<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1998
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
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EXPONENT, INC.
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(formerly named The Failure Group, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA 94025
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (650) 326-9400
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 7, 1998
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Common Stock $.001 par value 7,427,639 shares
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 3, 1998 AND JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 3, JANUARY 2,
1998 1998
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 5,807 $ 8,412
Short-term investments............................ - 6,370
Accounts receivable, net.......................... 33,030 27,279
Prepaid expenses and other assets................. 7,940 5,160
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Total current assets......................... 46,777 47,221
Property, equipment and leasehold improvements,net.... 31,962 30,277
Other assets.......................................... 9,398 10,753
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$ 88,137 $ 88,251
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......... 1,910 1,987
Notes payable and current installments of
long-term obligations....................... 1,248 1,248
Accrued payroll and employee benefits............ 8,460 8,351
Income taxes payable............................. - 2,207
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Total current liabilities................... 11,618 13,793
Long-term obligations, net of current installments... 16,210 16,654
Deferred income taxes................................ 1,088 1,088
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Total liabilities........................... 28,916 31,535
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Stockholders' equity:
Common stock..................................... 8 8
Additional paid-in capital....................... 33,218 33,133
Accumulated comprehensive income................. - 11
Retained earnings................................ 28,794 25,793
Treasury shares at cost, 459,857 and 459,784
shares at July 3, 1998, respectively........ (2,799) (2,229)
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Total stockholders' equity............. 59,221 56,716
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$ 88,137 $ 88,251
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The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
2
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EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND SIX MONTHS ENDED JULY 3, 1998 AND JULY 4, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Unaudited Unaudited
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Quarters Ended Six Months Ended
July 3, 1998 July 4, 1997 July 3, 1998 July 4, 1997
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<S> <C> <C> <C> <C>
Revenues $ 20,625 $ 17,570 $ 43,001 $ 34,060
Operating expenses:
Compensation and related expenses................................... 13,728 10,833 27,487 21,051
Other operating expenses............................................ 4,271 3,394 8,310 6,564
General and administrative expenses................................. 1,762 1,472 3,963 2,967
----------- ----------- ----------- -----------
19,761 15,699 39,760 30,582
----------- ----------- ----------- -----------
Operating income............................................ 864 1,871 3,241 3,478
Other income (expense) 427 181 682 527
--- --- --- ---
Income from continuing operations
before income taxes....................................... 1,291 2,052 3,923 4,005
Provision (benefit) for income taxes (284) 831 788 1,622
----------- ----------- ----------- -----------
Income from continuing operations 1,575 1,221 3,135 2,383
Discontinued operations
Income from operations of PLG, Inc. - 3 - 12
----------- ----------- ----------- -----------
Net income $ 1,575 $ 1,224 $ 3,135 $ 2,395
=========== =========== =========== ===========
Income per share from continuing
operations
Basic $ 0.21 $ 0.17 $ 0.42 $ 0.34
Diluted $ 0.20 $ 0.17 $ 0.39 $ 0.34
Net income per share
Basic $ 0.21 $ 0.17 $ 0.42 $ 0.34
Diluted $ 0.20 $ 0.17 $ 0.39 $ 0.34
Shares used in per share computations
Basic 7,532 7,078 7,504 6,942
Diluted 8,025 7,181 8,005 7,037
</TABLE>
3
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<TABLE>
<CAPTION>
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 3, 1998 AND JULY 4, 1997
(IN THOUSANDS)
SIX MONTHS ENDED
JULY 3, 1998 JULY 4, 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,135 $ 2,395
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 2,057 1,641
Provision for doubtful accounts 116 110
Changes in operating assets and liabilities:
Accounts receivable (5,769) (4,815)
Prepaid expenses and other current assets 349 (1,103)
Account payable and accrued liabilities (116) (1,660)
Accrued payroll and employee benefits 112 1,482
Income taxes payable and current deferred income tax (4,135) 217
Net operating activities of discontinued operations - (452)
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Net cash used by operating activities (4,251) (2,185)
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Cash flows from investing activities
Capital expenditures (3,360) (1,823)
Acquisition of BCS, Inc., net of cash acquired - (314)
Acquisition on EEG, Inc., net of cash acquired - (7,495)
Sales of short-term investments 8,309 15,310
Purchase of short-term investments (1,962) (2,945)
Other assets (173) 338
