FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number 0-18655
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EXPONENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number)
149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA 94025
- ---------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (650) 326-9400
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No___
--
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 4, 2000
- ---------------------------- -----------------------------
Common Stock $.001 par value 6,570,298 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(in thousands, except share data)
(unaudited)
June 30, December 31,
2000 1999
-------------- --------------
Assets
Current assets:
Cash and cash equivalents..................................... $ 485 $ -
Accounts receivable, net...................................... 40,890 38,494
Prepaid expenses and other assets............................. 3,271 2,345
Deferred income taxes......................................... 1,389 1,389
------------- -------------
Total current assets...................................... 46,035 42,228
Property, equipment and leasehold improvements, net................. 31,520 29,468
Goodwill............................................................ 7,164 7,851
Deferred income taxes............................................... 365 365
Other assets........................................................ 627 540
------------- -------------
$ 85,711 $ 80,452
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities...................... $ 2,677 $ 4,040
Current installments of long-term obligations................. 304 415
Accrued payroll and employee benefits......................... 12,056 11,101
Deferred revenues............................................. 5,491 -
------------- -------------
Total current liabilities................................. 20,528 15,556
Long-term obligations, net of current installments.................. 369 4,139
Other obligations................................................... 541 609
------------- -------------
Total liabilities......................................... 21,438 20,304
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Stockholders' equity:
Common stock.................................................. 8 8
Additional paid-in capital.................................... 33,153 33,406
Accumulated other comprehensive losses........................ (73) (66)
Retained earnings............................................. 38,943 34,470
Treasury shares, at cost, 1,224,998 and 1,223,231 shares at
June 30, 2000 and December 31, 1999, respectively........ (7,758) (7,670)
------------- -------------
Total stockholders' equity.............................. 64,273 60,148
------------- -------------
$ 85,711 $ 80,452
============= ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Six Months Ended June 30, 2000 and July 2, 1999
(in thousands, except per share data)
(unaudited)
Quarters Ended Six Months Ended
-------------------------------- -----------------------------------
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
--------------- --------------- --------------- ----------------
Revenues............................................. $ 25,619 $ 23,353 $ 51,745 $ 47,168
--------------- -------------- --------------- ----------------
Operating expenses:
Compensation and related expenses............... 16,345 15,186 32,587 30,354
Other operating expenses........................ 4,139 3,982 8,142 7,927
General and administrative expenses............. 2,289 2,360 4,881 4,634
--------------- -------------- --------------- ---------------
22,773 21,528 45,610 42,915
--------------- -------------- --------------- ---------------
Operating income.............................. 2,846 1,825 6,135 4,253
Other income, net.................................... 528 509 897 866
--------------- -------------- --------------- ---------------
Income from continuing operations
before income taxes......................... 3,374 2,334 7,032 5,119
Income taxes......................................... 1,396 966 2,913 2,120
--------------- -------------- --------------- ---------------
Income from continuing operations............. 1,978 1,368 4,119 2,999
Discontinued operations:
Loss from operation of BCS Wireless, Inc.
(net of taxes of ($109), ($68), ($69) and
($268) respectively).......................... (153) (95) (97) (377)
Gain on disposition of BCS Wireless, Inc.
