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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 1, 1999.
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.
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(formerly named The Failure Group, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 77-0218904
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(State or other jurisdiction 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 statements
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 19, 1999, was approximately $23,139,737.
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
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not necessarily a conclusive determination for other purposes.
The number of shares of the issuer's Common Stock outstanding as of March 19,
1999 was 6,969,092.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Stockholders for its fiscal
year ended January 1, 1999, 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 5, 1999,
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 thereto
under) 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.
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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, Exponent 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 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, health, environmental and other sectors of the
economy. Approximately 27% 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.
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The Company's standard rates for professionals range from $30 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
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:
. Biomechanics . Industrial Structures
. Civil Engineering . Information Management
. Data Analysis . Marine and Aviation
. Electrical Engineering . Materials Science and Mechanical
. Environmental Design Analysis
. Health . Thermal Sciences
. Human Factors . Vehicle Evaluation and Testing
. Hydrology . Visual Communications
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 analyses 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, material 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
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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.
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;
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flood and stormwater planning and management; sediment transport analyses; dam
failure analyses; and water supply reliability and resource planning and
management.
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
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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.
HYDROLOGY
Hydrology is the science of water, its properties, phenomena, and
distribution over the earth's surface. Exponent's hydrology services include the
analysis of flood retention facilities (levees, dams, etc.) and the evaluation
of the effects of flood water inundation on different types of structures. The
services also extend to investigating the cause of hillside movement, slope
erosion, and other soil movement that may be associated with flooding which may
include distinguishing between damage due to catastrophe and damage that has
been caused by or is related to long-term deterioration, foundation settlement,
slope movement, initial construction defects, or normal expected behavior of a
structure over time. In addition the hydrology practice provides property
damage assessment, geotechnical services, as well as helps develop remedial
repairs to address flood related distress. The hydrology services further
include the development of master plans of drainage (MPD) to enable cities to
coordinate all aspects of their flood control and surface water needs. This
master drainage plan considers all types of storms and their attendant runoff
and provides for safe transport of the waters off site.
INDUSTRIAL STRUCTURES
The Company has developed an expertise in power plant and industrial
chimneys, not only as a designer, but as a consultant for maintenance and
repair issues. The Industrial Structures Practice has developed "close to
reality" computer programs which are frequently used for design of chimneys
and other concrete towers that combine a high degree of safety with superior
economics.
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 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.
MARINE AND AVIATION
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
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.
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evaluation of the environmental impact of marine industrial operations and
incidents.
MATERIALS SCIENCE AND MECHANICAL DESIGN ANALYSIS
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 covers a broad range of services, from
engineering mechanics, energy, 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.
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.
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").
THERMAL SCIENCES
Fires, explosions and toxic chemical services encompass fire cause, origin,
and propagation
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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.
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 relied 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; court boards, 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.
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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 1, 1999, the Company employed approximately 707 full-time and
part time employees, including approximately 378 engineering and scientific
staff, 154 technical support staff, and 175 administrative and support staff.
The Company's future success depends on its continuing ability to attract
and retain highly qualified technical and managerial personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to retain its key managerial and technical employees or that it will be
able to attract, assimilate or retain other highly qualified technical and
managerial personnel in the future.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of April 1,1999,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- --------------------------------------------------
<S> <C> <C>
Michael R. Gaulke 53 President, Chief Executive Officer and Director
Subbaiah V. Malladi, Ph.D. 52 Chief Technical Officer and Director
Roger L. McCarthy, Ph.D. 50 Chairman of the Board of Exponent Failure Analysis
Associates, Inc. and Director
Richard L. Schlenker 34 Corporate Secretary
Terence G. Boyle 40 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
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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 Officer 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 MBA (1972) in Marketing
and Operations from Stanford University Graduate School of Business and a BS
(1968) in Electrical Engineering from Oregon State University.
Subbaiah V. Malladi, Ph.D., joined Exponent Failure Analysis Associates,
Inc. (FaAA) in 1982 as a Senior Engineer, becoming a Senior Vice President in
January 1988 and a Corporate Vice President of FaAA in September 1993. In
October 1998, Dr. Malladi was appointed Chief Technical Officer of the
Company. Dr. Malladi has also served as a director of the Company from March
1991 through September 1993. He was re-appointed as a director in April of
1996 and has remained on the Board since this date. He received a Ph.D. (1980)
in Mechanical Engineering from the California Institute of Technology, M.Tech
(1972) in Mechanical Engineering from the Indian Institute of Technology, B.E.
(1970) in Mechanical Engineering from SRI Venkateswara University, India and
B.S. (1966) in Physics, Chemistry and Mathematics from Osmania University,
India. Dr. Malladi is a Registered Professional Mechanical Engineer in the
State of California, and a member of the following professional organizations:
American Institute of Aeronautics and Astronautics; American Association for
the Advancement of Science; Combustion Institute; and National Fire Protection
Association.
Roger L. McCarthy, Ph.D., joined the Company in August 1978. Currently, Dr.
McCarthy is a director of the Company and Chairman of the Board of the Company's
principal operating subsidiary Exponent Failure Analysis Associates, Inc.
(FaAA). From June 1996 to October 1998, he served as Chief Technical Officer of
both the Company and FaAA, director of the Company and Chairman of the Board of
FaAA. He has been a director of the Company since 1989 and a director of FaAA
since 1980. He was Chief Executive Officer of the Company and FaAA from 1989 to
June 1996. He also served as Chairman and President of the Company from 1989 to
March 1993. 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 (ASME);
Safety Engineering and Risk Analysis Division of ASME; 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; American Statistical Association.
Richard L. Schlenker is the Director of Corporate 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 Exponent Failure Analysis
Associates, Inc. (FaAA) where he managed the business activities for over 100
consulting engineers. Mr. Schlenker holds a M.B.A. from Santa Clara University
and a B.S. in Finance from the University of Southern California.
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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 1998, transportation
industry related engagements accounted for approximately 27% of the Company's
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.
12
<PAGE>
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,
California headquarters that have lease terms that expire within the 2000-2001
time periods. In fiscal 1998 and 1997, miscellaneous rental income associated
with these facilities amounted to approximately 32% and 26%, respectively 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.
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 1, 1999, aggregated $16.2 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 that 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. During fiscal
1998, the Company made a decision to close down its offices is Moscow and
Poland.
Leases for these offices, warehouse and laboratory facilities have terms
generally ranging between one to ten years. Aggregate lease payments in fiscal
1998 for all leased properties were approximately $2,715,000.
13
<PAGE>
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 1, 1999 (the "1998 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 1998 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
With the exception of the discussion below regarding the Company's
readiness for Year 2000 compliance, 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 1998 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.
YEAR 2000 COMPLIANCE
GENERAL
The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example, the
clock circuit in the hardware may be incapable of holding a date beyond the year
1999; some operating systems may recognize a date using "00" as the year 1900
rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material adverse affect on companies through
business interruption or shutdown, financial loss, damage to reputation, and
legal liability to third parties.
STATE OF READINESS
The Company established a Year 2000 Readiness Project Team comprised of
senior executives of the Company in the areas of Management Information Systems,
Facilities and Operations, and Finance.
14
<PAGE>
The Project Team reports to the President and Chief Executive Officer and the
Audit Committee of the Board of Directors.
The Project Team developed and manages the Company's Y2K Plan to address
the potential impact of Y2K on the Company's operations and business processes.
In particular, the Plan identified 8 principal areas that may be impacted by the
Y2K issue: Business Systems; Facility Systems; End-User Community; Non-
Production Suppliers; Financial Services; Communication Providers; Outsourcing
Vendors; and Business Partners/Joint Ventures. With respect to the IT Systems
and Non-IT Business Systems, the Y2K Plan consists of two separate but
overlapping phases: Phase I - Inventory and Risk Assessment; and Phase II -
Remediation.
