ITEM 1. BUSINESS
STV Group, Inc. provides engineering and architectural consulting and design services on a variety of projects for the federal government, local, state and foreign governments and private industry. The Company is also pursuing selected design/build projects. STV Group, Inc. consists of the following wholly-owned subsidiaries: STV Incorporated, STV Architects, Inc., STV Environmental, Inc., STV International, Inc., STV Surveying, Inc. and STV Construction Services. STV and its subsidiaries are hereinafter collectively referred to as the "Company".
The Company's projects frequently require the service of a firm with diverse capabilities. For example, a particular project may require electrical engineers, civil engineers, draftsmen and other professional personnel. Each of STV Group, Inc.'s subsidiaries customarily staffs a particular project with personnel from the respective firm's offices. Where appropriate, however, multifirm project teams are formed with qualified professionals drawn from the entire Company. Management believes that close cooperation among the STV Group, Inc. subsidiaries, under its management, assures proper control and support for all Company activities. As of September 30, 1996, the Company employed 982 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, 1996 1995 1994
Architectural Engineering 25% 27% 27% Civil, Highway, Bridge, Airport and Port Engineering 33 35 36 Defense Systems Engineering 4 5 4 Industrial Process Engineering 1 2 2 Transportation Engineering 35 29 28 Other Engineering Services 2 2 3
* The Company does not record revenue data according to each service area. However, to provide an approximation of the revenue attributable to each service area, the Company has analyzed contract revenue in the fiscal year according to its principal service area. The aggregate revenue each year of these contracts is at least 75% of the consolidated revenue for these fiscal years.
Architectural Engineering
Architectural engineering generally involves consulting and design services, as well as construction inspection services, for the construction of commercial, industrial and governmental
buildings, medical and educational facilities, laboratories, recreational, religious and cultural centers, military installations, penal institutions, and public utility facilities. As part of its services, the Company has designed and developed systems for heating, ventilation, cooling, refrigeration, fire protection, lighting, power generation and distribution and communications. In addition, the Company has performed energy conservation audits and has recommended and designed programs, including computerized control programs for multi-building complexes, for the conservation of fuel and electrical energy.
Civil, Highway, Bridge, Airport and Port Engineering
This area of engineering generally involves consulting and design services for the construction of highways (including interchange ramps and secondary roads), bridges, airports and marine ports. Services performed by the Company have included site selection and development (including economic evaluations and feasibility reports), design and development of specifications, and construction inspection. As part of these services, the Company has designed lighting, toll and service facilities, drainage and erosion control systems, and has performed mapping and landscaping, hydraulic and hydrologic studies, soils engineering, traffic studies and surveys. In addition, the Company has designed and inspected the construction of airport terminals, runways, aircraft maintenance hangars, fuel systems, control towers and marine ports.
Defense Systems Engineering
Defense systems engineering involves consulting and design services for the development of equipment and special hardware for the Department of Defense. Services performed by the Company have included the design, development and testing for systems relating to naval aircraft, weapons systems, aircraft carriers, support ships, land-based operations and support missions. The Company has prepared analytical support studies for aircraft carriers, support ships, land-based operations and support missions, analytical support studies for aircraft catapults and arresting systems, jet blast deflectors, shipboard weapons, loading and transfer systems, ship-weapon compatibility, mobile weapon loaders, munition trailers, launch and recovery television systems, lighting and marking systems, parachutes, life rafts and personnel life-support systems. In addition, the Company has prepared operation and maintenance manuals, technical reports, specifications and other documents describing equipment and hardware. The Company has the capacity to provide all of the services necessary to prepare these publications, including layout, artwork composition, photography and reproduction.
Industrial Process Engineering
This area involves consulting and design services for the development of various manufacturing equipment and process systems. Services performed by the Company have included technical analyses, feasibility studies, plant layouts and machinery and construction inspection services. The Company has provided these services in connection with systems for the manufacture of paper, plastics, bulk chemicals, flooring, steel, rubber, telephone equipment, television sets, ammunition, foods and automotive production equipment. In addition, the Company has provided
services for various waste-to-energy engineering projects such as municipal and industrial incinerators designed to convert various forms of waste into marketable energy and for various environments, sanitary and water pollution control projects, including water supply systems, storm and sanitary sewage collection systems.
Transportation Engineering
Transportation engineering involves consulting and design services, as well as construction supervision services, for various transportation facilities, including the planning and design of track, terminals, stations, yards and shops for the railway industry. This area also involves evaluation and inspection of rolling stock for intercity rail lines, light rail, commuter line and urban mass transit systems and design and construction inspection of maintenance and storage facilities.
Design Build
This area involves the joint and simultaneous design and construction of a project under a single contract with an owner. Projects could be for complex transportation facilities, building design or rehab, and/or industrial projects. In order to perform these projects, the Company will join with a construction firm in order to provide the services to a client. The arrangement with a contractor could be as a subcontractor, a joint-venture partner, or as the prime contractor. Depending upon the type of arrangement with the owner and the contractor, the Company may be responsible for ensuring the actual construction of a project for a guaranteed price.
In November, 1996 the Company entered into an agreement with Bombardier Corporation to provide the design and installation of three maintenance facilities for new trainsets to be purchased by Amtrak for its Northeast Corridor fleet.
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, 1996 1995 1994
U.S. Government Contracts................. 14% 19% 22%
State and Local Government Contracts...... 56 50 49
Foreign Government Contracts.............. 2 2 1
Private Contracts......................... 28 29 28
In fiscal years 1996, 1995, and 1994 the Company's business activities in countries other than the United States accounted for approximately 4%, 4%, and 5% of total revenues, respectively. Due to the fact that virtually all of the Company's international business is funded through United States or international development agencies, management believes that there are no unusual risks attendant to obtaining payment for services rendered under its foreign contracts.
