-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WSdmp2mQvKRKGFIlIHwuFFZ+8EyQWCce0X7OFd+jneFL63NalqVJczG7GiXSotD/ 7J2R/msmoMraF1Im0tv2aQ== 0001012870-98-000873.txt : 19980403 0001012870-98-000873.hdr.sgml : 19980403 ACCESSION NUMBER: 0001012870-98-000873 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980102 FILED AS OF DATE: 19980402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPONENT INC CENTRAL INDEX KEY: 0000851520 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 770218904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18655 FILM NUMBER: 98586570 BUSINESS ADDRESS: STREET 1: 149 COMMONWEALTH DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4156886954 MAIL ADDRESS: STREET 1: 149 COMMONWEALTH DR CITY: MENLO PARK STATE: CA ZIP: 94025 FORMER COMPANY: FORMER CONFORMED NAME: FAILURE GROUP INC DATE OF NAME CHANGE: 19930831 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ________________________________ [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 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 EXPONENT, INC. -------------- (formerly named The Failure Group, Inc.) (Exact name of registrant as specified in its charter) Delaware 77-0218904 -------- ---------- (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 149 Commonwealth Drive, Menlo Park, California 94025 - ---------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (650) 326-9400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value - ----------------------------- (Title of Class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing sale price of the Common Stock as reported on the NASDAQ National Market on March 27, 1998, was approximately $40,326,406. For purposes of this determination, shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the issuer's Common Stock outstanding as of March 27, 1998 was 7,469,412. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Stockholders for its fiscal year ended January 2, 1998, are incorporated by reference in Parts II and IV of this Form 10-K to the extent stated herein. (2) Portions of the Registrant's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders to be held on May 13, 1998, are incorporated by reference into Part III of this Form 10-K. 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. PART I - ------ ITEM 1. BUSINESS GENERAL Exponent, Inc., incorporated in Delaware in 1989 ("Exponent", and, together with its subsidiaries, the "Company"), through its principal operating subsidiaries, Failure Analysis Associates, Inc. ("FaAA"), Exponent Health Group, Inc.(formerly named Environmental Health Strategies, Inc.) ("EHG"), Exponent Environmental Group, Inc. (formerly named Performance Technologies, Incorporated) ("EEG") and BCS Wireless, Inc. ("BCS"), is a multidisciplinary organization of scientists, physicians, engineers, and business consultants performing in-depth scientific research and analysis in over 50 technical disciplines. BCS specializes in the design, installation and maintenance of wireless communication networks. During fiscal 1996, the Company entered into the epidemiology arena with the acquisition of EHG. EHG, acquired on August 1, 1996, provides epidemiology advice and services on a wide variety of topics, including occupational and environmental health, pharmaceutical and medical device issues, and health-related consumer product safety. During fiscal 1997, the Company continued implementing its strategy of growth and diversification through the acquisitions of BCS and EEG. BCS, acquired on January 4, 1997, specializes in the design, installation and maintenance of wireless communication networks. BCS is located in the greater Madison, Wisconsin area and has erected communication towers and provided related training and technical services for the telecommunications industry since 1981. EEG, acquired on May 16, 1997, is a scientific and engineering consulting firm specializing in scientific solutions for complex environmental problems. The Company sold one of its subsidiaries PLG, Inc. ("PLG") in the third quarter of fiscal 1997. The Company sold PLG based on management's assessment that the services PLG provided were no longer complementary to the Company's core business practice areas. CLIENTS General The Company serves clients in manufacturing, transportation, utilities, energy, insurance, government and other sectors of the economy. Approximately 29% of the Company's revenues are derived from professional services provided to clients, organizations and insurers related to the transportation industry. Many of the Company's engagements are initiated by lawyers or insurance companies whose clients anticipate or experience significant litigation over an alleged failure of their products, equipment or services. In other cases, the Company is engaged when a client requires independent testing of a product or requires specialized analysis regarding the likelihood of failures or techniques to prevent such failures. Pricing and Terms of Engagements The Company provides its services on either a fixed fee basis or on a "time and expenses" basis, charging hourly rates for each staff member involved in a project, based on his or her skill and experience. The Company's standard rates for professionals range from $40 to $650 per hour. The Company's engagement agreements typically provide for monthly billing, require payment of the Company's invoices within 30 days of receipt, permit clients to terminate an engagement at any time and generally grant the Company ownership of intellectual property developed by the Company in the course of the engagement. Clients normally agree to indemnify Exponent's work and its 2 personnel against liabilities arising out of the use or application of the results of the Company's work or recommendations. SERVICES The Company provides services in the following practice areas:
. Biomechanics . Human Factors . Civil Engineering . Information Management . Data Analysis . Materials Science and Engineering . Electrical Engineering . Mechanical Design Analysis . Environmental . Vehicle Evaluation and Testing . Fire, Explosions and Toxic Chemicals . Visual Communication . Health
BIOMECHANICS Biomechanics uses engineering and biology to determine how people become injured and to determine what injuries can be expected when people are exposed to a certain incident or environment. The analysis encompasses: claimed injury, injury mechanisms, and injury prevention; effectiveness of restraint systems; ergonomic design evaluation; low-speed and high-speed automotive collisions, cardiovascular devices; helmet effectiveness; occupational injuries; recreational sports injuries; evaluation of implant designs; cardiovascular medicine and failure; and human body dynamics. CIVIL ENGINEERING Civil engineering investigates all types of structural, geotechnical, geological, geomechanical, construction, and building problems, from major catastrophes to simple performance failures. The scientific investigation of these events provides a thorough assessment of damage, as well as expert analysis of causation to be used for purposes of retrofit, repair, claims adjustment, or litigation. The analysis provides a comprehensive evaluation of structural failures that include site condition and assessment surveys, advanced theoretical and numerical modeling techniques, dynamic testing and analysis, reliability and risk analysis, materiel testing, and repair solutions. Earthquake engineering encompasses safety and damage assessment, seismic analysis and design, post-earthquake reconnaissance and field inspection of all types of structures, analysis of earthquake ground motion, investigation of structural failures, development of remedial repairs and mitigation measures, investigation protocol development, and disaster management services. This includes subrogation studies, mediation and arbitration support, and technical and scientific support for litigation. Geotechnical, geological, geomechanical engineering and groundwater hydrology encompasses problems with soil, rock and fluids with properties that are poorly understood compared to the structures that they support. The applied earth sciences analysis encompasses problems associated with landslides, earthwork construction, foundations, retaining walls, oil-well distress, tunnels and pipelines. Structural engineering encompasses comprehensive evaluations, including state-of-the-art structural analyses, site condition and assessment surveys, dynamic testing and vibration measurement, computer animated reconstruction, reliability and risk analyses, advanced theoretical and numeric modeling, due diligence consulting, and component or material testing. Once the root cause of the failure is known, and when the extent and severity of the distress is fully assessed, optimal repair options are recommended. 3 DATA ANALYSIS Data analysis quantifies how machines, vehicles, consumer products, and components behave in the real world to directly measure risk. Most of the risk analysis is based on information from in-house databases of over 350 million computerized records, one of the world's largest collections of accident and incident records. The analysis encompasses: accident data analysis; automotive safety design and evaluations; database development; epidemiological research and analysis; fire risk, property loss and insurability; health risk assessment and epidemiology; safety assessment; statistical modeling and analysis; survey design and analysis; system reliability and failure probability; work injury; and consumer product safety. ELECTRICAL ENGINEERING Electrical engineering encompasses accident reconstruction, component and printed circuit board failure analysis, electrical system design analysis, equipment failure investigation, and patent evaluation and infringement review. Typical investigations include: electric power systems; electric equipment and energy conversation equipment and interruptible power systems; automotive electronics; printed circuit boards; telecommunication electronics; semiconductor devices; power supplies and batteries; prototypes; and transportation systems. ENVIRONMENTAL Environmental engineering includes ecological and human health risk assessment; air quality evaluation; site investigation and liability management; natural resource damage assessment; and water resources and quality management. Air quality evaluation encompasses accident reconstruction; air quality management; chemical release analyses; combustion calculations and modeling; computer modeling of plume dynamics; statistical analyses; visualization, animation, and geographic information systems; indoor air quality assessment; risk analyses; uncertainty evaluation; expert testimony and litigation support. Site investigation and liability management encompasses site assessments; remedial investigations/feasibility studies; Resource Conservation and Recovery Act facility investigation/corrective measure studies; natural attenuation studies; groundwater and surface water modeling; bench scale testing; transport and fate analysis; air quality monitoring; bio availability studies; sediment investigations; remedial alternatives analysis; remediation/redevelopment oversight; and economic analysis. Water resources and water quality management encompasses groundwater, surface water, and vadose-zone analyses; environmental transport and fate analyses; natural attenuation and degradation studies; river and reservoir water quality analyses; groundwater remedial investigations; watershed and basin-scale hydrological modeling and management; site-specific hydrology and geochemical evaluations; flood and stormwater planning and management; sediment transport analyses; dam failure analyses; and water supply reliability and resource planning and management. FIRES, EXPLOSIONS AND TOXIC CHEMICALS Fires, explosions and toxic chemical services encompass fire cause, origin, and propagation analysis; combustion and explosion investigations; arson investigations; chemical reactions and kinetics assessment; chemical processes review; fire protection evaluation; site investigation and documentation; smoke and plume propagation modeling; heat transfer and thermodynamics analysis; fluid mechanics evaluation; heating and cooling equipment design reviews; and full- scale fire and explosion testing. The information gained from these analyses provides clients with a means of assessing preventative measures related to the design of their products as well as evaluating failures when they occur. 