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 April 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission File Number 0-18655
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EXPONENT, INC.
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(formerly named The Failure Group, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
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(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA 94025
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (650) 326-9400
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
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Common Stock $.001 par value 7,537,491 shares
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 3, 1998 AND JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
April 3, 1998 January 2, 1998
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ASSETS
Current assets:
Cash and cash equivalents............ $ 3,331 $ 8,412
Short-term investments............... 3,991 6,370
Accounts receivable, net of
allowance for doubtful accounts
of $1,000 at April 3, 1998
and January 2, 1998................. 31,344 27,279
Prepaid expenses and other assets.... 5,140 5,160
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Total current assets.............. 43,806 47,221
Property, equipment and leasehold....... 31,022 30,277
improvements, net
Other assets............................ 10,840 10,753
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$85,668 $88,251
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 2,135 $ 1,987
Notes payable and current
installments of long-term........... 1,248 1,248
obligations
Accrued payroll and employee
benefits............................ 6,202 8,351
Income taxes payable................. 259 2,207
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Total current liabilities......... 9,844 13,793
Long-term obligations, net of current... 16,071 16,654
installments
Deferred income taxes................... 1,088 1,088
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Total liabilities................. 27,003 31,535
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Stockholders' equity:
Common stock......................... 8 8
Additional paid-in capital........... 33,218 $33,133
Accumulated comprehensive income..... 16 11
Retained earnings.................... 27,285 25,793
Treasury shares, at cost: 365,005
and 459,784 shares at April 3, 1998
and January 2, 1998, respectively... (1,862) (2,229)
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Total stockholders' equity........ 58,665 56,716
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$85,668 $88,251
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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 ENDED APRIL 3, 1998 AND APRIL 4,1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarters Ended
April 3, 1997 April 4, 1997
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Revenues............................................................. $22,376 $16,490
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Operating expenses:
Professional compensation and related expenses.................... 13,759 10,219
Other operating expenses.......................................... 4,039 3,169
General and administrative expenses............................... 2,201 1,495
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19,999 14,883
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Operating income.............................................. 2,377 1,607
Other income (expense)............................................... 255 347
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Income from continuing operations before income
taxes...................................................... 2,632 1,954
Provision for income taxes........................................... 1,072 791
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Income from continuing operations............................. 1,560 1,163
Discontinued operations
Income from operations of PLG, Inc............................ - 8
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Net income.............................................. $ 1,560 $ 1,171
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Income per share from continuing operations
Basic...................................................... $ 0.21 $ 0.17
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Diluted.................................................... $ 0.20 $ 0.17
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Net income per share
Basic...................................................... $ 0.21 $ 0.17
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Diluted.................................................... $ 0.20 $ 0.17
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Shares used in per share computations
Basic...................................................... 7,476 6,806
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Diluted.................................................... 7,987 6,892
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 4, 1997
(IN THOUSANDS)
THREE MONTHS ENDED
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APRIL 3, 1998 April 4, 1997
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Cash flows from operating activities:
Net income................................................................ $ 1,560 $ 1,171
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization........................................... 1,016 488
Provision for doubtful accounts......................................... 58 14
Changes in operating assets and liabilities
Accounts receivable..................................................... (4,123) (4,580)
Prepaid expenses........................................................ 20 (983)
Accounts payable and accrued liabilities................................ 148 (1,785)
Accrued payroll and employee benefits................................... (2,149) (296)
Income taxes payable and current deferred income tax.................... (1,948) 27
Net operating activities of discontinued operations....................... - (214)
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Net cash used by operating activities....................................... (5,418) (6,158)
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Cash flows from investing activities:
Capital expenditures.................................................... (1,567) (585)
Acquisition of BCS, Inc., net of cash acquired.......................... - (314)
Sales of short-term investments......................................... 4,084 9,026
Purchases of short-term investments..................................... (1,705) (1,064)
Other assets............................................................ (276) 97
Net investing activities of discontinued operations..................... - (21)
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Net cash provided by investing activities................................... 536 7,139
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Cash flows from financing activities:
Proceeds from borrowings and issuance of long-term obligations.......... - 7
Repayments of borrowings and long-term obligations...................... (583) (811)
Net issuance and retirements of common stock............................ 384 33
Net financing activities of discontinued operations..................... - (3)
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Net cash used by financing activities....................................... (199) (774)
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Net increase (decrease) in cash and cash equivalents........................ (5,081) 207
Cash and cash equivalents at beginning of period............................ 8,412 4,465
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Cash and cash equivalents at end of period.................................. $ 3,331 $ 4,672
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTERS ENDED
APRIL 3, 1998 AND APRIL 4, 1997
NOTE 1: BASIS OF PRESENTATION
Exponent, Inc., together with its subsidiaries (referred to as the
"Company"), is a multidisciplinary organization of scientists, physicians,
engineers and business consultants performing in-depth scientific research and
analysis in over 50 technical disciplines. The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, Failure Analysis Associates, Inc. ("FaAA"), Exponent Health Group,
Inc. ("EHG"), Exponent Environmental Group, Inc. ("EEG"), BCS Wireless, Inc.
