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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 2, 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
EXPONENT, INC.
--------------
(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 of (IRS employer identification no.)
incorporation or organization)
149 Commonwealth Drive, Menlo Park, California 94025
- ----------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (650) 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 on March 27, 1998, was approximately $40,326,406. 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 March 27,
1998 was 7,469,412.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Stockholders for its fiscal
year ended January 2, 1998, 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 1998 Annual Meeting of Stockholders to be held on May 13,
1998, are incorporated by reference into Part III of this Form 10-K.
FORWARD-LOOKING STATEMENTS
This Report 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.
<PAGE>
PART I
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ITEM 1. BUSINESS
GENERAL
Exponent, Inc., incorporated in Delaware in 1989 ("Exponent", and,
together with its subsidiaries, the "Company"), through its principal operating
subsidiaries, Failure Analysis Associates, Inc. ("FaAA"), Exponent Health Group,
Inc.(formerly named Environmental Health Strategies, Inc.) ("EHG"), Exponent
Environmental Group, Inc. (formerly named Performance Technologies,
Incorporated) ("EEG") and BCS Wireless, Inc. ("BCS"), is a multidisciplinary
organization of scientists, physicians, engineers, and business consultants
performing in-depth scientific research and analysis in over 50 technical
disciplines. BCS specializes in the design, installation and maintenance of
wireless communication networks.
During fiscal 1996, the Company entered into the epidemiology arena
with the acquisition of EHG. EHG, acquired on August 1, 1996, provides
epidemiology 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.
During fiscal 1997, the Company continued implementing its strategy
of growth and diversification through the acquisitions of BCS and EEG. BCS,
acquired on January 4, 1997, specializes in the design, installation and
maintenance of wireless communication networks. BCS is located in the greater
Madison, Wisconsin area and has erected communication towers and provided
related training and technical services for the telecommunications industry
since 1981. EEG, acquired on May 16, 1997, is a scientific and engineering
consulting firm specializing in scientific solutions for complex environmental
problems.
The Company sold one of its subsidiaries PLG, Inc. ("PLG") in the
third quarter of fiscal 1997. The Company sold PLG based on management's
assessment that the services PLG provided were no longer complementary to the
Company's core business practice areas.
CLIENTS
General
The Company serves clients in manufacturing, transportation,
utilities, energy, insurance, government and other sectors of the economy.
Approximately 29% 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 $40 to $650 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 Exponent's work
and its
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personnel against liabilities arising out of the use or application of the
results of the Company's work or recommendations.
SERVICES
The Company provides services in the following practice areas:
<TABLE>
<CAPTION>
<S> <C> <C>
. Biomechanics . Human Factors
. Civil Engineering . Information Management
. Data Analysis . Materials Science and Engineering
. Electrical Engineering . Mechanical Design Analysis
. Environmental . Vehicle Evaluation and Testing
. Fire, Explosions and Toxic Chemicals . Visual Communication
. Health
</TABLE>
BIOMECHANICS
Biomechanics uses engineering and biology to determine how people become
injured and to determine what injuries can be expected when people are exposed
to a certain incident or environment. The analysis encompasses: claimed
injury, injury mechanisms, and injury prevention; effectiveness of restraint
systems; ergonomic design evaluation; low-speed and high-speed automotive
collisions, cardiovascular devices; helmet effectiveness; occupational
injuries; recreational sports injuries; evaluation of implant designs;
cardiovascular medicine and failure; and human body dynamics.
CIVIL ENGINEERING
Civil engineering investigates all types of structural, geotechnical,
geological, geomechanical, construction, and building problems, from major
catastrophes to simple performance failures. The scientific investigation of
these events provides a thorough assessment of damage, as well as expert
analysis of causation to be used for purposes of retrofit, repair, claims
adjustment, or litigation. The analysis provides a comprehensive evaluation of
structural failures that include site condition and assessment surveys,
advanced theoretical and numerical modeling techniques, dynamic testing and
analysis, reliability and risk analysis, materiel testing, and repair
solutions.
Earthquake engineering encompasses safety and damage assessment, seismic
analysis and design, post-earthquake reconnaissance and field inspection of
all types of structures, analysis of earthquake ground motion, investigation
of structural failures, development of remedial repairs and mitigation
measures, investigation protocol development, and disaster management
services. This includes subrogation studies, mediation and arbitration
support, and technical and scientific support for litigation.
Geotechnical, geological, geomechanical engineering and groundwater
hydrology encompasses problems with soil, rock and fluids with properties that
are poorly understood compared to the structures that they support. The
applied earth sciences analysis encompasses problems associated with
landslides, earthwork construction, foundations, retaining walls, oil-well
distress, tunnels and pipelines.
Structural engineering encompasses comprehensive evaluations, including
state-of-the-art structural analyses, site condition and assessment surveys,
dynamic testing and vibration measurement, computer animated reconstruction,
reliability and risk analyses, advanced theoretical and numeric modeling, due
diligence consulting, and component or material testing. Once the root cause
of the failure is known, and when the extent and severity of the distress is
fully assessed, optimal repair options are recommended.
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DATA ANALYSIS
Data analysis quantifies how machines, vehicles, consumer products, and
components behave in the real world to directly measure risk. Most of the risk
analysis is based on information from in-house databases of over 350 million
computerized records, one of the world's largest collections of accident and
incident records. The analysis encompasses: accident data analysis; automotive
safety design and evaluations; database development; epidemiological research
and analysis; fire risk, property loss and insurability; health risk assessment
and epidemiology; safety assessment; statistical modeling and analysis; survey
design and analysis; system reliability and failure probability; work injury;
and consumer product safety.
ELECTRICAL ENGINEERING
Electrical engineering encompasses accident reconstruction, component and
printed circuit board failure analysis, electrical system design analysis,
equipment failure investigation, and patent evaluation and infringement review.
Typical investigations include: electric power systems; electric equipment and
energy conversation equipment and interruptible power systems; automotive
electronics; printed circuit boards; telecommunication electronics;
semiconductor devices; power supplies and batteries; prototypes; and
transportation systems.
ENVIRONMENTAL
Environmental engineering includes ecological and human health risk
assessment; air quality evaluation; site investigation and liability management;
natural resource damage assessment; and water resources and quality management.
Air quality evaluation encompasses accident reconstruction; air quality
management; chemical release analyses; combustion calculations and modeling;
computer modeling of plume dynamics; statistical analyses; visualization,
animation, and geographic information systems; indoor air quality assessment;
risk analyses; uncertainty evaluation; expert testimony and litigation support.
Site investigation and liability management encompasses site assessments;
remedial investigations/feasibility studies; Resource Conservation and Recovery
Act facility investigation/corrective measure studies; natural attenuation
studies; groundwater and surface water modeling; bench scale testing; transport
and fate analysis; air quality monitoring; bio availability studies; sediment
investigations; remedial alternatives analysis; remediation/redevelopment
oversight; and economic analysis.
Water resources and water quality management encompasses groundwater,
surface water, and vadose-zone analyses; environmental transport and fate
analyses; natural attenuation and degradation studies; river and reservoir water
quality analyses; groundwater remedial investigations; watershed and basin-scale
hydrological modeling and management; site-specific hydrology and geochemical
evaluations; flood and stormwater planning and management; sediment transport
analyses; dam failure analyses; and water supply reliability and resource
planning and management.
FIRES, EXPLOSIONS AND TOXIC CHEMICALS
Fires, explosions and toxic chemical services encompass fire cause,
origin, and propagation analysis; combustion and explosion investigations; arson
investigations; chemical reactions and kinetics assessment; chemical processes
review; fire protection evaluation; site investigation and documentation; smoke
and plume propagation modeling; heat transfer and thermodynamics analysis; fluid
mechanics evaluation; heating and cooling equipment design reviews; and full-
scale fire and explosion testing. The information gained from these analyses
provides clients with a means of assessing preventative measures related to the
design of their products as well as evaluating failures when they occur.
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HEALTH
Health services provide solutions to complex health problems from client
consultation to clinical trials, health care evaluations, literature reviews and
epidemiological studies. Health research includes reproductive effects, cancer,
injuries, and health effects from workplace exposures, pharmacoepidemiolgy, and
infectious disease control. Epidemiology, exposure assessment, and occupational
medicine expertise is used to evaluate occupational and environmental health
issues. Decision analysis, cost-benefit, risk-benefit, and outcome analysis is
applied to assist health care companies in evaluating health care and with
strategic planning and technology assessment.
Epidemiology is the science of studying disease within a population.
Through the principles of epidemiology, analyses are performed on the
interaction of host, agent, and environment to reach conclusions about the
causes and occurrence of disease in human populations. Epidemiology services
encompass designing and conducting occupational and environmental studies to
evaluate the health effects of community and workplace exposures, work-related
disease and injury; conducting decision analysis for alternative forms of
medical treatments; designing, conducting, and interpreting clinical trials;
consulting on product safety; and evaluating quality of health care.
Healthcare evaluation provides various approaches to accreditation,
program evaluation and cost-effectiveness analyses. These approaches encompass
statistical analysis; survey design and analysis; accreditation applications;
cost-effectiveness analysis; performance indicators; accreditation requirements;
outcome measurements; disease management; quality improvement; clinical practice
guidelines; and program evaluation.
Medical technology assessments provide a comprehensive and independent
assessment of medical devices and technologies. These assessments encompass
clinical indications; materials selection; technology (engineering) review; FDA
and other regulatory hurdles; target condition epidemiology (size of U.S. and
worldwide market); pricing and reimbursement issues; cost effectiveness;
complications and/or failure modes (liability); marketing strategy; and
competing technologies.
Risk assessments and related analyses are a critical component of many
environmental regulatory decisions. The results of such analyses help determine
the need for and nature of remedial actions at hazardous waste sites, support
the derivation of cleanup levels, and assist in permitting new facilities and
developing closure plans for solid waste management units and facilities that
are going out of service. Human health toxicology services encompass
comprehensive multi-pathway risk assessments; screening-level risk evaluations;
derivation of risk-based cleanup levels; deterministic and probabilistic
exposure assessments; toxicity assessments and data evaluation; risk assessment
strategy development and review; research and development to address sources of
uncertainty; bio availability studies; fish consumption surveys and studies; and
toxic tort, class action, and general litigation support.