4 HEALTH Health services provide solutions to complex health problems from client consultation to clinical trials, health care evaluations, literature reviews and epidemiological studies. Health research includes reproductive effects, cancer, injuries, and health effects from workplace exposures, pharmacoepidemiolgy, and infectious disease control. Epidemiology, exposure assessment, and occupational medicine expertise is used to evaluate occupational and environmental health issues. Decision analysis, cost-benefit, risk-benefit, and outcome analysis is applied to assist health care companies in evaluating health care and with strategic planning and technology assessment. Epidemiology is the science of studying disease within a population. Through the principles of epidemiology, analyses are performed on the interaction of host, agent, and environment to reach conclusions about the causes and occurrence of disease in human populations. Epidemiology services encompass designing and conducting occupational and environmental studies to evaluate the health effects of community and workplace exposures, work-related disease and injury; conducting decision analysis for alternative forms of medical treatments; designing, conducting, and interpreting clinical trials; consulting on product safety; and evaluating quality of health care. Healthcare evaluation provides various approaches to accreditation, program evaluation and cost-effectiveness analyses. These approaches encompass statistical analysis; survey design and analysis; accreditation applications; cost-effectiveness analysis; performance indicators; accreditation requirements; outcome measurements; disease management; quality improvement; clinical practice guidelines; and program evaluation. Medical technology assessments provide a comprehensive and independent assessment of medical devices and technologies. These assessments encompass clinical indications; materials selection; technology (engineering) review; FDA and other regulatory hurdles; target condition epidemiology (size of U.S. and worldwide market); pricing and reimbursement issues; cost effectiveness; complications and/or failure modes (liability); marketing strategy; and competing technologies. Risk assessments and related analyses are a critical component of many environmental regulatory decisions. The results of such analyses help determine the need for and nature of remedial actions at hazardous waste sites, support the derivation of cleanup levels, and assist in permitting new facilities and developing closure plans for solid waste management units and facilities that are going out of service. Human health toxicology services encompass comprehensive multi-pathway risk assessments; screening-level risk evaluations; derivation of risk-based cleanup levels; deterministic and probabilistic exposure assessments; toxicity assessments and data evaluation; risk assessment strategy development and review; research and development to address sources of uncertainty; bio availability studies; fish consumption surveys and studies; and toxic tort, class action, and general litigation support. HUMAN FACTORS Analysis of human behavior and the limitations and capabilities of people as they use a product or participate in an activity can provide a better understanding of how accidents occur. The impact of warning labels, other safety information, and training on changing human behavior and reducing accidents is an active area of ongoing research. Human factors services encompasses the development of warnings and safety information for consumer, medical, and work- related products; analysis of the role of warnings in particular accidents; use of injury/illness data to identify human behavior associated with accidents; use of risk analysis to quantify the safety of a product or activity; measurement of illuminance, luminance, and noise levels in work environments; measurement of human motor performance such as jumping ability, variation in gait, finger pinch strength and visual-motor control; testing of people's knowledge of hazards and comprehension of safety information; and analysis of user reaction to complex information and control systems. INFORMATION MANAGEMENT Information management covers information systems technology, technical consulting, and application. Services encompass access to one of the largest private collections of computerized accident and incident data bases in the world; providing design and installation of customized reports and automated queries; design and execution of complex queries and technical information in a particular 5 field, including suggestions for primary research. These services help to simplify preliminary research and risk analyses by offering access over the Internet in a streamlined approach to help organizations react quickly to new circumstances and unanticipated demands. MATERIALS SCIENCE AND ENGINEERING Materials science and engineering is the science of understanding how and why materials fail in medical, automotive, construction, recreational, and other environments. Areas of expertise include metallurgists, polymer scientists, and ceramists. Services encompass accident reconstruction; fatigue and fracture mechanics analysis; fractography; adhesion and coating evaluation; joining and welding evaluation; bulk and surface chemical analysis; laboratory testing of metals, plastics, ceramics and glasses; composites (fiberglass, sheet molding compound and carbon) evaluation; life assessment; corrosion assessment; defect detection and effect investigation; material characterization, selection and compatibility assessment; environmental effect assessment; microscopy; experimental stress analysis; non-destructive evaluation; and fabrication and material processing. MECHANICAL DESIGN ANALYSIS Mechanical design analysis covers a broad range of services, from engineering mechanics, energy, aviation, marine, risk management and reliability to safety and process risk management. Engineering mechanics involves the evaluation of loads on a system or product, from medical devices to commercial aircraft. Projects range from modeling fluid flow characteristics in a system to predicting the remaining lifetime of structures and components and to establishing design and operating envelopes for processes and technologies. Services encompass component/structure lifetime prediction; material constitutive modeling, testing, and evaluation; damage assessment; non-destructive evaluation; stress analysis; design review; finite element analysis; blast and explosion; failure modes and effects analysis; structural, thermal, and fluid dynamics analysis; vibration evaluation and rotating equipment; fracture mechanics; medical device assessment; and impact and penetration. Energy services encompass creation of innovative maintenance management of existing electric power plant equipment and systems; assisting power plant owners and investors in modernization/expansion programs and new plant development; component and plant condition assessments; and reliability analyses and economic optimization. Aviation analysis includes engineering analyses and design reviews, accident reconstruction and testing for aircraft, aircraft structures, systems and auxiliary equipment as well as spacecraft, satellites and rockets. Services encompass accident reconstruction; fire cause and origin analysis and prevention; aerodynamics analysis; materials and corrosion evaluation; aircraft system testing and evaluation; performance and control calculations; computer simulation; regulatory analysis; design evaluation; risk analysis and service life assessment; and wind tunnel testing. Marine services perform independent engineering analysis and design review, accident reconstruction and testing for ships, marine structures, offshore platforms, and auxiliary marine equipment. Other services encompass marine materials and corrosion evaluation; sea-states and weather characterization; regulatory compliance review; structural design and fabrication process review; risk analysis and service life assessment; shipyard management and operations review; fire cause and origin analysis and prevention; structural assessment; management and oversight of vessel construction; and evaluation of the environmental impact of marine industrial operations and incidents. Risk management and reliability focuses on the areas of industrial hazard assessment, mitigation, and prevention, operational reliability, safety hazards, product quality, and economic risks and benefits. Risk assessments and accident analysis are performed for the construction, operation, and servicing of manufacturing plants, processing and storage facilities, and transportation systems. Techniques used encompass fault-tree and event-tree analysis; failure modes and effects analysis ("FMEA"); operational performance evaluation; statistical analysis; and probabilistic risk assessments. 6 Safety and process risk management is the effective way to address safety issues in chemical and petrochemical industries that store, handle, or process toxic or flammable materials in quantities that, if released, could have a major impact on workers, nearby communities, or facilities. These events can have significant life-safety, environmental, legal, regulatory, and financial consequences. Services encompass process hazards analysis; mechanical integrity assessment; determination of blast overpressures and structural assessments; failure/accident investigation; offshore platform hazards analysis; consequence modeling; and quantitative risk assessment ("QRA"). VEHICLE EVALUATION AND TESTING Vehicle evaluation and testing covers design analysis, component testing, and accident reconstruction. Projects have included automobiles, buses, trucks, vans, bicycles, trailers, motorcycles, trains, forklifts, tractors, cranes, mining and construction equipment, all terrain vehicles, and golf carts. Services encompass accident reconstruction; product validation testing; crash testing; component testing and evaluation; design analysis; occupant kinematics and injury analysis; vehicle handling analysis and testing; human performance assessment; instrumentation and data analysis; risk analysis; fire causation analysis; and product development. VISUAL COMMUNICATION Visual communication means the generation, development, and production of visual concepts. Pictures are relyed upon whether printed, displayed on a computer, projected onto a screen, or presented as virtual reality to reveal and explain what words alone cannot. The products include animation, graphics, multimedia, photography, and video. Services encompass charts, graphs and tables; electronic imaging and enhancement; computer animation; photogrammetry; concept generation and development; site and studio photography; courtboards, laser disks, and CD-ROMs; slides, prints, and overhead transparencies; custom photographic processing; stereo and high-speed photography; video and post- production; and interactive presentations. COMPETITION The marketplace for the Company's services is fragmented and the Company faces different sources of competition in providing its various services. In addition, the services the Company provides to some of its clients can be performed in-house by those clients. However, because of liability and independence concerns, clients who have the capability to perform such services themselves often retain the Company or other independent consultants. In each of the foregoing areas, the Company believes that the principal competitive factors are technical capability and breadth of services, ability to deliver services on a timely basis, professional reputation, knowledge of the litigation process, and the ability to offer fixed fee pricing. Although the Company believes it generally competes favorably in each of these areas, some of the Company's competitors may be able to provide services acceptable to the clients at significantly lower prices. The Company generally believes that the barriers to entry in particular areas of engineering expertise are low and that for many of its technical disciplines, competition is increasing. In addition, the Company expects that as a result of these low barriers, competition may become more intense in other aspects of its business. In response to competitive forces in the marketplace, the Company continues to explore new markets for its various technical disciplines. Competitive pressures could reduce the market acceptance of the Company's services and result in price reductions. EMPLOYEES As of January 2, 1998, the Company employed approximately 636 full- time and part time employees, including approximately 336 engineering staff, 144 technical support staff, and 156 administrative and support staff. The Company's future success depends on its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there 7 can be no assurance that the Company will be able to retain its key managerial and technical employees or that it will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. EXECUTIVE OFFICERS The executive officers of the Company and their ages as of April 2, 1998 are as follows:
Name Age Position - ---- --- -------- Michael R. Gaulke 52 President, Chief Executive Officer and Director Roger L. McCarthy, Ph.D. 49 Chief Technical Officer and Director Marc W. Lorenzen, Ph.D. 53 President, Exponent Environmental Group, Inc. Robert W. Morgan, MD, Ph.D. 60 President, Exponent Health Group, Inc. Richard L. Schlenker 33 Corporate Secretary Terence G. Boyle 39 Corporate Controller
Executive officers of the Company are appointed by the Board of Directors and serve at the discretion of the Board or until the appointment of their successors. There is no family relationship between any of the directors and officers of the Company. Mr. Gaulke joined the Company in September 1992, as Executive Vice President and Chief Financial Officer. He was named President in March 1993, and he was appointed as a member of the Board of Directors of the Company in January 1994. He assumed his current role of President and Chief Executive Officer in June of 1996. From November 1988 to September 1992, Mr. Gaulke served as Executive Vice President and Chief Financial Officer at Raynet Corporation, a subsidiary of Raychem Corporation. Prior to joining Raynet, Mr. Gaulke was Executive Vice President and Chief Financial Officers of Spectra Physics, Inc., where he was employed from 1979 to 1988. From 1972 to 1979, Mr. Gaulke served as a consultant with McKinsey & Company. Mr. Gaulke is a member of the Board of Directors of RockShox, Inc. and serves on the Board of Trustees of the Palo Alto Medical Foundation. Mr. Gaulke received a M.B.A. (1972) in Marketing and Operations from Stanford University Graduate School of Business and a B.S. (1968) in Electrical Engineering from Oregon State University. Dr. McCarthy was named Chief Technical Officer of the Company and Chairman of the Board of the Company's principal operating subsidiary Failure Analysis Associates, Inc. (FaAA) in June of 1996. He has been a director of the Company and FaAA since 1989 and a director of FaAA since 1980, Chief Executive Officer of the Company and FaAA from 1989 to June 1996. Additionally, he was Chairman and President of the Company from 1989 to March 1993. He joined the Company in August 1978. Dr. McCarthy received his Ph.D. (1977), Mech.E. (1975), and S.M. (1973) from Massachusetts Institute of Technology, and his B.S.E. (1972) in Mechanical Engineering and A.B. (1972) in Philosophy from the University of Michigan. Dr. McCarthy is a Registered Professional Engineer in the states of California and Arizona and a member of the following professional organizations: American Society of Metals; American Society of Mechanical Engineers; Society of Automotive Engineers; American Society for Testing and Materials; Human Factors and Ergonomics Society; National Society of Professional Engineers; American Society of Heating, Refrigeration and Air- Conditioning Engineers; National Fire Protection Association; American Welding Society; National Safety Council; Society for Risk Analysis; and the American Statistical Association. Dr. Lorenzen is the co-founder and has been the President of one of the Company's principal subsidiaries, Exponent Environmental Group, Inc. (formerly Performance Technologies, Incorporated) 8 ("EEG") since 1987. Dr. Lorenzen has 31 years of professional experience in waste management and water pollution control with special expertise in the areas of water quality modeling and analysis of the effects of waste load allocation and nutrient inputs to river and lake systems. Dr. Lorenzen received a Ph.D. (1973) and an M.S. (1971) in Environmental Engineering from Harvard Univeristy. He received an M.S. (1967) in Sanitary Engineering and a B.S. (1966) in Civil Engineering from the University of California, Berkeley. Dr. Lorenzen is a member of the American Society of Civil Engineers; Science Council and Foundation Associate, Pacific Science Center; American Water Works Association Best Thesis Competition (prize winner); and the Hydrologic Transport and Dispersion Committee, American Society of Civil Engineers Hydraulics Division. Dr. Morgan has been the President of one of the Company's principal subsidiaries, Exponent Health Group, Inc. (formerly Environmental Health Strategies, Inc.) ("EHG") since 1989. For the past twenty years, Dr. Morgan has directed health studies to assess a wide variety of health issues ranging from breast cancer to asbestos exposure to water contamination to artificial sweeteners to cellular telephones. Dr. Robert Morgan is a medical graduate of the University of British Columbia and received a Master's Degree in Epidemiology from Harvard. Dr. Morgan is board-certified in Occupational and Environmental Medicine and is a Fellow in the American College of Epidemiology. Dr. Morgan is a member of various scientific societies and organizations and is a reviewer for scientific journals. Richard R. Schlenker is the Manager of Business Development for the Company and was appointed secretary of the Company in November 1997. From 1993 to 1996, Mr. Schlenker was a Business Manager at FaAA where he managed the business activities for over 100 consulting engineers. Mr. Schlenker holds a MBA from Santa Clara University and a BS in Finance from the University of Southern California. Terence G. Boyle, CPA, joined the Company in February 1995. From February 1995 to January 1996, Mr. Boyle served as Corporate Controller at PLG, a wholly-owned operating subsidiary of the Company. In February 1996, Mr. Boyle was named Corporate Controller of the Company. Prior to joining PLG, Mr. Boyle was Vice President of Finance and Administration for Kaiser Compositek, Inc. from 1990 to 1995. Mr. Boyle is a Certified Public Accountant in California and received his MBA in Finance from California State University, Los Angeles in 1984. 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. CUSTOMER CONCENTRATION The Company currently derives, and believes that it will continue to derive, a significant portion of its revenues from clients, organizations and insurers related to the transportation industry. In 1997, transportation industry related engagements accounted for approximately 29% of the Company's 9 revenues. The loss of any large client, organization or insurer related to the transportation industry 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 exposures of manufacturers, owners, service providers and others to liability, the demand for environmental services may be significantly reduced. COMPETITION The markets for the Company's services are highly competitive. In addition, there are relatively low barriers to entry into the Company's markets and the Company has faced, and expects to continue to face, additional competition from new entrants into its markets. Competitive pressure could reduce the market acceptance of the Company's services and result in price reductions that could have a material adverse effect on the Company's business, financial condition and results of operations. ABSENCE OF BACKLOG Revenues are primarily derived from services provided in response to client request or events that occur without notice, and engagements, generally billed on a "time and expenses" basis, are terminable at any time by clients. As a result, backlog at any particular time is small in relation to its quarterly or annual 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. PROPERTIES The Company currently subleases excess facilities in its Menlo Park, CA headquarters that have lease terms that expire within the 1998-2000 time periods. In 1997, miscellaneous rental income associated with these facilities amounted to approximately 26% 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. 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. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, in approximately two years, computer systems and/or software used by the Company may need to be 10 upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists concerning the potential effects associated with compliance. Although the Company believes that it will be Year 2000 compliant, there can be no assurance that coding errors or other defects will not be discovered in the future. Any Year 2000 non compliance could result in a material adverse effect on the Company's business, financial conditions and operating results. ITEM 2. PROPERTIES The Company's headquarters office facilities consist of a 153,738 square foot building, with office and laboratory space located on a 6.3 acre tract of land owned by the Company in Menlo Park, California, an adjacent 32,000 square foot office building owned by the Company, and an adjacent 27,000 square feet of leased warehouse storage space. The Company's primary facility is subject to a variable rate mortgage tied to London Interbank Offering Rate which, as of the period ending January 2, 1998, aggregated $17.5 million in principal amount outstanding. The Company's Test and Engineering Center occupies 147 acres in Maricopa County, Arizona. The Company leases this land from the state of Arizona under a 30 year lease agreement which expires in January of 2028. In addition, the Company leases office, warehouse and laboratory space in 23 other separate locations in 14 states as well as in Germany, Poland and Russia. Leases for these office, warehouse and laboratory facilities have terms generally ranging between one to ten years. Aggregate lease payments in fiscal 1997 for all leased properties were approximately $2,062,000. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company has been named as a defendant in actions arising out of its business. The Company is not currently engaged in any such litigation that management believes would have a material adverse impact on the Company if resolved adversely to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II - ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to the section entitled "Quarterly Stock Data" in the Company's Annual Report to Stockholders for the year ended January 2, 1998 (the "1997 Annual Report"). An excerpt from the Annual Report to the Stockholders containing this information has been filed as Exhibit 13.1 to this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the section entitled "Financial Highlights" in the 1997 Annual Report. An excerpt from the Annual Report to the Stockholders containing this information has been filed as Exhibit 13.1 to this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 11 Annual Report. An excerpt from the Annual Report to the Stockholders containing this information has been filed as Exhibit 13.1 to this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The consolidated financial statements of the Company are incorporated by reference to the 1997 Annual Report, where such information appears under the captions "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Independent Auditors' Report" on pages 15 through 29 of such report. An excerpt from the Annual Report to the Stockholders containing this information has been filed as Exhibit 13.1 to this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders (the "Proxy Statement") relating to the section entitled "Proposal No. 1: Election of Directors" and "Other Information Compliance with Section 16(a) of the Exchange Act." See item 1 for information regarding the executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the section entitled "Executive Officer Compensation" of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section entitled "Other Information -- Share Ownership by Principal Stockholders and Management" of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section entitled "Certain Transactions" of the Proxy Statement. PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this Annual Report on Form 10-K. 1. FINANCIAL STATEMENTS The following consolidated financial statements of Exponent, Inc. and subsidiaries and the Independent Auditors' Report are incorporated by reference to the 1997 Annual Report: 12 Consolidated Statements of Operations for the years ended January 2, 1998, January 3, 1997 and December 29, 1995; Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997; Consolidated Statements of Stockholders' Equity for the years ended January 2, 1998, January 3, 1997 and December 29, 1995; Consolidated Statements of Cash Flows for the years ended January 2, 1998, January 3, 1997 and December 29, 1995; and Notes to consolidated financial statements. 2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedule of Exponent, Inc. for the years ended January 2, 1998, January 3, 1997 and December 29, 1995 is filed as part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements of Exponent, Inc. Description ----------- Schedule II Valuation and qualifying accounts Schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is otherwise included. 3. EXHIBITS The following exhibits are filed as part of, or incorporated by reference into (as indicated parenthetically), this Annual Report on Form 10-K: Exhibit Number Description -------------- ----------- 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to the Company's Registration statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). 4.1 Specimen copy of Common Stock Certificate of the Company (incorporated by reference to the Company's Registration Statement on Forms S-1 as filed on June 25, 1990, registration number 33-35562). *10.1 1989 Stock Option Plan for Subbaiah. V. Malladi (incorporated by reference to the Company's Registration Statement on Form S- 1 as filed on June 25, 1990, registration number 33-35562). *10.2 Stock Option Agreement, dated May 30, 1989, between the Company and Subbaiah V. Malladi (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.3 Stock Option Agreement dated June 22, 1990, between the Company and Subbaiah V. Malladi (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). 13 *10.4 1990 Stock Option and Rights Plan, as amended through March 31, 1993 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993). *10.5 Form of Incentive Stock Option Agreement under the 1990 Stock Option and Rights Plan (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.6 Form of Nonqualified Stock Option Agreement under the 1990 Stock Option and Rights Plan (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.7 Form of Indemnification Agreement entered into or proposed to be entered into between the Company and its officers and directors (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.8 Failure Analysis Associates Employee Pension Plan, as amended March 19, 1991 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.9 Promissory Note for $19,400,000, by FaAA Realty Corporation in favor of The Variable Annuity Life Insurance Company, dated November 9, 1989, as assumed by FaAA (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.10 Form of Agreement between the Company and non-employee members of the Board of Directors, dated March 25, 1991, regarding exchange of rights to receive shares for nonqualified stock options (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.11 Form of Nonqualified Stock Option Agreement between the Registrant and non-employee members of the Board of Directors, dated March 25, 1991 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.12 1991 Restricted Stock Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.13 Exponent, Inc. Employee Pension Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.14 Amendment to Exponent, Inc. Employee Pension Plan, as amended on September 20, 1993 (incorporated by reference to the Company's Transition Period Report on Form 10-K for the seven month period ended December 31, 1993 filed on). *10.15 Amendment to Incentive Stock Option Agreement between the Company and Subbaiah V. Malladi, dated June 27, 1991 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 14 *10.16 Form of Incentive Stock Option Agreement, between the Registrant and optionees under the 1990 Stock Option and Rights Plan, relative to replacement of outstanding options (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.17 Form of Nonqualified Stock Option Agreement, between the Registrant and nonemployee members of the Board of Directors, relative to replacement of outstanding options (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.18 Amendment to Stock Option Agreement, between the Registrant and Subbaiah V. Malladi, relative to repricing outstanding option under 1989 Stock Option Plan for Malladi V. Subbaiah (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.19 Form of Stock Option Agreement between the Company and Subbaiah V. Malladi, relative to replacement of outstanding option under 1990 Stock Option and Rights Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.20 Exponent, Inc. Employee Stock Purchase Plan, as amended August 1993 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993). 