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 July 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number)
149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA 94025
- ---------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (650) 326-9400
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
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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 August 6, 1999
- ---------------------------- -----------------------------
Common Stock $.001 par value 6,783,970 shares
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 2, 1999 and January 1, 1999
(in thousands, except share data)
(unaudited)
July 2, January 1,
1999 1999
------------- -------------
Assets
Current assets:
Cash and cash equivalents........................................... $ - $ 6,082
Accounts receivable, net............................................ 38,262 33,889
Prepaid expenses and other assets................................... 4,807 5,126
------------- -------------
Total current assets............................................ 43,069 45,097
Property, equipment and leasehold improvements, net...................... 28,656 32,147
Goodwill................................................................. 8,221 8,584
Other assets............................................................. 1,267 1,157
------------- -------------
$ 81,213 $ 86,985
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities............................ 1,866 2,151
Notes payable and current installments of long-term obligations..... 1,646 1,709
Accrued payroll and employee benefits............................... 10,158 8,388
Income taxes payable................................................ 181 278
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Total current liabilities....................................... 13,851 12,526
Long-term obligations, net of current installments....................... 9,074 16,144
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Total liabilities............................................... 22,925 28,670
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Stockholders' equity:
Common stock........................................................ 8 8
Additional paid-in capital.......................................... 33,353 33,257
Accumulated other comprehensive losses.............................. (48) (16)
Retained earnings................................................... 31,988 29,575
Treasury shares, at cost, 1,124,276 and 701,804 shares at
July 2, 1999 and January 1, 1999, respectively (7,013) (4,509)
------------- -------------
Total stockholders' equity...................................... 58,288 58,315
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$ 81,213 $ 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 and Six Months Ended July 2, 1999 and July 3, 1998
(in thousands, except per share data)
(unaudited)
Quarters Ended Six Months Ended
------------------------------- ------------------------------
July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998
-------------- -------------- ------------- --------------
Revenues $23,353 $19,362 $47,168 $40,662
------- ------- ------- -------
Operating expenses:
Compensation and related expenses......................... 15,186 13,066 30,354 26,250
Other operating expenses.................................. 3,982 3,937 7,927 7,662
General and administrative expenses....................... 2,360 1,685 4,634 3,785
------- ------- ------- -------
21,528 18,688 42,915 37,697
------- ------- ------- -------
Operating income................................. 1,825 674 4,253 2,965
Other income (expense) 509 430 866 691
------- ------- ------- -------
Income from continuing operations
before income taxes......................... 2,334 1,104 5,119 3,656
Provision (benefit) for income taxes 966 (360) 2,120 680
------- ------- ------- -------
Income from continuing operations 1,368 1,464 2,999 2,976
Discontinued operations
Income (loss) from operation of BCS Wireless, Inc.
(net of taxes of ($68), $75, ($268) and $108
respectively) (95) 111 (377) 159
------- ------- ------- -------
Net income $ 1,273 $ 1,575 $ 2,622 $ 3,135
======= ======= ======= =======
Income per share from continuing operations:
Basic $ 0.20 $ 0.19 $ 0.43 $ 0.40
Diluted $ 0.20 $ 0.18 $ 0.43 $ 0.37
Income (loss) per share from discontinued operations:
Basic $ (0.01) $ 0.01 $ (0.05) $ 0.02
Diluted $ (0.01) $ 0.01 $ (0.05) $ 0.02
Net income per share:
Basic $ 0.19 $ 0.21 $ 0.38 $ 0.42
Diluted $ 0.18 $ 0.20 $ 0.37 $ 0.39
Shares used in per share computations:
Basic 6,794 7,532 6,935 7,504
Diluted 6,922 8,025 7,049 8,005
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 and Six Months Ended July 2, 1999 and July 3, 1998
(in thousands)
(unaudited)
Quarters Ended Six Months Ended
----------------------------- ------------------------------
July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998
------------- ------------ ------------- -------------
Net income................................................. $1,273 $1,575 $2,622 $3,135
Other comprehensive income (losses):
Foreign currency translation adjustment................. (7) (24) (33) (24)
Unrealized gains on investments, net of reclassification
adjustment.............................................. - (16) - (11)
------------- ------------ ------------- -------------
Comprehensive income....................................... $1,266 $1,535 $2,589 $3,100
============= ============ ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended July 2, 1999 and July 3, 1998
(in thousands)
(unaudited)
Six Months Ended
-------------------------
July 2, July 3,
1999 1998
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Cash flows from operating activities:
Net income .............................................................. $ 2,622 $ 3,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................................... 2,222 1,960
Gain on sale of building........................................... 213 -
Provision for doubtful accounts.................................... 1,061 81
Changes in operating assets and liabilities:
Accounts receivable............................................. (6,114) (4,940)
Prepaid expenses and other assets............................... 347 (319)
Accounts payable and accrued liabilities........................ 49 (253)
Accrued payroll and employee benefits........................... 1,869 164
Income tax payable.............................................. (98) (4,135)
Net operating activities of discontinued operations............. 271 56
-------------------------
Net cash provided by (used in) operating activities.......... 2,442 (4,251)
-------------------------
Cash flows from investing activities:
Purchase of short-term investments....................................... - (1,962)
Sales of short-term investments.......................................... - 8,309
Gross proceeds from sale of building..................................... 4,411 -
Capital expenditures..................................................... (2,863) (3,277)
Other assets............................................................. (153) (173)
Net investing activities of discontinued operations...................... (33) (83)
-------------------------
Net cash provided by investing activites..................... 1,362 2,814
-------------------------
Cash flows from financing activities:
Proceeds from borrowings and issuance of long-term obligations........... 17,391 -
Repayments of borrowings and long-term obligations....................... (24,629) (547)
Repurchase of common stock............................................... (3,047) (1,173)
Issuance of common stock................................................. 399 552
-------------------------
Net cash used by financing activities........................ (9,886) (1,168)
-------------------------
Net decrease in cash and cash equivalents.............................................. (6,082) (2,605)
Cash and cash equivalents at beginning of period....................................... 6,082 8,412
-------------------------
Cash and cash equivalents at end of period............................................. $ - $ 5,807
=========================
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 and Six Months Ended
July 2, 1999 and July 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 and six months ended July 2, 1999
and July 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 and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, all adjustments which are necessary for the fair
presentation of the condensed consolidated financial statements have been
included and all such adjustments are of a normal and recurring nature. The
operating results for the fiscal quarters and six month periods ended July 2,
1999 and July 3, 1998, are not necessarily representative of the results of
future quarterly or annual periods.
Reclassifications:
Certain amounts in the statements of income for the quarters and six
months ended July 2, 1999 have been reclassified in order to conform to prior
years 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 and six months ended July 2, 1999
and July 3, 1998 have been recorded as a discontinued operation in the condensed
consolidated statements of income. The condensed consolidated balance sheet as
of July 2, 1999 includes approximately $1.7 million in accounts receivable and
other assets, $615,000 in capital equipment, $2.4 million in an intercompany
payable to the Company and $241,000 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 from continuing
operations.
The following schedule reconciles the denominator of the Company's
calculation for basic and diluted net income per share:
6
(In thousands) Quarter Ended Six Months Ended
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
---------------------------- ----------------------------
Basic earnings per share-
Weighted average shares outstanding 6,794 7,532 6,935 7,504
Diluted earnings per share-
Effect of dilutive common stock options outstanding 128 493 114 501
----- ----- ----- -----
Denominator for diluted earnings per share 6,922 8,025 7,049 8,005
===== ===== ===== =====
Common stock options to purchase 918,947 and 24,400 shares for the quarters
ended July 2, 1999 and July 3, 1998, respectively, were excluded from the
diluted per share calculation, due to their antidilutive effect. For the six
months ended July 2, 1999 and July 3, 1998, respectively, common stock options
to purchase 994,947 and 24,400 shares, were excluded from the diluted per share
calculation, 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, secured by the Company's
headquarters building, 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 term
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 term 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.
7
Note 5: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information, in
thousands:
Six Months Ended
------------------------------
July 2, 1999 July 3, 1998
---------------- ------------
Cash paid during the period:
Interest $ 360 $ 589
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Income taxes $1,832 $4,923
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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 and six months ended July 2, 1999 and July
3, 1998 follows:
Revenues
Quarters Ended Six Months Ended
------------------------------------------- -----------------------------------
July 2, July 3, July 2, July 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- -------------------- ---------------- ----------------
Environmental and health $ 5,124 $ 4,117 $10,121 $ 9,285
Other scientific and engineering 18,229 15,245 37,047 31,377
-------------------- -------------------- ---------------- ----------------
Total revenue $23,353 $19,362 $47,168 $40,662
==================== ==================== ================ ================
Operating Income(Loss)
Quarters Ended* Six Months Ended*
------------------------------------------- -----------------------------------
July 2, July 3, July 2, July 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- -------------------- ---------------- ----------------
Environmental and health $ 760 $ 193 $ 1,438 $ 997
Other scientific and engineering 4,575 2,848 9,888 6,798
-------------------- -------------------- ---------------- ----------------
Total segment operating income 5,335 3,041 11,326 7,795
Corporate operating expenses (3,510) (2,367) (7,073) (4,830)
-------------------- -------------------- ---------------- ----------------
Total operating income from
continuing operations $ 1,825 $ 674 $ 4,253 $ 2,965
==================== ==================== ================ ================
8
* 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 second quarter and first six months of fiscal 1999 are
corporate related costs that had been included in the operating income of the
environmental and health segment for the second quarter and first six months of
fiscal 1998. The Company has not restated segment information for the quarter
and six months ending July 3, 1998 to be comparable with the quarter and six
months ending July 2, 1999 as it would be impracticable to do so.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q (this "Report") for Exponent, Inc. (the
"Company" or "Exponent") contains, and incorporates by reference, certain
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995 and the rules promulgated pursuant to the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended) that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. Such forward-looking statements are subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. When used in
this document and in the documents incorporated herein by reference, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such forward-
looking statements. Such statements reflect the current views of the Company or
its management with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, the
Company's actual results, performance, or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Factors that could cause or contribute to such material differences include
those discussed elsewhere in this Report and in the documents incorporated
herein by reference. The inclusion of such forward-looking information should
not be regarded as a representation by the Company or any other person that the
future events, plans, or expectations contemplated by the Company will be
achieved. The Company undertakes no obligation to release publicly any updates
or revisions to any such forward-looking statements that may reflect events or
circumstances occurring after the date of this Report.
General
The Company 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 1, 1999, which is contained in the Company's
fiscal 1998 Annual Report on Form 10-K.
1999 Fiscal Quarter and Six Months Ended July 2, 1999 compared to 1998 Fiscal
Quarter and Six Months Ended July 3, 1998
Revenues for the second quarter of fiscal 1999 were $23.4 million compared
to $19.4 million for the same quarter of fiscal 1998, an increase of 20.6%. The
increase was a result of growth in both segments of the Company's business
during the quarter, especially in the Environmental and Health segment, which
had a 24.5% increase in revenue.
9
Revenues increased by 16.0% for the six months ended July 2, 1999 to $47.2
million compared to $40.7 million for the same period in fiscal 1998. The
Company's other scientific and engineering segment contributed the greatest
portion of the revenue growth in the first six months of 1999 primarily due to
the effect of higher billable hours. These higher billable hours were a result
of an increase in professional staff as well as higher utilization of existing
professional staff.
Compensation and related expenses increased by 16.2% to $15.2 million for
the second quarter of fiscal 1999 compared to $13.1 million for the same
period in fiscal 1998. The increase was due to increases in headcount combined
with annual salary increases for all employees as well as a stock-based
compensation charge. In addition, in 1999 the Company standardized its
benefits plans for all Company segments, which resulted in higher benefit
costs. As a percentage of revenue, total compensation decreased to 65.0% for
the second quarter of fiscal 1999 compared to 67.5% for the same period in
fiscal 1998. This decrease was primarily due to increased utilization rates in
the second quarter of fiscal 1999 in a number of the Company's practice areas.
For the six months ended July 2, 1999, compensation and related expenses
increased by 15.6% to $30.4 million as compared to $26.3 million for the six
months ended July 3, 1998. As mentioned previously, this increase resulted
from company-wide salary and headcount increases and changes in company-wide
benefit plans as well as a stock-based compensation charge. As a percentage of
revenue, compensation and related expenses decreased slightly to 64.4% for the
six months ended July 2, 1999 as compared to 64.6% for the six months ended
July 3, 1998.
Other operating expenses increased by 1.1% to $4.0 million for the second
quarter of fiscal 1999 compared to $3.9 million for the same quarter in fiscal
1998. Increases in occupancy and depreciation costs associated with new
regional facilities opened in 1998 were largely offset by reductions in
technical supplies, computer and office expenses. Other operating expenses were
17.1% of total revenues for the second quarter of fiscal 1999 compared to 20.3%
for the comparable quarter of fiscal 1998. Other operating expenses increased
by 3.5% to $7.9 million for the six months ended July 2, 1999 compared to $7.7
million for the same period a year ago. The increase was attributable to the
aforementioned increase in occupancy and depreciation costs offset by reductions
in technical supplies and computer expenses. As a percentage of revenue,
operating expenses decreased overall to 16.8% for the six month period ended
July 2, 1999 as compared to 18.8% for the six month period ended July 3, 1998.
General and administrative expenses increased 40.1% to $2.4 million for the
second quarter of fiscal 1999 compared to $1.7 million for the same period in
fiscal 1998. This increase was a result of higher recruiting and relocation
costs for new employees, increased travel costs associated with business and
practice development, and an increase in legal expenses and the provision for
bad debt. General and administrative expenses as a percentage of revenue
increased to 10.1% of total revenues for the second quarter of fiscal 1999
compared to 8.7% for the second quarter of fiscal 1998. For the six months
ended July 2, 1999, general and administrative expenses increased to $4.6
million from $3.8 million for the six month period ended July 3, 1998. As a
percentage of revenue, general and administrative expenses increased slightly to
9.8% for the six months ended July 2, 1999 from 9.3% 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 $509,000 for the second quarter of fiscal 1999 and to $866,000 for
the six months ended July 2, 1999 compared to $430,000 and $691,000 during the
same periods a year ago, respectively. These increases were primarily due to a
$213,000 gain on the sale of one of the Company's properties in Menlo Park,
California in May of 1999 and decreased interest expense on the Company's
mortgage. These gains were partially offset by a decrease in rental income
derived from the sale of the aforementioned property and a decrease in interest
income due to the Company's lower cash and investment balances during the first
six months of 1999 as compared to the same period of 1998.
The provision for income taxes for the second quarter of fiscal 1999 was
$966,000, compared to a tax benefit of $360,000 in the second quarter of 1998.
The tax benefit in the second quarter of 1998 was due to the removal of a
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. For the
six months ended July 2, 1999 the provision for income taxes was $2.1 million as
compared to $680,000 for the same period of 1998.
10
Liquidity and Capital Resources
1999 Fiscal Quarter and Six Months Ended July 2, 1999 Compared to 1998 Fiscal
Quarter and Six Months Ended July 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 July 2, 1999. The balance on the Company's
mortgage, however, was reduced to $9.4 million at July 2, 1999 compared to the
$16.2 million balance at January 1, 1999. The Company financed its business for
the current period principally through cash received from operating activities.
