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 2, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number 0-18655
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EXPONENT, INC.
--------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
(State or other (I.R.S. Employer
jurisdiction of incorporation) 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
--------------
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 May 7, 1999
- ---------------------------- --------------------------
Common Stock $.001 par value 6,796,032 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 2, 1999 and January 1, 1999
(in thousands, except share data)
April 2, January 1,
1999 1999
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents......................................................... $ - $ 6,082
Accounts receivable, net.......................................................... 36,137 33,889
Prepaid expenses and other assets................................................. 4,941 5,126
--------- ---------
Total current assets.......................................................... 41,078 45,097
Property, equipment and leasehold improvements, net................................... 32,143 32,147
Goodwill.............................................................................. 8,378 8,584
Other assets.......................................................................... 1,276 1,157
--------- ---------
$ 82,875 $ 86,985
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.......................................... 1,876 2,151
Notes payable and current installments of long-term
obligations................................................................... 3,122 1,709
Accrued payroll and employee benefits............................................. 6,972 8,388
Income taxes payable.............................................................. 639 278
--------- ---------
Total current liabilities..................................................... 12,609 12,526
Long-term obligations, net of current installments.................................... 12,221 16,144
--------- ---------
Total liabilities............................................................. 24,830 28,670
--------- ---------
Stockholders' equity:
Common stock...................................................................... 8 8
Additional paid-in capital........................................................ 33,251 33,257
Accumulated comprehensive losses.................................................. (42) (16)
Retained earnings................................................................. 30,872 29,575
Treasury shares, at cost, 956,164 and 701,804 shares at
April 2, 1999 and January 1, 1999, respectively............................... (6,044) (4,509)
--------- ---------
Total stockholders' equity................................................ 58,045 58,315
--------- ---------
$ 82,875 $ 86,985
========= =========
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 2, 1999 and April 3, 1998
(in thousands, except per share data)
Three Months Ended
----------------------------------------------
April 2, 1999 April 3, 1998
------------------- -------------------
Revenues $24,705 $21,888
------------------- -------------------
Operating expenses:
Compensation and related expenses......................... 15,164 13,244
Other operating expenses.................................. 4,836 4,294
General and administrative expenses....................... 2,274 2,059
------------------- -------------------
22,274 19,597
------------------- -------------------
Operating income....................................... 2,431 2,291
Other income................................................ 357 261
------------------- -------------------
Income from continuing operations before income taxes.. 2,788 2,552
Income taxes................................................ 1,157 1,040
------------------- -------------------
Income from continuing operations...................... 1,631 1,512
Discontinued operations:
Income (loss) from operations of BCS Wireless, Inc. (net of
taxes of ($200) and $33, respectively) .............. (282) 48
------------------- -------------------
Net income......................................... $ 1,349 $ 1,560
=================== ===================
Income per share from continuing operations:
Basic $ 0.23 $ 0.20
Diluted $ 0.23 $ 0.19
Income (loss) per share from discontinued operations:
Basic $ (0.04) $ 0.01
Diluted $ (0.04) $ 0.01
Net income per share:
Basic $ 0.19 $ 0.21
Diluted $ 0.19 $ 0.20
Shares used in per share computations:
Basic 7,076 7,476
Diluted 7,176 7,987
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Quarters Ended April 2, 1999 and April 3, 1998
(in thousands, except per share data)
Three Months Ended
----------------------------------------------
April 2, 1999 April 3, 1998
------------------- -------------------
Net income..................................................... 1,349 1,560
Other comprehensive income (losses):
Foreign currency translation adjustment..................... (26) -
Unrealized gains on investments, net of reclassification
adjustment................................................. - 5
------ ------
Comprehensive income........................................... $1,323 $1,565
====== ======
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 Quarters Ended April 2, 1999 and April 3, 1998
(in thousands)
Three Months Ended
--------------------------------------
April 2, April 3,
1999 1998
--------------------------------------
Cash flows from operating activities:
Net income ..................................................... $ 1,349 $ 1,560
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 1,103 968
Provision for doubtful accounts........................... 522 41
Changes in operating assets and liabilities:
Accounts receivable..................................... (3,693) (3,487)
Prepaid expenses and other assets....................... 560 (196)
Accounts payable and accrued liabilities................ (9) 50
Accrued payroll and employee benefits................... (1,334) (2,159)
Income tax payable...................................... 360 (1,948)
Net operating activities of discontinued operations..... 256 (247)
--------------------------------------
Net cash used by operating activities................ (886) (5,418)
--------------------------------------
Cash flows from investing activities:
Purchase of short-term investments.............................. - (1,705)
Sales of short-term investments................................. - 4,084
Capital expenditures............................................ (890) (1,545)
Other assets.................................................... (122) (276)
Net investing activities of discontinued operations............. (12) (22)
--------------------------------------
Net cash provided by (used in) investing activities... (1,024) 536
--------------------------------------
Cash flows from financing activities:
Proceeds from borrowings and issuance of
long-term obligations........................................ 17,928 -
Repayments of borrowings and long-term obligations.............. (20,481) (583)
Repurchase of common stock...................................... (1,764) -
Issuance of common stock........................................ 145 384
--------------------------------------
Net cash used by financing activities................. (4,172) (199)
--------------------------------------
Net decrease in cash and cash equivalents............................... (6,082) (5,081)
Cash and cash equivalents at beginning of period........................ 6,082 8,412
--------------------------------------
Cash and cash equivalents at end of period.............................. $0 $3,331
======================================
The accompanying notes are an integral part of the
condensed consolidated financial statements
5
EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Quarters Ended
April 2, 1999 and April 3, 1998
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 ending April 2, 1999 and April 3, 1998.