10.21 Credit Agreement dated March 16, 1995, between Failure Analysis Associates, Inc. and Bank of America (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1994). 10.22 Zarnowicka Elektrownia Gazowa, joint venture, dated September 8, 1994 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1994 filed on). 10.23 Promissory note with Bank of America dated July 26, 1996 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1997). 13.1 Registrant's Annual Report to Stockholders for the fiscal year ended January 2, 1998, pages 11 through 31. 21.1 List of subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP, independent auditors. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule. 27.3 Restated Financial Data Schedule. --------------------------------------------------------------------- * Indicates management compensatory plan, contract or arrangement. (B) REPORTS ON FORM 8-K On July 30, 1997, the Company filed with the Commission a Form 8-K/A, which was amendment number 1 to the Company's Current Report on Form 8-K filed with the Commission on May 30, 1997, regarding the acquisition of Exponent Environmental Group, Inc. (formerly named Performance Technologies, Incorporated). 15 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duty authorized. Date: April 2, 1998 EXPONENT, INC. (formerly named The Failure Group, Inc.) (Registrant) /s/ Michael R. Gaulke ---------------------------------------- Michael R. Gaulke, Chief Executive Officer, President and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints as his attorney-in-fact, with full power of substitution for him in any and all capacities, to sign any and all amendments to this report on form 10-K, and to file the same, with the exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ MICHAEL R. GAULKE Chief Executive Officer, President and Director - --------------------------------- Michael R. Gaulke /s/ TERENCE G. BOYLE Controller (Principal Financial and Accounting - --------------------------------- Officer) Terence G. Boyle /s/ ROGER L. MCCARTHY Chief Technical Officer and Director - --------------------------------- Roger L. McCarthy /s/ EDWARD J. KEITH Chairman of the Board - --------------------------------- Edward J. Keith /s/ SAMUEL H. ARMACOST Director - --------------------------------- Samuel H. Armacost /s/ BARBARA M. BARRETT Director - --------------------------------- Barbara M. Barrett /s/ JON R. KATZENBACH Director - --------------------------------- Jon R. Katzenbach /s/ GEORGE T. VAN GILDER Director - --------------------------------- George T. Van Gilder
16 EXHIBIT INDEX The following exhibits are filed as part of, or incorporated by reference into (as indicated parenthetically), the Annual Report on Form 10-K: 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to the Company's Registration statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). 4.1 Specimen copy of Common Stock Certificate of the Company (incorporated by reference to the Company's Registration Statement on Forms S-1 as filed on June 25, 1990, registration number 33-35562). *10.1 1989 Stock Option Plan for Subbaiah. V. Malladi (incorporated by reference to the Company's Registration Statement on Form S- 1 as filed on June 25, 1990, registration number 33-35562). *10.2 Stock Option Agreement, dated May 30, 1989, between the Company and Subbaiah V. Malladi (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.3 Stock Option Agreement dated June 22, 1990, between the Company and Subbaiah V. Malladi (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.4 1990 Stock Option and Rights Plan, as amended through March 31, 1993 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993). *10.5 Form of Incentive Stock Option Agreement under the 1990 Stock Option and Rights Plan (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.6 Form of Nonqualified Stock Option Agreement under the 1990 Stock Option and Rights Plan (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.7 Form of Indemnification Agreement entered into or proposed to be entered into between the Company and its officers and directors (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). *10.8 Failure Analysis Associates Employee Pension Plan, as amended March 19, 1991 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.9 Promissory Note for $19,400,000, by FaAA Realty Corporation in favor of The Variable Annuity Life Insurance Company, dated November 9, 1989, as assumed by FaAA (incorporated by reference to the Company's Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562). 17 *10.10 Form of Agreement between the Company and non-employee members of the Board of Directors, dated March 25, 1991, regarding exchange of rights to receive shares for nonqualified stock options (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.11 Form of Nonqualified Stock Option Agreement between the Registrant and non-employee members of the Board of Directors, dated March 25, 1991 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.12 1991 Restricted Stock Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.13 Exponent, Inc. Employee Pension Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.14 Amendment to Exponent, Inc. Employee Pension Plan, as amended on September 20, 1993 (incorporated by reference to the Company's Transition Period Report on Form 10-K for the seven month period ended December 31, 1993). *10.15 Amendment to Incentive Stock Option Agreement between the Company and Subbaiah V. Malladi, dated June 27, 1991 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.16 Form of Incentive Stock Option Agreement, between the Registrant and optionees under the 1990 Stock Option and Rights Plan, relative to replacement of outstanding options (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.17 Form of Nonqualified Stock Option Agreement, between the Registrant and nonemployee members of the Board of Directors, relative to replacement of outstanding options (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.18 Amendment to Stock Option Agreement, between the Registrant and Subbaiah V. Malladi, relative to repricing outstanding option under 1989 Stock Option Plan for Malladi V. Subbaiah (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.19 Form of Stock Option Agreement between the Company and Subbaiah V. Malladi, relative to replacement of outstanding option under 1990 Stock Option and Rights Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.20 Exponent, Inc. Employee Stock Purchase Plan, as amended August 1993 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993). 10.21 Credit Agreement dated March 16, 1995, between Failure Analysis Associates, Inc. and Bank of America (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1994). 18 10.22 Zarnowicka Elektrownia Gazowa, joint venture, dated September 8, 1994 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1994). 10.23 Promissory note with Bank of America dated July 26, 1996 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1997). 13.1 Registrant's Annual Report to Stockholders for the fiscal year ended January 2, 1998, pages 11 through 31. 21.1 List of subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP, independent auditors. 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule 27.3 Restated Financial Data Schedule ---------------------------------------------------------------------- 19 EXPONENT, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Additions Deletions ----------- ------------------------------- Accounts Balance at Provision Reduction Charged Off Balance Beginning of Charged to of Net at End of Year Expenses Provision of Recoveries Year ---------------------------------------------------------------------------------------- Year Ended January 2, 1998 Allowance for doubtful accounts $1,500 ($450) ($50) $1,000 Year Ended January 3, 1997 Allowance for doubtful accounts $1,500 $1,871 ($1,871) $1,500 Year Ended December 29, 1995 Allowance for doubtful accounts $2,800 $3,435 ($4,735) $1,500
EX-13.1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The statements in this report that are forward-looking are based on current expectations, and actual results may differ materially. The forward-looking statements include those regarding future demand for the Company's services and the possible impact of current and future claims against the Company based upon negligence and other theories of liability. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibility that the demand for the Company's services may decline as a result of changes in general and industry-specific economic conditions and the effects of competitive services and pricing; one or more current or future claims made against the Company may result in substantial liabilities; and such other risks and uncertainties as are described in reports and other documents filed by the Company from time to time with the Securities and Exchange Commission. Overview 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 Company's services include analysis of product development or product recall, regulatory compliance, discovery of potential problems related to products, people or property, and impending litigation. During fiscal 1997, the Company continued implementing its strategy of growth and diversification through the acquisition of BCS Wireless, Inc. ("BCS") and Exponent Environmental Group, Inc. ("EEG"), formerly named Performance Technologies, Incorporated. BCS, acquired on January 4, 1997, specializes in the design, installation and maintenance of wireless communication networks. BCS is located in the greater Madison, Wisconsin area and has erected communication towers and provided related training and technical services for the telecommunications industry since 1981. EEG, acquired on May 16, 1997, is a scientific and engineering consulting firm specializing in providing scientific solutions for complex environmental problems. BCS and EEG, when combined with Exponent Health Group, Inc. ("EHG"), formerly named Environmental Health Strategies, Inc., which was acquired effective August 1, 1996, are collectively herein referred to as the "Acquisitions." In addition to acquiring companies, the Company made a strategic decision to sell one of its subsidiaries, PLG, Inc. ("PLG"), in the third quarter of fiscal 1997. The Company sold PLG based on management's assessment that the services provided were no longer complementary to the Company's core business practice areas. The Company has recorded the results of operations for PLG as discontinued operations in the consolidated statements of operations for all years presented. RESULTS OF OPERATIONS The following table sets forth for the periods indicated, the percentage of revenue of certain items in the Company's consolidated statements of operations and the percentage increase (decrease) in the dollar amount of such items year to year:
PERCENTAGE OF REVENUES PERIOD TO PERIOD CHANGE ----------------------------------------------------- ----------------------------- January 2, 1998 January 3, 1997 December 29, 1995 1997 vs. 1996 1996 vs. 1995 --------------- --------------- ----------------- ------------- ------------- Revenues 100.0% 100.0% 100.0% 37.9% 0.8% ----- ----- ----- ------- ------- Operating expenses: Compensation and related expenses 62.6 63.0 60.5 37.1 5.0 Other operating expenses 19.1 23.2 24.7 13.2 (5.3) General and administrative expenses 9.4 10.5 8.3 24.8 27.6 ----- ----- ----- ------- ------- 91.1 96.7 93.5 30.0 4.3 ----- ----- ----- ------- ------- Operating income 8.9 3.3 6.5 266.3 (48.5) ----- ----- ----- ------- ------- Other income (expense), net 1.2 0.8 0.2 110.6 284.1 Income from continuing operations and before income taxes 10.1 4.1 6.7 235.7 (37.9) Provision for income taxes 4.1 0.7 2.7 717.2 (74.5) ----- ----- ----- ------- ------- Income from continuing operations and before discontinued operations and extraordinary item 6.0 3.4 4.0 139.6 (13.0) Discontinued operations (net of taxes) (0.2) (3.4) (0.2) (92.1) 1,891.3 Extraordinary item (net of taxes) (0.8) (100.0) ----- ----- ----- ------- ------- Net income (loss) 5.8% (0.8)% 3.8% (1,077.5)% (121.6)% ===== ===== ===== ======= =======