Contracts
In recent years, many of the Company's contracts have been awarded on a cost-plus, as opposed to a fixed-price, basis. Under cost-plus contracts, the Company is reimbursed for its allowable costs (direct labor plus overhead rate) and is paid a negotiated fixed fee. Under fixed-price contracts, the Company is paid an agreed-upon price for services rendered. Under fixed-price contacts, the Company bears any risk of increased or unexpected costs that may reduce its profit or cause it to sustain a loss. The majority (approximately 75%) of the Company's contracts are cost-plus contracts.
Government Contracts
Many of the government programs in which the Company participates as a contractor may extend for several years but may be funded on an annual basis. The Company's government contracts are subject to termination, reduction or modification as a result of changes in the government's requirements or budgetary restrictions. In addition, government contracts are subject to termination at the convenience of the government. If a contract were to be terminated for convenience, the Company would be reimbursed for its allowable costs to the date of termination and would be paid a proportionate amount of the stipulated profits or fees attributable to the work actually performed. To date, no government agency has terminated for convenience any significant contracts with the Company.
Under certain circumstances, the government can suspend or debar individuals or firms from obtaining future contracts with the government. While the Company has not experienced such a suspension or debarment and considers the possibility of any suspension or debarment to be remote, any such suspension or debarment would have a materially adverse effect upon the Company.
The books and records of the Company are subject to audits by a number of federal, state and local government agencies, including the Defense Contract Audit Agency. Such audits could result in adjustments to contract costs and fees. To date, no material audit adjustments have been made in the Company's contracts, although no assurances can be given that future adjustments will not be required. All contract revenues are recorded in amounts which are expected to be realized upon final settlement and the Company does not anticipate material audit adjustments.
Accounts Receivable and Costs and Estimated Profits of Uncompleted Contracts in Excess of Related Billings
Accounts receivable and costs and estimated profits of uncompleted contracts in excess of related billings represented 87% and 83% of total assets as of September 30, 1996 and 1995, 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, 1996 and 1995 was approximately $130,000,000 and $129,000,000, respectively. The Company's backlog includes anticipated pass through cost 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 1996, 22.2 in 1995, and 26.5% in 1994.
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, 1996, the Company had 982 employees, of whom 864 were engaged in engineering and architectural services, 87 were engaged in administration and 31 in marketing.
Because of the nature of services provided, many employees are professional or technical personnel having specialized training and skills, including engineers, architects, analysts, management specialists, technical writers and skilled technicians. Although many of the Company's personnel are highly specialized in certain areas the Company is not currently experiencing any material difficulty in obtaining the personnel it requires to perform under its contracts. Management believes that the future growth and success of the Company will depend, in part, upon its continued ability to retain and attract highly qualified personnel. The Company believes its employee relations to be good.
Environmental Compliance
The Company's facilities are subject to federal, state and local authorities environmental control regulations. The Company believes it is in compliance with these numerous regulations and that it is not exposed to any material liability as it relates to contamination of the environment. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings nor has it required the Company to expend significant capital expenditures.
Executive Officers of the Registrant
Position with STV Group, Inc. Business Name Age Experience During the Past 5 Years ---- --- ------------------------------------
Michael Haratunian (1) 63 Chairman of the Board and Chief Executive Officer of STV Group, Inc.
Dominick M. Servedio (2) 56 Director, President and Chief Operating Officer of STV Group, Inc. and President and Chief Operating Officer of STV Incorporated
Frank E. Lyon, Jr. (3) 68 Senior Vice President of STV Incorporated
W. A. Sanders II (4) 49 Senior Vice President of STV Incorporated
Peter W. Knipe (5) 47 Secretary/Treasurer of STV Group, Inc.
_______________ (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 was appointed Chief Executive Officer in 1991 and Chairman of the Board in 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. Mr. Servedio is a registered professional engineer.
(3) Mr. Lyon was the President and Chairman of the Board of Lyon Associates, Inc. for more than five years prior to the acquisition of certain of its assets by a subsidiary of the Company in 1983. Mr. Lyon currently is President of the Company's Lyon Associates, Inc. subsidiary. Mr. Lyon is a registered professional engineer.
(4) 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.
(5) Mr. Knipe joined the Company in 1979, was appointed Controller in 1983 and was elected Treasurer in 1987 and Secretary in 1993. In addition to his position with the Company, he serves as a director and officer of certain subsidiaries of the Company.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices and a principal engineering office are located in a modern 58,000 square foot building leased by the Company in Douglassville, Pennsylvania, pursuant to a lease which expires in October 2011.
The Company leases office facilities in a number of other locations both in the United States and overseas, at which it performs engineering and architectural consulting and design services, including a facility of approximately 55,000 square feet in New York, New York, pursuant to a 15 year lease which expires in December, 2006.
The Company believes that its facilities are adequate to meet the current and foreseeable needs of the Company. The Company does not expect to experience any difficulty in securing additional space should that become necessary.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is the subject of various claims, legal actions and complaints arising in the ordinary course of business. In most cases, the Company is one of several named defendants or third-party defendants. In the opinion of management, most of these matters are without merit or are of such a nature or involve such amounts that an unfavorable disposition would not have a material adverse effect on the financial condition of the Company.
