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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
________________________________
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 3, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
Commission File Number 0-18655
THE FAILURE GROUP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0218904
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
149 Commonwealth Drive, Menlo Park, California 94025
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (415) 326-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the closing sale price of the Common Stock as reported on
the Nasdaq National Market February 28, 1997) was approximately $15,755,311.
For purposes of this determination, shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of the issuer's Common Stock outstanding as of February 28,
1997 was 6,805,837.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Stockholders for its fiscal
year ended January 3, 1997, are incorporated by reference in Parts II and
IV of this Form 10-K to the extent stated herein.
(2) Portions of the Registrant's definitive Proxy Statement for the
Registrant's 1997 annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
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PART I
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ITEM 1. BUSINESS
GENERAL
The Failure Group, Inc. ("FGI", and together with its subsidiaries,
the "Company"), through its principal operating subsidiaries, Failure Analysis
Associates, Inc. ("FaAA"), PLG, Inc. ("PLG"), and Environmental Health
Strategies, Inc. ("EHS"), is a technical consulting firm devoted to the
investigation, analysis and prevention of accidents and failures of an
engineering or scientific nature. The Company serves clients in the
transportation, manufacturing, utilities, energy and insurance industries, as
well as in government and other sectors of the economy. The Company provides
expertise in a broad range of engineering disciplines, including mechanical,
metallurgical, aeronautical, civil, chemical and electrical engineering,
epidemiology, and in scientific fields such as statistics, health science,
computer science and human performance. The Company has assembled what it
believes is the world's largest and most comprehensive collection of databases
relating to accidents and incidents and believes its staff has more experience
in investigating failures and disasters than any other organization in the
world. The Company provides services through a professional staff of
approximately 350 full-time equivalent individuals, of whom 275 hold
professional degrees and 109 hold doctorates, located in twenty offices
throughout the United States, and in Germany, Poland, Russia and Korea.
The Company's revenues are primarily derived from services in
connection with the investigation, analysis and prevention of accidents and
failures. Furthermore, the Company's personnel often testify as expert
witnesses in major litigation. The Company believes many other engagements not
arising directly out of a major failure or litigation, including some product
testing and design consultation, stem from clients' concerns over the potential
of failures, accidents and the associated litigation. The Company provides
substantial services required by clients to comply with governmental and state
health, safety and environmental regulations, such as testing automobiles for
compliance with Federal Motor Vehicle Safety Standards. In addition, the
Company offers product life extension services suggesting corrective measures
for major components nearing the end of their design lives--and for services
relating to the prediction and prevention of failures. The Company also
provides professional services in connection with analysis of hazardous waste
materials, the impact of various environmental factors on susceptibility to
certain diseases and other environmentally sensitive issues. Additionally, due
to the acquisition of EHS, the Company provides epidemiological advice and
services on a variety of topics including occupational and environmental health,
pharmaceutical and medical device issues and health-related consumer product
safety. Should changes in the litigation or regulatory environment
significantly reduce the exposure of manufacturers, service providers and others
to liability arising out of failures, demand for the Company's services could be
reduced.
RECENT DEVELOPMENTS
During the fiscal year ended January 3, 1997, the Company experienced
a slight decline in revenues in the non-litigation area. In the first three
quarters of 1996, the Company was retained on a number of large engagements
which lead to increased revenues over the previous year. However, during the
fourth quarter of 1996, the Company experienced a slowdown in demand for the use
of its Phoenix Test and Engineering Center ("TEC") and the services of its PLG
subsidiary, which offers reliability and risk assessment services. The Company
addressed these issues by offering more tailored services to the TEC's non-
litigation support client and restructuring PLG by imposing spending
constraints, reduced administrative support and writing off the remaining
goodwill. To improve its ability to bring in new revenue, the Company has
invested in business development and marketing programs to reach prospective
clients. Additionally, strategic priorities include adding professional staff
for expanding practice areas and continuing to explore acquisition
opportunities.
New Business Areas
------------------
On January 4, 1997, FGI acquired all of the stock of Broadcast
Communications Systems, Inc. ("BCS"), a privately-held firm specializing in the
design, installation and maintenance of wireless communications networks. BCS
is based in the greater Madison, Wisconsin area and has erected communication
towers and provided related training and technical services for the
telecommunications
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industry since 1981. The goodwill will be amortized using
the straight-line method over seven years. The impact of the financial
combination of BCS and the Company is immaterial.
In September of 1994, FGI and Applied Energy Services Electric Limited
("AESE") created Zarnowiecka Elektrownia Gazowa SA, a joint stock company
whereby each Company owns 50% of the equity. In January 1996, the joint stock
company won a tender to develop, design, construct and operate a $700 million
1,000 megawatt natural gas combustion turbine power plant in Poland. The first
phase of the construction is expected to be finished in the year 2000.
CLIENTS
General
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The Company serves clients in manufacturing, transportation,
utilities, energy, insurance, government and other sectors of the economy.
Approximately 38% of the Company's revenues are derived from professional
services provided to clients, organizations and insurers related to the
transportation industry.
Many of the Company's engagements are initiated by lawyers or
insurance companies whose clients anticipate or experience significant
litigation over an alleged failure of their products, equipment or services. In
other cases, the Company is engaged when a client requires independent testing
of a product or requires specialized analysis regarding the likelihood of
failures or techniques to prevent such failures.
Pricing and Terms of Engagements
--------------------------------
The Company provides its services on either a "fixed fee basis" or on
a "time and expenses" basis, charging hourly rates for each staff member
involved in a project, based on his or her skill and experience. The Company's
standard rates for professionals range from $65 to $600 per hour.
The Company's engagement agreements typically provide for monthly
billing, require payment of the Company's invoices within 30 days of receipt,
permit clients to terminate an engagement at any time and generally grant the
Company ownership of intellectual property developed by the Company in the
course of the engagement. Clients normally agree to indemnify FGI's work and
its personnel against liabilities arising out of the use or application of the
results of the Company's work or recommendations. The Company also maintains
insurance at levels it believes are appropriate.
SERVICES
The Company provides services in the following areas:
. analysis, reconstruction and prevention of accidents, failures and
disasters
. engineering and scientific support services
. information and data management
. environmental health services
ANALYSIS, RECONSTRUCTION AND PREVENTION OF ACCIDENTS, FAILURES AND DISASTERS
The Company's primary service area is the analysis and reconstruction
of failures and accidents. Initially, the Company analyzed metallurgical,
mechanical and structural failures. However, over time it has expanded its
service offerings to a broader range of technical disciplines, including all of
the major engineering disciplines (mechanical, electrical, civil, structural,
aeronautical, environmental, petrochemical, biomechanical, etc.), as well as
scientific expertise in mathematics, statistics, computer science, health
science and human performance. The accidents the Company has investigated have
ranged from small electronic components to household appliances, toys,
transportation vehicles, and larger structures such as oil rigs, bridges,
supertankers and high-rise buildings.
Transportation Research and Engineering
---------------------------------------
The Company analyzes transportation-related accidents and failures,
including those involving automobiles, trucks, recreational vehicles, aircraft,
ships, trains and buses. Included within its
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offerings are inspection and testing services, often used to analyze or assess
the risks associated with a specific vehicle or groups of makes and models of
vehicles.
Vehicles
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Over one-third of the Company's research involves motor vehicles.
Whether automotive, truck or recreational vehicles, the Company handles issues
ranging from safety to vehicle handling, performance and design. For example,
the Company may assess whether seat belt usage or air bag deployment decreases
the chance of injury in a particular accident using biomechanics and design
analyses. In addition, the Company tests individual components, such as brakes
or fuel systems, for defects or alleged improper design.
Aircraft
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For more than two decades, the Company has provided objective and
accurate analysis of aviation accidents involving such products as parasails,
private, commercial and military aircraft, and satellites. Using flight data
and cockpit voice recorder data, physical evidence, and three-dimensional
computer animation capabilities, the Company has reconstructed accidents. In
addition to its accident reconstruction services, the Company has designed
instrumentation systems to record aircraft performance and, in one particular
parasailing accident, conducted flight tests at the scene of the accident.
Naval Architecture and Marine Engineering
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The Company's capabilities include failure analysis investigations of
ships, offshore platforms, coastal structures and recreational boats.
Investigations have ranged from complete accident reconstructions, to laboratory
testing of equipment and components, to computer analysis of structures exposed
to a range of sea and weather conditions. For example, site inspections are
performed to determine boat headings and to address possible navigational errors
by the boat operators. During the investigation of the EXXON Valdez accident,
the Company inspected and documented damage to the entire 987-foot hull and
created a three-dimensional computer mapping of the damaged structure.
Biomechanics
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As well as analyzing failures of equipment, vehicles and products, the
Company investigates and analyzes injury mechanisms, medical devices and
protective systems, such as helmets and seat belts. Typical injury
investigations have included cars, trucks, recreational vehicles, diving, skiing
and surfing accidents, and injuries sustained on playground equipment, amusement
park rides and in the workplace. The Company often prepares computer models of
human motions and animates the results for effective presentation to lay
audiences. The Society of Automotive Engineers, in its continuing efforts to
improve safety of all motor vehicles, engaged the Company to conduct a research
program in which heavy truck crash-worthiness is evaluated. Included within the
research is a study of occupant motion and injuries, as well as the development
of tests for heavy truck restraint systems, interior components and cab
structures. In addition, the Company has been engaged to perform mechanical
property evaluation and microscopy on explanted breast implant devices to
determine their overall strength and performance characteristics.
Human Performance and Risk Analysis
-----------------------------------
The Company also analyzes how human performance affects accidents
associated with work or leisure activities. Taking into account sensory
phenomena, reactions, attention span, and other things which motivate people to
take risks and make mistakes, the Company researches questions ranging from the
placement of controls on farm and industrial equipment to the effectiveness of
safety information on common products and recreational equipment. Through risk
analysis, the Company examines and quantifies how products and components behave
in the real world utilizing their accident or failure history. The Company uses
this information to advise clients whether design changes may increase or
decrease the risk, or whether the overall safety justifies the design changes.
Combustion, Fire and Fluid Dynamics
-----------------------------------
The Company has investigated incidents of fires and explosions
involving high-rise hotels and office buildings, chemical plants and refineries,
foundries, utility power plants and substations, construction sites, storage
facilities and family dwellings. The types of accidents that the Company has
analyzed, involved items ranging from home appliances to off-shore oil
structures. In some instances, the Company assists insurance companies to
determine the origin of fires. Fire dynamics, chemical and
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thermal analyses, computer modeling and experimental testing, including test and
data acquisition instruments developed by the Company, are utilized to explore
complex combustion and fluid mechanics problems.
Mechanical Engineering
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The Company applies mechanical engineering principles to the majority
of investigations performed. Expertise in this area ranges from engineering
mechanics, design analysis, reliability and hazards evaluation, to fracture
mechanics and materials life prediction. Typical investigations have ranged
from process equipment design analysis to pressure vessel explosions, to
computer-assisted analysis of crack propagation within materials or heat
transfer within pipes. Many projects involve international investigations such
as a natural gas pipeline explosion in Venezuela or reliability analysis in
Italy and Brazil. In addition to accident investigation and design analysis,
the Company also performs government funded research in all aspects of
engineering, and writes specialized computer software to support project
activities.
Civil/Structural Engineering
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The Company brings together expertise in structural, geotechnical,
materials and construction engineering to provide comprehensive analysis of
problems in industrial, commercial, residential, and transportation structures
including buildings, towers, underground transmission pipelines and chimneys.
For critical facilities and unique structures, the Company performs evaluations
of existing facilities and sophisticated cost-effective designs for retrofit and
new construction. The Company has been involved in analyzing the safety of
structures following the January 17, 1994 earthquake in the Los Angeles area.
Following most major earthquakes, like the Los Angeles earthquake or the 1989
Loma Prieta earthquake in the San Francisco Bay Area, owners and insurers of
damaged properties contact the Company for assistance to determine the severity
and extent of damage to residential buildings, high-rise structures, hospitals
and industrial facilities. The scope of the Company's investigations include
emergency safety assessment, post-earthquake field inspections, analytical
modeling and time history simulations of building and component behavior,
evaluation of mechanical system performance and recommendations for repair or
demolition.
Environmental Engineering and Health Sciences
---------------------------------------------
The Company has built a track record of objectively evaluating
environmental pollution and its effects. Whether the pollution medium is air,
water, soil or ground water, the Company has pioneered many scientific
techniques used in environmental investigation and assessment. One particular
technique utilized by the Company is ground penetrating radar, which delineates
subsurface geological features and assists in mapping subsurface contaminants.
In addition, accidental and routine releases of chemical substances may affect
human health and, therefore, may require risk assessment studies. The Company
has the capability to identify hazards, assess exposure scenarios, conduct
health surveys and evaluate the relationship between the exposure and response.
Materials Investigation
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In cases involving materials of all types, including metals, plastics,
composites and chemicals, the Company uses a wide range of macroscopic and
microscopic analysis and testing techniques to examine and document the physical
evidence, and determine the location and mode of failure. Components are
studied to determine pre-existing defects, evaluate specific properties for
compliance with specifications, as well as determine the operating and residual
stresses under which the part operated. Examinations ranging from giant machine
turbines to the smallest consumer products have been conducted in laboratories
throughout the Company's regional office network.
Electrical Engineering
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The Company studies problems with transformers, generators, motors and
other electrical components, ranging from integrated circuits to transmission
lines. In addition, the Company is active in failure prevention in the fields
of electric power and transportation systems. Investigations have included
analysis of emergency/standby power arrangements, load demand, electric utility
reliability, airplane-ship-vehicle electrical failures, and many other critical
functions.
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Petrochemical Services
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The Company's petrochemical professionals investigate explosions,
chemical releases, fires and equipment failures in the petroleum, plastics and
chemical process industries. Chemical engineers and chemists analyze process
conditions through the use of chemical thermodynamics, fluid mechanics,
analytical chemistry, instrumentation and process control, and chemical
kinetics. The Company also offers prevention services which include process
safety management, review and audit for regulatory compliance and hazardous
operations procedures.