Phase I - Inventory and Risk Assessment
This Phase requires an inventory and assessment of the Non-IT Business
Systems used by the Company including systems with embedded technology, building
access systems, and health and safety systems. This Phase also includes
inventory and assessment of IT Systems used by the Company which include large
information technology systems, desktop hardware and software, and network
hardware and software. Each system is evaluated and a priority is assigned as
being High, Medium or Low Risk to the Company's business. Systems which are High
Risk are those which if uncorrected would cause an interruption or complete
failure to conduct the Company's business. Medium Risks are those which would
negatively impact the business but complete cessation could be avoided with some
inconvenience. Low Risks are those where the risk to business interruption or
cessation are remote. High and Medium Risk items will be remediated or
replaced, and Low Risk items will be addressed as time and resources permit.
Currently, the Company has completed Phase I.
Phase II - Remediation
This Phase includes the replacement or correction of the High and Medium
Risk Non-IT Business Systems and IT Systems. A detailed project plan for the
remediation has been developed and is currently being implemented. This Phase is
approximately 80% complete and the Company anticipates that this Phase will be
completed during the third quarter of fiscal 1999.
THIRD PARTY RELATIONSHIPS
The Company's business operations are dependent on third party corporate
service vendors, materials suppliers, outsourced operations partners and others.
The Company is working with key external parties to identify and attempt to
mitigate the potential risks to it of Y2K. The failure of external parties to
resolve their own Y2K issues in a timely manner could result in a material
adverse financial risk to the Company. As part of its overall Y2K program, the
Company is actively communicating with third parties on an ongoing basis to
ascertain their state of readiness. Although numerous third parties have
indicated to the Company in writing that they are addressing their Y2K issues on
a timely basis, the readiness of third parties overall varies widely. Because
the Company's Y2K compliance is dependent on the timely Y2K compliance of third
parties, there can be no assurances that the Company's efforts alone will
resolve all Y2K issues.
COST TO ADDRESS Y2K
The costs of the Y2K program are primarily costs associated with the
utilization of existing internal resources and minimal external spending. These
costs exclude the costs that could be incurred by
15
<PAGE>
the Company if one or more of its significant third party service providers fail
to achieve Y2K compliance. The Company is not separately identifying Y2K costs
incurred that are the result of utilization of existing internal resources.
To date, the historical and estimated costs of remediation to address the
Company's Y2K issues have not been material and have been funded through working
capital resources.
RISK FACTORS
Based on current information, the Company believes the Y2K issue will not
have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Y2K remediation by the Company or third parties will be
properly and timely completed, and the failure to do so could have a material
adverse effect on the company, its business, results of operations, and its
financial condition. In addition, important factors that could cause results to
differ materially include, but are not limited to, the ability of the Company to
successfully identify systems which have a Y2K issue, the nature and amount of
remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the Y2K issues.
CONTINGENCY PLANS
The Company's contingency plans, which will be based in part on the
assessment and the magnitude and probability of potential risk, will primarily
focus on steps to prevent Y2K failures from occurring, or if they should occur,
to detect them quickly, minimize their impact and expedite their repair.
A failure of the services provided by the Company's project and accounting
system could result in the loss of customer records which could disrupt the
ability to bill customers for a protracted time. The Company plans to prepare
electronic backup records of its project and accounting system prior to the year
2000 to allow for data recovery.
Security and fire protection systems failures could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site. Also, certain
personal computers interface and control elevators, public access systems and
certain telephony systems. In the event such computers cease operating,
conducting a power off/on is expected to resume normal functioning. If a power
off/on does not resume normal functioning, the Company expects to resolve the
problem by resetting the computer to a pre-designated date that precedes the
year 2000.
ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to some interest rate risk associated with the
Company's long-term debt obligation on the Company's headquarters building.
Effective February 1, 1999, the Company refinanced its headquarters building
under a 10 year, $35.0 million note. The new note consists of a line of credit
with a borrowing amount up to $5.0 million and a revolving reducing note up to
$30.0 million for a total maximum borrowing amount of $35.0 million. The line of
credit is subject to two interest rate options of either the prime rate in
effect from time to time, or a fixed rate determined by the bank to be 2.75%
above LIBOR, with a floating rate option of one month, two months, three months,
six months, nine months or twelve months. The $30.0 million revolving reducing
note is also subject to two interest rate options of
16
<PAGE>
either prime less 1.5% or the fixed LIBOR plus 1.25% with a floating rate option
of one month, two months, three months, six months, nine months, or twelve
months.
The company's general policy for selecting among the interest rate
options and related terms will be to minimize interest expense. However, given
the risk of interest rate fluctuations, the Company cannot be certain that the
lowest rate option will always be obtained, therefore, consistently minimizing
the Company's interest expense. No sensitivity analysis was performed on the
Company's exposure to interest rate fluctuations, however, given the
historical low volatility of both the Prime and LIBOR interest rates, the
Company believes any exposure would be minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are incorporated by
reference to the 1998 Annual Report, where such information appears under the
captions "Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Comprehensive Income (Loss)," "Consolidated
Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows,"
"Notes to Consolidated Financial Statements," and "Independent Auditors' Report"
on pages 9 through 30 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 the
Company's definitive Proxy Statement for its 1999 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 "Stock Ownership" of the Proxy Statement.
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
17
<PAGE>
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Exponent, Inc. and
subsidiaries and the Independent Auditors' Report are incorporated by
reference to the 1998 Annual Report:
Consolidated Statements of Operations for the years ended January 1,
1999, January 2, 1998 and January 3, 1997;
Consolidated Statements of Comprehensive Income (Loss) for the years
ended January 1, 1999, January 2, 1998 and January 3, 1997;
Consolidated Balance Sheets as of January 1, 1999 and January 2, 1998;
Consolidated Statements of Stockholders' Equity for the years ended
January 1, 1999, January 2, 1998 and January 3, 1997;
Consolidated Statements of Cash Flows for the years ended January 1,
1999, January 2, 1998 and January 3, 1997; and
Notes to consolidated financial statements.
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Exponent, Inc. for the
years ended January 1, 1999, January 2, 1998 and January 3, 1997 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).
18
<PAGE>
*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 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).
*10.10 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).
*10.11 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).
10.12 Exponent, Inc. Employee Pension Plan (incorporated by reference
to the
19
<PAGE>
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1991).
10.13 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).
*10.14 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).
*10.15 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).
*10.16 Form of Nonqualified Stock Option Agreement, between the
Registrant and non-employee 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).
*10.17 Amendment to Stock Option Agreement, between the Registrant and
Subbaiah V. Malladi, relative to repricing outstanding option
under 1989 Stock Option Plan for Subbaiah V. Malladi
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991).
*10.18 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).
*10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 Acquisition agreement between Exponent Environmental Group,
Inc.(formerly named Performance Technologies, Incorporated) and
Exponent, Inc. (formerly
20
<PAGE>
the Failure Group, Inc.) dated May 16, 1997 (incorporated by
reference to the Company's Form 8-K/A filed on July 30, 1997
which was amendment number 1 to the Company's Report on Form
8-K filed on May 30, 1997).
10.24 Exponent, Inc. 1998 Non Statutory Stock Option Plan dated
October 24, 1998 (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended January 1,
1999).
13.1 Registrant's Annual Report to Stockholders for the fiscal year
ended January 1, 1999, pages 9 through 30.
21.1 List of subsidiaries.
23.1 Consent of KPMG, independent auditors.
27.1 Financial Data Schedule.
---------------
* Indicates management compensatory plan, contract or
arrangement.
(b) REPORTS ON FORM 8-K
None
21
<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 1, 1999 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>
Signature Title Date
--------- ----- ----
<S> <C> <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/ SUBBAIAH V. MALLADI Chief Technical Officer and Director
- -----------------------------
Subbaiah V. Malladi
/s/ ROGER L. MCCARTHY Chairman of the Board of Exponent Failure
- ----------------------------- Analysis Associates, Inc. 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
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
/s/ JON R. KATZENBACH Director
- -----------------------------
Jon R. Katzenbach
/s/ GEORGE T. VAN GILDER Director
- -----------------------------
George T. Van Gilder
</TABLE>
23
<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
24
<PAGE>
for the fiscal year ended May 31, 1991).
