FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 0-18655
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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 November 6, 1998
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7,258,881
Common Stock $.001 par value ________________shares
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 1998 AND JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 2, JANUARY 2,
1998 1998
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ASSETS
Current assets:
Cash and cash equivalents..................................... $ 1,912 $ 8,412
Short-term investments........................................ - 6,370
Accounts receivable, net...................................... 35,164 27,279
Prepaid expenses and other assets............................. 8,223 5,160
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Total current assets........................................ 45,299 47,221
Property, equipment and leasehold improvements, net............. 32,297 30,277
Other assets.................................................... 9,370 10,753
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$86,966 $88,251
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities...................... 2,688 1,987
Notes payable and current installments of long-term
obligations.................................................. 1,737 1,248
Accrued payroll and employee benefits......................... 6,915 8,351
Income taxes payable.......................................... - 2,207
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Total current liabilities................................... 11,340 13,793
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Long-term obligations, net of current installments.............. 16,153 16,654
Deferred income taxes........................................... 1,088 1,088
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Total liabilities........................................... 28,581 31,535
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Stockholders' equity:
Common stock.................................................. 8 8
Additional paid-in capital.................................... 33,244 33,133
Accumulated comprehensive income.............................. - 11
Retained earnings............................................. 29,293 25,793
Treasury shares, at cost, 643,615 and 459,784 shares at
October 2, 1998 and January 2, 1998, respectively............ (4,160) (2,229)
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Total stockholders' equity.................................. 58,385 56,716
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$86,966 $88,251
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND NINE MONTHS ENDED OCTOBER 2, 1998 AND OCTOBER 3, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
Quarters Ended Nine Months Ended
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October 2, October 3, October 2, October 3,
1998 1997 1998 1997
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Revenues............................... $ 20,942 $20,178 $63,943 $54,238
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Operating expenses:
Compensation and related expenses..... 13,632 12,538 41,119 33,591
Other operating expenses.............. 4,383 3,728 12,693 10,290
General and administrative expenses... 2,155 1,961 6,118 4,927
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20,170 18,227 59,930 48,808
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Operating income................. 772 1,951 4,013 5,430
Other income........................... 246 170 928 697
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Income from continuing operations
before income taxes............ 1,018 2,121 4,941 6,127
Provision for income taxes............. 409 859 1,197 2,481
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Income from continuing operations... 609 1,262 3,744 3,646
Discontinued operations:
Income (loss) from operations of
PLG, Inc....................... - (155) - (144)
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Net income.................... $ 609 $ 1,107 $ 3,744 $ 3,502
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Income per share from continuing
operations
Basic........................ $ 0.08 $ 0.17 $ 0.50 $ 0.51
Diluted...................... $ 0.08 $ 0.17 $ 0.48 $ 0.49
Net income per share:
Basic........................ $ 0.08 $ 0.15 $ 0.50 $ 0.49
Diluted...................... $ 0.08 $ 0.15 $ 0.48 $ 0.47
Shares used in per share
computations
Basic........................ 7,324 7,305 7,444 7,100
Diluted...................... 7,480 7,594 7,840 7,400
The accompanying notes are an integral part of these condensed consolidated
financial statements
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EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1998 AND OCTOBER 3, 1997
(IN THOUSANDS)
UNAUDITED
NINE MONTHS ENDED
OCTOBER 2, 1998 OCTOBER 3, 1997
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Cash flows from operating activities:
Net income............................................................ $ 3,744 $ 3,502
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization..................................... 3,315 2,604
Provision for doubtful accounts................................... 128 261
Net operating activities of discontinued operations................... - (23)
Changes in operating assets and liabilities:
Accounts receivable.......................................... (8,013) (6,789)
Prepaid expenses............................................. 1,069 (729)
Accounts payable and accrued liabilities..................... 701 (1,452)
Accrued payroll and employee benefits........................ (1,497) 330
Income taxes payable and current deferred income tax......... (3,866) 210
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Net cash used by operating activities...................................... (4,419) (2,086)
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Cash flows from investing activities:
Capital expenditures.................................................. (4,632) (2,835)
Acquisition of BCS, Inc., net of cash acquired........................ - (314)
Acquisition of PTI, Inc., net of cash acquired........................ - (7,495)
Sales of short-term investments....................................... 8,309 19,300
Purchase of short-term investments.................................... (1,962) (4,557)
Other assets.......................................................... (389) 268
Net investing activities of discontinued operations................... - (154)
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Net cash provided by investing activities.................................. 1,326 4,213
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Cash flows from financing activities:
Proceeds from borrowings and issuance of long-term obligations........ - 6
Repayments of borrowings and long-term obligations.................... (1,344) (1,429)
Net issuance's and retirements of common stock........................ 756 145
Repurchases of common stock........................................... (2,819) -
Net financing activities of discontinued operations................... - -
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Net cash used by financing activities...................................... (3,407) (1,278)
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Net increase (decrease) in cash and cash equivalents....................... (6,500) 849
Cash and cash equivalents at beginning of period........................... 8,412 4,465
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Cash and cash equivalents at end of period................................. $ 1,912 $ 5,314
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The accompanying notes are an integral part of these condensed consolidated
financial statements
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EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTERS AND NINE MONTHS ENDED
OCTOBER 2, 1998 AND OCTOBER 3, 1997
NOTE 1: BASIS OF PRESENTATION
Exponent, Inc., (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 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.
