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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-18655
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THE FAILURE GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA 94025
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (415) 326-9400
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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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 1, 1996
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Common Stock $.001 par value 6,542,294 shares
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 29, 1996 AND DECEMBER 29, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 29, December 29,
1996 1995
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 7,780 $ 7,401
Short-term investments....................... 17,172 17,109
Accounts receivable, net of allowance for
doubtful accounts of $1,600 and $1,500 at
March 29, 1996 and December 29, 1995,
respectively................................ 17,782 18,919
Prepaid expenses and other assets............ 3,550 3,601
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Total current assets..................... 46,284 47,030
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Property, equipment and leasehold
improvements, net............................. 28,939 29,083
Other assets................................... 2,094 1,595
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$77,317 $77,708
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..... $ 2,381 $ 3,215
Notes payable and current installments of
long-term obligations....................... 218 222
Accrued payroll and employee benefits........ 4,941 4,808
Income taxes payable and deferred income
taxes....................................... 791 608
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Total current liabilities.................. 8,331 8,853
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Long-term obligations, net of current
installments.................................. 18,862 18,905
Deferred income taxes.......................... 1,520 1,520
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Total long-term liabilities................ 20,382 20,425
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Stockholders' equity:
Common stock, $.001 per value; 20,000,000
shares authorized; 7,902,496 shares issued
and outstanding at March 29, 1996 and
December 29, 1995........................... 8 8
Additional paid-in capital................... 32,559 32,538
Net unrealized loss on investments........... (108) (74)
Retained earnings............................ 22,726 22,080
Treasury shares, at cost; 1,348,554 and
1,265,105 shares at March 29, 1996 and
December 29, 1995, respectively............. (6,581) (6,122)
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Total stockholders' equity................. 48,604 48,430
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$77,317 $77,708
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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THE FAILURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 29, 1996 AND MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS ENDED
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MARCH 29, MARCH 31,
1996 1995
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<S> <C> <C>
Revenues
Professional fees................................ $13,428 $13,457
Equipment fees and net billed expenses........... 1,448 1,525
Other revenue.................................... 135 170
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15,011 15,152
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Operating expenses
Professional compensation and related expenses... 8,252 8,378
Other operating expenses......................... 3,305 3,525
General and administrative expenses.............. 2,405 2,444
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13,962 14,347
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Operating income............................ 1,049 805
Other income....................................... 36 19
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Income before income taxes.................. 1,085 824
Provision for income taxes......................... 439 334
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Net income....................................... $ 646 $ 490
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Net income per share............................... $ .10 $ .07
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Weighted average number of common shares........... 6,633 6,596
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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THE FAILURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MARCH 29, 1996 MARCH 31, 1995
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<S> <C> <C>
Cash flows from operating activities
Net income................................ $ 646 $ 490
Adjustments to reconcile net income to
net cash provided by
operating activities
Depreciation and amortization........... 873 857
Provision for doubtful accounts......... 326 732
Changes in operating assets and liabilities
Accounts receivable..................... 811 300
Prepaid expenses........................ 51 (1,783)
Accounts payable and accrued liabilities (834) (240)
Accrued payroll and employee benefits... 133 651
Income taxes payable and current
deferred income tax.................... 183 (294)
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Net cash provided by operating
activities........................... 2,189 713
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Cash flows from investing activities:
Capital expenditures...................... (720) (315)
Acquisition of PLG, Inc................... (501) -
Net change in short-term investments...... (97) 7
Other assets.............................. (7) (189)
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Net cash used by investing activities... (1,325) (497)
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Cash flows from financing activities
Proceeds from borrowings and issuance of
long-term obligations.................... 4 32
Repayments of borrowings and long-term
obligations.............................. (51) (56)
Net purchases of common stock............. (510) (324)
Net issuance and retirements of common
stock.................................... 72 26
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Net cash used by financing activities....... (485) (322)
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Net increase (decrease) in cash and cash
equivalents................................ 379 (106)
Cash and cash equivalents at beginning of
period..................................... 7,401 2,976
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Cash and cash equivalents at end of period.. $ 7,780 $ 2,870
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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THE FAILURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTERS ENDED MARCH 29, 1996 AND MARCH 31, 1995
NOTE 1: BASIS OF PRESENTATION
The Failure Group, Inc. ("FGI" and, together with its subsidiaries, the
"Company") is a multidisciplinary organization providing engineering consulting,
scientific, investigation, and information support services. The Company
operates on a 52-53 week fiscal calendar year ending on the Friday closest to
the last day of December.
The accompanying condensed, consolidated financial statements are prepared
in accordance with generally accepted accounting principles and include the
accounts of FGI and its subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. In the opinion of
management, all adjustments which are necessary for the fair presentation of the
condensed consolidated financial statements have been included and all such
adjustments are of a normal and recurring nature. The operating results for the
fiscal quarters ended March 29, 1996 and March 31, 1995, are not necessarily
representative of the results of future quarterly or annual periods.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental disclosure of cash flow information, in
thousands.
<TABLE>
<CAPTION>
Quarters Ended
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March 29, 1996 March 31, 1995
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<S> <C> <C>
Cash paid during the period:
Interest $554 $523
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Income taxes $256 $616
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</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited, condensed, consolidated financial statements and notes thereto and
with the Company's audited consolidated financial statements and notes thereto
for the fiscal year ended December 29, 1995, which is contained in the Company's
1995 Annual Report.
GENERAL
The Company derives most of its revenues from professional service activities.
Revenues from professional services are mostly derived under "time and expenses"
and "fixed-fee" billing arrangements, and are recorded as work is performed.
