<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: July 11, 1997
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-12771 95-3630868
(COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(619) 546-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
================================================================================
<PAGE> 2
FORM 8-K
ITEM 5. OTHER EVENTS.
As previously reported, on November 20, 1996, Registrant entered into a
definitive acquisition agreement to purchase Bell Communications Research, Inc.
("Bellcore"), a global provider of communications software, engineering, and
consulting services. Pursuant to Rule 3-05 of Regulation S-X, filed herewith are
audited financial statements of Bellcore for the three year period ended
December 31, 1996 and unaudited financial statements for the interim period
ended March 31, 1997. Further, pursuant to Rule 11-01 of Regulation S-X, filed
herewith are pro forma financial information reflecting the probable acquisition
of Bellcore.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following consolidated financial Statements of Bellcore are filed
as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants F-1
Consolidated Statements of Operations and Retained Earnings
(Deficit) for the years ended December 31, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-4
Notes to Consolidated Financial Statements, December 31, 1996, F-5
1995 and 1994
Unaudited Consolidated Statements of Operations and Retained
Earnings (Deficit) for the three months ended March 31, 1997 and
1996 F-20
Unaudited Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 F-21
Unaudited Consolidated Statements of Cash Flows for the three F-22
months ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements, March 31, 1997 and F-23
1996
</TABLE>
<PAGE> 3
(b) The following pro forma condensed consolidated financial statements
are filed with this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of F-27
April 30, 1997
Unaudited Pro Forma Condensed Consolidated Statement of Income:
Fiscal year ended January 31, 1997 F-28
Three months ended April 30, 1997 F-29
Notes to Unaudited Pro Forma Condensed Consolidated Financial F-30
Statements
</TABLE>
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Bellcore:
We have audited the accompanying consolidated balance sheets of Bellcore and its
wholly-owned subsidiaries (the "Company") as of December 31, 1996 and 1995, and
the related consolidated statements of operations and retained earnings
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996. We have also audited the financial statement schedule
included on page F-19 of this Form 8-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
February 12, 1997
F-1
<PAGE> 5
BELLCORE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
Dollars in thousands 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Bell Operating Companies $ 774,454 $ 833,795 $ 872,384
Third Party 235,397 184,180 146,696
- --------------------------------------------------------------------------------------------------------------------
Total Revenues 1,009,851 1,017,975 1,019,080
- --------------------------------------------------------------------------------------------------------------------
Cost of Revenues 727,953 774,965 776,604
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 281,898 243,010 242,476
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Research & Investment 41,855 32,054 48,218
Marketing & Sales 138,627 104,015 36,625
General & Administrative 112,200 140,788 159,435
- --------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 292,682 276,857 244,278
- --------------------------------------------------------------------------------------------------------------------
Operating Loss (10,784) (33,847) (1,802)
- --------------------------------------------------------------------------------------------------------------------
Interest 8,389 7,694 9,559
Other Expense/(Income) (1,111) (856) 357
- --------------------------------------------------------------------------------------------------------------------
Loss Before Income Taxes (18,062) (40,685) (11,718)
- --------------------------------------------------------------------------------------------------------------------
Benefit for Income Taxes (5,842) (19,055) (12,630)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (12,220) $ (21,630) $ 912
- --------------------------------------------------------------------------------------------------------------------
Retained earnings (deficit), beginning of period $ (41,673) (20,043) $ 6,063
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) (12,220) (21,630) 912
Amount transferred from Additional Paid In Capital/Common Stock 23,575 22,789 2,102
Dividends paid (23,575) (22,789) (29,120)
- --------------------------------------------------------------------------------------------------------------------
RETAINED DEFICIT, END OF PERIOD $ (53,893) $ (41,673) $ (20,043)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
F-2
<PAGE> 6
BELLCORE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, December 31,
Dollars in thousands 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 53,504 $ 24,882
Accounts Receivable:
Bell Operating Companies 131,625 143,493
Third Party, net of allowance of $2,415 84,284 55,079
Prepaid Expenses and Other 7,962 9,553
Deferred Income Taxes 19,791 19,500
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 297,166 252,507
- ---------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 651,203 683,805
Less Accumulated Depreciation (431,805) (443,250)
- ---------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 219,398 240,555
- ---------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets 25,811 36,815
Noncurrent Deferred Income Taxes 24,351 15,474
Income Taxes Receivable 43,933 49,006
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 610,659 $ 594,357
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-Term Borrowings $ 89,000 $ 109,600
Accounts Payable 21,842 28,518
Accrued Liabilities:
Wages and Salaries 52,155 49,548
Benefits 30,867 30,849
Bell Operating Companies 59,718 31,168
Other Accrued Liabilities 82,489 73,825
Current Portion of Capital Lease Obligations 6,504 7,551
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 342,575 331,059
- ---------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Long-Term Capital Lease Obligations 2,968 8,958
Accrued Pension and Postretirement Benefits 88,790 63,766
Other Noncurrent Liabilities 79,080 57,533
- ---------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 170,838 130,257
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note K)
Stockholders' Equity
Common Stock - Seven Shares Authorized, Issued and Outstanding Without Par Value 151,139 174,714
Retained Deficit (53,893) (41,673)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 97,246 133,041
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 610,659 $ 594,357
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
F-3
<PAGE> 7
BELLCORE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
Dollars in thousands 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (12,220) $ (21,630) $ 912
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities
Depreciation and Amortization 66,950 73,964 81,046
Deferred Income Taxes (9,168) (15,138) (46,087)
Provision for Doubtful Accounts 2,415 - -
Decrease (Increase) in Assets:
Accounts Receivable (19,752) (32,785) 13,108
Prepaid Expenses and Other 1,591 3,872 14,604
Deferred Charges and Other Assets 11,004 29,057 21,244
Income Taxes Receivable 5,073 (29,578) (19,428)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Liabilities 33,163 48,073 25,477
Accrued Pension and Postretirement Benefits 25,024 18,373 22,952
Other Noncurrent Liabilities 21,547 (15,028) 35,403
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 125,627 59,180 149,231
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment (40,263) (65,533) (45,229)
Proceeds from Disposals of Property, Plant and
Equipment 1,416 1,310 458
- -----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (38,847) (64,223) (44,771)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Short-Term Borrowings (20,600) 74,700 (55,900)
Payments of Note to Bell Operating Companies - (17,613) (2,937)
Dividends Paid (23,575) (22,789) (29,120)
Principal Payments on Capital Lease Obligations (13,983) (21,448) (21,489)
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (58,158) 12,850 (109,446)
- -----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 28,622 7,807 (4,986)
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 24,882 17,075 22,061
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53,504 $ 24,882 $ 17,075
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid (Received) During the Period for:
Interest $ 6,328 $ 6,334 $ 3,000
Income Taxes $ (4,143) $ 20,074 $ 37,658
Supplemental Schedule of Noncash Investing and
Financing Activities
Capital Lease Obligations Incurred for Use of Equipment $ 6,946 $ 9,420 $ 14,660
</TABLE>
In 1995, the Company received stock with an estimated fair value of $3,347, as
advanced payment of royalties.
