and communications. In addition, the Company has performed
energy conservation audits and has recommended and designed programs, including
computerized control programs for multi-building complexes, for the conservation
of fuel and electrical energy.
Civil, Highway, Bridge, Airport and Port Engineering
----------------------------------------------------
This area of engineering generally involves consulting and design services
for the construction of highways (including interchange ramps and secondary
roads), bridges, airports and marine ports. Services performed by the Company
have included site selection and development (including economic evaluations and
feasibility reports), design and development of specifications, and construction
inspection. As part of these services, the Company has designed lighting, toll
and service facilities, drainage and erosion control systems, and has performed
mapping and landscaping, hydraulic and hydrologic studies, soils engineering,
traffic studies and surveys. In addition, the Company has designed and inspected
the construction of airport terminals, runways, aircraft maintenance hangars,
fuel systems, control towers and marine ports.
Defense Systems Engineering
---------------------------
Defense systems engineering involves consulting and design services for the
development of equipment and special hardware for the Department of Defense.
Services performed by the Company have included the design, development and
testing for systems relating to naval aircraft, weapons systems, aircraft
carriers, support ships, land-based operations and support missions. The Company
has prepared analytical support studies for aircraft carriers, support ships,
land-based operations and support missions, analytical support studies for
aircraft catapults and arresting systems, jet blast deflectors, shipboard
weapons, loading and transfer systems, ship-weapon compatibility, mobile weapon
loaders, munition trailers, launch and recovery television systems, lighting and
marking systems, parachutes, life rafts and personnel life-support systems. In
addition, the Company has prepared operation and maintenance manuals, technical
reports, specifications and other documents describing equipment and hardware.
The Company has the capacity to provide all of the services necessary to prepare
these publications, including layout, artwork composition, photography and
reproduction.
Industrial Process Engineering
------------------------------
This area involves consulting and design services for the development of
various manufacturing equipment and process systems. Services performed by the
Company have included technical analyses, feasibility studies, plant layouts and
machinery and construction inspection services. The Company has provided these
services in connection with systems for the manufacture of paper, plastics, bulk
chemicals, flooring, steel, rubber, telephone equipment, television sets,
ammunition, foods and automotive production equipment. In addition, the Company
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has provided services for various waste-to-energy engineering projects such as
municipal and industrial incinerators designed to convert various forms of waste
into marketable energy and for various environments, sanitary and water
pollution control projects, including water supply systems, storm and sanitary
sewage collection systems.
Transportation Engineering
--------------------------
Transportation engineering involves consulting and design services, as well
as construction supervision services, for various transportation facilities,
including the planning and design of track, terminals, stations, yards and shops
for the railway industry. This area also involves evaluation and inspection of
rolling stock for intercity rail lines, light rail, commuter line and urban mass
transit systems and design and construction inspection of maintenance and
storage facilities.
Design Build
------------
This area involves the joint and simultaneous design and construction of a
project under a single contract with an owner. Projects could be for complex
transportation facilities, building design or rehab, and/or industrial projects.
In order to perform these projects, the Company joins with a construction firm
in order to provide the services to a client. The arrangement with a contractor
could be as a subcontractor, a joint-venture partner, or as the prime
contractor. Depending upon the type of arrangement with the owner and the
contractor, the Company may be responsible for ensuring the actual construction
of a project for a guaranteed price. Thus these contracts involve a higher
degree of risk than other areas.
Customers
---------
The following table sets forth the percentage of contract revenues derived
from each of the following customers for the periods indicated:
Year Ended September 30,
---------------------------
2000 1999 1998
---- ---- ----
U.S. Government Contracts.................... 8% 9% 14%
State and Local Government Contracts......... 70 66 56
Private Contracts............................ 22 25 30
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Contracts
---------
In recent years, many of the Company's contracts have been awarded on a
cost-plus, as opposed to a fixed-price, basis. Under cost-plus contracts, the
Company is reimbursed for its allowable costs (direct labor plus overhead rate)
and is paid a negotiated fixed fee. Under fixed-price contracts, the Company is
paid an agreed-upon price for services rendered. Under fixed-price contacts, the
Company bears any risk of increased or unexpected costs that may reduce its
profit or cause it to sustain a loss. The majority (approximately 75%) of the
Company's contracts are cost-plus contracts.
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Government Contracts
--------------------
Many of the government programs in which the Company participates as a
contractor may extend for several years but may be funded on an annual basis.
The Company's government contracts are subject to termination, reduction or
modification as a result of changes in the government's requirements or
budgetary restrictions. In addition, government contracts are subject to
termination at the convenience of the government. If a contract were to be
terminated for convenience, the Company would be reimbursed for its allowable
costs to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed. To date,
no government agency has terminated for convenience any significant contracts
with the Company.