("BCS") and PLG, Inc. ("PLG") whose results of operations have been accounted
for as a discontinued operation for the quarter ending April 4, 1997. The
Company operates on a 52-53 week fiscal calendar year ending on the Friday
closest to the last day of December.
The accompanying condensed, consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of Exponent and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In the opinion
of management, all adjustments which are necessary for the fair presentation of
the condensed consolidated financial statements have been included and all such
adjustments are of a normal and recurring nature. The operating results for the
fiscal quarters ended April 3, 1998 and April 4, 1997, are not necessarily
representative of the results of future quarterly or annual periods.
NOTE 2: DISCONTINUED OPERATIONS
Effective September 18, 1997 the Company sold all of the outstanding
shares of stock of its wholly owned subsidiary, PLG, Inc. ("PLG"), for a total
purchase price of approximately $2.0 million which included a premium of
$600,000 over the net book value. The Company made the decision to sell PLG
based on management's assessment that the services PLG provided, which included
consulting services primarily to the nuclear industry, were no longer
complementary to the Company's core business practice areas.
The Company received an unsecured subordinated promissory note as
consideration of the $2.0 million purchase price. The note has an 18-month
maturity date and bears interest at 10%. Six quarterly principal payments of
approximately $170,000 plus accrued interest will be made starting December 18,
1997 with the final quarterly payment plus the remaining principal and any
unpaid accrued interest due on March 18, 1999. To date, all principal quarterly
payments that have come due have been paid.
The effect of this discontinued operations on the basic and diluted earnings per
share for the quarter ending April 4, 1997 was immaterial.
NOTE 3: NET INCOME PER SHARE
Basic per share amounts are computed using the weighted average number
of common shares outstanding during the period. Dilutive per share amounts are
computed using the weighted-average number of common shares and potential common
shares outstanding, using the treasury stock method, when antidilutive.
5
The following schedule reconciles the denominator of the Company's net
income per share calculation for basic and dilutive net income per share:
Quarters Ended
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April 3, 1998 April 4, 1997
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Denominator
Denominator for basic net income per share-
weighted average shares outstanding 7,476 6,806
Effect of dilutive securities
Dilutive options outstanding 511 86
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversion 7,987 6,892
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130," Reporting Comprehensive Income". SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
shareholders' equity in accordance with SFAS No. 115, "Accounting for Certain
Debt and Equity Securities." SFAS No. 130 is effective for annual and interim
periods beginning after December 15, 1997 and for periods ended before that date
when presented for comparative purposes. The Company has not yet determined the
format it will use to display the information required by SFAS No. 130 in the
financial statements for the year ending January 1, 1999. Total comprehensive
income, in thousands, was $5K and ($55K) for the three months ended April 3,
1998 and April 4, 1997, respectively. The primary components of other
comprehensive income included foreign currency translation adjustments and
unrealized holding gains and losses related to the Company's available-for-sale
investments.