Net cash provided by operating activities was $2.4 million in the first six
months of fiscal 1999, compared to net cash used in operating activities of
$4.3 million for the comparable period in fiscal 1998. This increase in cash
provided by operating activities was primarily attributable to the decrease in
taxes paid offset partially by an increase in Accounts Receivable and a lower
net income in the first six months of fiscal 1999.
Net cash provided by investing activities was $1.4 million for the first
six months of fiscal 1999, compared to $2.8 million for the comparable period of
fiscal 1998. This decrease was primarily a result of the reduction in short
term investment proceeds for the Company due to the change in cash management
policy mentioned above. This was offset partially by a reduction in capital
expenditures during the first six months of 1999 as compared to the same period
in 1998, and by the funds provided by the sale of one of the Company's
properties in Menlo Park.
Net cash used for financing activities was $9.9 million for the first six
months of fiscal 1999 compared to $1.2 million for the comparable period in
fiscal 1998. This increase in cash used in financing activities was primarily
due to the net payment of $7.2 million on the Company's $30.0 revolving mortgage
note. In addition, the Company repurchased $3.0 million in shares of the
Company's common stock in the first six months of fiscal 1999 compared to $1.2
million in shares purchased during the same period a year ago.
The Company's long-term obligations at July 2, 1999 consisted primarily of
the obligation on the $30.0 million revolving mortgage note of $9.4 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. The sale of one of
these excess facilities in May of 1999 will reduce the amount of future rental
income. Should the remaining subleases not be extended, renewed or have their
term options exercised, the loss of additional miscellaneous rental income
could have a material adverse effect on the Company's operating results.
Year 2000 Compliance
General
- -------
The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example, the
clock circuit in the hardware may be incapable of holding a date beyond the year
1999; some operating systems may recognize a date using "00" as the year 1900
rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material adverse affect on companies through
business interruption or shutdown, financial loss, damage to reputation, and
legal liability to third parties.
12
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 95% 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.
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
14
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 term 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 term 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
historically low volatility of both the Prime and LIBOR interest rates, the
Company believes any exposure would be minimal.
15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 1999 Annual Meeting of Stockholders held on May 5, 1999
(the "Annual Meeting"), the following individuals were elected to the Board of
Directors:
BROKER
FOR WITHELD NON-VOTES
--- ------- ---------
Michael R. Gaulke 5,241,078 1,083,663 N/A
Samuel H. Armacost 5,574,123 750,618 N/A
Barbara M. Barrett 5,253,438 1,071,303 N/A
Jon R. Katzenbach 5,254,938 1,069,803 N/A
Edward J. Keith 5,241,078 1,083,663 N/A
Subbaiah V. Malladi 5,239,678 1,085,063 N/A
Roger L. McCarthy 5,251,921 1,072,820 N/A
George T. Van Gilder 5,253,938 1,070,803 N/A
The following proposals were approved by the stockholders at the Company's
Annual Meeting:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1. To amend the Company's
Employee Stock Purchase Plan
by increasing the Plan by
400,000 shares and allowing for
specified annual increases 2,932,740 925,034 391,975 2,074,992
2. To establish a 1999 Stock
Option Plan that initially has
400,000 shares available for
grant and allows for specified
annual increases 2,771,355 1,084,419 393,975 2,074,992
3. To establish a Restricted
Stock Plan that initially has
100,000 shares available for
grant and allows for specified
annual increases 3,227,292 627,082 395,375 2,074,992
4. The appointment of KPMG LLP
as independent auditors for
the period ending
December 31, 1999. 6,317,272 1,300 6,169 0
16
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 July 2, 1999.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPONENT, INC.
--------------
(Registrant)
Date: August 13, 1999 /s/ Michael R. Gaulke
---------------------
Michael R. Gaulke, Chief Executive Officer,
President and Director
18
Index to Exhibits
-----------------
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
19