Net investing activities of discontinued operations - 570
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Net cash provided by investing activities 2,814 3,641
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Cash flows from financing activities:
Repayments of borrowings and long-term obligations (547) (807)
Net issuance's and retirements of common stock 552 4
Repurchases of common stock (1,173) 60
Net financing activities of discontinued operations - (4)
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Net cash used by financing activities (1,168) (747)
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Net increase (decrease) in cash and cash equivalents (2,605) (709)
Cash and cash equivalents at beginning of period 8,412 4,465
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Cash and cash equivalents at end of period $ 5,807 $ 5,174
============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
4
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EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTERS AND SIX MONTHS ENDED
JULY 3, 1998 AND JULY 4, 1997
NOTE 1: BASIS OF PRESENTATION
Exponent, Inc., together with its subsidiaries (referred to as the
"Company"), is a multidisciplinary organization of scientists, physicians,
engineers and business consultants performing in-depth scientific research and
analysis in over 50 technical disciplines. The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, Exponent Failure Analysis Associates, Inc. ("FaAA"), Exponent
Health Group, Inc. ("EHG"), Exponent Environmental Group, Inc. ("EEG"), BCS
Wireless, Inc. ("BCS") and PLG, Inc. ("PLG") whose results of operations have
been accounted for as a discontinued operation for the quarter and six month
period ended July 4, 1997. The Company operates on a 52-53 week fiscal calendar
year ending on the Friday closest to the last day of December.
The accompanying condensed, consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of Exponent and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In the opinion
of management, all adjustments which are necessary for the fair presentation of
the condensed consolidated financial statements have been included and all such
adjustments are of a normal and recurring nature. The operating results for the
fiscal quarters and six month periods ended July 3, 1998 and July 4, 1997, are
not necessarily representative of the results of future quarterly or annual
periods.
NOTE 2: DISCONTINUED OPERATIONS
Effective September 18, 1997 the Company sold all of the outstanding
shares of stock of its wholly owned subsidiary, PLG, Inc. ("PLG"), for a total
purchase price of approximately $2.0 million which included a premium of
$600,000 over the net book value. The Company made the decision to sell PLG
based on management's assessment that the services PLG provided, which included
consulting services primarily to the nuclear industry, were no longer
complementary to the Company's core business practice areas.
The Company received an unsecured subordinated promissory note as
consideration of the $2.0 million purchase price. The note has an 18-month
maturity date and bears interest at 10%. Six quarterly principal payments of
approximately $170,000 plus accrued interest will be made starting December 18,
1997 with the final quarterly payment plus the remaining principal and any
unpaid accrued interest due on March 18, 1999. To date, all principal quarterly
payments that have come due have been paid.
The effect of this discontinued operations on the basic and diluted earnings per
share for the quarter and six month period ended July 4, 1997 was immaterial.
NOTE 3: NET INCOME PER SHARE
Basic per share amounts are computed using the weighted average number
of common shares outstanding during the period. Dilutive per share amounts are
computed using the weighted-average number of common shares and potential common
shares outstanding, using the treasury stock method,
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even when antidilutive, if their effect would be dilutive on the per share
amount from continuing operations.
The following schedule reconciles, in thousands, the shares used in the
Company's basic and diluted net income per share calculation.
<TABLE>
<CAPTION>
Quarter Six Months
Ended Ended
July 3, July 4, July 3, July 4,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Basic earnings per share-
weighted average shares outstanding 7,532 7,078 7,504 6,942
Effect of dilutive securities
options outstanding 493 103 501 95
--- --- --- --
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversion 8,025 7,181 8,005 7,037
===== ===== ===== =====
</TABLE>
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains
and losses that are not included in net income but rather are recorded directly
in shareholders' equity in accordance with SFAS No. 115, "Accounting for Certain
Debt and Equity Securities." SFAS No. 130 is effective for annual and interim
periods beginning after December 15, 1997 and for periods ended before that date
when presented for comparative purposes. The Company has not yet determined the
format it will use to display the information required by SFAS No. 130 in the
financial statements for the year ending January 1, 1999. Total comprehensive
income, in thousands, was ($40K) and ($16K) for the quarters ended July 3, 1998
and July 4, 1997 respectively and ($35K) and ($71K) for the six months ended
July 3, 1998 and July 4, 1997 respectively. The primary components of other
comprehensive income included foreign currency translation adjustments and
unrealized holding gains and losses related to the Company's available-for-sale
investments.