("Health"), Exponent Environmental Group, Inc. ("Environmental"), BCS Wireless,
Inc. ("BCS") and PLG, Inc. ("PLG") whose results of operations have been
accounted for as a discontinued operation for the quarter and nine month period
ended October 3, 1997. The Company operates on a 52-53 week fiscal calendar
year ending on the Friday closest to the last day of December.
The accompanying condensed, consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of Exponent and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. In the opinion
of management, all adjustments which are necessary for the fair presentation of
the condensed consolidated financial statements have been included and all such
adjustments are of a normal and recurring nature. The operating results for the
fiscal quarters and nine month periods ended October 2, 1998 and October 3,
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. 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 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.
The effect of this discontinued operation on the basic and diluted earnings
per share for the quarter and nine month period ended October 3, 1997 was
immaterial.
NOTE 3: NET INCOME PER SHARE
Basic per share amounts are computed using the weighted- average
number of common shares outstanding during the period. Dilutive per share
amounts are computed using the weighted average number of common shares and
potential common shares outstanding, using the treasury stock method,
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even when antidilutive, if their effect would be dilutive on the per share
amount from continuing operations.
The following schedule reconciles, in thousands, the shares used in the
Company's basic and diluted net income per share calculation.
Quarter Ended Nine Months Ended
October 2, October 3, October 2, October 3,
1998 1997 1998 1997
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Basic earnings per share-
weighted average shares outstanding 7,324 7,305 7,444 7,100
Effect of dilutive securities
options outstanding 156 289 396 300
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Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversion 7,480 7,594 7,840 7400
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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. 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. 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 $25K
and $21K for the quarters ended October 2, 1998 and October 3, 1997 respectively
and ($10K) and ($51K) for the nine months ended October 2, 1998 and October 3,
1997 respectively.
In June of 1998, the Financial Accounting Standards Board issued SFAS
No 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods beginning after
June 15, 1999 and management does not believe the adoption of SFAS No 133 will
have a material effect on the financial position of the Company.
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NOTE 5: SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental disclosure of cash flow information,
in thousands:
Nine Months Ended
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October 2, 1998 October 3, 1997
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Cash paid during the period:
Interest $ 891 $ 947
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Income taxes $5,025 $2,092
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Non-cash investing activities
Disposition of operations in
Exchange for a promissory note __ $2,053
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NOTE 6: INCOME TAXES
During the second quarter of fiscal 1998, the Company removed a 100%
valuation allowance recorded against the $800,000 deferred tax asset generated
from a tax loss resulting from the sale of PLG Inc. in September 1997. The
decision to remove the valuation allowance was based upon plans management is
working on to generate capital gains via a potential sale and/or sales/leaseback
of one or more of its owned buildings at the Company's headquarters facility.
Other options for realizing a portion of the value of the headquarters buildings
and/or generating capital gains are also being evaluated. The final plan
implementation is subject to the Company's Board of Directors approval. The
Company has until September 2002 to generate sufficient capital gains to utilize
the entire $800,000 deferred tax asset.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q (this "Report") for Exponent, Inc. (the
"Company" or "Exponent") contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995 and the rules promulgated pursuant to the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended) that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. Such forward-looking statements are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. When used in
this document and in the documents incorporated herein by reference, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such forward-
looking statements. Such statements reflect the current views of the Company or
its management with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual results, performance, or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Factors that could cause or contribute to such material differences include
those discussed elsewhere in this Report and in the documents incorporated
herein by reference. The inclusion of such forward-looking information should
not be regarded as a representation by the Company or any other person that the
future events, plans, or expectations contemplated by the Company will be
achieved. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of this Report.