HUMAN FACTORS
Analysis of human behavior and the limitations and capabilities of people
as they use a product or participate in an activity can provide a better
understanding of how accidents occur. The impact of warning labels, other safety
information, and training on changing human behavior and reducing accidents is
an active area of ongoing research. Human factors services encompasses the
development of warnings and safety information for consumer, medical, and work-
related products; analysis of the role of warnings in particular accidents; use
of injury/illness data to identify human behavior associated with accidents; use
of risk analysis to quantify the safety of a product or activity; measurement of
illuminance, luminance, and noise levels in work environments; measurement of
human motor performance such as jumping ability, variation in gait, finger pinch
strength and visual-motor control; testing of people's knowledge of hazards and
comprehension of safety information; and analysis of user reaction to complex
information and control systems.
INFORMATION MANAGEMENT
Information management covers information systems technology, technical
consulting, and application. Services encompass access to one of the largest
private collections of computerized accident and incident data bases in the
world; providing design and installation of customized reports and automated
queries; design and execution of complex queries and technical information in a
particular
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field, including suggestions for primary research. These services help to
simplify preliminary research and risk analyses by offering access over the
Internet in a streamlined approach to help organizations react quickly to new
circumstances and unanticipated demands.
MATERIALS SCIENCE AND ENGINEERING
Materials science and engineering is the science of understanding how and
why materials fail in medical, automotive, construction, recreational, and other
environments. Areas of expertise include metallurgists, polymer scientists, and
ceramists. Services encompass accident reconstruction; fatigue and fracture
mechanics analysis; fractography; adhesion and coating evaluation; joining and
welding evaluation; bulk and surface chemical analysis; laboratory testing of
metals, plastics, ceramics and glasses; composites (fiberglass, sheet molding
compound and carbon) evaluation; life assessment; corrosion assessment; defect
detection and effect investigation; material characterization, selection and
compatibility assessment; environmental effect assessment; microscopy;
experimental stress analysis; non-destructive evaluation; and fabrication and
material processing.
MECHANICAL DESIGN ANALYSIS
Mechanical design analysis covers a broad range of services, from
engineering mechanics, energy, aviation, marine, risk management and reliability
to safety and process risk management.
Engineering mechanics involves the evaluation of loads on a system or
product, from medical devices to commercial aircraft. Projects range from
modeling fluid flow characteristics in a system to predicting the remaining
lifetime of structures and components and to establishing design and operating
envelopes for processes and technologies. Services encompass component/structure
lifetime prediction; material constitutive modeling, testing, and evaluation;
damage assessment; non-destructive evaluation; stress analysis; design review;
finite element analysis; blast and explosion; failure modes and effects
analysis; structural, thermal, and fluid dynamics analysis; vibration evaluation
and rotating equipment; fracture mechanics; medical device assessment; and
impact and penetration.
Energy services encompass creation of innovative maintenance management
of existing electric power plant equipment and systems; assisting power plant
owners and investors in modernization/expansion programs and new plant
development; component and plant condition assessments; and reliability analyses
and economic optimization.
Aviation analysis includes engineering analyses and design reviews,
accident reconstruction and testing for aircraft, aircraft structures, systems
and auxiliary equipment as well as spacecraft, satellites and rockets. Services
encompass accident reconstruction; fire cause and origin analysis and
prevention; aerodynamics analysis; materials and corrosion evaluation; aircraft
system testing and evaluation; performance and control calculations; computer
simulation; regulatory analysis; design evaluation; risk analysis and service
life assessment; and wind tunnel testing.
Marine services perform independent engineering analysis and design
review, accident reconstruction and testing for ships, marine structures,
offshore platforms, and auxiliary marine equipment. Other services encompass
marine materials and corrosion evaluation; sea-states and weather
characterization; regulatory compliance review; structural design and
fabrication process review; risk analysis and service life assessment; shipyard
management and operations review; fire cause and origin analysis and prevention;
structural assessment; management and oversight of vessel construction; and
evaluation of the environmental impact of marine industrial operations and
incidents.
Risk management and reliability focuses on the areas of industrial hazard
assessment, mitigation, and prevention, operational reliability, safety hazards,
product quality, and economic risks and benefits. Risk assessments and accident
analysis are performed for the construction, operation, and servicing of
manufacturing plants, processing and storage facilities, and transportation
systems. Techniques used encompass fault-tree and event-tree analysis; failure
modes and effects analysis ("FMEA"); operational performance evaluation;
statistical analysis; and probabilistic risk assessments.
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Safety and process risk management is the effective way to address safety issues
in chemical and petrochemical industries that store, handle, or process toxic or
flammable materials in quantities that, if released, could have a major impact
on workers, nearby communities, or facilities. These events can have significant
life-safety, environmental, legal, regulatory, and financial consequences.
Services encompass process hazards analysis; mechanical integrity assessment;
determination of blast overpressures and structural assessments;
failure/accident investigation; offshore platform hazards analysis; consequence
modeling; and quantitative risk assessment ("QRA").
VEHICLE EVALUATION AND TESTING
Vehicle evaluation and testing covers design analysis, component testing,
and accident reconstruction. Projects have included automobiles, buses, trucks,
vans, bicycles, trailers, motorcycles, trains, forklifts, tractors, cranes,
mining and construction equipment, all terrain vehicles, and golf carts.
Services encompass accident reconstruction; product validation testing; crash
testing; component testing and evaluation; design analysis; occupant kinematics
and injury analysis; vehicle handling analysis and testing; human performance
assessment; instrumentation and data analysis; risk analysis; fire causation
analysis; and product development.
VISUAL COMMUNICATION
Visual communication means the generation, development, and production of
visual concepts. Pictures are relyed upon whether printed, displayed on a
computer, projected onto a screen, or presented as virtual reality to reveal and
explain what words alone cannot. The products include animation, graphics,
multimedia, photography, and video. Services encompass charts, graphs and
tables; electronic imaging and enhancement; computer animation; photogrammetry;
concept generation and development; site and studio photography; courtboards,
laser disks, and CD-ROMs; slides, prints, and overhead transparencies; custom
photographic processing; stereo and high-speed photography; video and post-
production; and interactive presentations.
COMPETITION
The marketplace for the Company's services is fragmented and the
Company faces different sources of competition in providing its various
services. 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.
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,
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 response to competitive forces in
the marketplace, the Company continues to explore new markets for its various
technical disciplines. Competitive pressures could reduce the market acceptance
of the Company's services and result in price reductions.
EMPLOYEES
As of January 2, 1998, the Company employed approximately 636 full-
time and part time employees, including approximately 336 engineering staff, 144
technical support staff, and 156 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
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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.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of April 2,
1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael R. Gaulke 52 President, Chief Executive Officer and Director
Roger L. McCarthy, Ph.D. 49 Chief Technical Officer and Director
Marc W. Lorenzen, Ph.D. 53 President, Exponent Environmental Group, Inc.
Robert W. Morgan, MD, Ph.D. 60 President, Exponent Health Group, Inc.
Richard L. Schlenker 33 Corporate Secretary
Terence G. Boyle 39 Corporate Controller
</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.
Mr. Gaulke joined the Company in September 1992, as Executive Vice
President and Chief Financial Officer. He was named President in March 1993,
and he was appointed as a member of the Board of Directors of the Company in
January 1994. He assumed his current role of President and Chief Executive
Officer in June of 1996. 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. Prior to joining Raynet, Mr.
Gaulke was Executive Vice President and Chief Financial Officers of Spectra
Physics, Inc., where he was employed from 1979 to 1988. From 1972 to 1979, Mr.
Gaulke served as a consultant with McKinsey & Company. Mr. Gaulke is a member of
the Board of Directors of RockShox, Inc. and serves on the Board of Trustees of
the Palo Alto Medical Foundation. Mr. Gaulke received a M.B.A. (1972) in
Marketing and Operations 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 of the Company and
Chairman of the Board of the Company's principal operating subsidiary Failure
Analysis Associates, Inc. (FaAA) in June of 1996. He has been a director of the
Company and FaAA since 1989 and a director of FaAA since 1980, Chief Executive
Officer of the Company and FaAA from 1989 to June 1996. Additionally, he was
Chairman and President of the Company from 1989 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. (1972) in Philosophy 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; National Fire Protection Association; American Welding
Society; National Safety Council; Society for Risk Analysis; and the American
Statistical Association.
Dr. Lorenzen is the co-founder and has been the President of one of
the Company's principal subsidiaries, Exponent Environmental Group, Inc.
(formerly Performance Technologies, Incorporated)
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("EEG") since 1987. Dr. Lorenzen has 31 years of professional experience in
waste management and water pollution control with special expertise in the
areas of water quality modeling and analysis of the effects of waste load
allocation and nutrient inputs to river and lake systems. Dr. Lorenzen
received a Ph.D. (1973) and an M.S. (1971) in Environmental Engineering from
Harvard Univeristy. He received an M.S. (1967) in Sanitary Engineering and a
B.S. (1966) in Civil Engineering from the University of California, Berkeley.
Dr. Lorenzen is a member of the American Society of Civil Engineers; Science
Council and Foundation Associate, Pacific Science Center; American Water Works
Association Best Thesis Competition (prize winner); and the Hydrologic
Transport and Dispersion Committee, American Society of Civil Engineers
Hydraulics Division.
Dr. Morgan has been the President of one of the Company's principal
subsidiaries, Exponent Health Group, Inc. (formerly Environmental Health
Strategies, Inc.) ("EHG") since 1989. For the past twenty years, Dr. Morgan has
directed health studies to assess a wide variety of health issues ranging from
breast cancer to asbestos exposure to water contamination to artificial
sweeteners to cellular telephones. Dr. Robert Morgan is a medical graduate of
the University of British Columbia and received a Master's Degree in
Epidemiology from Harvard. Dr. Morgan is board-certified in Occupational and
Environmental Medicine and is a Fellow in the American College of Epidemiology.
