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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3630868
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
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)
COPY TO:
DOUGLAS E. SCOTT, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 546-6000
(name, address, including zip code, and telephone number,
including area code, of agent for service)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC:
FROM TIME TO TIME AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
[ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED* REGISTERED PER UNIT** OFFERING PRICE REGISTRATION FEE***
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Class A Common Stock, par value $.01 per
share....................................... 13,202,928 shs. $47.22 $623,442,260.10 $183,915.47
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</TABLE>
* This Registration Statement also relates to an indeterminate number of
interests in the Science Applications International Corporation Cash or
Deferred Arrangement, and the TransCore Retirement Savings Plan, pursuant to
which certain of the shares of Class A Common Stock offered pursuant to the
Prospectus included as part of this Registration Statement may be issued and
delivered or sold.
** Estimated solely for the purpose of calculating the registration fee.
*** Pursuant to Rule 429 under the Securities Act of 1933, as amended, (Rule
"429") this Registration Statement contains a combined prospectus that
relates to 13,202,928 shares of the Registrant's Class A Common Stock being
registered hereunder, and to 21,797,072 of the 44,653,040 shares of the
Registrant's Class A Common Stock registered on Registration Statement No.
333-26025 on Form S-3, as amended, previously filed by the Registrant on
April 28, 1997; Registration Statement No. 333-3215 on Form S-3, as amended,
previously filed by the Registrant on May 7, 1996; Registration Statement
No. 33-58669 on Form S-3, as amended, previously filed by the Registrant on
April 18, 1995; Registration Statement No. 33-61022 on Form S-2, as amended,
previously filed by the Registrant on April 14, 1993; Registration Statement
No. 33-47244 on Form S-2, as amended, previously filed by the Registrant on
April 15, 1992; and Registration Statement No. 33-40079 on Form S-2, as
amended, previously filed by the Registrant on April 19, 1991 (together, the
"Earlier Registration Statements"). Pursuant to Rule 429, the registration
fee covers only the 13,202,928 shares of Class A Common Stock being
registered for the first time. Fees totaling $124,604.73 covering the
previously registered shares were paid by the Registrant upon filing the
Earlier Registration Statements.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS LOGO
35,000,000 SHARES OF CLASS A COMMON STOCK
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Of the 35,000,000 shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), of Science Applications International Corporation
(the "Company") offered hereby, 34,796,115 shares may be offered and sold by the
Company and 203,885 shares may be offered and sold by certain directors of the
Company (the "Selling Stockholders"). See "Plan of Distribution" and "Selling
Stockholders." The Company will not receive any portion of the net proceeds from
the sale of shares by the Selling Stockholders.
The 34,796,115 shares of Class A Common Stock offered by the Company are
anticipated to be offered as follows: (i) 1,927,142 shares may be offered and
sold by the Company or its stockholders to present and future employees,
consultants and directors in the limited market maintained by Bull, Inc. (the
"Limited Market") or may be offered and sold directly by the Company to present
and future employees, consultants and directors; (ii) 1,500,000 shares may be
issued and delivered to a trustee for the benefit of employees under the
Company's Employee Stock Retirement Plan; (iii) 1,750,000 shares may be issued
and delivered to a trustee for the benefit of employees under the Company's Cash
or Deferred Arrangement; (iv) 1,000,000 shares may be awarded to employees and
directors under the Company's 1984 Bonus Compensation Plan; (v) 600,000 shares
may be issued and delivered to a trustee for the benefit of employees under the
Company's Stock Compensation Plan and Management Stock Compensation Plan; (vi)
100,000 shares may be issued and delivered to a trustee for the benefit of
employees under the Company's Key Executive Stock Deferral Plan; (vii) 418,973
shares may be offered and sold to a trustee or agent for the benefit of
employees under the Company's 1995 Employee Stock Purchase Plan; (viii)
17,400,000 shares may be issued upon the exercise of options granted and
available to be granted under the Company's 1992 Stock Option Plan and 1995
Stock Option Plan; (ix) 100,000 shares may be issued and delivered to a trustee
for the benefit of employees of Syntonic Technology, Inc., doing business as
TransCore, a wholly-owned subsidiary of the Company ("TransCore"), under its
TransCore Retirement Savings Plan; (x) 1,500,000 shares may be offered and sold
to a trustee or agent for the benefit of employees under the Company's 1998
Employee Stock Purchase Plan, if such plan is approved at the Company's 1998
Annual Meeting of Stockholders; and (xi) 8,500,000 shares may be issued upon the
exercise of options available to be granted under the Company's 1998 Stock
Option Plan, if such plan is approved at the Company's 1998 Annual Meeting of
Stockholders. The foregoing allocation of the total shares offered by the
Company represents the Company's current anticipated use of such shares and is
provided for illustrative purposes only. The actual number of shares offered and
sold by the Company under each category may exceed or be less than the indicated
number. All of the shares of Class A Common Stock offered hereby will be subject
to certain restrictions (including restrictions on their transferability) set
forth in the Company's Restated Certificate of Incorporation (the "Certificate
of Incorporation") and may be subject to certain other contingencies. See "Plan
of Distribution," "Selling Stockholders" and "Employee Benefit Plans." The
Selling Stockholders and all other stockholders (other than the Company and the
Retirement Plans, as defined on page 8) will pay a commission to Bull, Inc., a
wholly-owned subsidiary of the Company, equal to two percent of the proceeds
from the sale of shares of Class A Common Stock sold by them in the Limited
Market. Bull, Inc. is a registered broker-dealer whose business is limited to
processing trades in the Limited Market by matching buy orders with sell orders,
Bull, Inc. does not purchase or sell shares of Class A Common Stock for its own
account. See 1998 10-K (as defined below), Item 5, "Market for Registrant's
Common Equity and Related Stockholder Matters -- The Limited Market" and "Risk
Factors -- Absence of a Public Market."
SEE "RISK FACTORS" ON PAGES 3 TO 7 FOR A DESCRIPTION OF CERTAIN RISKS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The purchase price of the shares of Class A Common Stock offered hereby,
other than those shares issuable upon exercise of options or awarded under the
Company's 1984 Bonus Compensation Plan, the Stock Compensation Plan or the
Management Stock Compensation Plan, will be the price determined by the Board of
Directors pursuant to a valuation process, which includes the formula set forth
below (the "Formula Price"). The Board of Directors sets the market factor in
the formula at the value which causes the formula to yield the price which the
Board of Directors believes represents a fair market value. The Formula Price is
reviewed four times each year, generally in conjunction with Board of Directors
meetings which are currently scheduled for January, April, July and October. The
price applicable to shares of Class B Common Stock, par value $.05 per share, of
the Company (the "Class B Common Stock") will be equal to five times the Formula
Price. The following formula (the "Formula") is used in determining the Formula
Price: the price per share is equal to the sum of (i) a fraction, the numerator
of which is the stockholders' equity of the Company at the end of the fiscal
quarter immediately preceding the date on which a price determination is to
occur ("E") and the denominator of which is the number of outstanding common
shares and common share equivalents at the end of that fiscal quarter ("W(1)"),
and (ii) a fraction, the numerator of which is 5.66 multiplied by the market
factor ("M" or "Market Factor"), multiplied by the earnings of the Company for
the four fiscal quarters immediately preceding the price determination ("P"),
and the denominator of which is the weighted average number of outstanding
common shares and common share equivalents for those four fiscal quarters, as
used by the Company in computing diluted earnings per share ("W"). The number of
outstanding common shares and common share equivalents described above assumes
the conversion of each share of Class B Common Stock into five shares of Class A
Common Stock. The 5.66 multiplier is a constant which was first included in the
Formula in March 1976. The Market Factor is a numerical factor which yields a
fair market value for the Class A Common Stock and Class B Common Stock by
reflecting existing securities market conditions relevant to the valuation of
such stock. The Market Factor is generally reviewed quarterly by the Board of
Directors in conjunction with an appraisal which is prepared by an independent
appraisal firm for the committees administering the Company's and certain of its
subsidiaries' qualified retirement plans (collectively referred to as the
"Committee"). Valuation input from the appraiser is one of the factors
considered by the Board of Directors in establishing the Formula Price. The
Board of Directors believes that the valuation process results in a fair market
value for the Class A Common Stock within a broad range of financial criteria.
See "Determination of Offering Price." Since April 10, 1998, the Market Factor
has been 3.9. Prior thereto and since January 9, 1998, the Market Factor was
3.6. The Formula Price of the Class A Common Stock, expressed as an equation, is
as follows:
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<S> <C> <C> <C>
E 5.66MP
Formula Price = -- + ------
W(1) W
</TABLE>
On May 4, 1998, the Formula Price was $47.22, and the price for the Class B
Common Stock was $236.10.
This Prospectus contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company or its officers with respect to, among other things, trends affecting
the Company's financial condition or results of operations and the impact of
competition.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
that actual results may differ materially from those in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Prospectus, including, without limitation, the information
under "Risk Factors" and "Use of Proceeds" identifies important factors that
could cause such differences.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC" or "Commission") a Registration Statement under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. For further information,
reference is made to such Registration Statement and exhibits. Statements
contained in this Prospectus as to any contract, plan or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract, plan or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statement and the exhibits thereto may be inspected without
charge at the offices of the Commission listed below, and copies of all or any
part thereof may be obtained from the Commission upon payment of prescribed
fees.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
requirements of the Exchange Act, the Company files with the Commission reports,
proxy statements and other information which can be inspected and copied at the
offices of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549; Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511; and World Trade Center, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Commission's Public
Reference Section, Washington, D.C. 20549. The Commission maintains a web site
at http://www.sec.gov that contains reports, proxy and information regarding
issuers that file electronically with the Commission.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference: (1) the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1998 (the "1998
10-K"); (2) the Company's Current Report on Form 8-K dated July 11, 1997; (3)
the Company's Current Report on Form 8-K dated September 19, 1997; (4) the
Company's Current Report on Form 8-K dated February 5, 1998; (5) the Company's
Current Report on Form 8-K dated April 15, 1998; and (6) the description of the
Company's Class A Common Stock which is registered under Section 12 of the
Exchange Act in the Registration Statement on Form 8-A filed with the SEC on
August 10, 1984, as amended. In addition, all documents subsequently filed by
the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the termination of this offering shall be deemed to be incorporated
herein by reference. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein will be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is, or
is deemed to be, incorporated by reference herein modifies or supersedes any
such statement. Any such statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide, without charge, to any person to whom a
copy of this Prospectus is delivered, upon the written or oral request of such
person, a copy of any document incorporated by reference into this Prospectus,
without exhibits (unless such exhibits are incorporated by reference into such
documents). Requests for such copies should be directed to: Science Applications
International Corporation, 10260 Campus Point Drive, San Diego, California
92121, Attention: Corporate Secretary (telephone (619) 535-7323).
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RISK FACTORS
Prior to purchasing the Class A Common Stock offered in the Prospectus,
purchasers should carefully consider all of the information contained in the
Prospectus and in particular should carefully consider the following factors:
CONCENTRATION OF REVENUE
Revenues generated from the sale of the Company's Technical Services and
Products (as such terms are defined on page 8) to the U.S. Government as a prime
contractor or subcontractor accounted for 66%, 79% and 83% of revenues in fiscal
years 1998, 1997 and 1996, respectively. U.S. Government spending has declined
in recent years, and the current Congress and presidential administration have
indicated that they intend to further reduce U.S. Government spending. In
addition, revenues from the U.S. Government continues to shift toward lower cost
service type contracts. The loss of a substantial amount of government business
could have a material adverse effect on the Company's results of operations and
financial condition. In addition, the Company's wholly-owned subsidiary, Bell
Communications Research, Inc. ("Bellcore"), has historically derived
substantially all of its revenues from the Regional Bell Operating Companies
(the "RBOCs"). Although the Company has made progress in its efforts to
diversify its business, it remains heavily dependent upon business with the U.S.
Government and with the RBOCs, and there can be no assurances that the Company
will be successful in expanding its customer base or that any new customers will
place orders for the Company's Technical Services or Products in amounts
comparable to those of the U.S. Government or the RBOCs. See "The Company."
POTENTIAL IMPACT OF ACQUISITION OF BELLCORE
On November 14, 1997, pursuant to a definitive agreement, the Company
completed its acquisition of Bellcore, a global provider of software,
engineering and consulting services, advanced research and development,
technical training and other services to the telecommunications industry. As of
January 31, 1998, Bellcore had approximately 5,400 employees and annual revenues
of approximately $1 billion. The acquisition resulted in a substantial growth in
both the employee base and commercial revenues of the Company. The Company
financed a portion of the purchase price of Bellcore with debt financing. Such
growth and additional debt may place a significant strain on the Company's
management, operational and financial resources. There can be no assurance that
the Company will be able to effectively manage the expansion of its operations
or that the Company's systems, procedures or controls will be adequate to
support the integration of the acquired business. Any inability to effectively
integrate the acquired business or manage the growth could have a material
adverse effect on the Company's results of operations and financial condition.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
A significant portion of the growth in the Company's revenues in recent
years has been achieved through acquisitions of businesses that complement the
Company's Technical Services and Products. Although the Company intends to make
additional acquisitions in the future, the number and size of the acquisitions
that the Company can complete may be limited due to the Company's acquisition of
Bellcore. In addition, while the Company has been successful in identifying and
consummating acquisitions in the past, there can be no assurance that it will be
able to continue to make such acquisitions in the future at prices that it
considers reasonable or, if the acquisitions are consummated, that the Company
will be able to integrate the acquired businesses without adversely affecting
the Company's results of operations and financial condition.
YEAR 2000 COMPLIANCE
The Company has commenced, and in some cases finalized, the evaluation of
computer systems to ensure its operations will not be adversely impacted by Year
2000 software problems. The evaluation determined that certain portions of the
Company's software and systems require modification or replacement. If the
necessary modifications to existing software and conversions to new software are
not made, or are not completed timely, the Year 2000 issue could have a material
adverse impact on the Company's consolidated financial position,
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results of operations, cash flows or its ability to conduct business. In
addition, the Company has initiated communications with its critical service
providers, suppliers and vendors to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. There can be no assurance that such failure would not have a material
adverse effect on the Company's consolidated financial position, results of
operations, cash flows or its ability to conduct business. Furthermore, the
Company has implemented an ongoing program to assess its exposure with respect
to its products and services. To date, no matters have come to the attention of
the Company's management that would have a material adverse effect on the
Company's consolidated financial position, results of operations, cash flows or
its ability to conduct business; however, there can be no assurance that the
Company will not be subject to material liability claims in the future.
The Company's assessment of the Year 2000 issue, including the costs of the
project and the timing of completion are based on management's best estimates
and input from third party customers, service providers, suppliers and vendors.
These estimates were derived using numerous assumptions about future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ materially from
those anticipated. See 1998 10-K, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ABSENCE OF A PUBLIC MARKET
There is no public market for the Class A Common Stock. The Limited Market
permits existing stockholders to offer for sale shares of Class A Common Stock
on predetermined days (each a "Trade Date"). Generally, there are four Trade
Dates each year. The Company and the trustees and agents of the Company's and
certain of its subsidiaries' employee benefit plans are currently authorized,
but not obligated, to purchase shares of Class A Common Stock in the Limited
Market on any Trade Date, but only if and to the extent that they, in their
discretion, determine to make such purchases. To the extent that purchases by
such trustees, agents or the Company are not sufficient, the ability of
stockholders to resell their shares in the Limited Market will likely be
adversely affected. In each trade occurring during the last two fiscal years,
all shares of Class A Common Stock offered for sale in the Limited Market were
matched with buy orders and sold in the Limited Market. No assurance, however,
can be given that a stockholder desiring to sell all or a portion of his or her
shares of Class A Common Stock in any future trade will be able to do so. See
1998 10-K, Item 5, "Market for Registrant's Common Equity and Related
Stockholder Matters -- The Limited Market."
CLASS A COMMON STOCK PRICE DETERMINED BY BOARD OF DIRECTORS
The offering price and the price at which the Class A Common Stock trades
in the Limited Market are not, and subsequent prices will not be, determined by
the operation of a market of bargaining buyers and sellers. Instead, the price
is a value established by the Board of Directors pursuant to the Formula and
valuation process described on the cover page of the Prospectus which the Board
of Directors believes represents a fair market value. The Board of Directors
generally has broad discretion to modify the Formula. The Formula was last
modified in April 1998. The Formula does not specifically include variables
reflecting all relevant financial and valuation criteria. The mechanical
application of the Formula, assuming a constant Market Factor, tends to smooth
the impact on the stock price of quarterly fluctuations in the Company's
operating results because the Formula takes into account the net income of the
Company for the four preceding quarters. See "Determination of Offering Price."
POSSIBLE VOLATILITY OF STOCK PRICE
The Formula Price of the Class A Common Stock could be subject to greater
fluctuations in the future than it has experienced in the past. The increased
volatility is expected to result from a number of factors, including (i) plans
to continue to increase the proportion of the Company's business involving
private sector customers, international customers and information technology and
the greater stock price volatility associated with companies in such business
areas, (ii) the financial leverage impact of current and any future debt levels
of the Company as debt financing is used to finance acquisitions and for other
purposes, (iii) the impact of
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other equity transactions that the Company may pursue, including public
offerings of securities of the Company's subsidiaries or affiliates and (iv) the
volatility of the stock price of the Class A Common Stock of Network Solutions,
Inc. ("NSI"), a publicly-traded security of a majority-owned subsidiary of the
Company, and its impact on the Formula Price. As of March 13, 1998, the Company
owned 100% of the outstanding Class B Common Stock of NSI, representing
approximately 76% of the combined outstanding common stock of NSI. The NSI Class
B Common Stock is convertible into NSI Class A Common Stock, subject to certain
limitations.
NO ASSURANCES REGARDING FUTURE RETURNS
There can be no assurance that the Class A Common Stock will in the future
provide returns comparable to historical returns or that the Formula Price will
not decline. See "Determination of Offering Price."
COMPETITION
The businesses in which the Company is engaged are highly competitive. The
Company's competitors include larger organizations with substantially greater
financial resources and larger technical staffs, smaller, more highly
specialized entities, the U.S. Government's own in-house capabilities and
federal non-profit contract research centers. The Company's continued success is
dependent upon its ability to provide superior service and performance on a
cost-effective basis. See 1998 10-K, Item 1, "Business -- Competition."
EARLY TERMINATION OF GOVERNMENT CONTRACTS
Many of the U.S. Government programs in which the Company participates as a
contractor or subcontractor may extend for several years; however, such programs
are normally funded on an annual basis. All U.S. Government contracts and
subcontracts may be modified, curtailed or terminated at the convenience of the
government. Modification, termination or curtailment of major programs or
contracts of the Company could have a material adverse effect on the Company's
results of operations and financial condition. Although such contract and
program modifications, terminations or curtailments have not had a material
adverse effect on the Company in the past, no assurance can be given that they
will not have such an effect in the future.