- --------------------------------------------------------------------------------
The accompanying Notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
F-4
<PAGE> 8
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A) ORGANIZATION
Bell Communications Research, Inc. ("Bellcore") was organized in 1983 in
connection with the court-ordered divestiture by AT&T Corporation of its
operating telephone companies that provide local telecommunications and exchange
access services. The consent decree permitted the divested companies to support
and share the costs of an organization for the provision of engineering,
administrative and other services most efficiently provided on a centralized
basis, and required the divested companies to provide through a centralized
organization a point of contact for coordination to satisfy national security
and emergency preparedness requirements.
On December 31, 1983, AT&T Corporation and certain of its affiliated
corporations transferred to Bellcore the assets required to operate the
centralized organization in exchange for seven shares of common stock. One share
of that stock was transferred effective January 1, 1984 to each of the seven
regional companies formed to implement the divestiture of the telephone
companies, each of which during 1984 assigned its share of Bellcore to operating
telephone subsidiaries or other affiliated corporations (the "Owners"). The
Owners subsequently entered into a shareholders' agreement to establish their
rights and obligations, including their financial commitments to Bellcore. In
accordance with the shareholders' agreement, an Owner cannot sell its share
without providing notice two full fiscal years from the date of request. The
current shareholders are Ameritech Services, Inc., Bell Atlantic NSI Holdings,
Inc., BellSouth Telecommunications, Inc., Pacific Bell, Southwestern Bell
Telephone Company, Telesector Resources Group, Inc. and U S WEST Communications,
Inc.
On November 20, 1996, the Owners entered into an agreement to sell their common
shares of Bellcore to Science Applications International Corporation ("SAIC").
The transaction is expected to be finalized in late 1997 after the Owners obtain
the requisite regulatory approvals.
Bellcore operates in one business segment as a leading provider of software
development, engineering and consulting services, and advanced research and
development to support the authorized telecommunications activities of the
Owners and their affiliates. Bellcore, accordingly, derives its revenues
principally from the Owners under service agreements which provide for the
recovery of certain regulatory costs, including a return on investment.
B) ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bellcore and its
wholly-owned subsidiaries (the "Company"). In consolidation, all intercompany
balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-5
<PAGE> 9
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
B) ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company derives its revenues principally from the Owners under service
agreements, which provide for the recovery of its costs plus a return on
investment as defined. The Company also sells to third parties. The Company
recognizes revenue for products and services in the period in which it is
earned, which is generally over the contract period or when the related services
are performed.
As directed by the Company's Board of Directors, the Company reduces the amount
billed to the Owners for products and services by an amount equal to the profit
margin earned on third party sales.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less as cash equivalents for financial reporting
purposes. The Company's cash equivalents are in high-quality securities placed
in a wide array of institutions with high credit ratings. The Company has a
concentration of credit risk as one of the Company's subsidiaries maintains its
cash balances in one financial institution.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Leasehold improvements are
amortized over the shorter of the terms of the related leases or the estimated
useful lives of the assets. Depreciation is computed on the straight-line method
for financial reporting purposes and on prescribed accelerated methods for
income tax purposes. For financial reporting purposes, gains or losses from the
disposition of fixed assets are charged to operations.
Property, plant and equipment acquired under capital leases are capitalized at
the lower of the present value of minimum lease payments or the fair value of
the leased property. Depreciation expense includes the amortization of leased
assets.
COMPENSATED ABSENCES
Prior to January 1, 1990, Bellcore accounted for future compensated absences by
establishing a liability and a corresponding deferred charge. The Company
recovered such costs through billings to its Owners as such amounts were paid.
Effective January 1, 1990, the Company began to amortize the December 31, 1989
deferred charge balance over a ten-year period and is also recognizing expense
as future compensated absences are earned. This method of accounting is
consistent with the regulatory accounting method used by its Owners.
In December 1995, the Company modified its vacation policy to reduce the number
of vacation days earned at the beginning of each year. This modification
resulted in the Company providing for less earned vacation at the beginning of
the year than had been provided under the prior policy. In connection with this
change in policy, the Company wrote-off the remaining unamortized deferred
charge to offset the benefit associated with the change in vacation policy.
F-6
<PAGE> 10
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
B) ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS TO CURRENT OWNERS
Since inception, Bellcore's net income has been based on a statutory return on
the Company's asset base. The Company's policy through 1994 had been to dividend
the entire net income on a quarterly basis to the Owners. Beginning in 1994,
certain expenses of the Company were incurred without a corresponding billing to
the Owners. This resulted in reduced net income for 1994, 1995, and 1996. The
Company's Owners elected to receive dividends as if the nonbilled expenses were
not incurred which resulted in dividends in excess of net income which reduced
additional paid in capital and common stock.
RESEARCH TAX CREDITS
Research tax credits are claimed by the Owners or their affiliates and by other
contracting parties with respect to amounts paid to the Company for services
consisting of research or experimental activities. However, research tax credits
associated with formative projects are claimed by Bellcore and are not passed
through to the Owners or their affiliates.
COSTS INCURRED ON BEHALF OF THE OWNERS
The Company has incurred certain costs on behalf of its Owners related to the
proposed sale of the Company to SAIC. The Owners have agreed to reimburse the
Company for the costs of the transaction whether or not the sale is consummated.
Currently, such costs will be reimbursed upon consummation of the sale. Total
costs to be reimbursed of $4.3 million at December 31, 1996 are included in
prepaid expenses and other current assets.
RECLASSIFICATION
Prior year balances have been reclassified to conform with the 1996
presentation.