*10.9 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).
*10.10 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).
*10.11 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).
10.12 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).
10.13 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).
*10.14 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).
*10.15 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).
*10.16 Form of Nonqualified Stock Option Agreement, between the
Registrant and non-employee 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).
*10.17 Amendment to Stock Option Agreement, between the Registrant
and Subbaiah V. Malladi, relative to repricing outstanding option
under 1989 Stock Option Plan for Subbaiah V. Malladi
(incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1991).
*10.18 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).
*10.19 Exponent, Inc. Employee Stock Purchase Plan, as amended August
1993
25
<PAGE>
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended May 28, 1993).
10.20 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).
10.21 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).
10.22 Acquisition agreement between Exponent Environmental Group,
Inc.(formerly named Performance Technologies, Incorporated) and
Exponent, Inc. (formerly the Failure Group, Inc.) dated May 16,
1997 (incorporated by reference to the Company's Form 8-K/A filed
on July 30, 1997 which was amendment number 1 to the Company's
Report on Form 8-K filed on May 30, 1997).
10.23 Exponent, Inc. 1998 Non Statutory Stock Option Plan dated October
24, 1998 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 1999).
13.1 Registrant's Annual Report to Stockholders for the fiscal year
ended January 1, 1999, pages 9 through 30.
21.1 List of subsidiaries.
23.1 Consent of KPMG, independent auditors.
27.1 Financial Data Schedule
- -----------------------------
* Indicates management compensatory plan, contract or arrangement.
26
<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 1, 1999
Allowance for doubtful accounts $1,000 $2,167 ($2,167) $1,000
Year Ended January 2, 1998
Allowance for doubtful accounts $1,500 $ 750 ($450) ($800) $1,000
Year Ended January 3, 1997
Allowance for doubtful accounts $1,500 $1,871 ($1,871) $1,500
</TABLE>
Page 1
<PAGE>
EXHIBIT 10.23
II. 1998 NONSTATUTORY STOCK OPTION PLAN
<PAGE>
EXPONENT, INC.
1998 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option Plan
--------------------
are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees and Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the administration
---------------
of stock option plans under U.S. state corporate laws, U.S. federal and
state securities laws, the Code, any stock exchange or quotation system on
which the Common Stock is listed or quoted and the applicable laws of any
foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board in
---------
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Exponent, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in Section
----------
22(e)(3) of the Code.
1
<PAGE>
(k) "Employee" means any person, excluding Directors, employed by the
--------
Company or any Parent or Subsidiary of the Company. A Service Provider shall
not cease to be an Employee in the case of (i) any leave of absence approved
by the Company or (ii) transfers between locations of the Company or between
the Company, its Parent, any Subsidiary, or any successor. Neither service
as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(m) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation The Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system for the
grant date, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, the Fair Market Value of a Share
of Common Stock shall be the mean between the high bid and low asked prices
for the Common Stock on the grant date, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(iii) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Administrator.
(n) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option grant. The Notice of
Grant is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant to the
------
Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(q) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(r) "Option Exchange Program" means a program whereby outstanding options
-----------------------
are surrendered in exchange for options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option.
--------------
2
<PAGE>
(t) "Optionee" means the holder of an outstanding Option granted under the
--------
Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1998 Nonstatutory Stock Option Plan.
----
(w) "Service Provider" means an Employee, excluding a Director.
----------------
(x) "Share" means a share of the Common Stock, as adjusted in accordance
-----
with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation," whether now or hereafter
----------
existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the
-------------------------
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 300,000 Shares. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
--------------------------
(a) Administration. The Plan shall be administered by (i) the Board or (ii)
--------------
a Committee, which committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and
---------------------------
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be granted
hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based
3
<PAGE>
on performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or the
shares of Common Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by
such Option shall have declined since the date the Option was granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(xi) to modify or amend each Option (subject to Section 14(b) of the
Plan), including the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for in
the Plan;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option previously granted by
the Administrator;
(xiii) to determine the terms and restrictions applicable to Options;
(xiv) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value
equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined. All elections by an Optionee to
have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers; provided,
-----------
however, that notwithstanding anything to the contrary contained in the Plan, an
Option may only be granted to an Officer as an inducement essential to his or
her initial employment with the Company.
4
<PAGE>
6. Limitation. Neither the Plan nor any Option shall confer upon an Optionee
----------
any right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for ten (10) years, unless sooner terminated
under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
---------------------------------
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions which must be satisfied before the Option may
be exercised.
(c) Form of Consideration. The Administrator shall determine the acceptable
---------------------
form of consideration for exercising an Option, including the method of payment.
Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
5
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
6
<PAGE>
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
-----------------
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
-----------------
for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Non-Transferability of Options. Unless determined otherwise by the
------------------------------
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
- ----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible in shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
--------------------------
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction as to all the Optioned Stock covered thereby, including Shares as to
which the Option would not
7
<PAGE>
otherwise be exercisable. In addition, the Administrator may provide that any
Company repurchase option applicable to any Shares purchased upon exercise of an
Option shall lapse as to all such Shares, provided the proposed dissolution or
liquidation takes place at the time and in the manner contemplated. To the
extent it has not been previously exercised, an Option will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
--------------------
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock, immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holder were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all purposes,
-------------
the date on which the Administrator makes the determination granting such
Option, or such other later date as is determined by the Administrator. Notice
of the determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
8
<PAGE>
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
----------------
of an Option unless the exercise of such Option and the issuance and delivery of
such Shares shall comply with Applicable Laws and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan, will at
---------------------
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENT
The statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. These 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 made the decision to sell PLG based on management's assessment
that the services PLG 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 state-ments of operations
for all years presented.
1
<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
Fiscal Years 1998 1997
---------------------------- -----------------------
1998 1997 1996 vs 1997 vs 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 16.3% 37.9%
Operating expenses:
Compensation and related expenses 64.5 62.6 63.0 19.9 37.1
Other operating expenses 20.2 19.1 23.2 22.9 13.2
General and administrative expenses 10.3 9.4 10.5 26.4 24.8
--------------------------------------------------------
95.0 91.1 96.7 21.2 30.0
--------------------------------------------------------
Operating income 5.0 8.9 3.3 (34.2) 266.3
Other income, net 1.4 1.2 0.8 34.4 110.6
Income from continuing operations and before
income taxes 6.4 10.1 4.1 (25.7) 235.7
Income taxes 1.6 4.1 0.7 (52.6) 717.2
Income from continuing operations and before
discontinued operations and extraordinary item 4.8 6.0 3.4 (7.4) 139.6
Discontinued operations, net of taxes - (0.2) (3.4) (100.0) (92.1)
--------------------------------------------------------
Extraordinary item, net of taxes - - (0.8) (100.0)
--------------------------------------------------------
Net income (loss) 4.8% 5.8% (0.8%) (4.3%) (1077.5%)
--------------------------------------------------------
</TABLE>
Fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997
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.
During fiscal 1998, revenues increased by $12.0 million or 16.3%. This increase
is primarily due to an increase in revenue associated with the Company's
environ-mental and health segment, which had a revenue increase of $6.3 million
or 52.5% of the total revenue increase. The revenue increase associated with the
environmental and health segment was primarily due to the inclusion of four
additional months of revenue in fiscal 1998 compared to fiscal 1997 for the
Environmental Group. BCS, the Company's wireless communication joint-venture
business, contributed $2.5 million of the total $12.0 million increase while the
Company's other scientific and engineering segment increased slightly by $3.2
million over fiscal 1997. The revenue increase associated with the Company's
other scientific and engineering segment is primarily attributable to an
increase in total billable hours in fiscal 1998 associated with an increase of
professional staff of approximately 15 employees over fiscal 1997.