Dr. Morgan is a member of various scientific societies and organizations and is
a reviewer for scientific journals.
Richard R. Schlenker is the Manager of Business Development for the
Company and was appointed secretary of the Company in November 1997. From 1993
to 1996, Mr. Schlenker was a Business Manager at FaAA where he managed the
business activities for over 100 consulting engineers. Mr. Schlenker holds a MBA
from Santa Clara University and a BS in Finance from the University of Southern
California.
Terence G. Boyle, CPA, joined the Company in February 1995.
From February 1995 to January 1996, Mr. Boyle served as
Corporate Controller at PLG, a wholly-owned operating subsidiary of the
Company. In February 1996, Mr. Boyle was named Corporate Controller of the
Company. Prior to joining PLG, Mr. Boyle was Vice President of Finance and
Administration for Kaiser Compositek, Inc. from 1990 to 1995. Mr. Boyle is a
Certified Public Accountant in California and received his MBA in Finance from
California State University, Los Angeles in 1984.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
Exponent operates in a rapidly changing environment that involves a
number of 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:
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 a significant number of the Company's employees could
have a material adverse impact on the Company, including its ability to secure
and complete engagements.
CUSTOMER CONCENTRATION
The Company currently derives, and believes that it will continue to
derive, a significant portion of its revenues from clients, organizations and
insurers related to the transportation industry. In 1997, transportation
industry related engagements accounted for approximately 29% of the Company's
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revenues. The loss of any large client, organization or insurer related to the
transportation industry 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 exposures of manufacturers, owners, service providers
and others to liability, the demand for environmental services may be
significantly reduced.
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.
ABSENCE OF BACKLOG
Revenues are primarily derived from services provided in response to
client request 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 its
quarterly or annual revenues and is not a reliable indicator of revenues for any
future periods. Revenues and operating margins for any particular quarter are
generally affected by staffing mix, resource requirements and timing and size of
engagements.
PROPERTIES
The Company currently subleases excess facilities in its Menlo Park,
CA headquarters that have lease terms that expire within the 1998-2000 time
periods. In 1997, miscellaneous rental income associated with these facilities
amounted to approximately 26% of income from continuing operations before income
taxes. Should these subleases not be extended, renewed or have their term
options exercised, the loss of the miscellaneous rental income could have a
material adverse effect on the Company's operating results.
VARIABILITY OF QUARTERLY FINANCIAL RESULTS
Variations in the Company's revenues and operating results occur from
time to time as a result of a number of factors, such as the significance of
client engagements commenced and completed during a quarter, the number of
working days in a quarter, employee hiring and utilization rates, and
integration of companies acquired. Because a high percentage of the Company's
expenses, particularly personnel and facilities related, are relatively fixed in
advance of any particular quarter, a variation in the timing of the initiation
or the completion of client assignments, at or near the end of any quarter, can
cause significant variations in operating results from quarter to quarter.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by the Company
may need to be
10
<PAGE>
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with compliance. Although the
Company believes that it will be Year 2000 compliant, there can be no assurance
that coding errors or other defects will not be discovered in the future. Any
Year 2000 non compliance could result in a material adverse effect on the
Company's business, financial conditions and operating results.
ITEM 2. PROPERTIES
The Company's headquarters office facilities consist of a 153,738
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, an adjacent 32,000
square foot office building owned by the Company, and an adjacent 27,000 square
feet of leased warehouse storage space. The Company's primary facility is
subject to a variable rate mortgage tied to London Interbank Offering Rate
which, as of the period ending January 2, 1998, aggregated $17.5 million in
principal amount outstanding.
The Company's Test and Engineering Center occupies 147 acres in
Maricopa County, Arizona. The Company leases this land from the state of
Arizona under a 30 year lease agreement which expires in January of 2028.
In addition, the Company leases office, warehouse and laboratory space
in 23 other separate locations in 14 states as well as in Germany, Poland and
Russia. Leases for these office, warehouse and laboratory facilities have terms
generally ranging between one to ten years.
Aggregate lease payments in fiscal 1997 for all leased properties were
approximately $2,062,000.
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 management believes 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.
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 year ended January 2, 1998 (the "1997 Annual Report"). An
excerpt from the Annual Report to the Stockholders containing this information
has been filed as Exhibit 13.1 to this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the section entitled "Financial Highlights" in the 1997 Annual Report. An
excerpt from the Annual Report to the Stockholders containing this information
has been filed as Exhibit 13.1 to this Annual Report on Form 10-K.
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 1997
11
<PAGE>
Annual Report. An excerpt from the Annual Report to the Stockholders containing
this information has been filed as Exhibit 13.1 to this Annual Report on
Form 10-K.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are incorporated
by reference to the 1997 Annual Report, where such information appears under the
captions "Consolidated Balance Sheets," "Consolidated Statements of
Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements," and
"Independent Auditors' Report" on pages 15 through 29 of such report. An
excerpt from the Annual Report to the Stockholders containing this information
has been filed as Exhibit 13.1 to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's definitive Proxy Statement for its 1998 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." See item 1 for information regarding the executive
officers of the Company.
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.
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
The following documents are filed as part of this Annual Report on
Form 10-K.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Exponent, Inc. and
subsidiaries and the Independent Auditors' Report are incorporated by
reference to the 1997 Annual Report:
12
<PAGE>
Consolidated Statements of Operations for the years ended January 2,
1998, January 3, 1997 and December 29, 1995;
Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997;
Consolidated Statements of Stockholders' Equity for the years ended
January 2, 1998, January 3, 1997 and December 29, 1995;
Consolidated Statements of Cash Flows for the years ended January 2,
1998, January 3, 1997 and December 29, 1995; and
Notes to consolidated financial statements.
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Exponent, Inc. for the
years ended January 2, 1998, January 3, 1997 and December 29, 1995 is
filed as part of this Report on Form 10-K and should be read in
conjunction with the Consolidated Financial Statements of Exponent,
Inc.
Description
-----------
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.
3. EXHIBITS
The following exhibits are filed as part of, or incorporated by
reference into (as indicated parenthetically), this Annual Report on
Form 10-K:
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference 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 (incorporated by
reference 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
(incorporated by reference to the Company's Registration
Statement on Forms S-1 as filed on June 25, 1990, registration
number 33-35562).
*10.1 1989 Stock Option Plan for Subbaiah. V. Malladi (incorporated
by reference 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 (incorporated by reference 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 (incorporated by reference to the
Company's Registration Statement on Form S-1 as filed on June
25, 1990, registration number 33-35562).
13
<PAGE>
*10.4 1990 Stock Option and Rights Plan, as amended through March
31, 1993 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference
to the Company's Registration Statement on Form S-1 as filed on
June 25, 1990, registration number 33-35562).
*10.10 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 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1991).
*10.11 Form of Nonqualified Stock Option Agreement between the
Registrant and non-employee members of the Board of Directors,
dated March 25, 1991 (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1991).
*10.12 1991 Restricted Stock Plan (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1991).
10.13 Exponent, Inc. Employee Pension Plan (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991).
10.14 Amendment to Exponent, Inc. Employee Pension Plan, as amended
on September 20, 1993 (incorporated by reference to the
Company's Transition Period Report on Form 10-K for the seven
month period ended December 31, 1993 filed on).
*10.15 Amendment to Incentive Stock Option Agreement between the
Company and Subbaiah V. Malladi, dated June 27, 1991
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
14
<PAGE>
*10.16 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
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
*10.17 Form of Nonqualified Stock Option Agreement, between the
Registrant and nonemployee members of the Board of Directors,
relative to replacement of outstanding options (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1991).
*10.18 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
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
*10.19 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 (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991).
*10.20 Exponent, Inc. Employee Stock Purchase Plan, as amended August
1993 (incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended May 28, 1993).
10.21 Credit Agreement dated March 16, 1995, between Failure Analysis
Associates, Inc. and Bank of America (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1994).
10.22 Zarnowicka Elektrownia Gazowa, joint venture, dated September
8, 1994 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1994
filed on).
10.23 Promissory note with Bank of America dated July 26, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1997).
13.1 Registrant's Annual Report to Stockholders for the fiscal year
ended January 2, 1998, pages 11 through 31.
21.1 List of subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
---------------------------------------------------------------------
* Indicates management compensatory plan, contract or arrangement.
(B) REPORTS ON FORM 8-K
On July 30, 1997, the Company filed with the Commission a Form 8-K/A,
which was amendment number 1 to the Company's Current Report on Form
8-K filed with the Commission on May 30, 1997, regarding the
acquisition of Exponent Environmental Group, Inc. (formerly named
Performance Technologies, Incorporated).
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 duty authorized.
Date: April 2, 1998 EXPONENT, INC.
(formerly named The Failure Group, Inc.)
(Registrant)
/s/ Michael R. Gaulke
----------------------------------------
Michael R. Gaulke, Chief Executive Officer, President
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints as his attorney-in-fact,
with full power of substitution for him in any and all capacities, to sign any
and all amendments to this report on form 10-K, and to file the same, with the
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission.
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>
/s/ MICHAEL R. GAULKE Chief Executive Officer, President and Director
- ---------------------------------
Michael R. Gaulke
/s/ TERENCE G. BOYLE Controller (Principal Financial and Accounting
- --------------------------------- Officer)
Terence G. Boyle
/s/ ROGER L. MCCARTHY Chief Technical Officer and Director
- ---------------------------------
Roger L. McCarthy
/s/ EDWARD J. KEITH Chairman of the Board
- ---------------------------------
Edward J. Keith
/s/ SAMUEL H. ARMACOST Director
- ---------------------------------
Samuel H. Armacost
/s/ BARBARA M. BARRETT Director
- ---------------------------------
Barbara M. Barrett
/s/ JON R. KATZENBACH Director
- ---------------------------------
Jon R. Katzenbach
/s/ GEORGE T. VAN GILDER Director
- ---------------------------------
George T. Van Gilder
</TABLE>
16
<PAGE>
EXHIBIT INDEX
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
(incorporated by reference 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 (incorporated by
reference 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
(incorporated by reference to the Company's Registration
Statement on Forms S-1 as filed on June 25, 1990, registration
number 33-35562).