C) SHORT-TERM BORROWINGS AND CREDIT AGREEMENTS
Bellcore has available lines of credit totaling $460.0 and $585.0 million, of
which $89.0 and $109.6 million were outstanding at December 31, 1996 and 1995,
respectively. In June of 1996, Bellcore entered into a $250.0 million revolving
credit agreement. The five year agreement contains financial covenants that
require the Company to meet a Debt ratio and Interest coverage, and defines
limits to the amount of certain liens, investments and dividend payments. The
Company was in compliance with these covenants, as amended, as of December 31,
1996. There are no formal compensating balance agreements involved with these
lines of credit or revolving credit agreement.
During the years ended December 31, 1996 and 1995, the maximum aggregate
short-term borrowings outstanding at any month-end were $162.8 and $109.6
million, respectively; the average aggregate short-term borrowings outstanding
were $120.7 and $75.4 million, respectively; and the weighted average interest
rates were 5.3 and 5.9 percent, respectively. The average interest rate on
short-term borrowings outstanding at December 31, 1996 and 1995 was 6.9 and 5.7
percent, respectively. At December 31, 1996, there were no loans outstanding
under the revolving credit agreement. The carrying value of the short-term
borrowings approximate their fair value.
F-7
<PAGE> 11
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
D) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
For the years ended December 31,
Dollars in thousands 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS (1):
Cash $ 2,778 $24,861
Short-term Investments 50,726 21
------- -------
53,504 24,882
======= =======
ACCRUED LIABILITIES:
Wages and Salaries
Bonuses (Success Sharing Plan) $48,461 $45,534
Other 3,694 4,014
------- -------
52,155 49,548
======= =======
Benefits
Accrued Vacation $23,378 $23,748
Flexible Benefits Medical Reserve 5,000 4,700
Other 2,489 2,401
------- -------
30,867 30,849
======= =======
Other Accrued Liabilities
Deferred Revenue/Customer Prepayments $24,374 $ 6,124
Accrued Severance 11,241 20,175
Accrued Facility Closing Costs 7,098 8,740
Fixed Asset Accruals 6,773 6,337
Contractor Expense Accruals 2,279 6,255
Other 30,724 26,194
------- -------
82,489 73,825
======= =======
ACCRUED PENSION AND POSTRETIREMENT BENEFITS:
Other Post-Employment Benefits (OPEB) $64,807 $43,613
Post-Employment Benefits (PEB) 10,408 8,983
Other 13,575 11,170
------- -------
88,790 63,766
======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) One of the Company's subsidiaries, who serves as an agent for the Bell
Operating Companies, has segregated short-term investments of $50.6 million as
of December 31, 1996 and segregated cash of $21.1 million as of December 31,
1995, which is maintained on behalf of the Bell Operating Companies (See Note
H).
F-8
<PAGE> 12
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
E) INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
For the years ended December 31,
Dollars in thousands 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ (7,018) $ (7,013) $ 11,796
Deferred (581) (9,832) (22,170)
-------- -------- --------
(7,599) (16,845) (10,374)
-------- -------- --------
State and Local
Current (4,262) (807) 4,021
Deferred 6,019 (1,403) (6,277)
-------- -------- --------
1,757 (2,210) (2,256)
-------- -------- --------
BENEFIT FOR INCOME TAXES $ (5,842) $(19,055) $(12,630)
======== ======== ========
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities consist of facility
consolidations, depreciation, pension and vacation pay expenses and warranty
accrual. As of December 31, 1996, 1995 and 1994, the total deferred tax asset is
$72.3, $72.0 and $63.4 million and the total deferred tax liability is $28.2,
$37.0 and $43.6 million, respectively. In addition, as of December 31, 1996 and
1995, the Company has income tax receivables of $43.9 and $49.0 million,
respectively.
Income tax expense for the years ended December 31, 1996, 1995 and 1994 differs
from the amount computed by applying the statutory federal income tax rate.
These differences are attributable to the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
For the years ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory income tax rate (35.0) % (35.0) % (35.0) %
State income taxes, net of federal income tax benefit 6.3 (3.5) (12.5)
Investment tax credits (0.4) (0.2) (27.5)
Research and other tax credits, net (5.5) (4.2) (27.1)
Other 2.2 (4.0) (5.7)
----- ----- ------
EFFECTIVE INCOME TAX RATE (32.4) % (46.9) % (107.8) %
===== ===== ======
</TABLE>
F-9
<PAGE> 13
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
E) INCOME TAXES (CONTINUED)
During 1994, the Company received final resolution of the 1984 through 1989 tax
examinations, which resulted in a reserve adjustment relating to investment tax
credits of $3.0 million. During 1996, the Company received final resolution of
the 1990 through 1993 tax examinations. The Company is subject to tax
examinations in various jurisdictions and believes that adequate tax payments
have been made and accruals recorded for all years.
Deferred income taxes are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes. Deferred
tax assets (liabilities) are comprised of the following temporary differences:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
For the years ended December 31,
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Accrued compensation, principally postretirement
benefits, and compensated absences $ 32,075 $ 24,645
Accrued expenses, principally warranty and legal
accruals 9,015 3,187
Amortization, primarily software 8,174 15,188
Restructuring accruals 7,308 7,425
Accrued facility closing costs 5,668 8,731
Deferred revenue 3,438 4,146
Deferred compensation 3,413 6,186
Other 3,256 2,457
-------- --------
TOTAL DEFERRED TAX ASSETS $ 72,347 $ 71,965
-------- --------
Deferred Tax Liabilities
Plant and equipment, principally due to differences in
depreciation $(23,144) $(26,722)
Prepaid expenses, principally due to overfunded
pension plans (3,622) (7,242)
Partnership losses -- (2,091)
Other (1,439) (936)
-------- --------
TOTAL DEFERRED TAX LIABILITIES (28,205) (36,991)
-------- --------
NET DEFERRED TAX ASSET 44,142 34,974
NET CURRENT DEFERRED TAX ASSET 19,791 19,500
-------- --------
NET NONCURRENT DEFERRED TAX ASSET $ 24,351 $ 15,474
======== ========
</TABLE>
F-10
<PAGE> 14
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
December 31,
Dollars in thousands 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Land $ 9,916 $ 9,916
Building and improvements 88,801 89,375
Furniture and fixtures 26,801 30,924
Machinery and equipment 20,137 20,109
Computer equipment 299,834 302,747
Laboratory apparatus 95,179 105,577
Leasehold improvements 110,535 125,157
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT $651,203 $683,805
======== ========
</TABLE>
The assets of the Company are located primarily in New Jersey. The principal
office is in Morristown; research and engineering are conducted at facilities in
Morris, Middletown and Chester Townships; and software systems development is
performed in Piscataway. Bellcore also operates a center for technical education
near Chicago, Illinois and maintains an office in Washington, D.C. for federal
legislative and regulatory support and for national security and emergency
preparedness coordination.