GENERAL
The Company recognizes most of its revenue from professional service
activities, generally at the time services are performed. The majority of these
activities are provided under a time and materials or fixed-price billing
arrangement with revenues consisting of professional fees and expenses and fees
for the use of the Company's equipment and facilities in connection with the
services provided. On fixed-price contracts, revenue is recognized on the basis
of the estimated percentage of completion of services rendered. Provision for
estimated losses on engagements is made during the period in which the loss
becomes probable and can be reasonably estimated. The Company's principal
expenses are professional compensation and related expenses.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited, condensed, consolidated financial statements and notes thereto and
with the Company's audited consolidated financial statements and notes thereto
for the fiscal year ended January 2, 1998, which is contained in the Company's
fiscal 1997 Annual Report on Form 10-K.
1998 Fiscal Quarter and Nine Months Ended October 2, 1998 Compared to 1997
Fiscal Quarter and Nine Months Ended October 3, 1997
Revenues for the third quarter of fiscal 1998 were $20.9 million compared
to $20.2 million for the same quarter of fiscal 1997, an increase of 3.8%. This
increase was primarily due to an increase in the revenues generated by the
Company's subsidiary, BCS Wireless, Inc. ("BCS"), of approximately $750,000.
Revenues also increased for the nine months ended October 2, 1998 by 17.9% to
$63.9 million compared to $54.2 million for the comparable period in fiscal
1997. Environmental accounted for $5.9 million of the total $9.7 million
increase, an increase primarily associated with the inclusion of 4
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additional months of Environmental revenue in fiscal 1998 compared to fiscal
1997. BCS accounted for $2.1 million of the total increase, while the Company's
core litigation practice increased by $1.5 million, primarily due to strong
utilization rates in the first quarter of fiscal 1998.
Compensation and related expenses increased by 8.7% to $13.6 million for
the third quarter of fiscal 1998 compared to $12.5 million for the same period
in fiscal 1997. As a percentage of revenue, total compensation increased to
65.1% for the third quarter of fiscal 1998 compared to 62.1% for the same period
in fiscal 1997. This increase in total compensation dollars in addition to the
increase of total compensation as a percentage of revenue is due to the increase
of professional staff of approximately 50 employees while the Company's revenue
growth was not sufficient to absorb this increase in fixed compensation cost.
For the Nine months ended October 2, 1998, compensation and related expenses
increased by $7.5 million or 22.4%. Environmental accounted for $3.8 million or
50.7% of the total increase. BCS accounted for $1.0 million of the total
increase, an increase associated with their revenue growth. The remaining $2.7
million increase resulted from a company-wide increase in professional staff.
As a percentage of revenue, compensation and related expenses increased to 64.3%
for the nine months ended October 2, 1998 compared to 61.9% for the nine months
ended October 3, 1997. Again, this increase of total compensation as a
percentage of revenue is a result of an increase in fixed labor costs while
revenue has not increased proportionally due to lower utilization rates.
Other operating expenses increased by 17.6% to $4.4 million for the third
quarter of fiscal 1998 compared to $3.7 million for the same quarter in fiscal
1997. Approximately $550,000 of this total increase was due to an overall
increase in depreciation expense and other operating costs associated with the
relocation of existing offices. The remaining increase is primarily due to an
increase of cost of goods sold for BCS associated with their overall increase in
revenues. Other operating expenses were 20.9% of total revenues for the third
quarter of fiscal 1998 compared to 18.5% for the comparable quarter of fiscal
1997, an increase of 2.4%. Other operating expenses increased to $12.7 million
for the nine months ended October 2, 1998 compared to $10.3 million for the same
period a year ago. Environmental accounted for approximately $960,000 of the
total increase due to the inclusion of 4 additional months of Environmental
operating expenses in fiscal 1998 compared to fiscal 1997. BCS accounted for
approximately $550,000 of the total increase again primarily due to the increase
of cost of goods sold and equipment lease expense associated with the increase
in revenue. The remaining increase was due to the overall increase in occupancy
cost and depreciation expense associated with the relocation of offices during
the second and third quarters of fiscal 1998. As a percentage of revenue,
operating expenses were 19.9% and 19.0% for the nine month periods ended October
2, 1998 and October 3, 1997 respectively.