In June of 1998, the Financial Accounting Standards Board issued SFAS
No 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods beginning after
June 15, 1999 and management does not believe the adoption of SFAS No 133 will
have a material effect on the financial position of the Company.
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NOTE 5: SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental disclosure of cash flow information,
in thousands:
Six Months Ended
----------------------------------------
July 3, 1998 July 4, 1997
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Cash paid during the period:
Interest $ 589 $ 912
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Income taxes $ 4,923 $ 2,083
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NOTE 6: INCOME TAXES
During the second quarter of fiscal 1998, the Company removed a 100%
valuation allowance recorded against the $800,000 deferred tax asset generated
from a tax loss resulting from the sale of PLG, Inc. ("PLG") in September
1997. The decision to remove the valuation allowance was based upon plans
management is working on to generate capital gains via a potential sale and/or
sales/leaseback of one or more of its owned buildings at the Company's
headquarters facility. Other options for realizing a portion of the value of
the headquarters buildings and/or generating capital gains are also being
evaluated. The final plan implementation is subject to the Company's Board of
Directors approval. The Company has until September 2002 to generate
sufficient capital gains to utilize the entire $800,000 deferred tax asset.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q (this "Report") for Exponent, Inc.
(the "Company" or "Exponent") contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995 and the rules promulgated pursuant to the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended) that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. Such forward-looking statements are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. When used in
this document and in the documents incorporated herein by reference, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such forward-
looking statements. Such statements reflect the current views of the Company or
its management with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual results, performance, or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Factors that could cause or contribute to such material differences include
those discussed elsewhere in this Report and in the documents incorporated
herein by reference. The inclusion of such forward-looking information should
not be regarded as a representation by the Company or any other person that the
future events, plans, or expectations contemplated by the Company will be
achieved. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of this Report.
GENERAL
The Company recognizes most of its revenue from professional service
activities, generally at the time services are performed. The majority of these
activities are provided under a time and materials or fixed-price billing
arrangement with revenues consisting of professional fees and expenses and fees
for the use of the Company's equipment and facilities in connection with the
services provided. On fixed-price contracts, revenue is recognized on the basis
of the estimated percentage of completion of services rendered. Provision for
estimated losses on engagements is made during the period in which the loss
becomes probable and can be reasonably estimated. The Company's principal
expenses are professional compensation and related expenses.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
attached unaudited, condensed, consolidated financial statements and notes
thereto and with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended January 2, 1998, which is contained in
the Company's fiscal 1997 Annual Report on Form 10-K.
1998 Fiscal Quarter and Six Months Ended July 3, 1998 Compared to 1997 Fiscal
Quarter and Six Months Ended July 4, 1997
Revenues for the second quarter of fiscal 1998 were $20.6 million
compared to $17.6 million for the same quarter of fiscal 1997, an increase of
17.4%. This increase was primarily due to the acquisition of Exponent
Environmental Group, Inc. ("EEG"), which contributed $1.8 million or 60.0% of
the total revenue increase. The remaining increase was due to an increase in the
revenues generated by the Company's subsidiary, BCS Wireless, Inc. ("BCS"), of
approximately $620,000 and a revenue increase of
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<PAGE>
$600,000 in the Company's core litigation practice from Exponent Failure
Analysis Associates, Inc. ("Exponent Failure Analysis Associates"). Revenues
also increased for the six months ended July 3, 1998 by 26.3% to $43.0 million
compared to $34.1 million for the comparable period in fiscal 1997. Again this
increase was primarily due to revenue generated from the acquisition of EEG,
which accounted for $5.8 million of the total $8.9 million increase. BCS
accounted for $1.4 million of the total increase, while the Company's core
litigation practice increased by $1.7 million, primarily due to stronger
utilization rates in the first quarter of fiscal 1998.