POTENTIAL GOVERNMENT INQUIRIES AND INVESTIGATIONS
The Company is from time to time subject to certain U.S. Government
inquiries and investigations of its business practices. No assurance can be
given that any such inquiry or investigation would not have a material adverse
effect on the Company's results of operations and financial condition.
CONTRACT REVENUES SUBJECT TO AUDITS BY GOVERNMENT AGENCIES
Contract costs for services or products supplied to the U.S. Government,
including allocated indirect costs, are subject to audit and adjustments by
negotiations between the Company and U.S. Government representatives.
Substantially all of the Company's indirect contract costs have been agreed upon
through the fiscal year ended January 31, 1997. Contract revenues for subsequent
years have been recorded in amounts which are expected to be realized upon final
settlement. However, no assurance can be given that audits and adjustments for
subsequent years will not result in decreased revenues or profits for those
years.
FIXED PRICE CONTRACT EXPOSURE
During the fiscal years ended January 31, 1998, 1997 and 1996, 32%, 20% and
16%, respectively, of Technical Services revenues were from firm fixed-price
type contracts, while the majority of Products revenues in these three years
were derived from such contracts. Because the Company assumes the risk of
performing a firm fixed-price contract at the stipulated price, the failure to
accurately estimate ultimate costs or to control costs during performance of the
work could result, and in some instances has resulted, in reduced profits or
losses for particular firm fixed-price contracts.
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AT RISK CONTRACT COSTS
Any costs incurred by the Company prior to the execution of a contract or
contract amendment are incurred at the Company's risk, and it is possible that
such costs will not be reimbursed by the customer. Unbilled receivables in this
category which were included in Technical Services revenues and Products
revenues, exclusive of related fees, at January 31, 1998 were $14,583,000 and
$664,000, respectively. The Company expects to recover substantially all such
costs; however, no assurance can be given that the contracts or contract
amendments will be received or that the related costs will be recovered.
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND CURRENCY EXCHANGES
The Company conducts a portion of its business outside of the U.S. in
transactions denominated in foreign currencies. As a result, the Company is
exposed to fluctuations in exchange rates which could result in losses and, in
turn, could adversely impact the Company's results of operations. Under the
Company's current foreign currency management policy, the Company may use
forward foreign currency exchange rate contracts to hedge against movements in
exchange rates for contracts executed in foreign currencies. However, the
Company generally does not hedge its exchange rate risks for its foreign
subsidiaries, which generally conduct business in currencies other than the U.S.
Dollar. Significant fluctuations in exchange rates in such countries could have
a material adverse effect on the Company's results of operations. This risk may
be significant for entities such as INTESA (a Venezuelan joint venture in which
the Company has a 60% ownership interest) that operate in highly inflationary
economies. To date, losses resulting from exchange rate fluctuations have not
had a material adverse impact on the Company's results of operations; however,
there can be no assurance that the Company's future results of operations will
not be materially impacted by exchange rate fluctuations.
NO CASH DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and no cash dividends on the Class A Common Stock or Class B Common Stock
are contemplated in the foreseeable future. The Company's present intention is
to retain any future earnings for use in its business.
RESTRICTIONS ON CLASS A COMMON STOCK
Certain of the shares of Class A Common Stock presently outstanding are,
and all shares of Class A Common Stock offered hereby will be, subject to
certain restrictions (including a right of first refusal and a right of
repurchase upon termination of employment or affiliation (except that qualified
retiring employees may elect to have the Company defer its repurchase rights for
five years) and other restrictions on their transferability) set forth in the
Company's Certificate of Incorporation.
DEPENDENCE UPON KEY PERSONNEL
The Company's success will depend upon the continued contributions of its
founder, J.R. Beyster, its officers and key personnel, the loss of which could
materially adversely affect the Company's operations. The Company has not
generally entered into long-term employment contracts with its officers and key
employees. In addition, the Company does not maintain "key man" life insurance
for its officers or key employees.
ATTRACTION AND RETENTION OF SKILLED EMPLOYEES
The highly technical and complex services and products provided by the
Company are dependent upon the availability of professional, administrative and
technical personnel having high levels of training and skills. Because of the
Company's growth and competitive business environment, it has become more
difficult to meet all of the Company's needs for such employees in a timely
manner. Competition for such personnel is intense and competitors often employ
aggressive tactics to recruit key employees. The Company intends to continue to
devote significant resources to recruit and retain qualified employees; however,
no assurance can be given that the Company will be able to attract and retain
such employees on acceptable terms. Any failure to do so could have a material
adverse effect on the Company's operations.
6
<PAGE> 8
ANTI-TAKEOVER EFFECTS
Consistent with and in furtherance of the Company's employee ownership
philosophy, certain provisions of the Company's Certificate of Incorporation and
Bylaws may discourage, delay or prevent attempts to acquire control of the
Company that are not approved by the Company's Board of Directors. The
provisions may, individually or collectively, have the effect of discouraging
takeover attempts that some stockholders might deem to be in their best
interests, including tender offers in which stockholders might receive a premium
for their shares over the Formula Price, as well as making it more difficult for
individual stockholders or a group of stockholders to elect directors.
7
<PAGE> 9
THE COMPANY
The Company provides diversified professional and technical services
("Technical Services") and designs, develops and manufactures high-technology
products ("Products"). The Company's Technical Services and Products have been
primarily sold to departments and agencies of the U.S. Government, including the
Department of Defense, Department of Energy, Department of Transportation,
Department of Veterans Affairs, Environmental Protection Agency and National
Aeronautics and Space Administration. The balance of the Company's revenues were
attributable to the sales of Technical Services and Products to foreign, state
and local governments, commercial customers and others. With the completion of
the acquisition of Bellcore, the Company's revenues attributable to the sales of
Technical Services and Products to commercial customers are expected to increase
substantially as a percentage of revenues. See "Risk Factors -- Concentration of
Revenue."
The percentage of revenues attributable to Technical Services has increased
since fiscal year 1996 while Products revenues have correspondingly decreased.
The Company provides Technical Services primarily in the areas of "National
Security," "Health," "Environment," "Energy," "Telecommunications," "Commercial
Information Technology" and "Other Technical Services," the last of which
includes the Company's transportation and space business areas. The percentage
of Technical Services revenues attributable to National Security-related work
has gradually declined since fiscal year 1996.
A significant portion of the growth in the Company's revenues in recent
years has been achieved through acquisitions of businesses that complement the
Company's Technical Services. Acquisitions of businesses in fiscal years 1998
and 1997 were primarily financed with cash and in fiscal year 1996 were made
primarily with issuance of Class A Common Stock. On November 14, 1997, pursuant
to a definitive agreement, the Company completed its acquisition of Bellcore, a
global provider of software, engineering and consulting services, advanced
research and development, technical training and other services to the
telecommunications industry. As of January 31, 1998, Bellcore had approximately
5,400 employees and annual revenues of approximately $1 billion. The acquisition
resulted in a substantial growth in both the employee base and commercial
revenues of the Company. The Company financed a portion of the purchase price of
Bellcore with debt financing. See "Risk Factors -- Potential Impact of
Acquisition of Bellcore" and "-- Dependence on Acquisitions for Growth."
The Company's principal executive offices are located at 10260 Campus Point
Drive, San Diego, California 92121 and its telephone number is (619) 546-6000.
As used in this Prospectus, all references to the Company include, unless the
context indicates otherwise, Science Applications International Corporation and
its predecessor and subsidiary corporations. The Company's Cash or Deferred
Arrangement, Employee Stock Retirement Plan and certain other retirement plans
of the Company and its subsidiaries are referred to herein collectively as the
"Retirement Plans."
PLAN OF DISTRIBUTION
CLASS A COMMON STOCK OFFERED BY OR ATTRIBUTED TO THE COMPANY
The shares of Class A Common Stock offered by the Company may be offered
directly or contingently to present, future and potential employees, consultants
and directors of the Company and its Affiliates (as defined below) or pursuant
to the employee benefit plans of the Company or its subsidiaries as described
below. The Company believes that its success is principally dependent upon the
abilities of its employees, consultants and directors. Therefore, since its
inception, the Company has pursued a policy of offering such persons an
opportunity to make an equity investment in the Company as an inducement to such
persons to become or remain employed by or affiliated with the Company or its
subsidiaries.
Direct and Contingent Sales to Employees, Consultants and Directors
At the discretion of the Board of Directors or the Operating Committee of
the Board of Directors (the "Operating Committee"), employees, directors and
consultants of the Company and any entity in which the Company has an equity
interest (an "Affiliate") may be offered an opportunity to subscribe to purchase
a
8
<PAGE> 10
specified number of the shares of Class A Common Stock offered hereby. Direct
and contingent sales to employees, directors and consultants of the Company and
its Affiliates (i) are effected through the Limited Market and are attributed to
the Company by the SEC, regardless of whether such shares are actually sold by
individual stockholders or the Company or (ii) are made directly by the Company
from time to time. All persons purchasing shares of Class A Common Stock in the
Limited Market from any source or directly from the Company will receive a copy
of this Prospectus from the Company at or prior to the sale. Pursuant to the
Certificate of Incorporation, all shares of Class A Common Stock offered by the
Company, directly or contingently, to its employees, consultants or directors
are subject to a right of first refusal and a right of repurchase upon
termination of employment or affiliation (except that qualified retiring
employees may elect to have the Company defer its repurchase rights for five
years). With respect to shares of Class A Common Stock offered by the Company to
employees, directors and consultants of Affiliates, restrictions comparable to
those contained in the Certificate of Incorporation are implemented by
individual contracts with such individuals.
Offerings Pursuant to Employee Benefit Plans
The shares of Class A Common Stock offered by the Company may be offered
pursuant to the following employee benefit plans maintained by the Company,
including its subsidiaries: (i) the Cash or Deferred Arrangement (the "CODA");
(ii) the Employee Stock Retirement Plan (the "Employee Stock Retirement Plan");
(iii) the 1984 Bonus Compensation Plan (the "Bonus Compensation Plan"); (iv) the
Stock Compensation Plan (the "Stock Compensation Plan"); (v) the Management
Stock Compensation Plan (the "Management Stock Compensation Plan"); (vi) the Key
Executive Stock Deferral Plan (the "Stock Deferral Plan"); (vii) the 1995
Employee Stock Purchase Plan (the "Stock Purchase Plan"); (viii) the 1998
Employee Stock Purchase Plan to be submitted for approval by stockholders at the
Company's 1998 Annual Meeting (the "1998 Employee Stock Purchase Plan"); (ix)
the 1992 Stock Option Plan; (x) the 1995 Stock Option Plan; (xi) the 1998 Stock
Option Plan to be submitted for approval by stockholders at the Company's 1998
Annual Meeting (the "1998 Stock Option Plan"); and (xii) the Retirement Savings
Plan (the "TransCore Retirement Savings Plan") maintained by the Company's
wholly-owned subsidiary, Syntonic Technology, Inc., doing business as TransCore
("TransCore"). See "Employee Benefit Plans."
CLASS A COMMON STOCK OFFERED BY THE SELLING STOCKHOLDERS
The Selling Stockholders may sell up to an aggregate of 203,885 shares of
Class A Common Stock being offered hereby in the Limited Market or otherwise.
The Selling Stockholders will not be treated more favorably than other
stockholders participating in the Limited Market and, like all stockholders
selling shares in the Limited Market (other than the Company and the Retirement
Plans), will pay the Company's wholly-owned, broker-dealer subsidiary, Bull,
Inc., a commission equal to two percent of the proceeds from their sales. See
1998 10-K, Item 5, "Market for Registrant's Common Equity and Related Matters --
The Limited Market." Pursuant to the Certificate of Incorporation, all of the
shares of Class A Common Stock purchased in the Limited Market from the Selling
Stockholders will be subject to the Company's right of first refusal and the
Company's right of repurchase upon termination of employment or affiliation
(except that qualified retiring employees may elect to have the Company defer
its repurchase rights for five years).
9
<PAGE> 11
SELLING STOCKHOLDERS
The following table sets forth information as of April 13, 1998 with
respect to the number of shares of Class A Common Stock owned by each Selling
Stockholder (including shares issuable upon the exercise of outstanding stock
options which are exercisable within 60 days of such date and shares allocated
to such person's accounts as of such date under the Company's employee benefit
plans). Each of the Selling Stockholders is or has been a director and/or
officer of the Company within the past three years. Except as indicated below,
all the shares are owned of record and beneficially.
<TABLE>
<CAPTION>
SHARES OWNED PRIOR
TO OFFERING NUMBER
-------------------------- SHARES
NAME POSITION NUMBER PERCENTAGE(1) BEING OFFERED
---- -------- ------- ------------- -------------
<S> <C> <C> <C> <C>
J.R. Beyster....................... Chairman of the Board 791,085(2)(3) 1.48% 50,000
and Chief Executive
Officer
Other Selling Stockholders Group 883,337(2) 1.65% 153,885
(4)..............................
</TABLE>
- ---------------
(1) Based upon the total number of outstanding shares of Class A Common Stock at
April 13, 1998. Assuming that each outstanding share of Class B Common
Stock is converted into five shares of Class A Common Stock, Dr. J.R.
Beyster and the Other Selling Stockholders Group own 1.44% and 1.61%,
respectively, of the Company's Common Stock prior to the offering based
upon the total number of outstanding shares of Class A and Class B Common
Stock at April 13, 1998.
(2) Includes shares that are owned of record by family members and/or trusts.
(3) Includes 1,958 shares held by The Beyster Family Foundation.
(4) Other Selling Stockholders Group is a group comprised of nine individuals
that each hold less than 1% of the Company's Class A Common Stock prior to
the offering.
The 203,885 shares of Class A Common Stock registered for sale by the
Selling Stockholders listed above represent only the maximum number of shares
that may be sold by such persons pursuant to this Prospectus. Of the 203,885
shares of Class A Common Stock offered by certain of the directors and directors
emeritus of the Company pursuant to the Company's Prospectus dated July 3, 1997,
as of April 27, 1998, only 44,583 shares were actually sold by such persons.
Because the Selling Stockholders may sell all or some of the Class A Common
Stock that may be offered by such persons pursuant to this Prospectus, no
estimate can be given as to the aggregate amount of shares of Class A Common
Stock that will actually be offered hereby or that will be owned by the Selling
Stockholders upon completion of the offering to which this Prospectus relates.
Accordingly, the aggregate amount of Class A Common Stock offered hereby by the
Selling Stockholders may decrease.
DETERMINATION OF OFFERING PRICE
The Formula Price of the Class A Common Stock is established by the Board
of Directors pursuant to a valuation process which includes the Formula set
forth on the cover page of this Prospectus. The Board of Directors sets the
Market Factor in the Formula at the value which causes the Formula to yield the
price which the Board of Directors believes represents a fair market value. The
Formula Price is the price at which the Class A Common Stock trades in the
Limited Market and is reviewed by the Board of Directors at least four times
each year, generally in conjunction with Board of Directors meetings which are
currently scheduled for January, April, July and October and are held
approximately two weeks prior to each Trade Date. Pursuant to the Company's
Certificate of Incorporation, the price applicable to shares of Class B Common
Stock is equal to five times the Formula Price. See "Risk Factors -- Class A
Common Stock Price Determined by Board of Directors."
The following formula is used in determining the Formula Price: the price
per share is equal to the sum of (i) a fraction, the numerator of which is the
stockholders' equity of the Company at the end of the fiscal quarter immediately
preceding the date on which a price determination is to occur ("E") and the
denominator
10
<PAGE> 12
of which is the number of outstanding common shares and common share equivalents
at the end of such fiscal quarter ("W1") and (ii) a fraction, the numerator of
which is 5.66 multiplied by the market factor ("M" or "Market Factor"),
multiplied by the earnings of the Company for the four fiscal quarters
immediately preceding the price determination ("P"), and the denominator of
which is the weighted average number of outstanding common shares and common
share equivalents for those four fiscal quarters, as used by the Company in
computing diluted earnings per share ("W"). The number of outstanding common
shares and common share equivalents described above assumes the conversion of
each share of Class B Common Stock into five shares of Class A Common Stock. The
5.66 multiplier is a constant which was first included in the Formula in March
1976 to cause the price generated by the Formula to equal the fair market value
of the Class A Common Stock as determined by the Board of Directors following an
amendment of the Formula. The 5.66 multiplier has not been assessed for change
since that time. The Market Factor is a numerical factor which is reviewed and
set by the Board of Directors as part of the valuation process. Historical
values for each variable contained in the Formula are set forth in the 1998
10-K.
The Formula Price of the Class A Common Stock, expressed as an equation, is
as follows:
<TABLE>
<S> <C> <C> <C>
E 5.66MP
Formula Price = --- + ------
W(1) W
</TABLE>
A valuation formula containing consideration of stockholder equity and
earnings per share was first used by the Board of Directors in establishing the
stock price of the Class A Common Stock in 1972. The Formula was amended in
1973, by inclusion of the Market Factor, to reflect the broad range of business,
financial and market forces that also affect the fair market value of the Class
A Common Stock. The Formula was modified by the Board of Directors on April 14,
1995 to delete a limitation that the Formula Price not be less than 90% of the
net book value per share of the Class A Common Stock at the end of the quarter
immediately preceding the date on which a price revision is to occur (the "Book
Value Floor"). This modification was intended to ensure that the Formula Price
would be a fair market value as required by law. The Formula Price has always
exceeded the Book Value Floor, and the Book Value Floor has never been used to
establish the Formula Price. The Formula was also modified by the Board of
Directors on April 10, 1998 so that the Weighted Average Shares Outstanding or
"W" was derived by reference to the Company's "diluted earnings per share"
rather than by reference to the Company's "primary earnings per share." This
modification was made to conform to changes in the accounting standards related
to the calculation of earnings per share. See "Risk Factors -- Class A Common
Stock Price Determined by Board of Directors."
The Board of Directors has broad discretion to modify the Formula.
Nevertheless, other than the quarterly review and possible modification of the
Market Factor, the Board of Directors will not change the Formula unless (i) in
the good faith exercise of its fiduciary duties and after consultation with the
Company's independent accountants as to whether the change would result in a
charge to earnings upon the sale of Class A Common Stock, the Board of
Directors, including a majority of the directors who are not employees of the
Company, determines that the Formula no longer results in a fair market value
for the Class A Common Stock or (ii) a change in the Formula or the method of
valuing the Class A Common Stock is required under applicable law.
In determining the price of the Class A Common Stock, the Board of
Directors considers the performance of the general securities markets and
relevant industry groups, the historical financial performance of the Company
versus comparable public companies, the prospects for the Company's future
performance, general economic conditions, input from an independent appraisal
firm and other relevant factors. The Board of Directors sets the Market Factor
at the value which causes the Formula to yield a price equal to the Board of
Directors' assessment of a fair market value for the Class A Common Stock. In
conjunction with the Board of Directors' valuation process, an appraisal of the
Class A Common Stock is prepared by an independent appraisal firm for the
Committee. Valuation input from the appraiser is one of the factors considered
by the Board of Directors in establishing the Formula Price. The Formula Price
and Market Factor, as determined by the Board of Directors, remains in effect
until subsequently changed by the Board of Directors. The Board of Directors
believes that the valuation process results in a value which represents a fair
market value for the Class A Common Stock within a broad range of financial
criteria.