Total fiscal 1997 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 other
scientific and engineering segment across many 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 due to an
increase in demand of the Company's services.
COMPENSATION AND RELATED EXPENSES In fiscal 1998, total compensation and
related costs increased by $9.2 million or 19.9% over fiscal 1997. The
environmental and health segment accounted for $4.9 million or 53.3% of the
total increase, primarily due to the inclusion of four additional months of
compensation expense in fiscal 1998 associated with the Environmental Group.
2
<PAGE>
BCS contributed $1.1 million of the total $9.2 million compensation increase, an
increase associated with a 40% increase of staff over fiscal 1997. The remaining
$3.2 million increase is attributable to the Company's other scientific and
engineering segment. This increase in compensation expense resulted from an
increase in professional and administrative staff of approximately 15 employees
in addition to an increase in the average employee salary. As a percentage of
revenue, compensation and related expenses increased to 64.5% in fiscal 1998
from 62.6% in fiscal 1997. This increase is primarily a result of lower average
professional staff utilization rates in fiscal 1998 compared to fiscal 1997
which resulted from an increase in professional staff occurring at a faster rate
than anticipated business growth.
Total fiscal 1997 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 63.0% in fiscal 1996.
OTHER OPERATING EXPENSES Other operating expenses increased by $3.2 million
or 22.9% over fiscal 1997. The environmental and health segment contributed $1.1
million of the total operating expense increase while BCS accounted for
approximately $800,000. The increase in operating expenses associated with the
environmental and health segment is again attributable to the addition of four
months of operating expense in fiscal 1998 compared to fiscal 1997. The increase
in BCS's operating expense is primarily attributable to an increase in cost of
goods sold and leased equipment expense directly associated with the overall
increase in revenue. Operating expenses for the Company's other scientific and
engineering segment increased by $1.3 million or 40.6% of the total operating
expense increase. This increase was due to an increase in occupancy costs and
depreciation expense associated with the relocation of offices during fiscal
1998. As a percentage of revenue, operating expenses increased to 20.2% in
fiscal 1998 from 19.1% in fiscal 1997, an increase directly associated with the
relocation and expansion of offices, while revenue growth was not as strong.
In fiscal 1997, 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 the total operating expense increase in fiscal
1997, while the Company's other scientific and engineering segment had a
decrease in other operating expenses of approximately $500,000. The $500,000
decrease in the Company's other scientific and engineering segment operating
expenses was due to a decrease in depreciation expense and other computer-
related expenses associated with the ongoing cost savings from the conversion to
a new, lower cost accounting system which was imple-mented in October 1996.
Other operating expenses as a percentage of revenue decreased to 19.1% in fiscal
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.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased by $1.8 million or 26.4%. This increase is primarily attributable to
the Company's other scientific and engineering segment, which accounted for $1.6
million of the total $1.8 million increase. Of the $1.6 million increase,
approx-imately $850,000 is due to an increase in bad debt expense of which
approximately $280,000 resulted from some unusually large client bankruptcies.
Approximately $600,000 is due to an increase in travel, marketing and outside
consulting expense associated with the Company's increased marketing efforts. As
a percentage of revenue, general and administrative expenses increased to 10.3%
in fiscal 1998 from 9.4% in fiscal 1997.
In fiscal 1997, 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 other scientific and engineering segment 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 efforts to
maintain overhead expenses as revenues continue to grow.
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, net, increased by $314,000 or 34.4%. This increase is
primarily due to a $725,000 decrease in interest expense associated with the
Company's IRS settlement and a decrease in mortgage
3
<PAGE>
interest of approximately $100,000. This decrease in interest expense was
partially offset by a decrease in interest income of approximately $350,000 due
to lower average cash and investment balances during fiscal 1998, in addition to
a slight decrease in rental income of approximately $138,000 due to a decrease
in space subleased to outside companies.
In fiscal 1997, 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, in addition to an increase in the rent charged per square
foot.
INCOME TAXES In fiscal 1998, income taxes as a percentage of income is 25.9%.
This lower effective tax rate is primarily due to the Company removing a 100%
valuation allowance recorded against the $788,000 deferred tax asset generated
from a tax loss resulting from the sale of PLG in September 1997. The decision
to remove the valuation allowance was based upon plans management is working on
to generate capital gains via a potential sale of one or more of its owned
buildings at the Company's headquarters facility. Other options for generating
capital gains are also being evaluated. The Company has until fiscal year 2002
to generate sufficient capital gains to utilize the entire $788,000 deferred tax
asset.
The Company's income taxes as a percentage of income from continuing operations
is 40.5% for fiscal 1997. In fiscal 1996, 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 for the refinancing of this note, as an extraordinary item in
the statement of operations.
LIQUIDITY AND CAPITAL RESOURCES At January 1, 1999, the Company had $6.1 million
in cash and cash equivalents. The Company has financed its business principally
through cash flows from operating activities.
Net cash provided by operating activities was $1.2 million in fiscal 1998
compared to $3.8 million in fiscal 1997. This decrease in operating cash flow in
fiscal 1998 is primarily due to an increase in accounts receivable associated
with the Company's continued revenue growth, in addition to an increase of days
of revenue outstanding at the end of fiscal 1998 compared to fiscal 1997.
Additionally, cash provided by operating activities decreased over fiscal 1997
because of a decrease in income taxes payable due to earlier payment of fiscal
1998 taxes, in addition to an increase in the net deferred tax asset. This
decrease in cash from changes in operating assets and liabilities was partially
offset by an increase in net income after adjusted for non-cash items in fiscal
1998 compared to fiscal 1997. The Company has historically and will continue to
experience swings in the timing of its collections. Despite the increase in days
of revenue outstanding, the general credit quality of the Company's clients
remains high due to the majority of the Company's clients being Fortune 500
companies who pose minimal credit risk.
During fiscal 1998, the Company generated approximately $500,000 of cash from
investing activities primarily through the sale of short-term investments for a
net amount of $6.3 million offset by cash used for capital expenditures of $5.4
million. During fiscal 1997, the Company generated $1.3 million from investing
activities again primarily through the sale of short-term investments for a net
amount of $13.8 million offset by cash used for acquisitions of approximately
$7.8 million and capital expenditures of $4.2 million.
Net cash used in financing activities increased to $4.0 million in fiscal 1998
compared to $1.1 million in fiscal 1997. This increase is primarily due to stock
repurchases in fiscal 1998 of $3.4 million.
4
<PAGE>
The Company's long-term obligations at January 1, 1999 consisted primarily of
the mortgage obligation on the headquarters facility of $16.2 million.
Additionally, the Company renewed its $10.0 million line of credit agreement in
August 1998. There were no amounts borrowed against the line of credit during
fiscal 1998, 1997 or 1996. In February 1999, the Company refinanced both its
mortgage and line of credit under one borrowing agreement for a total maximum
borrowing amount of $35.0 million. See further discussion under Note 16 of Notes
to Consolidated Financial Statements.