Compensation and related expenses increased by 26.7% to $13.7 million
for the second quarter of fiscal 1998 compared to $10.8 million for the same
period in fiscal 1997. The acquisition of EEG accounted for $1.2 million of the
total increase. The remaining $1.7 million increase was primarily due to a 9%
increase in the total number of employees, primarily for Exponent Failure
Analysis Associates and BCS, in addition to a company-wide salary increase which
became effective April 4, 1998. As a percentage of revenue, total compensation
increased to 66.6% for the second quarter of fiscal 1998 compared to 61.7% for
the same period in fiscal 1997. This increase was primarily due to the lower
utilization rates in the second quarter of fiscal 1998 in a number of the
Company's practice areas. For the six months ended July 3, 1998, compensation
and related expenses increased by $6.4 million or 30.6%. EEG accounted for $3.7
million or 57% of the total increase while the remaining $2.7 million increase
resulted from a company-wide salary and headcount increase. As a percentage of
revenue, compensation and related expenses increased to 63.9% for the six months
ended July 3, 1998 compared to 61.8% for the six months ended July 4, 1998,
again a result of the lower utilization rates in the second quarter of fiscal
1998.
Other operating expenses increased by 25.8% to $4.3 million for the
second quarter of fiscal 1998 compared to $3.4 million for the same quarter in
fiscal 1997. This increase was primarily due to the inclusion of operating
expenses attributable to the acquisition of EEG totaling approximately $325,000.
The remaining increase was due to an overall increase in operating costs for BCS
of $200,000 in addition to an increase in occupancy costs for Exponent Failure
Analysis Associates associated with the relocation of existing offices. Other
operating expenses were 20.7% of total revenues for the second quarter of fiscal
1998 compared to 19.3% for the comparable quarter of fiscal 1997, a slight
increase of 1.4%. Other operating expenses increased to $8.3 million for the six
months ended July 3, 1998 compared to $6.6 million for the same period a year
ago. EEG accounted for approximately $900,000 of the total increase, while BCS
accounted for approximately $400,000 of the total increase. The remaining
increase was due to the increase in occupancy cost for Exponent Failure Analysis
Associates from the second quarter of fiscal 1998. As a percentage of revenue,
operating expenses remained flat at 19.3% for both of the six month periods
ended July 3, 1998 and July 4, 1997.
General and administrative expenses increased 19.7% to $1.8 million for
the first quarter of fiscal 1998 compared to $1.5 million for the same period in
fiscal 1997. This increase was primarily due to the acquisition of EEG, which
accounted for approximately $150,000 of the total increase. General and
administrative expenses as a percentage of revenue increased slightly to 8.5% of
total revenues for the second quarter of fiscal 1998 compared to 8.4% for the
second quarter of fiscal 1997. For the six months ended July 3 1998, general and
administrative expenses increased to $4.0 million from $3.0 million for the six
month period ended July 4, 1997. EEG accounted for approximately $500,000 of the
total increase, while the remaining increase was primarily attributable to
higher recruiting and relocation expense from the first quarter of fiscal 1998.
As a percentage of revenue, general and administrative expenses increased to
9.2% for the six months ended July 3, 1998 from 8.7% for the same period a year
ago.
Other income (expense) consists primarily of interest expense on the
Company's mortgage, net of investment income earned on available cash and short-
term investments and rental income from leasing excess space in the Company's
headquarters facility located in Menlo Park, California. Other income, net,
increased to $427,000 for the second quarter of fiscal 1998 and to $682,000 for
the six months ended July 3, 1998 compared to $181,000 and $527,000 during the
same periods a year ago, respectively. These
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increases were primarily due to a decrease in interest expense associated with
the Internal Revenue Service tax settlement partially offset by lower interest
income earned on the Company's short-term investments. The Company is currently
evaluating all options for realizing a portion of the value of its headquarters
buildings. Depending upon the timing and use of the cash proceeds resulting from
the implementation of these options, interest income (expense) could be
materially impacted.