(net of taxes of $320)........................ 451 - 451 -
--------------- -------------- --------------- ---------------
298 (95) 354 (377)
--------------- -------------- --------------- ---------------
Net income.................................... $ 2,276 $ 1,273 $ 4,473 $ 2,622
=============== ============== =============== ===============
Income per share from continuing operations:
Basic $ 0.30 $ 0.20 $ 0.62 $ 0.43
Diluted $ 0.28 $ 0.20 $ 0.58 $ 0.43
Income (loss) per share from discontinued operations:
Basic $ 0.04 $ (0.01) $ 0.05 $ (0.05)
Diluted $ 0.04 $ (0.01) $ 0.05 $ (0.05)
Net income per share:
Basic $ 0.34 $ 0.19 $ 0.67 $ 0.38
Diluted $ 0.32 $ 0.18 $ 0.63 $ 0.37
Shares used in per share computations:
Basic 6,690 6,794 6,685 6,935
Diluted 7,105 6,922 7,090 7,049
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Quarters and Six Months Ended June 30, 2000 and July 2, 1999
(in thousands)
(unaudited)
Quarters Ended Six Months Ended
------------------------------- --------------------------------
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
-------------- --------------- --------------- ---------------
Net income........................................... $ 2,276 $ 1,273 $ 4,473 $ 2,622
Other comprehensive income (loss) -
foreign currency translation adjustments......... 7 (7) (7) (33)
-------------- --------------- --------------- ---------------
Comprehensive income................................. $ 2,283 $ 1,266 $ 4,466 $ 2,589
============== =============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and July 2, 1999
(in thousands)
(unaudited)
Six Months Ended
-------------------------------------
June 30, 2000 July 2, 1999
----------------- -----------------
Cash flows from operating activities:
Net income........................................................... $ 4,473 $ 2,622
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................. 2,190 2,222
Gain on disposition of BCS Wireless, Inc...................... (451) -
Gain on sale of building...................................... - (213)
Provision for doubtful accounts............................... 1,381 1,061
Changes in operating assets and liabilities:
Accounts receivable....................................... (5,264) (6,114)
Prepaid expenses and other assets......................... (400) 347
Accounts payable and accrued liabilities.................. (1,531) 49
Accrued payroll and employee benefits..................... 1,022 1,869
Deferred revenues......................................... 5,491 -
Income taxes payable...................................... 268 (98)
Other obligations......................................... (126) (94)
Net operating activities of discontinued operations....... 693 271
---------------- ----------------
Net cash provided by operating activities.............. 7,746 1,922
---------------- ----------------
Cash flows from investing activities:
Gross proceeds from sale of building................................. - 4,411
Capital expenditures................................................. (4,451) (2,437)
Proceeds from disposition of BCS Wireless, Inc., net................. 1,870 -
Other assets......................................................... (433) (153)
Net investing activities of discontinued operations.................. (34) (33)
---------------- ----------------
Net cash provided by (used in) investing activities.... (3,048) 1,788
---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings and issuance of
long-term obligations............................................ - 17,391
Repayments of borrowings and long-term obligations................... (3,882) (24,535)
Repurchase of common stock........................................... (1,372) (3,047)
Issuance of common stock............................................. 1,026 399
Net financing activities of discontinued operations.................. 15 -
---------------- ----------------
Net cash used in financing activities.................. (4,213) (9,792)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents.............................. 485 (6,082)
Cash and cash equivalents at beginning of period.................................. - 6,082
---------------- ----------------
Cash and cash equivalents at end of period........................................ $ 485 $ -
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Quarters and Six Months Ended
June 30, 2000 and July 2, 1999
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") and BCS
Wireless, Inc. ("BCS") whose results of operations have been accounted for as a
discontinued operation for the quarters and six months ended June 30, 2000 and
July 2, 1999. The Company operates on a 52-53 week fiscal calendar year ending
on the Friday closest to the last day of December.
The accompanying condensed, consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of Exponent and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In the opinion
of management, all adjustments which are necessary for the fair presentation of
the condensed consolidated financial statements have been included and all such
adjustments are of a normal and recurring nature. The operating results for the
fiscal quarters and six month periods ended June 30, 2000 and July 2, 1999, are
not necessarily representative of the results of future quarterly or annual
periods.
Reclassifications:
Certain amounts in the statement of cash flows for the six months ended
July 2, 1999 have been reclassified in order to conform to current financial
statement presentation.
Note 2: Discontinued Operations
On May 1, 2000, the Company sold certain assets of BCS Wireless, Inc.
for $2.0 million in cash and the assumption of approximately $745,000 in
liabilities. The Company recorded a gain on the disposition of BCS of $451,000,
net of taxes of $320,000. The Company retained approximately $400,000 in net
cash and $1.4 million in net accounts receivables of BCS. As of June 30, 2000,
approximately $520,000 in net accounts receivable remained outstanding.
The Company committed to a formal plan to divest BCS effective April 2,
1999. Accordingly, the results of operations for BCS for the quarters ending
June 30, 2000 and July 2, 1999 have been recorded as a discontinued operation in
the condensed consolidated statements of income. The decision to divest BCS was
made because the Company's management believed the subsidiary was no longer a
strategic fit for the Company.
Note 3: Net Income Per Share
Basic per share amounts are computed using the weighted average number
of common shares outstanding during the period. Dilutive per share amounts are
computed using the weighted-average number of common shares outstanding and
potentially dilutive securities, using the treasury stock method, even when
antidilutive, if their effect would be dilutive on the per share amount of
income from continuing operations.