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995 REVENUES The Company's revenues consist of professional fee services, fees for use of the Company's equipment and facilities as well as third-party expenses directly associated with the services performed that are billed to the client. Third- party expenses are included in revenue net of the related costs. Total revenues increased by $20.2 million or 37.9% over fiscal 1996. This increase in revenue is partially a result of the Acquisitions, which contributed $13.3 million, or 65.8% of the total revenue increase. The remaining $6.9 million increase is due to a general increase in the Company's core litigation practice across many of the Company's technical disciplines. This internal growth was achieved through an increase of billable hours which resulted from an increase in consulting staff in fiscal 1997 of approximately 31 employees, in addition to higher average billable utilization rates in fiscal 1997, due to an increase in demand for the Company's services. Total revenues in fiscal 1996 remained relatively flat over fiscal 1995 with only a small increase of $449,000 or 0.8%. This small increase is primarily attributable to the acquisition of EHG which contributed four months of revenue approximating $864,000. This increase was partially offset by a slowdown in the Company's automotive consulting practice including a slowdown in the use of the vehicle testing track in the Company's Phoenix facility. COMPENSATION AND RELATED EXPENSES Total compensation and related costs increased by $12.5 million or 37.1% over fiscal 1996. Acquisitions accounted for $8.6 million or 68.8% of the total increase. The remaining increase of $3.9 million is generally due to an increase in employee compensation resulting from an 8% increase in the number of employees in fiscal 1997. As a percentage of revenue, total compensation decreased slightly to 62.6% in fiscal 1997 from 63% in fiscal 1996. In fiscal 1996, total compensation and related costs increased by $1.6 million or 5% over fiscal 1995. The acquisition of EHG accounted for $406,000 of this increase, while the remaining increase is due to the inclusion of an extra week of compensation in fiscal 1996 due to the fiscal year operating on a 53- week calendar year as opposed to 52 weeks. As a percentage of revenue, compensation and related expenses increased to 63% in fiscal 1996 from 60.5% in fiscal 1995. OTHER OPERATING EXPENSES Other operating expenses increased by $1.6 million or 13.2% over fiscal 1996. This increase is primarily attributed to the Acquisitions, which accounted for $2.1 million of other operating expenses in fiscal 1997, while the Company's core business had a decrease in other operating expenses of approximately $500,000. The $500,000 decrease in the Company's core business operating expenses was due to a decrease in depreciation expense and other computer- related expenses which is a direct result of the ongoing cost savings from the conversion to a new, lower cost accounting system which was implemented in October 1996. Other operating expenses as a percentage of revenue decreased to 19.1% in 1997 from 23.2% in fiscal 1996. This decrease was achieved from the cost savings of the Company's new accounting software package while revenues for the Company increased. In fiscal 1996, other operating expenses decreased by approximately $688,000 or 5.3% over fiscal 1995. As in fiscal 1997, this decrease is primarily attributable to the related cost savings achieved from the conversion to a lower cost accounting system, including lower depreciation expense and outside consulting. As a percentage of revenue, other operating expenses decreased to 23.2% in fiscal 1996 from 24.7% in fiscal 1995. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased by $1.4 million or 24.8% over fiscal 1996. Acquisitions accounted for $1.9 million of this increase, while the Company's core business had a decrease in general and administrative expenses of approximately $500,000 primarily due to a decrease in bad debt and marketing expense. As a percentage of revenue, general and administrative expenses decreased to 9.4% in fiscal 1997 from 10.5% in fiscal 1996, which is a result of the Company's continued efforts to maintain overhead expenses even as revenues continue to grow. In fiscal 1996, general and administrative expenses increased by $1.2 million or 27.6% over fiscal 1995. This increase is due to the inclusion of four months of general and administrative expenses of approximately $150,000 from the acquisition of EHG in fiscal 1996, in addition to an increase in travel expenses of approximately $250,000 and bad debt expense of approximately $800,000 due to the non-recurring reduction of the bad debt reserve in fiscal 1995 of $1.3 million. OTHER INCOME AND EXPENSE Other income and expense consists primarily of interest expense on the Company's mortgage net of interest income earned on corporate investments and rental income derived from the leasing of certain portions of the Company's headquarters building. Other income and expense increased by $480,000 or 110.6% over fiscal 1996. This increase is principally due to an increase in rental income resulting from both an increase in the amount of square footage leased to outside entities and an increase in the rent charged per square foot. In fiscal 1996, other income and expense increased by $321,000 or 284.1%. This increase was primarily due to an increase of rental income achieved through rent increases as well as an increase in the amount of space rented. PROVISION FOR INCOME TAXES The Company's provision for income taxes as a percentage of income from continuing operations is 40.5% for fiscal years 1997 and 1995. In fiscal 1996, the provision for income taxes as a percentage of income from continuing operations is 17%. This lower effective tax rate is primarily due to the tax benefit from tax-exempt interest earned on the Company's investments in fiscal 1996. DISCONTINUED OPERATIONS In September 1997, the Company sold its wholly owned subsidiary, PLG, for approximately $2.0 million. Accordingly, the results of operations for PLG have been shown in the consolidated statements of operations as a loss from discontinued operations, net of taxes, for all fiscal years presented. Additionally, during fiscal 1996, the Company determined that the goodwill associated with the purchase of PLG became impaired and, therefore, wrote off the remaining $1.6 million goodwill balance. This goodwill write-off in addition to goodwill amortization during fiscal 1996 and 1995 has been included in the loss from discontinued operations. EXTRAORDINARY ITEM In June 1996, the Company committed to refinance its building mortgage. The Company recorded the tax-effected prepayment penalty charge of $443,000, net of taxes, for the refinancing of this note as an extraordinary item in the statement of operations. LIQUIDITY AND CAPITAL RESOURCES At January 2, 1998, the Company had $8.4 million in cash and cash equivalents and $6.4 million in short-term investments. The Company has financed its business principally through cash flows from operating activities. Net cash provided by operating activities was $3.6 million in fiscal 1997 compared to $4.4 million in fiscal 1996. This decrease in operating cash flow is primarily due to a decrease in accounts payable as well as an increase in accounts receivable due to an increase in revenues. The general credit quality of the Company's clients is high due to the majority of the clients being Fortune 500 companies who pose minimal credit risk. Historically, the timing of collections has been subject to swings; however, the Company's days of revenue outstanding has decreased to 109 days at January 2, 1998 from 135 days at December 30, 1994. During fiscal 1997, the Company generated $1.5 million of cash from investing activities primarily through the sale of short-term investments for a net amount of $13.8 million offset partially by cash used for acquisitions of approximately $7.8 million and capital expenditures of $4.2 million. During fiscal 1996, the Company used $6.9 million of cash from investing activities primarily through the reinvestment of excess cash from operating activities of $2.4 million in addition to cash used for capital expenditures of $2.8 million. Net cash used in financing activities increased to $1.1 million in fiscal 1997 compared to $468,000 in fiscal 1996. This increase is primarily due to two principal payments made on the Company's mortgage in fiscal 1997 of $1.2 million compared to the repurchase of common stock in fiscal 1996. The Company's long-term obligations at January 2, 1998 consisted primarily of the mortgage obligation on the headquarters facility of $17.5 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 (LIBOR). This rate is subject to adjustment every February and August. Additionally, the Company renewed its $10 million line of credit agreement in August 1997. This agreement is renewable on an annual basis. There were no amounts borrowed against the line of credit during fiscal 1997, 1996 or 1995. Management believes that its existing cash and short-term investment balances, together with its existing line of credit and funds generated from operations, will provide adequate cash to fund the Company's anticipated cash needs through at least the next twelve-month period. Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL YEARS ENDED ------------------------------------------------------ JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- Revenues $73,468 $53,273 $52,824 ------- ------- ------- Operating expenses: Compensation and related expenses 45,991 33,541 31,942 Other operating expenses 14,021 12,381 13,069 General and administrative expenses 6,965 5,579 4,373 ------- ------- ------- 66,977 51,501 49,384 ------- ------- ------- Operating income 6,491 1,772 3,440 ------- ------- ------- Other income (expense): Interest expense, net (1,254) (1,188) (1,059) Miscellaneous income, net 2,168 1,622 1,172 ------- ------- ------- Income from continuing operations before income taxes 7,405 2,206 3,553 Provision for income taxes 2,999 367 1,439 ------- ------- ------- Income from continuing operations and before discontinued operations and extraordinary item 4,406 1,839 2,114 ------- ------- ------- Discontinued operations: Loss from operations of PLG, Inc. (net of taxes of $(97), $(24) and $8, respectively) (144) (1,832) (92) Extraordinary item (net of taxes of $301) (443) Net income (loss) $ 4,262 $ (436) $ 2,022 ======= ======= ======= Income per share from continuing operations and discontinued operations and before extraordinary item Basic $ 0.62 $ 0.28 $ 0.32 Diluted $ 0.60 $ 0.27 $ 0.31 Loss per share from discontinued operations Basic $ (0.02) $ (0.27) $ (0.01) Diluted $ (0.02) $ (0.27) $ (0.01) Loss per share from extraordinary item Basic $ (0.07) Diluted $ (0.07) Net income (loss) per share Basic $ 0.60 $ (0.07) $ 0.31 Diluted $ 0.58 $ (0.06) $ 0.30 Shares used in per share computations Basic 7,148 6,663 6,610 Diluted 7,385 6,801 6,728 ======= ======= =======
The accompanying notes are an integral part of the Consolidated Financial Statements. Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT PER SHARE DATA) AS OF --------------------------------- JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 8,412 $ 4,465 Short-term investments 6,370 20,271 Accounts receivable, net of allowance for doubtful accounts of $1,000 and $1,500, respectively 27,279 19,710 Prepaid expenses and other assets 3,186 4,111 Deferred income taxes 1,974 816 ------- ------- Total current assets 47,221 49,373 ------- ------- Property, equipment and leasehold improvements, net 30,277 28,789 Goodwill 8,988 1,873 Other assets 1,765 543 ------- ------- $88,251 $80,578 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 1,987 $ 4,047 Current installment of long-term obligations 1,248 1,250 Accrued payroll and employee benefits 8,351 5,590 Income taxes payable 2,207 928 ------- ------- Total current liabilities 13,793 11,815 ------- ------- Long-term obligations, net of current installments 16,654 18,505 Deferred income taxes 1,088 987 ------- ------- Total liabilities 31,535 31,307 ------- ------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value; 2,000 shares authorized; no shares outstanding Common stock, $.001 par value; 20,000 shares authorized; 7,902 shares issued and outstanding 8 8 Additional paid in capital 33,133 33,013 Net unrealized gain on investments 11 56 Retained earnings 25,793 21,644 Treasury shares, at cost: 460 and 1,097 shares held, respectively (2,229) (5,450) ------- ------- Total stockholders' equity 56,716 49,271 ------- ------- $88,251 $80,578 ======= =======
The accompanying notes are an integral part of the Consolidated Financial Statements. Consolidated Statements of Stockholders' Equity
(IN THOUSANDS) COMMON STOCK ADDITIONAL UNREALIZED TREASURY ----------------- PAID-IN GAIN (LOSS) RETAINED ------------------------------ SHARES AMOUNT CAPITAL ON INVESTMENTS EARNINGS SHARES AMOUNT TOTAL ------ ------ ------- -------------- ---------- -------- ------ ----- Balance at December 30, 1994 7,902 $ 8 $32,495 $(428) $20,198 (1,248) $(6,160) $46,113 Sale of stock pursuant to employee stock plans 11 (140) 55 394 265 Issuance of stock to directors 11 20 95 106 Net unrealized gain on investments 354 354 Purchase of treasury shares (92) (451) (451) Other 21 21 Net income 2,022 2,022 ------ ------ -------- ----- -------- ------- ------- ------- Balance at December 29, 1995 7,902 8 32,538 (74) 22,080 (1,265) (6,122) 48,430 Sale of stock pursuant to employee stock plans 10 61 297 307 Issuance of stock to directors 92 92 Acquisition of EHG (Note 11) 401 284 1,399 1,800 Net unrealized gain on investments 130 130 Purchase of treasury shares (177) (1,024) (1,024) Other (28) (28) Net loss (436) (436) ------ ------ -------- ----- -------- ------- ------- ------- Balance at January 3, 1997 7,902 8 33,013 56 21,644 (1,097) (5,450) 49,271 Sale of stock pursuant to employee stock plans 148 (14) 157 747 881 Acquisition of EEG (Note 11) (99) 480 2,474 2,375 Net unrealized loss on investments (45) (45) Other (28) (28) Net income 4,262 4,262 ------ ------ -------- ----- -------- ------- ------- ------- Balance at January 2, 1998 7,902 $ 8 $33,133 $ 11 $25,793 (460) $(2,229) $56,716