*10.1 1989 Stock Option Plan for Subbaiah. V. Malladi (incorporated
by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference 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 (incorporated by reference
to the Company's Registration Statement on Form S-1 as filed on
June 25, 1990, registration number 33-35562).
17
<PAGE>
*10.10 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 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1991).
*10.11 Form of Nonqualified Stock Option Agreement between the
Registrant and non-employee members of the Board of Directors,
dated March 25, 1991 (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1991).
*10.12 1991 Restricted Stock Plan (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1991).
10.13 Exponent, Inc. Employee Pension Plan (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991).
10.14 Amendment to Exponent, Inc. Employee Pension Plan, as amended
on September 20, 1993 (incorporated by reference to the
Company's Transition Period Report on Form 10-K for the seven
month period ended December 31, 1993).
*10.15 Amendment to Incentive Stock Option Agreement between the
Company and Subbaiah V. Malladi, dated June 27, 1991
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
*10.16 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
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
*10.17 Form of Nonqualified Stock Option Agreement, between the
Registrant and nonemployee members of the Board of Directors,
relative to replacement of outstanding options (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1991).
*10.18 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
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
*10.19 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 (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991).
*10.20 Exponent, Inc. Employee Stock Purchase Plan, as amended August
1993 (incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended May 28, 1993).
10.21 Credit Agreement dated March 16, 1995, between Failure Analysis
Associates, Inc. and Bank of America (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1994).
18
<PAGE>
10.22 Zarnowicka Elektrownia Gazowa, joint venture, dated September
8, 1994 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 30,
1994).
10.23 Promissory note with Bank of America dated July 26, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1997).
13.1 Registrant's Annual Report to Stockholders for the fiscal year
ended January 2, 1998, pages 11 through 31.
21.1 List of subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
----------------------------------------------------------------------
19
<PAGE>
EXPONENT, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Deletions
----------- -------------------------------
Accounts
Balance at Provision Reduction Charged Off Balance
Beginning of Charged to of Net at End of
Year Expenses Provision of Recoveries Year
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended January 2, 1998
Allowance for doubtful accounts $1,500 ($450) ($50) $1,000
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
</TABLE>
<PAGE>
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
The statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. The forward-looking
statements include those regarding future demand for the Company's services and
the possible impact of current and future claims against the Company based upon
negligence and other theories of liability. Forward-looking statements involve
numerous risks and uncertainties that could cause actual results to differ
materially, including, but not limited to, the possibility that the demand for
the Company's services may decline as a result of changes in general and
industry-specific economic conditions and the effects of competitive services
and pricing; one or more current or future claims made against the Company may
result in substantial liabilities; and such other risks and uncertainties as are
described in reports and other documents filed by the Company from time to time
with the Securities and Exchange Commission.
Overview
The Company, together with its subsidiaries, is a multidisciplinary organization
of scientists, physicians, engineers, and business consultants performing in-
depth scientific research and analysis in over 50 technical disciplines. The
Company's services include analysis of product development or product recall,
regulatory compliance, discovery of potential problems related to products,
people or property, and impending litigation.
During fiscal 1997, the Company continued implementing its strategy of
growth and diversification through the acquisition of BCS Wireless, Inc. ("BCS")
and Exponent Environmental Group, Inc. ("EEG"), formerly named Performance
Technologies, Incorporated. BCS, acquired on January 4, 1997, specializes in the
design, installation and maintenance of wireless communication networks. BCS is
located in the greater Madison, Wisconsin area and has erected communication
towers and provided related training and technical services for the
telecommunications industry since 1981. EEG, acquired on May 16, 1997, is a
scientific and engineering consulting firm specializing in providing scientific
solutions for complex environmental problems. BCS and EEG, when combined with
Exponent Health Group, Inc. ("EHG"), formerly named Environmental Health
Strategies, Inc., which was acquired effective August 1, 1996, are collectively
herein referred to as the "Acquisitions."
In addition to acquiring companies, the Company made a strategic decision
to sell one of its subsidiaries, PLG, Inc. ("PLG"), in the third quarter of
fiscal 1997. The Company sold PLG based on management's assessment that the
services provided were no longer complementary to the Company's core business
practice areas. The Company has recorded the results of operations for PLG as
discontinued operations in the consolidated statements of operations for all
years presented.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentage of
revenue of certain items in the Company's consolidated statements of operations
and the percentage increase (decrease) in the dollar amount of such items year
to year:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES PERIOD TO PERIOD CHANGE
----------------------------------------------------- -----------------------------
January 2, 1998 January 3, 1997 December 29, 1995 1997 vs. 1996 1996 vs. 1995
--------------- --------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 37.9% 0.8%
----- ----- ----- ------- -------
Operating expenses:
Compensation and related
expenses 62.6 63.0 60.5 37.1 5.0
Other operating expenses 19.1 23.2 24.7 13.2 (5.3)
General and administrative
expenses 9.4 10.5 8.3 24.8 27.6
----- ----- ----- ------- -------
91.1 96.7 93.5 30.0 4.3
----- ----- ----- ------- -------
Operating income 8.9 3.3 6.5 266.3 (48.5)
----- ----- ----- ------- -------
Other income (expense), net 1.2 0.8 0.2 110.6 284.1
Income from continuing
operations and before
income taxes 10.1 4.1 6.7 235.7 (37.9)
Provision for income taxes 4.1 0.7 2.7 717.2 (74.5)
----- ----- ----- ------- -------
Income from continuing
operations and before
discontinued operations
and extraordinary item 6.0 3.4 4.0 139.6 (13.0)
Discontinued operations
(net of taxes) (0.2) (3.4) (0.2) (92.1) 1,891.3
Extraordinary item
(net of taxes) (0.8) (100.0)
----- ----- ----- ------- -------
Net income (loss) 5.8% (0.8)% 3.8% (1,077.5)% (121.6)%
===== ===== ===== ======= =======
</TABLE>
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
REVENUES
The Company's revenues consist of professional fee services, fees for use of the
Company's equipment and facilities as well as third-party expenses directly
associated with the services performed that are billed to the client. Third-
party expenses are included in revenue net of the related costs.
Total revenues increased by $20.2 million or 37.9% over fiscal 1996. This
increase in revenue is partially a result of the Acquisitions, which contributed
$13.3 million, or 65.8% of the total revenue increase. The remaining $6.9
million increase is due to a general increase in the Company's core litigation
practice across many of the Company's technical disciplines. This internal
growth was achieved through an increase of billable hours which resulted from an
increase in consulting staff in fiscal 1997 of approximately 31 employees, in
addition to higher average billable utilization rates in fiscal 1997, due to an
increase in demand for the Company's services.
Total revenues in fiscal 1996 remained relatively flat over fiscal 1995
with only a small increase of $449,000 or 0.8%. This small increase is primarily
attributable to the acquisition of EHG which contributed four months of revenue
approximating $864,000. This increase was partially offset by a slowdown in the
Company's automotive consulting practice including a slowdown in the use of the
vehicle testing track in the Company's Phoenix facility.
<PAGE>
COMPENSATION AND RELATED EXPENSES
Total compensation and related costs increased by $12.5 million or 37.1% over
fiscal 1996. Acquisitions accounted for $8.6 million or 68.8% of the total
increase. The remaining increase of $3.9 million is generally due to an increase
in employee compensation resulting from an 8% increase in the number of
employees in fiscal 1997. As a percentage of revenue, total compensation
decreased slightly to 62.6% in fiscal 1997 from 63% in fiscal 1996.
In fiscal 1996, total compensation and related costs increased by $1.6
million or 5% over fiscal 1995. The acquisition of EHG accounted for $406,000 of
this increase, while the remaining increase is due to the inclusion of an extra
week of compensation in fiscal 1996 due to the fiscal year operating on a 53-
week calendar year as opposed to 52 weeks. As a percentage of revenue,
compensation and related expenses increased to 63% in fiscal 1996 from 60.5% in
fiscal 1995.
OTHER OPERATING EXPENSES
Other operating expenses increased by $1.6 million or 13.2% over fiscal 1996.
This increase is primarily attributed to the Acquisitions, which accounted for
$2.1 million of other operating expenses in fiscal 1997, while the Company's
core business had a decrease in other operating expenses of approximately
$500,000. The $500,000 decrease in the Company's core business operating
expenses was due to a decrease in depreciation expense and other computer-
related expenses which is a direct result of the ongoing cost savings from the
conversion to a new, lower cost accounting system which was implemented in
October 1996. Other operating expenses as a percentage of revenue decreased to
19.1% in 1997 from 23.2% in fiscal 1996. This decrease was achieved from the
cost savings of the Company's new accounting software package while revenues for
the Company increased.
In fiscal 1996, other operating expenses decreased by approximately
$688,000 or 5.3% over fiscal 1995. As in fiscal 1997, this decrease is primarily
attributable to the related cost savings achieved from the conversion to a lower
cost accounting system, including lower depreciation expense and outside
consulting. As a percentage of revenue, other operating expenses decreased to
23.2% in fiscal 1996 from 24.7% in fiscal 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $1.4 million or 24.8% over
fiscal 1996. Acquisitions accounted for $1.9 million of this increase, while the
Company's core business had a decrease in general and administrative expenses of
approximately $500,000 primarily due to a decrease in bad debt and marketing
expense. As a percentage of revenue, general and administrative expenses
decreased to 9.4% in fiscal 1997 from 10.5% in fiscal 1996, which is a result of
the Company's continued efforts to maintain overhead expenses even as revenues
continue to grow.