Under certain circumstances, the government can suspend or debar
individuals or firms from obtaining future contracts with the government. While
the Company has not experienced such a suspension or debarment and considers the
possibility of any suspension or debarment to be remote, any such suspension or
debarment would have a materially adverse effect upon the Company.
The books and records of the Company are subject to audits by a number of
federal, state and local government agencies, including the Defense Contract
Audit Agency. Such audits could result in adjustments to contract costs and
fees. To date, no material audit adjustments have been made in the Company's
contracts, although no assurances can be given that future adjustments will not
be required. All contract revenues are recorded in amounts which are expected to
be realized upon final settlement and the Company does not anticipate material
audit adjustments.
Accounts Receivable and Costs and Estimated Profits of Uncompleted Contracts in
Excess of Related Billings
--------------------------------------------------------------------------------
Accounts receivable and costs and estimated profits of uncompleted
contracts in excess of related billings represented 83% and 78% of total assets
as of September 30, 2000 and 1999, respectively. Accounts receivable are
comprised of billed receivables, while costs and estimated profits of
uncompleted contracts in excess of related billings are essentially unbilled
receivables. Unbilled receivables represent payment obligations for which
invoices have not or cannot be presented until a later period. The reasons for
which invoices are not presented may include normal invoice preparation lag,
lack of billable documents to be supplied by the client, and excess of actual
direct and indirect costs over amounts currently billable under cost
reimbursement contracts to the extent they are expected to be billed and
collected. The financing of receivables requires bank borrowings and the payment
of associated interest expense. Interest expense is a business expense not
permitted as a reimbursable item of cost under any government contracts.
Backlog
-------
Backlog represents the value of existing contracts less the portion of such
contracts included in revenues on the basis of percentage-of-completion. The
Company's backlog for services as of September 30, 2000 and 1999 was
approximately $250,000,000 and $200,000,000, respectively. The Company's backlog
includes anticipated pass through costs such as reimbursement for travel,
purchase of supplies and sub-contracts. Over the last three years, pass through
costs, as a percent of total revenues, have been 24.2% in 2000, 29.9% in 1999,
and 23.3% in 1998.
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A majority of the Company's customer orders or contract awards and
additions to contracts previously awarded are received or occur at random during
the year and may have varying periods of performance. The comparison of backlog
amounts on the same date in successive years is not necessarily indicative of
trends in the Company's business or future revenues.
The major component of the Company's operating costs are payroll and
payroll-related costs. Since the Company's business is dependent upon the
reputation and experience of its personnel and adequate staffing, a reasonable
backlog is important for the scheduling of operations and for the maintenance of
a fully staffed level of operation.
Competition
-----------
The Company has numerous competitors in all areas in which it does
business. Some of its competitors are large, diversified firms having
substantially greater financial resources and larger technical staffs than the
Company. It is not possible to predict the extent of competition which the
Company will encounter in the future because of changing customer requirements
in terms of types of projects and technological developments. It has been the
Company's experience that the principal competitive factors for the type of
service business in which the Company engages are a firm's demonstrated ability
to perform certain types of projects, the client's own previous experience with
the competing firms, a firm's size and financial condition, and the cost of the
particular proposal.
It is management's belief that the diversified scope of the services
offered by the Company is a positive competitive factor. Among other things, the
wide range of expertise which the Company possesses permits it to remain
competitive in obtaining federal government contracts despite shifts in federal
spending emphasis. Management believes that the national and international scope
of the Company is a positive factor in attracting and retaining clients which
have the need for engineering services in different regions of the country and
the world.
Marketing
---------
Marketing activities are conducted by key operating and executive
personnel, including specifically assigned sales personnel, as well as through
professional personnel who maintain existing and develop new client
relationships. The Company's ability to compete successfully in the industry is
largely dependent on aggressive marketing, the development of information
regarding client requirements, the submission of responsive cost-effective
proposals and the successful completion of contracts. Information concerning
private and governmental requirements is obtained during the course of contract
performance, from formal and informal briefings, from participation in
activities of professional organizations, and from literature published by the
government and other organizations.
Personnel
---------
As of September 30, 2000, the Company had 1,228 employees, of whom 1,004
were engaged in engineering and architectural services, 122 were engaged in
administration and 45 in marketing.
Because of the nature of services provided, many employees are professional
or technical personnel having specialized training and skills, including
engineers, architects, analysts, management specialists, technical writers and
skilled technicians. Management believes that the future growth and success of
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the Company will depend, in part, upon its continued ability to retain and
attract highly qualified personnel. The Company believes its employee relations
to be good.