Management believes that its existing cash, together with its new credit line
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.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
EXPONENT, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------
Fiscal Years
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $85,477 $ 73,468 $ 53,273
Operating expenses:
Compensation and related expenses 55,162 45,991 33,541
Other operating expenses 17,237 14,021 12,381
General and administrative expenses 8,804 6,965 5,579
-----------------------------------
81,203 66,977 51,501
-----------------------------------
Operating income 4,274 6,491 1,772
-----------------------------------
Other income (expense):
Interest expense, net (662) (1,254) (1,188)
Miscellaneous income, net 1,890 2,168 1,622
-----------------------------------
Income from continuing operations
before income taxes 5,502 7,405 2,206
Income taxes 1,422 2,999 367
-----------------------------------
Income from continuing operations 4,080 4,406 1,839
-----------------------------------
Discontinued operations:
Loss from operations of PLG, Inc. (net of tax
benefit of $97 and $24, respectively) - (144) (1,832)
Extraordinary item (net of taxes of $301) - - (443)
-----------------------------------
Net income (loss) $ 4,080 $ 4,262 ($436)
-----------------------------------
Income per share from continuing operations:
Basic $0.55 $0.62 $0.28
Diluted $0.53 $0.60 $0.27
Loss per share from discontinued operations:
Basic - ($0.02) ($0.28)
Diluted - ($0.02) ($0.27)
Loss per share from extraordinary item:
Basic - - ($0.07)
Diluted - - ($0.07)
Net income (loss) per share:
Basic $0.55 $0.60 ($0.07)
Diluted $0.53 $0.58 ($0.07)
Shares used in per share computations:
Basic 7,392 7,148 6,663
Diluted 7,708 7,385 6,801
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
EXPONENT, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 4,080 $ 4,262 ($436)
Other comprehensive income (losses):
Foreign currency translation adjustments (1) (28) (28)
Unrealized gains (losses) on investments, net of
reclassification adjustment (11) (45) 130
---------------------------------
Comprehensive income (loss) $ 4,068 $ 4,189 ($334)
---------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
7
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
EXPONENT, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------
(In thousands, except share and per share data) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,082 $ 8,412
Short-term investments - 6,370
Accounts receivable, net of allowance for doubtful accounts of $1,000 33,889 27,279
Prepaid expenses and other assets 3,949 3,186
Deferred income taxes 1,177 1,974
-------------------------
Total current assets 45,097 47,221
-------------------------
Property, equipment and leasehold improvements, net 32,147 30,277
Goodwill 8,584 8,988
Deferred income taxes 524 -
Other assets 633 1,765
-------------------------
$86,985 $ 88,251
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,151 $ 1,987
Current installment of long-term obligations 1,709 1,248
Accrued payroll and employee benefits 8,388 8,351
Income taxes payable 278 2,207
-------------------------
Total current liabilities 12,526 13,793
Long-term obligations, net of current installments 16,144 16,654
Deferred income taxes - 1,088
-------------------------
Total liabilities 28,670 31,535
-------------------------
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 33,257 33,148
Accumulated other comprehensive losses (16) (4)
Retained earnings 29,575 25,793
Treasury shares, at cost: 702 and 460 shares held, respectively (4,509) (2,229)
-------------------------
Total stockholders' equity 58,315 56,716
-------------------------
$86,985 $ 88,251
-------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
8
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EXPONENT, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------
Additional Accumulated
COMMON STOCK paid-in comprehensive Retained Treasury
-------------- --------------------------
(In thousands) Shares Amount capital income (losses) earnings Shares Amount Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 29, 1995 7,902 $ 8 $ 32,497 ($33) $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
Purchase of treasury shares - - - - - (177) (1,024) (1,024)
Net unrealized gain on
investments - - - 130 - - - 130
Other - - - (28) - - - (28)
Net loss - - - - (436) - - (436)
-------------------------------------------------------------------------------------
Balance at January 3, 1997 7,902 8 33,000 69 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 33,148 (4) 25,793 (460) (2,229) 56,716
Sale of stock pursuant to
employee stock plans - - 112 - (298) 247 1,124 938
Purchase of treasury shares - - - - - (489) (3,404) (3,404)
Net unrealized loss
on investments - - - (11) - - - (11)
Other - - (3) (1) - - - (4)
Net income - - - - 4,080 - - 4,080
-------------------------------------------------------------------------------------
Balance at January 1, 1999 7,902 $ 8 $ 33,257 ($16) $29,575 (702) ($4,509) $58,315
-------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
EXPONENT, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,080 $ 4,262 ($436)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,477 3,581 3,411
Extraordinary item - - 443
Provision for doubtful accounts 732 (421) 2,102
Impairment of long-lived assets - - 1,572
Change in deferred income taxes (815) (1,057) (1,799)
Changes in operating assets and liabilities:
Accounts receivable (7,342) (4,396) (3,022)
Prepaid expenses 1,839 1,688 (235)
Accounts payable and accrued liabilities 164 (3,485) 768
Accrued payroll and employee benefits 37 2,347 691
Income tax payable (1,929) 1,278 768
Net operating activities of discontinued operations - (23) 157
------------------------------
Net cash provided by operating activities 1,243 3,774 4,420
Cash flows from investing activities:
Purchase of short-term investments (1,962) (11,395) (9,785)
Sales of short-term investments 8,309 25,213 7,362
Acquisition of PLG, Inc. and contingency payments, net of cash acquired - - (501)
Acquisition of EHG, Inc. and contingency payments, net of cash acquired (393) - (250)
Acquisition of BCS, Inc., net of cash acquired - (313) -
Acquisition of EEG, Inc., net of cash acquired - (7,495) -
Capital expenditures (5,364) (4,218) (2,848)
Other assets (117) (323) (72)
Net investing activities of discontinued operations - (154) (794)
------------------------------
Net cash provided by (used in) investing activities 473 1,315 (6,888)
------------------------------
Cash flows from financing activities:
Proceeds from borrowing and issuance of long-term obligations - - 19,311
Repayments of borrowing and long-term obligations (1,580) (1,996) (19,126)
Repurchase of common stock (3,404) - (1,024)
Net issuance of common stock 938 854 371
------------------------------
Net cash used by financing activities (4,046) (1,142) (468)
------------------------------
Net increase (decrease) in cash and cash equivalents (2,330) 3,947 (2,936)
Cash and cash equivalents at beginning of year 8,412 4,465 7,401
------------------------------
Cash and cash equivalents at end of year $ 6,082 $ 8,412 $ 4,465
------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPONENT, INC. AND SUBSIDIARIES
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, Exponent Failure Analysis Associates, Inc. ("FaAA"),
Exponent Health Group, Inc. ("EHG"), Exponent Environmental Group, Inc. ("EEG"),
BCS Wireless, Inc. ("BCS") and PLG, Inc. ("PLG") whose results of operations
have been accounted for as a discontinued operation for 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 1998, 1997 and 1996 will
be represented by the fiscal period dates ending January 1, 1999, January 2,
1998 and January 3, 1997, respectively.
REVENUE RECOGNITION The Company derives 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.
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 $13,129,315,
$10,755,000 and $6,245,000 in fiscal 1998, 1997 and 1996, respectively.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally acceptable 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 consolidated
financial statements have been reclassified in order to conform with the
presentation of the 1998 and 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. 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 as
accumulated other comprehensive income.
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.
IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF The Company
evaluates long-lived assets 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
11
<PAGE>
from the purchase of its two new subsidiaries, BCS and EEG respectively.
Additionally, during fiscal 1998, the Company recorded additional goodwill of
approximately $393,000 associated with the acquisition of EHG which considered
future payments to be paid based upon the attainment of certain revenue and
profitability requirements. These future payments have been accounted for as
goodwill as they have been treated as an adjustment to the original acquisition
purchase price.
The Company periodically evaluates the ongoing profitability of the businesses
acquired to determine if there is goodwill impairment. In accordance with the
Company's policy in evaluating the impairment of a long-lived asset, the Company
made the decision to writeoff the remaining goodwill related to the purchase of
its subsidiary, PLG, during the fourth quarter of 1996. The total amount charged
to income was $1.6 million.
INCOME TAXES Income taxes are accounted for under the asset and liability
method. 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. Deferred tax assets and liabilities
are 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. A valuation allowance is recorded for deferred tax assets if it
is more likely than not, that some portion or all of the deferred tax assets
will not be realized.
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 of income from continuing operations.
The following schedule reconciles both the numerator and denominator of the
Company's calculation for basic and dilutive net income (loss) per share:
Fiscal Years
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------
Basic earnings per share:
Weighted-average shares
outstanding 7,392 7,148 6,663
Effect of dilutive common
stock options outstanding 316 237 138
----- ----- -----
Diluted earnings per share:
Adjusted for weighted-average
shares and effect of dilutive
options outstanding 7,708 7,385 6,801
----- ----- -----
Common stock options to purchase 126,761, 609,201 and 584,476 shares were
excluded from the diluted per share calculation for the fiscal years ended
January 1, 1999, January 2, 1998 and January 3, 1997, respectively, due to their
antidilutive effect.