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, Inc. 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 2, 1999 and April 3, 1998,
are not necessarily representative of the results of future quarterly or annual
periods.
Reclassifications:
Certain amounts in the statement of income for the quarter ending
April 3, 1998 have been reclassified in order to conform to the fiscal 1999
financial statement presentation.
Note 2: Discontinued Operations
Effective April 2, 1999 the Company committed to a formal plan to
divest its wholly owned subsidiary, BCS Wireless, Inc. ("BCS"). Accordingly, the
results of operations for BCS for the quarters ending April 2, 1999 and April 3,
1998 have been recorded as a discontinued operation in the condensed
consolidated statements of income. The condensed consolidated balance sheet as
of April 2, 1999 includes approximately $1.9 million in accounts receivable and
other assets, $594,000 in capital equipment, $2.3 million in an intercompany
payable to the Company and $327,000 in accounts payable and accrued liabilities
associated with BCS. The decision to divest BCS was made because the Company's
management believes the subsidiary is no longer a strategic fit for the Company.
The Company plans to sell BCS by no later than the end of fiscal year 1999 and
anticipates that there will be no loss on the sale.
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, even when antidilutive, if
their effect would be dilutive on the per share amount of income from continuing
operations.
6
The following schedule reconciles the denominator of the Company's
calculation for basic and dilutive net income per share:
(In thousands) Three Months Ended
--------------------------------------
April 2, 1999 April 3, 1998
--------------------------------------
Basic earnings per share-
Weighted-average shares outstanding 7,076 7,476
Effect of dilutive common stock options outstanding 100 511
--------------------------------------
Denominator for diluted net income per share 7,176 7,987
======================================
Common stock options to purchase 959,982 and 8,828 shares were excluded from the
diluted per share calculation for the fiscal quarters ended April 2, 1999 and
April 3, 1998, respectively, due to their antidilutive effect.
Note 4: Long-Term Obligations
Effective February 1, 1999, the Company refinanced its 15-year mortgage
note on the Company's headquarters building. The old note, which had an
outstanding principal balance of $16.2 million at the time of the refinancing,
had a floating rate of interest that was tied to LIBOR and was subject to
adjustment every month. Principal payments of $623,333 were due semi-annually on
February 1 and August 1 with the final principal payment and all accrued
interest due and payable on August 1, 2011.
The new note consists of a line of credit with a borrowing amount up to
$5.0 million and a revolving reducing note up to $30.0 million for a total
maximum borrowing amount of $35.0 million. The $5.0 million line of credit is
subject to two interest rate options of either the prime rate in effect from
time to time, or a fixed rate determined by the bank to be 2.75% above LIBOR,
with a floating rate option of one month, two months, three months, six months,
nine months or twelve months. The $30.0 million revolving reducing note is also
subject to two interest rate options of either prime less 1.5% or the fixed
LIBOR plus 1.25% with a floating rate option of one month, two months, three
months, six months, nine months, or twelve months. Both notes have a ten-year
term maturing February 1, 2009. Interest will be paid on a monthly basis.