For policy years beginning March 4, 1993, the Company's professional liability insurance arrangement provides for an annual aggregate $5,000,000 of coverage with a $250,000 deductible per occurrence on a claims made basis. For the policy year beginning March 4, 1992, the Company's professional liability insurance arrangement provided for an aggregate $5,000,000 of coverage. There was a $500,000 deductible and a requirement to indemnify the insurer for an additional aggregate $1,000,000. The Company had a similar arrangement for professional liability coverage for the period October 1, 1986, to March 3, 1992, providing an aggregate $5,000,000 of professional liability coverage. The Company has recognized the indemnity obligation by charges of $4,500,000 to operations in prior years and the posting of a $1,000,000 letter of credit. In addition to the professional liability coverage, the Company has general liability insurance in excess of $10,000,000 per occurrence and in the aggregate.
During 1992, the Company and its insurers settled a personal injury lawsuit for $5,400,000, of which $2,700,000 was paid by the Company's professional liability insurer from the funded indemnity and $2,700,000 by the general liability insurer. There remains a declaratory judgement action pending as to whether insurance coverage was to be provided under the previous general liability policy or professional liability policy then in effect. In this proceeding, the court has required that the limits of the Company's insured coverage be reserved to pay this claim if the insurer is found liable. The Company and its professional liability insurer believe that this matter should be covered under its general liability policy in which case the $2,700,000 would be repaid to the professional liability insurer to replenish the indemnity.
In addition, in 1992 the Company's former professional liability insurer was found liable for approximately $4,000,000 due to a previous arbitration proceeding allegedly relating to an asset acquisition. The judgement was reversed on appeal in 1994. If the Company's professional liability insurer is found ultimately liable under both of these actions, the Company may be required to indemnify the professional liability insurer to the extent of the policy limit of $5,000,000 as described above. Such payments would constitute a charge to operations in the year the determination is made. The Company and the Company's professional liability insurer continue to deny liability and intend to vigorously pursue defenses available to them.
The Company is also involved in various other litigation arising out of the ordinary course of business, which may require the payment of additional amounts. The Company's management believes that the final resolution of the above legal matters will not have a material adverse effect on the Company's financial statements.
If the outcome of all of the aforementioned litigation is adverse to the Company and the Company is required to pay additional amounts, 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 these legal matters will not have a material adverse effect on the Company's financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information contained under the caption "Common Stock Market Prices" from the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1996, is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Financial Highlights for the Fiscal Year Ended September 30," 1992 through 1996 in the Company's Annual Report to Shareholders for the fiscal year ended September 30, 1996 is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Results of Operation
The Company's contracts have been awarded on a cost-plus or fixed-price basis. See Part I, Item 1, "BUSINESS - Contracts". As a service business, the Company's profitability is directly affected by the degree to which its professional staff is fully utilized on existing contracts.
Fiscal Year 1996 Compared to Fiscal Year 1995
Total revenues for the fiscal year ended September 30, 1996, increased 5.4 percent to $94,073,000. This is up from a .3 percent decrease in fiscal 1995 and up from a 2.4 percent increase in fiscal 1994. The increase in total revenues in fiscal 1996 was mostly due to a 15.0 percent increase in subcontract and procurement mainly in the transportation area. Revenues from U.S. government contracts decreased 21.5 percent in fiscal 1996 as compared to fiscal 1995 and 13 percent as compared to fiscal 1994. This decrease is attributable to the government's spending reduction, particularly in overseas infrastructure projects. Operating revenues (total revenues excluding pass-through costs) increased 2.7 percent to $71,271,000 compared to a 5.6 percent increase to $69,397,000 in fiscal 1995 and a 4.9 percent increase in fiscal 1994. We continue to see an increased demand for facilities and transportation engineering. United States 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, increased to 24.2 percent in fiscal 1996 compared to 22.2 percent in fiscal 1995 compared to 26.5 percent in fiscal 1994. 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 89.2 percent in fiscal 1996, which is a decrease from the 89.3 percent in fiscal 1995, but is comparable to 89.2 percent in fiscal 1994. In fiscal 1996, costs increased from $61,942,000 in fiscal 1995 to $63,557,000. This increase is due primarily to increased labor expenses as a result of increased workload commensurate with operating revenue increase.
General and administrative expense, expressed as a percentage of operating revenues, decreased to 6.9 percent in fiscal 1996 from 7.1 in 1995 and 1994. Total general and administrative costs also decreased .8 percent in fiscal 1996 from $4,952,000 to $4,912,000.
Interest, expressed as a percentage of operating revenues, was 2.1 percent in fiscal 1996 and 2.2 percent in fiscal 1995 and 1994. Interest rates decreased in fiscal 1996, and bank loans were lower due to a more efficient use of cash.
The Company had a pre-tax profit of $1,301,000. Income tax expense was 54 percent of pre-tax income compared to 58 percent in fiscal 1995 and 45 percent in fiscal 1994. The variance in the rate is due to reduction in non-deductible expenses as a percent of pre-tax income.
In the fourth quarter, the Company had a pre-tax profit of $483,000 as compared to $286,000 in fiscal 1995 and $144,000 in fiscal 1994. The increase in pre-tax profit from fiscal 1995 is due to a decrease in employee-related costs and interest expense.