Total depreciation expense amounted to $57.8, $60.6 and $57.7 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
G) LEASES
The Company leases buildings, computer equipment and other office equipment
under operating and capital leases with varying terms, some containing renewal
and/or purchase options, expiring through 2012. Total rent expense for operating
leases amounted to $31.5, $37.6 and $40.8 million for the years ended December
31, 1996, 1995 and 1994, respectively.
F-11
<PAGE> 15
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
G) LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating and capital leases,
having remaining terms in excess of one year as of December 31, 1996, for each
of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Operating Capital
Dollars in thousands Leases Leases
- --------------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 27,330 $ 7,040
1998 19,957 2,440
1999 18,353 648
2000 18,083 0
2001 17,978 0
Thereafter 27,457 0
-------- --------
TOTAL MINIMUM PAYMENTS DUE $129,158 $ 10,128
========
Less: Amount representing interest 656
--------
PRESENT VALUE OF MINIMUM LEASE PAYMENTS $ 9,472
========
</TABLE>
Assets recorded under capital leases, consisting principally of computer
equipment of $57.7 and $59.0 million and laboratory apparatus of $7.1 and $7.1
million for the years ended December 31, 1996 and 1995, respectively, are
included in property, plant and equipment. Accumulated amortization of assets
under capital leases is $54.3 and $52.0 million for the years ended December 31,
1996 and 1995, respectively.
H) RELATED PARTY TRANSACTIONS
In May 1993, the Company executed a note to the Owners bearing interest at 6.0%
in connection with the toll-free service operations. Interest and principal were
payable in equal annual installments in February of each year. During 1995, this
note was paid in full.
The Company provides toll-free services operations through one of its
subsidiaries as the agent of the Bell Operating Companies. The Company has
recorded cash collections in excess of costs incurred to provide toll-free
services operations as a liability to the Bell Operating Companies. At December
31, 1996 and 1995, the liability amounted to $59.7 and $31.2 million,
respectively.
The Bell Operating Companies and their affiliates represent a significant
portion of the Company's revenue base, and are anticipated to remain major
customers in the future.
F-12
<PAGE> 16
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
I) EMPLOYEE BENEFITS
PENSION PLANS
The Company sponsors two noncontributory, defined benefit pension plans, one for
management and one for support staff employees. The pension benefit formula used
in the determination of pension expense under the management pension plan is
based on a stated percentage of final average pay. Under the support staff plan,
the pension benefit formula used in the determination of pension expense is
based on a flat dollar amount per years of service, according to job
classification. All of the assets of the plans, which are primarily comprised of
listed stocks and U.S. Government and domestic corporate bonds, are held in a
master trust administered by the Company.
The Company's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Pension expense as a percentage
of base salaries was 1.6, 1.5 and 1.6 percent for the years ended December 31,
1996, 1995, and 1994, respectively.
Pension expense for the two plans is comprised of the following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
For the years ended December 31,
Dollars in thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 30,088 $ 27,282 $ 28,231
Interest cost on projected benefit obligation 66,801 64,921 62,249
Return on plan assets (143,328) (243,347) (155)
Net amortization and deferral 53,358 157,225 (83,612)
Other items 300 350 150
--------- --------- ---------
PENSION EXPENSE $ 7,219 $ 6,431 $ 6,863
========= ========= =========
</TABLE>
F-13
<PAGE> 17
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
I) EMPLOYEE BENEFITS (CONTINUED)
PENSION PLANS
The following table sets forth the plans' funded status and amounts recorded in
the Company's balance sheets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31,
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $731,688 and $645,229 $ 814,125 $ 736,689
=========== ===========
Projected benefit obligation (1,049,053) (955,165)
Plan assets at fair value 1,260,894 1,159,711
----------- -----------
PLAN ASSETS IN EXCESS OF PROJECTED
BENEFIT OBLIGATION $ 211,841 $ 204,546
----------- -----------
Unrecognized net assets at January 1, 1987 being amortized over remaining
periods of 9.8 and 11.7 years
for management and support staff, respectively (31,417) (34,934)
Unrecognized prior service cost 32,108 35,206
Unrecognized net gain (190,159) (175,526)
----------- -----------
PREPAID PENSION EXPENSE INCLUDED IN BALANCE SHEET $ 22,373 $ 29,292
=========== ===========
</TABLE>
For 1996 and 1995, the assumed weighted average annual rate of increase in
future compensation levels and the discount rate used in determining the
actuarial present value of projected benefit obligations were 5.0 and 7.0
percent, respectively. In 1994, these rates were 5.5 and 7.5 percent,
respectively. In addition, the expected long-term rate of return on assets was
8.5 percent for 1996, 1995, and 1994.
The Company sponsors two contributory savings plans for eligible employees.
These plans provide a 70 percent match of all employee contributions up to 6
percent of the employee's salary. The Company also contributes 0.5% of salary to
each eligible employee in a separate Company sponsored savings plan. The Company
contributed $16.2, $16.0 and $16.8 million to these plans for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-14
<PAGE> 18
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
I) EMPLOYEE BENEFITS (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company offers certain postretirement medical and life insurance benefits to
substantially all of its retired employees. In 1993, Bellcore began providing
all eligible retirees non-taxable healthcare benefit credits. Retirees currently
have a choice of three medical options for themselves and all eligible
dependents. In 1994, cost sharing was implemented and the benefit credits
provided to retirees were modified by inflation and age/service requirements.
The number of active and retired Company employees covered under these benefits
at December 31, 1996 is approximately 5,280 and 1,241, respectively.
Currently, all of the plan assets are held in two Voluntary Employee Benefit
Association (VEBA) trusts. In 1996 and 1995, Bellcore did not make any
contributions to the VEBA trusts. In 1994, Bellcore contributed $10.3 million to
the VEBA trusts to provide for retiree benefits. The Company's funding policy is
to contribute annually an amount determined by management, based on federal
income tax limitations.