Principal amounts subject to the prime interest rate may be repaid at any time
without penalty. Principal amounts subject to the fixed LIBOR rate may also be
repaid at any time but are subject to a prepayment penalty if paid before the
fixed rate term or additional interest if paid after the fixed rate term.
Additionally, the revolving reducing note is subject to annual principal
payments based on a 15-year amortization of the initial commitment amount using
an interest rate of 3 month LIBOR plus 1.25% in effect on the date of the note.
Note 5: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information, in
thousands:
Three Months Ended
---------------------------------
April 2, 1999 April 3, 1998
---------------------------------
Cash paid during the period:
Interest $149 $ 295
---- ------
Income taxes $444 $3,021
---- ------
7
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
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 ended April 2, 1999 and April 3, 1998
follows:
Revenues
April 2, April 3,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------
Environmental and health $ 5,035 $ 5,196
Other scientific and engineering 19,670 16,692
-------------------------------------
Total revenue $24,705 $21,888
=====================================
Operating Income(Loss)
April 2, April 3,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------
Environmental and health $ 677 $ 804 *
Other scientific and engineering 5,316 3,949
-------------------------------------
Total segment operating expense 5,993 4,753
Corporate operating expenses (3,562) (2,462)*
-------------------------------------
Total operating income from
continuing operations $ 2,431 $ 2,291
=====================================
* Due to a Company reorganization and centralization of the Company's corporate
functions effective January 2, 1999, operating income (loss) for the periods
presented are not comparable. Included in the Company's corporate operating
expenses for the first quarter of fiscal 1999 are corporate related costs that
had been included in the operating income of the environmental and health
segment for the first quarter of fiscal 1998. The Company has not restated
segment information for the quarter ending April 3, 1998 to be comparable with
the quarter ending April 2, 1999 as it would be impracticable to do so.
8
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 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 1, 1999, which is contained in the Company's
fiscal 1998 Annual Report on Form 10-K.
1999 Fiscal Quarter Ended April 2, 1999 Compared to 1998 Fiscal Quarter Ended
April 3, 1998
Revenues for the first quarter of fiscal 1999 were $24.7 million compared
to $21.9 million for the same quarter in fiscal 1998, an increase of 12.9%.
This increase of revenue is primarily associated with the Company's other
scientific and engineering segment due to an overall increase of headcount among
the engineering and scientist staff resulting in higher billable hours.
Compensation and related expenses increased 14.5% to $15.2 million for the
first quarter of fiscal 1999 compared to $13.2 million for the same period in
fiscal 1998. This increase is directly associated with the increase of both the
consulting and administrative staff of approximately 45 employees primarily from
the Company's other scientific and engineering segment. As a percentage of
revenue,
9
total compensation increased to 61.4% for the first quarter of fiscal 1999 from
60.5% for the same quarter in fiscal 1998.
Other operating expenses increased by 12.6% to $4.8 million for the first
quarter of fiscal 1999 compared to $4.3 million for the same quarter in fiscal
1998. This increase is primarily due to an increase of facility costs including
rent, depreciation and office furniture and equipment expense associated with
many of the office expansions that occurred during fiscal 1998. Other operating
expenses remained flat at 19.6% of total revenue for both the first quarter of
fiscal 1999 and 1998.
General and administrative expenses were $2.3 million for the first quarter
of fiscal 1999 compared to $2.1 million for the same period in fiscal 1998, an
increase of 10.4%. General and administrative expenses as a percentage of
revenue decreased slightly to 9.2% of total revenues for the first quarter of
fiscal 1999 compared to 9.4% for the first quarter of fiscal 1998.
Other income consists primarily of rental income from leasing excess space
in the Company's headquarter facility located in Menlo Park, California less
interest expense on the Company's mortgage. Other income increased by $96,000
or 36.8 % over the first quarter of fiscal 1998. This increase is primarily due
to a decrease in interest expense of approximately $200,000 associated with
lower mortgage interest in the first quarter of fiscal 1999 and interest expense
accrued during fiscal 1998 for the IRS tax settlement that no longer needed to
be accrued for in fiscal 1999. This decrease in interest expense was partially
offset by a decrease in interest income due the Company's lower cash and
investment balances during the first quarter of fiscal 1999 compared to the same
quarter in fiscal 1998.