Fiscal Year 1995 Compared to Fiscal Year 1994
Total revenues for the fiscal year ended September 30, 1995 decreased, 0.3% to $89,232,000. This is down from a 2.4% increase in fiscal 1994 and a 15.3% increase in fiscal 1993. The reduction in total revenues in fiscal 1995 was the result of a 16.4% reduction in subcontract and procurement mainly in the transportation area. Revenues from U. S. Government contracts decreased 13% in fiscal 1995 as compared to fiscal 1994 and 15.8% as compared to fiscal 1993. This decrease is attributable to the Government's spending reduction, particularly in overseas infrastructure projects. Operating revenues (total revenues excluding pass-through costs) increased 5.6% to $69,397,000 compared to a 4.9% increase in fiscal 1994 and a 13.5% increase in fiscal 1993. While there was a reduction in the international region, we continue to see an increased demand for facilities and transportation engineering. United States 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 22.2% in fiscal 1995 compared to 26.5% in fiscal 1994 and 28.2% in fiscal 1993. 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 89.3% in fiscal 1995, which is comparable to the 89.2% in fiscal 1994, but is an increase from the 88.0% in fiscal 1993. In fiscal 1995, costs increased from $58,614,000 in fiscal 1994 to $61,942,000. This increase is due to increased international marketing efforts and increased labor and labor-related expenses due to
increased workload. The increase in fiscal 1994 was due in part to a transfer of certain costs from general and administrative expense to cost of services. Without this transfer, cost of services expressed as a percentage of revenue was comparable to fiscal 1993 at 87.7%. Total costs in fiscal 1994 (excluding the transfer of $1.0 million) increased to $57,614,000 from $55,173,000. This increase was due to increased post retirement benefit costs, increased international marketing efforts and increased labor and labor-related expenses due to an increased workload.
General and administrative expense, expressed as a percentage of operating revenues, was 7.1% in fiscal 1995 and 1994 and decreased from 8.3% in fiscal 1993. Total general and administrative costs increased 6.3% in fiscal 1995 from $4,657,000 to $4,952,000. This increase is due mainly to an increase in legal fees. The decrease in fiscal 1994 was due to the above mentioned reclassification of costs from general and administrative expense to cost of services.
Interest, expressed as a percentage of operating revenues, was 2.2% in fiscal 1995 and 1994 and decreased from 2.3% in fiscal 1993. While interest rates increased in fiscal 1995, the average amount of the bank loan outstanding decreased by 7% as compared to fiscal 1994.
The company had a pre-tax profit of $949,000. Income tax expense was 58% of pre-tax income compared to 45% in fiscal 1994 and 46% in fiscal 1993. The variance in the rate is due to an increase in non-deductible expenses and the recognition of income in the various states in which we do business and their tax rates.
In the fourth quarter the Company had a pre-tax profit of $286,000 as compared to $144,000 in fiscal 1994 and $152,000 in fiscal 1993.
Fiscal Year 1994 Compared to Fiscal Year 1993
Total revenues for the fiscal year ended September 30, 1994 increased 2.4% to $89,465,000. This is down from a 15.3% increase in fiscal 1993 and a 6.4% increase in fiscal 1992. The increased revenues in fiscal 1994 were the result of increased demand for transportation engineering services. In fiscal 1993, U. S. government contracts accounted for 47 percent of the total increase in revenues as compared to fiscal 1992, while revenues for U. S. government contracts were comparable in fiscal 1994 versus fiscal 1993. The balance of the fiscal 1993 increase was also due to increased demand for transportation engineering services. Operating revenues (total revenues excluding pass-through costs) increased 4.9% to $65,746,000 compared to a 13.5% increase in fiscal 1993 and a 1.6% decrease in fiscal 1992. The increase in operating revenues reflects continued demand for transportation engineering services as well as the results of increased marketing effort. While there have been decreases in the U.S. Government spending for defense, there has been significant demand for services in other departments of the U. S. government as well as demand by non U. S. government clients for transportation and infrastructure.
Pass-through costs, expressed as a percentage of total revenue, decreased to 26.5% in fiscal 1994 compared to 28.2% in fiscal 1993 and 27.1% in fiscal 1992. 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, increased to 89.2% in fiscal 1994 from 88.0% in fiscal 1993 and decreased from 89.6% in fiscal 1992. The increase in fiscal 1994 is due in part to a transfer of certain costs from general and administrative expense to cost of services. Without this transfer, cost of services expressed as a percentage of revenue would be comparable to fiscal 1993 at 87.7%. Total costs (excluding the transfer of $1.0 million) increased from $55,173,000 to $57,614,000. This increase is due to increased post retirement benefit costs, increased international marketing efforts and increased labor and labor related expenses due to an increased workload. The decrease in fiscal 1993 from fiscal 1992 was due to an increase in revenue and the Company's cost containment strategy.
General & administrative expense, expressed as a percentage of operating revenues, decreased to 7.1% in fiscal 1994 from 8.3% in fiscal 1993 and 8.9% in fiscal 1992. This reduction was due to the above mentioned reclassification of costs from general and administrative expense to cost of services and without this reclassification, would have been comparable to previous years at 8.6%.
Interest, expressed as a percentage of operating revenues, decreased to 2.2% in fiscal 1994 from 2.3% in fiscal 1993 and 2.5% in fiscal 1992. This decrease was the result of the increase in revenues.
The company had a pre-income tax profit of $1,028,000 due to the increase in revenues. Income tax expense was 45% of pre-tax income compared to 46% in fiscal 1993 and an income tax benefit of 37% in fiscal 1992. Included in the 1994 tax rate was a favorable adjustment of $45,000 due to the adoption of FASB 109. The variance in the rate is primarily due to the recognition of income in the various states in which we do business and their tax rates.
In the fourth quarter the Company had a pre-tax profit of $144,000. This profit was impacted by higher than anticipated legal expenses.
Liquidity, Capital Resources and Financing Agreements.
Cash provided in operating activities was $4,268,000 in fiscal 1996 compared to cash provided in operating activities of $1,109,000 in fiscal 1995. This increase was due mainly to an increase in billings in excess of related costs and an increase in accounts payable and other current liabilities. Working capital increased $501,000 to $8,721,000 in fiscal 1996 compared to a $1,036,000 increase in 1995 and a $554,000 increase in 1994. Investing activities slowed to $357,000 for the continued purchase of computer hardware and software compared to $951,000 in 1995. Financing activities consisted of a $3,803,000 net reduction in short-term borrowing due to the previously mentioned increase in billings in excess and accounts payable and other current liabilities.
Capital resources available to the Company include an existing line of credit for working capital. The current line is a maximum of $16.5 million based on accounts receivable and work-in-progress, of which approximately $5,900,000 is currently available. An agreement is being negotiated whereby the line of credit may be reduced. The line of credit is also a demand note and requires the Company to maintain certain financial covenants. To date, the Company has maintained these
covenants and believes that its working capital and existing or reduced line of credit are adequate to meet current fiscal year requirements. If the Company should fail to meet these covenants or should the bank demand payment on the note, there would be a material adverse financial impact. The Company is not aware of any reason for the bank to demand payment and does not expect that it would do so in the future. 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. If demand for services should increase sharply, additional sources of financing may be required.
The Company is currently involved in two lawsuits, Skinner and American Continental Properties. If the outcome of these lawsuits is adverse, the Company may be required to pay substantial deductibles or indemnification. The Company believes that it will be able to finance any adverse finding through the use of an income tax carryback of the resulting loss in combination with the line of credit and existing resources. The Company is vigorously pursuing its defenses, and management believes the final resolution of these legal matters will not have a material adverse effect on the Company's financial statements.
Impact of Inflation
Because the Company's business is essentially the supplying to customers of the expertise of its employees, there are certain factors which significantly reduce the impact of inflation. One such factor is that the Company has a comparatively small investment in property and equipment as a percentage of total assets. In addition, a substantial percentage of the Company's contracts are under cost reimbursement contract provisions or fixed-price contracts which include inflation assumptions when bid upon.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of the independent auditors and consolidated financial statements included in the Company's Annual Report to Shareholders for the year ended September 30, 1996, are included in Part IV, Item 14 of this Report.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the caption "Election of Directors" in the company's 1996 Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" in the Company's 1996 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the caption "Security Ownership" in the Company's 1996 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS.
The information contained under the caption "Certain Transactions" in the Company's 1996 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(A) The following documents are filed as part of this report;
(1) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets - September 30, 1996 and
Consolidated Statements of Income - Years ended September 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity Years ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - September 30, 1996
(2) Financial Statements schedules required by Item 8.
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(B) Reports on Form 8-K.
There were no reports on Form 8-K for the fiscal year ended September 30, 1996.
(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.
* 4.0 Specimen Common Stock Certificate of the Company.
* 10.2 Loan Agreement, undated, between the Company and Richard L. Holland, relating to the purchase of 48,779 shares of Common Stock.
*** 10.3 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.
* 10.4 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
* 10.5 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.
* 10.6 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.
* 10.7 STV Engineers, Inc. Employee Stock Ownership Plan, dated January 7, 1982, and STV Engineers Employee Stock Ownership Plant Trust Agreement, dated January 7, 1982, and Amendment No. 1 thereto, dated May 14, 1982.
* 10.8 STV Revised Pension Plan.
* 10.9 STV, Inc. Money Purchase Pension Plan.
10.10 Officers' and Directors' Liability Policy.
*** 10.11 Employment Agreement of Richard L. Holland
**** 10.12 Stipulation of Amendment to Employee Stock Ownership Plan effective October 1, 1984.
*** 10.13 Loan Agreement, dated February 28, 1986, between the Company and First Pennsylvania Bank, N.A., relating to the Company's $13,000,000 line of credit.
*** 10.14 Amendment, dated November 26, 1986, to the Loan Agreement between the company and First Pennsylvania Bank, N.A., increasing the limit of standby letters of credit in the Agreement to $3,500,000.
*** 10.15 STV Engineers, Inc. 1985 Stock Option Plan.
*** 10.16 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.
*** 10.17 Amendment, dated May 28, 1987, between the Company and First Pennsylvania Bank, N.A., decreasing the interest rate for short term borrowings and the creation of a $1,500,000 term loan.
*** 10.18 Amendment, dated November 12, 1987, increasing the line of credit to $17,000,000.
***** 10.22 Amendment, dated June 1, 1990 between the Company and First Pennsylvania Bank, NA increasing the interest rate for short term borrowings.
****** 10.26 Amendment dated September 30, 1991, between the company and CoreStates Bank, N.A., decreasing the maximum amount of the line of credit and increasing the charge for issuing letters of credit.
******* 10.27 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.
******* 10.28 Agreement effective January 1, 1992 relating to ACEC medical and life insurance.
******* 10.29 Agreement dated August 29, 1991 relating to U. S. Healthcare medical insurance.
********* 10.31 Employment Agreement of Dominick M. Servedio.
********* 10.32 Employment Agreement of Michael Haratunian.
********** 10.33 Amendment to the STV Group Incorporated Employee Stock Ownership Plan
10.34 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.
10.35 Agreement effective July 1, 1996 with Corporate Health Insurance Company providing Group Health Insurance - Custom Plan.
10.36 Agreement effective December 1, 1996 with U. S. Healthcare providing medical insurance.
11 Statement Re: Computation of Per Share Earnings.
13.1 "Common Stock Market Prices" from Company's Annual Report to Shareholders.