General and administrative expenses increased 9.9% to $2.2 million for the
third quarter of fiscal 1998 compared to $2.0 million for the same period in
fiscal 1997. This increase was primarily due to an increase of accounting,
travel and marketing related expenses. General and administrative expenses as a
percentage of revenue increased to 10.3% of total revenues for the third quarter
of fiscal 1998 compared to 9.7% for the third quarter of fiscal 1997. For the
nine months ended October 2, 1998, general and administrative expenses increased
to $6.1 million from $4.9 million for the nine month period ended October 3,
1997. Environmental accounted for approximately $350,000 of the total increase,
while the remaining $850,000 increase was primarily attributable to an increase
of bad debt expense of $300,000 resulting from an unusually low bad debt
expense in fiscal 1997, in addition to an increase of accounting, travel and
marketing expense. As a percentage of revenue, general and administrative
expenses increased to 9.6% for the nine months ended October 2, 1998 from 9.1%
for the same period a year ago.
Other income (expense) consists primarily of interest expense on the
Company's mortgage, net of investment income earned on available cash and short-
term investments and rental income from leasing excess space in the Company's
headquarters facility located in Menlo Park, California. Other income, net,
increased to $246,000 for the third quarter of fiscal 1998 and to $928,000 for
the nine months ended October 2, 1998 compared to $170,000 and $697,000 during
the same periods a year ago, respectively. These increases were primarily due
to a decrease in interest expense associated with the Internal Revenue Service
tax settlement partially offset by lower interest income earned on the Company's
short-term
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investments. The Company is currently evaluating all options for realizing a
portion of the value of its headquarters buildings. Depending upon the timing
and use of the cash proceeds resulting from the implementation of these options,
interest income (expense) could be materially impacted.
LIQUIDITY AND CAPITAL RESOURCES
1998 Fiscal Quarter and Nine Months Ended October 2, 1998 Compared to 1997
Fiscal Quarter and Nine Months Ended October 3, 1997
At October 2, 1998, the Company had $1.9 million in cash and cash
equivalents. During the nine month periods ended October 2, 1998 and October 3,
1997, the Company's working capital needs were generally funded through the sale
of its short-term investments.
Net cash used by operating activities was $4.4 million in the first nine
months of fiscal 1998 compared to $2.1 million for the comparable period in
fiscal 1997. Excluding the net change in income taxes payable, cash generated
from operating activities increased by $1.8 million compared to the first nine
months of fiscal 1997. This $1.8 million increase is primarily due to an
increase of net income in the first nine months of fiscal 1998 in addition to a
decrease of prepaid expenses partially offset by an increase of accounts
receivable. The $1.8 million increase of operating cash was offset by a $4.1
million decrease in income taxes payable, a decrease primarily due to the $5.0
million of taxes paid in fiscal 1998.
Net cash provided by investing activities was approximately $1.4 million
for the first nine months of fiscal 1998 compared to $4.2 million for the
comparable period of fiscal 1997. This decrease in net cash provided by
investing activities was a result of increased spending on capital expenditures
of approximately $1.8 million primarily associated with the relocation of
existing offices in addition to a decrease of cash generated from the sale of
short-term investments net of cash used for acquisitions of approximately
$600,000 in the first nine months of fiscal 1998 compared to the same period a
year ago.
Net cash used for financing activities was $3.5 million for the first nine
months of fiscal 1998 compared to $1.3 million for the comparable period in
fiscal 1997. This increase in cash used in financing activities was primarily
due to the repurchase of shares of the Company's common stock for $2.8 million
partially offset by an increase in cash from the issuance of shares of the
Company's common stock through the Company's employee stock purchase plan and
the exercising of stock options in the first nine months of fiscal 1998 compared
to the same period a year ago. On June 24, 1998, the Board authorized $2.0
million of shares of the Company's common stock to be repurchased under the
Company's share repurchase program. As of October 2, 1998 the entire $2.0
million authorized share amount had been repurchased.
The Company's long-term obligations at October 2, 1998 consisted primarily
of the mortgage obligation on the Company's headquarters facility in the amount
of $15.0 million, which will mature in August 2011 and consists of fixed semi-
annual principal payments and monthly interest payments based on an adjustable
interest rate tied to the London Interbank Offering Rate. This rate is subject
to adjustments every 30 days. Additionally, in June 1998 the Company renewed
its $10 million line of credit agreement, which is renewable on an annual basis.
There were no amounts borrowed against the line of credit during the nine month
period ended October 2, 1998.
The Company is currently evaluating all options for realizing a portion of the
value of its headquarters buildings. Potential uses of any resulting proceeds
may include, but are not limited to, additional common stock share repurchase
programs, acquisitions of companies, working capital requirements, debt
repayment, or short-term investments.