Liquidity and Capital Resources
1999 Fiscal Quarter Ended April 2, 1999 Compared to 1998 Fiscal Quarter Ended
April 3, 1998
Effective February 1, 1999, the Company changed its cash management policy
to use all excess operating cash to pay down the mortgage on the Company's
headquarters building. As a result of this policy change, the Company had no
cash or cash equivalents at April 2, 1999. The balance on the Company's
mortgage, however, was reduced to $13.9 million at April 2, 1999 compared to the
$16.2 million balance at January 1, 1999. The Company financed its business for
the current period principally through its existing cash balances at the
beginning of the fiscal year.
Net cash used by operating activities was $886,000 in the first three
months of fiscal 1999 compared to $5.4 million for the comparable period of
fiscal 1998. This decrease in cash used in operating activities was primarily
attributed to timing differences associated with the payment of the Company's
corporate income taxes in addition to an increase of accrued benefits associated
with the Company's overall increase in total staff.
The Company used $1.0 million of cash for investing activities during the
first quarter of fiscal 1999 compared to $536,000 of cash generated from
investing activities during the first quarter of fiscal 1998. This decrease in
cash was a result of cash generated from the net sale of short-term investment
of $2.4 million in the first quarter of fiscal 1998 offset partially by lower
capital expenditures in the first quarter of fiscal 1999 of approximately
$655,000.
Net cash used for financing activities was $4.2 million for the first
quarter of fiscal 1999 compared to $199,000 for the first quarter of fiscal
1998. This increase in cash used in financing activities is due to the
repurchase of shares of the Company's common stock for $1.8 million in addition
to a net payment of $2.6 million on the Company's $30.0 million revolving
mortgage note.
10
The Company's long-term obligations at April 2, 1999 consisted primarily of
the obligation on the $30.0 million revolving mortgage note of $11.1 million.
There were no amounts borrowed against the available $5.0 million line of
credit.
Management believes that its existing credit line and 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
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.
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.
Properties
The Company currently subleases excess facilities in its Menlo Park,
California headquarters that have lease terms that expire within the 2000 2001
time periods. In fiscal 1998 and 1997, miscellaneous rental income associated
with these facilities amounted to approximately 32% and 26%, respectively of
income from continuing operations before income taxes. Should these subleases
not be extended, renewed or have their term options exercised, the loss of the
miscellaneous rental income could have a material adverse effect on the
Company's operating results.
Year 2000 Compliance
General
- -------
The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example, the
clock circuit in the hardware may be incapable of holding a date beyond the year
1999; some operating systems may recognize a date using "00" as the year 1900
rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material adverse affect on companies
12
through business interruption or shutdown, financial loss, damage to reputation,
and legal liability to third parties.
State of Readiness
- ------------------
The Company established a Year 2000 Readiness Project Team comprised of
senior executives of the Company in the areas of Management Information Systems,
Facilities and Operations, and Finance. The Project Team reports to the
President and Chief Executive Officer and the Audit Committee of the Board of
Directors.
The Project Team developed and manages the Company's Y2K Plan to address
the potential impact of Y2K on the Company's operations and business processes.
In particular, the Plan identified 8 principal areas that may be impacted by the
Y2K issue: Business Systems; Facility Systems; End-User Community; Non-
Production Suppliers; Financial Services; Communication Providers; Outsourcing
Vendors; and Business Partners / Joint Ventures. With respect to the IT Systems
and Non-IT Business Systems, the Y2K Plan consists of two separate but
overlapping phases: Phase I Inventory and Risk Assessment; and Phase II
Remediation.
Phase I--Inventory and Risk Assessment
This Phase requires an inventory and assessment of the Non-IT Business
Systems used by the Company including systems with embedded technology, building
access systems, and health and safety systems. This Phase also includes
inventory and assessment of IT Systems used by the Company which include large
information technology systems, desktop hardware and software, and network
hardware and software. Each system is evaluated and a priority is assigned as
being High, Medium or Low Risk to the Company's business. Systems which are High
Risk are those which if uncorrected would cause an interruption or complete
failure to conduct the Company's business. Medium Risks are those which would
negatively impact the business but complete cessation could be avoided with some
inconvenience. Low Risks are those where the risk to business interruption or
cessation are remote. High and Medium Risk items will be remediated or
replaced, and Low Risk items will be addressed as time and resources permit.
Currently, the Company has completed Phase I.
Phase II--Remediation
This Phase includes the replacement or correction of the High and Medium
Risk Non-IT Business Systems and IT Systems. A detailed project plan for the
remediation has been developed and is currently being implemented. This Phase is
approximately 80% complete and the Company anticipates that this Phase will be
completed during the third quarter of fiscal 1999.