The accompanying notes are an integral part of the Consolidated Financial Statements. Consolidated Statements of Cash Flows
(IN THOUSANDS) FISCAL YEARS ENDED JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- Cash flows from operating activities Net income (loss) $ 4,262 $ (436) $ 2,022 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,581 3,411 3,376 Extraordinary item, net of retirement of debt (net taxes of $301) 443 Provision for doubtful accounts (421) 2,102 3,435 Impairment of long-lived assets 1,572 Change in deferred income taxes (1,057) (1,799) 750 Issuance of stock to directors 95 Changes in operating assets and liabilities: Accounts receivable (4,396) (3,022) (697) Prepaid expenses 1,517 (235) (2,243) Accounts payable and accrued liabilities (3,485) 768 337 Accrued payroll and employee benefits 2,347 691 868 Income tax payable 1,278 768 (1,595) Net operating activities of discontinued operations (23) 157 1,252 --------------- --------------- ----------------- Net cash provided by operating activities 3,603 4,420 7,600 --------------- --------------- ----------------- Cash flows from investing activities Purchase of short-term investments (11,395) (9,785) (20,233) Sales of short-term investments 25,213 7,362 19,186 Acquisition of PLG, Inc., and contingency payments, net of cash acquired (501) (198) Acquisition of EHG, net of cash acquired (250) Acquisition of BCS, net of cash acquired (313) Acquisition of EEG, net of cash acquired (7,495) Repayment on note receivable--sale of PLG, Inc. 171 Capital expenditures (4,218) (2,848) (1,335) Other assets (323) (72) (42) Net investing activities of discontinued operations (154) (794) (55) --------------- --------------- ----------------- Net cash provided by (used in) investing activities 1,486 (6,888) (2,677) --------------- --------------- ----------------- Cash flows from financing activities Proceeds from borrowings and issuance of long-term obligations 19,311 3 Repayments of borrowings and long-term obligations (1,996) (19,126) (347) Repurchase of common stock (1,024) (451) Net issuance and retirements of common stock 854 371 297 --------------- --------------- ----------------- Net cash used in financing activities (1,142) (468) (498) --------------- --------------- ----------------- Net increase (decrease) in cash and cash equivalents 3,947 (2,936) 4,425 Cash and cash equivalents at beginning of year 4,465 7,401 2,976 Cash and cash equivalents at end of year $ 8,412 $ 4,465 $ 7,401 =============== =============== =================
The accompanying notes are an integral part of the Consolidated Financial Statements. Notes to Consolidated Financial Statements 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, Failure Analysis Associates, Inc. ("FaAA"), Exponent Health Group, Inc. ("EHG"), Exponent Environmental Group, Inc. ("EEG"), BCS Wireless, Inc. ("BCS") and PLG, Inc. ("PLG") whose results of operations have been accounted for as a discontinued operation for all fiscal years presented. All significant inter-company transactions and balances have been eliminated in consolidation. The Company operates on a 52-53 week fiscal calendar year with each year ending on the Friday closest to December 31st. Fiscal periods 1997, 1996 and 1995 will be represented by the fiscal period dates ending January 2, 1998, January 3, 1997 and December 29, 1995, respectively. Revenue Recognition 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 reports revenue net of outside direct expenses which consists primarily of subcontractor fees and travel expenses. Outside direct expenses reported against revenue excluding PLG were approximately $10,755,000, $6,245,000 and $5,927,000 in fiscal 1997, 1996 and 1995, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Reclassifications Certain amounts in the accompanying 1996 and 1995 consolidated financial statements have been reclassified in order to conform with the presentation of the 1997 consolidated financial statements. Cash Equivalents Cash equivalents consist of highly liquid investments such as money market mutual funds and commercial paper with original maturities of three months or less. Short-Term Investments Short-term investments consist of fixed-income taxable corporate and treasury bonds. Management believes that there is no concentration of credit risk in short-term investments which could result in a material loss to the Company. The Company's securities are classified as "available-for-sale" and are carried at fair market value, with the unrealized gains and losses reported as a separate component of stockholders' equity. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements are stated at cost less accumulated depreciation or amortization. Depreciation and amortization are computed using the straight-line method. Buildings are depreciated over their estimated useful lives ranging from 30 to 40 years. Equipment is depreciated over its estimated useful life, which generally ranges from two to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives, generally seven years, or over the term of the related lease. Note 1: Summary of Significant Accounting Policies (continued) Impairment of Long-Lived Assets and Assets to Be Disposed Of The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121 requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. Goodwill Goodwill represents the excess of the purchase price over the fair market value of the net assets of various entities acquired by the Company accounted for under the purchase method of accounting. The Company currently amortizes goodwill on a straight-line basis over periods ranging from 7 to 20 years. In January 1997 the Company recorded $485,000 of goodwill and in May 1997, the Company recorded $7.2 million of goodwill arising from the purchase of its two new subsidiaries, BCS and EEG respectively. In accordance with SFAS No. 121 the Company periodically evaluates the ongoing profitability of the businesses acquired to determine if there is goodwill impairment. During the fourth quarter of 1996, the Company made the decision to write off the remaining goodwill related to the purchase of its subsidiary, PLG. The total amount charged to income was $1.6 million. Income Taxes Income taxes are accounted for under the asset and liability method. The Company's deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. The provision for income taxes of the Company is based upon the differences between financial reporting and tax basis for assets and liabilities measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. Fair Value of Financial Instruments Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and debt obligations approximate their fair values which for debt is based upon current rates available to the Company. Stock-Based Compensation The Company uses the intrinsic value method to account for all of its employee stock-based compensation plans. Net Income (Loss) 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 for income from continuing operations. In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of basic earnings per share ("EPS") and, for companies with complex capital structures or potentially dilutive securities, such as convertible debt, options, and warrants, diluted EPS. Net income (loss) per share has been restated for all periods presented to conform to the provisions of SFAS No. 128. The following schedule reconciles both the numerator and denominator of the Company's EPS calculation for basic and dilutive EPS:
FISCAL YEARS ENDED (IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- Denominator Denominator for basic net income per share-- weighted average shares outstanding 7,148 6,663 6,610 Effect of Dilutive Securities Dilutive options outstanding 237 138 118 Denominator for diluted earnings per share--adjusted weighted average shares and assumed conversion 7,385 6,801 6,728
NOTE 2 Short-Term Investments Available-for-sale securities consist of the following:
AMORTIZED ACCRUED UNREALIZED UNREALIZED FAIR MARKET (IN THOUSANDS) COST INTEREST GAINS LOSSES VALUE --------- -------- ---------- ---------- ----------- At January 2, 1998 Corporate $ 2,991 $ 64 $ 8 $ 3,063 U.S. Treasury 3,269 35 3 3,307 --------- -------- ---------- ---------- ----------- $ 6,260 $ 99 $11 $ 6,370 ========= ======== ========== ========== =========== At January 3, 1997 Municipal bonds $19,998 $217 $68 $ (12) $20,271 ========= ======== ========== ========== ===========
The cost and estimated fair value of available-for-sale securities at January 2, 1998 by contractual maturity consist of the following:
AMORTIZED FAIR MARKET (IN THOUSANDS) COST VALUE ---------- ----------- Due in one year or less $1,502 $1,533 Due in one to five years 4,758 4,837 Thereafter ---------- ----------- $6,260 $6,370 ========== ===========
The cost of securities sold is based upon the specific identification method. Total proceeds from the sale of short-term investments in fiscal 1997, 1996 and 1995 were $25,213,000, $7,362,000, and $19,186,000, respectively. Total proceeds from sales vs. maturities were as follows:
FISCAL YEARS ENDED (IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 -------------- --------------- ----------------- Sales $24,653 $ 6,732 $14,411 Maturities 560 630 4,775 -------------- --------------- ----------------- $25,213 $ 7,362 $19,186 ============== =============== =================
Gross realized gains and losses on sales and maturities of short-term investments are immaterial for all fiscal years presented. NOTE 3 Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements consist of the following:
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- Property: Land $ 5,450 $ 5,450 Buildings 26,337 26,138 Construction in progress 657 248 Equipment: Machinery and equipment 23,083 19,805 Office furniture and equipment 4,802 4,956 Leasehold improvements 2,956 2,633 --------------- --------------- 63,285 59,230 Less accumulated depreciation and amortization 33,008 30,441 --------------- --------------- Property, equipment and leasehold improvements, net $30,277 $28,789 =============== ==============
NOTE 4 Long-Term Obligations Long-term obligations consist of the following:
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- Mortgage note $17,453 $18,700 Other 449 1,055 --------------- --------------- 17,902 19,755 Less current installments 1,248 1,250 --------------- --------------- Long-term obligations, net of current portion $16,654 $18,505 =============== ===============
Other long-term obligations consist primarily of deferred compensation. Effective August 1, 1996, the Company refinanced its $18.8 million, 30-year fixed-rate note at 10.75%, which consisted of periodic payments maturing in December 1999. As a result of this refinancing during 1996, the Company incurred a prepayment penalty of $744,000 which was recorded as an extraordinary item net of tax of $443,000 in the statement of operations. The new mortgage, having an original principal balance of $18.7 million, is secured by the Company's headquarters building and has a 15-year life with equal principal payments of $623,333 due semi-annually on February 1 and August 1. The note bears a floating rate of interest tied to LIBOR and is subject to adjustment every six months. The rate on this note was 7.01% as of January 2, 1998. In August of 1997, the Company renewed its $10,000,000 unsecured line of credit agreement. This agreement expires in July of 1998. There were no borrowings against the line of credit in fiscal 1997 or fiscal 1996. The mortgage note and line of credit contain restrictive covenants. Principal payments due on long-term obligations are $1,248,000, $1,350,000, $1,354,000, $1,355,000, and $1,319,000 in fiscal 1998 through fiscal 2002 respectively, and $11,276,000 thereafter. NOTE 5 Income Taxes The provision for income taxes consists of the following:
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- Current Federal $ 3,128 $ 1,375 $ 542 State 831 466 155 --------------- --------------- ----------------- $ 3,959 $ 1,841 $ 697 Deferred Federal (655) (1,430) 593 State (402) (369) 157 --------------- --------------- ----------------- (1,057) (1,799) 750 --------------- --------------- ----------------- Total $ 2,902 $ 42 $1,447 =============== =============== =================
The provision for income taxes from continuing operations differs from the tax expense calculated at the applicable federal statutory rate of 34% as follows for the years ending:
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- Tax at federal statutory rate of 34% $2,518 $750 State taxes, net of federal benefit 283 140 Amortization of goodwill non-deductible for tax 100 Tax-exempt interest (585) Other 98 62 --------------- --------------- Actual expense from continuing operations $2,999 $367 =============== ================
The provision for income taxes for the year ended December 29, 1995 differs from tax expense calculated at the applicable federal rate of 34%, primarily due to the provision for state taxes net of federal tax benefit. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 2, 1998 and January 3, 1997 are presented below.
(IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- Deferred tax assets: State taxes $ 55 $ 147 Compensated absences 713 535 Accrued expenses 645 989 Capital loss carryforward 788 Other 1 156 Valuation allowance (788) --------------- --------------- Total deferred tax asset 1,414 1,827 --------------- --------------- Deferred tax liabilities: Work-in-progress (838) Plant and equipment (528) (1,160) --------------- --------------- Total deferred tax liabilities (528) (1,998) --------------- --------------- Net deferred tax asset (liability) $ 886 $ (171) =============== ===============
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred assets. NOTE 6 Stockholders' Equity Preferred Stock The Board of Directors has the authority to issue up to 2,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of the shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. There are no shares of preferred stock outstanding. Employee Stock Purchase Plan The Company has authorized 400,000 shares of common stock for issuance under the 1992 Employee Stock Purchase Plan (the "Purchase Plan"). Qualified employees may elect to have a certain percentage (not to exceed 15%) of their salary withheld for purchase of stock pursuant to this plan. On July 23, 1997, the Board of Directors amended the Purchase Plan to reduce the discount price at which employees may purchase the Company shares from 90% to 85% of the lower of the fair market value of the common stock at the beginning or ending of a three- month offering period. As of January 2, 1998, 221,376 shares have been sold under the plan. Average purchase prices for shares sold under the plan in fiscal 1997, 1996 and 1995 were $5.35, $5.13 and $4.84, respectively. Restricted Stock Plan In March 1991, the Board of Directors approved a Restricted Stock Plan for key employees and directors. Up to an aggregate of 200,000 common shares had been reserved for grant under the plan. This plan was terminated as of October 24, 1996. Prior to termination, 100,000 shares were granted of which 77,500 shares have vested as of January 2, 1998. Stock Option Plans The Company has a Stock Option Plan (the "Plan"), which covers up to an aggregate of 2,000,000 shares of common stock. The Plan provides for the grant of incentive stock options, exercisable at a price equal to the fair market value of the shares at the date of grant, or non-qualified options, exercisable at a price not less than 85% of the fair market value of the shares at the date of grant. Options are granted for terms of up to ten years and generally vest ratably over a four-year period from the grant date. In addition, the Company has a stock plan for an officer covering up to 119,000 shares of common stock, all of which have been granted. Option activity under the Stock Option Plan is as follows:
OPTIONS AVAILABLE NUMBER WEIGHTED AVERAGE FOR GRANT OF SHARES EXERCISE PRICE ----------------- --------- --------------- Balance as of December 30, 1994 359,199 1,386,232 $5.89 Options granted (65,000) 65,000 5.13 Options canceled 96,173 (96,173) 6.06 Options exercised (13,125) 4.77 ----------------- --------- --------------- Balance as of December 29, 1995 390,372 1,341,934 $5.85 Options granted (173,000) 173,000 5.83 Options canceled 54,448 (54,448) 5.72 Options exercised (28,000) 4.78 ----------------- --------- --------------- Balance as of January 3, 1997 271,820 1,432,486 $5.88 Options granted (345,575) 345,575 6.80 Options canceled 65,875 (65,875) 6.51 Options exercised (109,272) 5.51 Additional shares reserved 450,000 ----------------- --------- --------------- Balance as of January 2, 1998 442,120 1,602,914 $6.08
Information regarding options outstanding at January 2, 1998 is summarized below:
OUTSTANDING EXERCISABLE -------------------------------- -------------------------- WEIGHTED- WEIGHTED- WEIGHTED- RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - ---------------------- ------------- ---------------- --------- ------------- --------- $2.49-$4.50 30,760 1.57 $2.56 30,510 $2.54 $4.75 437,000 6.47 $4.75 319,250 $4.75 $4.81-$6.00 268,825 7.80 $5.48 105,575 $5.19 $6.13-$7.00 296,000 7.04 $6.57 146,500 $6.87 $7.13 280,744 3.89 $7.13 280,744 $7.13 $7.25-$10.25 289,585 7.65 $7.49 118,510 $7.48 ------------- ---------------- --------- ------------- --------- 1,602,914 1,001,089 $6.03 ============= ================= ========== ============= =========
Pro Forma Fair Value Information The Company uses the intrinsic value method in accounting for its Employee Stock Purchase Plan, Restricted Stock Plan and Stock Option Plan, collectively called "Options." As the Options are generally granted at exercise prices equal to the fair value of the Company's common stock on the date of the grant, no compensation expense has been recognized in the financial statements. Pro forma information regarding net income and earnings per share is required to be determined as if the Company had accounted for its Options under the fair value method prescribed by SFAS No. 123. The Company uses the Black-Scholes option pricing model to calculate the fair value of its Options. In calculating the fair value of an option at the date of grant, the Black- Scholes option pricing model requires the input of highly subjective assumptions. The Company used the following weighted average assumptions for fiscal 1997, 1996 and 1995:
EMPLOYEE STOCK PURCHASE PLAN STOCK OPTION PLAN JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- --------------- --------------- ----------------- Expected life (in years) 0.25 0.25 0.25 6 6 6 Risk-free interest rate 5.61% 5.60% 5.74% 6.2% 6.8% 6.8% Volatility 0.74 0.79 0.79 0.76 0.72 0.72 Dividend yield 0% 0% 0% 0% 0% 0%
Using the above assumptions, the weighted average fair value of Options granted during fiscal 1997, 1996 and 1995 was $4.82, $4.05 and $3.55, respectively. Had the Company determined compensation cost based on the estimated fair value at the grant date for its Options under SFAS No. 123, the Company's net income from continuing operations would have been adjusted to the pro forma amounts indicated below:
FISCAL YEARS ENDED (IN THOUSAND, EXCEPT PER SHARE DATA) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- Income from continuing operations As reported $4,406 $1,839 $2,114 Pro forma $3,908 $1,636 $2,023 Income per share from continuing operations As reported Basic $ 0.62 $ 0.28 $ 0.32 Diluted $ 0.60 $ 0.27 $ 0.31 Pro forma Basic $ 0.55 $ 0.25 $ 0.31 Diluted $ 0.53 $ 0.24 $ 0.30
NOTE 7 Pension Plan The Company's subsidiaries Failure Analysis Associates, Inc. and Exponent Health Group, Inc. have a defined contribution retirement plan covering all salaried employees of at least 21 years of age. Contributions made by the Company to this plan were $1,965,000, $1,745,000, and $1,623,000 in fiscal 1997, 1996, and 1995, respectively. NOTE 8 Commitments and Contingencies The following is a summary of the future minimum payments, net of rental income, required under non-cancelable operating leases, with terms in excess of one year as of January 2, 1998:
YEAR ENDING LEASE RENTAL NET FUTURE (IN THOUSANDS) COMMITMENTS INCOME PAYMENTS ----------- --------- ---------- 1998 $ 2,885 $ (1,255) $ 1,630 1999 2,475 (83) 2,392 2000 1,985 (53) 1,932 2001 1,595 -- 1,595 2002 1,459 -- 1,459 Thereafter 8,652 -- 8,652 ----------- --------- ---------- $19,051 $(1,391) $17,660 =========== ========= ==========
NOTE 8 Commitments and Contingencies (continued) Total rent and equipment lease expense in fiscal 1997, 1996 and 1995 was $2,548,000, $2,369,000 and $2,378,000, respectively. The Company has reached a tentative settlement on a proposed tax assessment primarily related to the deferral of unbilled work-in-process from taxable income. The net impact of the tentative settlement is insignificant on the financial statements. From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts which would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved. There are currently no such matters. NOTE 9 Other Income and Expense Interest and other income (expense), net, consist of the following:
FISCAL YEARS ENDED (IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 --------------- --------------- ----------------- Interest income $ 861 $ 1,265 $ 1,116 Interest expense (2,115) (2,453) (2,175) Rental income 1,889 1,473 1,168 Other 279 149 4 --------------- --------------- ----------------- Total $ 914 $ 434 $ 113 =============== =============== =================
NOTE 10 Client and Industry Credit Risk The Company serves clients in various segments of the economy. During fiscal 1997, the Company provided services, representing approximately 29% of revenues, to clients and to organizations and insurers acting on behalf of clients in the transportation industry. Revenues of approximately $5,246,000, $6,886,000 and $10,850,000 in fiscal 1997, 1996 and 1995, respectively, were earned on engagements for one client or for organizations insuring or providing services to such client. As of January 2, 1998 and January 3, 1997, accounts receivable included $1,912,000 and $1,400,000, respectively, related to this client. The majority of the Company's clients are Fortune 500 companies who pose minimal credit risk. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry. NOTE 11 Acquisitions As part of the Company's strategic objective to increase revenues, during fiscal year 1997, the Company acquired two new companies, BCS Wireless, Inc. ("BCS") and Exponent Environmental Group, Inc. ("EEG"), formerly named Performance Technologies, Incorporated. BCS, acquired on January 4, 1997, is a company which specializes in the design, installation and maintenance of wireless communication networks. It is located in the greater Madison, Wisconsin area and has erected communication towers and provided related training and technical services for the telecommunications industry since 1981. The Company acquired all of the stock of BCS for $375,000 in cash. The Company recorded $485,000 in goodwill which is being amortized over seven years using the straight-line method. EEG, acquired on May 16, 1997, is a scientific and engineering consulting firm specializing in providing scientific solutions for complex environmental problems. The Company acquired all of the stock of EEG for approximately $7.5 million in cash and 480,002 shares of stock with an approximate value of $2.4 million. The Company recorded approximately $7.2 million of goodwill which is being amortized over twenty years using the straight-line method. On August 1, 1996, the Company acquired Exponent Health Group, Inc. ("EHG"), formerly named Environmental Health Strategies, Inc. EHG provides epidemiological services in the areas of occupational and environmental health, pharmaceutical and medical devices and health-related consumer product safety. The Company acquired all of the stock of EHG for a combination of $250,000 in cash and 283,742 shares of stock for a total purchase price of $2.1 million. The Company recorded approximately $2.0 million of goodwill which is being amortized over seven years using the straight-line method. The acquisition also considers future payments of either cash or stock, based upon the attainment of certain revenue and profitability requirements, as defined per the terms of the acquisition agreement. In February of 1998, the Company made the first contingent payment of $143,000 for EHG's financial performance through fiscal 1997. Additional contingent payments may be made at the end of each fiscal year through fiscal 2001 if the revenue and profitability requirements are attained. All acquisitions have been accounted for as purchases and, accordingly, the purchase price was allocated to the net assets acquired based on the estimated fair market value at the date of the acquisition. The results of operations from the date of the acquisitions have been included in the Company's consolidated statements of operations. Pro forma disclosures giving effect to the acquisitions of both BCS and EHG do not differ materially from the Company's historical results. Results from continuing operations for the fiscal year ending January 2, 1998 and January 3, 1997 assuming the Company and EEG were combined at the beginning of the fiscal year would have been as follows:
FISCAL YEARS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA) JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- Revenues $78,117 $64,795 Income from continuing operations $ 4,437 $ 2,588 Net income $ 4,293 $ 313 Income per share from continuing operations Basic $ 0.62 $ 0.39 Diluted $ 0.60 $ 0.38 Net income per share Basic $ 0.60 $ 0.05 Diluted $ 0.58 $ 0.05
NOTE 12 Discontinued Operations Effective September 18, 1997 the Company sold all of the outstanding shares of stock of its wholly owned subsidiary, PLG, Inc. ("PLG"), for a total purchase price of approximately $2.0 million which includes a premium of $600,000 over the net book value. The Company made the decision to sell PLG based on management's assessment that the services PLG provided, which included consulting services primarily to the nuclear industry, were no longer complementary to the Company's core business practice areas. The Company received an unsecured subordinated promissory note as consideration of the $2.0 million purchase price. The note has an 18-month maturity date and bears interest at 10%. Six quarterly principal payments of approximately $170,000 plus accrued interest will be made starting December 18, 1997 with the final quarterly payment plus the remaining principal and any unpaid accrued interest due on March 18, 1999. The first quarterly payment due on December 18, 1997 was paid in full. Certain expenses related to the sale of PLG and a reserve against the note receivable offset the $600,000 gain on disposal; therefore, no gain on the sale was recorded. The Company has recorded the results of operations for PLG as a discontinued operation in the consolidated financial statements for all fiscal years presented. NOTE 13 Supplemental Cash Flow Information The following is supplemental disclosure of cash flow information:
FISCAL YEARS ENDED (IN THOUSANDS) JANUARY 2, 1998 JANUARY 3, 1997 --------------- --------------- Cash paid during the year: Interest $ 1,260 $ 2,156 Income taxes $ 2,198 $ 1,054 --------------- --------------- Non-cash investing activities: Disposition of operations in exchange for a promissory note $ 2,053 Treasury shares issued for acquisition of EEG $ 2,375
NOTE 14 Comparative Quarterly Financial Data (Unaudited) Summarized quarterly financial data is as follows:
FISCAL 1997, IN THOUSANDS, EXCEPT PER SHARE DATA APRIL 4, 1997 JULY 4, 1997 OCTOBER 3, 1997 JANUARY 2, 1998 ------------- ------------ --------------- --------------- Revenues $ 16,490 $ 17,571 $20,178 $19,229 Operating income 1,607 1,872 1,951 1,061 Income from continuing operations and before income taxes 1,954 2,053 2,121 1,277 Income from continuing operations and before discontinued operations 1,163 1,221 1,262 760 Income (loss) from discontinued operations 8 3 (155) Net income $ 1,171 $ 1,224 $ 1,107 $ 760 Income per share from continuing operations Basic $ 0.17 $ 0.17 $ 0.17 $ 0.10 Diluted $ 0.17 $ 0.17 $ 0.17 $ 0.10 Net income per share Basic $ 0.17 $ 0.17 $ 0.15 $ 0.10 Diluted $ 0.17 $ 0.17 $ 0.15 $ 0.10 Shares used in per share computations Basic 6,806 7,078 7,305 7,405 Diluted 6,892 7,181 7,594 7,932 FISCAL 1996, IN THOUSANDS, EXCEPT PER SHARE DATA MARCH 29, 1996 JUNE 28, 1996 SEPTEMBER 27, 1996 JANUARY 3, 1997 --------------- ------------- ------------------ --------------- Revenues $13,400 $14,459 $12,995 $12,419 Operating income (loss) 750 1,137 503 (618) Income (loss) from continuing operations and before income taxes 750 1,175 531 (250) Income (loss) from continuing operations and before discontinued operations and extraordinary item 625 978 443 (207) Income (loss) from discontinued operations 21 (32) (48) (1,773) Extraordinary item (443) Net income (loss) $ 646 $ 503 $ 395 $(1,980) --------------- ------------- ------------------ --------------- Income (loss) per share from continuing operations Basic $ 0.09 $ 0.15 $ 0.07 $ (0.03) Diluted $ 0.09 $ 0.15 $ 0.06 $ (0.03) Net income (loss) per share Basic $ 0.10 $ 0.08 $ 0.06 $ (0.29) Diluted $ 0.10 $ 0.08 $ 0.06 $ (0.29) Shares used in per share computations Basic 6,633 6,526 6,684 6,729 Diluted 6,744 6,669 6,854 6,729
Independent Auditor's Report The Board of Directors and Stockholders Exponent, Inc. We have audited the accompanying consolidated balance sheets of Exponent, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended January 2, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Exponent, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997, and the results of their operations and their cash flows for each of the years in the three-year period ending January 2, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Mountain View, California January 26, 1998 Quarterly Stock Data The Company's common stock is traded on the NASDAQ Stock Market under the symbol "EXPO." The following table sets forth for the fiscal periods indicated the high and low sales prices for the Company's common stock.
STOCK PRICES BY QUARTER HIGH LOW - ----------------------- ------ ----- Fiscal Year Ended January 3, 1997 First Quarter $ 7.00 $5.00 Second Quarter $ 7.13 $5.00 Third Quarter $ 7.13 $5.88 Fourth Quarter $ 6.88 $5.63 Fiscal Year Ended January 2, 1998 First Quarter $ 6.38 $4.25 Second Quarter $ 6.75 $4.00 Third Quarter $ 8.63 $6.13 Fourth Quarter $10.75 $8.00 Fiscal Year Ending January 1, 1999 First Quarter (through February 28, 1998) $11.00 $8.50
As of February 28, 1998, there were 335 holders of record of the Company's common stock. The Company has never paid cash dividends. The Company currently intends to retain future earnings for reinvestment in the Company's business and, therefore, does not anticipate paying cash dividends in the foreseeable future. Financial Summary
(IN THOUSANDS, EXCEPT PER FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED SEVEN MONTHS ENDED SHARE DATA) JANUARY 2, 1998 JANUARY 3, 1997 DECEMBER 29, 1995 DECEMBER 30, 1994 DECEMBER 31, 1993 ----------------- ----------------- ------------------ ----------------- ------------------ Revenues $73,468 $53,273 $52,824 $51,037 $31,174 Operating expenses: Compensation and related expenses 45,991 33,541 31,942 29,800 19,719 Other operating expenses 14,021 12,381 13,069 13,257 8,322 General and administrative expenses 6,965 5,579 4,373 5,547 5,878 Provision for restructuring expenses (333) 1,600 ----------------- ----------------- ------------------ ----------------- ----------------- 66,977 51,501 49,384 48,271 35,519 ----------------- ----------------- ------------------ ----------------- ----------------- Operating income (loss) 6,491 1,772 3,440 2,766 (4,345) Other income (expense): Interest expense, net (1,254) (1,188) (1,059) (1,278) (736) Miscellaneous income, net 2,168 1,622 1,172 615 60 ----------------- ----------------- ------------------ ----------------- ----------------- Income (loss) from continuing operations before income taxes 7,405 2,206 3,553 2,103 (5,021) Provision (benefit) for income taxes 2,999 367 1,439 906 (1,758) ----------------- ----------------- ------------------ ----------------- ----------------- Income (loss) from continuing operations and before discontinued operations and extraordinary item 4,406 1,839 2,114 1,197 (3,263) Discontinued operations: Loss from operations of PLG, Inc. (144) (1,832) (92) (77) (68) ----------------- ----------------- ------------------ ----------------- ----------------- Extraordinary item (443) Net income (loss) $ 4,262 $ (436) $ 2,022 $ 1,120 $(3,331) ----------------- ----------------- ------------------ ----------------- ----------------- Income (loss) per share from continuing operations Basic $ 0.62 $ 0.28 $ 0.32 $ 0.16 $ (0.42) Diluted $ 0.60 $ 0.27 $ 0.31 $ 0.16 $ (0.42) Net income (loss) per share Basic $ 0.60 $ (0.07) $ 0.31 $ 0.15 $ (0.43) Diluted $ 0.58 $ (0.06) $ 0.30 $ 0.15 $ (0.43) Shares used in per share computations Basic 7,148 6,663 6,610 7,302 7,784 Diluted 7,385 6,801 6,728 7,313 7,801
EX-21.1 3 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 SUBSIDIARIES OF THE COMPANY State or Other Jurisdiction of Incorporation or Name of Subsidiary Organization ------------------ ----------------------------- Failure Analysis Associates, Inc. Delaware FaAA Investment Corporation California FaAA Products Corporation California 170181 Canada Ltd. Canada Failure Analysis Associates B.V. Netherlands Spectus Technologies, Inc. California (formerly Applied Visual Computing, Inc.) Failure Analysis Associates, Spolka z o.o Poland Exponent Health Group, Inc. California BCS Wireless, Inc. Wisconsin Exponent Environmental Group, Inc. Washington EX-23.1 4 INDEPENDENT AUDITOR'S REPORT Exhibit 23.1 ------------ Independent Auditors' Report and Consent ---------------------------------------- The Board of Directors and Stockholders Exponent, Inc. The audits referred to in our report dated January 26, 1998, included the related financial statement schedule as of January 2, 1998, and for each of the years in the three-year period ended January 2, 1998. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to incorporation by reference in the registration statements (Nos. 33-38479, 33-46054, 33-75210 and 33-79368) on Form S-8 of Exponent, Inc. of our reports dated January 26, 1998, relating to the consolidated balance sheets of Exponent, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 2, 1998, and their related schedule, which reports appear or are incorporated by reference in the January 2, 1998, annual report on Form 10-K for Exponent, Inc. KPMG Peat Marwick LLP Mountain View, California April 1, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE ENDING 01/02/1998
5 1,000 12-MOS JAN-02-1998 JAN-04-1997 JAN-02-1998 8,412 6,370 28,279 (1,000) 0 47,221 63,285 33,008 88,251 13,793 0 0 0 8 56,708 88,251 0 73,468 0 45,991 20,986 0 (1,254) 7,405 2,999 4,406 (144) 0 0 4,262 .60 .58
EX-27.2 6 FINANCIAL DATA SCHEDULE FOR PERIOD ENDING 1/3/1997
5 1,000 12-MOS JAN-03-1997 DEC-30-1995 JAN-03-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 53,273 0 33,541 17,960 0 (1,188) 2,206 367 1,839 (1,832) (443) 0 (436) (0.07) (0.06)
EX-27.3 7 FINANCIAL DATA SCHEDULE FOR PERIOD ENDING 1/29/95
5 1,000 12-MOS DEC-29-1995 DEC-31-1994 DEC-29-1995 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 52,824 0 31,942 17,442 0 (1,059) 3,553 1,439 2,114 (92) 0 0 2,022 .31 .30
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