Environmental Compliance
------------------------
The Company's facilities are subject to federal, state and local
authorities environmental control regulations. The Company believes it is in
compliance with these numerous regulations and that it is not exposed to any
material liability as it relates to contamination of the environment. To date,
compliance with these environmental regulations has not had a material effect on
the Company's earnings nor has it required the Company to expend significant
capital expenditures.
ITEM 2. PROPERTIES
----------
The Company's executive offices and a principal engineering office are
located in a modern 58,000 square foot building leased by the Company in
Douglassville, Pennsylvania, pursuant to a lease which expires in October, 2011.
The Company leases office facilities in a number of other locations in the
United States at which it performs engineering and architectural consulting and
design services, including a facility of approximately 69,000 square feet in New
York, New York, pursuant to a 15 year lease which expires in May, 2014.
The Company believes that its facilities are adequate to meet the current
and foreseeable needs of the Company. The Company does not expect to experience
any difficulty in securing additional space should that become necessary.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in various litigation arising out of the ordinary
course of business. The Company's management believes that the final resolution
of this litigation will not have a material adverse effect on the Company's
financial statements.
A garnishment proceeding was commenced in March 1994 against the Company's
professional liability carrier by American Continental Properties in
Philadelphia Court of Common Pleas. In that proceeding, the plaintiff-creditor
seeks to enforce an approximate $4,000,000 judgment it entered in New York
against an entity whose assets and liabilities were partially acquired by the
Company in 1987. The Company intervened in that proceeding, and along with its
professional liability carrier, denies that there is any coverage for the loss
under the professional liability policy. The Company and its professional
liability insurer are vigorously pursuing defenses available to them. If the
outcome of the litigation is adverse to the Company and the Company is required
to pay amounts in excess of the policy limits of its insurance policy, it could
have a material adverse effect on the earnings and financial condition of the
Company in the year such determination is made; however, management believes
that the final resolution of this litigation will not have a material adverse
effect on the Company's financial condition.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
------------------------------------
<TABLE>
<CAPTION>
Position with STV Group, Inc. Business
Name Age Experience During the Past 5 Years
---- --- -------------------------------------------------------
<S> <C> <C>
Michael Haratunian (1) 67 Chairman of the Board of STV Group, Inc.
Dominick M. Servedio (2) 60 Director, President, Chief Executive Officer and Chief
Operating Officer of STV Group, Inc. and
President, Chief Executive Officer and Chief
Operating Officer of STV Incorporated
W. A. Sanders II (3) 53 Senior Vice President of STV Incorporated
Peter W. Knipe (4) 51 Chief Financial Officer and Secretary/
Treasurer of STV Group, Inc.
__________
<FN>
(1) Mr. Haratunian has been associated with the Company continuously since 1972
in various capacities and was appointed President of Seelye, Stevenson,
Value & Knecht, Inc. in 1977 and Director and Executive Vice-President of
Engineering of STV Group, Inc. in 1981 and assumed the Presidency of STV
Group, Inc. in 1988. He served as Chief Executive Officer from 1991 until
1998 and as Chairman of the Board since 1993. Mr. Haratunian is a
registered professional engineer.
(2) Mr. Servedio joined the Company is 1977 as Vice President of Seelye,
Stevenson, Value & Knecht, Inc. and was appointed Executive Vice President
in 1982. He was appointed President of Seelye, Stevenson, Value & Knecht,
Inc. and Executive Vice President of STV Group, Inc. in 1988. Mr. Servedio
was elected President of STV Group, Inc. in 1993 and Chief Executive
Officer of STV Group, Inc. in 1999. Mr. Servedio is a registered
professional engineer.
(3) Mr. Sanders has been associated with the Company continuously since 1968 in
various capacities and was appointed Executive Vice President of Sanders &
Thomas in 1991. Mr. Sanders is a registered professional engineer.
(4) Mr. Knipe joined the Company in 1979, was appointed Controller in 1983 and
was elected Treasurer in 1987, Secretary in 1993 and Chief Financial
Officer in 1999. In addition to his position with the Company, he serves as
a director and officer of certain subsidiaries of the Company.
</FN>
</TABLE>
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
-----------------------------------------------------------------
The information contained under the caption "Common Stock Market Prices"
from the Company's Annual Report to Shareholders for the fiscal year ended
September 30, 2000, is incorporated herein by reference.