11
<PAGE> 13
The value assigned by the Board of Directors to the Market Factor has been
subject to larger and more frequent changes. Nonetheless, the Board of Directors
continues to use the Formula in determining the Formula Price. The price of the
Class A Common Stock and the Market Factor could be subject to greater
fluctuations in the future than in the past due to a number of factors,
including (i) plans to continue to increase the proportion of the Company's
business involving private sector customers, international customers and
information technology and the greater stock price volatility associated with
companies in such business areas, (ii) the financial leverage impact of current
and any future debt levels of the Company as debt financing is used to finance
acquisitions and for other purposes, (iii) the impact of other equity
transactions that the Company may pursue, including public offerings of
securities of the Company's subsidiaries or affiliates and (iv) the volatility
of the stock price of the Class A Common Stock of NSI, a publicly-traded
security of a majority-owned subsidiary of the Company, and its impact on the
Formula Price. See "Risk Factors -- Possible Volatility of Stock Price."
USE OF PROCEEDS
The shares of Class A Common Stock which may be offered by the Company are
principally being offered to permit the continued acquisition of shares by the
Company's employee benefit plans as described herein and to permit the Company
to offer shares of Class A Common Stock to present and potential employees,
consultants and directors. The net proceeds to be received by the Company from
the sale of shares of Class A Common Stock offered by the Company, after
deducting expenses payable by the Company, which are estimated to be $286,000,
will be added to the general funds of the Company for working capital and
general corporate purposes. Currently, the Company has no specific plans for the
use of such proceeds. Approximately 2,131,027 of the shares registered hereby
are offered by stockholders, including the Selling Stockholders, for sale in the
Limited Market and such sales may be attributed to the Company for federal
securities law purposes. The Company will not receive any portion of the net
proceeds from the sale of such shares, including any sale of shares sold by the
Selling Stockholders.
EMPLOYEE BENEFIT PLANS
The Company maintains several employee benefit plans pursuant to which
certain of the shares of Class A Common Stock being offered hereby may be sold.
The primary purpose of these plans is to motivate the Company's employees,
consultants and directors to contribute to the growth and development of the
Company by encouraging them to achieve and surpass annual goals of the Company
and of the operations for which they are responsible. The following is a summary
description of each of these plans. All capitalized terms, unless otherwise
defined herein, have the meanings ascribed to them in the employee benefit plan
to which they relate.
CODA
The CODA became effective on January 1, 1983 and was approved by the
stockholders of the Company at the 1983 Annual Meeting of Stockholders.
Eligibility and Participation
Generally, all employees (as defined in the CODA) are eligible to
participate in the CODA upon commencing employment, except for employees in
groups or units designated as ineligible.
Contributions and Allocations
The CODA permits a participant to elect to defer a portion of such
participant's compensation for the Plan Year and to have such deferred amount
contributed directly by the Company to the participant's CODA account. Under the
terms of the CODA, deferred amounts are treated as contributions made by the
Company. The maximum amount of compensation that a participant may elect to
defer is determined by the Committee, but in no event may the deferral exceed
$7,000 per year (adjusted for cost-of-living under rules prescribed by
12
<PAGE> 14
the Secretary of the Treasury). For 1998, the limitation is $10,000. In addition
to amounts deferred by participants, the Company may, but is not obligated to,
make a matching contribution to the CODA accounts of those participants who have
elected to defer a portion of their compensation equal to a percentage or
percentages of the amounts which such participants have elected to defer. This
Company matching contribution is allocated to the matching contribution accounts
of those participants (i) who have elected to defer a portion of their
compensation, (ii) who are not employees of a group or unit designated as
ineligible to receive a matching contribution and (iii) who have attained the
age of 21 and have completed 12 months of employment and 850 Hours of Service
with the Company during one of the applicable 12-month computational periods.
Forfeitures by terminated participants of unvested Company matching
contributions are used to offset future Company matching contributions. The
Company may also make additional contributions to the CODA in order to comply
with Sections 401(k) and (m) of the Internal Revenue Code of 1986, as amended
(the "Code"). The Company's additional contribution to the CODA is paid in cash
unless the Board of Directors determines to make the contribution in shares of
Class A Common Stock or another form.
Company contributions to the CODA are made by the due date (including
extensions) for the Company's federal income tax return for the applicable year
except contributions resulting from amounts deferred by participants, which must
be made shortly after the deferral under applicable regulations. The Company's
practice has been to make matching contributions quarterly based on current
participant bi-weekly deferrals. Any additional Company contribution, if
required, is made after the end of the Plan Year.
A participant's elective deferrals to CODA will reduce his or her
compensation, on a dollar-for-dollar basis, for purposes of receiving
allocations under the Company's Profit Sharing Retirement Plan and the Employee
Stock Retirement Plan, as applicable.
An Eligible Employee may transfer a rollover contribution from another
qualified retirement plan to the trust fund maintained for the CODA pursuant to
applicable regulations and Committee procedures. A participant in the CODA who
has made a deferral election may terminate or alter the rate of his or her
deferrals at any time under the terms of the CODA.
Investment of Funds
The Committee is authorized to establish a choice of investment
alternatives, including securities of the Company, in which Company
contributions to the CODA (including that portion of compensation which
participants elect to defer) may be invested. The investment alternatives
established by the Committee and currently available to participants in the CODA
consist of the Company Stock Fund and 13 Vanguard mutual funds managed by the
Vanguard Group ("Vanguard"), located in Valley Forge, Pennsylvania. The
Company's matching contributions for the Plan Year ended December 31, 1997 were
(and the matching contributions for the Plan Year ending December 31, 1998 are
currently intended to be) invested in the Company Stock Fund, which
contributions may not be exchanged for another investment alternative.
Participants may elect at such time, in such manner and subject to such
restrictions as the Committee may specify, to have contributions (other than
matching contributions) allocated or apportioned among the different investment
alternatives. Separate CODA accounts are established for each investment
alternative selected by a participant and each such account is valued
separately. Cash contributions that are to be invested in the Company Stock Fund
are initially invested in the Vanguard Money Market Reserves -- Prime Portfolio
until shortly before each Trade Date and then are transferred automatically into
the Company Stock Fund. The Committee, in its sole discretion, may permit
participants to transfer amounts from one investment alternative to one or more
other investment alternatives at such time, in such manner and subject to such
restrictions as the Committee may specify. No commissions are payable with
respect to acquisitions or dispositions of Vanguard fund shares.
Investments in the Company Stock Fund (other than the non-exchangeable
matching contribution described in the preceding paragraph) may be exchanged
into other investment choices only on a Trade Date. Generally, balances from
Vanguard investments may not be exchanged into the Company Stock Fund. However,
the Committee, in its sole discretion, may from time to time allow participants
to exchange balances from Vanguard investments into the Company Stock Fund
during a limited window period. It is the current
13
<PAGE> 15
policy of the Committee to keep all amounts related to the Company Stock Fund
invested in Class A Common Stock, except for estimated cash reserves which are
primarily used to provide future benefit distributions, future investment
exchanges and other cash needs as determined by the Committee. Residual cash
remaining after accounting for estimated cash reserves generally will be used to
purchase Class A Common Stock at the Formula Price then in effect. If cash
reserves in the Company Stock Fund are insufficient at any given time to provide
benefit distributions and/or investment exchanges, shares held by the Company
Stock Fund will be offered to the Company for purchase. If the Company declines
to purchase the shares, the Committee intends to offer the shares for sale in
the Limited Market. Exchanges out of the Company Stock Fund may be deferred
until such time, if ever, that sufficient cash is available to make required
benefit distributions and provide for investment exchanges. Accordingly,
investment exchanges of participants' investments held in the Company Stock Fund
may be restricted. See "Risk Factors -- Absence of Public Market."
The following table summarizes, as of the dates indicated, the investment
performance for the last three years of the Company Stock Fund and of each of
Vanguard's 13 mutual funds available for investment. The summary is based on an
initial investment of $100 in each investment alternative as of December 31,
1995.
COMPANY STOCK FUND*
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
- --------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 124.50 24.5
December 31, 1997........................................... 189.37 52.1
</TABLE>
GNMA PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
- --------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 105.20 5.2
December 31, 1997........................................... 115.19 9.5
</TABLE>
INDEX TRUST -- 500 PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
- --------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 122.90 22.9
December 31, 1997........................................... 163.70 33.2
</TABLE>
- ---------------
* There are six separate Company Stock Funds among and/or within the Company's
qualified retirement plans, the returns of which differ slightly due to
differing cash flows and cash reserves. The figures shown represent returns
from a representative Company Stock Fund or Funds.
14
<PAGE> 16
MONEY MARKET RESERVES -- PRIME PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
- --------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 105.30 5.3
December 31, 1997........................................... 110.99 5.4
</TABLE>
SHORT-TERM FEDERAL PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
- --------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 104.80 4.8
December 31, 1997........................................... 111.61 6.5
</TABLE>
WELLESLEY INCOME FUND
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 109.40 9.4
December 31, 1997........................................... 131.50 20.2
</TABLE>
WINDSOR FUND
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 126.40 26.4
December 31, 1997........................................... 154.21 22.0
</TABLE>
INTERNATIONAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 114.60 14.6
December 31, 1997........................................... 119.30 4.1
</TABLE>
U.S. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 126.00 26.0
December 31, 1997........................................... 158.63 25.9
</TABLE>
15
<PAGE> 17
INTERMEDIATE TERM CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 102.80 2.8
December 31, 1997........................................... 111.95 8.9
</TABLE>
INDEX TRUST -- SMALL CAPITALIZATION STOCK PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 118.10 18.1
December 31, 1997........................................... 147.15 24.6
</TABLE>
VANGUARD LIFESTRATEGY FUNDS -- CONSERVATIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 110.40 10.4
December 31, 1997........................................... 128.95 16.8
</TABLE>
VANGUARD LIFESTRATEGY FUNDS -- MODERATE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 112.70 12.7
December 31, 1997........................................... 135.02 19.8
</TABLE>
VANGUARD LIFESTRATEGY FUNDS -- GROWTH PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 115.40 15.4
December 31, 1997........................................... 141.13 22.3
</TABLE>
Vesting
Under the CODA as currently in effect, each participant is, at all times,
100% vested in amounts deferred to his or her CODA account. Effective as of
January 1, 1995, the Company's matching contribution for employees hired on or
after such date does not vest at all prior to the time such participant is
credited with three Years of Service, and thereafter vests at the rate of 25%
per Years of Service for years three through six, so that each participant's
interest in his or her Company matching account becomes fully vested after the
participant is credited with six Years of Service. A participant's interest in
such account also becomes fully
16
<PAGE> 18
vested, notwithstanding the fact that the participant has not yet been credited
with six Years of Service, at the time of such participant's attainment of age
59 1/2, permanent disability, judicial declaration of mental incompetence or
death, while employed by the Company. The Company's matching contribution for
employees hired on or prior to December 31, 1994 remains fully vested.
Loans
Loans are available to a participant from his or her CODA account. Loans
under all of the Company's and its subsidiaries' qualified retirement plans have
a combined maximum limit of $50,000 per participant reduced by the excess of the
participant's highest aggregate outstanding loan balance(s) during the preceding
12-month period over the aggregate loan balance(s) outstanding on the date of a
new loan. Loans are further limited to 50% of a participant's vested interest in
his or her accounts in all of the Company's qualified retirement plans (loans
from the CODA may not exceed the vested value in the CODA account less vested
amounts invested in the Company Stock Fund within the Plan). Loans must (i) bear
a reasonable rate of interest, (ii) be adequately secured, (iii) state the date
upon which the loan must be repaid, which in any event may not exceed five years
from the date on which the loan is made, unless the proceeds are used to acquire
a principal residence, in which case repayment may not exceed 25 years; and (iv)
be amortized with level payments, made not less frequently than quarterly, over
the term of the loan. The minimum loan amount is $500. A $50 processing fee is
charged for each loan. The Committee currently requires that loans be repaid
through payroll deductions. The loan documents provide that 50% of the
participant's vested account balances in all of the Company's qualified
retirement plans are security for the loan; therefore, the CODA (as well as the
other Company retirement plans in which the participant has a loan) has a lien
against such balances. A loan will result in a withdrawal of the borrowed
amounts from the participant's interest in the funds against which the loan is
made. Principal and interest payments on the loan are allocated to the
account(s) of the borrowing participant in accordance with the current
investment choices of the participant.
Distributions and Withdrawals
If a participant's employment with the Company terminates on or after the
date on which the participant attains the age of 59 1/2, the participant is
entitled to receive a single distribution of his or her entire interest in his
or her CODA account and vested interest in the matching contribution account.
Distributions are made on a quarterly basis. In the event a participant dies
while employed by the Company, the Committee will direct the Trustee to make a
single distribution of the participant's entire interest in his or her CODA
account and matching contribution account to the participant's spouse.
Alternatively, if such spouse has given proper consent or if the participant has
no spouse, the Committee will direct the Trustee to make a single distribution
of the deceased participant's entire interest to the Beneficiary designated by
the participant. In the event the Committee determines that the participant has
suffered a permanent disability while employed by the Company, the Committee
will direct the Trustee to make a single distribution of the participant's
entire interest in his or her CODA account and matching contribution account to
the disabled participant.
If a participant's employment with the Company terminates, other than by
reason of permanent disability or death, prior to the date on which the
participant attains the age of 59 1/2, the participant's entire interest in his
or her CODA account and vested interest in the matching contribution account
generally will be paid in a single distribution. If the participant's vested
interest in his or her account is $5,000 or less, benefits are paid within a
year following the date of such termination. If his or her vested interest is
more than $5,000, the participant may elect to receive distribution of his or
her account(s) any time following his or her termination of employment (subject
to normal processing requirements), not later than age 70 1/2. The CODA has been
amended to permit the Company to require participants in the CODA whose
employment with the Company has terminated to transfer any account balances
invested in the Company Stock Fund to other CODA investment choices. This change
has not been implemented by the Company. A participant must generally withdraw
his or her entire accounts. However, after age 59 1/2 a participant may withdraw
balances not invested in the Company Stock Fund while leaving in the CODA the
Company Stock Fund investments. Only one such partial withdrawal after age
59 1/2 is permitted.
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<PAGE> 19
If a participant who was only partially vested in his or her matching
contribution account is reemployed before having five consecutive Breaks in
Service, he or she may reinstate his or her account, including the nonvested
portion which was previously forfeited, by repaying the amount distributed to
him or her from such account before the earlier of (i) the date he or she incurs
five consecutive Breaks in Service following the date of distribution or (ii)
five years following reemployment. Except in the case of a qualifying hardship,
no withdrawals may be made from a participant's CODA account prior to his or her
termination of employment unless and until he or she attains the age of 59 1/2.
Any withdrawals made thereafter may only be made once in each Plan Year. In the
absence of a qualified domestic relations order to the contrary, a participant's
interest in the CODA may not be voluntarily or involuntarily assigned or
hypothecated, except for the purpose of qualified Company retirement plan loans.
The Committee has established procedures for hardship withdrawals including (i)
definition of qualifying hardships, (ii) requirements for having first withdrawn
all voluntary after-tax contributions from any other Company retirement plans
and having received the maximum loans available under such plans and (iii)
requirement for a 12-month suspension from making elective deferrals into the
CODA following the hardship withdrawal.
All distributions, including withdrawals, from the CODA are paid in cash.
EMPLOYEE STOCK RETIREMENT PLAN
The Company's stock bonus retirement plan became effective on February 1,
1973 and was approved by the stockholders of the Company at the 1982 Annual
Meeting of Stockholders. Effective January 1, 1985, the plan was amended to
change its name to the Employee Stock Ownership Plan and to enable it to
purchase shares of Class A Common Stock with the proceeds of qualifying loans
made either to the Company or to the Employee Stock Ownership Plan. This loan
feature was never utilized. In February 1990, the Company Stock Funds within the
Company's Profit Sharing Retirement Plan and the CODA were transferred to the
Employee Stock Ownership Plan to enable it to qualify as a "30% ESOP" and
further the Company's goal of employee stock ownership by increasing the
percentage of the Company's Class A Common Stock and Class B Common Stock
beneficially owned by current employees. In November 1992, the non-exchangeable
Company Stock Fund within the CODA was transferred to the Employee Stock
Ownership Plan to enable it to qualify as a "30% ESOP" in connection with an
Offer to Purchase for Cash, pursuant to which the Employee Stock Ownership Plan
acquired 700,444 shares of Class A Common Stock from 186 stockholders who were
not employees, directors, consultants or members of their families in a
transaction designed to increase the beneficial ownership of current employees,
directors and consultants. On October 1, 1997, the Employee Stock Ownership Plan
was converted to a stock bonus plan, the special loan provisions were eliminated
and the name of the plan was changed to the Employee Stock Retirement Plan.
Eligibility and Participation
Generally, all employees who have attained the age of 21, completed 12
months of employment and completed 850 Hours of Service with the Company during
one of the applicable 12-month computational periods are eligible to participate
as of the next semi-annual entry date, except employees of groups or units
designated as ineligible.
Contributions, Allocations and Forfeitures
The amount of the Company's annual contribution to participants' accounts
in the Employee Stock Retirement Plan is determined by, and within the
discretion of, the Board of Directors, subject to certain limitations. See
"General Provisions of the Profit Sharing Retirement Plan, Employee Stock
Retirement Plan and CODA." Participants may not make voluntary contributions to
the Employee Stock Retirement Plan. The Company's contributions are made by the
due date (including extensions) of the Company's federal income tax return for
the applicable year. The Company's current practice has been to make pro-rata
contributions quarterly.
Company contributions to the Employee Stock Retirement Plan for each Plan
Year are allocated to the accounts of participants who are eligible to receive
such contributions in the ratio which each such
18
<PAGE> 20
participant's eligible compensation bears to the total eligible compensation of
all such participants. Eligible participants are participants who (i) complete
850 Hours of Service during the Plan Year and (ii) either are employed on the
last working day of the Plan Year or whose employment terminated during the Plan
Year as a result of death, retirement, disability or involuntary layoff (other
than for cause). Forfeitures, if any, of the nonvested portion of terminated
participants' accounts are allocated to the accounts of remaining participants
who are entitled to receive an allocation of the Company contribution.
Forfeitures are allocated in the ratio which each such remaining participant's
eligible compensation bears to the total eligible compensation of all such
remaining participants. However, effective January 1, 1995, allocations of
Company contributions are made separately to different Fringe Rate groups
designated by the Company, such that participants in one Fringe Rate group will
receive a different allocation (as a percentage of compensation) than
participants in another Fringe Rate group.