13.2 "Financial Highlights for the Fiscal Year Ended September 30," 1992 through 1996 from Company's Annual Report to Shareholders.
21.1 Subsidiaries of the Company from Company's Annual Report to Shareholders.
* Incorporated by reference from the Annual Report and Form 10-K for the year ended September 30, 1984.
** Incorporated by reference from Registration Statement No. 2-88904.
*** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1987.
**** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1989.
***** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1990.
****** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1991.
******* Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1992.
******** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1993.
********* Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1994.
********** Incorporated by reference from Form 10-K and the Annual Report for the year ended September 30, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 30, 1996 STV GROUP, INCORPORATED ------------------------- (Registrant)
By: /s/ Michael Haratunian ------------------------- MICHAEL HARATUNIAN, Chairman of the Board, Chief Executive 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 December 30, 1996 - ------------------------------- Chairman of the Board, MICHAEL HARATUNIAN Chief Executive Officer and Director (Principal Executive Officer)
/s/ Dominick M. Servedio December 30, 1996 - ------------------------------- President, Chief DOMINICK M. SERVEDIO Operating Officer and Director
/s/ Peter W. Knipe December 30, 1996 - ------------------------------- Secretary/Treasurer PETER W. KNIPE (Principal Accounting and Financial Officer)
/s/ Richard L. Holland - ------------------------------- Director December 30, 1996 RICHARD L. HOLLAND
/s/ Harry Prystowsky - ------------------------------- Director December 30, 1996 HARRY PRYSTOWSKY
/s/ Ray M. Monti - ------------------------------- Director December 30, 1996 RAY M. MONTI
/s/ Maurice L. Meier - ------------------------------- Director December 30, 1996 MAURICE L. MEIER
/s/ William J. Doyle - ------------------------------- Director December 30, 1996 WILLIAM J. DOYLE
FINANCIAL STATEMENTS
Index
Report of Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors STV Group, Incorporated
We have audited the accompanying consolidated balance sheets of STV Group, Incorporated and Subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of STV Group, Incorporated and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Reading, Pennsylvania
November 14, 1996
CONSOLIDATED BALANCE SHEETS STV Group and Subsidiaries.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME STV Group and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY STV Group and Subsidiaries
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS STV Group and Subsidiaries
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STV Group and Subsidiaries.
1. Significant Accounting Policies
Basis of Presentation
The Company and its subsidiaries consider themselves in a single line of business: consulting engineering, architectural, surveying and related services. The Company's clients consist primarily of various governmental agencies, with an increasing presence in the private sector in geographic regions throughout the United States.
Certain amounts in the 1994 and 1995 financial statements have been reclassified to conform to their 1996 presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries, and the 50 percent interest in an architectural joint venture. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company 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
The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, investments in U.S. treasury bills, trade payables, and debt instruments. The book value of cash and cash equivalents, trade receivables, U.S. treasury bills, and trade payables are considered to be representative of their respective fair values. The carrying value of the Company's long-term debt is comparable to fair value based on current rates and terms, with the exception of the deferred compensa
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
tion plan liability with interest imputed at 16 percent (See Note 11.) The fair value of this liability discounted at 8 percent is estimated to be $1,382,000.
Depreciation
Depreciation is primarily on the straight-line method over the estimated useful lives of the assets. Depreciation of assets recorded under capital leases is included in depreciation expense. For income tax purposes, accelerated depreciation methods are used by certain subsidiaries and deferred income taxes are provided, when applicable.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The Company will adopt SFAS 121 in the first quarter of fiscal year 1997 and, based upon the circumstances, does not believe the effect of adoption will be material.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for fiscal years beginning after December 15, 1995. SFAS 123 provides companies with a choice to follow the provisions of SFAS 123 in determining stock-based compensation expense or to continue with the provisions of APB 25, "Accounting for Stock Issued to Employees." The Company expects to continue to follow APB 25 in respect to its Stock Option Plan and will provide disclosures as required by SFAS 123 in the September 30, 1997, notes to the financial statements.
2. Costs and Estimated Profits of Uncompleted Contracts in Excess of Related Billings
Costs and estimated profits of uncompleted contracts at September 30, 1996, and 1995, respectively, are as follows:
1996 1995 Costs and estimated earnings on uncompleted contracts $328,090,000 $294,418,000 Less billings to date 318,118,000 284,786,000 ------------ ------------ $ 9,972,000 $ 9,632,000
Costs and estimated profits of uncompleted contracts are included in the accompanying balance sheet under the following captions:
1996 1995 Costs and estimated profits of uncompleted contracts in excess of related billings $14,290,000 $12,976,000
Billings on uncompleted contracts in excess of related costs and estimated profits 4,318,000 3,344,000 ----------- ----------- $ 9,972,000 $ 9,632,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
Included in accounts receivable are retainages related to uncompleted contracts in the amount of $3,230,000 in 1996 and $3,245,000 in 1995. The collection of retainages generally coincides with final project acceptance.
3. Property and Equipment
Property and equipment, at cost, are as follows:
1996 1995
Land $ 54,000 $ 54,000
Equipment 5,895,000 5,616,000
Leased equipment 930,000 1,227,000
Furniture and fixtures 2,673,000 2,334,000
Leased furniture and fixtures 233,000 271,000
Leasehold improvements 2,516,000 2,566,000 ----------- ----------- $12,301,000 $12,068,000 Less: Accumulated depreciation and amortization 10,987,000 10,185,000 ----------- ----------- $ 1,314,000 $ 1,883,000
4. Note Payable
The note payable on demand with the Company's bank is with interest at 1-1/2 percent above the prime rate and is secured by substantially all assets. The weighted average interest rate was 9.9 percent and 10.2 percent in fiscal 1996 and 1995, respectively. The bank also provides letters of credit which incur a charge of 2-1/2 percent of the face value. Currently, $1,140,000 letters of credit are outstanding. The face value of the letters of credit and note payable cannot exceed a maximum of $16,500,000 based on the accounts receivable and contracts in progress.
An agreement with this bank contains restrictive covenants regarding additional debt and stockholders' equity. The restrictions include maintaining a minimum tangible net worth, a maximum total debt to tangible net worth ratio, and a minimum working capital amount.
5. Income Taxes
The Company uses the liability method of accounting for income taxes required by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount 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, 1996, are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
Deferred tax assets: Vacation accruals $ 574,000 Depreciation 88,000 Deferred compensation 662,000 Litigation 284,000 Postemployment benefits 18,000 Postretirement medical benefits 314,000 ---------- Total deferred tax assets 1,940,000 Deferred tax liabilities: Retainage 391,000 ---------- Total deferred tax liabilities 391,000
Net deferred tax assets $1,549,000
Significant components of the provision (benefit) for income taxes are as follows:
1996 1995 1994
Current: Federal $ 734,000 $ 520,000 $ 600,000 State 330,000 200,000 90,000 ----------- ----------- ----------- Total current $ 1,064,000 $ 720,000 $ 690,000
Deferred: Federal $ (239,000) $ (100,000) $ (172,000) State (119,000) (65,000) (53,000) ----------- ----------- ----------- Total deferred $ (358,000) $ (165,000) $ (225,000)
Income tax expense $ 706,000 $ 555,000 $ 465,000
A reconciliation of federal income taxes at the statutory rate to the Company's income tax provision follows:
1996 1995 1994 Federal income tax rate 34.0% 34.0% 34.0%
Non-deductible expenses and other 9.2 14.6 7.0
State taxes, net of federal tax effect 10.8 9.4 4.0 ---- ---- ----
54.0% 58.0% 45.0%
The Company made income tax payments of $488,000, $1,014,000, and $881,000 in 1996, 1995, and 1994, respectively. The Company received income tax refunds of $51,000 in 1996, $92,000 in 1995, and $225,000 in 1994.
6. Amounts per Common Share
Earnings per common share is based on the weighted-average number of shares outstanding during the periods presented after giving effect to the potential dilutive effect, if any, of the exercise of stock options. Earnings per common share are based upon 1,873,000 shares in 1996, 1,832,000 shares in 1995, and 1,754,000 shares in 1994.
7. Commitments and Contingencies
For policy years beginning March 4, 1993, the Company's professional liability insurance arrangement provides for an annual aggregate $5,000,000 of coverage with a $250,000 deductible per occurrence
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
on a claims made basis. For the policy year beginning March 4, 1992, the Company's professional liability insurance arrangement provides for an aggregate $5,000,000 of coverage. There was a $500,000 deductible and a requirement to indemnify the insurer for an additional aggregate $1,000,000. The Company had a similar arrangement for professional liability coverage for the period October 1, 1986, to March 3, 1992, providing an aggregate $5,000,000 of professional liability coverage. The Company has recognized the indemnity obligation by charges of $4,500,000 to operations in prior years and the posting of a $1,000,000 letter of credit. In addition to the professional liability coverage, the Company has general liability insurance in excess of $10,000,000 per occurrence and in the aggregate.
During 1992, the Company and its insurers settled a personal injury lawsuit for $5,400,000, of which $2,700,000 was paid by the Company's professional liability insurer from the funded indemnity and $2,700,000 by the general liability insurer. There remains a declaratory judgement action pending as to whether insurance coverage was to be provided under the previous general liability policy or professional liability policy then in effect. In this proceeding, the court has required that the limits of the Company's insured coverage be reserved to pay this claim if the insurer is found liable. The Company and its professional liability insurer believe that this matter should be covered under its general liability policy in which case the $2,700,000 would be repaid to the professional liability insurer to replenish the indemnity.
In addition, in 1992 the Company's former professional liability insurer was found liable for approximately $4,000,000 due to a previous arbitration proceeding allegedly relating to an asset acquisition. The judgement was reversed on appeal in 1994. If the Company's professional liability insurer is found ultimately liable under both of these actions, the Company may be required to indemnify the professional liability insurer to the extent of the policy limit of $5,000,000 as described above. Such payments would constitute a charge to operations in the year the determination is made. The Company and the Company's professional liability insurer continue to deny liability and intend to vigorously pursue defenses available to them.
The Company is also involved in various other litigation arising out of the ordinary course of business, which may require the payment of additional amounts. The Company's management believes that the final resolution of the above legal matters will not have a material adverse effect on the Company's financial statements.
The Company 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
Capital Leases Operating Leases
1997 $ 555,000 $ 2,987,000 1998 $ 228,000 $ 2,453,000 1999 $ -- $ 2,375,000 2000 $ -- $ 1,920,000 2001 $ -- $ 1,771,000 Thereafter $ -- $10,741,000
Total minimum lease payments $ 783,000 $22,247,000
Less amount representing interest $ 56,000
Present value of net minimum lease payments $ 727,000
Rental expense under operating leases amounted to $2,892,000, $2,705,000, and $2,713,000 in 1996, 1995, and 1994, respectively.