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The Company believes that its existing cash balances, together with its
existing line of credit and funds generated from operations, will provide
adequate cash to fund the Company's anticipated cash needs through at least the
next twelve-month period.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Exponent operates in a rapidly changing environment that involves numerous
uncertainties, some of which are beyond the Company's control. These
uncertainties include, but are not limited to, those mentioned elsewhere in this
Report and the following:
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company's business involves the delivery of professional services and
is labor-intensive. The Company's success depends in large part upon its
ability to attract, retain and motivate highly qualified technical and
managerial personnel. Qualified personnel are in great demand and are likely to
remain a limited resource for the foreseeable future. There can be no assurance
that the Company can continue to attract sufficient numbers of highly qualified
technical and managerial personnel and to retain existing employees. The loss
of employees could impact its ability to secure and complete engagements or
could otherwise have an adverse effect on the Company's business, financial
condition or results of operations.
ABSENCE OF BACKLOG
Revenues are primarily derived from services provided in response to client
requests or events that occur without notice, and engagements, generally billed
on a "time and expenses" basis, are terminable at any time by clients. As a
result, backlog at any particular time is small in relation to the Company's
quarterly revenues and is not a reliable indicator of revenues for any future
period. Revenues and operating margins for any particular quarter are generally
affected by staffing mix, resource requirements and the timing and size of
engagements.
COMPETITION
The markets for the Company's services are highly competitive. In addition,
there are relatively low barriers to entry into the Company's markets and the
Company has faced, and expects to continue to face, additional competition from
new entrants into its markets. Competitive pressure could reduce the market
acceptance of the Company's services and result in price reductions that could
have a material adverse effect on the Company's business, financial condition
and results of operations.
REGULATION
Public concern over health, safety and preservation of the environment has
resulted in the enactment of a broad range of environmental laws and regulations
by local, state and federal lawmakers and agencies. These laws and the
implementing regulations affect nearly every industry, as well as the agencies
of federal, state and local governments charged with their enforcement. To the
extent changes in such laws, regulations and enforcement or other factors
significantly reduce the exposure of manufacturers, owners, service providers
and others to liability, the demand for environmental services may be
significantly reduced, which could adversely effect the Company's business.
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IMPACT OF YEAR 2000
The "Year 2000" issue is the result of computer programs being written using
two digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Year 2000 compliant,
they may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar business activities.
The Company has been assessing the impact of Year 2000 issues on its computer
systems and applications and has developed a Year 2000 compliance plan.
Conversion activities are in process and the Company presently expects
conversion and testing for Year 2000 compliance to be completed by the middle of
1999. The Company is also taking into consideration the potential adverse
effects on the Company of Year 2000 noncompliance by the Company's material
suppliers, customers and other external business partners.
Through the period ended October 2, 1998, the following progress has been
achieved:
. The Company's operating information technology system has been upgraded
to a Year 2000 compliant system in the majority of the worldwide office
locations, with the balance scheduled to be completed by December 31,
1998.
. The Company's project and accounting system has been converted to a Year
2000 compliant version.
. The Company's non-information technology systems issues have been
identified and remedial actions are underway to ensure full compliance
by early 1999.
. The Company's third party providers of banking, insurance, retirement,
and payroll processing services have all represented to the Company that
many of their systems are already Year 2000 compliant, with full
compliance expected by December 31, 1998.
There can be no assurance that the systems of other companies on which the
Company's systems and operations rely will be Year 2000 compliant. Even if the
internal systems of the Company are not materially affected by the Year 2000
issue, disruptions in the operations of any of the entities with which the
Company interacts could have a material adverse effect on the Company's
business, financial condition or results of operations.
To date, the historical and estimated costs of remediation to address the
Company's Year 2000 issues have not been material and have been funded through
normal working capital resources.
Based upon the Company's current assessments of the Year 2000 impact, the
Company does not currently believe that the consequences of a known event,
trend, or uncertainty related to the Year 2000 issue are likely to have a
material effect on the Company's results of operations, liquidity, and financial
condition.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Restated Financial Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended October 3, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPONENT, INC.
------------------------------------------
(formerly named The Failure Group, Inc.)
(Registrant)
Date: November 13, 1998 /s/ Michael R. Gaulke
------------------------------------------
Michael R. Gaulke, Chief Executive Officer,
President and Director
Date: November 13, 1998 /s/ Terence G. Boyle
------------------------------------------
Terence G. Boyle, Controller
(Principal Financial Officer)
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INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
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