Investment of Funds
Although it is generally intended that the assets of the Employee Stock
Retirement Plan will be held in a Company Stock Fund consisting primarily of
securities of the Company, the Employee Stock Retirement Plan and/or such
Company Stock Fund may hold other assets which may consist of cash, qualifying
employer real property or qualifying employer securities within the meaning of
Sections 407(d)(4) and (5) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or other property. The exact number of shares of
Class A Common Stock, if any, which may be purchased by the Trustee of the
Employee Stock Retirement Plan in the future will depend on various factors,
including any modifications to the Employee Stock Retirement Plan adopted either
in response to changes or modifications in the laws and regulations governing
the Employee Stock Retirement Plan or at the discretion of the Company's
management.
With respect to those Company Stock Funds transferred to the Employee Stock
Retirement Plan in February 1990 as to which participants had the right to
exchange into other investment choices under the Company's Profit Sharing
Retirement Plan or CODA, as applicable, the investment choices available under
the latter plans (see "Employee Benefit Plans -- CODA -- Investment of Funds")
are made available within the Employee Stock Retirement Plan. In addition,
participants who have attained the age of 55 and have ten or more years of
service are entitled, pursuant to the terms of the Employee Stock Retirement
Plan and Committee procedures, to exchange a percentage of their balances in the
Company Stock Fund into the same Vanguard investment alternatives as are
available under the CODA.
The Committee, in its sole discretion, may permit participants to transfer
amounts from one investment alternative to one or more other investment
alternatives at such time, in such manner and subject to such restrictions as
the Committee may specify. Investments in the Company Stock Fund may be
exchanged into other investment choices only on a Trade Date. However, balances
from other Vanguard investments may not be exchanged into the Company Stock
Fund. Company contributions directed to the Company Stock Fund are initially
utilized as cash reserves to provide benefit distributions and/or investment
exchanges. It is the current policy of the Committee to keep all amounts related
to the Company Stock Fund invested in Class A Common Stock, except for estimated
cash reserves which are primarily used to provide future benefit distributions,
future investment exchanges and other cash needs as determined by the Committee.
Residual cash remaining after accounting for estimated cash reserves will
generally be used to purchase Class A Common Stock at the Formula Price then in
effect. Cash contributions that are to be invested in the Company Stock Fund are
initially invested in the Vanguard Money Market Reserves -- Prime Portfolio
until shortly before each Trade Date and then are transferred automatically into
the Company Stock Fund. If at any given time cash reserves in the Company Stock
Fund are insufficient to provide benefit distributions and/or investment
exchanges, shares held by the Company Stock Fund will be offered to the Company
for purchase. If the Company declines to purchase the shares, the Committee
intends to offer the shares for sale in the Limited Market. Exchanges out of the
Company Stock Fund may be deferred until such time, if ever, that sufficient
cash is available to make required benefit distributions and provide for
investment exchanges. Accordingly, investment exchanges of participants'
investments held in the Company Stock Fund may be restricted. See 1998 10-K,
Item 5, "Market for Registrant's Common Equity and Related Stockholder
Matters -- The Limited Market" and "Risk Factors -- Absence of a Public Market."
19
<PAGE> 21
Vesting
The Employee Stock Retirement Plan vesting schedule currently provides that
a participant's interest does not vest at all prior to the time such participant
is credited with three Years of Service, and thereafter vests at the rate of 25%
per Year of Service for years three through six, so that each participant's
interest becomes fully vested after the participant is credited with six Years
of Service. A participant's interest also becomes fully vested, notwithstanding
the fact that the participant has not yet been credited with six Years of
Service, at the time of such participant's attainment of the age of 59 1/2,
permanent disability, judicial declaration of mental incompetence or death,
while employed by the Company. A participant's interest in the funds transferred
from the CODA are 100% vested at all times.
Loans
Loans are available to a participant from his or her Employee Stock
Retirement Plan account. Loans under all of the Company's and its subsidiaries'
qualified retirement plans have a combined maximum limit of $50,000 per
participant reduced by the excess of the participant's highest aggregate
outstanding loan balance(s) during the preceding 12-month period over the
aggregate loan balance(s) outstanding on the date of a new loan. Loans are
further limited to 50% of a participant's vested interest in his or her accounts
in all the Company's qualified retirement plans (loans from the Employee Stock
Retirement Plan may not exceed the vested value of the amounts in the Employee
Stock Retirement Plan account less vested amounts invested in the Company Stock
Fund within the Plan). Loans must (i) bear a reasonable rate of interest, (ii)
be adequately secured, (iii) state the date upon which the loan must be repaid,
which in any event may not exceed five years, unless the proceeds are used to
acquire a principal residence, in which case repayment may not exceed 25 years
and (iv) be amortized with level payments, made not less frequently than
quarterly, over the term of the loan. The minimum loan amount is $500. The
Committee currently requires that loans be repaid through payroll deductions.
The loan documents provide that 50% of the participant's vested account balances
in all the Company's retirement plans are security for the loan; therefore, the
Employee Stock Retirement Plan (as well as the other Company retirement plans in
which the participant has a loan) has a lien against such balances. A loan will
result in a withdrawal of the borrowed amounts from the participant's interest
in the Funds against which the loan is made (other than the Company Stock Fund).
Principal and interest payments on the loan are allocated to the account(s) of
the borrowing participant in accordance with the current investment choices of
the participant.
Distributions and Withdrawals
If a participant's employment with the Company terminates on or after the
date on which the participant attains the age of 59 1/2, the participant is
entitled to receive a single distribution of his or her entire interest in his
or her Employee Stock Retirement Plan account. Distributions are made on a
quarterly basis. In the event a participant dies while employed by the Company,
the Committee will direct the Trustee to make a single distribution of the
participant's entire interest in his or her Employee Stock Retirement Plan
account to the participant's spouse or if such spouse has given proper consent
or if the participant has no spouse to the Beneficiary designated by the
participant. In the event the Committee determines that the participant has
suffered a permanent disability while employed by the Company, the Committee
will direct the Trustee to make a single distribution of the participant's
entire interest in his or her Employee Stock Retirement Plan account to the
disabled participant.
If a participant's employment with the Company terminates, other than by
reason of permanent disability or death, prior to the date on which the
participant attains the age of 59 1/2, the participant's vested interest in his
or her Employee Stock Retirement Plan account generally will be paid in cash in
a single distribution. If the participant's vested interest in his or her
account is $5,000 or less, benefits are paid within a year of termination of
employment. If his or her vested interest in the account is more than $5,000,
the participant may elect to receive a distribution of his or her account in
cash any time following his or her termination of employment (subject to normal
processing requirements), not later than age 70 1/2.
20
<PAGE> 22
A participant may elect to receive a distribution in the form of Class A
Common Stock (and Class B Common Stock, where applicable) in lieu of the cash
distribution alternatives described above. Such distribution will be made within
120 days of the participant's normal retirement age (age 59 1/2) or date of
actual retirement, if later. However, for employees whose employment is
terminated after February 9, 1990, with respect to any shares of Class A Common
Stock purchased after December 31, 1986, a participant electing to receive
Common Stock shall receive the payments in five annual installments commencing
within one year after the fifth Plan Year following termination of employment.
If a participant who was only partially vested in his or her account is
reemployed before having five consecutive Breaks in Service, he or she may
reinstate his or her account, including the nonvested portion which was
previously forfeited, by repaying the amount distributed to him or her before
the earlier of (i) the date he or she incurs five consecutive Breaks in Service
following the date of distribution or (ii) five years following reemployment.
All distributions from the Employee Stock Retirement Plan will be made in
cash, except as noted above. In those instances in which shares of Class A
Common Stock or Class B Common Stock are distributed to participants in lieu of
cash, participants cannot be assured that they will be able to sell their shares
in any one quarterly Trade Date or over any specific period of time.
Accordingly, a participant's ability to sell shares of Class A Common Stock or
Class B Common Stock distributed out of the Employee Stock Retirement Plan would
be adversely affected by any lack of liquidity in the Limited Market. See 1998
10-K, Item 5, "Market for Registrant's Common Equity and Related Stockholder
Matters -- The Limited Market" and "Risk Factors -- Absence of a Public Market."
All distributions of shares of Class A Common Stock (and Class B Common
Stock, where applicable) from the Employee Stock Retirement Plan will be subject
to the following conditions imposed by the Employee Stock Retirement Plan and/or
the Company's Certificate of Incorporation:
(a) Such shares will be subject to a right of first refusal by the
Company and the Employee Stock Retirement Plan, but will not be subject to
the Company's right of repurchase upon termination of employment or
affiliation.
(b) In the event that such shares, at the time they are distributed
out of the Employee Stock Retirement Plan, are not "Readily Tradeable
Stock" (as that term is defined under Treasury Regulation Section
54.4975-7(b)(1)(iv)) or are subject to a "Trading Limitation" (as that term
is defined under Treasury Regulation Section 54.4975-7(b)(10)), then they
will be subject to a "put option" which gives the holder of such shares the
right to require the Company to purchase all or a portion of such shares at
their fair market value during two limited time periods. The first of these
periods is the 60-day period following the date on which the shares are
distributed out of the Employee Stock Retirement Plan and the second of
these periods is the 60-day period following notification by the Company of
the valuation of the Class A Common Stock and Class B Common Stock as soon
as practicable after the beginning of the Plan Year commencing after such
distribution.
Accounts transferred from the CODA or Profit Sharing Retirement Plan retain
the distribution options available under the terms of the plan from which they
were transferred.
Participants are not permitted to make withdrawals under the Employee Stock
Retirement Plan prior to termination of employment (or age 70 1/2, if still
employed), except for hardship withdrawals from the account transferred to the
Employee Stock Retirement Plan from the CODA. However, a participant may, under
rules established by the Committee, make one withdrawal from the Employee Stock
Retirement Plan after attaining age 62, even if the participant has not
terminated employment. Withdrawals after age 70 1/2 are not restricted. See
"Employee Benefit Plans -- CODA -- Distributions and Withdrawals." In the
absence of a qualified domestic relations order to the contrary, a participant's
interest in the Employee Stock Retirement Plan may not be voluntarily or
involuntarily assigned or hypothecated, except for the purpose of qualified
Company retirement plan loans.
21
<PAGE> 23
GENERAL PROVISIONS OF THE PROFIT SHARING RETIREMENT PLAN, EMPLOYEE STOCK
RETIREMENT PLAN AND CODA
The Profit Sharing Retirement Plan, Employee Stock Retirement Plan and CODA
(collectively, the "Plans") each contain the following provisions:
Contribution Limitations
The maximum contribution for any Plan Year which the Company may make to
all Plans for the benefit of a participant (including contributions to the CODA
as a result of salary deferral elections by participants), plus forfeitures, may
not exceed the lesser of (i) $30,000 or (ii) 25% of the participant's
compensation. The $30,000 limit will be adjusted for cost of living in
accordance with rules of the Secretary of the Treasury.
Administration
The Plans are administered by the Committee, whose members are appointed by
and serve at the discretion of the Company's Board of Directors. The members of
the Committee receive no compensation from the Plans for services rendered in
connection therewith. The current members of the Committee are A.H. Avery, D.W.
Baldwin, S.P. Fisher, W.M. Layson, F.W. Jenkins, E.R. Kalin, J.C. Rains, Jr.,
W.A. Roper, Jr., B.L. Theule, E.A. Timmes, Jr. and M.W. Tobriner (Chairman). The
address of each such person is Science Applications International Corporation,
10260 Campus Point Drive, San Diego, CA 92121, except for Messrs. Jenkins,
Layson, Rains and Tobriner each of whom's address is Science Applications
International Corporation, 1710 Goodridge Drive, McLean, VA 22102 and Mr. Timmes
whose address is Science Applications International Corporation, 3045 Technology
Parkway, Orlando, FL 32826.
The Committee has the power to supervise administration and control of each
Plan's operations, including the power and authority to (i) allocate fiduciary
responsibilities, other than trustee responsibilities, among the Named
Fiduciaries, (ii) designate agents to carry out responsibilities relating to the
Plan, other than fiduciary responsibilities, (iii) employ legal, actuarial,
medical, accounting, programming and other assistance as the Committee may deem
appropriate in carrying out the Plan, (iv) establish rules and regulations for
the conduct of the Committee's business and the administration of the Plan, (v)
administer, interpret, construe and apply the Plan and determine questions
relating to eligibility, the amount of any participant's service and the amount
of benefits to which any participant or beneficiary is entitled, (vi) determine
the manner in which Plan assets are disbursed and (vii) direct the Trustee
regarding investment of Plan assets, subject to the directions of participants
when provided in the Plan.
Pass-Through Voting and Tendering of Class A Common Stock and Class B Common
Stock
Each participant in the Plans has the right to instruct the Trustee on a
confidential basis how to vote his or her proportionate interest in all shares
of Class A Common Stock and/or Class B Common Stock held in the various Plans.
The Plan documents provide that the Trustee will vote all allocated shares held
in the Plans as to which no voting instructions are received, together with all
unallocated shares held in the Plans, in the same proportion, on a Plan-by-Plan
basis, as the allocated shares for which voting instructions have been received
are voted. The Committee is required to notify participants of their
pass-through voting rights prior to each meeting of stockholders.
In the event of a tender or exchange offer for the Company's securities,
each participant in the Plans has the right, under current Plan procedures, to
instruct the Trustee on a confidential basis whether or not to tender or
exchange his or her proportionate interest in all shares of Class A Common Stock
and/or Class B Common Stock held in the various Plans. The Plan documents
provide that the Trustee will not tender or exchange any allocated shares with
respect to which no instructions are received from participants. Shares held in
the Plans which have not yet been allocated to the accounts of participants will
be tendered or exchanged by the Trustee, on a Plan-by-Plan basis, in the same
proportion as the allocated shares held in each Plan are tendered or exchanged.
The Trustee's duties with respect to voting and tendering of Class A and
Class B Common Stock are governed by the fiduciary provisions of ERISA. These
fiduciary provisions of ERISA may require, in certain
22
<PAGE> 24
limited circumstances, that the Trustee override the votes, or decisions whether
or not to tender, of participants with respect to Class A or Class B Common
Stock and to determine, in the Trustee's best judgment, how to vote the shares
or whether or not to tender the shares.
Trustee
Vanguard Fiduciary Trust Company of Valley Forge, PA is the Trustee under
each of the Plans.
Generally, the Trustee has all the rights afforded a trustee under
applicable law, although the Trustee generally may exercise those rights only at
the direction of the Committee. Subject to this limitation and those set forth
in the Plans and master trust agreement, the Trustee's rights include, but are
not limited to, the right to (i) invest and reinvest the funds held in the
Plans' trust in any investment of any kind, including qualifying employer
securities and qualifying employer real property as such investments are defined
in Section 407(d) of ERISA, and contracts issued by insurance companies,
including contracts under which the insurance company holds Plan assets in a
separate account or commingles separate accounts managed by the insurance
company, (ii) retain or sell the securities and other property held in the
Plans' trust, (iii) consent or participate in any reorganization or merger in
regard to any corporation whose securities are held in the Plans' trust (subject
in the case of the Company's securities, generally, to the participants'
pass-through voting rights and right to instruct the Trustee in the event of a
tender or exchange offer) and pay calls or assessments imposed on the holder
thereof and consent to any contract, lease, mortgage or purchase or sale of any
property between such corporation and any other parties, (iv) exercise all the
rights of the holder of any security held in the Plans' trust, including the
right to vote such securities (subject, in the case of the Company's securities,
generally, to the participants' pass-through voting rights), convert such
securities into other securities, acquire additional securities and exchange
such securities, (v) vote proxies and exercise any other similar rights of
ownership, subject to the Committee's right to instruct the Trustee as to how
(or the method of determining how) the proxies should be voted or such rights
should be exercised and (vi) lend to participants in the Plans such amounts as
the Committee directs.
The Trustee's compensation and all other expenses incurred in the
establishment, administration and operation of the Plans are borne by the
respective Plans unless the Company elects to pay such expenses. Costs or
expenses which are particular to a specific asset or group of assets (such as
interest and normal brokerage and other similar charges incurred in connection
with the purchase of securities by the Plans' trust) are chargeable and
allocable to the participants' accounts to which such securities are allocated
in a manner determined by the Committee.
Amendment and Termination
The Company has reserved the right to amend each of the Plans at any time,
for any reason and without prior notice, except that no such amendment may have
the effect of (i) generally causing any assets of the Plans' trusts to be used
for or diverted to any purpose other than providing benefits to participants and
their beneficiaries and defraying expenses of the Plans, except as permitted by
applicable law, (ii) depriving any participant or beneficiary, on a retroactive
basis, of any benefit to which they would otherwise be entitled had the
participant's employment with the Company terminated immediately prior to the
amendment or (iii) increasing the liabilities or responsibilities of a Trustee
or an Investment Manager without its written consent.
The Company has also retained the right to terminate any of the Plans at
any time and for any reason, including if the Company ceases to exist as an
entity in the event it merges into or with any other corporation. In addition,
the Company may discontinue contributions to the Plans; provided, however, that
any such discontinuation of contributions shall not automatically terminate the
Plans as to funds and assets then held by the Trustee.
ERISA
Each of the Plans is subject to the provisions of ERISA, including
reporting and disclosure obligations, fiduciary standards and the prohibited
transaction rules of Title I thereof. Since each of the Plans is an
23
<PAGE> 25
individual account plan under ERISA, none of the Plans are subject to the
jurisdiction of the Pension Benefit Guaranty Corporation ("PBGC") under Title IV
of ERISA and none of the Plans' benefits are guaranteed by the PBGC.
Federal Income Tax Consequences
Each of the Plans is qualified under Section 401(a) of the Code.
Qualification of the Plans under Section 401(a) of the Code has the following
federal income tax consequences:
(a) A participant will not be subject to federal income tax on Company
contributions to the Plans at the time such contributions are made.
(b) A participant will not be subject to federal income tax on any
income or appreciation with respect to such participant's accounts under
the Plans until distributions are made (or deemed to be made) to such
participant.
(c) A participant and the Company will not be subject to federal
employment taxes on Company contributions to the Plans, except as set forth
below with respect to certain Company contributions to the CODA.
(d) The Plans will not be subject to federal income tax on the
contributions to them by the Company and will not be subject to federal
income tax on any of their income or realized gains, assuming that the
Plans do not realize any unrelated business taxable income.
(e) Participation in the Plans will preclude or restrict an employee
from making deductible contributions to an Individual Retirement Account
("IRA"), depending on the employee's marital status and adjusted gross
income ("AGI") for the year. If an employee is covered by any of the Plans,
an IRA deduction is available only if the participant's AGI does not exceed
a phase-out level. If the participant is married and files a joint return,
the phase-out begins at $50,000, and there is no deduction if the AGI
exceeds $60,000 for 1998. The phase-out for single employees is
$30,000/$40,000 of AGI for 1998. For AGI in the phase-out range, the IRA
deduction limit is reduced by the ratio of AGI in excess of $50,000 or
$30,000, as applicable, to $10,000. AGI is determined before any IRA
deduction, but after any elective deferrals to the CODA. Participation in
any of the Plans by an employee will preclude contributions to an IRA by
the employee's spouse for 1998 only if the joint AGI is over $160,000 (the
deduction is phased out beginning at $150,000 in AGI).