RECENT ACCOUNTING PRONOUNCEMENTS Effective for the fiscal year ending January
1, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating segments
in interim financial reports issued to stockholders. It also establishes
standards for related disclosure about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker.
NOTE 2: SHORT-TERM INVESTMENTS
Available-for-sale securities consisted of the following:
Amortized Accrued Unrealized Unrealized Fair market
(In thousands) cost interest gains losses value
- -------------------------------------------------------------------------------
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
--------------------------------------------------------
12
<PAGE>
The cost of securities sold is based upon the specific identification method.
Total proceeds from the sale of short-term investments in fiscal 1998, 1997 and
1996 were $8,309,000, $25,213,000 and $7,362,000, respectively. The total
proceeds from sales vs. maturities were as follows:
Fiscal Years
(In thousands) 1998 1997 1996
- ---------------------------------------------------------
Sales $8,309 $24,653 $6,732
Maturities - 560 630
-------------------------
$8,309 $25,213 $7,362
-------------------------
Gross realized gains and losses on sales and maturities of short-term
investments are immaterial for all fiscal years presented.
NOTE 3: PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Fiscal Years
(In thousands) 1998 1997
- ------------------------------------------------------------
Property:
Land $ 5,450 $ 5,450
Buildings 27,077 26,337
Construction in progress 185 657
Equipment:
Machinery and equipment 21,848 23,083
Office furniture and equipment 5,173 4,802
Leasehold improvements 4,510 2,956
-----------------
64,243 63,285
Less accumulated depreciation
and amortization 32,096 33,008
-----------------
Property, equipment and
leasehold improvements, net $32,147 $30,277
-----------------
NOTE 4: LONG-TERM OBLIGATIONS
Fiscal Years
(In thousands) 1998 1997
- ------------------------------------------------------------
Mortgage note $16,207 $17,453
Other 1,646 449
-----------------
17,853 17,902
Less current installments 1,709 1,248
-----------------
Long-term obligations, net of
current portion $16,144 $16,654
-----------------
Other long-term obligations consist primarily of deferred compensation and a
note with a third party financing company for the financing of the Company's
corporate insurance.
The Company's existing mortgage, which had 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 month. The rate on this note was 6.75%
as of January 1, 1999.
In August 1998, the Company renewed its $10.0 million unsecured line of credit
agreement. This agreement expires in July 1999. There were no borrowings against
the line of credit in fiscal 1998 or fiscal 1997. The mortgage note and line of
credit contain restrictive covenants.
Principal payments due on long-term obligations are $1,709,000, $1,825,000,
$1,537,000, $1,329,000 and $1,287,000 in fiscal 1999 through fiscal 2003,
respectively, and $10,166,000 thereafter.
In February 1999, the Company refinanced both its mortgage and line of credit
under one borrowing agreement. See further discussion under Note 16 of Notes to
Consolidated Financial Statements.
NOTE 5: INCOME TAXES
The provision for income taxes consists of the following:
Fiscal Years
(In thousands) 1998 1997 1996
- --------------------------------------------------
Current:
Federal $1,762 $ 3,128 $ 1,375
State 475 831 466
------------------------------
$2,237 $ 3,959 $ 1,841
Deferred:
Federal ($788) ($655) ($1,430)
State (27) (402) (369)
------------------------------
($815) ($1,057) ($1,799)
------------------------------
Total $1,422 $ 2,902 $ 42
------------------------------
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:
Fiscal Years
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------
Tax at federal statutory
rate of 34% $1,871 $2,518 $ 750
Change in beginning-of-
the-year balance of the
valuation allowance for
deferred tax assets allocated
to income tax expense (788) - -
State taxes, net of federal
benefit 296 283 140
Amortization of goodwill
non-deductible for tax 142 100 -
Tax-exempt interest - - (585)
Other (99) 98 62
------------------------
Tax expense from
continuing operations $1,422 $2,999 $ 367
------------------------
13
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 1, 1999 and
January 2, 1998 are presented below:
Fiscal Years
(In thousands) 1998 1997
- -------------------------------------------------------
Deferred tax assets:
State taxes $ - $ 55
Compensated absences 684 713
Accrued expenses 511 645
Capital loss carryforward 830 788
Other - 1
Valuation allowance - (788)
----------------
Total deferred tax assets 2,025 1,414
----------------
Deferred tax liabilities:
State taxes (18) -
Deductible goodwill (72) -
Plant and equipment (234) (528)
----------------
Total deferred tax liabilities (324) (528)
----------------
Net deferred tax assets $1,701 $ 886
----------------
The net change in the total valuation allowance for the fiscal year 1998 was a
decrease of $788,000. 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.
The Company has a capital loss carryforward of $2,071,000 for federal and state
tax purposes that will expire in fiscal years 2000 through 2002.
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.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive
income (loss) consists of:
Fiscal Years
(In thousands) 1998 1997
- ------------------------------------------------------------
Unrealized gain (loss) on investments - $ 11
Cumulative foreign translation adjustment (16) (15)
------------
$(16) $(4)
------------
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 1, 1999,
348,792 shares have been sold under the plan. Weighted-average purchase prices
for shares sold under the plan in fiscal 1998, 1997 and 1996 were $5.96, $5.35
and $5.13, 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 97,500 shares have vested as of January 1, 1999.
STOCK OPTION PLANS The Company has an incentive stock option plan, which
covers up to an aggregate of 2,000,000 shares of common stock. In October 1998,
the Board approved a new non-statutory stock option plan, which covers up to an
aggregate of 300,000 shares of common stock. Both plans provide for the grant of
either 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 option plan for one officer covering up to 119,000 shares of common
stock, all of which have been granted and 29,760 have been exercised as of
January 1, 1999. All three stock option plans are collectively referred to as
the "Plan."
14
<PAGE>
Option activity under the stock option plan is as follows:
Weighted-
Options average
available Number exercise
for grant of shares price
- --------------------------------------------------------------------
Balance as of
December 29,1995 390,372 1,341,934 $ 5.85
Options granted (173,000) 173,000 5.83
Options cancelled 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 cancelled 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
Options granted (469,500) 469,500 6.76
Options cancelled 56,500 (56,500) 6.15
Options exercised - (120,107) 4.86
Additional shares
reserved under
new stock plan 300,000 - -
----------------------------------
Balance as of
January 1, 1999 329,120 1,895,807 $ 6.32
Information regarding options outstanding at January 1, 1999 is
summarized below:
Outstanding Exercisable
--------------------------------- --------------------
Weighted-
average Weighted- Weighted-
remaining average average
Range of Number contractual exercise Number exercise
exercise price of shares life price of shares price
- --------------------------------------------------------------------------
$4.50 1,000 5.58 $ 4.50 1,000 $4.50
$4.75 368,000 5.48 $ 4.75 368,000 $4.75
$4.81-$5.75 464,325 8.62 $ 5.57 105,575 $5.08
$5.88-$7.00 396,500 6.78 $ 6.37 210,375 $6.58
$7.13-$7.25 362,897 3.09 $ 7.16 362,897 $7.16
$7.50-$10.50 303,085 8.61 $ 8.33 56,029 $7.91
--------- ---- ------ --------- -----
1,895,807 1,103,876 $6.08
PRO FORMA FAIR VALUE INFORMATION The Company uses the intrinsic value method
in accounting for its Employee Purchase 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. SFAS No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires the
Company to disclose pro forma information regarding net income and earnings per
share as if the Company had accounted for its Options under the fair value
method. Under the fair value method, compensation expense is calculated for
options granted using a defined valuation technique. 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 1998, 1997 and 1996:
Employee Stock Purchase Plan Stock Option Plan
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------
Expected life
(in years) 1 0.25 0.25 6 6 6
Risk-free
interest rate 4.85% 5.61% 5.60% 4.3% 6.2% 6.8%
Volatility 4.67 0.74 0.79 0.87 0.76 0.72
Dividend yield 0% 0% 0% 0% 0% 0%
Using the above assumptions, the weighted-average fair value of options granted
during 1998, 1997 and 1996 was $5.06, $4.82 and $4.05, 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:
FISCAL YEARS
(In thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------
Income from continuing
operations:
As reported $4,080 $4,406 $1,839
Pro forma $2,516 $3,908 $1,636
Income per share from
continuing operations:
As reported:
Basic $ 0.55 $ 0.62 $ 0.28
Diluted $ 0.53 $ 0.60 $ 0.27
Pro forma:
Basic $ 0.34 $ 0.55 $ 0.25
Diluted $ 0.33 $ 0.53 $ 0.24
NOTE 7: PENSION PLAN
The Company's subsidiaries Exponent 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 to this
plan were $1,922,000, $1,965,000 and $1,745,000 in fiscal 1998, 1997 and 1996
respectively.