Third Party Relationships
- -------------------------
The Company's business operations are dependent on third party corporate
service vendors, materials suppliers, out-sourced operations partners and
others. The Company is working with key external parties to identify and attempt
to mitigate the potential risks to it of Y2K. The failure of external parties
to resolve their own Y2K issues in a timely manner could result in a material
adverse financial risk to the Company. As part of its overall Y2K program, the
Company is actively communicating with third parties on an ongoing basis to
ascertain their state of readiness. Although numerous third parties have
indicated to the Company in writing that they are addressing their Y2K issues on
a timely basis, the readiness of third parties overall varies widely. Because
the Company's Y2K compliance is dependent on the timely Y2K compliance of third
parties, there can be no assurances that the Company's efforts alone will
resolve all Y2K issues.
13
Cost to Address Y2K
- -------------------
The costs of the Y2K program are primarily costs associated with the
utilization of existing internal resources and minimal external spending. These
costs exclude the costs that could be incurred by the Company if one or more of
its significant third party service providers fail to achieve Y2K compliance.
The Company is not separately identifying Y2K costs incurred that are the result
of utilization of existing internal resources.
To date, the historical and estimated costs of remediation to address the
Company's Y2K issues have not been material and have been funded through working
capital resources.
Risk Factors
- ------------
Based on current information, the Company believes the Y2K issue will not
have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Y2K remediation by the Company or third parties will be
properly and timely completed, and the failure to do so could have a material
adverse effect on the company, its business, results of operations, and its
financial condition. In addition, important factors that could cause results to
differ materially include, but are not limited to, the ability of the Company to
successfully identify systems which have a Y2K issue, the nature and amount of
remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the Y2K issues.
Contingency Plans
- -----------------
The Company's contingency plans, which will be based in part on the
assessment and the magnitude and probability of potential risk, will primarily
focus on steps to prevent Y2K failures from occurring, or if they should occur,
to detect them quickly, minimize their impact and expedite their repair.
A failure of the services provided by the Company's project and accounting
system could result in the loss of customer records which could disrupt the
ability to bill customers for a protracted time. The Company plans to prepare
electronic backup records of its project and accounting system prior to the year
2000 to allow for data recovery.
Security and fire protection systems failures could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site. Also, certain
personal computers interface and control elevators, public access systems and
certain telephony systems. In the event such computers cease operating,
conducting a power off/on is expected to resume normal functioning. If a power
off/on does not resume normal functioning, the Company expects to resolve the
problem by resetting the computer to a pre-designated date that precedes the
year 2000.
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.
14
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 which
consists of a line of credit with a borrowing amount up to $5.0 million and a
revolving reducing note up to $30.0 million for a total maximum borrowing amount
of $35.0 million. The line of credit is subject to two interest rate options of
either the prime rate in effect from time to time, or a fixed rate determined by
the bank to be 2.75% above LIBOR, with a floating rate option of one month, two
months, three months, six months, nine months or twelve months. The $30.0
million revolving reducing note is also subject to two interest rate options of
either prime less 1.5% or the fixed LIBOR plus 1.25% with a floating rate option
of one month, two months, three months, six months, nine months, or twelve
months.
The company's general policy for selecting among the interest rate options
and related terms will be to minimize interest expense. However, given the risk
of interest rate fluctuations, the Company cannot be certain that the lowest
rate option will always be obtained, therefore, consistently minimizing the
Company's interest expense. No sensitivity analysis was performed on the
Company's exposure to interest rate fluctuations, however, given the historical
low volatility of both the Prime and LIBOR interest rates, the Company believes
any exposure would be minimal.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.25 Revolving Line of Credit Note dated January 27, 1999, between
Exponent, Inc. and Wells Fargo Bank.
10.26 Revolving Reducing Note dated January 27, 1999, between Exponent,
Inc. and Wells Fargo Bank.
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 April 2, 1999.
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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.
--------------
(Registrant)
Date: May 17, 1999 /s/ Michael R. Gaulke
-------------------------------------------
Michael R. Gaulke, Chief Executive Officer,
President and Director
17
Index to Exhibits
-----------------
Exhibit
Number Description
- ------ -----------
10.25 Revolving Line of Credit Note dated January 27, 1999, between
Exponent, Inc. and Wells Fargo Bank.
10.26 Revolving Reducing Note dated January 27, 1999, between Exponent,
Inc. and Wells Fargo Bank.
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
18