Beginning in 1998, employees may make nondeductible contributions to a
Roth IRA of up to $2,000 less any amounts contributed to a regular IRA for
the year, regardless of participation in any of the Plans. However, the
ability to contribute to a Roth IRA is phased out for single employees
between $95,000 and $110,000 of AGI and for married employees filing
jointly between $150,000 and $160,000 of AGI.
(f) Subject to the contribution limitations contained in the Plans,
the Company will be able to deduct the amounts that it contributes under
the Plans, with the amount of such deduction generally equaling the amount
of the contributions.
(g) Distributions from the Plans will be subject to federal income tax
under special, complex rules that apply generally to distributions from
tax-qualified retirement plans. In general, a single distribution from any
of the Plans will be taxable in the year of receipt at regular ordinary
income rates (on the full amount of the distribution, exclusive of the
amount of the participant's voluntary, non-deductible contributions made to
those Plans which previously permitted such contributions) unless the
distributee is eligible for and elects (i) to make a qualifying "rollover"
of the amount distributed to an IRA or another qualified plan or (ii) to
utilize 10-year averaging, 5-year averaging or partial capital gains
taxation of the distribution. However, the tax on any portion of a
qualifying lump sum distribution represented by "net unrealized
appreciation" in Class A or Class B Common Stock distributed shall be
deferred until a subsequent sale or taxable disposition of the shares,
unless the distributee elects not to have this deferral apply.
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<PAGE> 26
A "lump sum distribution," for purposes of eligibility for deferral of
tax on net unrealized appreciation, is defined as a distribution of the
employee's entire vested interest under the Plan within one taxable year
(i) on account of the participant's death or other separation from service,
(ii) on account of the participant's qualifying disability or (iii) after
the participant has attained age 59 1/2. For purposes of this definition,
distributions from the CODA and the Profit Sharing Retirement Plan must be
aggregated. For a lump sum distribution to be eligible for 5-year
averaging, the participant also must have been a participant in the Plan
from which the distribution is made for at least five years prior to the
year of distribution and must have attained age 59 1/2 when the
distribution is received. Under a special transition rule, an individual
who had attained age 50 on January 1, 1986 and who would otherwise be
entitled to elect 5-year averaging (without regard to the age 59 1/2
requirement) may instead make a one-time election of 10-year averaging (at
1986 rates) and may elect to have the pre-1974 portion of the distribution
taxed at 1986 capital gains rates. The special 5-year or 10-year averaging
treatment, as well as partial capital gains treatment, of lump sum
distributions is applicable to a lump sum distribution from a Plan only if
all other lump sum distributions (whether or not from the same Plan or
Plans of a similar type) received during the same taxable year by the
participant are treated in the same manner. Hence, for example, if a
participant receives a lump sum distribution from the CODA, the Profit
Sharing Retirement Plan and the Employee Stock Retirement Plan in the same
taxable year, he or she could not elect to use 5-year or 10-year averaging
on the CODA and Profit Sharing Retirement Plan distributions while electing
a rollover to an IRA of the distribution from the Employee Stock Retirement
Plan. Five-year averaging has been repealed for tax years beginning after
December 31, 1999.
"Early" distributions from the Plans will result in an additional 10%
tax on the taxable portion of the distribution, except to the extent the
distribution (i) is rolled over to an IRA or other qualified plan or (ii)
is used for deductible medical expenses. "Early" distributions are
in-service distributions (i.e., prior to termination of employment) prior
to the date the participant attains age 59 1/2 unless due to the permanent
disability of the participant and distributions made following termination
of service unless due to the death of the participant or made to a
participant who terminated employment during or after the calendar year the
participant attained the age of 55.
(h) A participant (or his or her spouse in the event of the
participant's death) who (i) receives a distribution from the Plans (other
than certain mandatory distributions after age 70 1/2) and (ii) wishes to
defer immediate tax upon receipt of such distribution, may transfer (i.e.,
"rollover") all or a portion thereof, exclusive of the amount of the
participant's voluntary non-deductible contributions (made to those Plans
which previously permitted the participant to make voluntary non-deductible
contributions) received in the distribution, to either an IRA or, in the
case of a participant, another qualified retirement plan. To be effective,
the "rollover" must be completed within 60 days of receipt of the
distribution. Alternatively, the participant or spouse may request a direct
rollover from the Plans to an IRA or, in the case of a participant, to
another qualified retirement plan.
A participant (or his or her spouse) who does not arrange a direct
rollover to an IRA or another qualified plan will be subject to mandatory
federal income tax withholding at a rate of 20% of the taxable
distribution, even if the participant or spouse later makes a rollover
within the 60-day period.
A participant (or his or her spouse) who makes a valid "rollover" to
an IRA will defer payment of federal income tax until such time as such
participant (or his or her spouse) actually begins to receive distributions
from the IRA. IRA earnings accumulate on a tax-deferred basis until
actually distributed; however, IRA funds may not be withdrawn without
penalty until a participant (or his or her spouse) (i) attains the age of
59 1/2, (ii) becomes disabled or (iii) dies. The Code requires that
distributions from a regular (i.e., non-Roth) IRA begin not later than
April 1 of the taxable year following the year in which an individual
attains the age of 70 1/2, at which time periodic distributions may
continue for the participant's lifetime or for the lifetime of the
participant and the participant's spouse.
In addition to the federal income tax consequences applicable to all of the
Plans, the Deferred Fund of the CODA is intended to be a qualified "cash or
deferred arrangement" under Section 401(k) of the Code. A participant in the
CODA who elects to defer a portion of his or her compensation and have the
Company
25
<PAGE> 27
contribute it to the CODA will not be subject to federal income tax on the
amounts contributed at the time the contributions are made. However, these
contributions will be subject to social security taxes and certain federal
unemployment taxes. Elective deferrals by a participant to his or her CODA
account is limited to $7,000 annually (adjusted for cost-of-living). This annual
limit applies on an employee-by-employee basis to all 401(k) plans (including
plans of other employers) in which the employee participates. For calendar year
1998, the adjusted limit is $10,000.
Generally, the Company will be able to deduct the amounts that it
contributes to the CODA pursuant to employee elections to defer a portion of
their compensation, as well as any matching or additional Company contributions
it makes to the Deferred Fund. The deduction will be equal to the amount of
contributions made.
With respect to loans from the CODA commencing after December 31, 1986, any
interest paid by the participant will not be deductible, regardless of the
purpose of the loan or use of the loan proceeds. Moreover, interest paid on any
loan from any of the Plans by a "key employee," as defined in Section 416(i) of
the Code, will not be deductible.
The foregoing discussion is based upon the advice of the Company's counsel,
Baker & McKenzie, and is intended only as a summary of certain federal income
tax consequences and does not purport to be a complete discussion of all of the
tax consequences of participation in the Plans. The Company is not making any
representation as to the tax consequences to any participant from participation
in the Plans. Accordingly, participants should consult their own tax advisors
with respect to all federal, state and local tax effects of participation in the
Plans. Moreover, the Company does not represent that the foregoing tax
consequences will apply to any particular participant's specific circumstances
or will continue to apply in the future and makes no undertaking to maintain the
tax-qualified status of the Plans.
TRANSCORE RETIREMENT SAVINGS PLAN
The TransCore Retirement Savings Plan became effective January 1, 1986. The
TransCore Retirement Savings Plan permits participants to direct that a portion
of their account balances be invested in a Company Stock Fund under rules
established by TransCore.
Eligibility and Participation
Generally, all employees (other than temporary employees and employees
covered under a collective bargaining agreement) of TransCore who have completed
1,000 hours of service during one of the 12-month computational periods are
eligible to participate.
Contributions and Allocations
The TransCore Retirement Savings Plan permits a participant to elect to
defer a portion of such participant's compensation and to have such amount
contributed on a pre-tax basis by TransCore to the participant's account in the
TransCore Retirement Savings Plan.
The maximum amount a participant may defer as a pre-tax contribution each
year is determined by TransCore so as to satisfy certain tests imposed under the
Code, but in no event may exceed $10,000 in 1998, which amount is adjusted for
cost-of-living under rules prescribed by the Secretary of the Treasury. In
addition to amounts deferred or contributed by participants, TransCore may make
a matching contribution to the accounts of participants who have elected to make
pre-tax contributions under Section 401(k) of the Code to the TransCore
Retirement Savings Plan. In addition, TransCore may, but is not required to,
make a discretionary profit sharing contribution to the accounts of participants
who complete 1,000 or more hours of service during the Plan Year and are
employed on the last day of the Plan Year.
TransCore's contributions to the TransCore Retirement Savings Plan are made
by the due date (including extensions) for the Company's federal income tax
return for the applicable year except contributions arising from participant's
pre-tax contributions, which must be made shortly after the deferral under
applicable regulations. TransCore's practice has been to make matching
contributions monthly.
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<PAGE> 28
A participant's pre-tax contributions to the TransCore Retirement Savings
Plan will not reduce his or her compensation for purposes of receiving
allocations of any profit sharing contributions under the TransCore Retirement
Savings Plan.
An eligible employee may transfer a rollover contribution from another
qualified retirement plan to the trust fund maintained for the TransCore
Retirement Savings Plan pursuant to applicable regulations and procedures
established by TransCore.
Investment of Funds
The TransCore Retirement Savings Plan currently permits participants to
direct investment of their account balances among nine Vanguard mutual funds and
the Company Stock Fund. The Vanguard funds offered are: Money Market Reserves --
Prime Portfolio, GNMA Portfolio, Index Trust-500 Portfolio, Short-Term Federal
Portfolio, Wellesley Income Fund, International Growth Portfolio, Long-Term
Corporate Portfolio, Wellington Fund and Windsor II Fund. The performance tables
for the first six funds and the Company Stock Fund can be found at pages 14 and
15. See "Employee Benefit Plans -- CODA." The following table summarizes, as of
the dates indicated, the investment performance of the latter three funds for
the last three years.
LONG-TERM CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 101.20 1.2
December 31, 1997........................................... 115.17 13.8
</TABLE>
WELLINGTON FUND
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 116.20 16.2
December 31, 1997........................................... 143.16 23.2
</TABLE>
WINDSOR II FUND
<TABLE>
<CAPTION>
PERCENT
UNIT INCREASE/DECREASE
VALUATION AS OF VALUE FOR YEAR
--------------- ------- -----------------
<S> <C> <C>
December 31, 1995........................................... $100.00
December 31, 1996........................................... 124.20 24.2
December 31, 1997........................................... 164.44 32.4
</TABLE>
Participants may elect at such time, in such manner and subject to such
restrictions as TransCore may specify, to have contributions (other than
discretionary profit sharing contributions) allocated or apportioned among the
different investment alternatives. Separate accounts are established for each
investment alternative selected by a participant and each such account is valued
separately. TransCore, in its sole discretion, may permit participants to
transfer amounts from one investment alternative to one or more other investment
alternatives at such time, in such manner and subject to such restrictions as
TransCore may specify.
Pre-tax contributions made under Section 401(k) of the Code invested by
participants in the Company Stock Fund may be exchanged into other investment
choices only on a Trade Date. TransCore's matching
27
<PAGE> 29
contributions that are invested by participants in the Company Stock Fund may
not be exchanged for another investment alternative. Discretionary profit
sharing contributions, if any, made by TransCore are currently intended to be
invested in the Company Stock Fund, which contributions may not be exchanged for
another investment alternative. Generally, balances from Vanguard investments
may not be exchanged into the Company Stock Fund. However, the Committee, in its
sole discretion, may from time to time allow participants to exchange balances
from Vanguard investments into the Company Stock Fund during a limited window
period. It is the current policy of TransCore to keep all amounts in the Company
Stock Fund invested in Class A Common Stock, except for estimated cash reserves
which are primarily used to provide future benefit distributions, future
investment exchanges and other cash needs. Residual cash remaining after
accounting for estimated cash reserves generally will be used to purchase Class
A Common Stock at the Formula Price then in effect. Cash contributions that are
to be invested in the Company Stock Fund are initially invested in the Vanguard
Money Market Reserves -- Prime Portfolio until shortly before each Trade Date
and then are transferred automatically into the Company Stock Fund. If cash
reserves in the Company Stock Fund are insufficient at any time to provide
benefit distributions and/or investment exchanges, shares held by the Company
Stock Fund will be offered to the Company for purchase. If the Company declines
to purchase the shares, the shares may be offered for sale in the Limited
Market. Exchanges out of the Company Stock Fund may be deferred until such time,
if ever, that sufficient cash is available to make required benefit
distributions and provide for investment exchanges. Accordingly, investment
exchanges of participants' investments held in the Company Stock Fund may be
restricted. See 1998 10-K, Item 5, "Market for Registrant's Common Equity and
Related Stockholder Matters -- The Limited Market" and "Risk Factors -- Absence
of a Public Market."
Vesting
Under the TransCore Retirement Savings Plan as currently in effect, each
participant is, at all times, 100% vested in his or her pre-tax contributions
account. Accounts containing employer matching contributions and profit sharing
contributions vest 20% per year of service, as defined in the TransCore
Retirement Savings Plan. A participant's interest in such accounts also becomes
fully vested upon attaining age 65, upon permanent disability or death of the
participant.
Loans
Loans are available from a participant's account in the TransCore
Retirement Savings Plan in an amount up to the lesser of $50,000 (reduced by the
excess of the participant's highest aggregate loan balance(s) during the
preceding 12-month period over the aggregate loan balances on the date of a new
loan) or 50% of a participant's vested account balance. Loans are limited to
specified hardships as approved by TransCore. The minimum loan amount is $1,000
and only one loan may be outstanding at any time. A loan processing fee of $100
is charged for each loan. Loans are funded from the investment funds designated
by the participant, but a participant may not borrow from the Company Stock Fund
or more than 75% of a participant's Equity Fund balance. Loans must (i) bear a
reasonable rate of interest, (ii) be adequately secured by the participant's
account(s) balance, (iii) state the date upon which the loan must be repaid,
which in any event may not exceed five years from the date the loan is made,
unless the proceeds are used to acquire a principal residence and (iv) be
amortized with level payments, made not less frequently than quarterly, over the
term of the loan. Loans must be repaid through payroll deductions. If a
participant's employment terminates for any reason when the participant has an
outstanding loan balance, the unpaid loan balance will be taken from the
participant's account and treated as a distribution to the participant.
Principal and interest payments on the loan are allocated to the participant's
account(s) in accordance with the current investment choices of the participant.
Distributions and Withdrawals
If a participant's employment with TransCore terminates on or after the
date on which the participant attains retirement age (65, or 55 with 5 years of
service), the participant is entitled to receive a single distribution of his or
her entire interest in his or her retirement account(s). Distributions are made
on a
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<PAGE> 30
quarterly basis. In the event a participant dies while employed by TransCore,
TransCore will direct the Trustee to make a single distribution of the
participant's entire interest in his or her account(s) to the participant's
spouse. Alternatively, if such spouse has given proper consent or if the
participant has no spouse, TransCore will direct the Trustee to make a single
distribution of the deceased participant's entire interest to the Beneficiary
designated by the participant. In the event TransCore determines that the
participant has suffered a permanent disability while employed by TransCore,
TransCore will direct the Trustee to make a single distribution of the
participant's entire interest in his or her account(s) to the disabled
participant.
If a participant's employment with TransCore terminates, other than by
reason of permanent disability or death, prior to the date on which the
participant attains retirement age, the participant's entire interest in his or
her pre-tax contributions account and vested interest in the matching
contribution and profit sharing account(s) generally will be paid in a single
distribution as soon as practicable following the date of such termination. If
his or her vested interest is more than $5,000, the participant may elect to
defer distribution of his or her account(s), but not beyond retirement age,
until any time following his or her termination of employment but not later than
age 70 1/2.
If a participant who was only partially vested in his or her matching
contribution or profit sharing account is reemployed before having five
consecutive Breaks in Service, he or she may reinstate his or her account,
including the nonvested portion which was previously forfeited, by repaying the
amount distributed to him or her from such account before the earlier of (i) the
date he or she incurs five consecutive Breaks in Service following the date of
distribution or (ii) five years following reemployment. Except in the case of
qualifying hardship, no withdrawals may be made from a participant's account(s)
prior to his or her termination of employment unless and until he or she attains
the age of 59 1/2. Any withdrawals made after age 59 1/2 and any hardship
withdrawals may be made only once in any 12-month period. In the absence of a
qualified domestic relations order to the contrary, a participant's interest in
the TransCore Retirement Savings Plan may not be voluntarily or involuntarily
assigned or hypothecated, except for the purpose of qualified loans. TransCore
has established procedures for hardship withdrawals, including (i) definition of
qualifying hardships, (ii) requirements for having received the maximum loans
available under all plans maintained by an Affiliated Company, and (iii)
requirement for a 12-month suspension from making elective deferrals into the
TransCore Retirement Savings Plan following the hardship withdrawal.
Additional Provisions of the TransCore Retirement Savings Plan
The TransCore Retirement Savings Plan contains provisions similar to the
Profit Sharing Retirement Plan, Employee Stock Retirement Plan and CODA with
respect to Contribution Limitations, Pass-Through Voting and Tendering of Class
A Common Stock, Amendment and Termination and powers of the committee
administering the TransCore Retirement Savings Plan. In addition, the
description of "ERISA" and "Federal Income Tax Consequences" applicable to the
Profit Sharing Retirement Plan, Employee Stock Retirement Plan and CODA applies
equally to the TransCore Retirement Savings Plan. TransCore relies upon the
Company's Committee's review of the price of the Class A Common Stock. See
"Employee Benefit Plans -- General Provisions of the Profit Sharing Retirement
Plan, Employee Stock Retirement Plan and CODA."
The Plan Administrator of the TransCore Retirement Savings Plan is
TransCore, and the trustee of the TransCore Retirement Savings Plan is Vanguard
Fiduciary Trust Company. The committee, which is delegated specified duties in
connection with the administration of the TransCore Retirement Savings Plan, has
three members who are M.W. Tobriner whose address is Science Applications
International Corporation, 1710 Goodridge Drive, McLean, VA 22102, and N. Martin
and J. Worthington whose address is TransCore, 7611 Derry Street, Harrisburg, PA
17111. The members of the committee receive no compensation from the TransCore
Retirement Savings Plan for services rendered in connection therewith. TransCore
has entered into an agreement with Vanguard, pursuant to which Vanguard performs
specified administrative services for the TransCore Retirement Savings Plan,
principally related to accounting and recordkeeping. Vanguard's fees for these
administrative services are paid by TransCore.
29
<PAGE> 31
BONUS COMPENSATION PLAN
General
The Company's Bonus Compensation Plan became effective on February 1, 1984
and was approved by the stockholders of the Company at the 1984 Annual Meeting
of Stockholders. The Bonus Compensation Plan was amended and restated in its
current form on April 2, 1991. The Plan provides for the distribution of bonuses
in cash, shares of Class A Common Stock or both. The Bonus Compensation Plan is
not subject to ERISA and is not intended to be qualified under Section 401(a) of
the Code.