Effective January 1, 1999, the Company terminated its existing defined
contribution retirement plan and
15
<PAGE>
modified its existing 401K plan whereby the Company will contribute to each
eligible employee's 401K account, 7% of the employee's base salary plus
overtime, regardless of the amount contributed by the employee. The employee
does not need to make a contribution to the plan to be eligible for the
Company's 7% contribution. To be eligible under the plan, an employee must be at
least 21 years of age and be either a full-time or part-time salaried employee.
The 7% Company contribution will vest 20% a year for employees hired after
January 1, 1999 and immediately for employees hired as of December 31, 1998. The
Company's subsidiaries, Exponent Failure Analysis Associates, Inc., Exponent
Health Group, Inc. and Exponent Environmental Group, Inc. are covered under the
newly modified 401K plan.
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 1, 1999:
(In thousands) Lease Rental Net future
Year ending commitments income payments
- ---------------------------------------------------------
1999 $ 2,770 $(1,296) $ 1,474
2000 2,267 (1,285) 982
2001 1,813 (74) 1,739
2002 1,571 (29) 1,542
2003 1,306 (24) 1,282
Thereafter 7,410 7,410
----------------------------------
$ 17,137 $(2,708) $ 14,429
----------------------------------
Total rent and equipment lease expense in 1998, 1997 and 1996 was $3,115,000,
$2,548,000 and $2,369,000, respectively.
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, consisted of the following:
Fiscal Years
(In thousands) 1998 1997 1996
- ---------------------------------------------------
Interest income $ 509 $ 861 $ 1,265
Interest expense (1,171) (2,115) (2,453)
Rental income 1,752 1,889 1,473
Other 138 279 149
------- ------- -------
Total $ 1,228 $ 914 $ 434
------- ------- -------
NOTE 10: CLIENT AND INDUSTRY CREDIT RISK
The Company serves clients in various segments of the economy. During 1998, 1997
and 1996, the Company provided services, representing approximately 27%, 29%
and 38%, respectively, of revenues to clients and to organizations and insurers
acting on behalf of clients in the transportation industry.
Revenues of approximately $10,076,000, $5,246,000 and $6,886,000 in fiscal 1998,
1997 and 1996, respectively, were earned on engagements for one client or for
organizations insuring or providing services to such client. As of January 1,
1999 and January 2, 1998, accounts receivable included $3,640,000 and
$1,912,000, 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 grow 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 that
specializes in the design, installation and maintenance of wireless
communication networks. They are located in the greater Madison, Wisconsin area
and have 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 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
16
<PAGE>
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. Under the original acquisition agreement,
future contingent payments of either cash or stock were considered, based upon
the attainment of certain revenue and profitability requirements as defined per
the terms of the agreement. Contingent payments were to be made at the end of
each fiscal year through fiscal 2001 if the revenue and profitability
requirements were attained. In February 1998, the Company made the first
contingent payment of $143,000 for EHG's financial performance through fiscal
1997. In September 1998, the original acquisition agreement was amended whereby
the Company's obligation for any future contingent payments was terminated in
exchange for a final payment of $250,000. Both payments were recorded against
goodwill as a purchase price adjustment.
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
financial statements. 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 years 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:
Fiscal Years
(In thousands, except per share data) 1997 1996
- -----------------------------------------------------------------
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
NOTE 12: DISCONTINUED OPERATIONS
Effective September 18, 1997 the Company sold all of the outstanding shares of
stock of its wholly-owned subsidiary, PLG, for a total purchase price of approx-
imately $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 started December 18, 1997 with the final
quarterly payment plus the remaining principal and any unpaid accrued interest
due on March 18, 1999. To date, all principal quarterly payments that have come
due have been paid.
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:
Fiscal Years
(In thousands) 1998 1997
- --------------------------------------------------------------------
Cash paid during the year:
Interest $1,087 $1,260
Income taxes $5,367 $2,198
Non-cash investing and financing activities:
Disposition of operations in
exchange for a promissory note - $2,053
Issuance of debt for financing of
insurance policy $1,369 -
Treasury shares issued for
acquisition of EEG - $2,375
17
<PAGE>
NOTE 14: SEGMENT REPORTING
The Company is a multidisciplinary organization of scientists, physicians,
engineers and business consultants performing in-depth scientific research and
analysis in a number of technical disciplines. The Company has two operating
segments based on two primary areas of service. One operating segment provides
services in the area of environmental and health risk analysis. This operating
segment provides a wide range of consulting services relating to environmental
hazards and risks and the impact on both human health and the environment. The
Company's other operating segment is a broader service providing scientific and
engineering consulting in different practices and primarily in the area of
impending litigation.