The Company has not paid any dividends in the last two fiscal years.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information contained under the caption "Financial Highlights for
Fiscal Years Ended September 30, 1996 through 2000" in the Company's Annual
Report to Shareholders for the fiscal year ended September 30, 2000 is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
---------------------------------------------------------------
The information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" from the Company's
Annual Report to Shareholders for the fiscal year ended September 30, 2000 is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Market risk exposures to the Company are not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The report of independent auditors and consolidated financial statements
included in the Company's Annual Report to Shareholders for the year ended
September 30, 2000, are included in Part IV, Item 14 of this Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
----------------------------------------------------------------------
None.
-8-
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information contained under the caption "Election of Directors" in the
Company's 2000 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information contained under the caption "Executive Compensation" in the
Company's 2000 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information contained under the caption "Security Ownership" in the
Company's 2000 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS.
---------------------------------------------
The information contained under the caption "Certain Transactions" in the
Company's 2000 Proxy Statement is incorporated herein by reference.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
-------------------------------------------------------
(A) The following documents are filed as part of this report;
(1) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets - September 30, 2000 and 1999
Consolidated Statements of Income - Years ended September 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Years ended
September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended September 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements - September 30, 2000
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(2) Financial statement schedules required by Item 8.
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions
or are inapplicable, and therefore have been omitted.
(B) Reports on Form 8-K.
There were no reports on Form 8-K for the last quarter of
the fiscal year ended September 30, 2000.
(C) Exhibits filed pursuant to Item 601 of Regulation S-K:
****** 3.1 Amended and restated Articles of Incorporation of the
Company.
****** 3.2 By-Laws of the Company, as amended.
*** 3.3 Amendment to Section 1.04 of the By-Laws of the Company.
* 4.1 Specimen Common Stock Certificate of the Company.
* 10.1 Loan Agreement, undated, between the Company and Richard
L. Holland, relating to the purchase of 48,779 shares of
Common Stock. +
*** 10.2 Asset Acquisition Agreement, dated September 22, 1987,
between STV/WAI, Inc. and Michael Lynn Assoc., P.C.
relating to the acquisition by STV/Michael Lynn
Associates, Inc. of certain assets of Michael Lynn
Assoc., P.C.
* 10.3 Lease, dated October 3, 1980, between the Company and
Montco Investors Realty Company, relating to the
Company's executive and engineering offices in Pottstown,
Pennsylvania.
* 10.4 Lease, dated August 30, 1983, between the Company and
Montco Investors Realty Company, relating to the addition
to the Company's offices in Pottstown, Pennsylvania and
granting the Company an option to extend its lease for
such facility for two additional five-year periods.
* 10.5 Lease, dated November 22, 1983, accompanying Workletter,
dated October 12, 1983, and letters (2) dated November
22, 1983 between the Company and 225 Fourth Company,
providing for the renovation and use of office space at
225 Park Avenue South, New York, New York.
* 10.6 STV Engineers, Inc. Employee Stock Ownership Plan, dated
January 7, 1982, and STV Engineers Employee Stock
Ownership Plant Trust Agreement, dated January 7, 1982,
and Amendment No. 1 thereto, dated May 14, 1982. +
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* 10.7 STV Revised Pension Plan. +
* 10.8 STV, Inc. Money Purchase Pension Plan. +
10.9 Officers' and Directors' Liability Policy. +
*** 10.10 Employment Agreement of Richard L. Holland. +
**** 10.11 Stipulation of Amendment to Employee Stock Ownership Plan
effective October 1, 1984. +
*** 10.14 STV Engineers, Inc. 1985 Stock Option Plan. +
*** 10.15 Lease, dated January 27, 1986, and Amendments thereto,
between Company and 225 Fourth Company providing for the
use of office space at 233 Park Avenue, New York, New
York.
******* 10.20 Lease extension dated March 13, 1992 between the Company
and 225 Fourth Company relating to an extension of seven
years, four months for use of office space at 225 Park
Avenue South, New York, New York.
******* 10.21 Agreement effective January 1, 1992 relating to ACEC
medical and life insurance. +
******* 10.22 Agreement dated August 29, 1991 relating to U. S.
Healthcare medical insurance. +
*********** 10.23 Employment Agreement of Dominick M. Servedio. +
*********** 10.24 Employment Agreement of Michael Haratunian. +
********* 10.25 Amendment to the STV Group Incorporated Employee Stock
Ownership Plan. +
********** 10.26 Lease, dated August 21, 1995, and Addendums thereto,
between the Company and Dame Enterprises, relating to the
Company's executive and engineering offices in
Douglassville, Pennsylvania.