8. Stock Plans
On October 1, 1981, the Company initiated an Employee Stock Ownership Plan (ESOP) which covers substantially all of its employees. Contributions to the plan are based on a percentage of eligible salaries. The total retirement expense for the years 1996, 1995, and 1994 was $1,002,000, $989,000, and $918,000, 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 has funded the 1996 contribution with cash payments throughout 1996. At September 30, 1996, 1,240,000 shares of Company stock are held by the ESOP and are included in the earnings per share computation.
The Company adopted the 1985 Stock Option Plan which reserves 300,000 shares of its common stock for grants of options to officers and key employees. The plan requires that option prices be at least equal to the fair market value of the common stock at the date of grant. Options to purchase 190,000 shares at $4.12 to $5.12 per share have been granted.
A new Stock Option Plan was approved in fiscal 1996. Under this plan, 500,000 shares of common stock are reserved for issuance upon the exercise of the options granted. No options under the plan have been granted.
On October 20, 1995, certain Company officers borrowed $125,000 from the Company to purchase 25,000 shares of common stock from an outside director of the Company. The five-year term loan, secured by a stock pledge agreement, is payable at the term with interest at the Company bank borrowing rate currently at 1-1/2 percent above prime rate. These loans have been recorded as a reduction to stockholders' equity.
9. Postretirement Benefit Plan
The Company 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
The following table presents the plan's status reconciled with amounts recognized in the Company's balance sheets:
1996 1995 Accumulated postretirement benefit obligation: Retirees $ (305,000) $ (728,000) Fully eligible active plan participants (489,000) (1,071,000) Other active plan participants (375,000) (790,000) ----------- ----------- Accumulated postretirement benefit obligation $(1,169,000) $(2,589,000) Unrecognized net gain (536,000) (250,000) Unrecognized transition obligation 951,000 2,220,000 ----------- ----------- Accrued postretirement benefit cost $ (754,000) $ (619,000)
Net periodic postretirement benefit costs include the following components:
1996 1995 1994 Service cost $ 43,000 $ 67,000 $ 70,000 Interest cost 119,000 185,000 187,000 Amortization of transition obligation over 20 years 84,000 124,000 124,000 Unrecognized (gain) loss (49,000) -- -- --------- --------- --------- Net periodic postretirement benefit cost $ 197,000 $ 376,000 $ 381,000
Effective December 1,1995, STV switched from an indemnity to a combination indemnity and managed care program. The cost assumptions associated with a managed care plan are less than with an indemnity program. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 11.5 percent for 1996 (12 percent in 1995, 12.5 percent in 1994) 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, 1996, 1995 and 1994 by $133,000, $330,000 and $334,000, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 and 1995 by $20,000 and $34,000, respectively.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.75 percent at September 30, 1996 and 1995.
10. Major Customers
The percentage of total revenues derived from contracts with the United States government for fiscal years 1996, 1995 and 1994 were 14 percent, 19 percent and 22 percent, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
11. Long-Term Debt
Long-term debt consists of the following:
(1) These agreements for two current executives provide for future cash payments of $122,000 and $226,000 annually, based on salary at retirement commencing September 2003 and September 2005, respectively. If maximum Company performance goals are achieved, these amounts would be increased 20 percent starting in September 2003, or at a prorated rate based on the levels of performance achieved.
Interest paid during 1996, 1995, and 1994 amounted to $1,472,000, $1,517,000, and $1,423,000, respectively.
The company incurred capital lease obligations of $ 0 in 1996, $804,000 in 1995, and $613,000 in 1994 to acquire equipment.
Annual maturities of long-term debt are as follows:
Year ending September 30
1997 $1,000,000 1998 $ 254,000 1999 $ 42,000 2000 $ 49,000 2001 $ 57,000 Thereafter $1,393,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STV Group and Subsidiaries
12. Quarterly Results (unaudited) (All dollar amounts omit 000 except per share data.)
Quarter Year First Second Third Fourth Revenue from services: 1996 $ 22,983 $ 23,502 $ 24,949 $ 22,639 $ 94,073 1995 $ 22,817 $ 21,092 $ 23,187 $ 22,136 $ 89,232
Operating revenue: 1996 $ 18,004 $ 17,788 $ 17,982 $ 17,497 $ 71,271 1995 $ 17,353 $ 17,519 $ 17,358 $ 17,167 $ 69,397
Gross profit: 1996 $ 1,883 $ 1,781 $ 1,979 $ 2,071 $ 7,714 1995 $ 1,885 $ 1,871 $ 1,835 $ 1,864 $ 7,455
Net income: 1996 $ 103 $ 71 $ 159 $ 262 $ 595 1995 $ 102 $ 95 $ 79 $ 118 $ 394
Earnings per share: 1996 $ .06 $ .04 $ .08 $ .14 $ .32 1995 $ .05 $ .05 $ .05 $ .07 $ .22
In the fourth quarter of 1996, STV made revised estimates to record the actual results of certain expenses. The impact of these adjustments on fourth quarter earnings was an increase of $.05 per share.
EXHIBITS
Index
Exhibit 10.10 - Officers' and Directors' Liability Policy
Exhibit 10.34 - 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.
Exhibit 10.35 - Agreement effective July 1, 1996 with corporate Health Insurance Company providing Group Health Insurance - Custom Plan.
Exhibit 10.36 - Agreement effective December 1, 1996 with U. S. Healthcare providing medical insurance.
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 13.1 - "Common Stock Market Prices" from Company's Annual Report to Shareholders
Exhibit 13.2 - "Financial Highlights for the Fiscal Year Ended September 30," 1991 through 1995 from Company's Annual Report to Shareholders
Exhibit 21.1 - Subsidiaries of the Company from Company's Annual Report to Shareholders