In fiscal 1996, general and administrative expenses increased by
$1.2 million or 27.6% over fiscal 1995. This increase is due to the inclusion of
four months of general and administrative expenses of approximately $150,000
from the acquisition of EHG in fiscal 1996, in addition to an increase in travel
expenses of approximately $250,000 and bad debt expense of approximately
$800,000 due to the non-recurring reduction of the bad debt reserve in fiscal
1995 of $1.3 million.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest expense on the Company's
mortgage net of interest income earned on corporate investments and rental
income derived from the leasing of certain portions of the Company's
headquarters building.
Other income and expense increased by $480,000 or 110.6% over fiscal 1996.
This increase is principally due to an increase in rental income resulting from
both an increase in the amount of square footage leased to outside entities and
an increase in the rent charged per square foot.
In fiscal 1996, other income and expense increased by $321,000 or 284.1%.
This increase was primarily due to an increase of rental income achieved
through rent increases as well as an increase in the amount of space rented.
<PAGE>
PROVISION FOR INCOME TAXES
The Company's provision for income taxes as a percentage of income from
continuing operations is 40.5% for fiscal years 1997 and 1995. In fiscal 1996,
the provision for income taxes as a percentage of income from continuing
operations is 17%. This lower effective tax rate is primarily due to the tax
benefit from tax-exempt interest earned on the Company's investments in fiscal
1996.
DISCONTINUED OPERATIONS
In September 1997, the Company sold its wholly owned subsidiary, PLG, for
approximately $2.0 million. Accordingly, the results of operations for PLG have
been shown in the consolidated statements of operations as a loss from
discontinued operations, net of taxes, for all fiscal years presented.
Additionally, during fiscal 1996, the Company determined that the goodwill
associated with the purchase of PLG became impaired and, therefore, wrote off
the remaining $1.6 million goodwill balance. This goodwill write-off in addition
to goodwill amortization during fiscal 1996 and 1995 has been included in the
loss from discontinued operations.
EXTRAORDINARY ITEM
In June 1996, the Company committed to refinance its building mortgage. The
Company recorded the tax-effected prepayment penalty charge of $443,000, net of
taxes, for the refinancing of this note as an extraordinary item in the
statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
At January 2, 1998, the Company had $8.4 million in cash and cash equivalents
and $6.4 million in short-term investments. The Company has financed its
business principally through cash flows from operating activities.
Net cash provided by operating activities was $3.6 million in fiscal 1997
compared to $4.4 million in fiscal 1996. This decrease in operating cash flow is
primarily due to a decrease in accounts payable as well as an increase in
accounts receivable due to an increase in revenues. The general credit quality
of the Company's clients is high due to the majority of the clients being
Fortune 500 companies who pose minimal credit risk. Historically, the timing of
collections has been subject to swings; however, the Company's days of revenue
outstanding has decreased to 109 days at January 2, 1998 from 135 days at
December 30, 1994.
During fiscal 1997, the Company generated $1.5 million of cash from
investing activities primarily through the sale of short-term investments for a
net amount of $13.8 million offset partially by cash used for acquisitions of
approximately $7.8 million and capital expenditures of $4.2 million. During
fiscal 1996, the Company used $6.9 million of cash from investing activities
primarily through the reinvestment of excess cash from operating activities of
$2.4 million in addition to cash used for capital expenditures of $2.8 million.
Net cash used in financing activities increased to $1.1 million in fiscal
1997 compared to $468,000 in fiscal 1996. This increase is primarily due to two
principal payments made on the Company's mortgage in fiscal 1997 of $1.2 million
compared to the repurchase of common stock in fiscal 1996.
The Company's long-term obligations at January 2, 1998 consisted primarily
of the mortgage obligation on the headquarters facility of $17.5 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 (LIBOR). This rate is subject to adjustment every
February and August. Additionally, the Company renewed its $10 million line of
credit agreement in August 1997. This agreement is renewable on an annual basis.
There were no amounts borrowed against the line of credit during fiscal 1997,
1996 or 1995.
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.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL YEARS ENDED
------------------------------------------------------
JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Revenues $73,468 $53,273 $52,824
------- ------- -------
Operating expenses:
Compensation and related expenses 45,991 33,541 31,942
Other operating expenses 14,021 12,381 13,069
General and administrative expenses 6,965 5,579 4,373
------- ------- -------
66,977 51,501 49,384
------- ------- -------
Operating income 6,491 1,772 3,440
------- ------- -------
Other income (expense):
Interest expense, net (1,254) (1,188) (1,059)
Miscellaneous income, net 2,168 1,622 1,172
------- ------- -------
Income from continuing operations
before income taxes 7,405 2,206 3,553
Provision for income taxes 2,999 367 1,439
------- ------- -------
Income from continuing operations
and before discontinued operations
and extraordinary item 4,406 1,839 2,114
------- ------- -------
Discontinued operations:
Loss from operations of PLG, Inc. (net of taxes
of $(97), $(24) and $8, respectively) (144) (1,832) (92)
Extraordinary item (net of taxes of $301) (443)
Net income (loss) $ 4,262 $ (436) $ 2,022
======= ======= =======
Income per share from continuing operations
and discontinued operations and before
extraordinary item
Basic $ 0.62 $ 0.28 $ 0.32
Diluted $ 0.60 $ 0.27 $ 0.31
Loss per share from discontinued operations
Basic $ (0.02) $ (0.27) $ (0.01)
Diluted $ (0.02) $ (0.27) $ (0.01)
Loss per share from extraordinary item
Basic $ (0.07)
Diluted $ (0.07)
Net income (loss) per share
Basic $ 0.60 $ (0.07) $ 0.31
Diluted $ 0.58 $ (0.06) $ 0.30
Shares used in per share computations
Basic 7,148 6,663 6,610
Diluted 7,385 6,801 6,728
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) AS OF
---------------------------------
JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,412 $ 4,465
Short-term investments 6,370 20,271
Accounts receivable, net of allowance for doubtful accounts
of $1,000 and $1,500, respectively 27,279 19,710
Prepaid expenses and other assets 3,186 4,111
Deferred income taxes 1,974 816
------- -------
Total current assets 47,221 49,373
------- -------
Property, equipment and leasehold improvements, net 30,277 28,789
Goodwill 8,988 1,873
Other assets 1,765 543
------- -------
$88,251 $80,578
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,987 $ 4,047
Current installment of long-term obligations 1,248 1,250
Accrued payroll and employee benefits 8,351 5,590
Income taxes payable 2,207 928
------- -------
Total current liabilities 13,793 11,815
------- -------
Long-term obligations, net of current installments 16,654 18,505
Deferred income taxes 1,088 987
------- -------
Total liabilities 31,535 31,307
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 2,000 shares
authorized; no shares outstanding
Common stock, $.001 par value; 20,000 shares authorized;
7,902 shares issued and outstanding 8 8
Additional paid in capital 33,133 33,013
Net unrealized gain on investments 11 56
Retained earnings 25,793 21,644
Treasury shares, at cost: 460 and 1,097 shares held, respectively (2,229) (5,450)
------- -------
Total stockholders' equity 56,716 49,271
------- -------
$88,251 $80,578
======= =======
</TABLE>
The accompanying notes are an integral part of the Consolidated
Financial Statements.
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
(IN THOUSANDS)
COMMON STOCK ADDITIONAL UNREALIZED TREASURY
----------------- PAID-IN GAIN (LOSS) RETAINED ------------------------------
SHARES AMOUNT CAPITAL ON INVESTMENTS EARNINGS SHARES AMOUNT TOTAL
------ ------ ------- -------------- ---------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 30, 1994 7,902 $ 8 $32,495 $(428) $20,198 (1,248) $(6,160) $46,113
Sale of stock
pursuant to employee
stock plans 11 (140) 55 394 265
Issuance of stock
to directors 11 20 95 106
Net unrealized gain
on investments 354 354
Purchase of treasury
shares (92) (451) (451)
Other 21 21
Net income 2,022 2,022
------ ------ -------- ----- -------- ------- ------- -------
Balance at
December 29, 1995 7,902 8 32,538 (74) 22,080 (1,265) (6,122) 48,430
Sale of stock
pursuant to employee
stock plans 10 61 297 307
Issuance of stock
to directors 92 92
Acquisition of EHG
(Note 11) 401 284 1,399 1,800
Net unrealized gain
on investments 130 130
Purchase of treasury
shares (177) (1,024) (1,024)
Other (28) (28)
Net loss (436) (436)
------ ------ -------- ----- -------- ------- ------- -------
Balance at
January 3, 1997 7,902 8 33,013 56 21,644 (1,097) (5,450) 49,271
Sale of stock
pursuant to employee
stock plans 148 (14) 157 747 881
Acquisition of EEG
(Note 11) (99) 480 2,474 2,375
Net unrealized loss
on investments (45) (45)
Other (28) (28)
Net income 4,262 4,262
------ ------ -------- ----- -------- ------- ------- -------
Balance at
January 2, 1998 7,902 $ 8 $33,133 $ 11 $25,793 (460) $(2,229) $56,716
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(IN THOUSANDS) FISCAL YEARS ENDED
JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 4,262 $ (436) $ 2,022
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,581 3,411 3,376
Extraordinary item, net of retirement of debt
(net taxes of $301) 443
Provision for doubtful accounts (421) 2,102 3,435
Impairment of long-lived assets 1,572
Change in deferred income taxes (1,057) (1,799) 750
Issuance of stock to directors 95
Changes in operating assets and liabilities:
Accounts receivable (4,396) (3,022) (697)
Prepaid expenses 1,517 (235) (2,243)
Accounts payable and accrued liabilities (3,485) 768 337
Accrued payroll and employee benefits 2,347 691 868
Income tax payable 1,278 768 (1,595)
Net operating activities of discontinued operations (23) 157 1,252
--------------- --------------- -----------------
Net cash provided by operating activities 3,603 4,420 7,600
--------------- --------------- -----------------
Cash flows from investing activities
Purchase of short-term investments (11,395) (9,785) (20,233)
Sales of short-term investments 25,213 7,362 19,186
Acquisition of PLG, Inc., and contingency payments,
net of cash acquired (501) (198)
Acquisition of EHG, net of cash acquired (250)
Acquisition of BCS, net of cash acquired (313)
Acquisition of EEG, net of cash acquired (7,495)
Repayment on note receivable--sale of PLG, Inc. 171
Capital expenditures (4,218) (2,848) (1,335)
Other assets (323) (72) (42)
Net investing activities of discontinued operations (154) (794) (55)
--------------- --------------- -----------------
Net cash provided by (used in) investing activities 1,486 (6,888) (2,677)
--------------- --------------- -----------------
Cash flows from financing activities
Proceeds from borrowings and
issuance of long-term obligations 19,311 3
Repayments of borrowings and long-term obligations (1,996) (19,126) (347)
Repurchase of common stock (1,024) (451)
Net issuance and retirements of common stock 854 371 297
--------------- --------------- -----------------
Net cash used in financing activities (1,142) (468) (498)
--------------- --------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,947 (2,936) 4,425
Cash and cash equivalents at beginning of year 4,465 7,401 2,976
Cash and cash equivalents at end of year $ 8,412 $ 4,465 $ 7,401
=============== =============== =================
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 Summary of Significant Accounting Policies
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, 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 all fiscal years presented. 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. Fiscal periods 1997, 1996 and
1995 will be represented by the fiscal period dates ending January 2, 1998,
January 3, 1997 and December 29, 1995, respectively.