Utilities Services
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The Company has combined service offerings from its subsidiaries, FaAA
and PLG, to help its utility clients avoid costly failures by identifying
vulnerabilities and defining actions to reduce current and future risks. With a
client list of over 65 of the largest domestic utility companies, the Company's
analysis subjects range from entire plants to individual components. The
Company recently prepared a life cycle management plan for the reactor vessels
of a domestic utility to help them operate the plants beyond the original
license term. The combination of reactor vessel subcomponents and aging
mechanisms, radiation embrittlement, stress corrosion cracking and fatigue life
were assessed. Where appropriate, recommendations were developed to assure
adequate assessment and management of aging mechanisms for extended periods of
operation, enhancing the return on their installed assets.
Risk
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The safety and reliability of power generating, manufacturing and data
processing facilities are of increasing importance to owners, insurers,
regulators and the general public. With the experience of analyzing thousands
of failures, the Company provides unique and advanced services in industrial
hazard assessment, mitigation and prevention. The Company rapidly evaluates
industrial and manufacturing systems to determine factors critical to reliable
operations, personnel and public safety, and product quality. Once
deficiencies are identified, the Company's professionals provide input into the
design of remedial measures to reduce the risks associated with the design and
construction stages of new facilities.
ENGINEERING AND SCIENTIFIC SUPPORT SERVICES
Test and Engineering Center
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Much of the Company's transportation-related analysis and testing is
performed at its TEC in Phoenix, Arizona. The TEC is one of the largest
independent and comprehensive automobile testing facilities in the United
States, outside of the automotive manufacturing industry. At the TEC, the
Company provides a real-world environment for testing products and determining
the causes of their failures. On any given day, technicians are conducting
tests involving automobiles colliding, pressure vessels exploding, motorcycles
overturning, or carefully and scientifically investigating a host of other
incidents. The Company conducts vehicle handling investigations, tests vehicles
for compliance with federal guidelines, analyzes aircraft accidents and train
derailments, and studies occupant kinematics, failed parts and structural
elements. The TEC is equipped to handle diverse and unique engineering
situations. Key features include a two-mile test track, a ten-acre dynamic
handling pad, a 1,200-foot crash rail, a drop tower and sled impact facility,
static structural test fixtures and environmental test areas. Fully staffed
instrumentation, fabrication, computing, photographic and anthropomorphic dummy
laboratories provide essential test support.
Laboratory Services
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The Company's Laboratory and Testing Services Group in San Francisco
and the regional office laboratories provide rapid, responsive answers to
engineering questions in diverse areas: metallurgy and materials engineering,
corrosion, mechanics, fires and explosions, structural and electrical issues,
health questions and more. The Company's clients derive significant advantages
in efficiency and confidentiality from our policy of performing laboratory
investigations in-house whenever possible.
Visualization Techniques and Graphics Capabilities
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The Company has long been an innovator in the development and
application of visualization techniques to explore and explain complicated
failures and accidents. Engineers utilize state-
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of-the-art methods such as X-ray computed tomography scans and ultrasonic
inspections to discover the underlying problems in such diversified objects as
soil particles and exotic aerospace alloys.
Complex scientific findings need to be explained in clear-cut fashion
to lay people. The Company maintains capabilities in this evolving discipline
by employing animation, video and 3-D visualizations to provide accurate
accounts of accidents and failures. Examples of some of the work performed
include: 3-D animations of the Kennedy assassination for the American Bar
Association Mock Trial, 3-D animation of the Brown Simpson/Goldman murder, 3-D
modeling for a Menendez trial and 2-D and 3-D animations of automotive
accidents and building fires, as well as graphics, photographs and videos that
demonstrate how products function or how contaminates spread through the ground
or throughout the human body. In addition, state-of-the art visual presentation
techniques are utilized for all company developed presentations.
INFORMATION AND DATA MANAGEMENT
The Company's extensive use of computers to analyze data of all types
has given it the ability to provide stand-alone information and data management
services. As an independent firm involved in accident investigation, the
Company has accumulated over 370 million accident and injury records associated
with vehicles, aircraft, watercraft and consumer products, and occupation. The
quality, depth and usability of over 65 databases has made the Company one of
the world's primary sources of statistical information on most every type of
accident.
Using this information, the Company has been able to provide
customized database design and maintenance services, as well as develop custom
applications software for use by its clients and others. The Company has been
able to provide its clients access, for a fee, to certain databases it maintains
in support of its analytical services.
For clients, the Company can enter and cross-reference client data on
its mainframe computers and has built relational and other type of information
management systems appropriate for such data. The Company has computerized tens
of millions of items of data ranging from simple correspondence to contracts,
detailed sales records, product complaints, technical reports and
deposition/trial testimony transcripts. Clients gain access to this information
through remote terminals and computer networks. The Company is able to
translate client-provided data into graphical images and help clients generate
images in their own offices.
ENVIRONMENTAL HEALTH SERVICES
The Company acquired Environmental Health Strategies ("EHS"), in
August of 1996. EHS is a good strategic fit with the Company because it
provides a presence in the epidemiology field. EHS's staff includes
epidemilogogists, toxicologists, biostatisticians and industrial hygienists.
All scientific staff have advanced degrees and its medical doctors are board-
certified specialists. With decades of professional and scientific experience,
the EHS team is well-published, well-known, and well-respected.
EHS offers consultative and research services to evaluate virtually
and type of human health question. From client consultation, to clinical
trials, to literature reviews and epidemiologic studies, EHS specializes in
solving complex health questions. They have researched a large number of
topics, ranging from pharmaceutical and medical device safety to air and
groundwater contamination to safety of cellular telephones. While its
scientists are principally engaged in research, they also provide expert
opinions in courtrooms and at regulatory hearings.
COMPETITION
The marketplace for the Company's services is fragmented and the
Company faces different sources of competition in providing its various
services. For example, for a project to analyze the expected life of a concrete
structure, the Company may compete against regional and national structural
engineering concerns; for independent automotive testing projects, the Company
competes with a small number of independent test facilities; and for failure
analysis projects, the Company competes primarily against university professors
and research organizations. In addition, the services the Company provides to
some of its clients can be performed in-house by those clients. However,
because of liability and independence concerns, clients who have the capability
to perform such services themselves often retain the Company or other
independent consultants.
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In each of the foregoing areas, the Company believes that the
principal competitive factors are technical capability and breadth of services,
ability to deliver services on a timely basis, professional reputation and
knowledge of the litigation process, and the ability to offer fixed fee pricing.
Although the Company believes it generally competes favorably in each of these
areas, some of the Company's competitors may be able to provide services
acceptable to the clients at significantly lower prices.
The Company generally believes that the barriers to entry in
particular areas of engineering expertise are low, and that for many of its
technical disciplines competition is increasing. In addition, the Company
expects that as a result of these low barriers, competition may become more
intense in other aspects of its business. In answer to competitive forces in
the marketplace, the Company continues to explore new markets for its various
technical disciplines. Competitive pressure could reduce the market acceptance
of the Company's services and result in price reductions.
EMPLOYEES
As of January 3, 1997, the Company employed the equivalent of
approximately 350 full-time employees, including approximately 244 engineering
staff, 44 technical support staff, and 53 administrative and support staff.
The Company's future success depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to retain its key managerial and technical employees or
that it will be able to attract, assimilate or retain other highly qualified
technical and managerial personnel in the future. Among others, Graeme F.
Fowler, Robert A. Kadlec, Subbaiah V. Malladi, Roger L. McCarthy, Charles A.
Rau, Jr., Piotr D. Moncarz, Robert W. Morgan and one of the original founders,
Bernard Ross, have been responsible for attracting significant amounts of the
Company's business and are instrumental in the growth and management of the
Company.
ITEM 2. PROPERTIES
The Company's headquarters office facilities consist of a 153,000
square foot building, with office and laboratory space located on a 6.3 acre
tract of land owned by the Company in Menlo Park, California (of which 18% has
been sub-leased), an adjacent 32,000 square foot office building owned by the
Company (of which 89% is sub-leased), and an adjacent 27,000 square feet of
leased warehouse storage space. Lease payments on the warehouse storage space
amounted to $181,587 in 1996. The lease expires in the year 2000, with renewal
options for an additional ten years. The land and buildings the Company owns
are subject to a variable rate mortgage tied to LIBOR which, as of the period
ending January 3, 1997, aggregated $18.7 million in principal amount
outstanding.
The Company's Test and Engineering Center occupies 147 acres outside
of Phoenix, Arizona, 104 acres of which are used under a seven-year special use
permit expiring in 1998 that has no preferential right of renewal. The
remaining balance including all of the test facilities and a portion of the two-
mile test track, is leased under a 20-year lease expiring in 2010. Lease
expense on this land amounted to $465,912 in 1996.
In addition to the foregoing, the Company leases an aggregate of
86,100 square feet of office, warehouse and laboratory space in 16 other
separate locations in nine states, Germany, Poland Russia and Korea. Aggregate
lease payments in 1996 were approximately $929,501. Leases for these office,
warehouse and laboratory facilities are generally short-term with terms expiring
between February 1997 and 2005.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company has been named as a defendant in
actions arising out of its business. The Company is not currently engaged in
any such litigation that would have a material adverse impact on the Company if
resolved adversely to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT.
The executive officers and key employees of the Company and its
principal operating subsidiary, FaAA, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Michael R. Gaulke 51 Director and President and Chief Executive Officer of the Company
Roger L. McCarthy, Ph.D. 48 Director and Chief Technical Officer of the Company
Subbaiah V. Malladi, Ph.D. 50 Director and Corporate Vice President of FaAA
Gail E. Aldrich 48 Corporate Vice President and Secretary of the Company
Larry W. Anderson, Ph.D. 57 Group Vice President of FaAA
Terence G. Boyle 38 Corporate Controller
Graeme F. Fowler, Ph.D. 41 Corporate Vice President of FaAA
Paul R. Johnston, Ph.D. 43 Corporate Vice President of FaAA
Robert A. Kadlec, Ph.D. 55 Corporate Vice President of FaAA
Alexander Kusko, Sc.D. 75 Corporate Vice President of FaAA
John M. Leinonen 59 Corporate Vice President of FaAA
Piotr D. Moncarz, Ph.D. 47 Group Vice President of FaAA
Charles A. Rau, Jr., Ph.D. 54 Corporate Vice President of FaAA
Bernard Ross, Ph.D. 62 Chairman Emeritus
</TABLE>
Executive officers of the Company are appointed by the Board of
Directors and serve at the discretion of the Board or until the appointment of
their successors. There is no family relationship between any of the directors
and officers of the Company.
Michael R. Gaulke joined the Company in September 1992 as Executive
Vice President and Chief Financial Officer, became President in March 1993 and
was appointed as a member of the Board of Directors of the Company in January
1994. In June of 1996, Mr. Gaulke was named Chief Executive Officer of both FGI
and FaAA. He has been a member of the Board of Directors of FaAA since September
1993. From November 1988 to September 1992, Mr. Gaulke served as Executive Vice
President and Chief Financial Officer at Raynet Corporation, a subsidiary of
Raychem Corporation. He received an M.B.A. (1972) from Stanford University
Graduate School of Business and a B.S. (1968) in Electrical Engineering from
Oregon State University.
Dr. McCarthy was named Chief Technical Officer in June of 1996. Prior
to that change he was Chief Executive Officer of both the Company and the
Company's principal operating subsidiary, Failure Analysis Associates, Inc.
("FaAA"). He has been a director of the Company since 1989 and a director of
FaAA since 1980, Chief Executive Officer of the Company since 1989 and Chief
Executive Officer of FaAA since 1982. He was Chairman and President of the
Company from 1989 to March 1993, Chairman of FaAA from 1988 to March 1993, and
President of FaAA from 1982 to March 1993. He joined the Company in August
1978. Dr. McCarthy received his Ph.D. (1977), Mech.E. (1975) and S.M. (1973)
from Massachusetts Institute of Technology and his B.S.E. (1972) in Mechanical
Engineering and A.B. in Philosophy (1972) from the University of Michigan. Dr.
McCarthy is a Registered Professional Engineer in the states of California and
Arizona and a member of the following professional organizations: American
Society of Metals; American Society of Mechanical Engineers; Society of
Automotive Engineers; American Society for Testing and Materials; Human Factors
and Ergonomics Society; National Society of Professional Engineers; American
Society of Heating, Refrigeration and Air-Conditioning Engineers;
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National Fire Protection Association; American Welding Society; National Safety
Council; Society for Risk Analysis; and the American Statistical Association.
Subbaiah V. Malladi, Ph.D., joined FaAA in 1982 as a Senior Engineer,
becoming a Senior Vice President in January of 1988 and a Corporate Vice
President of FaAA in September of 1993. Dr. Malladi was a member of the Board
of Directors of the Company from March 1991 through September 1993, and was re-
elected to the Board in April of 1996. He received a Ph.D. (1980) in Mechanical
Engineering from the California Institute of Technology, M.Tech (1972) in
Mechanical Engineering from the Indian Institute of Technology, B.E. (1970) in
Mechanical Engineering from SRI Venkateswara University, India and B.S. (1966)
in Physics, Chemistry and Mathematics from Osmania University, India. Dr.
Malladi is a Registered Professional Mechanical Engineer in the State of
California, and a member of the following professional organizations: American
Institute of Aeronautics and Astronautics; American Association for the
Advancement of Science; Combustion Institute; and National Fire Protection
Association.
Gail E. Aldrich is Vice President of Human Resources and Corporate
Secretary for FGI and its subsidiaries, FaAA, PLG and EHS, in Menlo Park,
California. In this capacity, she is responsible for direction of programs and
services in the areas of recruiting, relocation, affirmative action, job
evaluation, benefits and compensation, and employee relations. Ms. Aldrich
joined the Company in November of 1994. Prior to her position at FGI, Ms.