Segment information for the three fiscal years ended January 1, 1999, January 2,
1998 and January 3, 1997 follows:
REVENUES
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Environmental and health $17,985 $11,651 $ 864
Other scientific and
engineering 62,428 59,284 52,409
Other 5,064 2,533 -
----------------------------------
Total revenue $85,477 $73,468 $53,273
----------------------------------
OPERATING INCOME (LOSS)
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Environmental and health $ 1,429 $ 1,527 $ 232
Other scientific and
engineering 12,018 13,740 10,892
Other 245 (593) -
----------------------------------
Total segment operating
income 13,692 14,674 11,124
----------------------------------
Corporate operating loss (9,418) (8,183) (9,352)
----------------------------------
Total operating income $ 4,274 $ 6,491 $ 1,772
----------------------------------
ASSETS
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Environmental and health $ 6,261 $ 5,774 $ 248
Other scientific and
engineering 36,977 30,791 29,002
Other 2,984 1,456 -
----------------------------------
Total segment assets 46,222 38,021 29,250
----------------------------------
Corporate assets 40,763 50,230 51,328
----------------------------------
Total assets $86,985 $88,251 $80,578
----------------------------------
CAPITAL EXPENDITURES
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Environmental and health $ 431 $ 298 $ 7
Other scientific and
engineering 4,007 3,156 2,124
Other 197 565 -
----------------------------------
Total segment capital
expenditures 4,635 4,019 2,131
----------------------------------
Corporate capital expenditures 729 199 717
----------------------------------
Total capital expenditures $ 5,364 $ 4,218 $ 2,848
----------------------------------
DEPRECIATION AND AMORTIZATION
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Environmental and health $ 327 $ 182 $ 7
Other scientific and
engineering 2,453 2,015 2,223
Other 119 82 -
----------------------------------
Total segment depreciation
and amortization 2,899 2,279 2,230
----------------------------------
Corporate depreciation and
amortization 1,578 1,302 1,181
----------------------------------
Total depreciation and
amortization $ 4,477 $ 3,581 $ 3,411
----------------------------------
Information regarding Exponent's operations in different geographical areas:
REVENUES*
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
United States $83,280 $71,560 $50,305
Foreign countries 2,197 1,908 2,968
----------------------------------
Total $85,477 $73,468 $53,273
----------------------------------
* GEOGRAPHIC REVENUES ARE ALLOCATED BASED ON THE LOCATION OF THE CUSTOMER
PROPERTY, PLANT AND EQUIPMENT, NET
- ----------------------------------------------------------------------------
Fiscal Years
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
United States $32,062 $30,184 $28,702
Foreign countries 85 93 87
----------------------------------
Total $32,147 $30,277 $28,789
----------------------------------
18
<PAGE>
NOTE 15: COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
FISCAL 1998
- -------------------------------------------------------------------------------------------------------------------
April 3, July 3, October 2, January 1,
(In thousands, except per share data) 1998 1998 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $22,376 $20,625 $20,942 $21,534
Operating income 2,377 864 772 261
Income from continuing operations and before income taxes 2,632 1,291 1,018 562
Income from continuing operations and before discontinued operations 1,560 1,575 609 336
Net income $ 1,560 $ 1,575 $ 609 $ 336
--------------------------------------------
Income per share from continuing operations:
Basic $0.21 $0.21 $0.08 $ 0.05
Diluted $0.20 $0.20 $0.08 $ 0.05
Net income per share:
Basic $0.21 $0.21 $0.08 $ 0.05
Diluted $0.20 $0.20 $0.08 $ 0.05
Shares used in per share computations:
Basic 7,476 7,532 7,324 7,236
Diluted 7,987 8,025 7,480 7,301
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
- -------------------------------------------------------------------------------------------------------------------
April 4, July 4, October 3, January 2,
(In thousands, except per share data) 1997 1997 1997 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 (loss) 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
</TABLE>
19
<PAGE>
NOTE 16: SUBSEQUENT EVENT (UNAUDITED)
Effective February 1, 1999, the Company refinanced its 15-year life mortgage
note on the Company's headquarters building. The old note, which had an
outstanding principal balance of $16.2 million at the time of the refinancing,
had a floating rate of interest that was tied to LIBOR and was subject to
adjustment every month. Principal payments of $623,333 were due semi-annually on
February 1 and August 1 with the final principal payment and all accrued
interest due and payable on August 1, 2011.
The new note consists of a line of credit with a borrowing amount up to $5.0
million and a revolving reducing note up to $30.0 million for a total maximum
borrowing amount of $35.0 million. The $5.0 million line of credit is subject to
two interest rate options of either the prime rate in effect from time to time,
or a fixed rate determined by the bank to be 2.75% above LIBOR, with a floating
rate option of one month, two months, three months, six months, nine months or
twelve months. The line of credit has a one-year term maturing February 1, 2000.
The $30.0 million revolving reducing note is also subject to two interest rate
options of either prime less 1.5% or the fixed LIBOR plus 1.25% with a floating
rate option of one month, two months, three months, six months, nine months or
twelve months. This note has a ten-year term maturing February 1, 2009. Interest
will be paid on a monthly basis. Principal amounts subject to the prime interest
rate may be repaid at any time without penalty. Principal amounts subject to the
fixed LIBOR rate may also be repaid at any time but are subject to a prepayment
penalty if paid before the fixed-rate term or additional interest if paid after
the fixed-rate term. Additionally, the revolving reducing note is subject to
annual principal payments based on a 15-year amortization of the initial
commitment amount using an interest rate of 3-month LIBOR plus 1.25% in effect
on the date of the note.
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Exponent, Inc. and Subsidiaries
The Board of Directors and Stockholders
Exponent, Inc.
We have audited the accompanying consolidated balance sheets of Exponent, Inc.
and subsidiaries as of January 1, 1999 and January 2, 1998 and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the years in the three-year
period ended January 1, 1999. 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 1, 1999 and January 2, 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ending January 1, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Mountain View, California
January 26, 1999
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 closing prices for the Company's common stock.
Stock prices by quarter High Low
- --------------------------------------------------------
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 ended January 1, 1999
First quarter $11.00 $8.50
Second quarter $11.88 $8.00
Third quarter $ 8.63 $4.19
Fourth quarter $ 6.63 $4.25
Fiscal year ended December 31, 1999
First quarter (through
February 26, 1999) $ 6.50 $5.75
As of February 26, 1999, there were 383 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.
21
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL SUMMARY
EXPONENT, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Revenues $85,477 $73,468 $53,273 $52,824 $51,037
Operating expenses:
Compensation and related expenses 55,162 45,991 33,541 31,942 29,800
Other operating expenses 17,237 14,021 12,381 13,069 13,257
General and administrative expenses 8,804 6,965 5,579 4,373 5,547
Provision for restructuring expenses - - - - (333)
---------------------------------------------------
81,203 66,977 51,501 49,384 48,271
---------------------------------------------------
Operating income 4,274 6,491 1,772 3,440 2,766
Other income (expense):
Interest expense, net (662) (1,254) (1,188) (1,059) (1,278)
Miscellaneous income, net 1,890 2,168 1,622 1,172 615
---------------------------------------------------
Income from continuing operations before
income taxes 5,502 7,405 2,206 3,553 2,103
Income taxes 1,422 2,999 367 1,439 906
---------------------------------------------------
Income from continuing operations 4,080 4,406 1,839 2,114 1,197
Discontinued operations:
Loss from operations of PLG, Inc. - (144) (1,832) (92) (77)
Extraordinary item - - (443) - -
---------------------------------------------------
Net income (loss) $ 4,080 $ 4,262 ($436) $ 2,022 $ 1,120
Income per share from continuing operations:
Basic $ 0.55 $ 0.62 $ 0.28 $ 0.32 $ 0.16
Diluted $ 0.53 $ 0.60 $ 0.27 $ 0.31 $ 0.16
Net income (loss) per share:
Basic $ 0.55 $ 0.60 ($0.07) $ 0.31 $ 0.15
Diluted $ 0.53 $ 0.58 ($0.07) $ 0.30 $ 0.15
Shares used in per share computations:
Basic 7,392 7,148 6,663 6,610 7,302
Diluted 7,708 7,385 6,801 6,728 7,313
</TABLE>
22
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
State or Other Jurisdiction
of Incorporation or
Subsidiary Incorporation or Organization
---------- -----------------------------
Exponent Failure Analysis Associates, Inc. Delaware
FaAA Investments 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
------------
Report on Financial Statement Schedule and Consent of Independent Auditors
--------------------------------------------------------------------------
The Board of Directors and Stockholders
Exponent, Inc.:
The audits referred to in our report dated January 26, 1999, included the
related financial statement schedule as of January 1, 1999, and for each of the
years in the three-year period ended January 1, 1999, as listed in the index in
item 14(a) 2 herein. 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, 1999, relating to the consolidated balance sheets of
Exponent, Inc. and subsidiaries as of January 1, 1999 and January 2, 1998 and
the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended January 1, 1999, and the related schedule, which
reports appear in the January 1, 1999, annual report on Form 10-K for
Exponent, Inc.
KPMG LLP
Mountain View, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K405
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 6,082
<SECURITIES> 0
<RECEIVABLES> 34,889
<ALLOWANCES> 1,000
<INVENTORY> 0
<CURRENT-ASSETS> 45,097
<PP&E> 64,243
<DEPRECIATION> 32,096
<TOTAL-ASSETS> 86,985
<CURRENT-LIABILITIES> 12,526
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 58,307
<TOTAL-LIABILITY-AND-EQUITY> 86,985
<SALES> 0
<TOTAL-REVENUES> 85,477
<CGS> 0
<TOTAL-COSTS> 55,162
<OTHER-EXPENSES> 26,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,171
<INCOME-PRETAX> 5,502
<INCOME-TAX> 1,422
<INCOME-CONTINUING> 4,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,080
<EPS-PRIMARY> .55
<EPS-DILUTED> .53
</TABLE>