Postretirement benefits expense for the plan is comprised of the following
components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31,
Dollars in thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Future service cost $ 6,933 $ 6,497 $ 6,831
Interest cost 13,027 12,823 13,990
Return on plan assets (4,156) (4,653) (667)
Net amortization and deferral 5,937 6,926 4,515
-------- -------- --------
POSTRETIREMENT BENEFITS EXPENSE $ 21,741 $ 21,593 $ 24,669
======== ======== ========
</TABLE>
F-15
<PAGE> 19
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
I) EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the plans' funded status and amounts recognized
in the Company's balance sheets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
December 31,
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
Retirees $ (92,132) $ (82,849)
Other fully eligible participants (4,501) (23,726)
Other active participants (106,321) (88,299)
--------- ---------
(202,954) (194,874)
Plan assets at fair value 56,084 58,551
--------- ---------
Plan assets less than accumulated benefit obligation (146,870) (136,323)
--------- ---------
Unrecognized transition liability 110,122 117,004
Unrecognized net gains (28,059) (24,294)
--------- ---------
ACCRUED POSTRETIREMENT BENEFITS $ (64,807) $ (43,613)
========= =========
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
For 1996 and 1995, the assumed weighted average annual rate of increase in
future compensation levels and the discount rate used in determining the
actuarial present value of projected benefit obligations were 5.0 and 7.0
percent, respectively. In 1994, these rates were 5.5 and 7.5 percent,
respectively. The expected long-term weighted average rate of return on assets
was 7.5 percent for 1996, and 7.0 percent for 1995 and 1994. The assumed health
care trend rates used to measure the expected cost of benefits covered by the
plan starts at 9.0 percent, decreasing 0.5 percent each year, to 5.0 percent
after a eight-year period. The actuary has estimated that a one-percentage point
increase in the assumed health care trend rate would have increased the 1996
postretirement benefits expense and the postretirement benefits obligation by
$3.4 and $28.3 million, respectively.
F-16
<PAGE> 20
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
I) EMPLOYEE BENEFITS (CONTINUED)
OTHER EMPLOYEE BENEFITS
The Company provides unfunded, non-qualified benefits to certain members of
management. These plans provide benefits that replace benefits not available in
the qualified plans due to design or legal limitations. The expense associated
with these plans was $3.0, $1.4, and $3.7 million in 1996, 1995 and 1994,
respectively. The Company had an accumulated liability of $13.6 and $11.2
million for these non-qualified benefit plans at December 31, 1996 and 1995,
respectively. In addition, the Company provides long-term incentive awards and
Stock Appreciation Rights (SARs) to certain members of senior management. These
plans are based on annual grants with cash distributions taking place three to
ten years after the initial grants. In 1995, the Company modified both the
long-term incentive plan and the SARs to account for a change in control of the
Company. The modifications call for the payment of all earned awards under the
long-term incentive plan and the immediate vesting and payment of all SARs as of
the closing date of sale of the Company. The expense associated with these plans
was $3.9, $9.3 and $1.0 million in 1996, 1995 and 1994, respectively. As of
December 31, 1996 and 1995, the Company's liability under the long-term
incentive and SARs plans was $9.7, and $12.3 million, respectively.
In 1995, the Company's Board of Directors adopted executive severance agreements
in the event of the termination of covered key employees following a change of
control of the Company. In addition, the Company has entered into agreements
with certain key employees which provide for the payment of additional
compensation as an incentive for them to remain with the Company. The aggregate
commitment under these agreements is approximately $16.3 million.
J) SIGNIFICANT TRANSACTIONS
The Company continues to evaluate its operations with the objective of
streamlining various general and administrative functions and reducing business
unit staffing levels to match project demand. These actions resulted in charges
to the income statement of $10.5, $18.5 and $2.0 million for the years 1996,
1995 and 1994, respectively, which consists primarily of severance payments,
related benefits, payroll taxes and outplacement services. At December 31, 1996,
$11.2 million of these future benefits were included in other accrued
liabilities.
In 1994, the Company made a decision to exit leased office space and consolidate
the activities performed at that location into other office space leased by the
Company. The decision to exit this facility resulted in a charge to the income
statement of $45.3 million, which consisted primarily of lease costs, property
taxes, maintenance on idle space and asset retirements relating to leasehold
improvements. At December 31, 1996, $7.1 and $12.2 million of the 1994 facility
closing costs were included in other accrued liabilities and other non-current
liabilities, respectively.
All of the above transactions are recorded in general and administrative
expenses in the respective years.
F-17
<PAGE> 21
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
K) PENDING LITIGATION
Bellcore is involved in various legal proceedings which are related to the
conduct of its business. The Company has established a reserve which it believes
is adequate and believes that the ultimate resolution of such pending litigation
will not have a material adverse effect on the Company's results of operations
or its financial position.
F-18
<PAGE> 22
BELLCORE AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE II/VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE ADDITIONS
AT -------------------------------------- BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO END
DOLLARS IN THOUSANDS OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bad Debt Reserve
1994 $ - $ - $ - $ - $ -
1995 - - - - -
1996 - 2,415 - - 2,415
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 23
BELLCORE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
For the three months ended March 31,
(Unaudited, Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Bell Operating Companies $ 164,740 $ 182,673
Third Party 70,807 56,472
- --------------------------------------------------------------------------------------------------
Total Revenues 235,547 239,145
- --------------------------------------------------------------------------------------------------
Cost of Revenues 169,961 179,618
- --------------------------------------------------------------------------------------------------
Gross Profit 65,586 59,527
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Research & Investment 9,462 8,562
Marketing & Sales 33,696 28,263
General & Administrative 18,321 32,852
- --------------------------------------------------------------------------------------------------
Total Operating Expenses 61,479 69,677
- --------------------------------------------------------------------------------------------------
Operating Income (Loss) 4,107 (10,150)
- --------------------------------------------------------------------------------------------------
Interest 2,168 1,865
Other Expense/(Income) (867) (1,581)
- --------------------------------------------------------------------------------------------------
Income/(Loss) Before Income Taxes 2,806 (10,434)
- --------------------------------------------------------------------------------------------------
Provision/(Benefit) for Income Taxes 1,153 (3,463)
- --------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,653 $( 6,971)
==================================================================================================
RETAINED EARNINGS
Retained earnings (deficit), beginning of period (53,893) (41,673)
Net income (loss) 1,653 (6,971)
Amount transferred from Additional Paid In Capital/Common Stock 5,506 5,653
Dividends paid (5,506) (5,653)
- --------------------------------------------------------------------------------------------------
RETAINED DEFICIT, END OF PERIOD $( 52,240) $( 48,644)
==================================================================================================
</TABLE>
The accompanying Notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
F-20
<PAGE> 24
BELLCORE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
DOLLARS IN THOUSANDS 1997 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 60,168 $ 53,504
Accounts Receivable:
Bell Operating Companies 154,146 131,625
Third Party, net of allowance 81,864 84,284
Prepaid Expenses and Other 13,713 7,962
Deferred Income Taxes 18,465 19,791
- --------------------------------------------------------------------------------------------
Total Current Assets 328,356 297,166
- --------------------------------------------------------------------------------------------
Property, Plant and Equipment 649,419 651,203
Less Accumulated Depreciation (444,072) (431,805)
- --------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 205,347 219,398
- --------------------------------------------------------------------------------------------
Deferred Charges and Other Assets 22,884 25,811
Noncurrent Deferred Income Taxes 22,636 24,351
Income Taxes Receivable 42,790 43,933
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $ 622,013 $ 610,659
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-Term Borrowings $ 118,900 $ 89,000
Accounts Payable 8,874 21,842
Accrued Liabilities:
Wages and Salaries 14,101 52,155
Benefits 33,220 30,867
Bell Operating Companies 72,941 59,718
Other Accrued Liabilities 98,872 82,489
Current Portion of Capital Lease Obligations 5,133 6,504
- --------------------------------------------------------------------------------------------
Total Current Liabilities 352,041 342,575
- --------------------------------------------------------------------------------------------
Long-Term Liabilities
Long-Term Capital Lease Obligations 2,073 2,968
Accrued Pension and Postretirement Benefits 94,329 88,790
Other Noncurrent Liabilities 80,177 79,080
- --------------------------------------------------------------------------------------------
Total Long-Term Liabilities 176,579 170,838
- --------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note F)
Stockholders' Equity
Common Stock - Seven Shares Authorized Without Par Value 145,633 151,139
Retained Deficit (52,240) (53,893)
- --------------------------------------------------------------------------------------------
Total Stockholders' Equity 93,393 97,246
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 622,013 $ 610,659
===========================================================================================
</TABLE>
The accompanying Notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
F-21
<PAGE> 25
BELLCORE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED, DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 1,653 $ (6,971)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities
Depreciation 16,840 17,314
Deferred Income Taxes 3,041 14,571
Provision for Doubtful Accounts 622 -
Decrease (Increase) in Assets:
Accounts Receivable (20,723) 28,766
Prepaid Expenses and Other (5,751) (12,063)
Deferred Charges and Other Assets 2,927 2,366
Income Taxes Receivable 1,143 -
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Liabilities (19,063) (65,586)
Accrued Pension and Postretirement Benefits 5,539 5,146
Other Noncurrent Liabilities 1,097 (6,322)
- -------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities (12,675) (22,779)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment (2,807) (6,026)
Proceeds from Disposals of Property, Plant and
Equipment 52 180
- -------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,755) (5,846)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Short-Term Borrowings 29,900 47,600
Dividends Paid (5,506) (5,653)
Principal Payments on Capital Lease Obligations (2,300) (3,933)
- -------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 22,094 38,014
- -------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 6,664 9,389
- -------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 53,504 24,882
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,168 $ 34,271
===========================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid (Received) During the Period for:
Interest $ 1,384 $ 1,449
Income Taxes $ (1,207) $ 310
Supplemental Schedule of Noncash Investing and
Financing Activities
Capital Lease Obligations Incurred for Use of Equipment $ 35 $ 2,046
===========================================================================================
</TABLE>
The accompanying Notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
F-22
<PAGE> 26
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In the opinion of management, the unaudited financial information for the three
month periods ended March 31, 1997 and 1996 reflect all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation
thereof.
B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
It is the Company's policy not to enter into derivative financial instruments
for speculative purposes. The Company has entered into foreign currency forward
contracts to protect against foreign currency exchange risks associated with
certain firm and identifiable foreign currency commitments entered into in the
ordinary course of business. At March 31, 1997, the Company had $17,980,000 of
foreign currency forward exchange contracts in Australian dollars, with net
unrealized losses of $76,000. These contracts were executed for terms of one and
one-quarter years or less.
C) SEGREGATED CASH
The Company provides toll-free services operations through one of its
subsidiaries as the agent of the Bell Operating Companies. The Company has
recorded cash collections in excess of costs incurred to provide toll-free
services operations as a liability to the Bell Operating Companies. At March 31,
1997 the liability amounted to $72.9 million. As a result, $59.0 million of the
reported cash and cash equivalents of $60.2 million is segregated for general
corporate purposes and is maintained on behalf of the Bell Operating Companies.
D) SHORT-TERM BORROWINGS AND CREDIT AGREEMENTS
The Company has a $250.0 million, unsecured revolving credit loan agreement with
five banks which allow borrowings on a revolving basis until June 2001. The
agreements enable borrowings at various interest rates based on certificate of
deposit, eurodollar, or interbank offshore borrowing rates. Annual facility fees
are .09% of the total commitment during the revolving credit term. At March 31,
1997, there were no loans outstanding under the revolving credit agreement.
E) INCOME TAXES
Income taxes for interim periods are computed using the estimated annual
effective rate method.
F-23
<PAGE> 27
BELLCORE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F) COMMITMENTS AND CONTINGENCIES
Bellcore is involved in various legal proceedings which are related to the
conduct of its business. The Company has established a reserve which it believes
is adequate and believes that the ultimate resolution of such pending litigation
will not have a material adverse effect on the Company's results of operations
or its financial position.
F-24
<PAGE> 28
ITEM 7 (b) Pro Forma Financial Information
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On November 20, 1996, Science Applications International Corporation
("SAIC" or "the Company") entered into a definitive acquisition agreement to
acquire all of the outstanding common stock of Bell Communications Research,
Inc. ("Bellcore"), a global provider of software development, engineering and
consulting services, advanced research and development, technical training and
other services to the telecommunications industry. Bellcore is currently owned
by the Regional Bell Operating Companies and is primarily located in New Jersey.
As of December 31, 1996, Bellcore had approximately 5,500 employees and annual
revenues of approximately $1 billion. The acquisition is subject to certain
conditions and contingencies, including regulatory approvals, and is expected to
be consummated in the Company's third quarter ending October 31, 1997. As of the
date of this filing, the Company has not consummated the acquisition and is
awaiting certain regulatory approvals. Upon consummation of the acquisition,
Bellcore will become a wholly-owned subsidiary of SAIC.
Currently, Bellcore's fiscal year end is December 31. For purposes of
the pro forma condensed consolidated financial statements, Bellcore's fiscal
year ended December 31, 1996 and interim period ended March 31, 1997 have been
included in the Company's January 31, 1997 and April 30, 1997 condensed
consolidated financial statements, respectively.
The following unaudited pro forma condensed consolidated financial
statements give effect to the probable acquisition of Bellcore by the Company in
a transaction using the purchase method of accounting and the assumptions and
adjustments in the accompanying notes. The pro forma adjustments are based on
preliminary estimates of fair value. Actual adjustments will be based on final
appraisals and other analyses of fair values.
The unaudited pro forma condensed consolidated balance sheet is based
on the individual balance sheets of Bellcore, appearing elsewhere in this form
8-K, and the Company, and have been prepared to reflect the acquisition by the
Company of Bellcore as of April 30, 1997. The unaudited pro forma condensed
consolidated statement of income combines the consolidated statement of income
of SAIC and Bellcore for the year ended January 31, 1997 and the interim period
ended April 30, 1997 as if the acquisition occurred on February 1, 1996.
The unaudited pro forma condensed consolidated financial statements are
based on assumptions the Company believes are reasonable, factually supportable
and directly attributable to the acquisition. However, the actual impact of the
Bellcore acquisition could differ materially from the unaudited pro forma
condensed consolidated balance sheet and statements of income included herein.
The purchase price allocation is preliminary and management anticipates that the
final allocation could differ materially from that included in the unaudited pro
forma condensed consolidated financial statements included herein. The final
purchase price could differ in the allocation to property and equipment, land
and buildings, and intangible assets and their corresponding amortization
periods. The amortization periods could differ ranging from one to eight years
for property and equipment, twenty to forty years for buildings, and three to
ten years for intangible assets. In addition, the final purchase price could
differ in the allocation to the pension plan asset and other postretirement
benefit (OPEB) liability and these differences could impact the final goodwill
amount.
The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, of the Company in its Annual Report on
Form 10-K/A for the year ended January 31, 1997 and of Bellcore contained in
this filing on Form 8-K, and the unaudited consolidated financial statements,
including notes thereto, of the Company in its Quarterly Report on Form 10-Q for
the quarterly period ended April 30, 1997 and of Bellcore contained in this
filing on Form 8-K. These unaudited pro forma condensed
F-25
<PAGE> 29
consolidated financial statements are shown for illustrative purposes only and
are not necessarily indicative of the results of operations or financial
position of the consolidated company that might have occurred had the Bellcore
acquisition been completed at the beginning of the periods specified, nor are
they necessarily indicative of future operating results or financial position.
F-26
<PAGE> 30
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, 1997
------------------------------------------------------------------
SAIC BELLCORE PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
(NOTE 1)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 147,810 $ 60,168 $ 365,120 (b) $ 90,478
(1,400)(b)
(481,220)(c)
Restricted cash..................................... 25,283 25,283
Receivables......................................... 507,021 236,010 743,031
Inventories......................................... 15,571 15,571
Prepaid expenses and other current assets........... 11,457 13,713 (4,700)(a) 20,470
Deferred income taxes............................... 42,890 18,465 61,355
------------- ------------ --------------- ---------------
Total current assets........................... 750,032 328,356 (122,200) 956,188
Property and equipment.............................. 88,507 153,758 25,000 (c) 267,265
Land and buildings.................................. 112,546 51,589 24,000 (c) 188,135
Intangible assets................................... 57,060 330,259 (d) 387,319
Other assets........................................ 56,559 88,310 195,000 (e) 365,269
24,000 (f)
1,400 (b)
------------- ------------ --------------- ---------------
$ 1,064,704 $ 622,013 $ 477,459 $ 2,164,176
============= ============ =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............ $ 279,152 $ 180,687 $ $ 459,839
Accrued payroll and employee benefits............... 129,599 47,321 176,920
Income taxes payable................................ 24,611 24,611
Notes payable and current portion of long-term
liabilities....................................... 20,184 124,033 165,120 (b) 309,337
------------- ------------ --------------- ---------------
Total current liabilities...................... 453,546 352,041 165,120 970,707
------------- ------------ --------------- ---------------
Long-term liabilities and minority interest......... 51,874 176,579 146,732 (g) 634,185
59,000 (f)
200,000 (b)
------------- ------------ --------------- ---------------
405,732
---------------
Common stock........................................ 508 145,633 (145,633)(c) 508
Additional paid-in capital.......................... 346,496 346,496
Retained earnings (deficit)......................... 223,178 (52,240) 52,240 (c) 223,178
Other stockholders' equity.......................... (10,898) (10,898)
------------- ------------ --------------- ----------------
Total stockholders' equity..................... 559,284 93,393 (93,393) 559,284
------------- ------------ ---------------- ---------------
$ 1,064,704 $ 622,013 $ 477,459 $ 2,164,176
============= ============ =============== ===============
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-27
<PAGE> 31
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997
--------------------------------------------------------------------
SAIC BELLCORE PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues.............................................. $ 2,402,224 $ 1,009,851 $ (5,817)(h) $ 3,406,258
Cost and expenses:
Cost of revenues.................................. 2,092,254 727,953 2,820,207
Selling, general and administrative expenses...... 191,836 292,682 22,962 (i) 501,322
(5,518)(j)
(640)(l)
Other expense/(income)............................ (1,111) (1,111)
Interest expense.................................. 4,925 8,389 26,084 (k) 39,538
140 (m)
------------- ---------------- ---------------- ---------------
2,289,015 1,027,913 43,028 3,359,956
Income (loss) before income taxes..................... 113,209 (18,062) (48,845) 46,302
Provision for (benefit from) income taxes............. 49,529 (5,842) (10,742)(n) 32,945
------------- ---------------- ---------------- ---------------
Net income (loss)..................................... $ 63,680 $ (12,220) $ (38,103) $ 13,357
============= ================ ================ ===============
Earnings per share.................................... $ 1.23 N/A $ .26
============= ================ ===============
Average number of shares outstanding, including
common stock equivalents 52,309 52,309
============= ===============
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-28
<PAGE> 32
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 1997
-----------------------------------------------------------------
SAIC BELLCORE PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues.............................................. $ 624,527 $ 235,547 $ (1,454)(h) $ 858,620
Cost and expenses:
Cost of revenues.................................. 545,786 169,961 715,747
Selling, general and administrative expenses...... 45,423 61,479 5,741 (i) 111,238
.................................................. (1,245)(j)
.................................................. (160)(l)
Other expense and minority interest............... 1,088 (867) 221
Interest expense 1,545 2,168 6,521 (k) 10,269
35 (m)
------------- ------------- ---------------- ---------------
593,842 232,741 10,892 837,475
Income (loss) before income taxes..................... 30,685 2,806 (12,346) 21,145
Provision for (benefit from) income taxes............. 13,809 1,153 (2,740)(n) 12,222
------------- ------------- ---------------- ---------------
Net income (loss)..................................... $ 16,876 $ 1,653 $ (9,606) $ 8,923
============= ============= ================ ===============
Earnings per share.................................... $ .32 $ N/A $ .17
============= ============= ===============
Average number of shares outstanding, including
common stock equivalents 53,784 53,784
============= ===============
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-29
<PAGE> 33
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 - The unaudited pro forma condensed consolidated balance sheets and
statements of income have been prepared to reflect the probable acquisition of
Bellcore by the Company for an estimated aggregate price of $481,220. Pro forma
adjustments are made to reflect:
(a) Assets that will not be acquired by the Company.