Aldrich was employed at the Electric Power Research Institute (EPRI) and the
University of Michigan. Ms. Aldrich received a B.S. degree in English from
Eastern Michigan University. She has completed graduate coursework in Business
Administration at Santa Clara University and completed the UCLA Advanced
Executive Program. Ms. Aldrich is actively involved in professional and
community activities. She was the Chair of the Society of Human Resources
Management ("SHRM") in 1994 and continues to serve on its Board of Directors.
SHRM has more than 50,000 members and is the world's largest professional
society dedicated to human resources management. She is a member of the Bay
Area Human Resources Executive Council ("BAHREC") and has served on its Board of
Directors. She has been certified as a Senior Professional of Human Resources
("SPHR") by the Human Resources Certification Institute. Ms. Aldrich is a long-
term member of the American Association of University Woman (AAUW), and has
served on the Leadership Development Committee for the California State Division
of AAUW.
Larry W. Anderson, Ph.D., joined FaAA in 1986 as a Managing Engineer,
becoming a Senior Managing Engineer in 1990 and Principal Engineer in 1992. He
was elected Vice President of FaAA in November 1996. Dr. Anderson received his
Ph.D. (1966) M.S. (1964) and B.S. (1961) in mechanical Engineering from the
University of Washington. Dr. Anderson is a Registered Professional Engineer in
the State of California. He is a member of the following professional
organizations: American Society of Heating, Refrigerating and Air-conditioning
Engineers; American Society of Mechanical Engineers; National Fire Protection
Association; Society of Fire Protection Engineers; and Tau Beta Pi National
Engineering Honorary.
Terence G. Boyle, CPA, joined FaAA in February 1996 as Corporate
Controller. From February 1995 to January 1996, Mr. Boyle served as Corporate
Controller at PLG, a wholly-owned operating subsidiary of FaAA. Prior to
joining PLG, Mr. Boyle was Vice President of Finance and Administration for a
high-tech manufacturing company and has over 17 years experience in financial
management, planning, implementing, controlling and analysis. Mr. Boyle is a
registered Certified Public Accountant in California and received his MBA in
Finance from California State University, Los Angeles in 1984.
Graeme F. Fowler Ph.D., joined FaAA in 1981 as an engineer, becoming a
Senior Engineer in 1982, Managing Engineer in 1986, Senior Managing Engineer in
1991 and a Principal Engineer in 1992. He was elected Vice President of FaAA in
August 1993. Dr. Fowler received his Ph.D. (1982) in Applied Mechanics from the
California Institute of Technology. He is also a registered Professional
Mechanical Engineer in the State of California and a member of the following
professional organizations: American Academy of Mechanics; Society of
Automotive Engineers; Society of Risk Analysis; and Society of Mechanical
Engineers.
Paul R. Johnston, Ph.D., joined FaAA in 1981 as a Structural Engineer,
becoming a Senior Engineer is 1982, Managing Engineer in 1983 and Principal
Engineer in 1987. He was elected Vice President of FaAA in November 1996. Dr.
Johnston received his Ph.D. (1981) in Civil Engineering and M.S. (1977) in
Structural Engineering from Stanford University. He received a B.A.I. (1976) in
Civil Engineering and B.A. (1976) in Mathematics from Trinity College, Dublin
University, Ireland. Dr. Johnston is a Registered Professional Civil Engineer in
the State of California. He is a member of the
10
<PAGE>
following professional organizations: American Society of Civil Engineers;
American Society of Mechanical Engineers; and Society of Automotive Engineers.
Robert A. Kadlec, Ph.D., was a consultant with FaAA from 1969 to 1978,
before joining FaAA full-time in 1978 as a Managing Engineer. Dr. Kadlec has
served as Los Angeles office director since 1982 and a Corporate Vice President
from 1986 to the present time. Dr. Kadlec received his Ph.D. (1973) with a
minor in Physics and M.S. (1966) in Aeronautics and Astronautics from Stanford
University and received his B.S. (1965) in Aeronautics and Engineering Mechanics
from the University of Minnesota. Dr. Kadlec is a Registered Professional
Engineer in the states of California and Washington. Dr. Kadlec is a member of
the following professional organizations: Tau Beta Pi; Sigma Gamma Tau;
American Association for the Advancement of Science; American Institute of
Aeronautics and Astronautics; American Physical Society; Optical Society of
America; National Fire Protection Agency; and Society of Risk Analysis.
Alexander Kusko, Sc.D., joined FaAA in February 1988 as a Senior
Engineer. He was elected Vice President of FaAA in December 1993. Dr. Kusko
received his Sc.D. (1951) in Electrical Engineering from the Massachusetts
Institute of Technology. He is a Registered Professional Electrical Engineer in
the States of Massachusetts and California, and is a Life Fellow of the
Institute of Electrical and Electronic Engineers.
John M. Leinonen joined the Company in January 1996 as a Corporate
Vice President and Principal Engineer. He was previously employed at Ford Motor
Company, where he began his career in 1963 as a Product Design Engineer and
retired from Ford as an Executive Engineer who had directed the activities of
all areas in Ford's Automotive Safety Office. Mr. Leinonen was President in 1995
of the Society of Automotive Engineers ("SAE"). He began his involvement with
SAE as Program Planning Director of the Detroit Section Governing Board in 1975.
From 1988-1990 he served his initial term on the SAE Board of Directors and is
currently in the midst of his second, third-year term. He is a member of the
SAE's Foundation Board of Trustees and its VISION 2000 Advisory Committee. He
received both his bachelor's and master's degree in Mechanical Engineering from
the University of Michigan and is a registered professional engineer.
Piotr D. Moncarz, Ph.D., joined FaAA in 1980 as a Structural Engineer,
becoming a Senior Engineer in 1983, Managing Engineer in 1984 and Principal
Engineer in 1987. He was elected Vice President of FaAA in May 1990. Dr.
Moncarz received his Ph.D. (1981) in Structural Engineering from Stanford
University. Since 1987, Dr. Moncarz has been a consulting associate professor
at the Civil Engineering Department at Stanford University, and since 1991
consulting professor. Dr. Moncarz is a Registered Professional Civil Engineer
in the State of California and a Licensed Professional Civil Engineer in the
Provinces of Saskatchewan and British Columbia, Canada, and is a member of the
following professional organizations: American Society of Civil Engineers;
Structural Engineering Association of Northern California; American Concrete
Institute; Prestressed Concrete Institute; Earthquake Engineering Research
Institute and International Institute of Industrial Reliability.
Charles A. Rau, Jr., Ph.D., joined FaAA in 1974 as General Manager,
Contract Research and Engineering and has served as a Vice President since 1976.
Dr. Rau served as Executive Vice President and COO of FaAA from 1980 to 1982 and
from 1985 to 1986. Dr. Rau received his Ph.D. (1967) and M.S. (1965) in
Materials Science and Engineering from Stanford University. He received his
B.S. (1963) in Metallurgical Engineering from Lafayette College. Dr. Rau is a
Registered Professional Engineer in the State of California and a Licensed
Professional Engineer in the Province of Saskatchewan, Canada. He is a Fellow
of the American Society for Metals, and a member of the following professional
organizations: American Society for Metals; The Metallurgical Society ("AIME")
American Society of Mechanical Engineers; Society for Experimental Mechanics;
American Society for Testing and Materials; and National Association of
Corrosion Engineers.
Bernard Ross, Ph.D., was one of the co-founders of FaAA and served as
a member of the Board of Directors of FaAA from 1967 until May 1990. He was
FaAA's President from 1978 to 1982, Chairman of the Board of Directors of FaAA
from 1978 to 1988, and presently is Chairman Emeritus. He is currently a
Consulting Professor at Stanford University. Dr. Ross received his Ph.D. (1965)
and M.Sc. (1959) in Aeronautical Engineering from Stanford University and his
B.M.E. (1957) in Mechanical Engineering from Cornell University. Dr. Ross was a
visiting Professor in the Graduate School of Civil Engineering, Santa Clara
University, from 1970 to 1978. Dr. Ross is a member of the ASME Design
Engineering Division, Stress Analysis and Failure Prevention Committee. He is
a member of the following professional organizations: American Institute of
Aeronautics and Astronautics; American Society of Mechanical Engineers; Society
of Automotive Engineers; and National Society of Professional
11
<PAGE>
Engineers. Dr. Ross is a Presidential Appointee to the Stanford University,
School of Engineering, Executive Board of Advisors.
PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Information required by this item is incorporated by reference to
the section entitled "Quarterly Stock Data" in the Company's Annual Report to
Stockholders for the period ended January 3, 1997 (the "1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the section entitled "Financial Highlights" in the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the Consolidated Financial Statements, related notes thereto, and the Report of
Independent Auditors in the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
With the exception of the information incorporated by reference from
the 1996 Annual Report to Stockholders in Parts II and IV of this Report on Form
10-K, the Company's 1996 Annual Report to Stockholders is not to be deemed filed
as part of this Report.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference the
Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders
(the "Proxy Statement") relating to the section entitled "Proposal No. 1:
Election of Directors" and "Other Information Compliance with Section 16(a) of
the Exchange Act," with the exception that information regarding the executive
officers of the Company is set forth in the section titled "Executive Officers
and Key Employees of the Registrant" of Part 1: Item 4A of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section entitled "Executive Officer Compensation" of the Proxy Statement.
12
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the section entitled "Other Information -- Share Ownership by Principal
Stockholders and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the section entitled "Certain Transactions" of the Proxy Statement.
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
Incorporation by reference to the 1996 Annual Report
Report of Independent Auditors (in the 1996 Annual Report)
Consolidated Statements of Income (Loss) for the years ended January
3, 1997, December 29, 1995, and December 30, (in the 1996 Annual
Report)
Consolidated Balance Sheets as of January 3, 1997 and December 29,
1995 (in the 1996 Annual Report)
Consolidated Statements of Stockholders' Equity for the years ended
January 3, 1997 and December 29, 1995 and December 30, (in the 1996
Annual Report)
Consolidated Statements of Cash Flows for the years ended January 3,
1997, December 29, 1995, and December 30, 1994 (in the 1996 Annual
Report)
Notes to Consolidated Financial Statements (in the 1996 Annual Report)
(a)2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of The Failure Group, Inc.
for the years ended January 3, 1997, December 29, 1995 and December
30, 1994 is filed as part of this Report on Form 10-K and should be
read in conjunction with the Consolidated Financial Statements of The
Failure Group, Inc.
Report of Independent Auditors
Schedule II Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they
are either not required, not applicable, or the information is
otherwise included.
(a)3. EXHIBITS
The following exhibits are filed as part of, or incorporated by
reference into (as indicated parenthetically), the Annual Report on
Form 10-K
3.1 Restated Certificate of Incorporation of the Company. (Exhibit
3.1 to the Company's Registration Statement on Form S-1 as
filed on June 25, 1990, registration number 33-35562)
3.2 Amended and Restated Bylaws of the Company. (Exhibit 3.2 to the
Company's Registration statement on Form S-1 as filed on June
25, 1990, registration number 33-35562)
13
<PAGE>
4.1 Specimen copy of Common Stock Certificate of the Company.
(Exhibit 4.2 to the Company's Registration Statement on Forms
S-1 as filed on June 25, 1990, registration number 33-35562)
4.2 References made to Exhibits 3.1 and 3.2
*10.1 1989 Stock Option Plan for Subbaiah. V. Malladi (Exhibit 10.1
to the Company's Registration Statement on Form S-1 as filed on
June 25, 1990, registration number 33-35562)
*10.2 Stock Option Agreement, dated May 30, 1989, between the Company
and Subbaiah V. Malladi. (Exhibit 10.2 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.3 Stock Option Agreement dated June 22, 1990, between the Company
and Subbaiah V. Malladi. (Exhibit 10.3 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.4 1990 Stock Option and Rights Plan, as amended through March 31,
1993. (Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 28, 1993)
*10.5 Form of Incentive Stock Option Agreement under the 1990 Stock
Option and Rights Plan. (Exhibit 10.5 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.6 Form of Nonqualified Stock Option Agreement under the 1990
Stock Option and Rights Plan. (Exhibit 10.6 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.7 Form of Indemnification Agreement entered into or proposed to
be entered into between the Company and its officers and
directors. (Exhibit 10.7 to the Company's Registration
Statement on Form S-1 as filed on June 25, 1990, registration
number 33-35562)
*10.8 Failure Analysis Associates Employee Pension Plan, as amended
March 19, 1991. (Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991)
10.9 Promissory Note for $19,400,000, by FaAA Realty Corporation in
favor of The Variable Annuity Life Insurance Company, dated
November 9, 1989, as assumed by FaAA. (Exhibit 10.10 to the
Company's Registration Statement on Form S-1 as filed on June
25, 1990, registration number 33-35562)
*10.13 Form of Agreement between the Company and non-employee members
of the Board of Directors, dated March 25, 1991, regarding
exchange of rights to receive shares for nonqualified stock
options. (Exhibit 10.23 to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1991)
*10.14 Form of Nonqualified Stock Option Agreement between the
Registrant and non-employee members of the Board of Directors,
dated March 25, 1991. (Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1991)
*10.15 1991 Restricted Stock Plan. (Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1991)
*10.16 The Failure Group, Inc. Employee Pension Plan. (Exhibit 10.26
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
14
<PAGE>
*10.17 Amendment to The Failure Group, Inc. Employee Pension Plan, as
amended on September 20, 1993. (Exhibit 10.20 to the Company's
Transition Period Report on Form 10-K for the seven month
period ended December 31, 1993)
*10.18 Amendment to Incentive Stock Option Agreement between the
Company and Subbaiah V. Malladi, dated June 27, 1991. (Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1991)
*10.19 Form of Incentive Stock Option Agreement, between the
Registrant and optionees under the 1990 Stock Option and Rights
Plan, relative to replacement of outstanding options. (Exhibit
10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1991)
*10.20 Form of Nonqualified Stock Option Agreement, between the
Registrant and nonemployee members of the Board of Directors,
relative to replacement of outstanding options. Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.21 Amendment to Stock Option Agreement, between the Registrant and
Subbaiah V. Malladi, relative to repricing outstanding option
under 1989 Stock Option Plan for Malladi V. Subbaiah. (Exhibit
10.32 to replacement of outstanding options. Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.22 Form of Stock Option Agreement between the Company and
Subbaiah V. Malladi, relative to replacement of outstanding
option under 1990 Stock Option and Rights Plan. (Exhibit 10.33
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.23 The Failure Group, Inc. Employee Stock Purchase Plan, as
amended August 1993. (Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 28, 1993)
10.24 Credit Agreement dated March 16, 1995, between Failure Analysis
Associates, Inc. and Bank of America. (Exhibit 10-27 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1994)
10.25 Zarnowicka Elektrownia Gazowa, joint venture, dated September
8, 1994. (Exhibit 10.29 to the Company's Annual Report on Form
10-K for the fiscal year ended December 30, 1994)
10.26 Promissory note with Bank of America dated July 26, 1996
11.1 Statement Regarding Computation of Net Income (Loss) Per Share
13.1 Annual Report to Stockholders for the fiscal year ended January
3, 1997
21.1 List of Subsidiaries of the Company
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
----------------------------------------------------------------------
* Indicates management compensatory plan, contract or arrangement.
(b) REPORTS ON FORM 8-K
None.
15
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 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: March 28, 1997 THE FAILURE GROUP, INC.
/s/ Michael R. Gaulke
---------------------
(Michael R. Gaulke, Director, and President and
Chief 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:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Michael R. Gaulke Director, President and Chief March 28, 1997
- ----------------------------- Executive Officer
Michael R. Gaulke (Principal Executive Officer)
/s/ Roger L. McCarthy Director and Chief Technical March 28, 1997
- ----------------------------- Officer
Roger L. McCarthy
/s/ Edward J. Keith Chairman of the Board March 28, 1997
- -----------------------------
Edward J. Keith
/s/ Samuel H. Armacost Director March 28, 1997
- -----------------------------
Samuel H. Armacost
/s/ Alexander D. Cross Director March 28, 1997
- -----------------------------
Alexander D. Cross
/s/ Elmer W. Johnson Director March 28, 1997
- -----------------------------
Elmer W. Johnson
/s/ Subbaiah V. Malladi Director March 28, 1997
- -----------------------------
Subbaiah V. Malladi
/s/ George T. Van Gilder Director March 28, 1997
- -----------------------------
George T. Van Gilder
</TABLE>
16
<PAGE>
EXHIBITS
The following exhibits are filed as part of, or incorporated by
reference into (as indicated parenthetically), the Annual Report on
Form 10-K
3.1 Restated Certificate of Incorporation of the Company. (Exhibit
3.1 to the Company's Registration Statement on Form S-1 as
filed on June 25, 1990, registration number 33-35562)
3.2 Amended and Restated Bylaws of the Company. (Exhibit 3.2 to the
Company's Registration statement on Form S-1 as filed on June
25, 1990, registration number 33-35562)
4.1 Specimen copy of Common Stock Certificate of the Company.
(Exhibit 4.2 to the Company's Registration Statement on Forms
S-1 as filed on June 25, 1990, registration number 33-35562)
4.2 References made to Exhibits 3.1 and 3.2
*10.1 1989 Stock Option Plan for Subbaiah. V. Malladi (Exhibit 10.1
to the Company's Registration Statement on Form S-1 as filed on
June 25, 1990, registration number 33-35562)
*10.2 Stock Option Agreement, dated May 30, 1989, between the Company
and Subbaiah V. Malladi. (Exhibit 10.2 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.3 Stock Option Agreement dated June 22, 1990, between the Company
and Subbaiah V. Malladi. (Exhibit 10.3 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.4 1990 Stock Option and Rights Plan, as amended through March 31,
1993. (Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended May 28, 1993)
*10.5 Form of Incentive Stock Option Agreement under the 1990 Stock
Option and Rights Plan. (Exhibit 10.5 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.6 Form of Nonqualified Stock Option Agreement under the 1990
Stock Option and Rights Plan. (Exhibit 10.6 to the Company's
Registration Statement on Form S-1 as filed on June 25, 1990,
registration number 33-35562)
*10.7 Form of Indemnification Agreement entered into or proposed to
be entered into between the Company and its officers and
directors. (Exhibit 10.7 to the Company's Registration
Statement on Form S-1 as filed on June 25, 1990, registration
number 33-35562)
*10.8 Failure Analysis Associates Employee Pension Plan, as amended
March 19, 1991. (Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991)
10.9 Promissory Note for $19,400,000, by FaAA Realty Corporation in
favor of The Variable Annuity Life Insurance Company, dated
November 9, 1989, as assumed by FaAA. (Exhibit 10.10 to the
Company's Registration Statement on Form S-1 as filed on June
25, 1990, registration number 33-35562)
*10.13 Form of Agreement between the Company and non-employee members
of the Board of Directors, dated March 25, 1991, regarding
exchange of rights to
17
<PAGE>
receive shares for nonqualified stock
options. (Exhibit 10.23 to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1991)
*10.14 Form of Nonqualified Stock Option Agreement between the
Registrant and non-employee members of the Board of Directors,
dated March 25, 1991. (Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1991)
*10.15 1991 Restricted Stock Plan. (Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1991)
*10.16 The Failure Group, Inc. Employee Pension Plan. (Exhibit 10.26
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.17 Amendment to The Failure Group, Inc. Employee Pension Plan, as
amended on September 20, 1993. (Exhibit 10.20 to the Company's
Transition Period Report on Form 10-K for the seven month
period ended December 31, 1993)
*10.18 Amendment to Incentive Stock Option Agreement between the
Company and Subbaiah V. Malladi, dated June 27, 1991. (Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1991)
*10.19 Form of Incentive Stock Option Agreement, between the
Registrant and optionees under the 1990 Stock Option and Rights
Plan, relative to replacement of outstanding options. (Exhibit
10.30 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1991)
*10.20 Form of Nonqualified Stock Option Agreement, between the
Registrant and nonemployee members of the Board of Directors,
relative to replacement of outstanding options. Exhibit 10.31
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.21 Amendment to Stock Option Agreement, between the Registrant and
Subbaiah V. Malladi, relative to repricing outstanding option
under 1989 Stock Option Plan for Malladi V. Subbaiah. (Exhibit
10.32 to replacement of outstanding options. Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.22 Form of Stock Option Agreement between the Company and
Subbaiah V. Malladi, relative to replacement of outstanding
option under 1990 Stock Option and Rights Plan. (Exhibit 10.33
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991)
*10.23 The Failure Group, Inc. Employee Stock Purchase Plan, as
amended August 1993. (Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 28, 1993)
10.24 Credit Agreement dated March 16, 1995, between Failure Analysis
Associates, Inc. and Bank of America. (Exhibit 10-27 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1994)
10.25 Zarnowicka Elektrownia Gazowa, joint venture, dated September
8, 1994. (Exhibit 10.29 to the Company's Annual Report on Form
10-K for the fiscal year ended December 30, 1994)
10.26 Promissory note with Bank of America dated July 26, 1996
11.1 Statement Regarding Computation of Net Income (Loss) Per Share
13.1 Annual Report to Stockholders for the fiscal year ended January
3, 1997
18
<PAGE>
21.1 List of Subsidiaries of the Company
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
---------------------------------------------------------------------
* Indicates management compensatory plan, contract or arrangement.
(b) REPORTS ON FORM 8-K
None.
19
<PAGE>
Independent Auditors' Report on Schedule
----------------------------------------
The Board of Directors and Stockholders
The Failure Group, Inc.
Under date of January 30, 1997, we reported on the consolidated balance sheets
of The Failure Group, Inc. and subsidiaries as of January 3, 1997 and December
29, 1995, and the related consolidated statements of income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended January 3, 1997, as contained the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon are
incorporated by reference in the January 3, 1997, annual report on Form 10-K of
The Failure Group, Inc. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as listed in Item 14(a)2 of this Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
Palo Alto, California
January 30, 1997
<PAGE>
THE FAILURE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Deletions
--------- ---------
Accounts
Balance at Provision Charged off, Balance at
Beginning of Charged to Net End of
Year Expenses of Recoveries Year
---- -------- ------------- ----
<S> <C> <C> <C> <C>
Year Ended January 3, 1997
Allowance for doubtful accounts...... $1,500 $1,871 $(1,871) $1,500
------ ------ ------- ------
Year Ended December 29, 1995
Allowance for doubtful accounts...... $2,800 $3,435 $(4,735) $1,500
------ ------ ------- ------
Year Ended December 30, 1994
Allowance for doubtful accounts...... $2,500 $3,654 $(3,354) $2,800
------ ------ ------- ------
</TABLE>
<PAGE>
EXHIBIT 10.26
[BANK OF AMERICA LOGO]
BANK OF AMERICA
- --------------------------------------------------------------------------------
PROMISSORY NOTE - (LIBOR)
$18,700,000.00 Loan No. 9351433156
June 20, 1996 San Francisco, California
1. BORROWER'S PROMISE TO PAY.
-------------------------
For value received, FAILURE ANALYSIS ASSOCIATES, INC., a Delaware
Corporation, ("Borrower") promises to pay EIGHTEEN MILLION SEVEN HUNDRED
THOUSAND DOLLARS AND NO/100 Dollars ($18,700,000.00), or so much of that sum as
may be advanced under this promissory note (the "Note") plus interest, to the
order of Bank of America National Trust and Savings Association ("Bank") at Palo
ALto CBO #1493, 530 Lytton Avenue, Palo Alto, CA 94301, California, or at such
other place as the holder of this Note may from time to time require.
This Note evidences a loan (the "Loan") from Bank to Borrower made
pursuant to a Standing Loan Agreement (the "Loan Agreement") between Bank and
Borrower of even date herewith. This Note is secured by a Deed of Trust With
Assignment of Rents, Security Agreement and Fixture Filing (the "Deed of Trust")
covering certain real property and other collateral as described therein.
2. INTEREST RATE AND PAYMENT TERMS
-------------------------------
A. THE INTEREST RATE. Interest on unpaid principal shall accrue at
-----------------
a rate equal to the LIBOR Rate, as defined below, plus one and 20/100ths percent
(1.2%) (the "Spread") per year. The LIBOR rate shall be adjusted every six
months on each February 1 and August 1, or if such date is not a Banking Day,
the next succeeding Banking Day ("Reset Date"). The first Reset Date shall be
February 1, 1997. The "LIBOR Rate" means the interest rate determined by the
following formula. (All amounts in the calculation will be determined by the
Bank as of the Reset Date.)
LIBOR Rate = London Inter-Bank Offered Rate
-------------------------------------------
(1.00 - Reserve Percentage)
Where,
(1) "London Inter-Bank Offered Rate" is the average per
annum rate of interest, at which United States dollar deposits in the
amount of the Loan would be offered for six (6) month periods by major
banks in the London U.S. dollar inter-bank market, as shown on Telerate
Page 3750 (or such other page as may replace it) as of 11:00 a.m.
(London time) on the day that is two (2) London Banking Days preceding
the Reset Date. If such rate does not appear on the Telerate Page 3750
(or such other page that may replace it), the rate for that six (6)
month period will be determined by such alternate method as reasonably
selected by Bank.
(2) "Reserve Percentage" means the total of the maximum
reserve percentage as prescribed by the Board of Governors of the
Federal Reserve System for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency Liabilities
as defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(3) "Banking Day" shall mean a day other than a Saturday or
Sunday on which bank is open for business in California, New York and
London and dealing in offshore dollars. "London Banking Day" shall mean
a day on which Bank's London Branch is open for business and dealing in
offshore dollars.
Initially, interest will accrue at the rate of SEVEN AND FORTY-FOUR ONE
THOUSANDTHS PERCENT (7.044%) per year (the "Note Rate"). This initial interest
rate is based on the LIBOR Rate as defined above, even if the number of days
between the date the loan is advanced and the first Reset Date is greater than
or less than six (6) months. The interest rate will change every six (6) months
with changes in the LIBOR Rate.
B. MONTHLY INTEREST PAYMENTS. Interest shall be payable on the
-------------------------
first day of each month in arrears (the "Interest Payment").
C. PRINCIPAL PAYMENTS. Principal shall be due and payable in
------------------
semiannual installments of $623,333.33 each Reset Date, commencing with February
1, 1997. Borrower shall make a final payment of all remaining unpaid principal,
accrued interest and other sums due under this Note, due and payable on August
1, 2011 (the "Maturity Date").
D. INTEREST APPORTIONMENT AND PAYMENT ALLOCATION. The amount of
----------------------------------------------
each year's interest on the Note will be calculated on the basis of a 360-day
year and actual days elapsed, which results in more interest than if a 365-day
year were used. The payments will be applied first to accrued but unpaid
interest and then to principal.
E. NO LIMIT ON AMOUNT OF INTEREST OR PAYMENT CHANGES. There is no
-------------------------------------------------
limit on the amount that the interest rate or interest payments on this Note may
increase or decrease on any single Reset Date, or in the aggregate on all Reset
Dates throughout the life of the Loan.
F. NOTICE OF CHANGES. Bank will deliver to Borrower notice of any
-----------------
changes in the interest rate, but the effectiveness and date of such changes
shall not be affected by such notice or the lack thereof.
G. SPECIAL CIRCUMSTANCES. From time to time, the Bank may determine
that:
-1-
<PAGE>
(1) dollar deposits in the principal amount of the Loan, and for
the period between Reset Dates, are not available in the London inter-bank
market; or
(2) it is illegal for Bank to fund the Loan using dollar
deposits in the London inter-bank market; or
(3) the LIBOR Rate does not accurately reflect the cost of
funding the Loan.
If the Bank determines in its sole discretion that any such event has occurred
("Special Circumstances"), then at Bank's option the following provisions shall
apply:
(4) if Bank in its sole discretion determines that a
Special Circumstance would not exist if the interest rate were determined based
on an inter-bank market for U.S. dollars located outside the United States other
than the London inter-bank market, then such alternative market, selected by
Bank, shall be used.