Eligibility and Participation
All officers, directors and employees of the Company are eligible to
participate in and receive bonuses under the Bonus Compensation Plan.
Awards
Each year the Company establishes a bonus pool which is currently limited
to seven percent of aggregate compensation paid or accrued by the Company for
all persons eligible to receive bonuses under the Bonus Compensation Plan.
Awards under the Bonus Compensation Plan are generally made based upon the
employee obtaining or achieving performance criteria. Awards of bonuses may be
made in cash or shares of Class A Common Stock or a combination of cash and
shares and are made upon the recommendation of group managers or the Chief
Executive Officer of the Company, at the discretion of the committee
administering the Bonus Compensation Plan (the "Bonus Compensation Committee").
Awards of bonuses pursuant to the Bonus Compensation Plan are generally
distributed after the end of the fiscal year to which the bonus relates.
Pursuant to the Certificate of Incorporation, all shares of Class A Common Stock
awarded under the Bonus Compensation Plan are subject to the Company's right of
first refusal and the Company's right of repurchase upon termination of
employment or affiliation (except that qualified retiring employees may elect to
have the Company defer its repurchase rights for five years). Awards of shares
of Class A Common Stock may also be subject to forfeiture, in whole or in part,
in the event of the termination of the recipient's employment or affiliation
with the Company prior to the expiration of certain vesting periods, as
determined by the Bonus Compensation Committee.
The Bonus Compensation Plan also provides for the award of special bonuses
("Spot Bonuses") to reward extraordinary effort or special achievement. Spot
Bonuses may be awarded and distributed to eligible persons at any time, in cash,
by a group manager or by the President of the Company. Individual awards, other
than Spot Bonuses, generally range in an amount from one week's salary to 25% of
a recipient's annual salary, based upon the recipient's position with the
Company; however, the Bonus Compensation Plan does not provide for a maximum or
minimum number of shares of Class A Common Stock or an amount of cash which may
be awarded to any recipient.
Pursuant to the Bonus Compensation Plan, bonuses to members of the Bonus
Compensation Committee (other than the Chief Executive Officer of the Company)
must be approved by the Chief Executive Officer and bonuses to the Chief
Executive Officer must be approved by the Board of Directors which has delegated
this authority to the Compensation Committee of the Board of Directors. Members
of the Bonus Compensation Committee are ineligible to receive awards of Class A
Common Stock while serving on the Bonus Compensation Committee.
Federal Income Tax Consequences
Awards under the Bonus Compensation Plan of cash bonuses and shares of
Class A Common Stock that are not subject to forfeiture are taxable as ordinary
income to the recipient in the year received. Awards of shares of Class A Common
Stock that are subject to forfeiture will not be recognized for federal income
tax purposes by the recipient at the time such awards are made, unless the
recipient makes an election, as discussed below, to recognize the award as
income at the time received.
30
<PAGE> 32
The recipient of shares of Class A Common Stock that are subject to
forfeiture will recognize income at the time all or a portion of the award
becomes nonforfeitable to the extent of the value of such nonforfeitable shares
at such time. Such recipient may, however, elect to recognize, for federal
income tax purposes, the value of an award of shares of Class A Common Stock on
the date such shares are received, even though the shares remain subject to
forfeiture at that time. The election must be made within 30 days after the
award of shares and must be pursuant to applicable Treasury regulations issued
under Section 83(b) of the Code.
If such an election is made, future appreciation in the value of the shares
of Class A Common Stock will not be treated as taxable compensation. However, if
the shares are forfeited after the taxable year in which such election is made,
no deduction will be allowed to the recipient. The Company is entitled to a
deduction at the time the recipient recognizes the award (or a portion thereof)
as taxable income in an amount equal to the amount recognized by the recipient
as taxable income.
The foregoing discussion is intended only as a summary of certain federal
income tax consequences and does not purport to be a complete discussion of all
of the tax consequences of participation in the Bonus Compensation Plan.
Accordingly, recipients of awards under the Bonus Compensation Plan should
consult their own tax advisors with respect to all federal, state and local tax
effects of participation in the Bonus Compensation Plan. Moreover, the Company
does not represent that the foregoing tax consequences will apply to any
particular recipient's specific circumstances.
Amendment and Termination
The Bonus Compensation Plan may at any time be amended or terminated,
either by the Company's stockholders or by the Board of Directors, except that
no amendment or termination of the Bonus Compensation Plan may, without a
recipient's consent, affect any bonus award previously made to such recipient.
Administration
The Bonus Compensation Plan is administered by the Bonus Compensation
Committee, whose members consist of two or more directors. The members of the
Bonus Compensation Committee are appointed by and serve at the discretion of the
Company's Board of Directors. Members of the Bonus Compensation Committee
receive no compensation from the Bonus Compensation Plan for services rendered
in connection therewith. The current members of the Bonus Compensation Committee
are M.E. Trout and J.B. Wiesler. The address of each such person is Science
Applications International Corporation, 10260 Campus Point Drive, San Diego, CA
92121.
STOCK COMPENSATION PLANS
General
The Company maintains the Stock Compensation Plan and the Management Stock
Compensation Plan, which are together referred to as the "Stock Compensation
Plans." In connection with the Stock Compensation Plans, the Company entered
into a trust agreement ("Trust Agreement") with Wachovia Bank, N.A., as Trustee,
establishing a trust ("Trust") which will hold the accounts of participants
under the Stock Compensation Plans.
Eligibility, Participation and Awards
All officers and employees of the Company (including directors who are
employees of the Company) are eligible to receive awards under the Stock
Compensation Plans. However, only a select group of management and highly
compensated senior employees are eligible to receive awards under the Management
Stock Compensation Plan. It is intended that the participants of the Management
Stock Compensation Plan be limited to individuals that would permit the plan to
be treated as a "top hat" plan under applicable Internal Revenue Service and
Department of Labor regulations.
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<PAGE> 33
Each year the Company will establish a discretionary stock compensation
award pool. Awards under the Stock Compensation Plans will generally be made
upon the employee attaining or achieving performance criteria. Awards under the
Stock Compensation Plans will be determined by the Awarding Authority, which is
an individual or individuals to be appointed by the Board of Directors of the
Company. M.E. Trout and J.B. Wiesler are the Awarding Authority for those senior
employees who are subject to the reporting requirements under Section 16 of the
Exchange Act ("Section 16"). J.R. Beyster is the Awarding Authority for those
senior employees who are not subject to the reporting requirements of Section
16. The address of J.R. Beyster, M.E. Trout and J.B. Wiesler is Science
Applications International Corporation, 10260 Campus Point Drive, San Diego, CA
92121.
Awards will be made in Share Units, as defined in the Stock Compensation
Plans. Each Share Unit generally corresponds to one share of Class A Common
Stock of the Company, but the employee receiving an award of Share Units will
not have a direct ownership interest in the shares of Class A Common Stock
represented by the Share Units. The Company will contribute to the Trust either
shares of Class A Common Stock or cash with which the Trustee will purchase
Class A Common Stock, corresponding to the Share Units awarded under the Stock
Compensation Plans. Each employee receiving an award of Share Units will have an
account established on his or her behalf in the Trust credited with the shares
of Class A Common Stock allocated to the account based on the award of Share
Units.
Each account established in the Trust under the Stock Compensation Plans
will be subject to a vesting schedule not to exceed seven years, established by
the Awarding Authority. It is contemplated that the vesting schedule will
generally provide for vesting at the rate of one-third at the end of each of the
fifth, sixth and seventh years following the date of the award. Unvested
portions of the account will be forfeited in the event of termination of
employment for whatever reason (other than death) prior to full vesting of the
account. Any forfeited account balances may be returned to the Company or
reallocated to other participants as determined by the Company.
Distribution of vested account balances will occur at the end of the
seven-year vesting period (or upon termination of employment, if earlier).
However, employees may elect, within 90 days of the date of the award, to
receive distribution of the account as it becomes vested or, alternatively, in
the case of the Management Stock Compensation Plan, to defer distribution until
termination of employment.
Provisions Relating to the Trust
Although administered under a single Trust Agreement, each of the Stock
Compensation Plans is a separate plan, and the accounts of each of the Stock
Compensation Plans are maintained under a separate sub-trust with the Trustee.
The assets of the sub-trust established for each of the Stock Compensation Plans
are not available to pay benefits or satisfy liabilities of the other Plan.
The Trust is a so-called "grantor" trust or "rabbi" trust. The assets of
the Trust are available to satisfy the creditors of the Company in the event of
the bankruptcy or insolvency of the Company. Accordingly, participants in the
Stock Compensation Plans have no direct right to obtain shares of Class A Common
Stock or other assets held in the Trust in the event of such insolvency or
bankruptcy and also have no direct rights against the Company for their
benefits. Rather, participants have the limited rights of a general creditor
(along with other general creditors of the Company) whose only recourse is
against the assets of the Company, including the assets of the Trust. The assets
of the Trust are not guaranteed or insured by any party, including the Company.
The shares of Class A Common Stock held in the Trust are voted in the same
proportion as the other stockholders of the Company vote their shares of Class A
Common Stock and Class B Common Stock. In the event of a tender offer for the
Class A Common Stock and Class B Common Stock, the Trust Agreement calls for the
Trustee to tender the shares of Class A Common Stock held in the Trust if more
than 50% of the shares of Class A Common Stock and Class B Common Stock held
outside the Trust are tendered by the stockholders of the Company.
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Federal Income Tax Consequences
Because awards under the Stock Compensation Plans are represented only by
an interest in the Trust, and because the Trust is intended to be a so-called
"grantor" trust within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Code (by virtue of the fact that the assets of the Trust
are available to satisfy the creditors of the Company in the event of the
Company's bankruptcy or insolvency), the participants in the Stock Compensation
Plans should not be considered to have taxable income until their accounts are
distributed or made available to them under the terms of the Stock Compensation
Plans. This tax treatment is consistent with a series of private letter rulings
issued by the Internal Revenue Service with respect to so-called "rabbi" trusts,
including a private letter ruling issued in 1992 with respect to a rabbi trust
designed to invest primarily or exclusively in employer stock. Although the
Company believes that the analysis contained in these private letter rulings
applies to the Stock Compensation Plans, the Stock Compensation Plans are not
identical to the plans considered in the rulings, and, moreover, private letter
rulings apply only to the taxpayer who requests and receives the ruling. Because
the Company is not applying for a ruling on behalf of the Stock Compensation
Plans, there can be no definite assurance that the above-described tax treatment
will apply. The foregoing discussion is based upon advice of the Company's
counsel, Baker & McKenzie, and is intended only as a summary of certain federal
income tax consequences and does not purport to be a complete discussion of all
of the tax consequences of participation in the Stock Compensation Plans.
Accordingly, participants should consult their own tax advisors with respect to
all federal, state and local tax effects of participation in the Stock
Compensation Plans. Moreover, the Company does not represent that the foregoing
tax consequences will apply to any particular participant's specific
circumstances or will continue to apply in the future.
ERISA
It is intended that the Management Stock Compensation Plan be exempt from
the reporting and disclosure, participation and vesting, funding and fiduciary
responsibility provisions of ERISA as a plan "which is unfunded and is
maintained by an employer primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees"
(a so-called "top hat" plan). The Department of Labor issued an opinion letter
in 1992 indicating that a rabbi trust established to be invested primarily in
stock of the employer would not cause the related plan to be "funded." Hence,
the related plan was entitled to rely on the top hat exemption.
It is intended that the Stock Compensation Plan be exempt from ERISA
because it is not a plan which is designed to provide retirement income to
employees or which results in the deferral of income by employees for periods
extending to the termination of employment or beyond. Although the Company
believes these ERISA exemptions are available to the Stock Compensation Plans,
no Department of Labor opinion is being sought and no assurances can be made
that the ERISA exemptions will apply or continue to apply.
Amendments and Termination
The Board of Directors may amend or terminate the Stock Compensation Plans
for any reason, including, but not limited to, adverse changes in accounting
rules or tax laws or the bankruptcy, receivership or dissolution of the Company.
In the event of amendment or termination, benefits will either be paid out when
due under the terms of the Stock Compensation Plans or paid out as soon as
practicable as determined by the Stock Compensation Plans Committee in its sole
discretion.
Administration
The day-to-day administration of the Stock Compensation Plans is provided
by the Stock Compensation Plans Committee appointed by the Board of Directors of
the Company. D.W. Baldwin, S.P. Fisher and W. Reed are the current members of
the Stock Compensation Plans Committee. The address of each such person is
Science Applications International Corporation, 10260 Campus Point Drive, San
Diego, CA 92121, except for Mr. Reed whose address is Science Applications
International Corporation, c/o Bell Communica-
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tions Research, Inc., 445 South Street, Morristown, NJ 07960. Members of the
Committee are eligible to receive awards under the Stock Compensation Plans.
KEY EXECUTIVE STOCK DEFERRAL PLAN
Effective January 4, 1996, the Company adopted the Key Executive Stock
Deferral Plan (the "Stock Deferral Plan"). In connection with the Stock Deferral
Plan, the Company has entered into a trust agreement with Wachovia Bank, N.A.,
as Trustee, establishing a trust which will hold the accounts of participants in
the Stock Deferral Plan and which is substantially identical in its terms with
the Trust established under the Stock Compensation Plans. See "Employee Benefit
Plans -- Stock Compensation Plans."
The provisions of the Stock Deferral Plan relating to the trust established
under the Stock Deferral Plan, and the description of the Federal Income Tax
Consequences, Amendment and Termination and Administration are substantially the
same as those described above for the Stock Compensation Plans. See "Employee
Benefit Plans -- Stock Compensation Plans."
Eligibility under the Stock Deferral Plan is limited to directors of the
Company and certain key executives as determined by the Deferral Authority under
the Plan. Eligible participants may defer up to 100% of bonuses and director
fees, if applicable. Similar to the Stock Compensation Plans, a participant's
interest in the trust established under the Stock Deferral Plan will be in the
form of Share Units and will be subject to a vesting schedule to the extent the
deferred bonus would have been subject to a vesting schedule under the Bonus
Compensation Plan.
Distribution of a participant's interest in the trust established under the
Stock Deferral Plan will be made in a lump sum upon termination of affiliation
or employment, except that a participant may elect five -- or ten-year
installment payments for distributions following his or her retirement date. All
distributions will be made in shares of Class A Common Stock, unless the
Committee determines that such distribution would be impossible or would create
adverse impact on the Company.
It is intended that the Stock Deferral Plan be exempt from the reporting
and disclosure, participation and vesting, funding and fiduciary responsibility
provisions of ERISA as a plan which is unfunded and is maintained by an employer
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. The treatment of the Stock
Deferral Plan is intended to be similar to the Management Stock Compensation
Plan. See "Employee Benefit Plans -- Stock Compensation Plans -- ERISA."
EMPLOYEE STOCK PURCHASE PLANS
1995 STOCK PURCHASE PLAN
General
The Stock Purchase Plan was approved by the stockholders of the Company at
the 1995 Annual Meeting of Stockholders and became effective on July 14, 1995.
The Stock Purchase Plan is intended to qualify under Section 423(b) of the Code.
The Stock Purchase Plan provides for the purchase of Class A Common Stock by
participating employees through voluntary payroll deductions. At each Trade
Date, the Trustee purchases for the account of each participant that whole
number of shares of Class A Common Stock which may be acquired from the funds
available in the participant's stock purchase account, together with the
Company's 10% contribution described below. The Stock Purchase Plan is not
subject to ERISA.
Eligibility
Generally, all of the Company's employees are eligible to participate in
the Stock Purchase Plan, except for employees in non-participating subsidiaries.
No employee, however, who owns capital stock of the Company having more than 5%
of the voting power or value of such capital stock will be able to participate.
An employee's eligibility to participate in the Stock Purchase Plan will
terminate immediately upon termination of employment with the Company or
transfer to a non-participating subsidiary.
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Employees may participate in the Stock Purchase Plan by completing a
payroll deduction authorization form and providing it to the designated
officials of the Company. The minimum payroll deduction allowed is 3% of
compensation and the maximum allowable deduction is 10% of compensation.
Further, no employee is entitled to purchase an amount of Class A Common Stock
having a fair market value (measured as of its purchase date) in excess of
$25,000 in any calendar year pursuant to the Stock Purchase Plan and any other
employee stock purchase plan that may be adopted by the Company.
Purchase of Shares
Shares of Class A Common Stock purchased under the Stock Purchase Plan may
be acquired in the Limited Market or purchased from the Company out of its
authorized but unissued shares. See "Market Information -- The Limited Market"
and "Risk Factors -- Absence of a Public Market." A maximum of 1,500,000 shares
of Class A Common Stock (subject to adjustment in the event of a change in the
capitalization of the Company effected without receipt of consideration by the
Company) has been authorized for issuance by the Company as newly issued shares
under the Stock Purchase Plan.
The purchase price to be paid for the shares of Class A Common Stock
acquired for the accounts of participants will be the prevailing Formula Price.
Of this amount, 90% is currently being paid out of the funds contributed by the
participant and 10% is currently being paid by the Company. Under the Stock
Purchase Plan, the Company's contribution to the purchase price may range from
0% to 15%, as determined by the Stock Purchase Committee from time to time.
Distribution and Withdrawals
Shares of Class A Common Stock acquired under the Stock Purchase Plan will
be distributed to each participant prior to any record date established by the
Company for a stockholder vote and in the interim will be held by the Trustee
for the account of such participant.
Pursuant to the Certificate of Incorporation, all shares of Class A Common
Stock purchased pursuant to the Stock Purchase Plan will be subject to the
Company's right of repurchase upon the participant's termination of employment
or affiliation with the Company (except that qualified retiring employees may
elect to have the Company defer its repurchase rights for five years) at the
then prevailing Formula Price in the case of shares held by the participant
directly, and at the Formula Price in effect at the time of the distribution of
shares out of the Stock Purchase Plan in the case of shares held by the Trustee
for the benefit of the participant. All such shares will also be subject to the
Company's right of first refusal in the event the participant desires to sell
such shares other than in the Limited Market.
Participants may withdraw from the Stock Purchase Plan and receive the
money held in their stock purchase accounts at any time prior to the acquisition
of shares of Class A Common Stock therewith. A participant who has withdrawn
will not be eligible to participate in the Stock Purchase Plan until the
following Plan Year after such withdrawal. No interest will be paid on the money
held in the stock purchase accounts of the participants unless required by law.
Amendment and Termination
The Board of Directors of the Company may suspend or amend the Stock
Purchase Plan in any respect, except that no amendment may (i) increase the
maximum number of shares authorized to be issued by the Company under the Plan
or (ii) deny to participating employees the right at any time to withdraw from
the Stock Purchase Plan and thereupon obtain all amounts then due to their
credit in their stock purchase accounts. The Stock Purchase Plan will terminate
on July 31, 1998.
Administration
The Stock Purchase Plan is administered by the Company's Stock Purchase
Plan Committee (the "Stock Purchase Committee"), whose members are appointed by
and serve at the discretion of the Company's Board of Directors. Members of the
Stock Purchase Committee receive no compensation from the
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Stock Purchase Plan for services rendered in connection therewith. The current
members of the Stock Purchase Committee are A.M. Jenings, W. Reed and W.A.