NOTE 5: SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental disclosure of cash flow information, in
thousands:
Quarters Ended
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April 3, 1998 April 4, 1997
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Cash paid during the period:
Interest $ 295 $ 342
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Income taxes $3,021 $1,883
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6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Report contains, and incorporates by reference, certain forward-
looking statements (as such term is defined in the Private Securities Litigation
Reform Act of 1995 and the rules promulgated pursuant to the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended) that are
based on the beliefs of the Company's management, as well as assumptions made by
and information currently available to the Company's management. Such forward-
looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. When used in this document and in the
documents incorporated herein by reference, the words "anticipate," "believe,"
"estimate," "expect" and similar expressions, as they relate to the Company or
its management, are intended to identify such forward-looking statements. Such
statements reflect the current views of the Company or its management with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, the Company's actual results,
performance, or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements. Factors that could cause or
contribute to such material differences include those discussed elsewhere in
this Report and in the documents incorporated herein by reference. The
inclusion of such forward-looking information should not be regarded as a
representation by the Company or any other person that the future events, plans,
or expectations contemplated by the Company will be achieved. The Company
undertakes no obligation to release publicly any updates or revisions to any
such forward-looking statements that may reflect events or circumstances
occurring after the date of this Report.
GENERAL
The Company derives a substantial majority of its revenues from
professional service activities. Revenues from professional services are
principally derived under "time and expenses" and "fixed-fee" billing
arrangements, and are recorded as work is performed. Professional fees are a
function of the total number of hours billed to clients and the associated
hourly billing rates or fixed-fee arrangement with the client. The Company also
derives revenue from equipment fees and net billed expenses which consist
primarily of fees charged to clients for use of the Company's equipment and
facilities in connection with services provided. The Company's principal
expenses are professional compensation and related expenses.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited, condensed, consolidated financial statements and notes thereto and
with the Company's audited consolidated financial statements and notes thereto
for the fiscal year ended January 2, 1998, which is contained in the Company's
fiscal 1997 Annual Report on Form 10-K.
1998 Fiscal Quarter Ended April 3, 1998 Compared To 1997 Fiscal Quarter Ended
April 4, 1997
Revenues for the first quarter of fiscal 1998 were $22.4 million compared
to $16.5 million for the same quarter of fiscal 1997, an increase of 35.7%. This
increase is primarily due to the acquisition of Exponent Environmental Group,
Inc. ("EEG") which contributed $3.9 million or 66.1% of the total revenue
increase. The remaining $2.0 million increase is primarily due to an increase in
the revenues generated from the Company's subsidiary, BCS Wireless, Inc. ("BCS")
and the Company's health group business, Exponent Health Group, Inc. ("EHG").
7
Compensation and related expenses increased 35.2% to $13.8 million for the
first quarter of fiscal 1998 compared to $10.2 million for the same period in
fiscal 1997. The acquisition of EEG accounted for $2.5 million of the total
increase. The remaining $1.1 million increase is primarily due to an 8%
increase in the total number of employees primarily for EHG and BCS. As a
percentage of revenue, total compensation remained relatively flat for the
first quarter of fiscal 1998 compared to the same period in fiscal 1997.
Other operating expenses increased 25.0% to $4.0 million for the first
quarter of fiscal 1998 compared to $3.2 million for the same quarter in fiscal
1997. This increase was primarily due to the inclusion of operating expenses
attributable to the acquisition of EEG totaling approximately $600,000. The
remaining $200,000 increase is due to an increase in depreciation expense and
cost of goods sold from higher sales activity from the Company's subsidiary,
BCS. Other operating expenses were 18.1% of total revenues for the first quarter
of fiscal 1998 as compared to 19.2% for the comparable quarter of fiscal 1997, a
decrease of 1.1%.
General and administrative expenses increased 46.6% to $2.2 million for the
first quarter of fiscal 1998 compared to $1.5 million for the same period in
fiscal 1997. The acquisition of EEG accounted for approximately $325,000 of the
total increase while the remaining increase is attributable to higher recruiting
and relocation expense. General and administrative expenses as a percentage of
revenue increased slightly to 9.8% of total revenues for the first quarter of
fiscal 1998 compared to 9.1% for the first quarter of fiscal 1997.