(5) If subparagraph (4) does not apply, then the loan shall
bear interest at a rate per annum equal to Bank's Reference Rate. The Reference
Rate is the rate of interest publicly announced from time to time by Bank in San
Francisco, California, as its Reference Rate. The Reference Rate is set by Bank
based on various factors, including Bank's costs and desired return, general
economic conditions and other factors, and is used as a reference point for
pricing some loans. Bank may price loans to its customers at, above, or below
the Reference Rate. Any change in the Reference Rate shall take effect at the
opening of business on the day specified in the public announcement of a change
in Bank's Reference Rate.
3. PRINCIPAL PREPAYMENTS.
---------------------
A. Subject to the terms and conditions of this Section 3, Borrower
has the right to prepay principal in whole or in part on any Banking Day before
the Maturity Date in minimum amounts equal to or greater than five (5%) percent
of the face amount of this Note. All prepayments of principal on the Note shall
be applied to the most remote principal installment or installments then unpaid.
B. Borrower shall give Bank irrevocable written notice of
Borrower's intention to make the prepayment, which notice shall specify the date
and amount of the prepayment. The notice must be received by the Bank at least
five (5) Banking Days in advance of the prepayment.
C. Each prepayment of the Loan, whether voluntary, by reason of
acceleration or otherwise, shall be accompanied by the amount of all accrued
interest on the amount prepaid; and, if the prepayment is on a date other than a
Reset Date, a prepayment fee ("Prepayment Fee") equal to the amount (if any) by
which
(1) the additional interest which would have been payable on
the amount prepaid had it not been paid until the next Reset Date, exceeds
(2) the interest which would have been recoverable by Bank
byplacing the amount prepaid on deposit in the domestic certificate of deposit
market, the eurodollar deposit market, or other appropriate money market
selected by the Bank, for a period starting on the date on which it was prepaid
and ending on the next Reset Date.
4. BORROWER'S WAIVER OF PREPAYMENT RIGHT.
-------------------------------------
By its signature below, Borrower waives any right under California Civil
Code Section 2954.10 or otherwise to prepay the Loan, in whole or in part,
without a Prepayment Premium as described above. Borrower acknowledges that
prepayment of the Loan may result in Bank's incurring additional losses, costs,
expenses and liabilities, including, but not limited to, lost revenue and lost
profits. Borrower therefore agrees to pay the Prepayment Premium if any
principal amount is prepaid, whether voluntarily or by reason of acceleration,
including, but not limited to, acceleration upon any transfer or conveyance of
any right, title or interest in the Property giving Bank the right to accelerate
the maturity of this Note as provided in the Deed of Trust. Borrower agrees that
Bank's willingness to offer the interest rate described above to Borrower is
sufficient and independent consideration, given individual weight by the Bank,
for this waiver. Borrower understands that Bank would not offer such an interest
rate to Borrower absent this waiver.
FAILURE ANALYSIS ASSOCIATES, INC.
a Delaware corporation
By: /s/ Michael R. Gaulke
_________________________
Michael R. Gaulke
President
5. LATE PAYMENTS.
-------------
A. LATE CHARGE FOR OVERDUE PAYMENTS. If Bank has not received the
--------------------------------
full amount of any monthly payment by the end of ten (10) calendar days after
the date it is due, Borrower will pay a late charge to Bank in the amount of six
percent (6%) of the overdue payment. Borrower will pay this late charge only
once on any late payment.
B. DEFAULT RATE. From and after the Maturity Date, or such earlier
------------
date as all sums owing on this Note become due and payable by acceleration or
otherwise, all sums owing on this Note (including interest), at the option of
the Bank, shall bear interest from the date the payment becomes due until
Borrower repays in full, at three percentage (3%) points above the rate at which
interest would otherwise accrue under this Note. This may result in compounding
of interest.
6. MISCELLANEOUS.
A. PAYMENTS. All amounts payable under this Note are payable in
--------
lawful money of the United States. Checks constitute payment only when
collected.
B. JOINT AND SEVERAL. If more than one person or entity are signing
-----------------
this Note as Borrower, their obligations under this Note will be joint and
several.
C. LOAN AGREEMENT. This Note is subject to the terms and conditions
--------------
of the Loan Agreement, which, among other things, contains provisions for
acceleration of the maturity of this Note.
-2-
<PAGE>
D. GOVERNING LAW. This Note is governed by the laws of the State of
-------------
California. This Note may be executed in one or more counterparts, each of which
is, for all purposes deemed an original and all such counterparts taken
together, constitute one and the same instrument.
E. WAIVERS. If Bank delays in exercising or fails to exercise any
-------
of its rights under this Note, that delay or failure shall not constitute a
waiver of any of Bank's rights, or of any breach, default, or failure of
condition of or under this Note. No waiver by Bank of any of its rights, or of
any such breach, default or failure of condition shall be effective, unless the
waiver is expressly stated in a writing signed by the Bank.
F. ASSIGNMENT. This Note inures to and binds the heirs, legal
----------
representatives, successors and assigns of Borrower and Bank; provided, however,
that Borrower may not assign this Note or any Loan funds, or assign or delegate
any of its rights or obligations, without the prior written consent of Bank in
each instance. Bank, in its sole discretion, may transfer this Note, and may
sell or assign participations or other interests in all or part of the Loan, on
the terms and subject to the conditions of the loan documents, all without
notice to or the consent of Borrower.
G. CUMULATIVE REMEDIES. All of Bank's remedies in connection with
-------------------
this Note or under applicable law shall be cumulative, and Bank's exercise of
any one or more of those remedies shall not constitute an election of remedies.
IN WITNESS WHEREOF, Borrower has duly executed and delivered this Note to
Bank as of the date first above written.
Borrower:
FAILURE ANALYSIS ASSOCIATES, INC.
a Delaware corporation
By: /s/ Michael R. Gaulke
___________________________
Michael R. Gaulke
President
-3-
<PAGE>
EXHIBIT 11.1
THE FAILURE GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF
NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 3 December 29 December 30
1997 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares issued and
outstanding................................ 6,702 6,654 7,302
Common stock equivalents - options and
awards /1,2/............................... -- -- --
----- ----- -----
Weighted average number of common
shares before extraordinary item........... 6,702 6,654 7,302
===== ===== =====
Weighted average number of common
shares for extraordinary item and net
income (loss).............................. 6,663 6,554 7,302
----- ----- -----
Net Income (loss) before extraordinary item.. $ 7 $2,022 $1,120
===== ===== =====
Net Income (loss)............................ $(436) $2,022 $1,120
===== ===== =====
Net Income (loss) per share before
extraordinary item......................... $ 0.00 $ .30 $ .15
===== ===== =====
Net Income (loss) per share for
extraordinary item and net income (loss)... $(0.07) $ .30 $ .15
===== ===== =====
</TABLE>
/1/ The dilutive impact of options and awards determined using the fully-diluted
the dilutive impact represented in this statement determined using the
caulculation.
/2/ Calculated on the modified treasury stock method.
<PAGE>
EXHIBIT 13.1
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
12 MONTHS 12 MONTHS 12 MONTHS 7 MONTHS 12 MONTHS 12 MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1-03-97 12-29-95 12-31-94/1/ 12-31-93/2/ 5-28-93/3/ 5-29-92
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $58,665 $59,092 $59,202 $35,775 $65,367 $70,289
Expenses 58,658 57,070 58,082 39,106 62,735 65,810
Income (loss) before - extraordinary item 7 2,022 1,120 (3,331) 2,632 4,479
Extraordinary item (net of taxes of $301) (443) -- -- -- -- --
------------------------------------------------------------------------
Net income (loss) $ (436) $ 2,022 1,120 (3,331) 2,632 4,479
------------------------------------------------------------------------
Income (loss) per share
before extraordinary item $ 0.00 $ 0.30 $ 0.15 $ (0.43) $ 0.33 $ 0.56
------------------------------------------------------------------------
Net income (loss) per share $ (0.07) $ 0.30 $ 0.15 $ (0.43) $ 0.33 $ 0.56
------------------------------------------------------------------------
Weighted average number of common shares
before extraordinary item 6,702 6,654 7,302 7,784 7,940 7,998
========================================================================
Weighted average number of common shares
for extraordinary item and
net income (loss) 6,663 6,654 7,302 7,784 7,940 7,998
========================================================================
</TABLE>
<TABLE>
<CAPTION>
January 3, December 29, December 30, December 31, May 28, May 29,
1997 1995 1994 1993 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $37,558 $38,177 $34,314 $36,919 $39,520 $35,708
Total assets 80,578 77,708 75,054 83,309 89,191 84,887
Long term obligations, net of current
installments 18,505 18,905 19,305 19,478 19,558 19,549
Stockholders' equity 49,271 48,430 46,113 50,521 54,665 52,697
</TABLE>
/1/ includes a $333,000 reversal of provision for restructuring expenses
/2/ includes a $1,600,000 provision for restructuring expenses
/3/ includes a $1,500,000 provision for restructuring expenses.
1
<PAGE>
SUMMARY CONSOLIDATED
FINANCIAL DATA
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
12 months ended
- ---------------------------------------------------------------------------------------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30,
(PERCENTAGE OF REVENUES) 1997 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Professional fees 90.1% 88.3% 87.3%
Equipment fees and net billed expenses 8.9 10.5 10.9
Other revenue 1.0 1.2 1.8
---------------------------------------------
100.0 100.0 100.0
---------------------------------------------
Operating expenses
Professional compensation and related expenses 57.3 54.8 54.0
Other operating expenses 23.7 23.4 25.2
General and administrative expenses 16.5 16.4 17.0
Provision for restructuring expenses -- -- (0.6)
Impairment of long-lived assets 2.7 -- --
---------------------------------------------
100.2 94.6 95.6
---------------------------------------------
Operating income (loss) (0.2) 5.4 4.4
Other income (expense)
Interest expense, net (1.9) (1.7) (2.2)
Miscellaneous income (expense) 2.7 2.0 1.1
---------------------------------------------
Income before income taxes 0.6 5.7 3.3
Provision for income taxes 0.6 2.3 1.4
---------------------------------------------
Income before extraordinary item 0.0 3.4 1.9
---------------------------------------------
Extraordinary item (net of taxes of $301) (0.7) -- --
---------------------------------------------
Income (loss) (0.7)% 3.4% 1.9%
=============================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
BACKGROUND
The Company operates on a 52-53 week fiscal year, ending the Friday closest to
the last day of December. All references herein to prior years are relevant to
the comparable period in the prior years.
The Failure Group, Inc. ("FGI" and, together with its subsidiaries, the
"Company") is a multi-disciplinary organization providing engineering
consulting, scientific and litigation support services in addition to
epidemiological services. The accompanying consolidated financial statements
include the accounts of FGI and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Effective August 1, 1996, FGI acquired all of the assets and liabilities of
Environmental Health Strategies ("ERS"). The financial statements of EHS from
the date of acquisition are included in the Company's Consolidated Financial
Statements for the twelve months ended January 3, 1997.
The Company began operations in 1967. A substantial majority of its revenue is
derived from professional service activities, which are principally derived
under "time and expenses" and "fixed-fee" billing arrangements, and is
recognized as revenue 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 the fixed-fee arrangement with the client. Equipment fees and net
billed expenses 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 principally from photographic services. The Company's
principal expenses are professional compensation and related expenses.
The Company continues to experience a strong demand in various aspects of its
business including the thermal, civil engineering, biomechanics areas and from
EHS's epidemiological practice. This growth is offset by a reduced demand from
the testing done at the Company's test track in Phoenix and from a decline in
services provided to the nuclear utilities industry.
<PAGE>
CONSOLIDATED STATEMENTS
OF INCOME (LOSS)
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
12 MONTHS 12 MONTHS 12 MONTHS
ENDED ENDED ENDED
JANUARY 3, DECEMBER 29, DECEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Professional fees $52,857 $52,176 $51,687
Equipment fees and net billed expenses 5,236 6,179 6,436
Other revenue 572 737 1,079
---------------------------------------------
58,665 59,092 59,202
---------------------------------------------
Operating expenses
Professional compensation and related expenses 33,611 32,357 31,940
Other operating expenses 13,882 13,827 14,903
General and administrative expenses 9,720 9,698 10,072
Provision for restructuring expenses -- -- (333)
Impairment of long-lived assets 1,572 -- --
---------------------------------------------
58,785 55,882 56,582
---------------------------------------------
Operating income (loss) (120) 3,210 2,620
Other income (expense)
Interest expense, net (1,138) (1,001) (1,275)
Miscellaneous income, net 1,608 1,190 622
---------------------------------------------
Income before income taxes 350 3,399 1,967
Provision for income taxes 343 1,377 847
---------------------------------------------
Income before extraordinary item 7 2,022 1,120
Extraordinary item (net of taxes of $301) (443) -- --
---------------------------------------------
Net (loss) income $ (436) $ 2,022 $ 1,120
=============================================
Income per share before extraordinary item $ 0.00 $ 0.30 $ 0.15
=============================================
Extraordinary item per share $ (0.07) $ 0.00 $ 0.00
=============================================
Net (loss) income per share $ (0.07) $ 0.30 $ 0.15
=============================================
Weighted average number of common
shares before extraordinary item 6,702 6,654 7,302
=============================================
Weighted average number of common
shares or extraordinary item and
net (loss) income 6,663 6,654 7,302
=============================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 3, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
1995
Fiscal 1996 revenues of $58.7 million decreased slightly as compared to 1995
revenues of $59.1 million. The Company attributes the decline in revenues
principally to the slow down in the activity from the automotive industry,
including a decline in the use of the test track in our Phoenix facility. This
decrease was somewhat offset by the four month inclusion of EHS, which
contributed $864,000 in total revenues. Revenues include professional fees,
equipment fees, net billed expenses and other revenues. Professional fees
increased 1% to $52.9 million in 1996 compared to $52.2 million in 1995. This
increase was attributable to a 5% increase in the average hourly chargeable rate
to $124 in 1996 from $118 in 1995, offset by an 8% decrease in total client-
service hours provided to 427,000 in 1996 from 462,000 in 1995. Equipment fees
and net billed expenses declined 15% to $5.2 million in 1996 from $6.2 million
in 1995. This decrease resulted from a decline in the usage of the Company's
computer and database services provided to the Company's clients as well as the
aforementioned decline in usage of the Phoenix test track. Other revenues
decreased 22% to $572,000 in 1996 from $737,000 in 1995, as a result of higher
commission from software sales in the previous year from our Poland office.
The Company will strive to grow revenues through continued recruitment of new
personnel for selected practice areas, increase marketing efforts and ongoing
exploration of potential acquisition opportunities, yet there is no assurance
such revenues growth can be achieved.
Professional compensation and related expenses, which have a direct correlation
with employees' involvement in the Company's professional practices, increased
4% to $33.6 million in 1996 compared to $32.4 million in 1995. This increase was
a result of a small increase in compensation to the professional staff, the
inclusion of EHS compensation totaling $406,000, and the accrual of an extra
week of salaries due to the 1996 fiscal year operating on a 53 week calendar
year. As a percentage of total revenue, professional compensation and related
expenses increased to 57.3% in 1996 from 54.8% in 1995.
Other operating expenses increased 0.4% to $13.9 million in 1996 from $13.8
million in 1995. This increase was due primarily to an increase in accounts
receivable bad debt expense, offset by decreases in depreciation expense and
computer expenses as a result of converting to a new accounting software system.
Other operating expenses as a percentage of total revenue increased to 23.7% in
1996 from 23.4% in 1995.
General and administrative expenses remained constant at $9.7 million for 1996
and 1995. Although recruiting and professional development expenses increased,
partially from the inclusion of EHS expenses, this increase was partially offset
by decreases in administrative compensation and non-chargeable outside
consulting services. As a percentage of revenues, general and administrative
expenses were 16.6% and 16.4% for 1996 and 1995, respectively.
The Company determined that the goodwill associated with the purchase of PLG
became impaired in fiscal 1996, and therefore wrote-off the $1.6 million
balance.
Other income/expense consists of interest expense on the Company's mortgage, net
of interest income earned on the investment of available cash and rental income
derived from leasing certain portions of its owned facilities to tenants. Net
other income/expense increased 148% to $470,000 in 1996 compared to $189,000 in
1995, primarily due to increased rental income, higher returns on investments
and lower interest expense as a result of refinancing the mortgage note on the
Company's headquarters building. (See "Commitments" under Note 8 of Notes to
Consolidated Financial Statements.)
6
<PAGE>
The Company's provision for income taxes from continuing operations for 1996 is
98%. The increased tax rate is primarily attributed to the $1.6 million
write-off of PLG goodwill and organization costs during 1996. For 1995, the
Company's provision for income taxes was calculated by applying an aggregate
federal and state tax rate of 40.5%. (See "Income Taxes" under Note 5 of Notes
to Consolidated Financial Statements.)
In June 1996, the Company committed to refinance its building mortgage which
held a 10.75% fixed rate note, amortized on a 30-year basis with the balance due
in 1999, to a new note in the amount of $18.7 million, having a 15-year term
with a floating rate tied to LIBOR. This rate is subject to adjustment every six
months. The new loan became effective August 1, 1996. The Company recorded the
tax-effected prepayment charge of $443,000 for the refinancing as an
extraordinary item in the Statement of Income.
FISCAL YEAR ENDED DECEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1994.
1995 revenues remained almost constant at $59.1 million as compared to $59.2
million in 1994. The Company attributed the decline in revenues principally to
the absence of large projects in the last half of the year. Professional fees
increased 1.0% to $52.2 million in 1995 compared to $51.7 million in 1994. This
increase was attributable to a 2.0% increase in the average hourly chargeable
rate to $118 in 1995 from $116 in 1994, offset by a 1.0% decrease in total
client-service hours provided to 462,000 in 1995 from 465,000 in 1994. Equipment
fees and net billed expenses declined 4.0% to $6.2 million in 1995 from $6.4
million in 1994. This decrease resulted from a decline in the usage of the
Company's computer and database services provided to the Company's clients.
Other revenues decreased 31.7% to $737,000 in 1995 from $1.1 million in 1994 as
a result of reduced photographic services.
Professional compensation and related expenses increased 1.3% to $32.4 million
in 1995 compared to $32.0 million in 1994. This increase was a result of
increased compensation to the professional staff plus, the re-instatement of
over-time for the Company's non-management consulting staff. This increase was
offset by lower fringe benefit expenses. As a percentage of total revenue,
professional compensation and related expenses increased to 54.8% in 1995 from
54.0% in 1994.
Other operating expenses decreased 7.2% to $13.8 million in 1995 from $14.9
million in 1994. This decrease was due primarily to a substantial reduction in
accounts receivable bad debt expense as a result of increased efforts to collect
aging receivables, a decrease in the purchase of technical materials resulting
from a reduction in research and reference material, and a decrease in
depreciation expense due to the retirement of assets in 1994, which were
considered obsolete. Other operating expenses, as a percentage of total revenue,
decreased to 23.4% in 1995 from 25.2% in 1994.
General and administrative expenses decreased 3.7% to $9.7 million in 1995 from
$10.1 million in 1994. This reduction was attributable to decreased spending in
legal services, general liability insurance, business development expenses as
well as the Company lowering reserve levels for contingent liabilities. As a
percentage of revenues, general and administrative expenses were 16.4% and 17.0%
for 1995 and 1994, respectively.
Net other income/expense increased 128.9% to $189,000 in net income from
$653,000 of expense in 1994, primarily due to increased rental income and higher
returns of investments. (See "Commitments" under Note 8 of Notes to Consolidated
Financial Statements.)
The Company's provision for income taxes has been calculated by applying an
aggregate federal and state tax rate of 40.5% and 43.0 % to income before taxes
in 1995, and 1994, respectively. (See "Income Taxes" under Note 5 of Notes to
Consolidated Financial Statements.)
7
<PAGE>
QUARTERLY OPERATING
RESULTS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 (Unaudited)
12 MONTHS ENDED JANUARY 3, 1997
- -------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(In thousands, except per share data) QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $15,011 $15,904 $14,114 $13,636
Operating income 1,049 1,545 627 (3,341)
Income (loss) before income taxes 1,085 1,590 664 (2,989)
---------------------------------------
Income (loss) before extraordinary item 646 946 395 (1,980)
Extraordinary item (net of taxes of $301) -- (443) -- --
Net income (loss) $ 646 $ 503 $ 395 $(1,980)
Income (loss) per share before extraordinary item $ .10 $ .14 $ .06 $ (.29)
Extraordinary item per share -- (.07) -- --
Net income (loss) per share $ .10 $ .08 $ .06 $ (.29)
---------------------------------------
Weighted average number of common shares 6,633 6,618 6,720 6,729
---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995 (Unaudited)
12 MONTHS ENDED DECEMBER 29, 1995
- -------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(In thousands, except per share data) QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $15,152 $15,988 $14,451 $13,501
Operating income 805 1,123 1,033 249
Income before income taxes 824 1,153 1,011 411
---------------------------------------
Net income $ 490 $ 686 $ 602 $ 244
Net income per share $ .07 $ .10 $ .09 $ .04
---------------------------------------
Weighted average number of common shares 6,596 6,584 6,642 6,669
---------------------------------------
</TABLE>
Quarterly Operating Results 1996-1995
The Company's results of operations may fluctuate significantly from quarter to
quarter. Revenues are generated from services provided in response to client
requests or events that occur without notice, and the Company's engagements can
generally be terminated at any time by clients.
Revenues and operating margins for any particular quarter are generally affected
by staffing mix, resource requirements and timing and size of engagements, and
the results for any particular quarter are not necessarily indicative of results
for any future period. Quarterly results of operations for 1996 and the prior
fiscal year are summarized above
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
THE FAILURE GROUP, INC. AND SUBSIDIARIES
The Company has financed its business principally through cash flows from
operating activities, periodic borrowings and sales of shares of common stock.
The Company's primary source of cash flows from operating activities is the
collection of its accounts receivable, which represented 115 days of revenue at
January 3, 1997 and 111 days of revenue at December 29, 1995. This 4% increase
in accounts receivable days outstanding ("DSO") is primarily due to the aging of
some receivables which are delayed due to approval process by our clients or the
beneficial party.
Net cash provided by operating activities was $4.4 million for the year ended
1996 as compared to $7.6 million for the year ended 1995. This decrease in
operating cash flows in 1996 as compared to the prior year was due principally
to an increase in gross accounts receivable, higher tax payments as a result of
higher net income in the prior years.
Net cash used by investing activities was $6.9 million for the year ended
January 3, 1997 as compared to $2.7 million for the year ended December 29,
1995. This increase, over the prior year, in net cash used by investing
activities was due to the reinvestment of earned income and additional
investment of excess cash to our investment portfolio, an increase in net
capital expenditures related to building and leasehold improvements, the
acquisition of EHS and contingent payments made to officers of PLG.
Net cash used by financing activities decreased to $468,000 in 1996 as compared
to $498,000 in 1995. Decreases in cash used by financing activities over the
comparable period resulted from the Company's increase from borrowings as a
result of the refinancing of the Company's fixed-rate mortgage, offset by the
repurchase of 176,700 shares of common stock in 1996 compared to 92,500 in 1995,
and a prepayment charge of $443,000 (net of taxes) for the refinancing of the
building which was classified as an extraordinary item in the Statements of
Income (Loss).
On October 20, 1995, the Board of Directors authorized a third repurchase
program, whereby up to $2,000,000 worth of the Company's common stock may be
repurchased in the open market. By January 3, 1997, 199,000 shares had been
repurchased. Additionally, during 1996, the Company issued 33,452 treasury
shares pursuant to the terms of its Employee Stock Purchase Plan. During 1996,
the Board of Directors voted to eliminate their restricted stock plan to assist
with the cost cutting measures of the Company.
The Company is currently appealing a proposed tax assessment primarily related
to the deferral of unbilled work-in-process from federal taxable income. The
Company deposited $1.8 million in 1995 towards the tax assessment until the
matter is resolved. The Company believes at this time that the resolution of
this issue will not have a significant impact on the operations of the Company.
At January 3, 1997, the Company had $4.5 million in cash balances, $20.3 million
in short-term investments and a $10 million line of credit agreement which
expires in 1997 and is renewable annually. During fiscal year 1996, no amounts
were drawn against the line of credit. The Company's long-term obligations at
January 3, 1997, consisted primarily of a mortgage obligation for the Company's
office facility in Menlo Park amounting to $18.7 million with maturity in
October 2011, which consists of fixed semi-annual principal payments and monthly
interest payments based on an adjustable interest rate. Management believes that
its existing cash and short-term investment balances, together with its existing
line of credit 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.
9
<PAGE>
CONSOLIDATED
BALANCE SHEETS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 29,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1997 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,465 $ 7,401
Short-term investments 20,271 17,109
Accounts receivable, net of allowance for doubtful
accounts of $1,500 at January 3, 1997 and
December 29, 1995 19,710 18,919
Prepaid expenses 4,111 3,601
Deferred tax asset 816 --
----------------------------
Total current assets 49,373 47,030
----------------------------
Property, equipment and leasehold improvements, net 28,789 29,083
Other assets 2,416 1,595
----------------------------
$80,578 $77,708
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,047 $ 3,215
Current installments of long-term obligations 1,250 222
Accrued payroll and employee benefits 5,590 4,808
Income taxes payable 928 158
Deferred income taxes -- 450
----------------------------
Total current liabilities 11,815 8,853
----------------------------
Long-term obligations, net of current installments 18,505 18,905
Deferred income taxes 987 1,520
----------------------------
Total long-term liabilities $19,492 $20,425
----------------------------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; no shares outstanding -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 7,902,496 shares issued and outstanding
at January 3, 1997 and December 29, 1995 8 8
Additional paid in capital 33,013 32,538
Net unrealized gain (loss) on investments 56 (74)
Retained earnings 21,644 22,080
Treasury shares, at cost; 1,096,659 and 1,265,105 shares
at January 3, 1997 and December 29, 1995 (5,450) (6,122)
----------------------------
Total stockholders' equity 49,271 48,430
----------------------------
$80,578 $77,708
============================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Unrealized
COMMON STOCK Additional Gain (Loss) TREASURY
------------------ Paid-in on Retained -----------------------
(In thousands, except share data) Shares Amount Capital Investments Earnings Shares Amount Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 3l, 1993 7,902,496 8 32,428 -- 19,263 (186,115) (1,178) 50,521
Sale of stock pursuant to
employee benefit plans -- -- -- -- (133) 38,922 294 161
Cancellation of stock -- -- -- -- 8 (5,000) (39) (31)
Issuance of stock to
directors -- -- (2) -- (60) 20,000 150 88
Net unrealized loss
on investments -- -- -- (428) -- -- -- (428)
Purchase of treasury shares -- -- -- -- -- (1,116,075) (5,387) (5,387)
Translation adjustment -- -- 69 -- -- -- -- 69
Net income -- -- -- -- 1,120 -- -- 1,120
---------------------------------------------------------------------------------------------------
Balance at December 30, 1994 7,902,496 8 32,495 (428) 20,198 (1,248,268) (6,160) 46,113
Sale of stock pursuant to
employee benefit plans -- -- 11 -- (140) 42,538 296 167
Issuance of stock to
directors -- -- 11 -- -- 20,000 95 106
Net unrealized gain
on investments -- -- -- 354 -- -- -- 354
Purchase of treasury shares -- -- -- -- -- (92,500) (451) (451)
Stock options exercised -- -- -- -- -- 13,125 98 98
Translation adjustment -- -- 21 -- -- -- -- 21
Net income -- -- -- -- 2,022 -- -- 2,022
---------------------------------------------------------------------------------------------------
Balance at December 29, 1995 7,902,496 8 32,538 (74) 22,080 (1,265,105) (6,122) 48,430
Sale of stock pursuant to
employee benefit plans -- -- 10 -- -- 33,452 162 172
Issuance of stock to
directors -- -- 92 -- -- -- -- 92
Acquisition of EHS
(Note 12) -- -- 401 -- -- 283,742 1,399 1,800
Net unrealized gain
on investments -- -- -- 130 -- -- -- 130
Purchase of treasury shares -- -- -- -- -- (176,748) (1,024) (1,024)
Stock options exercised -- -- -- -- -- 28,000 135 135
Translation adjustment -- -- (28) -- -- -- -- (28)
Net loss -- -- -- -- (436) -- -- (436)
---------------------------------------------------------------------------------------------------
Balance at January 3,1997 7,902,496 $ 8 $33,013 $ 56 $21,644 (1,096,659) $(5,450) $49,271
===================================================================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements
<PAGE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
12 months 12 months 12 months
ended ended ended
January 3, December 29, December 30,
(In thousands) 1997 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Income (loss) $ (436) $ 2,022 $ 1,120
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,557 3,516 3,667
Extraordinary item, net of retirement of debt (net of $301) taxes 443 -
Provision for doubtful accounts 2,077 3,435 3,654
Impairment of long-lived assets 1,572
Change in deferred income taxes (1,799) 750 (239)
Provision for restructuring expenses - - (333)
Issuance of stock to directors - 95 90
Changes in operating assets and liabilities:
Accounts receivable (2,868) (218) (3,334)
Prepaid expenses (510) (2,171) 496
Accounts payable and accrued liabilities 832 170 (1,750)
Accrued payroll and employee benefits 782 621 (1,138)
Income tax payable 770 (620) 778
------------------------------------------
Net cash provided by operating activities 4,420 7,600 3,011
------------------------------------------
Cash flows from investing activities
Purchases of short-term investments (10,394) (20,233) (9,571)
Sales of short-term investments 7,362 19,186 6,757
Acquisition of PLG, Inc., and contingency payments,
net of cash acquired (501) (198) (500)
Acquisition of EHS, Inc., net of cash acquired (250) -
Capital expenditures (2,971) (1,390) (1,177)
Other assets (134) (42) 119
------------------------------------------
Net cash used by investing activities (6,888) (2,677) (2,372)
------------------------------------------
Cash flows from financing activities
Proceeds from borrowings and issuance 19,311 3 20
of long-term obligations
Repayments of borrowings and long-term obligations (19,126) (347) (233)
Repurchases of common stock (1,024) (451) (5,418)
Net issuance and retirements of common stock 371 297 228
------------------------------------------
Net cash used by financing activities (468) (498) (5,403)
------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,936) 4,425 (4,764)
Cash and cash equivalents at beginning of year 7,401 2,976 7,740
------------------------------------------
Cash and cash equivalents at end of year $ 4,465 $ 7,401 $ 2,976
==========================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Failure Group, Inc. ("FGI" and, together with its subsidiaries, the
"Company") is a multi-disciplinary organization devoted to the investigation,
analysis and prevention of failures of an engineering and scientific nature in
addition to offering epidemiological services. The accompanying Consolidated
Financial Statements include the accounts of FGI and its wholly-owned
subsidiaries. All significant inter-company transactions and balances have been
eliminated in consolidation.
The Company operates on a 52-53 week fiscal calendar year with each year ending
on the Friday closest to December 31st.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company derives most of its revenues from professional service activities.
The majority of these services are provided on the basis of time and expenses,
fixed-fee and cost plus fixed-fee engagements and the related revenues are
recorded as services are provided. Provision for estimated losses on engagements
is made during the period in which the loss becomes probable and can be
reasonably estimated. The Company reports revenue net of reimbursable expenses
which are billed to and collected from clients. Reimbursable expenses were
approximately $6,946,000, $7,745,000 and $8,210,000 in fiscal 1996, 1995 and
1994, respectively.
Equipment fees and billed expenses consist principally of fees charged to
clients for the use of the Company's equipment and facilities in connection with
services provided. Other revenue is derived principally from photographic
service activities. Revenue from these activities is recorded as products are
delivered or services are provided.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments such as money market
mutual funds and commercial paper with original maturities of three months or
less.
SHORT-TERM INVESTMENTS
Short-term investments consist of direct obligations of high-quality,
fixed-income corporate and municipal securities. Management believes that there
is no concentration of risk in the short-term investment portfolio which would
expose a risk of material loss to the Company.
The Company's securities are classified as "available-for-sale" and are carried
at fair market value, with the unrealized gains and losses from changes in
market value reported as a separate component of stockholders' equity.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation or amortization. Depreciation and amortization are
computed using the straight-line method. Buildings are depreciated over their
estimated useful lives ranging from 30 to 40 years. Equipment is depreciated
over its estimated useful life, which generally ranges from two to seven years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives, generally seven years, or over the term of the related lease.
13
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
THE FAILURE GROUP, INC. AND SUBSIDIARIES
Effective December 30, 1995 the Company adopted SFAS No. 121 which requires
long-lived assets to be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. There are no assets that are considered impaired. The effective of
adoption is not material.
GOODWILL
Goodwill in a business combination accounted for as a purchase is the excess of
the fair market value of the consideration given over the fair market value of
the net assets acquired. Goodwill arising from the purchase of the Company's PLG
subsidiary was approximately $2.0 million, which was being amortized using the
straight-line method over a 10-year period, beginning in June of 1993. Goodwill
arising from the purchase of the Company's EHS subsidiary was approximately $2.0
million, which is being amortized using the straight-line method over a 7 year
period, beginning August of 1996. During the fourth quarter of 1996, the Company
determined that the goodwill arising from the PLG acquisition had been
permanently impaired and wrote-off the unamortized balance of $1.6 million.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statement tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactment of changes in tax laws or rates.
WEIGHTED AVERAGE SHARES
Net income (loss) per share is computed using the weighted average of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares include the dilutive effect of stock options and contingently
issuable shares using the modified treasury stock method for all periods
presented.
STOCK BASE COMPENSATION
The Company uses the intrinsic value method to account for all of its employee
stock-based compensation plans.
NOTE 2: SHORT-TERM INVESTMENTS
At January 3, 1997, available-for-sale securities consisted of the following:
<TABLE>
<CAPTION>
Amortized Accrued Unrealized Unrealized Fair Market
(In thousands) Cost Interest Gains Losses Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Municipal bonds $19,998 $217 $68 $(13) $20,271
----------------------------------------------------------------
$19,998 $217 $68 $(13) $20,271
================================================================
</TABLE>
At December 29, 1995, available-for-sale securities consisted of the following:
<TABLE>
<CAPTION>
Amortized Accrued Unrealized Unrealized Fair Market
(In thousands) Cost Interest Gains Losses Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Municipal bonds $15,693 $246 $31 $ (59) $15,911
Asset-backed securities 1,232 12 - (46) 1,198
----------------------------------------------------------------
$16,925 $258 $31 $(105) $17,109
================================================================
</TABLE>
The cost and estimated fair value of available-for-sale securities at January 3,
1997 by contractual maturity consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1997 DECEMBER 29, 1995
-----------------------------------------------------------------
Amortized Fair Market Amortized Fair Market
(In thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,825 $ 5,873 $ 239 $ 231
Due in one to five years 14,173 14,398 13,157 13,362
Thereafter -- -- 2,307 2,318
-----------------------------------------------------------------
19,998 20,271 15,693 15,911
Asset-backed securities -- -- 1,262 1,198
-----------------------------------------------------------------
$19,998 $20,271 $16,925 $17,109
=================================================================
</TABLE>
<PAGE>
NOTE 3: PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Property:
Land $ 5,450 $ 5,450
Buildings 25,070 24,353
Test and Engineering Center 1,068 1,068
Construction in progress 248 100
Equipment:
Computer equipment and purchased software 13,428 14,807
Office furniture and equipment 4,956 5,035
Laboratory equipment and vehicles 6,377 6,267
Leasehold improvements 2,633 2,412
--------------------
59,230 59,492
Less accumulated depreciation and amortization 30,441 30,409
--------------------
Property, equipment and leasehold improvements, net $28,789 $29,083
====================
</TABLE>
The Test and Engineering Center is constructed on leased land. A portion of the
property is subject to a special land-use permit which expires in 1998; the
remaining portion of the property is subject to a lease which expires in
January, 2010.
NOTE 4: LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ------------------------------------------------
<S> <C> <C>
Mortgage note $18,700 $18,652
Other 1,055 475
------- -------
19,755 19,127
Less current installments 1,250 222
------- -------
Long term obligations,
net of current portion $18,505 $18,905
======= =======
</TABLE>
Effective August 1, 1996, the Company refinanced its $18.8 million, 30-year
fixed rate note of 10.75%, which consisted of periodic payments maturing in
December 1999. The new note of $18.7 million, has a 15-year life that bears a
floating rate of interest tied to LIBOR, and is subject to adjustment every six
months. The current rate on this note is approximately 7%.
In the first quarter of 1996, the Company renewed its $10,000,000 unsecured line
of credit agreement. This agreement expires in May 1997, at which time the
Company plans to renew the line of credit. The mortgage note and line of credit
contain restrictive covenants regarding the maintenance of certain compensating
cash balances, balance sheet ratios and cash flow performance. There were no
borrowings against the line of credit in 1996. Principal payments due on long-
term obligations are $1,250,000, $1,313,000, $1,726,000, $1,373,000 in 1997
through 2000, respectively, and $14,093,000 thereafter.
NOTE 5: INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(In thousands) Federal State Total
- -----------------------------------------------------
<S> <C> <C> <C>
January 3, 1997
Current $ 1,375 $ 466 $ 1,841
Deferred $(1,430) (369) (1,799)
---------------------------
Total $ (55) $ 97 $ 42
---------------------------
December 29, 1995
Current $ 482 $ 145 $ 627
Deferred 593 157 750
---------------------------
Total $ 1,075 $ 302 $ 1,377
---------------------------
December 1994
Current $ 820 $ 266 $ 1,086
Deferred (165) (74) (239)
---------------------------
Total $ 655 $ 192 $ 847
===========================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The provision for income taxes from continuing operations for the year ending
January 3, 1997 differs from the tax expense calculated at the applicable
statutory rate of 34% as follows:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------
<S> <C>
Tax at federal statutory rate of 34% $ 119
State taxes 21
Amortization and write-off of PLG's
goodwill non-deductible for tax 788
Tax exempt interest (585)
-----
Tax expense from continuing operations $ 343
=====
</TABLE>
The provision for income taxes for the years ending December 29, 1995 and
December 30, 1994 differs from the tax expense calculated at the applicable
federal rate of 34% primarily due to the provision for state taxes, net of
federal benefit.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 3, 1997 and
December 29, 1995, are presented below.
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State taxes $ 147 $ 193
Compensated absences 535 478
Accrued expenses 989 982
Other 156 224
------------------
Total deferred tax asset 1,827 1,877
------------------
Deferred tax liabilities:
Work-in-progress (838) (2,186)
Plant and equipment (1,143) (1,519)
Change to the accrual method
of accounting for tax reporting
purposes for purchased entity -- (142)
Other (17) --
------------------
Total deferred tax liabilities (1,998) (3,847)
------------------
Net deferred tax liability $ (171) $(1,970)
==================
</TABLE>
NOTE 6: STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority to issue up to 2,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of the shares, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences. There
are no shares of preferred stock outstanding.
STOCK OPTION PLANS
The Company has a stock option plan (the "Plan") covering up to an aggregate of
1,550,000 shares of common stock. The Plan provides for the grant of incentive
stock options, exercisable at a price equal to the fair market value of the
shares at the date of grant, or non-qualified options, exercisable at a price
not less than 85% of the fair market value of the shares at the date of grant.
Options are granted for terms of up to ten years and generally vest ratably over
a four-year period from the grant date. 945,958 and 712,412 shares were vested
as of January 3, 1997 and December 29, 1995. In addition, the Company has a
stock plan for an officer covering up to 119,000 shares of common stock, all of
which have been granted.
The Company applies Accounting Principles Boards ("APB") Opinion No. 25 in
accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the
<PAGE>
<TABLE>
<CAPTION>
Weighted
Options Average
Options Price Number Available Exercise
per Share of Shares for Grant Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of December 30, 1994 $2.49-$10.25 1,386,232 359,199 $5.89
Options granted $4.38-$ 5.88 65,000 (65,000) 5.13
Options cancelled $4.75-$10.25 (96,173) 96,173 6.06
Options exercised $4.38-$ 5.00 (13,125) -- 4.77
--------------------------------------------------------------------------
Balance as of December 29, 1995 $2.49-$10.25 1,341,934 390,372 $5.85
Options granted $5.50-$ 6.38 173,000 (173,000) 5.83
Options cancelled $4.38-$ 7.13 (45,975) 45,975 5.72
Options exercised $4.38-$ 5.00 (28,000) -- 4.78
--------------------------------------------------------------------------
Balance as of January 03, 1997 $2.49-$10.25 1,440,459 263,347 $5.89
==========================================================================
</TABLE>
The weighted average fair value of options granted during 1996 and 1995,
determined using the Black-Scholes method, was $4.05 and $3.55, respectively.
Information regarding options outstanding summarized below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- -----------------------------------
Number Weighted- Weighted- Number Weighted-
Range of Outstanding Average Average Exercisable Average
Exercise at January Remaining Exercise at January Exercise
Price 3, 1997 Contractual Price 3, 1997 Price
- --------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
$2.49-$4.50 40,760 3.88 $ 2.97 35,260 $ 2.77
$4.75 475,500 7.47 $ 4.75 229,500 $ 4.75
$4.81-$6.00 257,125 7.87 $ 5.45 104,124 $ 5.43
$6.13-$7.13 457,726 6.33 $ 6.90 369,726 $ 7.08
$7.13-$9.22 206,148 4.69 $ 7.30 203,649 $ 7.29
$10.25 3,700 4.64 $10.25 3,700 $10.25
</TABLE>
In 1991, two non-employee directors were granted non-qualified options to
purchase 18,000 shares each of common stock and two non-employee directors were
granted non-qualified options to purchase 24,000 shares each of common stock.