********** 10.27 Agreement effective July 1, 1996 with Corporate Health
Insurance Company providing Group Health Insurance -
Custom Plan. +
********** 10.28 Agreement effective December 1, 1996 with U. S.
Healthcare providing medical insurance.
************ 10.30 STV Group, Incorporated 1995 Stock Option Plan. +
************* 10.31 First Amendment To Employment Agreement with Dominick M.
Servedio. +
************* 10.32 First Amendment To Employment Agreement with Michael
Haratunian. +
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************* 10.33 Employment Agreement for Peter W. Knipe. +
************* 10.34 Lease dated July 28, 1999 between the Company and 225
Fourth LLC relating to the Company's executive and
engineering offices at 225 Park Avenue, South, New York,
New York.
10.35 Letter Agreement with PNC Bank.
10.36 Committed Line of Credit Note with PNC Bank.
10.37 Security Agreement with PNC Bank
10.38 Reimbursement Agreement for Standby Letter(s) of Credit
with PNC Bank.
10.39 STV Group, Incorporated Non-Qualified Management Savings
Plan
13.1 The Company's Annual Report to Shareholders.
21.1 Subsidiaries of the Company from Company's Annual Report
to Shareholders.
23.1 Consent of Ernst & Young LLP.
27.0 Financial Data Schedule.
__________
+ Management contract or compensatory plan.
* Incorporated by reference from the Annual Report and Form 10-K
for the year ended September 30, 1984.
** Incorporated by reference from Registration Statement No.
2-88904.
*** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1987.
**** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1989.
***** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1990.
****** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1991.
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******* Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1992.
******** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1993.
********* Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1995.
********** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1996.
*********** Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1998.
************ Incorporated by reference from Proxy Statement for the year ended
September 30, 1995.
************* Incorporated by reference from Form 10-K and the Annual Report
for the year ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 29, 2000 STV GROUP, INCORPORATED
--------------------------
(Registrant)
By: /s/ DOMINICK M. SERVEDIO
-------------------------------
DOMINICK M. SERVEDIO,
Chief Executive Officer, President,
Chief Operating Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ MICHAEL HARATUNIAN
------------------------------- Chairman of the Board, December 29, 2000
MICHAEL HARATUNIAN and Director (Principal
Executive Officer)
/s/ DOMINICK M. SERVEDIO
------------------------------- Chief Executive Officer, December 29, 2000
DOMINICK M. SERVEDIO President, Chief
Operating Officer and
Director
/s/ PETER W. KNIPE
------------------------------- Chief Financial Officer, December 29, 2000
PETER W. KNIPE Secretary/Treasurer
(Principal Accounting
and Financial Officer)
/s/ RICHARD L. HOLLAND
------------------------------- Director December 29, 2000
RICHARD L. HOLLAND
/s/ G. MICHAEL STAKIAS
------------------------------- Director December 29, 2000
G. MICHAEL STAKIAS
/s/ RAY M. MONTI
------------------------------- Director December 29, 2000
RAY M. MONTI
/s/ MAURICE L. MEIER
------------------------------- Director December 29, 2000
MAURICE L. MEIER
/s/ WILLIAM J. DOYLE
------------------------------- Director December 29, 2000
WILLIAM J. DOYLE
-14-
<PAGE>
FINANCIAL STATEMENTS
--------------------
Index
-----
Report of Independent Auditors 16
Consolidated Balance Sheets 17
Consolidated Statements of Income 18
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
-15-
<PAGE>
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
-16-
<PAGE>
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.
-17-
<PAGE>
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.
-18-
<PAGE>
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>
-19-
<PAGE>
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.
-20-
<PAGE>
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."
-21-
<PAGE>
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.
-22-
<PAGE>
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
-23-
<PAGE>
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.
-24-
<PAGE>
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.
-25-
<PAGE>
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.
-26-
<PAGE>
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.
-27-
<PAGE>
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.
-28-
<PAGE>
EXHIBITS
--------
Index
-----
Exhibit 10.9 - Officers' and Directors' Liability Policy
Exhibit 10.35 - Letter Agreement with PNC Bank.
Exhibit 10.36 - Committed Line of Credit Note with PNC Bank.
Exhibit 10.37 - Security Agreement with PNC Bank
Exhibit 10.38 - Reimbursement Agreement for Standby Letter(s) of Credit
with PNC Bank.
Exhibit 10.39 - STV Group, Incorporated Non-Qualified Management Savings
Plan.
Exhibit 13.1 - The Company's Annual Report to Shareholders.
Exhibit 21.1 - Subsidiaries of the Company from Company's Annual Report
to Shareholders
Exhibit 23.1 - Consent of Ernst & Young LLP
Exhibit 27.0 - Financial Data Schedule