Other income (expense) consists primarily of interest expense on the
Company's mortgage, net of investment income earned on available cash and short-
term investments and rental income from leasing excess space in the Company's
headquarter facility located in Menlo Park, California. Other income (expense)
decreased by $92,000 to $255,000 for the first quarter of fiscal 1998 from
$347,000 for the same period in fiscal 1997. This decrease is primarily due to a
decrease in investment interest income.
LIQUIDITY AND CAPITAL RESOURCES
1998 Fiscal Quarter Ended April 3, 1998 Compared To 1997 Fiscal Quarter Ended
April 4, 1997
At April 3, 1998, the Company had $3.3 million in cash and cash equivalents
and $4.0 million in short-term investments. The Company continues to finance
its business principally through cash flows from operating activities.
Net cash used by operating activities was $5.4 million in the first three
months of fiscal 1998 compared to $6.2 million for the comparable period of
fiscal 1997. This quarter-to-quarter decrease in cash used in operating
activities was primarily attributed to higher net income adjusted for non cash
items in the first quarter of fiscal 1998.
Net cash provided by investing activities was approximately $500,000 for
the first quarter of fiscal 1998 compared $7.1 million for the comparable
quarter of fiscal 1997. This decrease was a result of higher sales of short-term
investments in the first quarter of fiscal 1997 to provide cash primarily for
the acquisition of EEG and BCS.
Net cash used for financing activities was $239,000 for the first quarter
of fiscal 1998 compared to $774,000 in the comparable period of fiscal 1997.
This decrease in cash used in financing activities is primarily due to an
increase in cash from issuance of common stock through the employee stock
purchase plan and the exercising of sock options in the first quarter of fiscal
1998 of approximately $400,000.
The Company's long-term obligations at April 3, 1998 consisted primarily of
the mortgage obligation on the Company's headquarters facility in the amount of
$16.8 million, which will mature in August 2011 and consists of fixed semi-
annual principal payments and monthly interest payments
8
based on an adjustable interest rate tied to the London Interbank Offering
Rate. This rate is subject to adjustments every February and August.
Additionally, the Company renewed its $10 million line of credit agreement in
August 1997. This agreement is renewable on an annual basis. There were no
amounts borrowed against the line of credit during the first quarter of fiscal
1998.
Management believes that its existing cash and short-term investment
balances, together with its existing line of credit and funds generated from
operations, will provide adequate cash to fund the Company's anticipated cash
needs through at least the next twelve-month period.
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.
REGULATION
Public concern over health, safety and preservation of the environment has
resulted in the enactment of a broad range of environmental laws and regulations
by local, state and federal lawmakers and agencies. These laws and the
implementing regulations affect nearly every industry, as well as the agencies
of federal, state and local governments charged with their enforcement. To the
extent changes in such laws, regulations and enforcement or other factors
significantly reduce the exposures of manufacturers, owners, service providers
and others to liability, the demand for environmental services may be
significantly reduced.
COMPETITION
The markets for the Company's services are highly competitive. In addition,
there are relatively low barriers to entry into the Company's markets and the
Company has faced, and expects to continue to face, additional competition from
new entrants into its markets. Competitive pressure could reduce the market
acceptance of the company's services and result in price reductions that could
have a material adverse effect on the company's business, financial condition
and results of operations.
ABSENCE OF BACKLOG
Revenues are primarily derived from services provided in response to client
request or events that occur without notice, and engagements, generally billed
on a "time and expenses" basis, are terminable at any time by clients. As a
result, backlog at any particular time is small in relation to its quarterly
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.
9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Restated 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 April 3, 1998.
10
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.
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(formerly named The Failure Group, Inc.)
(Registrant)
Date: May 18, 1998 /s/ Michael R. Gaulke
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Michael R. Gaulke, Chief Executive Officer,
President and Director
11
INDEX TO EXHIBITS
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Exhibit
Number Description
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27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule