-----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, L6LuykpPkeWpQrQS1guZq4NqL/Jckb+Bg0GWxAVfJDLUF4Gke1furNEWNpX6QGQo nI9TICBA7ZplgTNHJ2/EOQ== 0001012870-99-001002.txt : 19990403 0001012870-99-001002.hdr.sgml : 19990403 ACCESSION NUMBER: 0001012870-99-001002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990401 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: 99586097 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 1, 1999. OR [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________. Commission File Number 0-18655 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 statements 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 19, 1999, was approximately $23,139,737. 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 19, 1999 was 6,969,092. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Stockholders for its fiscal year ended January 1, 1999, 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 5, 1999, 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 thereto under) 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. 2 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, Exponent 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 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, health, environmental and other sectors of the economy. Approximately 27% 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. 3 The Company's standard rates for professionals range from $30 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 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 . Industrial Structures . Civil Engineering . Information Management . Data Analysis . Marine and Aviation . Electrical Engineering . Materials Science and Mechanical . Environmental Design Analysis . Health . Thermal Sciences . Human Factors . Vehicle Evaluation and Testing . Hydrology . Visual Communications 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 analyses 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, material 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 4 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. 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; 5 flood and stormwater planning and management; sediment transport analyses; dam failure analyses; and water supply reliability and resource planning and management. 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 6 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. HYDROLOGY Hydrology is the science of water, its properties, phenomena, and distribution over the earth's surface. Exponent's hydrology services include the analysis of flood retention facilities (levees, dams, etc.) and the evaluation of the effects of flood water inundation on different types of structures. The services also extend to investigating the cause of hillside movement, slope erosion, and other soil movement that may be associated with flooding which may include distinguishing between damage due to catastrophe and damage that has been caused by or is related to long-term deterioration, foundation settlement, slope movement, initial construction defects, or normal expected behavior of a structure over time. In addition the hydrology practice provides property damage assessment, geotechnical services, as well as helps develop remedial repairs to address flood related distress. The hydrology services further include the development of master plans of drainage (MPD) to enable cities to coordinate all aspects of their flood control and surface water needs. This master drainage plan considers all types of storms and their attendant runoff and provides for safe transport of the waters off site. INDUSTRIAL STRUCTURES The Company has developed an expertise in power plant and industrial chimneys, not only as a designer, but as a consultant for maintenance and repair issues. The Industrial Structures Practice has developed "close to reality" computer programs which are frequently used for design of chimneys and other concrete towers that combine a high degree of safety with superior economics. 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 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. MARINE AND AVIATION 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 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. 7 evaluation of the environmental impact of marine industrial operations and incidents. MATERIALS SCIENCE AND MECHANICAL DESIGN ANALYSIS 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 covers a broad range of services, from engineering mechanics, energy, 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. 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. 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"). THERMAL SCIENCES Fires, explosions and toxic chemical services encompass fire cause, origin, and propagation 8 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. 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 relied 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; court boards, 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. 9 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 1, 1999, the Company employed approximately 707 full-time and part time employees, including approximately 378 engineering and scientific staff, 154 technical support staff, and 175 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 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 1,1999, are as follows:
Name Age Position - --------------------------- --- -------------------------------------------------- Michael R. Gaulke 53 President, Chief Executive Officer and Director Subbaiah V. Malladi, Ph.D. 52 Chief Technical Officer and Director Roger L. McCarthy, Ph.D. 50 Chairman of the Board of Exponent Failure Analysis Associates, Inc. and Director Richard L. Schlenker 34 Corporate Secretary Terence G. Boyle 40 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 10 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 Officer 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 MBA (1972) in Marketing and Operations from Stanford University Graduate School of Business and a BS (1968) in Electrical Engineering from Oregon State University. Subbaiah V. Malladi, Ph.D., joined Exponent Failure Analysis Associates, Inc. (FaAA) in 1982 as a Senior Engineer, becoming a Senior Vice President in January 1988 and a Corporate Vice President of FaAA in September 1993. In October 1998, Dr. Malladi was appointed Chief Technical Officer of the Company. Dr. Malladi has also served as a director of the Company from March 1991 through September 1993. He was re-appointed as a director in April of 1996 and has remained on the Board since this date. He received a Ph.D. (1980) in Mechanical Engineering from the California Institute of Technology, M.Tech (1972) in Mechanical Engineering from the Indian Institute of Technology, B.E. (1970) in Mechanical Engineering from SRI Venkateswara University, India and B.S. (1966) in Physics, Chemistry and Mathematics from Osmania University, India. Dr. Malladi is a Registered Professional Mechanical Engineer in the State of California, and a member of the following professional organizations: American Institute of Aeronautics and Astronautics; American Association for the Advancement of Science; Combustion Institute; and National Fire Protection Association. Roger L. McCarthy, Ph.D., joined the Company in August 1978. Currently, Dr. McCarthy is a director of the Company and Chairman of the Board of the Company's principal operating subsidiary Exponent Failure Analysis Associates, Inc. (FaAA). From June 1996 to October 1998, he served as Chief Technical Officer of both the Company and FaAA, director of the Company and Chairman of the Board of FaAA. He has been a director of the Company since 1989 and a director of FaAA since 1980. He was Chief Executive Officer of the Company and FaAA from 1989 to June 1996. He also served as Chairman and President of the Company from 1989 to March 1993. 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 (ASME); Safety Engineering and Risk Analysis Division of ASME; 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; American Statistical Association. Richard L. Schlenker is the Director of Corporate 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 Exponent Failure Analysis Associates, Inc. (FaAA) where he managed the business activities for over 100 consulting engineers. Mr. Schlenker holds a M.B.A. from Santa Clara University and a B.S. in Finance from the University of Southern California. 11 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 1998, transportation industry related engagements accounted for approximately 27% of the Company's 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. 12 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, California headquarters that have lease terms that expire within the 2000-2001 time periods. In fiscal 1998 and 1997, miscellaneous rental income associated with these facilities amounted to approximately 32% and 26%, respectively of income from continuing operations before income taxes. Should these subleases not be extended, renewed or have their term options exercised, the loss of the miscellaneous rental income could have a material adverse effect on the Company's operating results. VARIABILITY OF QUARTERLY FINANCIAL RESULTS Variations in the Company's revenues and operating results occur from time to time as a result of a number of factors, such as the significance of client engagements commenced and completed during a quarter, the number of working days in a quarter, employee hiring and utilization rates, and integration of companies acquired. Because a high percentage of the Company's expenses, particularly personnel and facilities related, are relatively fixed in advance of any particular quarter, a variation in the timing of the initiation or the completion of client assignments, at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter. ITEM 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 1, 1999, aggregated $16.2 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 that 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. During fiscal 1998, the Company made a decision to close down its offices is Moscow and Poland. Leases for these offices, warehouse and laboratory facilities have terms generally ranging between one to ten years. Aggregate lease payments in fiscal 1998 for all leased properties were approximately $2,715,000. 13 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 1, 1999 (the "1998 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 1998 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 With the exception of the discussion below regarding the Company's readiness for Year 2000 compliance, 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 1998 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. YEAR 2000 COMPLIANCE GENERAL The Year 2000 (Y2K) issue is the result of certain computer hardware, operating system software and software application programs having been developed using two digits rather than four to define a year. For example, the clock circuit in the hardware may be incapable of holding a date beyond the year 1999; some operating systems may recognize a date using "00" as the year 1900 rather than 2000 and certain applications may have limited date processing capabilities. These problems could result in the failure of major systems or miscalculations, which could have a material adverse affect on companies through business interruption or shutdown, financial loss, damage to reputation, and legal liability to third parties. STATE OF READINESS The Company established a Year 2000 Readiness Project Team comprised of senior executives of the Company in the areas of Management Information Systems, Facilities and Operations, and Finance. 14 The Project Team reports to the President and Chief Executive Officer and the Audit Committee of the Board of Directors. The Project Team developed and manages the Company's Y2K Plan to address the potential impact of Y2K on the Company's operations and business processes. In particular, the Plan identified 8 principal areas that may be impacted by the Y2K issue: Business Systems; Facility Systems; End-User Community; Non- Production Suppliers; Financial Services; Communication Providers; Outsourcing Vendors; and Business Partners/Joint Ventures. With respect to the IT Systems and Non-IT Business Systems, the Y2K Plan consists of two separate but overlapping phases: Phase I - Inventory and Risk Assessment; and Phase II - Remediation. Phase I - Inventory and Risk Assessment This Phase requires an inventory and assessment of the Non-IT Business Systems used by the Company including systems with embedded technology, building access systems, and health and safety systems. This Phase also includes inventory and assessment of IT Systems used by the Company which include large information technology systems, desktop hardware and software, and network hardware and software. Each system is evaluated and a priority is assigned as being High, Medium or Low Risk to the Company's business. Systems which are High Risk are those which if uncorrected would cause an interruption or complete failure to conduct the Company's business. Medium Risks are those which would negatively impact the business but complete cessation could be avoided with some inconvenience. Low Risks are those where the risk to business interruption or cessation are remote. High and Medium Risk items will be remediated or replaced, and Low Risk items will be addressed as time and resources permit. Currently, the Company has completed Phase I. Phase II - Remediation This Phase includes the replacement or correction of the High and Medium Risk Non-IT Business Systems and IT Systems. A detailed project plan for the remediation has been developed and is currently being implemented. This Phase is approximately 80% complete and the Company anticipates that this Phase will be completed during the third quarter of fiscal 1999. THIRD PARTY RELATIONSHIPS The Company's business operations are dependent on third party corporate service vendors, materials suppliers, outsourced operations partners and others. The Company is working with key external parties to identify and attempt to mitigate the potential risks to it of Y2K. The failure of external parties to resolve their own Y2K issues in a timely manner could result in a material adverse financial risk to the Company. As part of its overall Y2K program, the Company is actively communicating with third parties on an ongoing basis to ascertain their state of readiness. Although numerous third parties have indicated to the Company in writing that they are addressing their Y2K issues on a timely basis, the readiness of third parties overall varies widely. Because the Company's Y2K compliance is dependent on the timely Y2K compliance of third parties, there can be no assurances that the Company's efforts alone will resolve all Y2K issues. COST TO ADDRESS Y2K The costs of the Y2K program are primarily costs associated with the utilization of existing internal resources and minimal external spending. These costs exclude the costs that could be incurred by 15 the Company if one or more of its significant third party service providers fail to achieve Y2K compliance. The Company is not separately identifying Y2K costs incurred that are the result of utilization of existing internal resources. To date, the historical and estimated costs of remediation to address the Company's Y2K issues have not been material and have been funded through working capital resources. RISK FACTORS Based on current information, the Company believes the Y2K issue will not have a material adverse effect on the Company, its consolidated financial position, results of operations or cash flows. However, there can be no assurance that the Y2K remediation by the Company or third parties will be properly and timely completed, and the failure to do so could have a material adverse effect on the company, its business, results of operations, and its financial condition. In addition, important factors that could cause results to differ materially include, but are not limited to, the ability of the Company to successfully identify systems which have a Y2K issue, the nature and amount of remediation effort required to fix the affected system, and the costs and availability of labor and resources to successfully address the Y2K issues. CONTINGENCY PLANS The Company's contingency plans, which will be based in part on the assessment and the magnitude and probability of potential risk, will primarily focus on steps to prevent Y2K failures from occurring, or if they should occur, to detect them quickly, minimize their impact and expedite their repair. A failure of the services provided by the Company's project and accounting system could result in the loss of customer records which could disrupt the ability to bill customers for a protracted time. The Company plans to prepare electronic backup records of its project and accounting system prior to the year 2000 to allow for data recovery. Security and fire protection systems failures could leave facilities vulnerable to intrusion and fire. The Company expects to return such systems to normal functioning by turning the power off and then on again ("power off/on"). The Company also plans to have additional security staff on site. Also, certain personal computers interface and control elevators, public access systems and certain telephony systems. In the event such computers cease operating, conducting a power off/on is expected to resume normal functioning. If a power off/on does not resume normal functioning, the Company expects to resolve the problem by resetting the computer to a pre-designated date that precedes the year 2000. ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to some interest rate risk associated with the Company's long-term debt obligation on the Company's headquarters building. Effective February 1, 1999, the Company refinanced its headquarters building under a 10 year, $35.0 million note. The new note consists of a line of credit with a borrowing amount up to $5.0 million and a revolving reducing note up to $30.0 million for a total maximum borrowing amount of $35.0 million. The line of credit is subject to two interest rate options of either the prime rate in effect from time to time, or a fixed rate determined by the bank to be 2.75% above LIBOR, with a floating rate option of one month, two months, three months, six months, nine months or twelve months. The $30.0 million revolving reducing note is also subject to two interest rate options of 16 either prime less 1.5% or the fixed LIBOR plus 1.25% with a floating rate option of one month, two months, three months, six months, nine months, or twelve months. The company's general policy for selecting among the interest rate options and related terms will be to minimize interest expense. However, given the risk of interest rate fluctuations, the Company cannot be certain that the lowest rate option will always be obtained, therefore, consistently minimizing the Company's interest expense. No sensitivity analysis was performed on the Company's exposure to interest rate fluctuations, however, given the historical low volatility of both the Prime and LIBOR interest rates, the Company believes any exposure would be minimal. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company are incorporated by reference to the 1998 Annual Report, where such information appears under the captions "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Comprehensive Income (Loss)," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Independent Auditors' Report" on pages 9 through 30 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 the Company's definitive Proxy Statement for its 1999 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 "Stock Ownership" of the Proxy Statement. PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K. 17 1. FINANCIAL STATEMENTS The following consolidated financial statements of Exponent, Inc. and subsidiaries and the Independent Auditors' Report are incorporated by reference to the 1998 Annual Report: Consolidated Statements of Operations for the years ended January 1, 1999, January 2, 1998 and January 3, 1997; Consolidated Statements of Comprehensive Income (Loss) for the years ended January 1, 1999, January 2, 1998 and January 3, 1997; Consolidated Balance Sheets as of January 1, 1999 and January 2, 1998; Consolidated Statements of Stockholders' Equity for the years ended January 1, 1999, January 2, 1998 and January 3, 1997; Consolidated Statements of Cash Flows for the years ended January 1, 1999, January 2, 1998 and January 3, 1997; and Notes to consolidated financial statements. 2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedule of Exponent, Inc. for the years ended January 1, 1999, January 2, 1998 and January 3, 1997 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). 18 *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 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). *10.10 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). *10.11 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). 10.12 Exponent, Inc. Employee Pension Plan (incorporated by reference to the 19 Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). 10.13 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). *10.14 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). *10.15 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). *10.16 Form of Nonqualified Stock Option Agreement, between the Registrant and non-employee 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). *10.17 Amendment to Stock Option Agreement, between the Registrant and Subbaiah V. Malladi, relative to repricing outstanding option under 1989 Stock Option Plan for Subbaiah V. Malladi (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.18 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). *10.19 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). 10.20 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). 10.21 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). 10.22 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). 10.23 Acquisition agreement between Exponent Environmental Group, Inc.(formerly named Performance Technologies, Incorporated) and Exponent, Inc. (formerly 20 the Failure Group, Inc.) dated May 16, 1997 (incorporated by reference to the Company's Form 8-K/A filed on July 30, 1997 which was amendment number 1 to the Company's Report on Form 8-K filed on May 30, 1997). 10.24 Exponent, Inc. 1998 Non Statutory Stock Option Plan dated October 24, 1998 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1999). 13.1 Registrant's Annual Report to Stockholders for the fiscal year ended January 1, 1999, pages 9 through 30. 21.1 List of subsidiaries. 23.1 Consent of KPMG, independent auditors. 27.1 Financial Data Schedule. --------------- * Indicates management compensatory plan, contract or arrangement. (b) REPORTS ON FORM 8-K None 21 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 1, 1999 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:
Signature Title Date --------- ----- ---- /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/ SUBBAIAH V. MALLADI Chief Technical Officer and Director - ----------------------------- Subbaiah V. Malladi /s/ ROGER L. MCCARTHY Chairman of the Board of Exponent Failure - ----------------------------- Analysis Associates, Inc. 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
22 /s/ JON R. KATZENBACH Director - ----------------------------- Jon R. Katzenbach /s/ GEORGE T. VAN GILDER Director - ----------------------------- George T. Van Gilder
23 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 24 for the fiscal year ended May 31, 1991). *10.9 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). *10.10 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). *10.11 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). 10.12 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). 10.13 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). *10.14 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). *10.15 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). *10.16 Form of Nonqualified Stock Option Agreement, between the Registrant and non-employee 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). *10.17 Amendment to Stock Option Agreement, between the Registrant and Subbaiah V. Malladi, relative to repricing outstanding option under 1989 Stock Option Plan for Subbaiah V. Malladi (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991). *10.18 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). *10.19 Exponent, Inc. Employee Stock Purchase Plan, as amended August 1993 25 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993). 10.20 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). 10.21 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). 10.22 Acquisition agreement between Exponent Environmental Group, Inc.(formerly named Performance Technologies, Incorporated) and Exponent, Inc. (formerly the Failure Group, Inc.) dated May 16, 1997 (incorporated by reference to the Company's Form 8-K/A filed on July 30, 1997 which was amendment number 1 to the Company's Report on Form 8-K filed on May 30, 1997). 10.23 Exponent, Inc. 1998 Non Statutory Stock Option Plan dated October 24, 1998 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1999). 13.1 Registrant's Annual Report to Stockholders for the fiscal year ended January 1, 1999, pages 9 through 30. 21.1 List of subsidiaries. 23.1 Consent of KPMG, independent auditors. 27.1 Financial Data Schedule - ----------------------------- * Indicates management compensatory plan, contract or arrangement. 26 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 1, 1999 Allowance for doubtful accounts $1,000 $2,167 ($2,167) $1,000 Year Ended January 2, 1998 Allowance for doubtful accounts $1,500 $ 750 ($450) ($800) $1,000 Year Ended January 3, 1997 Allowance for doubtful accounts $1,500 $1,871 ($1,871) $1,500
Page 1 EX-10.23 2 1998 STOCK OPTION PLAN EXHIBIT 10.23 II. 1998 NONSTATUTORY STOCK OPTION PLAN EXPONENT, INC. 1998 NONSTATUTORY STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option Plan -------------------- are: . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees and Consultants, and . to promote the success of the Company's business. Options granted under the Plan will be Nonstatutory Stock Options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as shall be ------------- administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration --------------- of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means a committee of Directors appointed by the Board in --------- accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. ------------ (g) "Company" means Exponent, Inc., a Delaware corporation. ------- (h) "Consultant" means any person, including an advisor, engaged by the ---------- Company or a Parent or Subsidiary to render services to such entity. (i) "Director" means a member of the Board. -------- (j) "Disability" means total and permanent disability as defined in Section ---------- 22(e)(3) of the Code. 1 (k) "Employee" means any person, excluding Directors, employed by the -------- Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ (m) "Fair Market Value" means, as of any date, the value of Common Stock ----------------- determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation The Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the grant date, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the grant date, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Notice of Grant" means a written or electronic notice evidencing --------------- certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (o) "Officer" means a person who is an officer of the Company within the ------- meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "Option" means a nonstatutory stock option granted pursuant to the ------ Plan, that is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (q) "Option Agreement" means an agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (r) "Option Exchange Program" means a program whereby outstanding options ----------------------- are surrendered in exchange for options with a lower exercise price. (s) "Optioned Stock" means the Common Stock subject to an Option. -------------- 2 (t) "Optionee" means the holder of an outstanding Option granted under the -------- Plan. (u) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (v) "Plan" means this 1998 Nonstatutory Stock Option Plan. ---- (w) "Service Provider" means an Employee, excluding a Director. ---------------- (x) "Share" means a share of the Common Stock, as adjusted in accordance ----- with Section 12 of the Plan. (y) "Subsidiary" means a "subsidiary corporation," whether now or hereafter ---------- existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the ------------------------- Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 300,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). 4. Administration of the Plan. -------------------------- (a) Administration. The Plan shall be administered by (i) the Board or (ii) -------------- a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and --------------------------- in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock; (ii) to select the Service Providers to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based 3 on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (viii) to institute an Option Exchange Program; (ix) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (x) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (xi) to modify or amend each Option (subject to Section 14(b) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to determine the terms and restrictions applicable to Options; (xiv) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xv) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, ---------------------------------- determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Options may be granted to Service Providers; provided, ----------- however, that notwithstanding anything to the contrary contained in the Plan, an Option may only be granted to an Officer as an inducement essential to his or her initial employment with the Company. 4 6. Limitation. Neither the Plan nor any Option shall confer upon an Optionee ---------- any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. 7. Term of Plan. The Plan shall become effective upon its adoption by the ------------ Board. It shall continue in effect for ten (10) years, unless sooner terminated under Section 14 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option -------------- Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, --------------------------------- the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable --------------------- form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (viii) any combination of the foregoing methods of payment. 5 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted ----------------------------------------------- hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ------------------------------------------------- ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option, but only within such period of time as is specified in the Option Agreement, and only to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service ---------------------- Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement, to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 6 (d) Death of Optionee. If an Optionee dies while a Service Provider, the ----------------- Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out ----------------- for a payment in cash or Shares, an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Non-Transferability of Options. Unless determined otherwise by the ------------------------------ Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset ------------------------------------------------------------------------ Sale. - ---- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible in shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution -------------------------- or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all the Optioned Stock covered thereby, including Shares as to which the Option would not 7 otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or -------------------- into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock, immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holder were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, ------------- the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, alter, ------------------------- suspend or terminate the Plan. (b) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to options granted under the Plan prior to the date of such termination. 8 15. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the exercise ---------------- of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an -------------------------- Option the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain ----------------------------- authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, will at --------------------- all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 9 EX-13.1 3 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENT The statements in this report that are forward-looking are based on current expectations, and actual results may differ materially. These 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 made the decision to sell PLG based on management's assessment that the services PLG 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 state-ments of operations for all years presented. 1 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 Fiscal Years 1998 1997 ---------------------------- ----------------------- 1998 1997 1996 vs 1997 vs 1996 - -------------------------------------------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% 16.3% 37.9% Operating expenses: Compensation and related expenses 64.5 62.6 63.0 19.9 37.1 Other operating expenses 20.2 19.1 23.2 22.9 13.2 General and administrative expenses 10.3 9.4 10.5 26.4 24.8 -------------------------------------------------------- 95.0 91.1 96.7 21.2 30.0 -------------------------------------------------------- Operating income 5.0 8.9 3.3 (34.2) 266.3 Other income, net 1.4 1.2 0.8 34.4 110.6 Income from continuing operations and before income taxes 6.4 10.1 4.1 (25.7) 235.7 Income taxes 1.6 4.1 0.7 (52.6) 717.2 Income from continuing operations and before discontinued operations and extraordinary item 4.8 6.0 3.4 (7.4) 139.6 Discontinued operations, net of taxes - (0.2) (3.4) (100.0) (92.1) -------------------------------------------------------- Extraordinary item, net of taxes - - (0.8) (100.0) -------------------------------------------------------- Net income (loss) 4.8% 5.8% (0.8%) (4.3%) (1077.5%) --------------------------------------------------------
Fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997 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. During fiscal 1998, revenues increased by $12.0 million or 16.3%. This increase is primarily due to an increase in revenue associated with the Company's environ-mental and health segment, which had a revenue increase of $6.3 million or 52.5% of the total revenue increase. The revenue increase associated with the environmental and health segment was primarily due to the inclusion of four additional months of revenue in fiscal 1998 compared to fiscal 1997 for the Environmental Group. BCS, the Company's wireless communication joint-venture business, contributed $2.5 million of the total $12.0 million increase while the Company's other scientific and engineering segment increased slightly by $3.2 million over fiscal 1997. The revenue increase associated with the Company's other scientific and engineering segment is primarily attributable to an increase in total billable hours in fiscal 1998 associated with an increase of professional staff of approximately 15 employees over fiscal 1997. Total fiscal 1997 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 other scientific and engineering segment across many 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 due to an increase in demand of the Company's services. COMPENSATION AND RELATED EXPENSES In fiscal 1998, total compensation and related costs increased by $9.2 million or 19.9% over fiscal 1997. The environmental and health segment accounted for $4.9 million or 53.3% of the total increase, primarily due to the inclusion of four additional months of compensation expense in fiscal 1998 associated with the Environmental Group. 2 BCS contributed $1.1 million of the total $9.2 million compensation increase, an increase associated with a 40% increase of staff over fiscal 1997. The remaining $3.2 million increase is attributable to the Company's other scientific and engineering segment. This increase in compensation expense resulted from an increase in professional and administrative staff of approximately 15 employees in addition to an increase in the average employee salary. As a percentage of revenue, compensation and related expenses increased to 64.5% in fiscal 1998 from 62.6% in fiscal 1997. This increase is primarily a result of lower average professional staff utilization rates in fiscal 1998 compared to fiscal 1997 which resulted from an increase in professional staff occurring at a faster rate than anticipated business growth. Total fiscal 1997 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 63.0% in fiscal 1996. OTHER OPERATING EXPENSES Other operating expenses increased by $3.2 million or 22.9% over fiscal 1997. The environmental and health segment contributed $1.1 million of the total operating expense increase while BCS accounted for approximately $800,000. The increase in operating expenses associated with the environmental and health segment is again attributable to the addition of four months of operating expense in fiscal 1998 compared to fiscal 1997. The increase in BCS's operating expense is primarily attributable to an increase in cost of goods sold and leased equipment expense directly associated with the overall increase in revenue. Operating expenses for the Company's other scientific and engineering segment increased by $1.3 million or 40.6% of the total operating expense increase. This increase was due to an increase in occupancy costs and depreciation expense associated with the relocation of offices during fiscal 1998. As a percentage of revenue, operating expenses increased to 20.2% in fiscal 1998 from 19.1% in fiscal 1997, an increase directly associated with the relocation and expansion of offices, while revenue growth was not as strong. In fiscal 1997, 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 the total operating expense increase in fiscal 1997, while the Company's other scientific and engineering segment had a decrease in other operating expenses of approximately $500,000. The $500,000 decrease in the Company's other scientific and engineering segment operating expenses was due to a decrease in depreciation expense and other computer- related expenses associated with the ongoing cost savings from the conversion to a new, lower cost accounting system which was imple-mented in October 1996. Other operating expenses as a percentage of revenue decreased to 19.1% in fiscal 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. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased by $1.8 million or 26.4%. This increase is primarily attributable to the Company's other scientific and engineering segment, which accounted for $1.6 million of the total $1.8 million increase. Of the $1.6 million increase, approx-imately $850,000 is due to an increase in bad debt expense of which approximately $280,000 resulted from some unusually large client bankruptcies. Approximately $600,000 is due to an increase in travel, marketing and outside consulting expense associated with the Company's increased marketing efforts. As a percentage of revenue, general and administrative expenses increased to 10.3% in fiscal 1998 from 9.4% in fiscal 1997. In fiscal 1997, 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 other scientific and engineering segment 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 efforts to maintain overhead expenses as revenues continue to grow. 