LIQUIDITY AND CAPITAL RESOURCES
1998 Fiscal Quarter and Six Months Ended July 3, 1998 Compared to 1997 Fiscal
Quarter and Six Months Ended July 4, 1997
At July 3, 1998, the Company had $5.8 million in cash and cash
equivalents. During the six month periods ended July 3, 1998 and July 4, 1997,
the Company's working capital needs were generally funded through the sale of
its short-term investments.
Net cash used by operating activities was $4.3 million in the first six
months of fiscal 1998 compared to $2.2 million for the comparable period in
fiscal 1997. This increase in cash used in operating activities was primarily
attributable to the increase in taxes paid offset partially by a higher net
income in the first six months of fiscal 1998.
Net cash provided by investing activities was approximately $2.8
million for the first six months of fiscal 1998 compared $3.6 million for the
comparable period of fiscal 1997. This decrease was a result of increased
spending on capital expenditures primarily associated with the opening of new
offices offset partially by an increase of cash generated from the sale of
short-term investments net of cash used for acquisitions in the first six
months of fiscal 1998 compared to the same period a year ago.
Net cash used for financing activities was $1.2 million for the first
six months of fiscal 1998 compared to $747,000 for the comparable period in
fiscal 1997. This increase in cash used in financing activities was primarily
due to the repurchase of shares of the Company's common stock for $1.2 million
partially offset by an increase in cash from the issuance of shares of the
Company's common stock through the Company's employee stock purchase plan and
the exercising of stock options in the first six months of fiscal 1998 compared
to the same period a year ago.
The Company's long-term obligations at July 3, 1998 consisted primarily
of the mortgage obligation on the Company's headquarters facility in the amount
of $15.6 million, which will mature in August 2011 and consists of fixed semi-
annual principal payments and monthly interest payments based on an adjustable
interest rate tied to the London Interbank Offering Rate. This rate is subject
to adjustments every 30 days. Additionally, in June 1998 the Company renewed its
$10 million line of credit agreement, which is renewable on an annual basis.
There were no amounts borrowed against the line of credit during the six month
period ended July 3, 1998.
The Company is currently evaluating all options for realizing a portion
of the value of its headquarters buildings. Potential uses of any resulting
proceeds may include, but are not limited to, additional common stock share
repurchase programs, acquisitions of companies, working capital requirements,
debt repayment, or short-term investments.
The Company believes that its existing cash 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Exponent operates in a rapidly changing environment that involves
numerous uncertainties, some of which are beyond the Company's control. These
uncertainties include, but are not limited to, those mentioned elsewhere in this
Report, and the following:
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ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company's business involves the delivery of professional services
and is labor-intensive. The Company's success depends in large part upon its
ability to attract, retain and motivate highly qualified technical and
managerial personnel. Qualified personnel are in great demand and are likely to
remain a limited resource for the foreseeable future. There can be no assurance
that the Company can continue to attract sufficient numbers of highly qualified
technical and managerial personnel and to retain existing employees. The loss of
employees could impact its ability to secure and complete engagements or could
otherwise have an adverse effect on the Company's business, financial condition
or results of operations.
ABSENCE OF BACKLOG
Revenues are primarily derived from services provided in response to
client requests or events that occur without notice, and engagements, generally
billed on a "time and expenses" basis, are terminable at any time by clients. As
a result, backlog at any particular time is small in relation to the Company's
quarterly revenues and is not a reliable indicator of revenues for any future
period. Revenues and operating margins for any particular quarter are generally
affected by staffing mix, resource requirements and the timing and size of
engagements.
COMPETITION
The markets for the Company's services are highly competitive. In
addition, there are relatively low barriers to entry into the Company's markets
and the Company has faced, and expects to continue to face, additional
competition from new entrants into its markets. Competitive pressure could
reduce the market acceptance of the Company's services and result in price
reductions that could have a material adverse effect on the Company's business,
financial condition and results of operations.
REGULATION
Public concern over health, safety and preservation of the environment
has resulted in the enactment of a broad range of environmental laws and
regulations by local, state and federal lawmakers and agencies. These laws and
the implementing regulations affect nearly every industry, as well as the
agencies of federal, state and local governments charged with their enforcement.
To the extent changes in such laws, regulations and enforcement or other factors
significantly reduce the exposure of manufacturers, owners, service providers
and others to liability, the demand for environmental services may be
significantly reduced, which could adversely effect the Company's business.