Professional fees are a function of the total number of hours billed to clients
and the associated hourly billing rates or fixed-fee arrangement with the
client. The Company also derives revenue from equipment fees and net billed
expenses which consist primarily of fees charged to clients for use of the
Company's equipment and facilities in connection with services provided. Other
revenue is generated primarily from photographic services. The Company's
principal expenses are professional compensation and related expenses.
RESULTS OF OPERATIONS
1996 fiscal quarter ended March 29, 1996 compared to 1995 fiscal quarter ended
March 31, 1995
Revenues in the first quarter of 1996 decreased by 1% to $15.0 million from
$15.2 million in the comparable fiscal quarter of 1995. Professional fees of
$13.4 million for the quarter were 1% lower than $13.5 million for the
comparable quarter of 1995. Equipment fees for the first quarter of 1996
decreased over the comparable quarter in 1995. This decline was attributable to
lower revenues of 23% generated from the usage of our software and database
equipment. Net billed expenses were 25% higher in the current fiscal quarter
compared to the same period in 1995, reflecting an increase in billable testing
of machinery.
The principal focus of the Company is to increase in revenues and contain its
level of spending. To accomplish this goal, the Company will remain focused on
expanding and diversifying its practice areas by emphasizing business
development, exploring potential acquisitions and continuing to recruit high
quality individuals. Additionally, the Company will continue to focus on cost
management.
Professional compensation and related expenses, which relate to employees
involved directly in the Company's professional practice, decreased slightly to
$8.3 million in the first quarter of 1996 compared to $8.4 million in the same
period in 1995. This decrease was primarily a result of full-time equivalent of
employees remaining the same for the comparable quarters. Professional
compensation, as a percentage of total revenues, remained constant at 55% for
the first quarter of 1996 as compared to the first quarter of 1995.
Other operating expenses in the first quarter of 1996 decreased 6% to $3.3
million from $3.5 million in the comparable quarter of 1995. This quarter-to-
quarter decline was comprised of a 22% decrease in computer related expenses and
a 6% decrease in occupancy. Other operating expenses were 22% of total revenues
for the first quarter of 1996 as compared to 23% for the same comparable quarter
of 1995.
General and administrative expenses in the first fiscal quarter of 1996 remained
constant at $2.4 million. The Company had a 109% increase in personnel expenses
due to the achievement of its recruiting goals for the year, which were offset
by a 45% decrease in outside consulting expenses. General and
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administrative expenses represented 16% of total revenues for the first quarter
of 1996 and for the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
1996 fiscal quarter ended March 29, 1996 compared to 1995 fiscal quarter ended
March 31, 1995
Net cash provided by operating activities was $2.2 million in the first three
months of 1996 compared to $713,000 for the comparable period in fiscal 1995.
Increases in cash provided by operating activities resulted primarily from an
increase in prepaid expenses as a result of a $1.8 million prepayment of a tax
assessment in the first quarter of 1995, which was related to the deferral of
unbilled work-in-process. The Company is currently protesting this assessment
and has requested a hearing with an appellate officer of the Internal Revenue
Service. Accounts receivable represented 106 days of revenue at March 29, 1996
compared with 130 days at March 31, 1995. The decrease in days' revenue is
primarily attributable to a 6% decline in outstanding accounts receivable, which
is a result of a stricter and more diversified collection policy.
Net cash used by investing activities was $1.3 million and $497,000 for the
first quarters of 1996 and 1995, respectively. This increase was partially a
result of a $501,000 payment, related to an agreement established at the time of
acquisition of PLG. This amount has been allocated to goodwill and will be
amortized over the remaining goodwill period. Additionally, there was an
increase in the purchase of capital assets.
Net cash used by financing activities was $485,000 in the first three months of
fiscal 1996 compared to $322,000 in the comparable period of fiscal 1995.
During the first three months of 1996, the Company purchased 94,100 shares of
common stock of which 2,000,000 shares were authorized by the Board of Directors
for repurchase.
At March 29, 1996, the Company had $7.8 million in cash balances, $17.2 million
in short-term investments and a $10 million line of credit agreement. The
Company's long-term obligations on March 29, 1996, consisted primarily of a
mortgage obligation for the Company's office facility in the San Francisco area
in the amount of $18.6 million which matures in December 1999, with uneven
monthly payments. Management believes that its existing cash and short-term
investment balances, together with existing bank credit facilities and funds
generated from operations, will provide adequate cash to fund the Company's
anticipated cash needs through at least the next twelve month period.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FAILURE GROUP, INC
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Registrant
Date: May 9, 1996 MICHAEL R. GAULKE
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Michael R. Gaulke, President
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Index to Exhibits
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Exhibit
Number Description of Document Page
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11.1 Statement Regarding Computation of Net Income 10
Per Share
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EXHIBIT 11.1
THE FAILURE GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF
NET INCOME PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarters Ended
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March 29, 1996 March 31, 1995(2)
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<S> <C> <C>
Weighted average shares issued and
outstanding Common stock............. 6,633 6,596
Common stock equivalent -- options
and awards(1)........................ - -
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Weighted average number of common
shares............................... 6,633 6,596
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Net income............................. $ 646 $ 490
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Net income per share................... $ .10 $ .07
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</TABLE>
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(1) The dilutive impact of options and awards determined using the fully-
diluted calculation is not materially different from the dilutive impact
represented in this statement determined using the primary calculation.
(2) The modified treasury stock method was used as shares obtainable exceeded
20% of the Common Stock outstanding at the end of the period. The assumed
reduced interest expense resulting from the application of this method is
immaterial.
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