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, net, increased by $314,000 or 34.4%. This increase is primarily due to a $725,000 decrease in interest expense associated with the Company's IRS settlement and a decrease in mortgage 3 interest of approximately $100,000. This decrease in interest expense was partially offset by a decrease in interest income of approximately $350,000 due to lower average cash and investment balances during fiscal 1998, in addition to a slight decrease in rental income of approximately $138,000 due to a decrease in space subleased to outside companies. In fiscal 1997, 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, in addition to an increase in the rent charged per square foot. INCOME TAXES In fiscal 1998, income taxes as a percentage of income is 25.9%. This lower effective tax rate is primarily due to the Company removing a 100% valuation allowance recorded against the $788,000 deferred tax asset generated from a tax loss resulting from the sale of PLG in September 1997. The decision to remove the valuation allowance was based upon plans management is working on to generate capital gains via a potential sale of one or more of its owned buildings at the Company's headquarters facility. Other options for generating capital gains are also being evaluated. The Company has until fiscal year 2002 to generate sufficient capital gains to utilize the entire $788,000 deferred tax asset. The Company's income taxes as a percentage of income from continuing operations is 40.5% for fiscal 1997. In fiscal 1996, 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 for the refinancing of this note, as an extraordinary item in the statement of operations. LIQUIDITY AND CAPITAL RESOURCES At January 1, 1999, the Company had $6.1 million in cash and cash equivalents. The Company has financed its business principally through cash flows from operating activities. Net cash provided by operating activities was $1.2 million in fiscal 1998 compared to $3.8 million in fiscal 1997. This decrease in operating cash flow in fiscal 1998 is primarily due to an increase in accounts receivable associated with the Company's continued revenue growth, in addition to an increase of days of revenue outstanding at the end of fiscal 1998 compared to fiscal 1997. Additionally, cash provided by operating activities decreased over fiscal 1997 because of a decrease in income taxes payable due to earlier payment of fiscal 1998 taxes, in addition to an increase in the net deferred tax asset. This decrease in cash from changes in operating assets and liabilities was partially offset by an increase in net income after adjusted for non-cash items in fiscal 1998 compared to fiscal 1997. The Company has historically and will continue to experience swings in the timing of its collections. Despite the increase in days of revenue outstanding, the general credit quality of the Company's clients remains high due to the majority of the Company's clients being Fortune 500 companies who pose minimal credit risk. During fiscal 1998, the Company generated approximately $500,000 of cash from investing activities primarily through the sale of short-term investments for a net amount of $6.3 million offset by cash used for capital expenditures of $5.4 million. During fiscal 1997, the Company generated $1.3 million from investing activities again primarily through the sale of short-term investments for a net amount of $13.8 million offset by cash used for acquisitions of approximately $7.8 million and capital expenditures of $4.2 million. Net cash used in financing activities increased to $4.0 million in fiscal 1998 compared to $1.1 million in fiscal 1997. This increase is primarily due to stock repurchases in fiscal 1998 of $3.4 million. 4 The Company's long-term obligations at January 1, 1999 consisted primarily of the mortgage obligation on the headquarters facility of $16.2 million. Additionally, the Company renewed its $10.0 million line of credit agreement in August 1998. There were no amounts borrowed against the line of credit during fiscal 1998, 1997 or 1996. In February 1999, the Company refinanced both its mortgage and line of credit under one borrowing agreement for a total maximum borrowing amount of $35.0 million. See further discussion under Note 16 of Notes to Consolidated Financial Statements. Management believes that its existing cash, together with its new credit line 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. 5
CONSOLIDATED STATEMENTS OF OPERATIONS EXPONENT, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------------- Fiscal Years (In thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------- Revenues $85,477 $ 73,468 $ 53,273 Operating expenses: Compensation and related expenses 55,162 45,991 33,541 Other operating expenses 17,237 14,021 12,381 General and administrative expenses 8,804 6,965 5,579 ----------------------------------- 81,203 66,977 51,501 ----------------------------------- Operating income 4,274 6,491 1,772 ----------------------------------- Other income (expense): Interest expense, net (662) (1,254) (1,188) Miscellaneous income, net 1,890 2,168 1,622 ----------------------------------- Income from continuing operations before income taxes 5,502 7,405 2,206 Income taxes 1,422 2,999 367 ----------------------------------- Income from continuing operations 4,080 4,406 1,839 ----------------------------------- Discontinued operations: Loss from operations of PLG, Inc. (net of tax benefit of $97 and $24, respectively) - (144) (1,832) Extraordinary item (net of taxes of $301) - - (443) ----------------------------------- Net income (loss) $ 4,080 $ 4,262 ($436) ----------------------------------- Income per share from continuing operations: Basic $0.55 $0.62 $0.28 Diluted $0.53 $0.60 $0.27 Loss per share from discontinued operations: Basic - ($0.02) ($0.28) Diluted - ($0.02) ($0.27) Loss per share from extraordinary item: Basic - - ($0.07) Diluted - - ($0.07) Net income (loss) per share: Basic $0.55 $0.60 ($0.07) Diluted $0.53 $0.58 ($0.07) Shares used in per share computations: Basic 7,392 7,148 6,663 Diluted 7,708 7,385 6,801
The accompanying notes are an integral part of the Consolidated Financial Statements. 6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) EXPONENT, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------- Net income (loss) $ 4,080 $ 4,262 ($436) Other comprehensive income (losses): Foreign currency translation adjustments (1) (28) (28) Unrealized gains (losses) on investments, net of reclassification adjustment (11) (45) 130 --------------------------------- Comprehensive income (loss) $ 4,068 $ 4,189 ($334) ---------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 7
CONSOLIDATED BALANCE SHEETS EXPONENT, INC. AND SUBSIDIARIES - ----------------------------------------------------------------------------------------------------- (In thousands, except share and per share data) 1998 1997 - ----------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 6,082 $ 8,412 Short-term investments - 6,370 Accounts receivable, net of allowance for doubtful accounts of $1,000 33,889 27,279 Prepaid expenses and other assets 3,949 3,186 Deferred income taxes 1,177 1,974 ------------------------- Total current assets 45,097 47,221 ------------------------- Property, equipment and leasehold improvements, net 32,147 30,277 Goodwill 8,584 8,988 Deferred income taxes 524 - Other assets 633 1,765 ------------------------- $86,985 $ 88,251 ------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 2,151 $ 1,987 Current installment of long-term obligations 1,709 1,248 Accrued payroll and employee benefits 8,388 8,351 Income taxes payable 278 2,207 ------------------------- Total current liabilities 12,526 13,793 Long-term obligations, net of current installments 16,144 16,654 Deferred income taxes - 1,088 ------------------------- Total liabilities 28,670 31,535 ------------------------- 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 33,257 33,148 Accumulated other comprehensive losses (16) (4) Retained earnings 29,575 25,793 Treasury shares, at cost: 702 and 460 shares held, respectively (4,509) (2,229) ------------------------- Total stockholders' equity 58,315 56,716 ------------------------- $86,985 $ 88,251 -------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY EXPONENT, INC. AND SUBSIDIARIES - ----------------------------------------------------------------------------------------------------------------------------- Additional Accumulated COMMON STOCK paid-in comprehensive Retained Treasury -------------- -------------------------- (In thousands) Shares Amount capital income (losses) earnings Shares Amount Total - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 29, 1995 7,902 $ 8 $ 32,497 ($33) $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 Purchase of treasury shares - - - - - (177) (1,024) (1,024) Net unrealized gain on investments - - - 130 - - - 130 Other - - - (28) - - - (28) Net loss - - - - (436) - - (436) ------------------------------------------------------------------------------------- Balance at January 3, 1997 7,902 8 33,000 69 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 33,148 (4) 25,793 (460) (2,229) 56,716 Sale of stock pursuant to employee stock plans - - 112 - (298) 247 1,124 938 Purchase of treasury shares - - - - - (489) (3,404) (3,404) Net unrealized loss on investments - - - (11) - - - (11) Other - - (3) (1) - - - (4) Net income - - - - 4,080 - - 4,080 ------------------------------------------------------------------------------------- Balance at January 1, 1999 7,902 $ 8 $ 33,257 ($16) $29,575 (702) ($4,509) $58,315 -------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 9