During 1993, each outside director accepted an offer to cancel their existing
option grants in exchange for a re-priced option grant for the same number of
shares. All such options had exercise prices equal to market value, which was
$7.13 and $8.00 on the dates of grant and vest at the rate of 6,000 shares per
year.
The fair value of options granted in 1996 and 1995 on the date of grant was
determined using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1996-expected dividend yield 0%, risk-free
interest rate of 6.8%, volatility rate of .72 and an expected life of 6 years;
1995 expected dividend yield 0%, risk-free interest rate of 6.8%, a volatility
rate of .72, and an expected life of 6 years.
EMPLOYEE STOCK PURCHASE PLAN
Effective February 29, 1992, the Board of Directors approved an employee stock
purchase plan. Up to an aggregate of 400,000 common shares may be sold under the
plan. Eligible employees may purchase shares on a quarterly basis, at a price
equal to 90% of the lower of the fair market value of the common stock at the
beginning or end of the applicable quarter. As of January 3, 1997, 173,775
shares had been sold under the plan.
Had the Company determined compensation cost based on the fair market value at
the grant date for its stock options under SFAS No. 123, the Company's net
income (loss) would have been adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $ (436) $2,022
Pro forma $ (636) $1,931
Earnings per share As reported $(0.07) $ .30
Pro forma $(0.10) $ .30
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FAIR VALUE INFORMATION
On the date of grant using the Black Scholes option-pricing model the following
weighted-average assumptions are: 1996 expected dividend yield 0%, risk-free
interest rate of 5.6%, a volatility rate of .79 and an expected life of 4
quarters; 1995 expected dividend yield 0%, risk-free interest rate of 5.74%, a
volatility rate of .79 and an expected life of 4 quarters. Pro forma net income
reflects only options granted in 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options and purchase plan is not
reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period of 10 years and
compensation cost for options granted prior to December 29, 1995 is not
considered.
RESTRICTED STOCK PLAN
In March 1991, the Board of Directors approved a restricted stock plan for key
employees and directors. Up to an aggregate of 200,000 common shares have been
reserved for grant under the plan. Under the terms of the plan, shares of common
stock may be granted to key employees. Each non-employee member of the Board of
Directors receives annually, on September 30 of the same year, an award of
restricted shares that is determined by dividing $75,000 by the closing price of
the common stock on the date of each such meeting, not to exceed a maximum of
5,000 shares. Through January 3, 1997, 100,000 restricted shares have been
granted under this plan, of which 50,000 shares have vested. This plan was
terminated as of October 24, 1996 by the Board of Directors.
NOTE 7: PENSION PLAN
The Company has a defined contribution retirement plan covering all salaried
employees of at least 21 years of age. Contribution expense related to this plan
was $1,745,000 and $1,623,000, in 1996 and 1995, respectively.
NOTE 8: COMMITMENTS
The following is a summary of the future minimum payments net of rental income,
required under non-cancelable leases, with terms in excess of one yar as of
January 3, 1997.
YEAR ENDING LEASE RENTAL NET FUTURE
(IN THOUSANDS) COMMITMENTS INCOME PAYMENTS
- --------------------------------------------------------------------------
1997 $ 1,980 $(1,198) $ 782
1998 1,361 (1,181) 180
1999 961 (618) 343
2000 682 (618) 64
2001 573 -- 573
Thereafter 4,516 -- 4,516
-------------------------------------------------
$10,073 $(3,615) $6,458
=================================================
Several of the non-cancelable operating leases for property contain escalation
clauses related to the Consumer Price Index. Total rent expense in 1996, 1995
and 1994 was $1,579,000, $1,658,000 and $1,608,000 respectively.
The Company is currently appealing a proposed tax assessment primarily related
to the deferral of unbilled work-in-process from federal taxable income. The
Company is protesting the assessment and has requested a hearing with an
appellate officer of the Internal Revenue Service. In 1995, the Company paid
$1.8 million towards the tax assessment to stop the accrual of interest until
the matter is resolved. Currently the Company does not anticipate that
resolution of this issue will have a significant impact on their financial
statement earnings of the Company.
NOTE 9: CLIENT AND INDUSTRY CREDIT RISK
The Company serves its clients in various segments of the economy. During 1996,
the Company provided services, representing approximately 38% of revenues, to
clients and to organizations and insurers acting on behalf of clients in the
transportation industry.
Revenues of approximately $6,886,000 and $10,850,000 in 1996 and 1995,
respectively, were earned on engagements for one client or for organizations
insuring or providing services to such client. As of January 3, 1997 and
December 29, 1995, accounts receivable included $1,400,000 and $2,709,000
respectively, related to this client.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: PROVISION FOR RESTRUCTURING EXPENSES
During the three-month period ended December 30, 1994, the Company reversed
$333,000 of the $1.6 million restructuring recorded during the year ending
December 31, 1993. The reversal is primarily due to actual costs to eliminate
certain offices being less than initially estimated. The restructuring activity
for the year ended December 30, 1994, is as follows:
DECEMBER 31, CHANGE BALANCE AT
1993 CASH WRITE- IN DECEMBER 30,
(IN THOUSANDS) PROVISION PAYMENTS OFFS ESTIMATE 1994
- -----------------------------------------------------------------------------
Employee
termination
payments $190 $(129) $ -- $ (61) $ --
Lease termination
payments 431 (372) -- (59) --
Write-off of
operating assets
as a result of
restructuring
plan 130 -- (214) 84 --
Write-down of
operating assets
to be placed in
different use 380 -- (339) (41) --
Provision for losses
on accounts
receivable with
foreign office
closure 200 -- (46) (154) --
Other 269 -- (167) (102) --
---------------------------------------------------
Total
restructuring
charge $1,600 $(501) $(766) $(333) $ --
===================================================
NOTE 11: ACQUISITIONS
On August 1, 1996, the Company acquired all the stock of Environmental Health
Strategies, Inc. ("EHS") for a combination of cash and stock. The acquisition
has been accounted for as a purchase and, accordingly, the purchase price has
been allocated to the net assets acquired based on the estimated fair market
value at the date of acquisition. Of the total purchase price of $2.1 million,
approximately $2.0 million has been recorded as goodwill, which reflects the
excess of the purchase price of the fair value of the net assets acquired. The
goodwill is being amortized using the straight-line method over seven years. The
acquisition also considers future payment of either cash or stock, based upon
the performance of EHS. The amounts of these payments cannot be determined until
such performance occurs. Should EHS meet the performance requirements,
contingent payments will be recorded as compensation expense. EHS provides
epidemiological advice and services on a wide variety of topics including
occupational and environmental health, pharmaceutical and medical device issues
and health-related consumer product safety. Pro forma disclosures giving effect
to the acquisition of EHS have been omitted since such pro forma results of
operations do not differ materially from the Company's historical results.
On January 4, 1997, the Company acquired all the stock of Broadcast
Communications Systems, Inc. ("BCS") for $375,000 in cash. BCS was a privately
held firm specializing in the design, installation and maintenance of wireless
communications networks. They are based in the greater Madison Wisconsin area
and have erected communications towers and provided related training and
technical services for the telecommunications industry since 1981. The goodwill
related to the purchase will be amortized using the straight-line method over
seven years. Pro forma disclosures giving effect to the acquisition of EHS have
been omitted since such pro forma results of operations do not differ materially
from the Company's historical results.
NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental disclosure of cash flow information:
12 MONTHS 12 MONTHS
ENDED ENDED
JANUARY 3, DECEMBER 29,
(IN THOUSANDS) 1997 1995
- -----------------------------------------------------------------------------
Cash paid during the year:
Interest, net $2,156 $2,067
===================================
Income taxes 1,054 1,112
===================================
19
<PAGE>
AUDITOR'S REPORT/
QUARTERLY STOCK DATA
THE BOARD OF DIRECTORS AND STOCKHOLDERS
THE FAILURE GROUP, INC
We have audited the accompanying consolidated balance sheets of The Failure
Group, Inc. and subsidiaries as of January 3, 1997 and December 29, 1995, and
the related consolidated statements of income (loss), stockholders' equity and
cash flows for each of the years in the three-year period ended January 3, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Failure Group,
Inc. and subsidiaries as of January 3, 1997 and December 29, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ending January 3, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Palo Alto, California
January 30, 1997
The Company's common stock has been traded on the Nasdaq National Market since
its initial public offering on August 17, 1990 under the symbol "FAIL". The
following table sets forth for the fiscal periods indicated the high and low
sales prices for the Company's common stock, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>
Stock Prices by Quarter High Low
- ------------------------------------------------
<S> <C> <C>
Fiscal Quarter ended
March 3l, 1995 $5.75 $4.00
Fiscal Quarter ended
June 30, 1995 $6.00 $5.00
Fiscal Quarter ended
September 29, 1995 $8.25 $5.25
Fiscal Quarter ended
December 29, 1995 $7.00 $4.50
Fiscal Quarter ended
March 29,1996 $7.00 $5.00
Fiscal Quarter ended
June 28, 1996 $7.13 $5.00
Fiscal Quarter ended
September 27, 1996 $7.13 $5.88
Fiscal Quarter ended
January 3, 1997 $6.88 $5.63
Fiscal Quarter ended
April 4, 1997 $6.75 $4.13
(through February 28, 1997)
-------------
</TABLE>
As of February 28, 1997, the Company's common stock was held by 285 holders of
record. The Company has never paid cash dividends. It intends to retain future
earnings for the development of its business and, therefore, does not anticipate
paying cash dividends in the foreseeable future.
<PAGE>
FINANCIAL SUMMARY
THE FAILURE GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
12 months 12 months 12 months 7 months 12 months
Ended Ended Ended Ended Ended
January 3, December 29, December 30, December 31, May 28,
(ten thousands, except per share data) 1997 1995 1994 1993 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Professional fees $52,857 $52,176 $51,687 $30,999 $55,544
Equipment fees and net billed expenses 5,236 6,179 6,436 4,175 8,537
Other revenue 572 737 1,079 601 1,286
--------------------------------------------------------------------------
58,665 59,092 59,202 35,775 65,367
--------------------------------------------------------------------------
Operating expenses
Professional compensation and related expenses 33,611 32,357 31,940 20,407 31,548
Other operating expenses 13,882 13,827 14,903 10,573 16,027
General and administrative expenses 9,720 9,698 10,072 7,650 10,829
Provision for restructuring expenses -- -- (333) 1,600 1,500
Impairment of long-lived assets 1,572 -- -- -- --
--------------------------------------------------------------------------
58,785 55,882 56,582 40,230 59,904
--------------------------------------------------------------------------
Operating income (loss) (120) 3,210 2,620 (4,455) 5,463
--------------------------------------------------------------------------
Other income (expense)
Interest expense, net (1,138) (1,001) (1,275) (726) (983)
Miscellaneous income, net 1,608 1,190 622 56 (57)
--------------------------------------------------------------------------
Income (loss) before income taxes 350 3,399 1,967 (5,125) 4,423
Provision (benefit) for income taxes 343 1,377 847 (1,794) 1,791
--------------------------------------------------------------------------
Income (loss) before
extraordinary item $ 7 $ 2,022 $ 1,120 $(3,331) 2,632
Extraordinary item (net of taxes of $301) (443) -- -- -- --
--------------------------------------------------------------------------
Net income (loss) $ (436) $ 2,022 $ 1,120 $(3,331) 2,632
==========================================================================
Income (loss) per share before
extraordinary item $ 0.00 $ 0.30 $ 0.15 $ (0.43) $ 0.33
==========================================================================
Extraordinary item per share $ (0.07) $ 0.00 $ 0.00 $ 0.00 $ 0.00
==========================================================================
Net income(loss)per share $ (0.07) $ 0.30 $ 0.15 $ (0.43) $ 0.33
==========================================================================
Weighted average number of common
shares before extraordinary item 6,702 6,654 7,302 7,784 7,940
==========================================================================
Weighted average number of common
shares for extraordinary item and net
income (loss) 6,663 6,654 7,302 7,784 7,940
==========================================================================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statement
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
State or Other Jurisdiction
of Incorporation or
Subsidiary Incorporation or Organization
---------- -----------------------------
Failure Analysis Associates, Inc. Delaware
FaAA Investment Corporation California
FaAA Products Corporation California
170818 Canada Ltd. Canada
Failure Analysis Associates B.V. Netherlands
Spectus Technologies, Inc. California
(formerly Applied Visual Computing, Inc.)
Failure Analysis Associates, Spolka z o.o. Poland
PLG, Inc. Washington D.C.
Environmental Health Strategies, Inc. California
- -------------------------------------------
All subsidiaries do business only under the name listed.
<PAGE>
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors and Stockholders
The Failure Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-38479, 33-46054, 33-75210, and 33-79368) on Form S-8 of The Failure Group,
Inc. of our reports dated January 30, 1997, relating to the consolidated balance
sheets of The Failure Group, Inc. and subsidiaries as of January 3, 1997 and
December 29, 1995, and the related consolidated statements of income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended January 3, 1997, and the related schedule, which reports appear or
are incorporated by reference in the January 3, 1997, annual report on Form 10-K
of the The Failure Group, Inc.
Palo Alto, California
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-START> DEC-30-1995
<PERIOD-END> JAN-03-1997
<CASH> 4,465
<SECURITIES> 20,271
<RECEIVABLES> 21,225
<ALLOWANCES> 1,515
<INVENTORY> 0
<CURRENT-ASSETS> 49,373
<PP&E> 59,230
<DEPRECIATION> 30,441
<TOTAL-ASSETS> 80,578
<CURRENT-LIABILITIES> 11,815
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 49,263
<TOTAL-LIABILITY-AND-EQUITY> 80,578
<SALES> 0
<TOTAL-REVENUES> 58,665
<CGS> 0
<TOTAL-COSTS> 33,611
<OTHER-EXPENSES> 25,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,138
<INCOME-PRETAX> 350
<INCOME-TAX> 343
<INCOME-CONTINUING> 7
<DISCONTINUED> 0
<EXTRAORDINARY> (443)
<CHANGES> 0
<NET-INCOME> (436)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
