<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_____________________
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO Section 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-12771
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3630868
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 546-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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
----- ----
As of November 30, 1996, the Registrant had 47,983,876 shares of
Class A common stock, $.01 par value per share, issued and outstanding, and
325,984 shares of Class B common stock, $.05 par value per share, issued and
outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------- -----------------------------------
October 31, 1996 October 31, 1995 October 31, 1996 October 31, 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 636,810 $ 547,774 $ 1,754,327 $ 1,553,395
---------- ---------- ------------ ------------
Costs and expenses:
Cost of revenues 556,956 480,782 1,531,597 1,356,537
Selling, general and
administrative expenses 46,243 39,736 136,593 119,417
Interest expense 1,273 918 3,705 3,216
---------- ---------- ------------ ------------
604,472 521,436 1,671,895 1,479,170
---------- ---------- ------------ ------------
Income before income taxes 32,338 26,338 82,432 74,225
Provision for income taxes 14,148 11,589 36,064 32,659
---------- ---------- ------------ ------------
Net income $ 18,190 $ 14,749 $ 46,368 $ 41,566
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Earnings per share of
common stock and equivalents $ .35 $ .29 $ .90 $ .82
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
October 31, 1996 January 31, 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,791 $ 22,765
Restricted cash 8,948 3,029
Receivables 549,441 500,201
Inventories 38,835 40,097
Prepaid expenses and other current assets 14,395 9,182
Deferred income taxes 18,233 18,953
------------ -----------
Total current assets 677,643 594,227
Property and equipment (less accumulated depreciation
of $125,060 and $110,344 at October 31, 1996
and January 31, 1996, respectively) 88,214 69,441
Land and buildings (less accumulated depreciation of
$12,756 and $10,894 at October 31, 1996
and January 31, 1996, respectively) 97,332 87,844
Intangible assets (less accumulated amortization of
$34,754 and $27,031 at October 31, 1996
and January 31, 1996, respectively) 62,179 55,210
Other assets 46,601 52,568
------------ -----------
$ 971,969 $ 859,290
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 235,653 $ 210,393
Accrued payroll and employee benefits 137,087 138,709
Income taxes payable 28,137 15,636
Notes payable and current portion of long-term liabilities 21,512 2,304
------------ -----------
Total current liabilities 422,389 367,042
Long-term liabilities 42,345 33,151
Stockholders' equity:
Common stock:
Class A, $.01 par value
Authorized: 100,000 shares
Issued and outstanding:
October 31, 1996 - 47,882 shares 479
January 31, 1996 - 46,909 shares 469
Class B, $.05 par value
Authorized: 5,000 shares
Issued and outstanding:
October 31, 1996 - 327 shares 16
January 31, 1996 - 332 shares 17
Additional paid-in capital 282,368 242,751
Retained earnings 224,372 215,860
------------ -----------
Total stockholders' equity 507,235 459,097
------------ -----------
$ 971,969 $ 859,290
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended
------------------------------------
October 31, 1996 October 31, 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 46,368 $ 41,566
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 29,615 23,832
Non-cash compensation 22,449 12,487
Loss on disposal of property and equipment 926 676
Increase (decrease) in cash, excluding effects of acquisitions,
resulting from changes in:
Receivables (17,462) (54,709)
Inventories 2,989 789
Prepaid expenses and other current assets (5,095) (4,281)
Deferred income taxes 720 40
Other assets (674) (2,477)
Progress payments (28,176) 2,829
Accounts payable and accrued liabilities 18,677 (15,735)
Accrued payroll and employee benefits (2,335) (4,847)
Income taxes payable 18,572 1,518
----------- ------------
86,574 1,688
----------- ------------
Cash flows from investing activities:
Expenditures for property and equipment (27,314) (18,247)
Expenditures for land and buildings (4,431) (522)
Acquisitions of certain business assets, net of cash acquired (17,964) (1,707)
Proceeds from disposal of property and equipment 206 291
Proceeds from sale of debt securities available for sale 7,576
----------- ------------
(41,927) (20,185)
----------- ------------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 6,000
Increase (decrease) in notes payable and long-term liabilities 4,054 (5,138)
Sales of common stock 13,294 11,653
Repurchases of common stock (36,969) (16,464)
----------- ------------
(19,621) (3,949)
----------- ------------
Increase (decrease) in cash and cash equivalents 25,026 (22,446)
Cash and cash equivalents at beginning of period 22,765 28,203
----------- ------------
Cash and cash equivalents at end of period $ 47,791 $ 5,757
----------- ------------
----------- ------------
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock for acquisitions
of certain business assets $ 8,973
------------
------------
Liabilities assumed or incurred in connection with acquisitions
of certain business assets $ 15,777 $ 13,936
----------- ------------
----------- ------------
Long-term mortgage assumed upon purchase of land and building $ 6,929
-----------
-----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with the
instructions to Form 10-Q and therefore does not necessarily include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
Certain amounts from the nine months ended October 31, 1995 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the nine months ended October 31, 1996.
In the opinion of management, the unaudited financial information for the nine
month periods ended October 31, 1996 and 1995 reflect all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation
thereof.
NOTE B - RESTRICTED CASH
The Company has a contract to provide support services to the National Cancer
Institute's Frederick Cancer Research and Development Center. As part of the
contract, the Company is responsible for paying for materials, equipment and
other direct costs of the Center through the use of a restricted cash account
which is pre-funded by the U.S. Government. In addition, the Company has
another agreement which requires the Company to set aside 30% of the revenue
collected which is to be used for development and enhancement of future
information technology.
NOTE C - RECEIVABLES
Unbilled accounts receivable include $13,993,000 of costs incurred on projects
for which the Company has been requested by the customer to begin work under a
new contract, or extend work under a present contract, but for which formal
contracts or contract modifications have not been executed at October 31, 1996.
NOTE D - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
October 31, 1996
----------------
(in thousands)
Inventories:
Contracts-in-process, less progress payments of $566 $ 14,863
Raw Materials 23,972
---------
$ 38,835
---------
---------
NOTE E - NOTES PAYABLE AND LONG-TERM LIABILITIES
During the quarter ended October 31, 1996, the Company assumed a mortgage note
of $6,929,000 in connection with the purchase of land and a building. Terms of
the note include quarterly payments of principal and interest with a variable
interest rate (6.42% at October 31, 1996) through December 2016.
In connection with an acquisition of certain business assets during the quarter
ended July 31, 1996, the Company incurred debt of $14,400,000. Terms of the
note include monthly payments of principal and interest with an interest rate of
6.96% through December 1999.
The Company has substantially equivalent unsecured revolving credit loan
agreements with three banks totaling $105,000,000 which allow borrowings on a
revolving basis until March 31, 2000. The agreements enable borrowings at
various interest rates, at the Company's option, based on prime, money market,
certificate of deposit, or interbank offshore borrowing rates. Annual facility
fees are 1/8 of 1% of the total commitment during the revolving credit term.
As of October 31, 1996, the entire $105,000,000 was available under the most
restrictive debt covenants of the credit
<PAGE>
loan agreements.
NOTE F - INCOME TAXES
Income taxes for interim periods are computed using the estimated annual
effective rate method.
NOTE G - COMMITMENTS AND CONTINGENCIES
In August 1996, the Company entered into a seven year operating lease for a
general purpose office building. The lease terms include an option for the
Company to purchase the building at the end of the initial seven year term. If
the purchase option is not exercised, the Company may be required to pay certain
supplemental rental payments if proceeds from the sale of the building are below
specified amounts. The maximum supplemental rental payment which could be
required is $28,809,000.
Subsequent to the quarter ended October 31, 1996, on November 20, 1996, the
Company entered into a definitive acquisition agreement to purchase Bell
Communications Research, Inc. ("Bellcore"). The consummation of the acquisition
is subject to certain contingencies, including receipt of regulatory approvals
which are expected to take between nine and fourteen months to obtain.
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations or ability to conduct business.
The Company leases a general purpose office building and has guaranteed a
$12,250,000 loan on behalf of the building owner. Certain financial ratios and
balances required by the guarantee have been maintained.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the three and nine months ended October 31, 1996 increased 16.3%
and 12.9%, respectively, compared to the same periods of the prior year. The
increase in revenues is primarily attributable to growth in the commercial and
international business areas and in lower cost service type contracts. This
latter trend reflects the increasingly competitive business environment in the
Company's traditional business areas, as well as the Company's increased success
in the engineering and field services market, which typically involve lower cost
contracts.
Revenues are generated from the efforts of the Company's technical staff as well
as the pass through of costs for materials and subcontract efforts, which
primarily occur on large, multi-year contracts. At October 31, 1996, the
Company had approximately 20,300 full-time employees compared to approximately
19,200 at October 31, 1995. Material and subcontract ("M&S") revenues were $177
million and $460 million for the three and nine months ended October 31, 1996,
respectively, compared to $144 million and $401 million for the same periods of
the prior year. As a percentage of total revenues, M&S revenues were 28% and 26%
for the three and nine months ended October 31, 1996, respectively, compared to
26% for the same periods of the prior year.
Revenues by contract type indicate that the percentage of the Company's revenues
attributable to the higher risk, firm fixed-price ("FFP") contracts increased to
23% for the nine months ended October 31, 1996 from 19% for the same period of
the prior year. Fixed-price level-of-effort and time-and-materials type
contracts represented 23% and 26% of revenues for the nine months ended
October 31, 1996 and 1995, respectively, while cost reimbursement contracts
were 54% and 55% for the same periods of the prior year, respectively. The
Company assumes greater performance risk on FFP contracts and the failure to
accurately estimate ultimate costs or to control costs during performance of
the work may result in reduced profits or losses.
The cost of revenues as a percentage of revenues (excluding interest income)
remained relatively constant at 87.5% and 87.3% for the three and nine months
ended October 31, 1996, respectively, compared to 87.8% and 87.4% for the same
periods of the prior year.
SG&A expenses as a percentage of revenues (excluding interest income) for the
three and nine months ended October 31, 1996 were 7.3% and 7.8%, respectively,
compared to 7.3% and 7.7% for the same periods of the prior year. SG&A is
comprised of general and administrative ("G&A"), bid and proposal ("B&P") and
independent research and development ("IR&D") expenses. IR&D and B&P costs
increased slightly as a percentage of revenues. The level of B&P activity and
costs has historically fluctuated depending on the availability of bidding
opportunities and resources. G&A expenses decreased as a percentage of
revenues. The Company continues to monitor G&A expenses as part of an ongoing
program to control direct costs.
Interest expense for the nine months ended October 31, 1996 and 1995 primarily
relates to interest on a building mortgage and deferred compensation.
Subsequent to the quarter ended October 31, 1996, on November 20, 1996, the
Company entered into a definitive acquisition agreement to purchase Bell
Communications Research, Inc. ("Bellcore"). The consummation of the acquisition
is subject to certain contingencies, including receipt of regulatory approvals
which are expected to take between nine and fourteen months to obtain.
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations or its ability to conduct business.
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity continue to be funds provided by
operations and revolving credit loan agreements. At October 31, 1996, there
were no borrowings outstanding under such agreements compared to $6 million
outstanding at an interest rate of 6.4% at October 31, 1995. Cash and cash-
equivalents and short and long-term investments totalled $48 million and $26
million at October 31, 1996 and 1995, respectively.
Cash flows generated from operating activities were $87 million for the nine
months ended October 31, 1996 compared to $2 million for the same period of the
prior year. Receivable days outstanding as of October 31, 1996 were 64 days
compared to 67 days for the same period of the prior year. Average receivable
days outstanding for the nine months ended October 31, 1996 were 64 days
compared to 65 days for the same period of the prior year. The Company
continues to actively monitor receivables with emphasis placed on collection
activities and the negotiation of more favorable payment terms.