Revenue Recognition
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 reports revenue net of outside direct expenses which consists
primarily of subcontractor fees and travel expenses. Outside direct expenses
reported against revenue excluding PLG were approximately $10,755,000,
$6,245,000 and $5,927,000 in fiscal 1997, 1996 and 1995, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Reclassifications
Certain amounts in the accompanying 1996 and 1995 consolidated financial
statements have been reclassified in order to conform with the presentation of
the 1997 consolidated financial statements.
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 fixed-income taxable corporate
and treasury bonds. Management believes that there is no concentration of
credit risk in short-term investments which could result in a 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
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.
<PAGE>
Note 1: Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets and Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121
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. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future cash flows to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or the fair value less costs
to sell.
Goodwill
Goodwill represents the excess of the purchase price over the fair market value
of the net assets of various entities acquired by the Company accounted for
under the purchase method of accounting. The Company currently amortizes
goodwill on a straight-line basis over periods ranging from 7 to 20 years. In
January 1997 the Company recorded $485,000 of goodwill and in May 1997,
the Company recorded $7.2 million of goodwill arising from the purchase of its
two new subsidiaries, BCS and EEG respectively.
In accordance with SFAS No. 121 the Company periodically evaluates the
ongoing profitability of the businesses acquired to determine if there is
goodwill impairment. During the fourth quarter of 1996, the Company made the
decision to write off the remaining goodwill related to the purchase of its
subsidiary, PLG. The total amount charged to income was $1.6 million.
Income Taxes
Income taxes are accounted for under the asset and liability method. The
Company's deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax basis and the
financial reporting basis of assets and liabilities. The provision for income
taxes of the Company is based upon the differences between financial reporting
and tax basis for assets and liabilities measured using the enacted tax rates
and laws in effect when the differences are expected to reverse. The effect on
deferred tax assets and liabilities from a change in tax rates is recognized in
income in the period that includes the enactment date.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable, and long-term debt. The carrying amount of the Company's cash
and cash equivalents, accounts receivable, accounts payable and debt obligations
approximate their fair values which for debt is based upon current rates
available to the Company.
Stock-Based Compensation
The Company uses the intrinsic value method to account for all of its employee
stock-based compensation plans.
Net Income (Loss) 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, even when
antidilutive, if their effect would be dilutive on the per share amount for
income from continuing operations.
In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires the presentation of basic earnings per share ("EPS") and,
for companies with complex capital structures or potentially dilutive
securities, such as convertible debt, options, and warrants, diluted EPS. Net
income (loss) per share has been restated for all periods presented to conform
to the provisions of SFAS No. 128.
<PAGE>
The following schedule reconciles both the numerator and denominator of the
Company's EPS calculation for basic and dilutive EPS:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Denominator
Denominator for basic net income per share--
weighted average shares outstanding 7,148 6,663 6,610
Effect of Dilutive Securities
Dilutive options outstanding 237 138 118
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversion 7,385 6,801 6,728
</TABLE>
NOTE 2 Short-Term Investments
Available-for-sale securities consist of the following:
<TABLE>
<CAPTION>
AMORTIZED ACCRUED UNREALIZED UNREALIZED FAIR MARKET
(IN THOUSANDS) COST INTEREST GAINS LOSSES VALUE
--------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
At January 2, 1998
Corporate $ 2,991 $ 64 $ 8 $ 3,063
U.S. Treasury 3,269 35 3 3,307
--------- -------- ---------- ---------- -----------
$ 6,260 $ 99 $11 $ 6,370
========= ======== ========== ========== ===========
At January 3, 1997
Municipal bonds $19,998 $217 $68 $ (12) $20,271
========= ======== ========== ========== ===========
</TABLE>
The cost and estimated fair value of available-for-sale securities at January 2,
1998 by contractual maturity consist of the following:
<TABLE>
<CAPTION>
AMORTIZED FAIR MARKET
(IN THOUSANDS) COST VALUE
---------- -----------
<S> <C> <C>
Due in one year or less $1,502 $1,533
Due in one to five years 4,758 4,837
Thereafter
---------- -----------
$6,260 $6,370
========== ===========
</TABLE>
The cost of securities sold is based upon the specific identification method.
Total proceeds from the sale of short-term investments in fiscal 1997, 1996 and
1995 were $25,213,000, $7,362,000, and $19,186,000, respectively. Total proceeds
from sales vs. maturities were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
-------------- --------------- -----------------
<S> <C> <C> <C>
Sales $24,653 $ 6,732 $14,411
Maturities 560 630 4,775
-------------- --------------- -----------------
$25,213 $ 7,362 $19,186
============== =============== =================
</TABLE>
Gross realized gains and losses on sales and maturities of short-term
investments are immaterial for all fiscal years presented.
<PAGE>
NOTE 3 Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
Property:
Land $ 5,450 $ 5,450
Buildings 26,337 26,138
Construction in progress 657 248
Equipment:
Machinery and equipment 23,083 19,805
Office furniture and equipment 4,802 4,956
Leasehold improvements 2,956 2,633
--------------- ---------------
63,285 59,230
Less accumulated depreciation
and amortization 33,008 30,441
--------------- ---------------
Property, equipment and leasehold
improvements, net $30,277 $28,789
=============== ==============
</TABLE>
NOTE 4 Long-Term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
Mortgage note $17,453 $18,700
Other 449 1,055
--------------- ---------------
17,902 19,755
Less current installments 1,248 1,250
--------------- ---------------
Long-term obligations,
net of current portion $16,654 $18,505
=============== ===============
</TABLE>
Other long-term obligations consist primarily of deferred compensation.
Effective August 1, 1996, the Company refinanced its $18.8 million, 30-year
fixed-rate note at 10.75%, which consisted of periodic payments maturing in
December 1999. As a result of this refinancing during 1996, the Company incurred
a prepayment penalty of $744,000 which was recorded as an extraordinary item net
of tax of $443,000 in the statement of operations.
The new mortgage, having an original principal balance of $18.7 million, is
secured by the Company's headquarters building and has a 15-year life with equal
principal payments of $623,333 due semi-annually on February 1 and August 1. The
note bears a floating rate of interest tied to LIBOR and is subject to
adjustment every six months. The rate on this note was 7.01% as of January 2,
1998.
In August of 1997, the Company renewed its $10,000,000 unsecured line of
credit agreement. This agreement expires in July of 1998. There were no
borrowings against the line of credit in fiscal 1997 or fiscal 1996. The
mortgage note and line of credit contain restrictive covenants.
Principal payments due on long-term obligations are $1,248,000, $1,350,000,
$1,354,000, $1,355,000, and $1,319,000 in fiscal 1998 through fiscal 2002
respectively, and $11,276,000 thereafter.
<PAGE>
NOTE 5 Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Current
Federal $ 3,128 $ 1,375 $ 542
State 831 466 155
--------------- --------------- -----------------
$ 3,959 $ 1,841 $ 697
Deferred
Federal (655) (1,430) 593
State (402) (369) 157
--------------- --------------- -----------------
(1,057) (1,799) 750
--------------- --------------- -----------------
Total $ 2,902 $ 42 $1,447
=============== =============== =================
</TABLE>
The provision for income taxes from continuing operations differs from the tax
expense calculated at the applicable federal statutory rate of 34% as follows
for the years ending:
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
Tax at federal statutory rate of 34% $2,518 $750
State taxes, net of federal benefit 283 140
Amortization of goodwill non-deductible for tax 100
Tax-exempt interest (585)
Other 98 62
--------------- ---------------
Actual expense from continuing operations $2,999 $367
=============== ================
</TABLE>
The provision for income taxes for the year ended December 29, 1995 differs from
tax expense calculated at the applicable federal rate of 34%, primarily due to
the provision for state taxes net of federal tax benefit.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 2, 1998 and
January 3, 1997 are presented below.
<TABLE>
<CAPTION>
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
State taxes $ 55 $ 147
Compensated absences 713 535
Accrued expenses 645 989
Capital loss carryforward 788
Other 1 156
Valuation allowance (788)
--------------- ---------------
Total deferred tax asset 1,414 1,827
--------------- ---------------
Deferred tax liabilities:
Work-in-progress (838)
Plant and equipment (528) (1,160)
--------------- ---------------
Total deferred tax liabilities (528) (1,998)
--------------- ---------------
Net deferred tax asset (liability) $ 886 $ (171)
=============== ===============
</TABLE>
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the net deferred
assets.