Roper, Jr. The address for Mr. Roper is Science Applications International
Corporation, 10260 Campus Point Drive, San Diego, CA 92121, the address for Ms.
Jenings is Science Applications International Corporation, 6021 South Syracuse
Way, Denver, CO 80111 and the address for Mr. Reed is Science Applications
International Corporation, c/o Bell Communications Research, Inc., 445 South
Street, Morristown, NJ 07960. Members of the Stock Purchase Committee are
eligible to participate in the Stock Purchase Plan.
Trustee
The Trustee of the Stock Purchase Plan is the Company.
Federal Income Tax Consequences
For federal income tax purposes, no taxable income will be recognized by a
participant in the Stock Purchase Plan until the taxable year of sale or other
disposition of the shares of Class A Common Stock acquired under the Plan. When
the shares are disposed of by a participant two years or more from the date such
shares were purchased for the participant's account by the Trustee, the
participant must recognize ordinary income for the taxable year of disposition
to the extent of the lesser of (i) the excess of the fair market value of the
shares on the purchase date over the amount of the purchase price paid by the
participant (the "Discount") or (ii) the amount by which the fair market value
of the shares at disposition or death exceeds the purchase price, with any gain
in excess of such ordinary income amount being treated as a long-term capital
gain, assuming that the shares are a capital asset in the hands of the
participant. In the event of a participant's death while owning shares acquired
under the Stock Purchase Plan, ordinary income must be recognized in the year of
death in the amount specified in the foregoing sentence. When the shares are
disposed of prior to the expiration of the two-year holding period (a
"disqualifying disposition"), the participant must recognize ordinary income in
the amount of the Discount, even if the disposition is by gift or is at a loss.
In the cases discussed above (other than death), the amount of ordinary
income recognized by a participant is added to the purchase price paid by the
participant and this amount becomes the tax basis for determining the amount of
the capital gain or loss from the disposition of the shares.
Net long-term capital gains are presently taxed at a maximum federal income
tax rate of 20% for assets held more than 18 months, compared to a maximum rate
of 39.6% for ordinary income. However, limitations on itemized deductions and
the phaseout of personal exemptions may result in effective marginal tax rates
higher than 20% for net capital gains and 39.6% for ordinary income.
The Company will not be entitled to a deduction at any time for the shares
issued pursuant to the Stock Purchase Plan if a participant holding such shares
continues to hold his or her shares or disposes of his or her shares after the
required two-year holding period or dies while holding such shares. If, however,
a participant disposes of such shares prior to the expiration of the two-year
holding period, the Company is allowed a deduction to the extent of the amount
of ordinary income includable in gross income by such participant for the
taxable year as a result of the early disposition of the shares.
The foregoing discussion is based upon the advice of the Company's counsel,
Baker & McKenzie, and is intended only as a summary of certain federal income
tax consequences and does not purport to be a complete discussion of all of the
tax consequences of participation in the Stock Purchase Plan. Accordingly,
participants should consult their own tax advisors with respect to all federal,
state and local tax effects of participation in the Stock Purchase Plan.
Moreover, the Company does not represent that the foregoing tax consequences
will apply to any participant's specific circumstances or will continue to apply
in the future and makes no undertaking to maintain the tax-qualified status of
the Stock Purchase Plan.
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1998 EMPLOYEE STOCK PURCHASE PLAN
On April 10, 1998, the Board of Directors approved, subject to stockholder
approval, the 1998 Employee Stock Purchase Plan. Stockholders will be asked to
approve the 1998 Employee Stock Purchase Plan at the Company's 1998 Annual
Meeting of Stockholders. If the 1998 Employee Stock Purchase Plan is approved by
stockholders, it will become effective on July 10, 1998 and will terminate July
31, 2001. The terms of the 1998 Employee Stock Purchase Plan will be
substantially the same as those currently in effect with respect to the existing
Stock Purchase Plan, except that the 1998 Employee Stock Purchase Plan allows
for participation by employees of subsidiaries that do not fall within the
definition of "subsidiary corporation" in Section 424(f) of the Code whose
purchase of shares would not qualify for favorable tax treatment under Sections
423(a) and 421(a) of the Code. The 1998 Employee Stock Purchase Plan provides
for an agent, which shall be the Company or its designee, to retain the stock
certificates representing the shares under the 1998 Employee Stock Purchase
Plan, which shall be distributed to each participant prior to any record date
established by the Company for a stockholder vote.
STOCK OPTION PLANS
1992 STOCK OPTION PLAN
General
The 1992 Stock Option Plan (the "1992 Option Plan") was approved by the
Board of Directors on April 10, 1992 and by the stockholders of the Company at
the 1992 Annual Meeting of Stockholders. The 1992 Option Plan provided for the
granting of non-qualified options to purchase a maximum of 12,000,000 shares of
Class A Common Stock to key employees, directors and consultants. As of April
13, 1998, the Company had 5,011,413 shares of Class A Common Stock reserved for
issuance upon the exercise of options granted under the 1992 Option Plan. The
1992 Option Plan is not subject to ERISA and is not intended to be qualified
under Section 401(a) of the Code.
The exercise price of options granted under the 1992 Option Plan is 100% of
the fair market value of the Class A Common Stock on the date of grant. Upon the
exercise of an option, the exercise price must be paid in full in cash or in
shares of Class A Common Stock valued at the Formula Price on the date of
exercise. Shares of Class A Common Stock acquired through the exercise of a
stock option must have been owned by the optionee at least six months before
such shares may be used to pay the exercise price of another option. Any income
tax withholding required as a result of the exercise of an option may, at the
discretion of the Stock Option Committee, be satisfied by withholding in shares
of Class A Common Stock valued at the Formula Price on the date of exercise. All
options granted under the 1992 Option Plan are non-transferable except by will
or the laws of intestate succession.
Options granted under the 1992 Option Plan may be exercised over a period
specified in the option agreement (which period may not exceed 10 years). If an
optionee's employment terminates as a result of retirement or permanent total
disability, all options may be exercised, to the extent exercisable at the date
of termination, for 90 additional days, but in no event beyond their respective
expiration dates. If an optionee dies while employed by or affiliated with the
Company, all unexercised options, to the extent exercisable at the date of
death, may, for up to one additional year, or such shorter period as may be
specified in the option agreement (but not beyond their respective expiration
dates), be exercised by the optionee's estate or the person to whom the
optionee's rights pass by will or the laws of descent and distribution. Upon
termination of employment for any other reason, all options will terminate as of
the date of termination of employment or affiliation, unless such date is
extended by the Stock Option Committee (but not beyond their respective
expiration dates). Currently, the practice of the Stock Option Committee is to
provide in the grant that the optionee may exercise the option within 30 days
following termination of employment or affiliation, but only to the extent that
the option was exercisable as of the date of such termination.
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Eligibility and Participation
The persons eligible to receive options under the 1992 Option Plan are key
employees, directors and consultants. No option may be granted to any individual
who, at the time the option is granted, owns more than 10% of the total combined
voting power of all classes of capital stock of the Company. Other than the
foregoing, the 1992 Option Plan does not provide any limit as to the number of
shares that may be subject to options granted to any one individual.
Amendment and Termination
The 1992 Option Plan may be amended, suspended or terminated by the Board
of Directors, except that no such amendment may, without the approval of the
holders of outstanding shares of the Company having a majority of the general
voting power, (i) increase the maximum number of shares for which options may be
granted (other than by reason of changes in capitalization and similar
adjustments), (ii) change the provisions of the 1992 Option Plan relating to the
establishment of the exercise price (other than the provisions relating to the
manner of determination of fair market value of the Company's capital stock to
conform to any applicable requirements of the Code or regulations issued
thereunder) or (iii) permit the granting of options to members of the Stock
Option Committee. The 1992 Option Plan terminated on July 31, 1995, and no
additional options may be granted.
1995 STOCK OPTION PLAN
General
The 1995 Stock Option Plan (the "1995 Option Plan") was approved by the
Board of Directors on April 14, 1995 and by the stockholders at the Company's
1995 Annual Meeting of Stockholders. The 1995 Option Plan became effective on
July 14, 1995 and will terminate on, and no option may be granted after, July
31, 1998. The terms of the 1995 Option Plan are substantially similar to those
currently in effect with respect to the 1992 Option Plan, except that pursuant
to the 1995 Option Plan a maximum of 12,000,000 shares of Class A Common Stock
will be authorized for issuance, the aggregate number of shares subject to
options granted to any individual may not exceed 500,000 shares, and ISOs as
well as non-qualified stock options may be granted. As of April 13, 1998, the
Company had 11,873,576 shares of Class A Common Stock reserved for issuance
under the 1995 Option Plan.
Eligibility and Participation
The persons eligible to receive options under the 1995 Option Plan are key
employees, directors and consultants. No option may be granted to any individual
who, at the time the option is granted, owns more than 10% of the total combined
voting power of all classes of capital stock of the Company. The aggregate
number of shares subject to options granted to any individual may not exceed
500,000 shares. Other than the foregoing, the 1995 Option Plan does not provide
any limit as to the number of shares that may be subject to options granted to
any one individual.
Amendment and Termination
The Board of Directors or the Operating Committee of the Board of Directors
may at any time suspend or terminate the 1995 Option Plan and may amend it from
time to time in such respects as the Board of Directors or the Operating
Committee may deem advisable in order that Options granted thereunder shall
conform to any change in the law, or in any other respect which the Board of
Directors or the Operating Committee may deem to be in the best interests of the
Company; provided, however, that no such amendment shall, without the approval
of a majority of the voting power of the capital stock of the Company present or
represented and entitled to vote at a duly constituted meeting of the
stockholders, (i) increase the maximum number of shares for which Options may be
granted under the 1995 Option Plan (other than by reason of changes in
capitalization and similar adjustments), (ii) change the provisions of Paragraph
6(c) of the 1995 Option Plan relating to the establishment of the Exercise Price
other than to change the manner of determining the fair market value of the
Company's Class A Common Stock to conform with any then
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applicable provisions of the Code or regulations issued thereunder or (iii)
permit the granting of options to members of the Stock Option Committee.
1998 STOCK OPTION PLAN
On April 10, 1998, the Board of Directors approved, subject to stockholder
approval, the 1998 Stock Option Plan (the "1998 Option Plan"). Stockholders will
be asked to approve the 1998 Option Plan at the Company's 1998 Annual Meeting of
Stockholders. If the 1998 Option Plan is approved by stockholders, it will
become effective on July 10, 1998 and will terminate on, and no option may be
granted after, July 31, 2000. The terms of the 1998 Option Plan will be
substantially the same as those currently in effect with respect to the existing
1995 Option Plan, except that pursuant to the 1998 Option Plan the maximum
number of shares of Class A Common Stock that will be authorized for issuance
will be the sum of the following (subject to adjustment under certain
circumstances): (i) 8,500,000 shares of Class A Common Stock; (ii) any shares of
Class A Common Stock available for future awards under the 1995 Option Plan as
of the effective date of the 1998 Option Plan (following which date no further
grants will be made under the 1995 Option Plan); and (iii) any shares of Class A
Common Stock that are subject to options granted under the 1992 Option Plan and
1995 Option Plan which are forfeited back to the Company when such options
expire, terminate or for any other reason cease to be exercisable in whole or in
part. In addition, the persons eligible to receive options under the 1998 Option
Plan will be key employees, directors and consultants of the Company and any
entity in which the Company has an equity ownership. The 1998 Option Plan will
be administered by the Stock Option Committee whose members must satisfy the
requirements to be a "non-employee director" under Rule 16b-3 under the Exchange
Act, as well as an "outside director" pursuant to the Treasury Regulations under
Section 162(m) of the Code. The Stock Option Committee may permit the exercise
price of an option to be paid by an election authorizing the withholding of a
number of shares from the shares to be issued upon exercise of the option. The
Stock Option Committee also will have the discretion to provide for
transferability of options and to determine the events that would trigger
termination of the options granted under the 1998 Option Plan.
GENERAL PROVISIONS OF THE STOCK OPTION PLANS
General
All shares issued upon exercise of options granted under the 1992 Option
Plan, the 1995 Option Plan and the 1998 Option Plan if approved by the
stockholders (collectively, the "Option Plans") are subject to (i) the Company's
right of first refusal in the event that the optionee desires to sell his or her
shares other than in the Limited Market and (ii) the Company's right of
repurchase upon termination of the optionee's employment or affiliation (except
that qualified retiring employees may elect to have the Company defer its
repurchase rights for five years). Only shares of Class A Common Stock will be
issued upon exercise of options.
The Company follows the practice of granting stock options to employees
outright, contingent upon the employee attaining a certain level of contract
awards for the Company during a specified period or satisfying other performance
criteria and, in some cases, also contingent upon a requirement that such
individuals purchase a specified number of shares of Class A Common Stock in the
Limited Market at the prevailing Formula Price. Options generally become
exercisable on a cumulative basis over a four-year period.
If the outstanding shares of the capital stock of the Company are changed
into, or exchanged for a different number or kind of shares or securities of the
Company through reorganization, merger, recapitalization, reclassification or
similar transaction, or if the number of outstanding shares is changed through a
stock split, stock dividend, stock consolidation or similar transaction, an
appropriate adjustment (determined by the Board of Directors in its sole
discretion) will be made in the number and kind of shares and the exercise price
per share of options which are outstanding or which may be granted thereafter.
As of April 13, 1998, there were 5,011,413 shares of Class A Common Stock
reserved for issuance under the 1992 Option Plan and 11,873,576 shares of Class
A Common Stock reserved for issuance under the 1995 Option Plan.
Under the Option Plans, the options will become fully exercisable upon any
person (other than the Company or any subsidiary or employee benefit plan
thereof) becoming the beneficial owner of more than
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25% of the outstanding capital stock without the prior approval of the Board of
Directors. The Stock Option Committee is also given the discretion to accelerate
or defer the exercise of options in other circumstances, at the Stock Option
Committee's discretion.
Administration
The Option Plans are administered by the Stock Option Committee whose
members consist of two or more directors or other individuals appointed by and
who serve at the discretion of the Company's Board of Directors. The members of
the Stock Option Committee are not eligible to receive options under either the
1992 Option Plan of the 1995 Option Plan while serving on the Stock Option
Committee, however, such members are eligible to receive options under the 1998
Option Plan. The Stock Option Committee is appointed annually by the Board of
Directors, which may also fill vacancies or replace members of the Stock Option
Committee. Subject to the express provisions of the Option Plans, the Stock
Option Committee has the authority to (i) interpret the Option Plans, (ii)
prescribe, amend and rescind rules and regulations relating to the Option Plans,
(iii) determine the individuals to whom and the time or times at which options
may be granted and the number of shares to be subject to each option granted
under the Option Plans, (iv) determine the terms and conditions of the option
agreements under the Option Plans (which need not be identical), (v) with
respect to the 1995 Option Plan and the 1998 Option Plan (if approved by the
stockholders), determine whether to grant ISOs or non-qualified stock options
and (vi) make all other determinations necessary or advisable for the
administration of the Option Plans. In addition, the Stock Option Committee may,
with the consent of the affected optionees and subject to the general
limitations of the Option Plans, make any adjustment in the exercise price, the
number of shares subject to or the term of any outstanding option by
cancellation of such option and a subsequent regranting of such option, or by
amendment or substitution of such option. Options which have been so amended,
regranted or substituted may have higher or lower exercise prices, cover a
greater or lesser number of shares of capital stock or have longer or shorter
terms, than the prior options. The members of the Stock Option Committee receive
no compensation from the Option Plans for services rendered in connection
therewith. The current members of the Stock Option Committee are M.E. Trout and
J.B. Wiesler. The address of each such person is Science Applications
International Corporation, 10260 Campus Point Drive, San Diego, CA 92121.
Federal Income Tax Consequences
The following discussion is based upon advice of the Company's counsel,
Baker & McKenzie, and is intended only as a summary of certain federal income
tax consequences and does not purport to be a complete discussion of all of the
tax consequences of participation in the Option Plans. Accordingly, holders of
options granted under the Option Plans should consult their own tax advisors for
specific advice with respect to all federal, state and local tax effects before
exercising any options and before disposing of any shares of capital stock
acquired upon the exercise of an option. Moreover, the Company does not
represent that the following tax consequences apply to any particular option
holder's specific circumstances or will continue to apply in the future. All
outstanding options under the 1992 Option Plan are non-qualified options.
Options granted under the 1995 Option Plan and the 1998 Option Plan (if approved
by the stockholders) may be non-qualified options or ISOs, as determined by the
Committee at the time of grant.
Non-Qualified Options. Generally, the optionee will not be taxed upon the
grant of any non-qualified option but rather, at the time of exercise of such
option, the optionee will recognize ordinary income for federal income tax
purposes in an amount equal to the excess of the fair market value at the time
of exercise of the capital stock purchased over the exercise price. The Company
will generally be entitled to a tax deduction at such time and in the same
amount that the optionee realizes ordinary income.
If capital stock acquired upon the exercise of a non-qualified option is
later sold or exchanged, then the difference between the sale price and the fair
market value of such capital stock on the date which governs the determination
of ordinary income is generally taxable (provided the stock is a capital asset
in the holder's hands) as long-term, mid-term or short-term capital gain or loss
depending upon whether the holding period for such capital stock at the time of
disposition is more or less than one year or more than 18 months.
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Exercise with Shares of Capital Stock
If payment of the exercise price of a non-qualified option is made by
surrendering previously owned shares of capital stock, the following rules
apply:
(a) No gain or loss will be recognized as a result of the surrender of
shares in exchange for an equal number of shares subject to the
non-qualified option, and the surrender of shares will not be treated as a
disqualifying disposition of any stock acquired through exercise of an ISO.
(b) The number of shares received equal to the shares surrendered will
have a basis equal to the shares surrendered and a holding period that
includes the holding period of the shares surrendered.
(c) Any additional shares received will (i) be taxed as ordinary
income in an amount equal to the fair market value of the shares at the
time of exercise, (ii) have a basis equal to the amount included in taxable
income by the optionee and (iii) have a holding period that begins on the
date of the exercise.
Incentive Stock Options. Options granted under the 1995 Option Plan or the
1998 Option Plan (if approved by the stockholders) designated as such are
intended to constitute ISOs for federal income tax purposes. Generally, an
optionee receiving an ISO will not be in receipt of taxable income upon the
grant of the ISO or upon its timely exercise. The exercise of an ISO will be
timely if made during its term and if the optionee remains an employee of the
Company at all times during the period beginning on the date of grant of the ISO
and ending on the date three months before the date of exercise (or one year
before the date of exercise in the case of death). Upon the ultimate sale of the
capital stock received upon such exercise, except as noted below, the optionee
will recognize mid-term or long-term capital gain or loss (if the capital stock
is a capital asset in the hands of the optionee) equal to the difference between
the amount realized upon such sale and the exercise price. The Company, under
these circumstances, will not be entitled to any federal income tax deduction in
connection with either the exercise of the ISO or the sale of such shares by the
optionee.