Cash flows used on investing activities increased to $42 million for the nine
months ended October 31, 1996 compared to $20 million for the same period of the
prior year. The increase was primarily due to acquisitions of businesses and
increased expenditures for property, equipment, land, and buildings.
The Company utilized $20 million for financing activities for the nine months
ended October 31, 1996 compared to $4 million for the same period of the prior
year. The Company's cash flows from operations plus borrowing capacity are
expected to provide sufficient funds for the Company's operations, business
acquisitions, common stock repurchases, capital expenditures, and future long-
term debt requirements. In addition, the Company intends to obtain financing to
complete the acquisition of Bellcore.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations or its ability to conduct business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K.
During the fiscal quarter for which this report is filed, the following
report(s) on Form 8-K were filed by the Registrant:
(i) Form 8-K filed October 2, 1996 - Item 5 "Other Events."
(ii) Form 8-K filed November 22, 1996 - Item 5 "Other Events."
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
Date: December 12, 1996 /s/W. A. Roper
-----------------------------
Senior Vice President and
Chief Financial Officer and
as a duly authorized officer
<PAGE>
Exhibit Index
Science Applications International Corporation
Fiscal Quarter Ended October 31, 1996
Exhibit
No. Description of Exhibits
- ------- ---------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
EXHIBIT TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPUTATION OF PER SHARE EARNINGS
(Unaudited, in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------------- ----------------------------------
October 31, 1996 October 31, 1995 October 31, 1996 October 31, 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
PRIMARY:
Net Income $ 18,190 $ 14,749 $ 46,368 $ 41,566
Reduction of interest expense, net of
income tax expense on assumed retirement
of short-term and long-term debt 190 216 570 647
Interest earned, net of income tax expense
on assumed investment of U.S. government
securities or commercial paper - - - -
--------- --------- --------- ---------
Adjusted net income $ 18,380 $ 14,965 $ 46,938 $ 42,213
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding 49,056 48,457 48,987 47,939
Dilutive stock options, based on the modified
treasury stock method, using average fair value 3,041 2,949 3,239 3,359
--------- --------- --------- ---------
Total average shares outstanding 52,097 51,406 52,226 51,298
--------- --------- --------- ---------
--------- --------- --------- ---------
Per Share Amount $ .35 $ .29 $ .90 $ .82
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED:
Net Income $ 18,190 $ 14,749 $ 46,368 $ 41,566
Reduction of interest expense, net of
income tax expense on assumed retirement
of short-term and long-term debt 146 191 437 573
Interest earned, net of income tax expense
on assumed investment of U.S. government
securities or commercial paper - - - -
--------- --------- --------- ---------
Adjusted net income $ 18,336 $ 14,940 $ 46,805 $ 42,139
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding 49,056 48,457 48,987 47,939
Dilutive stock options, based on the modified
treasury stock method, using quarter-end
or exercise date established price if higher than
average fair value 3,041 2,949 3,239 3,359
--------- --------- --------- ---------
Total average shares outstanding 52,097 51,406 52,226 51,298
--------- --------- --------- ---------
--------- --------- --------- ---------
Per Share Amount $ .35 $ .29 $ .90 $ .82
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED OCTOBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 56,739
<SECURITIES> 0
<RECEIVABLES> 549,441
<ALLOWANCES> 0
<INVENTORY> 38,835
<CURRENT-ASSETS> 677,643
<PP&E> 323,362
<DEPRECIATION> 137,816
<TOTAL-ASSETS> 971,969
<CURRENT-LIABILITIES> 422,389
<BONDS> 42,345
495
0
<COMMON> 0
<OTHER-SE> 506,740
<TOTAL-LIABILITY-AND-EQUITY> 971,969
<SALES> 0
<TOTAL-REVENUES> 1,754,327
<CGS> 0
<TOTAL-COSTS> 1,531,597
<OTHER-EXPENSES> 136,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,705
<INCOME-PRETAX> 82,432
<INCOME-TAX> 36,064
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,368
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
</TABLE>