<PAGE>
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.
Employee Stock Purchase Plan
The Company has authorized 400,000 shares of common stock for issuance under the
1992 Employee Stock Purchase Plan (the "Purchase Plan"). Qualified employees may
elect to have a certain percentage (not to exceed 15%) of their salary withheld
for purchase of stock pursuant to this plan. On July 23, 1997, the Board of
Directors amended the Purchase Plan to reduce the discount price at which
employees may purchase the Company shares from 90% to 85% of the lower of the
fair market value of the common stock at the beginning or ending of a three-
month offering period. As of January 2, 1998, 221,376 shares have been sold
under the plan. Average purchase prices for shares sold under the plan in fiscal
1997, 1996 and 1995 were $5.35, $5.13 and $4.84, respectively.
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 had been
reserved for grant under the plan. This plan was terminated as of October 24,
1996. Prior to termination, 100,000 shares were granted of which 77,500 shares
have vested as of January 2, 1998.
Stock Option Plans
The Company has a Stock Option Plan (the "Plan"), which covers up to an
aggregate of 2,000,000 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. 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.
Option activity under the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
----------------- --------- ---------------
<S> <C> <C> <C>
Balance as of December 30, 1994 359,199 1,386,232 $5.89
Options granted (65,000) 65,000 5.13
Options canceled 96,173 (96,173) 6.06
Options exercised (13,125) 4.77
----------------- --------- ---------------
Balance as of December 29, 1995 390,372 1,341,934 $5.85
Options granted (173,000) 173,000 5.83
Options canceled 54,448 (54,448) 5.72
Options exercised (28,000) 4.78
----------------- --------- ---------------
Balance as of January 3, 1997 271,820 1,432,486 $5.88
Options granted (345,575) 345,575 6.80
Options canceled 65,875 (65,875) 6.51
Options exercised (109,272) 5.51
Additional shares reserved 450,000
----------------- --------- ---------------
Balance as of January 2, 1998 442,120 1,602,914 $6.08
</TABLE>
Information regarding options outstanding at January 2, 1998 is summarized
below:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------------- ------------- ---------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$2.49-$4.50 30,760 1.57 $2.56 30,510 $2.54
$4.75 437,000 6.47 $4.75 319,250 $4.75
$4.81-$6.00 268,825 7.80 $5.48 105,575 $5.19
$6.13-$7.00 296,000 7.04 $6.57 146,500 $6.87
$7.13 280,744 3.89 $7.13 280,744 $7.13
$7.25-$10.25 289,585 7.65 $7.49 118,510 $7.48
------------- ---------------- --------- ------------- ---------
1,602,914 1,001,089 $6.03
============= ================= ========== ============= =========
</TABLE>
<PAGE>
Pro Forma Fair Value Information
The Company uses the intrinsic value method in accounting for its Employee
Stock Purchase Plan, Restricted Stock Plan and Stock Option Plan, collectively
called "Options." As the Options are generally granted at exercise prices
equal to the fair value of the Company's common stock on the date of the
grant, no compensation expense has been recognized in the financial
statements. Pro forma information regarding net income and earnings per share
is required to be determined as if the Company had accounted for its Options
under the fair value method prescribed by SFAS No. 123. The Company uses the
Black-Scholes option pricing model to calculate the fair value of its Options.
In calculating the fair value of an option at the date of grant, the Black-
Scholes option pricing model requires the input of highly subjective
assumptions. The Company used the following weighted average assumptions for
fiscal 1997, 1996 and 1995:
<TABLE>
<CAPTION>
EMPLOYEE STOCK PURCHASE PLAN STOCK OPTION PLAN
JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- ----------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 0.25 0.25 0.25 6 6 6
Risk-free interest rate 5.61% 5.60% 5.74% 6.2% 6.8% 6.8%
Volatility 0.74 0.79 0.79 0.76 0.72 0.72
Dividend yield 0% 0% 0% 0% 0% 0%
</TABLE>
Using the above assumptions, the weighted average fair value of Options granted
during fiscal 1997, 1996 and 1995 was $4.82, $4.05 and $3.55, respectively.
Had the Company determined compensation cost based on the estimated fair
value at the grant date for its Options under SFAS No. 123, the Company's net
income from continuing operations would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
(IN THOUSAND, EXCEPT PER SHARE DATA) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Income from continuing operations
As reported $4,406 $1,839 $2,114
Pro forma $3,908 $1,636 $2,023
Income per share from continuing
operations
As reported
Basic $ 0.62 $ 0.28 $ 0.32
Diluted $ 0.60 $ 0.27 $ 0.31
Pro forma
Basic $ 0.55 $ 0.25 $ 0.31
Diluted $ 0.53 $ 0.24 $ 0.30
</TABLE>
NOTE 7 Pension Plan
The Company's subsidiaries Failure Analysis Associates, Inc. and Exponent Health
Group, Inc. have a defined contribution retirement plan covering all salaried
employees of at least 21 years of age. Contributions made by the Company to this
plan were $1,965,000, $1,745,000, and $1,623,000 in fiscal 1997, 1996, and 1995,
respectively.
NOTE 8 Commitments and Contingencies
The following is a summary of the future minimum payments, net of rental income,
required under non-cancelable operating leases, with terms in excess of one year
as of January 2, 1998:
<TABLE>
<CAPTION>
YEAR ENDING LEASE RENTAL NET FUTURE
(IN THOUSANDS) COMMITMENTS INCOME PAYMENTS
----------- --------- ----------
<S> <C> <C> <C>
1998 $ 2,885 $ (1,255) $ 1,630
1999 2,475 (83) 2,392
2000 1,985 (53) 1,932
2001 1,595 -- 1,595
2002 1,459 -- 1,459
Thereafter 8,652 -- 8,652
----------- --------- ----------
$19,051 $(1,391) $17,660
=========== ========= ==========
</TABLE>
<PAGE>
NOTE 8 Commitments and Contingencies (continued)
Total rent and equipment lease expense in fiscal 1997, 1996 and 1995 was
$2,548,000, $2,369,000 and $2,378,000, respectively.
The Company has reached a tentative settlement on a proposed tax assessment
primarily related to the deferral of unbilled work-in-process from taxable
income. The net impact of the tentative settlement is insignificant on the
financial statements.
From time to time, the Company may be subject to other claims that arise
in the ordinary course of business. In the opinion of management, all such
matters involve amounts which would not have a material adverse effect on the
Company's consolidated financial position if unfavorably resolved. There are
currently no such matters.
NOTE 9 Other Income and Expense
Interest and other income (expense), net, consist of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Interest income $ 861 $ 1,265 $ 1,116
Interest expense (2,115) (2,453) (2,175)
Rental income 1,889 1,473 1,168
Other 279 149 4
--------------- --------------- -----------------
Total $ 914 $ 434 $ 113
=============== =============== =================
</TABLE>
NOTE 10 Client and Industry Credit Risk
The Company serves clients in various segments of the economy. During fiscal
1997, the Company provided services, representing approximately 29% of revenues,
to clients and to organizations and insurers acting on behalf of clients in the
transportation industry.
Revenues of approximately $5,246,000, $6,886,000 and $10,850,000 in fiscal
1997, 1996 and 1995, respectively, were earned on engagements for one client or
for organizations insuring or providing services to such client. As of January
2, 1998 and January 3, 1997, accounts receivable included $1,912,000 and
$1,400,000, respectively, related to this client.
The majority of the Company's clients are Fortune 500 companies who pose
minimal credit risk. The Company maintains reserves for potential credit losses,
but historically has not experienced any significant losses related to
individual customers or groups of customers in any particular industry.
NOTE 11 Acquisitions
As part of the Company's strategic objective to increase revenues, during
fiscal year 1997, the Company acquired two new companies, BCS Wireless, Inc.
("BCS") and Exponent Environmental Group, Inc. ("EEG"), formerly named
Performance Technologies, Incorporated. BCS, acquired on January 4, 1997, is a
company which specializes in the design, installation and maintenance of
wireless communication networks. It is located in the greater Madison, Wisconsin
area and has erected communication towers and provided related training and
technical services for the telecommunications industry since 1981. The Company
acquired all of the stock of BCS for $375,000 in cash. The Company recorded
$485,000 in goodwill which is being amortized over seven years using the
straight-line method. EEG, acquired on May 16, 1997, is a scientific and
engineering consulting firm specializing in providing scientific solutions for
complex environmental problems. The Company acquired all of the stock of EEG for
approximately $7.5 million in cash and 480,002 shares of stock with an
approximate value of $2.4 million. The Company recorded approximately $7.2
million of goodwill which is being amortized over twenty years using the
straight-line method.
On August 1, 1996, the Company acquired Exponent Health Group, Inc.
("EHG"), formerly named Environmental Health Strategies, Inc. EHG provides
epidemiological services in the areas of occupational and environmental health,
pharmaceutical and medical devices and health-related consumer product safety.
The Company acquired all of the stock of EHG for a combination of $250,000 in
cash and 283,742 shares of stock for a total purchase price of $2.1 million.
The Company recorded approximately $2.0 million of goodwill which is being
amortized over seven years using the straight-line method. The acquisition
also considers future payments of either cash or stock, based upon the
attainment of certain revenue and profitability requirements, as defined per
the terms of the acquisition agreement. In February of 1998, the Company made
the first contingent payment of $143,000 for EHG's financial performance
through fiscal 1997. Additional contingent payments may be made at the end of
each fiscal year through fiscal 2001 if the revenue and profitability
requirements are attained.