(b) Issuance of debt to finance the acquisition of Bellcore and deferral of
debt issuance costs. The debt consists of $200,000 in 7.6% long-term notes
payable maturing in May 2007 and $165,120 of borrowings on revolving line
of credit agreements, which expire in May 2002, with an interest rate of
6.3%.
(c) Purchase price allocation to record assets and liabilities at estimated
fair value:
<TABLE>
<S> <C>
Cash payment to Bellcore owners $ 471,120
Deferred acquisition costs 10,100
---------
Total purchase price 481,220
---------
Elimination of book value of net assets acquired:
Common stock (145,633)
Accumulated deficit 52,240
Assets not acquired 4,700
---------
Net equity (88,693)
---------
Excess of purchase price over net book value $ 392,527
=========
Allocation of excess purchase price over net book value:
Amount assigned to property and equipment $ 25,000
Amount assigned to land and buildings 24,000
Amount assigned to excess pension plan assets at fair
value over the projected benefit obligation 195,000
Deferred tax assets - non current 24,000
Deferred tax liabilities - non current (146,732)
Amount assigned to OPEB liabilities in excess of the fair
value of plan assets (59,000)
Amount assigned to identifiable intangible assets 118,300
Amount assigned to goodwill 211,959
---------
$ 392,527
=========
</TABLE>
The purchase price allocation is based upon estimates from a valuation process
that is still in its preliminary stages. Because the consummation of the
acquisition is awaiting regulatory approvals, which are expected to be obtained
during the Company's third quarter ending October 31, 1997, the final allocation
of the purchase price upon closing could materially differ from these estimates.
F-30
<PAGE> 34
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS)
(d) Identifiable intangible assets based upon estimates from a valuation
process that is still in its preliminary stages and goodwill. Because the
consummation of the acquisition is awaiting regulatory approvals, which
are expected to be obtained during the third quarter ending October 31,
1997, the final allocation of the purchase price upon closing could
materially differ from these estimates.
(e) Excess of the Bellcore pension plan assets at fair value over the
projected benefit obligation. The Company is in the process of reviewing
the actuarial assumptions and data relative to the Bellcore pension plan.
The final allocation of the purchase price could materially differ from
estimates based upon the review and final actuarial valuation and could
impact the final goodwill amount.
(f) Estimate of Bellcore's postretirement benefit obligation in excess of the
fair value of plan assets, including the related deferred tax asset. The
Company is reviewing the actuarial data relative to the Bellcore
postretirement benefit plans and based on the review, the final allocation
of the purchase price could differ and impact the final goodwill amount.
(g) Deferred tax liabilities, in accordance with SFAS 109, related to the
purchase price allocation (c) to property and equipment, land and
buildings, pension plan (e) and purchased intangibles (d), other than
goodwill.
(h) Elimination of interest income earned, calculated using an average rate of
5.0%, on cash balances which reflects the use of cash for the acquisition.
(i) Amortization of purchased intangibles on a straight-line basis over 3 to
10 years, and goodwill, on a straight-line basis over 15 years. The
Company is in the early stages of compiling data and reviewing the
preliminary assumptions related to the valuation of the excess of the
purchase price over the estimated fair value of net intangible and
tangible assets acquired. The final valuation and allocation of the
purchase price upon the consummation of the acquisition could materially
differ from the preliminary estimates.
(j) Elimination of amortization of unrecognized net transition
obligation/assets, unrecognized prior service cost and unrecognized net
gains included in the net periodic pension and postretirement benefits
expense.
(k) Interest expense on $200,000 of long-term notes and $165,120 of short-term
debt incurred in connection with the acquisition of Bellcore at an average
effective interest rate of 6.9%.
(l) Depreciation of property and equipment based on the estimated purchase
price allocation per the preliminary valuation.
(m) Amortization of deferred debt issuance costs on a straight-line basis over
the term of the $200,000 long-term notes. Difference between amortization
on a straight-line basis and using the net effective interest method of
amortization is deemed immaterial.
(n) Income tax effects of pretax pro forma adjustments using the statutory
rate in effect during the periods for which the pro forma condensed
consolidated statements of income are presented.
F-31
<PAGE> 35
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 hereunto duly authorized.
(Registrant) SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
Date: July 11, 1997 By: /s/ W.A. ROPER
---------------------------
W. A. Roper
Senior Vice President
and Chief Financial Officer
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
<S> <C> <C>
23(a) Consent of Coopers &
Lybrand [LLP]
</TABLE>
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
-------------
We consent to the inclusion in this Form 8-K of Science Applications
International Corporation of our report dated February 12, 1997, on our audits
of the consolidated financial statements and financial statement schedule of
Bellcore and Subsidiaries as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996, which report is included in
the consolidated financial statements of Bellcore for the year ended December
31, 1996.
/s/ COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
July 10, 1997