6
The following schedule reconciles both the numerator and denominator of
the Company's calculation for basic and diluted net income per share:
Quarters Ended Six Months Ended
---------------------------- ---------------------------
June 30, July 2, June 30, July 2,
(In thousands) 2000 1999 2000 1999
------------- ------------ ------------ ------------
Shares used in basic per share computation 6,690 6,794 6,685 6,935
Effect of dilutive common stock options outstanding 415 128 405 114
------------- ------------ ------------ ------------
Shares used in diluted per share computation 7,105 6,922 7,090 7,049
============= ============ ============ ============
Common stock options to purchase 261,291 and 918,947 shares for the quarters
ended June 30, 2000 and July 2, 1999, respectively, were excluded from the
diluted per share calculation, due to their antidilutive effect. For the six
months ended June 30, 2000 and July 2, 1999, respectively, common stock options
to purchase 218,570 and 994,947 shares, were excluded from the diluted per share
calculation, due to their antidilutive effect.
Note 5: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
Six Months Ended
-----------------------------------
(In thousands) June 30, 2000 July 2, 1999
---------------- -----------------
Cash paid during period:
Interest $ 107 $ 360
Income taxes $ 3,648 $ 1,832
Note 6: 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
and occupational hazards and risks and the impact on both human health and the
environment. The Company's other operating segment is a broader service group
providing scientific and engineering consulting in different practices and
primarily in the area of impending litigation.
Segment information for the quarters and six months ended June 30, 2000 and July
2, 1999 follows:
Revenues
Quarters Ended Six Months Ended
----------------------------------- -----------------------------------
(In thousands) June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
----------------- ----------------- ----------------- -----------------
Environmental and health $ 5,662 $ 5,124 $ 11,129 $ 10,121
Other scientific and engineering 19,957 18,229 40,616 37,047
----------------- ----------------- ----------------- -----------------
Total revenues $ 25,619 $ 23,353 $ 51,745 $ 47,168
================= ================= ================= =================
7
Operating income (loss)
Quarters Ended Six Months Ended
----------------------------------- ------------------------------------
(In thousands) June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
----------------- ----------------- ----------------- -----------------
Environmental and health $ 1,257 $ 760 $ 2,264 $ 1,438
Other scientific and engineering 4,901 4,575 10,796 9,888
----------------- ----------------- ----------------- -----------------
Total segment operating income 6,158 5,335 13,060 11,326
Corporate operating loss (3,312) (3,510) (6,925) (7,073)
----------------- ----------------- ----------------- -----------------
Total operating income $ 2,846 $ 1,825 $ 6,135 $ 4,253
================= ================= ================= =================
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q (this "Report" for Exponent, Inc.
(the "Company" or "Exponent")) contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995 and the rules promulgated pursuant to the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended) that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. Such forward-looking statements are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. When used in
this document and in the documents incorporated herein by reference, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. Such statements reflect the current views of the
Company or its management with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual results, performance, or achievements could differ
materially from those expressed in, or implied by, any such forward-looking
statements. Factors that could cause or contribute to such material differences
include those discussed elsewhere in this Report and in the documents
incorporated herein by reference. The inclusion of such forward-looking
information should not be regarded as a representation by the Company or any
other person that the future events, plans, or expectations contemplated by the
Company will be achieved. The Company undertakes no obligation to release
publicly any updates or revisions to any such forward-looking statements that
may reflect events or circumstances occurring after the date of this Report.
General
The Company derives most of its revenue from professional service
activities, generally at the time services are performed. The majority of these
activities are provided under "time and materials" or "fixed-price" billing
arrangements, 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's principal expenses are professional compensation and related expenses.
Results of Operations
The following discussion should be read in conjunction with the
attached unaudited condensed consolidated financial statements and notes thereto
and with the Company's audited consolidated financial statements and notes
thereto for the fiscal year ended December 31, 1999, which is contained in the
Company's fiscal 1999 Annual Report on Form 10-K.
2000 Fiscal Quarter and Six Months Ended June 30, 2000 compared to 1999 Fiscal
Quarter and Six Months Ended July 2, 1999
Revenues for the second quarter of fiscal 2000 were $25.6 million
compared to $23.4 million for the same quarter of fiscal 1999, an increase of
9.7%. This increase was the result of growth in both the environmental and
health, and other scientific and engineering segments during the quarter.
Revenues increased by 9.7% for the six months ended June 30, 2000 to $51.7
million compared to $47.2 million for the same period in fiscal 1999. This
increase was also a result of growth in both of the Company's segments for the
first six months of fiscal 2000. This growth was due to the effect of higher
billable hours due to an increase in the number of professional staff as well as
higher utilization of existing professional staff, and the effect of bill rate
increases. In addition, revenues from several fixed-price projects, including
the Land Warrior project for the U.S. Army, which is an integrated digital
system for the dismounted soldier, contributed to revenue growth for the first
six months of fiscal 2000.