<PAGE>
All acquisitions have been accounted for as purchases and, accordingly,
the purchase price was allocated to the net assets acquired based on the
estimated fair market value at the date of the acquisition. The results of
operations from the date of the acquisitions have been included in the
Company's consolidated statements of operations. Pro forma disclosures giving
effect to the acquisitions of both BCS and EHG do not differ materially from
the Company's historical results. Results from continuing operations for the
fiscal year ending January 2, 1998 and January 3, 1997 assuming the Company and
EEG were combined at the beginning of the fiscal year would have been as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
Revenues $78,117 $64,795
Income from continuing operations $ 4,437 $ 2,588
Net income $ 4,293 $ 313
Income per share from continuing operations
Basic $ 0.62 $ 0.39
Diluted $ 0.60 $ 0.38
Net income per share
Basic $ 0.60 $ 0.05
Diluted $ 0.58 $ 0.05
</TABLE>
NOTE 12 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 includes 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. The first quarterly payment due
on December 18, 1997 was paid in full.
Certain expenses related to the sale of PLG and a reserve against
the note receivable offset the $600,000 gain on disposal; therefore, no gain on
the sale was recorded.
The Company has recorded the results of operations for PLG as a
discontinued operation in the consolidated financial statements for all fiscal
years presented.
NOTE 13 Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
<S> <C> <C>
Cash paid during the year:
Interest $ 1,260 $ 2,156
Income taxes $ 2,198 $ 1,054
--------------- ---------------
Non-cash investing activities:
Disposition of operations in exchange for a
promissory note $ 2,053
Treasury shares issued for acquisition of EEG $ 2,375
</TABLE>
<PAGE>
NOTE 14 Comparative Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
FISCAL 1997, IN THOUSANDS, EXCEPT PER SHARE DATA APRIL 4, 1997 JULY 4, 1997 OCTOBER 3, 1997 JANUARY 2, 1998
------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 16,490 $ 17,571 $20,178 $19,229
Operating income 1,607 1,872 1,951 1,061
Income from continuing
operations and before
income taxes 1,954 2,053 2,121 1,277
Income from continuing
operations and before
discontinued operations 1,163 1,221 1,262 760
Income (loss) from
discontinued operations 8 3 (155)
Net income $ 1,171 $ 1,224 $ 1,107 $ 760
Income per share from
continuing operations
Basic $ 0.17 $ 0.17 $ 0.17 $ 0.10
Diluted $ 0.17 $ 0.17 $ 0.17 $ 0.10
Net income per share
Basic $ 0.17 $ 0.17 $ 0.15 $ 0.10
Diluted $ 0.17 $ 0.17 $ 0.15 $ 0.10
Shares used in per share computations
Basic 6,806 7,078 7,305 7,405
Diluted 6,892 7,181 7,594 7,932
<CAPTION>
FISCAL 1996, IN THOUSANDS, EXCEPT PER SHARE DATA MARCH 29, 1996 JUNE 28, 1996 SEPTEMBER 27, 1996 JANUARY 3, 1997
--------------- ------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues $13,400 $14,459 $12,995 $12,419
Operating income (loss) 750 1,137 503 (618)
Income (loss) from continuing
operations and before
income taxes 750 1,175 531 (250)
Income (loss) from continuing
operations and before
discontinued operations and
extraordinary item 625 978 443 (207)
Income (loss) from
discontinued operations 21 (32) (48) (1,773)
Extraordinary item (443)
Net income (loss) $ 646 $ 503 $ 395 $(1,980)
--------------- ------------- ------------------ ---------------
Income (loss) per share from
continuing operations
Basic $ 0.09 $ 0.15 $ 0.07 $ (0.03)
Diluted $ 0.09 $ 0.15 $ 0.06 $ (0.03)
Net income (loss) per share
Basic $ 0.10 $ 0.08 $ 0.06 $ (0.29)
Diluted $ 0.10 $ 0.08 $ 0.06 $ (0.29)
Shares used in per share computations
Basic 6,633 6,526 6,684 6,729
Diluted 6,744 6,669 6,854 6,729
</TABLE>
<PAGE>
Independent Auditor's Report
The Board of Directors and Stockholders
Exponent, Inc.
We have audited the accompanying consolidated balance sheets of Exponent, Inc.
and subsidiaries as of January 2, 1998 and January 3, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended January 2, 1998. 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 Exponent,
Inc. and subsidiaries as of January 2, 1998 and January 3, 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ending January 2, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Mountain View, California
January 26, 1998
<PAGE>
Quarterly Stock Data
The Company's common stock is traded on the NASDAQ Stock Market under the symbol
"EXPO." The following table sets forth for the fiscal periods indicated the high
and low sales prices for the Company's common stock.
<TABLE>
<CAPTION>
STOCK PRICES BY QUARTER HIGH LOW
- ----------------------- ------ -----
<S> <C> <C>
Fiscal Year Ended January 3, 1997
First Quarter $ 7.00 $5.00
Second Quarter $ 7.13 $5.00
Third Quarter $ 7.13 $5.88
Fourth Quarter $ 6.88 $5.63
Fiscal Year Ended January 2, 1998
First Quarter $ 6.38 $4.25
Second Quarter $ 6.75 $4.00
Third Quarter $ 8.63 $6.13
Fourth Quarter $10.75 $8.00
Fiscal Year Ending January 1, 1999
First Quarter (through February 28, 1998) $11.00 $8.50
</TABLE>
As of February 28, 1998, there were 335 holders of record of the Company's
common stock. The Company has never paid cash dividends. The Company currently
intends to retain future earnings for reinvestment in the Company's business
and, therefore, does not anticipate paying cash dividends in the foreseeable
future.
<PAGE>
Financial Summary
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED SEVEN MONTHS ENDED
SHARE DATA) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 DECEMBER 30, 1994 DECEMBER 31, 1993
----------------- ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $73,468 $53,273 $52,824 $51,037 $31,174
Operating expenses:
Compensation
and related expenses 45,991 33,541 31,942 29,800 19,719
Other operating expenses 14,021 12,381 13,069 13,257 8,322
General and
administrative
expenses 6,965 5,579 4,373 5,547 5,878
Provision for
restructuring
expenses (333) 1,600
----------------- ----------------- ------------------ ----------------- -----------------
66,977 51,501 49,384 48,271 35,519
----------------- ----------------- ------------------ ----------------- -----------------
Operating income (loss) 6,491 1,772 3,440 2,766 (4,345)
Other income (expense):
Interest expense, net (1,254) (1,188) (1,059) (1,278) (736)
Miscellaneous income, net 2,168 1,622 1,172 615 60
----------------- ----------------- ------------------ ----------------- -----------------
Income (loss) from
continuing
operations before
income taxes 7,405 2,206 3,553 2,103 (5,021)
Provision (benefit) for
income taxes 2,999 367 1,439 906 (1,758)
----------------- ----------------- ------------------ ----------------- -----------------
Income (loss) from
continuing operations
and before discontinued
operations and
extraordinary item 4,406 1,839 2,114 1,197 (3,263)
Discontinued operations:
Loss from operations of
PLG, Inc. (144) (1,832) (92) (77) (68)
----------------- ----------------- ------------------ ----------------- -----------------
Extraordinary item (443)
Net income (loss) $ 4,262 $ (436) $ 2,022 $ 1,120 $(3,331)
----------------- ----------------- ------------------ ----------------- -----------------
Income (loss) per share
from continuing operations
Basic $ 0.62 $ 0.28 $ 0.32 $ 0.16 $ (0.42)
Diluted $ 0.60 $ 0.27 $ 0.31 $ 0.16 $ (0.42)
Net income (loss) per share
Basic $ 0.60 $ (0.07) $ 0.31 $ 0.15 $ (0.43)
Diluted $ 0.58 $ (0.06) $ 0.30 $ 0.15 $ (0.43)
Shares used in per share
computations
Basic 7,148 6,663 6,610 7,302 7,784
Diluted 7,385 6,801 6,728 7,313 7,801
</TABLE>
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
State or Other Jurisdiction
of Incorporation or
Name of Subsidiary Organization
------------------ -----------------------------
Failure Analysis Associates, Inc. Delaware
FaAA Investment Corporation California
FaAA Products Corporation California
170181 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
Exponent Health Group, Inc. California
BCS Wireless, Inc. Wisconsin
Exponent Environmental Group, Inc. Washington
<PAGE>
Exhibit 23.1
------------
Independent Auditors' Report and Consent
----------------------------------------
The Board of Directors and Stockholders
Exponent, Inc.
The audits referred to in our report dated January 26, 1998, included the
related financial statement schedule as of January 2, 1998, and for each of
the years in the three-year period ended January 2, 1998. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, the 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.
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 Exponent, Inc. of our
reports dated January 26, 1998, relating to the consolidated balance sheets of
Exponent, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended January 2, 1998,
and their related schedule, which reports appear or are incorporated by
reference in the January 2, 1998, annual report on Form 10-K for Exponent, Inc.
KPMG Peat Marwick LLP
Mountain View, California
April 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-04-1997
<PERIOD-END> JAN-02-1998
<CASH> 8,412
<SECURITIES> 6,370
<RECEIVABLES> 28,279
<ALLOWANCES> (1,000)
<INVENTORY> 0
<CURRENT-ASSETS> 47,221
<PP&E> 63,285
<DEPRECIATION> 33,008
<TOTAL-ASSETS> 88,251
<CURRENT-LIABILITIES> 13,793
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 56,708
<TOTAL-LIABILITY-AND-EQUITY> 88,251
<SALES> 0
<TOTAL-REVENUES> 73,468
<CGS> 0
<TOTAL-COSTS> 45,991
<OTHER-EXPENSES> 20,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,254)
<INCOME-PRETAX> 7,405
<INCOME-TAX> 2,999
<INCOME-CONTINUING> 4,406
<DISCONTINUED> (144)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,262
<EPS-PRIMARY> .60
<EPS-DILUTED> .58
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<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> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 53,273
<CGS> 0
<TOTAL-COSTS> 33,541
<OTHER-EXPENSES> 17,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,188)
<INCOME-PRETAX> 2,206
<INCOME-TAX> 367
<INCOME-CONTINUING> 1,839
<DISCONTINUED> (1,832)
<EXTRAORDINARY> (443)
<CHANGES> 0
<NET-INCOME> (436)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.06)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> DEC-29-1995
<CASH> 0
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