CONSOLIDATED STATEMENTS OF CASH FLOWS EXPONENT, INC. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 4,080 $ 4,262 ($436) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,477 3,581 3,411 Extraordinary item - - 443 Provision for doubtful accounts 732 (421) 2,102 Impairment of long-lived assets - - 1,572 Change in deferred income taxes (815) (1,057) (1,799) Changes in operating assets and liabilities: Accounts receivable (7,342) (4,396) (3,022) Prepaid expenses 1,839 1,688 (235) Accounts payable and accrued liabilities 164 (3,485) 768 Accrued payroll and employee benefits 37 2,347 691 Income tax payable (1,929) 1,278 768 Net operating activities of discontinued operations - (23) 157 ------------------------------ Net cash provided by operating activities 1,243 3,774 4,420 Cash flows from investing activities: Purchase of short-term investments (1,962) (11,395) (9,785) Sales of short-term investments 8,309 25,213 7,362 Acquisition of PLG, Inc. and contingency payments, net of cash acquired - - (501) Acquisition of EHG, Inc. and contingency payments, net of cash acquired (393) - (250) Acquisition of BCS, Inc., net of cash acquired - (313) - Acquisition of EEG, Inc., net of cash acquired - (7,495) - Capital expenditures (5,364) (4,218) (2,848) Other assets (117) (323) (72) Net investing activities of discontinued operations - (154) (794) ------------------------------ Net cash provided by (used in) investing activities 473 1,315 (6,888) ------------------------------ Cash flows from financing activities: Proceeds from borrowing and issuance of long-term obligations - - 19,311 Repayments of borrowing and long-term obligations (1,580) (1,996) (19,126) Repurchase of common stock (3,404) - (1,024) Net issuance of common stock 938 854 371 ------------------------------ Net cash used by financing activities (4,046) (1,142) (468) ------------------------------ Net increase (decrease) in cash and cash equivalents (2,330) 3,947 (2,936) Cash and cash equivalents at beginning of year 8,412 4,465 7,401 ------------------------------ Cash and cash equivalents at end of year $ 6,082 $ 8,412 $ 4,465 ------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EXPONENT, INC. AND SUBSIDIARIES NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Exponent, Inc. together with its subsidiaries (referred to as the "Company"), is a multidisciplinary organization of scientists, physicians, engineers and business consultants performing in-depth scientific research and analysis in over 50 technical disciplines. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Exponent Failure Analysis Associates, Inc. ("FaAA"), Exponent Health Group, Inc. ("EHG"), Exponent Environmental Group, Inc. ("EEG"), 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 1998, 1997 and 1996 will be represented by the fiscal period dates ending January 1, 1999, January 2, 1998 and January 3, 1997, respectively. REVENUE RECOGNITION The Company derives 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. 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 $13,129,315, $10,755,000 and $6,245,000 in fiscal 1998, 1997 and 1996, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally acceptable 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 consolidated financial statements have been reclassified in order to conform with the presentation of the 1998 and 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. 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 as accumulated other comprehensive income. 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. IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF The Company evaluates long-lived assets 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 11 from the purchase of its two new subsidiaries, BCS and EEG respectively. Additionally, during fiscal 1998, the Company recorded additional goodwill of approximately $393,000 associated with the acquisition of EHG which considered future payments to be paid based upon the attainment of certain revenue and profitability requirements. These future payments have been accounted for as goodwill as they have been treated as an adjustment to the original acquisition purchase price. The Company periodically evaluates the ongoing profitability of the businesses acquired to determine if there is goodwill impairment. In accordance with the Company's policy in evaluating the impairment of a long-lived asset, the Company made the decision to writeoff the remaining goodwill related to the purchase of its subsidiary, PLG, during the fourth quarter of 1996. The total amount charged to income was $1.6 million. INCOME TAXES Income taxes are accounted for under the asset and liability method. 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. Deferred tax assets and liabilities are 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. A valuation allowance is recorded for deferred tax assets if it is more likely than not, that some portion or all of the deferred tax assets will not be realized. 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 of income from continuing operations. The following schedule reconciles both the numerator and denominator of the Company's calculation for basic and dilutive net income (loss) per share: Fiscal Years (In thousands) 1998 1997 1996 - ------------------------------------------------------------------- Basic earnings per share: Weighted-average shares outstanding 7,392 7,148 6,663 Effect of dilutive common stock options outstanding 316 237 138 ----- ----- ----- Diluted earnings per share: Adjusted for weighted-average shares and effect of dilutive options outstanding 7,708 7,385 6,801 ----- ----- ----- Common stock options to purchase 126,761, 609,201 and 584,476 shares were excluded from the diluted per share calculation for the fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997, respectively, due to their antidilutive effect. RECENT ACCOUNTING PRONOUNCEMENTS Effective for the fiscal year ending January 1, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosure about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker. NOTE 2: SHORT-TERM INVESTMENTS Available-for-sale securities consisted 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 -------------------------------------------------------- 12 The cost of securities sold is based upon the specific identification method. Total proceeds from the sale of short-term investments in fiscal 1998, 1997 and 1996 were $8,309,000, $25,213,000 and $7,362,000, respectively. The total proceeds from sales vs. maturities were as follows: Fiscal Years (In thousands) 1998 1997 1996 - --------------------------------------------------------- Sales $8,309 $24,653 $6,732 Maturities - 560 630 ------------------------- $8,309 $25,213 $7,362 ------------------------- 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 Fiscal Years (In thousands) 1998 1997 - ------------------------------------------------------------ Property: Land $ 5,450 $ 5,450 Buildings 27,077 26,337 Construction in progress 185 657 Equipment: Machinery and equipment 21,848 23,083 Office furniture and equipment 5,173 4,802 Leasehold improvements 4,510 2,956 ----------------- 64,243 63,285 Less accumulated depreciation and amortization 32,096 33,008 ----------------- Property, equipment and leasehold improvements, net $32,147 $30,277 ----------------- NOTE 4: LONG-TERM OBLIGATIONS Fiscal Years (In thousands) 1998 1997 - ------------------------------------------------------------ Mortgage note $16,207 $17,453 Other 1,646 449 ----------------- 17,853 17,902 Less current installments 1,709 1,248 ----------------- Long-term obligations, net of current portion $16,144 $16,654 ----------------- Other long-term obligations consist primarily of deferred compensation and a note with a third party financing company for the financing of the Company's corporate insurance. The Company's existing mortgage, which had 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 month. The rate on this note was 6.75% as of January 1, 1999. In August 1998, the Company renewed its $10.0 million unsecured line of credit agreement. This agreement expires in July 1999. There were no borrowings against the line of credit in fiscal 1998 or fiscal 1997. The mortgage note and line of credit contain restrictive covenants. Principal payments due on long-term obligations are $1,709,000, $1,825,000, $1,537,000, $1,329,000 and $1,287,000 in fiscal 1999 through fiscal 2003, respectively, and $10,166,000 thereafter. In February 1999, the Company refinanced both its mortgage and line of credit under one borrowing agreement. See further discussion under Note 16 of Notes to Consolidated Financial Statements. NOTE 5: INCOME TAXES The provision for income taxes consists of the following: Fiscal Years (In thousands) 1998 1997 1996 - -------------------------------------------------- Current: Federal $1,762 $ 3,128 $ 1,375 State 475 831 466 ------------------------------ $2,237 $ 3,959 $ 1,841 Deferred: Federal ($788) ($655) ($1,430) State (27) (402) (369) ------------------------------ ($815) ($1,057) ($1,799) ------------------------------ Total $1,422 $ 2,902 $ 42 ------------------------------ 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: Fiscal Years (In thousands) 1998 1997 1996 - ------------------------------------------------------------------- Tax at federal statutory rate of 34% $1,871 $2,518 $ 750 Change in beginning-of- the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense (788) - - State taxes, net of federal benefit 296 283 140 Amortization of goodwill non-deductible for tax 142 100 - Tax-exempt interest - - (585) Other (99) 98 62 ------------------------ Tax expense from continuing operations $1,422 $2,999 $ 367 ------------------------ 13 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 1, 1999 and January 2, 1998 are presented below: Fiscal Years (In thousands) 1998 1997 - ------------------------------------------------------- Deferred tax assets: State taxes $ - $ 55 Compensated absences 684 713 Accrued expenses 511 645 Capital loss carryforward 830 788 Other - 1 Valuation allowance - (788) ---------------- Total deferred tax assets 2,025 1,414 ---------------- Deferred tax liabilities: State taxes (18) - Deductible goodwill (72) - Plant and equipment (234) (528) ---------------- Total deferred tax liabilities (324) (528) ---------------- Net deferred tax assets $1,701 $ 886 ---------------- The net change in the total valuation allowance for the fiscal year 1998 was a decrease of $788,000. 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. The Company has a capital loss carryforward of $2,071,000 for federal and state tax purposes that will expire in fiscal years 2000 through 2002. 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. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) consists of: Fiscal Years (In thousands) 1998 1997 - ------------------------------------------------------------ Unrealized gain (loss) on investments - $ 11 Cumulative foreign translation adjustment (16) (15) ------------ $(16) $(4) ------------ 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 1, 1999, 348,792 shares have been sold under the plan. Weighted-average purchase prices for shares sold under the plan in fiscal 1998, 1997 and 1996 were $5.96, $5.35 and $5.13, 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 97,500 shares have vested as of January 1, 1999. STOCK OPTION PLANS The Company has an incentive stock option plan, which covers up to an aggregate of 2,000,000 shares of common stock. In October 1998, the Board approved a new non-statutory stock option plan, which covers up to an aggregate of 300,000 shares of common stock. Both plans provide for the grant of either 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 option plan for one officer covering up to 119,000 shares of common stock, all of which have been granted and 29,760 have been exercised as of January 1, 1999. All three stock option plans are collectively referred to as the "Plan." 14 Option activity under the stock option plan is as follows: Weighted- Options average available Number exercise for grant of shares price - -------------------------------------------------------------------- Balance as of December 29,1995 390,372 1,341,934 $ 5.85 Options granted (173,000) 173,000 5.83 Options cancelled 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 cancelled 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 Options granted (469,500) 469,500 6.76 Options cancelled 56,500 (56,500) 6.15 Options exercised - (120,107) 4.86 Additional shares reserved under new stock plan 300,000 - - ---------------------------------- Balance as of January 1, 1999 329,120 1,895,807 $ 6.32 Information regarding options outstanding at January 1, 1999 is summarized below: Outstanding Exercisable --------------------------------- -------------------- Weighted- average Weighted- Weighted- remaining average average Range of Number contractual exercise Number exercise exercise price of shares life price of shares price - -------------------------------------------------------------------------- $4.50 1,000 5.58 $ 4.50 1,000 $4.50 $4.75 368,000 5.48 $ 4.75 368,000 $4.75 $4.81-$5.75 464,325 8.62 $ 5.57 105,575 $5.08 $5.88-$7.00 396,500 6.78 $ 6.37 210,375 $6.58 $7.13-$7.25 362,897 3.09 $ 7.16 362,897 $7.16 $7.50-$10.50 303,085 8.61 $ 8.33 56,029 $7.91 --------- ---- ------ --------- ----- 1,895,807 1,103,876 $6.08 PRO FORMA FAIR VALUE INFORMATION The Company uses the intrinsic value method in accounting for its Employee Purchase 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. SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires the Company to disclose pro forma information regarding net income and earnings per share as if the Company had accounted for its Options under the fair value method. Under the fair value method, compensation expense is calculated for options granted using a defined valuation technique. 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 1998, 1997 and 1996: Employee Stock Purchase Plan Stock Option Plan 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------ Expected life (in years) 1 0.25 0.25 6 6 6 Risk-free interest rate 4.85% 5.61% 5.60% 4.3% 6.2% 6.8% Volatility 4.67 0.74 0.79 0.87 0.76 0.72 Dividend yield 0% 0% 0% 0% 0% 0% Using the above assumptions, the weighted-average fair value of options granted during 1998, 1997 and 1996 was $5.06, $4.82 and $4.05, 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 (In thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------ Income from continuing operations: As reported $4,080 $4,406 $1,839 Pro forma $2,516 $3,908 $1,636 Income per share from continuing operations: As reported: Basic $ 0.55 $ 0.62 $ 0.28 Diluted $ 0.53 $ 0.60 $ 0.27 Pro forma: Basic $ 0.34 $ 0.55 $ 0.25 Diluted $ 0.33 $ 0.53 $ 0.24 NOTE 7: PENSION PLAN The Company's subsidiaries Exponent 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 to this plan were $1,922,000, $1,965,000 and $1,745,000 in fiscal 1998, 1997 and 1996 respectively. Effective January 1, 1999, the Company terminated its existing defined contribution retirement plan and 15 modified its existing 401K plan whereby the Company will contribute to each eligible employee's 401K account, 7% of the employee's base salary plus overtime, regardless of the amount contributed by the employee. The employee does not need to make a contribution to the plan to be eligible for the Company's 7% contribution. To be eligible under the plan, an employee must be at least 21 years of age and be either a full-time or part-time salaried employee. The 7% Company contribution will vest 20% a year for employees hired after January 1, 1999 and immediately for employees hired as of December 31, 1998. The Company's subsidiaries, Exponent Failure Analysis Associates, Inc., Exponent Health Group, Inc. and Exponent Environmental Group, Inc. are covered under the newly modified 401K plan. 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 1, 1999: (In thousands) Lease Rental Net future Year ending commitments income payments - --------------------------------------------------------- 1999 $ 2,770 $(1,296) $ 1,474 2000 2,267 (1,285) 982 2001 1,813 (74) 1,739 2002 1,571 (29) 1,542 2003 1,306 (24) 1,282 Thereafter 7,410 7,410 ---------------------------------- $ 17,137 $(2,708) $ 14,429 ---------------------------------- Total rent and equipment lease expense in 1998, 1997 and 1996 was $3,115,000, $2,548,000 and $2,369,000, respectively. 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, consisted of the following: Fiscal Years (In thousands) 1998 1997 1996 - --------------------------------------------------- Interest income $ 509 $ 861 $ 1,265 Interest expense (1,171) (2,115) (2,453) Rental income 1,752 1,889 1,473 Other 138 279 149 ------- ------- ------- Total $ 1,228 $ 914 $ 434 ------- ------- ------- NOTE 10: CLIENT AND INDUSTRY CREDIT RISK The Company serves clients in various segments of the economy. During 1998, 1997 and 1996, the Company provided services, representing approximately 27%, 29% and 38%, respectively, of revenues to clients and to organizations and insurers acting on behalf of clients in the transportation industry. Revenues of approximately $10,076,000, $5,246,000 and $6,886,000 in fiscal 1998, 1997 and 1996, respectively, were earned on engagements for one client or for organizations insuring or providing services to such client. As of January 1, 1999 and January 2, 1998, accounts receivable included $3,640,000 and $1,912,000, 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 grow 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 that specializes in the design, installation and maintenance of wireless communication networks. They are located in the greater Madison, Wisconsin area and have 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 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 16 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. Under the original acquisition agreement, future contingent payments of either cash or stock were considered, based upon the attainment of certain revenue and profitability requirements as defined per the terms of the agreement. Contingent payments were to be made at the end of each fiscal year through fiscal 2001 if the revenue and profitability requirements were attained. In February 1998, the Company made the first contingent payment of $143,000 for EHG's financial performance through fiscal 1997. In September 1998, the original acquisition agreement was amended whereby the Company's obligation for any future contingent payments was terminated in exchange for a final payment of $250,000. Both payments were recorded against goodwill as a purchase price adjustment. 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 financial statements. 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 years 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 (In thousands, except per share data) 1997 1996 - ----------------------------------------------------------------- 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, for a total purchase price of approx- imately $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 started December 18, 1997 with the final quarterly payment plus the remaining principal and any unpaid accrued interest due on March 18, 1999. To date, all principal quarterly payments that have come due have been paid. 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 (In thousands) 1998 1997 - -------------------------------------------------------------------- Cash paid during the year: Interest $1,087 $1,260 Income taxes $5,367 $2,198 Non-cash investing and financing activities: Disposition of operations in exchange for a promissory note - $2,053 Issuance of debt for financing of insurance policy $1,369 - Treasury shares issued for acquisition of EEG - $2,375 17 NOTE 14: SEGMENT REPORTING The Company is a multidisciplinary organization of scientists, physicians, engineers and business consultants performing in-depth scientific research and analysis in a number of technical disciplines. The Company has two operating segments based on two primary areas of service. One operating segment provides services in the area of environmental and health risk analysis. This operating segment provides a wide range of consulting services relating to environmental hazards and risks and the impact on both human health and the environment. The Company's other operating segment is a broader service providing scientific and engineering consulting in different practices and primarily in the area of impending litigation. Segment information for the three fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997 follows: REVENUES - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Environmental and health $17,985 $11,651 $ 864 Other scientific and engineering 62,428 59,284 52,409 Other 5,064 2,533 - ---------------------------------- Total revenue $85,477 $73,468 $53,273 ---------------------------------- OPERATING INCOME (LOSS) - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Environmental and health $ 1,429 $ 1,527 $ 232 Other scientific and engineering 12,018 13,740 10,892 Other 245 (593) - ---------------------------------- Total segment operating income 13,692 14,674 11,124 ---------------------------------- Corporate operating loss (9,418) (8,183) (9,352) ---------------------------------- Total operating income $ 4,274 $ 6,491 $ 1,772 ---------------------------------- ASSETS - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Environmental and health $ 6,261 $ 5,774 $ 248 Other scientific and engineering 36,977 30,791 29,002 Other 2,984 1,456 - ---------------------------------- Total segment assets 46,222 38,021 29,250 ---------------------------------- Corporate assets 40,763 50,230 51,328 ---------------------------------- Total assets $86,985 $88,251 $80,578 ---------------------------------- CAPITAL EXPENDITURES - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Environmental and health $ 431 $ 298 $ 7 Other scientific and engineering 4,007 3,156 2,124 Other 197 565 - ---------------------------------- Total segment capital expenditures 4,635 4,019 2,131 ---------------------------------- Corporate capital expenditures 729 199 717 ---------------------------------- Total capital expenditures $ 5,364 $ 4,218 $ 2,848 ---------------------------------- DEPRECIATION AND AMORTIZATION - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- Environmental and health $ 327 $ 182 $ 7 Other scientific and engineering 2,453 2,015 2,223 Other 119 82 - ---------------------------------- Total segment depreciation and amortization 2,899 2,279 2,230 ---------------------------------- Corporate depreciation and amortization 1,578 1,302 1,181 ---------------------------------- Total depreciation and amortization $ 4,477 $ 3,581 $ 3,411 ---------------------------------- Information regarding Exponent's operations in different geographical areas: REVENUES* - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- United States $83,280 $71,560 $50,305 Foreign countries 2,197 1,908 2,968 ---------------------------------- Total $85,477 $73,468 $53,273 ---------------------------------- * GEOGRAPHIC REVENUES ARE ALLOCATED BASED ON THE LOCATION OF THE CUSTOMER PROPERTY, PLANT AND EQUIPMENT, NET - ---------------------------------------------------------------------------- Fiscal Years (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- United States $32,062 $30,184 $28,702 Foreign countries 85 93 87 ---------------------------------- Total $32,147 $30,277 $28,789 ---------------------------------- 18 NOTE 15: COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
FISCAL 1998 - ------------------------------------------------------------------------------------------------------------------- April 3, July 3, October 2, January 1, (In thousands, except per share data) 1998 1998 1998 1999 - ------------------------------------------------------------------------------------------------------------------- Revenues $22,376 $20,625 $20,942 $21,534 Operating income 2,377 864 772 261 Income from continuing operations and before income taxes 2,632 1,291 1,018 562 Income from continuing operations and before discontinued operations 1,560 1,575 609 336 Net income $ 1,560 $ 1,575 $ 609 $ 336 -------------------------------------------- Income per share from continuing operations: Basic $0.21 $0.21 $0.08 $ 0.05 Diluted $0.20 $0.20 $0.08 $ 0.05 Net income per share: Basic $0.21 $0.21 $0.08 $ 0.05 Diluted $0.20 $0.20 $0.08 $ 0.05 Shares used in per share computations: Basic 7,476 7,532 7,324 7,236 Diluted 7,987 8,025 7,480 7,301
FISCAL 1997 - ------------------------------------------------------------------------------------------------------------------- April 4, July 4, October 3, January 2, (In thousands, except per share data) 1997 1997 1997 1998 - ------------------------------------------------------------------------------------------------------------------- Revenues $16,490 $17,571 $20,178 $19,229 Operating income 1,607 1,872 1,951 1,061 Income (loss) 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
19 NOTE 16: SUBSEQUENT EVENT (UNAUDITED) Effective February 1, 1999, the Company refinanced its 15-year life mortgage note on the Company's headquarters building. The old note, which had an outstanding principal balance of $16.2 million at the time of the refinancing, had a floating rate of interest that was tied to LIBOR and was subject to adjustment every month. Principal payments of $623,333 were due semi-annually on February 1 and August 1 with the final principal payment and all accrued interest due and payable on August 1, 2011. The new note consists of a line of credit with a borrowing amount up to $5.0 million and a revolving reducing note up to $30.0 million for a total maximum borrowing amount of $35.0 million. The $5.0 million line of credit is subject to two interest rate options of either the prime rate in effect from time to time, or a fixed rate determined by the bank to be 2.75% above LIBOR, with a floating rate option of one month, two months, three months, six months, nine months or twelve months. The line of credit has a one-year term maturing February 1, 2000. The $30.0 million revolving reducing note is also subject to two interest rate options of either prime less 1.5% or the fixed LIBOR plus 1.25% with a floating rate option of one month, two months, three months, six months, nine months or twelve months. This note has a ten-year term maturing February 1, 2009. Interest will be paid on a monthly basis. Principal amounts subject to the prime interest rate may be repaid at any time without penalty. Principal amounts subject to the fixed LIBOR rate may also be repaid at any time but are subject to a prepayment penalty if paid before the fixed-rate term or additional interest if paid after the fixed-rate term. Additionally, the revolving reducing note is subject to annual principal payments based on a 15-year amortization of the initial commitment amount using an interest rate of 3-month LIBOR plus 1.25% in effect on the date of the note. 20 INDEPENDENT AUDITOR'S REPORT Exponent, Inc. and Subsidiaries The Board of Directors and Stockholders Exponent, Inc. We have audited the accompanying consolidated balance sheets of Exponent, Inc. and subsidiaries as of January 1, 1999 and January 2, 1998 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the years in the three-year period ended January 1, 1999. 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 1, 1999 and January 2, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ending January 1, 1999, in conformity with generally accepted accounting principles. KPMG LLP Mountain View, California January 26, 1999 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 closing prices for the Company's common stock. Stock prices by quarter High Low - -------------------------------------------------------- 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 ended January 1, 1999 First quarter $11.00 $8.50 Second quarter $11.88 $8.00 Third quarter $ 8.63 $4.19 Fourth quarter $ 6.63 $4.25 Fiscal year ended December 31, 1999 First quarter (through February 26, 1999) $ 6.50 $5.75 As of February 26, 1999, there were 383 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. 21
FINANCIAL SUMMARY EXPONENT, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------ (In thousands, except per share data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Revenues $85,477 $73,468 $53,273 $52,824 $51,037 Operating expenses: Compensation and related expenses 55,162 45,991 33,541 31,942 29,800 Other operating expenses 17,237 14,021 12,381 13,069 13,257 General and administrative expenses 8,804 6,965 5,579 4,373 5,547 Provision for restructuring expenses - - - - (333) --------------------------------------------------- 81,203 66,977 51,501 49,384 48,271 --------------------------------------------------- Operating income 4,274 6,491 1,772 3,440 2,766 Other income (expense): Interest expense, net (662) (1,254) (1,188) (1,059) (1,278) Miscellaneous income, net 1,890 2,168 1,622 1,172 615 --------------------------------------------------- Income from continuing operations before income taxes 5,502 7,405 2,206 3,553 2,103 Income taxes 1,422 2,999 367 1,439 906 --------------------------------------------------- Income from continuing operations 4,080 4,406 1,839 2,114 1,197 Discontinued operations: Loss from operations of PLG, Inc. - (144) (1,832) (92) (77) Extraordinary item - - (443) - - --------------------------------------------------- Net income (loss) $ 4,080 $ 4,262 ($436) $ 2,022 $ 1,120 Income per share from continuing operations: Basic $ 0.55 $ 0.62 $ 0.28 $ 0.32 $ 0.16 Diluted $ 0.53 $ 0.60 $ 0.27 $ 0.31 $ 0.16 Net income (loss) per share: Basic $ 0.55 $ 0.60 ($0.07) $ 0.31 $ 0.15 Diluted $ 0.53 $ 0.58 ($0.07) $ 0.30 $ 0.15 Shares used in per share computations: Basic 7,392 7,148 6,663 6,610 7,302 Diluted 7,708 7,385 6,801 6,728 7,313
22 EX-21.1 4 LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY State or Other Jurisdiction of Incorporation or Subsidiary Incorporation or Organization ---------- ----------------------------- Exponent Failure Analysis Associates, Inc. Delaware FaAA Investments 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 5 CONSENT OF KPMG Exhibit 23.1 ------------ Report on Financial Statement Schedule and Consent of Independent Auditors -------------------------------------------------------------------------- The Board of Directors and Stockholders Exponent, Inc.: The audits referred to in our report dated January 26, 1999, included the related financial statement schedule as of January 1, 1999, and for each of the years in the three-year period ended January 1, 1999, as listed in the index in item 14(a) 2 herein. 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, 1999, relating to the consolidated balance sheets of Exponent, Inc. and subsidiaries as of January 1, 1999 and January 2, 1998 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended January 1, 1999, and the related schedule, which reports appear in the January 1, 1999, annual report on Form 10-K for Exponent, Inc. KPMG LLP Mountain View, California March 29, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K405 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-01-1999 JAN-03-1998 JAN-01-1999 6,082 0 34,889 1,000 0 45,097 64,243 32,096 86,985 12,526 0 0 0 8 58,307 86,985 0 85,477 0 55,162 26,041 0 1,171 5,502 1,422 4,080 0 0 0 4,080 .55 .53
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