Compensation and related expenses increased by 7.6% to $16.3 million
for the second quarter of fiscal 2000 compared to $15.2 million for the same
period in fiscal 1999. The increase was due to the hiring of additional
employees
9
combined with annual salary increases for all employees. As a percentage of
revenue, total compensation decreased to 63.8% for the second quarter of fiscal
2000 compared to 65.0% for the same period in fiscal 1999. This decrease was
primarily due to increased utilization rates in the second quarter of fiscal
2000 in a number of the Company's practice areas. For the six months ended June
30, 2000, compensation and related expenses increased by 7.4% to $32.6 million
as compared to $30.4 million for the six months ended July 2, 1999. As mentioned
previously, this increase resulted from company-wide annual salary increases and
the hiring of additional employees. As a percentage of revenue, compensation and
related expenses decreased to 63.0% for the six months ended June 30, 2000 as
compared to 64.4% for the six months ended July 2, 1999.
Other operating expenses increased by 3.9% to $4.1 million for the
second quarter of fiscal 2000 compared to $4.0 million for the same quarter in
fiscal 1999. The increase was largely due to increases in occupancy costs and
technical supplies. The growth in occupancy expenses is primarily the result of
the addition of two new regional offices in California during the second half of
fiscal 1999, a new lease agreement for the Company's Seattle area office, which
took effect in May 1999 and a new lease agreement for the Company's warehouse
facility in Menlo Park, which took effect in June 2000. The increase in
technical supplies is a result of increased activity at the Company's Test and
Engineering Center in Phoenix. Other operating expenses increased by 2.7% to
$8.1 million for the six months ended June 30, 2000 compared to $7.9 million for
the same period a year ago. The increase was attributable to the aforementioned
increase in occupancy and technical supplies costs partially offset by
reductions in computer expenses. As a percentage of revenue, operating expenses
decreased overall to 15.7% for the six month period ended June 30, 2000 as
compared to 16.8% for the six month period ended July 2, 1999.
General and administrative expenses decreased 3.0% to $2.3 million for
the second quarter of fiscal 2000 compared to $2.4 million for the same period
in fiscal 1999. This decrease was primarily a result of a decrease in employee
relocation and travel costs, and a decrease in bad debt expense, partially
offset by increased business and practice development costs. General and
administrative expenses as a percentage of revenue decreased to 8.9% of total
revenues for the second quarter of fiscal 2000 compared to 10.1% for the second
quarter of fiscal 1999. For the six months ended June 30, 2000, general and
administrative expenses increased to $4.9 million from $4.6 million for the six
month period ended July 2, 1999. As a percentage of revenue, general and
administrative expenses decreased slightly to 9.4% for the six months ended June
30, 2000 from 9.8% for the same period a year ago. The increase in general and
administrative expenses for the first six months of fiscal 2000 as compared to
the same period of fiscal 1999 was primarily a result of an increase in bad debt
expense, the majority of which was recorded in the first quarter of fiscal 2000.
Other income, net, consists primarily of investment income earned on
available cash and cash equivalents and rental income from leasing excess space
in the Company's headquarters facility located in Menlo Park, California, net of
interest expense on the Company's mortgage. Other income, net, increased $19,000
to $528,000 for the second quarter of fiscal 2000 compared to $509,000 for the
same period of 1999. This increase was due to a decrease in interest expense due
to reduced borrowings on the Company's revolving reducing note, and $63,000
received as proceeds from insurance based investments. These increases were
partially offset by a reduction in rental income due to the sale of one of the
Company's excess facilities in May 1999. In addition, the sale of the facility
generated a $213,000 gain during the second quarter of fiscal 1999. Other
income, net increased to $897,000 for the six months ended June 30, 2000
compared to $866,000 during the same period a year ago. Again, the increase is
primarily due to a decrease in interest expense due to reduced borrowings on the
Company's revolving reducing note partially offset by a reduction in rental
income and the gain on the sale of the excess facility in 1999.
Liquidity and Capital Resources
2000 Fiscal Quarter and Six Months Ended June 30, 2000 Compared to 1999 Fiscal
Quarter and Six Months Ended July 2, 1999
Effective February 1, 1999, the Company changed its cash management
policy to use all excess operating cash to pay down the revolving reducing
mortgage on the Company's headquarters building. The balance on the Company's
mortgage was reduced to zero as of June 30, 2000. The Company invests excess
cash in short-term cash equivalents.