IMPACT OF YEAR 2000
The "Year 2000" issue is the result of computer programs being written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar business
acitivities.
The Company has been assessing the impact of Year 2000 issues on its
computer systems and applications and has developed a Year 2000 compliance plan.
Conversion activities are in process and the Company presently expects
conversion and testing for Year 2000 compliance to be completed by the middle of
1999. The failure to address the Year 2000 issue adequately and in a timely
fashion could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company is also taking into
consideration the potential adverse effects on the Company of Year 2000
noncompliance by the Company's material suppliers, customers and other external
business partners. There can be no assurance that the systems of other companies
on which the Company's systems and operations rely will be Year 2000 compliant.
Even if the internal systems of the Company are not materially affected by the
Year 2000 issue, disruptions in the operations of any of the entities with which
the Company interacts could have a material adverse effect on the Company's
business, financial condition or results of operations. The Company presently
expects that the costs associated with its Year 2000 compliance plan will not
have a material impact on the Company's consolidated financial position,
results of operations or cash flow.
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1998 Annual Meeting of Stockholders held on May 13,
1998 (the "Annual Meeting"), the following individuals were elected to the
Board of Directors:
BROKER
FOR WITHELD NON-VOTES
--- ------- ---------
Michael R. Gaulke 6,107,409 7,583 N/A
Samuel H. Armacost 6,107,609 7,383 N/A
Barbara M. Barrett 6,106,409 8,583 N/A
Jon R. Katzenbach 6,107,609 7,383 N/A
Edward J. Keith 6,107,609 7,383 N/A
Subbaiah V. Malladi 5,858,887 256,105 N/A
Roger L. McCarthy 5,963,367 151,625 N/A
George T. VanGilder 6,107,609 7,383 N/A
The following proposal was approved by the stockholders at the Company's Annual
Meeting:
FOR AGAINST ABSTAIN
--- ------- -------
The appointment of KPMG Peat 5,917,224 148,375 49,393
Marwick LLP as independent
auditors for the period ending
January 1, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Restated Financial Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended July 3, 1998.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPONENT, INC.
--------------
(formerly named The Failure Group, Inc.)
(Registrant)
Date: August 14, 1998 /s/ Michael R. Gaulke
---------------------
Michael R. Gaulke, Chief Executive Officer,
President and Director
-13-
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-01-1999 JAN-01-1999
<PERIOD-START> APR-04-1998 JAN-03-1998
<PERIOD-END> JUL-03-1998 JUL-03-1998
<CASH> 5,807 0
<SECURITIES> 0 0
<RECEIVABLES> 34,030 0
<ALLOWANCES> 1,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 46,777 0
<PP&E> 65,542 0
<DEPRECIATION> 33,580 0
<TOTAL-ASSETS> 88,137 0
<CURRENT-LIABILITIES> 11,618 0
<BONDS> 0 0
0 0
0 0
<COMMON> 8 0
<OTHER-SE> 59,213 0
<TOTAL-LIABILITY-AND-EQUITY> 88,137 0
<SALES> 0 0
<TOTAL-REVENUES> 20,265 43,001
<CGS> 0 0
<TOTAL-COSTS> 13,728 27,487
<OTHER-EXPENSES> 6,033 12,273
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 109 550
<INCOME-PRETAX> 1,291 3,923
<INCOME-TAX> (284) 788
<INCOME-CONTINUING> 1,575 3,135
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,575 3,135
<EPS-PRIMARY> .21 .42
<EPS-DILUTED> .20 .39
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-02-1998 JAN-02-1998
<PERIOD-START> APR-05-1997 JAN-04-1997
<PERIOD-END> JUL-04-1997 JUL-04-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 17,570 34,060
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 10,833 21,051
<OTHER-EXPENSES> 4,866 9,531
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 494 911
<INCOME-PRETAX> 2,052 4,005
<INCOME-TAX> 831 1,622
<INCOME-CONTINUING> 1,221 2,383
<DISCONTINUED> 3 12
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,224 2,395
<EPS-PRIMARY> .17 .34
<EPS-DILUTED> .17 .34
</TABLE>