10
The Company had $485,000 in cash and cash equivalents as of June 30, 2000. The
Company financed its business for the current period principally through cash
received from operating activities.
Net cash provided by operating activities was $7.7 million in the first
six months of fiscal 2000, compared to net cash provided by operating activities
of $1.9 million for the comparable period in fiscal 1999. This increase in cash
provided by operating activities was primarily attributable to increased net
income and the changes in operating assets and liabilities, especially the
increase in deferred revenues.
Net cash used in investing activities was $3.0 million for the first
six months of fiscal 2000, compared to net cash provided by investing activities
of $1.8 million for the comparable period of fiscal 1999. This increase in cash
used was primarily a result of increased capital expenditures related to the
construction of an engineering and test preparation building at the Company's
Test and Engineering Center in Phoenix, partially offset by the funds provided
by the disposition of BCS during the first six months of fiscal 2000.
Net cash used in financing activities was $4.2 million for the first
six months of fiscal 2000 compared to $9.8 million for the comparable period in
fiscal 1999. This decrease in cash used by financing activities was due to the
decrease in funds used for repayment of outstanding debt. The Company used $3.9
million in funds to pay down net borrowings during the first six months of
fiscal 2000 as compared to net repayments of $7.1 million during the same period
of fiscal 1999. In addition, there was a reduction in the amount of shares of
Company common stock repurchased during the period. The Company purchased $1.4
million in shares during the first six months of fiscal 2000 as compared to $3.0
million purchased during the same period of 1999.
The Company's long-term obligations at June 30, 2000 included the
long-term portion of an insurance financing agreement in the amount of $282,000.
Management believes that its revolving note, together with funds
generated from operations, will provide adequate cash to fund the Company's
anticipated cash needs through at least the next twelve-month period.
11
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.
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 as services are performed, are terminable at any time by clients. As a
result, backlog at any particular time is small in relation to its quarterly
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.
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.
Other Income
The Company currently subleases excess facilities, primarily in its
Menlo Park, California headquarters, that have lease terms that expire within
the 2000 to 2003 time period. In the first six months of fiscal 2000 and 1999,
miscellaneous rental income associated with these facilities amounted to
approximately 9.2% and 17.5%, respectively, of income from continuing operations
before income taxes. The sale of one of these excess facilities in May 1999
reduced the amount of future rental income, however much of the impact of this
reduction was offset by corresponding reductions in facility operating costs,
depreciation and interest expense. Should the remaining subleases not be
extended, renewed or have their term options exercised, the loss of additional
miscellaneous rental income could have a material adverse effect on the
Company's operating results.
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.
12
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 3. 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 new financing agreement. The new mortgage note consists of a revolving
reducing note, secured by the Company's headquarters building, with a borrowing
amount up to $30.0 million. The $30.0 million revolving reducing note is subject
to automatic annual reductions in the amount available to be borrowed of
approximately $1.3 million to $2.1 million per year until January 31, 2008. As
of June 30, 2000, $28.7 million was available to be borrowed. Any outstanding
amounts on the revolving reducing note are due and payable in full on January
31, 2009. The Company may from time to time during the term of the note borrow,
partially or wholly repay its outstanding borrowings and re-borrow up to the
maximum principal amounts, subject to the reductions in availability contained
in the note. The note is also subject to two interest rate options of either
prime less 1.5% or the fixed LIBOR plus 1.25% with a term option of one month,
two months, three months, six months, nine months, or twelve months. 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.
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.
13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2000 Annual Meeting of Stockholders held on May 1,
2000 (the "Annual Meeting"), the following individuals were elected to the Board
of Directors:
BROKER
FOR WITHELD NON-VOTES
--- ------- ---------
Michael R. Gaulke 6,035,845 478,416 N/A
Samuel H. Armacost 6,038,429 475,832 N/A
Barbara M. Barrett 6,038,329 475,932 N/A
Jon R. Katzenbach 6,011,085 503,176 N/A
Edward J. Keith 6,038,429 475,832 N/A
Subbaiah V. Malladi 6,036,128 478,133 N/A
Roger L. McCarthy 6,035,945 478,316 N/A
The following proposals were approved by the stockholders at the Company's
Annual Meeting:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1. The appointment of KPMG LLP
as independent auditors for
the period ending
December 29, 2000. 6,235,992 5,111 273,158 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 2000.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPONENT, INC.
-------------
(Registrant)
Date: August 11, 2000 /s/ Richard L. Schlenker
---------------------------------------------
Richard L. Schlenker, Chief Financial Officer
15
Index to Exhibits
-----------------
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
16