However, if the capital stock acquired upon the timely exercise of an ISO
is disposed of by the optionee prior to the expiration of two years from the
date of grant of the ISO or within one year from the date such capital stock is
transferred to the optionee upon exercise (a "disqualifying disposition"), any
gain realized by the optionee generally will be taxable at the time of such
disqualifying disposition as follows: (i) at ordinary income tax rates to the
extent of the difference between the exercise price and the lesser of the fair
market value of the capital stock on the date the ISO is exercised or the amount
realized on such disqualifying disposition and (ii) if the capital stock is a
capital asset in the hands of the optionee, as short-term, mid-term or long-term
capital gain to the extent of any excess of the amount realized on such
disqualifying disposition over the fair market value of the capital stock on the
date which governs the determination of his or her ordinary income. If a
disqualifying disposition is made in a transaction in which a loss would not be
recognized under the Code (e.g., a gift, sale to certain related parties, sale
followed by a purchase of stock or grant of a new option under the "wash sale"
rules), the taxable gain recognized as a result of such disqualifying
disposition will not be limited to the amount of gain realized in the
disqualifying disposition. In the case of a disqualifying disposition, the
Company may claim a federal tax deduction at the time and in the amount taxable
to the optionee as ordinary income. Any capital gain realized by the optionee
will be mid-term capital gain if the optionee's holding period for the capital
stock at the time of disposition is more than one year but 18 months or less;
long-term capital gain if the holding period is more than 18 months; otherwise,
it will be short-term capital gain.
Net capital gains are currently taxed at a maximum federal income tax rate
of 20% for long-term gains (shares held for more than 18 months) and 28% for
mid-term gains (shares held for more than 12 months but 18 months or less),
compared to a maximum rate of 39.6% for ordinary income. However, limitations on
itemized deductions and the phase-out of personal exemptions may result in
effective marginal tax rates higher than 20%/28% for net capital gains and 39.6%
for ordinary income.
To the extent that the aggregate fair market value (based on the fair
market value on the date of grant, which is the exercise price of the ISO) of
shares with respect to which an ISO first becomes exercisable (i.e., vests)
within any calendar year exceeds $100,000, the portion of the ISO representing
such excess is treated as a non-qualified stock option, subject to the tax
treatment described above. See "Employee Benefit Plans --
41
<PAGE> 43
General Provisions of the Stock Option Plans -- Federal Income Tax
Consequences -- Non-Qualified Options."
Alternative Minimum Tax. For purposes of the alternative minimum tax
provisions contained in Section 55 of the Code, the exercise of an ISO will
be treated as though it were a non-qualified option under Section 83 of the
Code, but solely for purposes of determining the optionee's alternative
minimum taxable income. The minimum tax is imposed at a rate of 26% of
alternative minimum taxable income (taxable income increased by items of
tax preference and adjusted for certain other items) up to $175,000 and 28%
of any additional such income over a specified exemption amount ($45,000
for married taxpayers filing jointly, $33,750 for single taxpayers, but
phased out at specified levels of income), but is payable only if the
minimum tax exceeds the taxpayer's regular tax liability for the year.
Exercise with Shares of Capital Stock. If payment for the exercise
price of an ISO is made by surrendering previously owned shares of the
capital stock, the following rules will apply:
If shares of "statutory option stock" (i.e., stock previously acquired
pursuant to the exercise of an ISO) are surrendered in payment of the
exercise price of an ISO and if, at the date of surrender, the applicable
holding period for such shares has not been met (e.g., if shares previously
acquired upon the exercise of an ISO are surrendered within two years from
the date of grant or within one year from the date the shares were
transferred to the optionee), such surrender will constitute a
"disqualifying disposition" and any gain realized on such transfer will
thus be taxable according to the rules described above for disqualifying
dispositions. If the shares surrendered are not statutory option stock, or
if they are statutory option stock but have been held for the requisite
holding period, no gain or loss should be recognized upon such surrender.
Although the Internal Revenue Service will not issue any rulings as to the
effect of such an exercise, it has issued a published ruling stating that
no gain or loss will be recognized upon the surrender of shares upon
exercise of a non-qualified stock option, and the Treasury Department has
issued proposed regulations which, if adopted in their current form, would
appear to provide that, except as discussed above, in general, when shares
are surrendered upon exercise of an ISO:
(a) No gain or loss will be recognized as a result of the exchange.
(b) A number of shares received which is equal in number to the shares
surrendered will have a basis equal to the shares surrendered and (except
for purposes of determining whether a disposition will be a disqualifying
disposition) will have a holding period which includes the holding period
of the shares exchanged.
(c) Any additional shares received will have a zero basis and will
have a holding period which begins on the date of the exchange. If any of
the shares received are disposed of within two years of the date of grant
of the ISO or within one year after the date shares were transferred to the
optionee, the shares with the lowest basis (i.e., a zero basis) will be
deemed to be disposed of first and such disposition will be a disqualifying
disposition giving rise to ordinary income as discussed above.
LEGAL MATTERS
The legality of the Class A Common Stock offered hereby has been passed
upon for the Company and the Selling Stockholders by Douglas E. Scott, Esquire,
Senior Vice President and General Counsel of the Company. As of April 13, 1998,
Mr. Scott owned of record 16,410 shares of Class A Common Stock, had the right
to acquire an additional 21,000 shares pursuant to previously granted stock
options and beneficially owned a total of 4,591 shares through the Retirement
Plans.
The summary of certain federal income tax matters with respect to the Plans
has been passed upon for the Company by Baker & McKenzie, San Francisco,
California.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K of Science Applications
International Corporation for the year ended January 31, 1998 have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
42
<PAGE> 44
The consolidated financial statements of Bell Communications Research, Inc.
incorporated by reference in this Prospectus from the Company's Report on Forms
8-K dated July 11, 1997 and September 19, 1997, have been incorporated by
reference herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
43
<PAGE> 45
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
STOCKHOLDERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Information Incorporated by
Reference............................ 2
Risk Factors........................... 3
The Company............................ 8
Plan of Distribution................... 8
Selling Stockholders................... 10
Determination of Offering Price........ 10
Use of Proceeds........................ 12
Employee Benefit Plans................. 12
Legal Matters.......................... 42
Experts................................ 42
</TABLE>
======================================================
======================================================
35,000,000 SHARES
CLASS A COMMON STOCK
LOGO
PROSPECTUS
, 1998
======================================================
<PAGE> 46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimated statement of all expenses
incurred in connection with the registration and distribution of the securities
being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $183,916*
Legal Fees and Expenses..................................... 25,000
Printing Fees and Expenses.................................. 35,000
Accounting Fees and Expenses................................ 21,000
Blue Sky Qualification Fees................................. 20,000
Miscellaneous............................................... 1,084
--------
Total..................................................... $286,000
========
</TABLE>
- ---------------
* The Selling Stockholders have each agreed to pay their pro-rata portion
of the registration fee.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware grants each
corporation organized thereunder, such as the Registrant, the power to indemnify
its directors and officers against certain circumstances. Article FIFTEENTH of
the Registrant's Restated Certificate of Incorporation provides for
indemnification of directors and officers to the fullest extent permitted by
law. The Company also has directors and officers liability insurance, with
policy limits of $50 million, under which directors and officers of the Company
are insured against certain liabilities which they may incur in such capacities.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS INCORPORATED BY REFERENCE TO
- ----------- ----------------------- ----------------------------
<S> <C> <C>
4(a) Article FOURTH of the Registrant's Exhibit 3 to the Registrant's
Restated Certificate of Incorporation, Post-Effective Amendment No. 1 to Form
as amended on August 21, 1987. S-2 as filed on August 21, 1987 with
the SEC.
5(a) Opinion of Douglas E. Scott, Esq. **
5(b) Internal Revenue Service determination Exhibit 5(b) to the Registrant's Form
letter dated February 3, 1997, relating S-3 as filed on April 28, 1997 with the
to the Company's Employee Stock SEC (the "1997 S-3").
Ownership Plan.
5(c) Internal Revenue Service determination Exhibit 5(c) to the 1997 S-3.
letter dated February 3, 1997, relating
to the Company's Cash or Deferred
Arrangement.
10(a) Registrant's Bonus Compensation Plan, Exhibit 10(a) to the Registrant's
as amended through October 2, 1996. Annual Report on Form 10-K for the
fiscal year ended January 31, 1998 (the
"1998 10-K").
10(b) Registrant's 1992 Stock Option Plan, as Exhibit 10(b) to the 1998 10-K.
amended through October 2, 1996.
10(c) Registrant's Stock Compensation Plan, Exhibit 10(c) to the 1998 10-K.
as amended through December 30, 1997.
10(d) Registrant's Management Stock Exhibit 10(d) to the 1998 10-K.
Compensation Plan, as amended through
December 30, 1997.
</TABLE>
II-1
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS INCORPORATED BY REFERENCE TO
- ----------- ----------------------- ----------------------------
<S> <C> <C>
10(e) 1995 Employee Stock Purchase Plan. Annex II of the Registrant's Proxy
Statement for the 1995 Annual Meeting
of Stockholders as filed June 1995 with
the SEC (the "1995 Proxy").
10(f) 1995 Stock Option Plan, as amended Exhibit 10(f) to the 1998 10-K.
through October 2, 1996.
10(g) Keystaff Deferral Plan, as amended Exhibit 10(g) to the 1998 10-K.
through December 30, 1997.
10(h) Key Executive Stock Deferral Plan. Exhibit 4(s) to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended January 31, 1996.
10(i) Form of Alumni Agreement. Exhibit 4(w) to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended January 31, 1997.
23(a) Consent of Douglas E. Scott, Esq. **
(contained in Exhibit 5(a) to this
Registration Statement).
23(b) Consent of Price Waterhouse LLP. **
23(c) Consent of Baker & McKenzie. **
23(d) Consent of Coopers & Lybrand L.L.P. **
</TABLE>
- ---------------
** Filed herewith.
ITEM 17. UNDERTAKINGS
(a) Rule 415 Offering
Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to the Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement, excluding information contained in
periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the Registration
Statement.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration
II-2
<PAGE> 48
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Security and Exchange Commission Policy Regarding Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions of Section 145 of the General Corporation
Law of Delaware and Article FIFTEENTH of Registrant's Certificate of
Incorporation, or otherwise, Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Registrant of the expenses incurred or paid by a director,
officer or controlling person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) Registrant hereby undertakes that it has submitted or will submit
Registrant's Cash or Deferred Arrangement, Profit Sharing Retirement Plan and
Employee Stock Retirement Plan (collectively, the "Plans") and any amendment
thereto to the Internal Revenue Service ("IRS") in a timely manner and has made
or will make all changes required by the IRS in order to qualify the Plans under
Section 401 of the Internal Revenue Code.
(e) Registrant hereby undertakes to file a Current Report on Form 8-K after
each price determination of the Class A Common Stock which will include a table
showing the values of each element of the Formula for the most recent price
determination and the three preceding price determinations.
II-3
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Diego, State of California on May 4, 1998.
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
/S/ J.R. BEYSTER
By
J.R. Beyster
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints J.D. Heipt and D.E. Scott, or any one of
them jointly and severally, such person's attorneys-in-fact, each with the power
of substitution, for such person in any and all capacities, to execute any and
all amendments (including post-effective amendments) to this Registration
Statement on Form S-3 and to file the same, with all exhibits thereto, and any
other documents in connection therewith, with the Securities and Exchange
Commission under the Securities Act of 1933, and hereby ratifies and confirms
all that each of said attorneys-in-fact, or each of their substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ J.R. BEYSTER Chairman of the Board and Chief May 4, 1998
- --------------------------------------------------- Executive Officer
J.R. Beyster
/s/ W.A. ROPER, JR. Principal Financial Officer May 4, 1998
- ---------------------------------------------------
W.A. Roper, Jr.
/s/ P.N. PAVLICS Principal Accounting Officer May 4, 1998
- ---------------------------------------------------
P.N. Pavlics
/s/ D.P. ANDREWS Director May 4, 1998
- ---------------------------------------------------
D.P. Andrews
/s/ V.N. COOK Director May 4, 1998
- ---------------------------------------------------
V.N. Cook
</TABLE>
II-4
<PAGE> 50
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ W.H. DEMISCH Director May 4, 1998
- ---------------------------------------------------
W.H. Demisch
/s/ W.A. DOWNING Director May 4, 1998
- ---------------------------------------------------
W.A. Downing
/s/ J.E. GLANCY Director May 4, 1998
- ---------------------------------------------------
J.E. Glancy
/s/ B.R. INMAN Director May 4, 1998
- ---------------------------------------------------
B.R. Inman
/s/ A.K. JONES Director May 4, 1998
- ---------------------------------------------------
A.K. Jones
/s/ H.M.J. KRAEMER, JR. Director May 4, 1998
- ---------------------------------------------------
H.M.J. Kraemer, Jr.
/s/ W.M. LAYSON Director May 4, 1998
- ---------------------------------------------------
W.M. Layson
/s/ C.B. MALONE Director May 4, 1998
- ---------------------------------------------------
C.B. Malone
/s/ J.W. MCRARY Director May 4, 1998
- ---------------------------------------------------
J.W. McRary
/s/ S.D. ROCKWOOD Director May 4, 1998
- ---------------------------------------------------
S.D. Rockwood
Director
- ---------------------------------------------------
R.C. Smith
/s/ E.A. STRAKER Director May 4, 1998
- ---------------------------------------------------
E.A. Straker
/s/ M.E. TROUT Director May 4, 1998
- ---------------------------------------------------
M.E. Trout
/s/ J.P. WALKUSH Director May 4, 1998
- ---------------------------------------------------
J.P. Walkush
</TABLE>
II-5
<PAGE> 51
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ J.H. WARNER, JR. Director May 4, 1998
- ---------------------------------------------------
J.H. Warner, Jr.
/s/ J.A. WELCH Director May 4, 1998
- ---------------------------------------------------
J.A. Welch
/s/ J.B. WIESLER Director May 4, 1998
- ---------------------------------------------------
J.B. Wiesler
/s/ A.T. YOUNG Director May 4, 1998
- ---------------------------------------------------
A.T. Young
</TABLE>
II-6
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS INCORPORATED BY REFERENCE TO
- ----------- ----------------------- ----------------------------
<S> <C> <C>
4(a) Article FOURTH of the Registrant's Exhibit 3 to the Registrant's
Restated Certificate of Incorporation, Post-Effective Amendment No. 1 to Form
as amended on August 21, 1987. S-2 as filed on August 21, 1987 with
the SEC.
5(a) Opinion of Douglas E. Scott, Esq. **
5(b) Internal Revenue Service determination Exhibit 5(b) to the Registrant's Form
letter dated February 3, 1997, relating S-3 as filed on April 28, 1997 with the
to the Company's Employee Stock SEC (the "1997 S-3").
Ownership Plan.
5(c) Internal Revenue Service determination Exhibit 5(c) to the 1997 S-3.
letter dated February 3, 1997, relating
to the Company's Cash or Deferred
Arrangement.
10(a) Registrant's Bonus Compensation Plan, Exhibit 10(a) to the Registrant's
as amended through October 2, 1996. Annual Report on Form 10-K for the
fiscal year ended January 31, 1998 (the
"1998 10-K").
10(b) Registrant's 1992 Stock Option Plan, as Exhibit 10(b) to the 1998 10-K.
amended through October 2, 1996.
10(c) Registrant's Stock Compensation Plan, Exhibit 10(c) to the 1998 10-K.
as amended through December 30, 1997.
10(d) Registrant's Management Stock Exhibit 10(d) to the 1998 10-K.
Compensation Plan, as amended through
December 30, 1997.
10(e) 1995 Employee Stock Purchase Plan. Annex II of the Registrant's Proxy
Statement for the 1995 Annual Meeting
of Stockholders as filed June 1995 with
the SEC (the "1995 Proxy").
10(f) 1995 Stock Option Plan, as amended Exhibit 10(f) to the 1998 10-K.
through October 2, 1996.
10(g) Keystaff Deferral Plan, as amended Exhibit 10(g) to the 1998 10-K.
through December 30, 1997.
10(h) Key Executive Stock Deferral Plan. Exhibit 4(s) to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended January 31, 1996.
10(i) Form of Alumni Agreement. Exhibit 4(w) to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended January 31, 1997.
23(a) Consent of Douglas E. Scott, Esq. **
(contained in Exhibit 5(a) to this
Registration Statement).
23(b) Consent of Price Waterhouse LLP. **
23(c) Consent of Baker & McKenzie. **
23(d) Consent of Coopers & Lybrand L.L.P. **
</TABLE>
- ---------------
** Filed herewith.
<PAGE> 1
Exhibit 5(a)
May 4, 1998
Science Applications
International Corporation
10260 Campus Point Drive
San Diego, CA 92121
Gentlemen:
I am the Senior Vice President and General Counsel of Science
Applications International Corporation (the "Company"). As such, I have acted as
your counsel in connection with the Prospectus of the Company covering the offer
and sale by (i) the Company of up to 34,796,115 shares (the "Company Shares") of
its Class A Common Stock, par value $0.01 per share (the "Class A Common
Stock"), and (ii) the Selling Stockholders (as defined in the Prospectus) of up
to an aggregate of 203,885 shares of Class A Common Stock (the "Selling
Stockholder Shares"). The Company Shares may be offered and sold directly by the
Company, sold by stockholders through the limited market maintained by Bull,
Inc. (the sale of which may be attributed to the Company), issued pursuant to
the Company's existing stock option plans, issued pursuant to the 1998 Stock
Option Plan and the 1998 Employee Stock Purchase Plan if such plans are approved
by stockholders at the Company's annual meeting or issued pursuant to the
Company's or its subsidiaries' other employee benefits plans (all such plans are
hereinafter referred to collectively as the "Employee Plans"). The Company
Shares and the Selling Stockholder Shares are being offered pursuant to a
Prospectus which constitutes a part of the Registration Statement on Form S-3
(the "Registration Statement") to be filed with the Securities and Exchange
Commission (the "Commission") on May 4, 1998 under the Securities Act of 1933,
as amended (the "Securities Act").
I am generally familiar with the affairs of the Company. In addition, I
have examined and am familiar with originals or copies, certified or otherwise
identified to my satisfaction, of (i) the Registration Statement, (ii) the
Restated Certificate of Incorporation and Bylaws of the Company as currently in
effect, (iii) resolutions adopted by the Board of Directors and the Operating
Committee thereof relating to the filing of the Registration Statement and the
issuance of the Company Shares thereunder, (iv) the Employee Plans and (v) such
other documents as I have deemed necessary or appropriate as a basis for the
opinions set forth below. In my examination, I have assumed the genuineness of
all signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to me as originals, the conformity to original documents of
all documents submitted to me as certified or photostatic copies, and the
authenticity of the originals of such copies.
<PAGE> 2
Science Applications
International Corporation
May 4, 1998
Page 2
Based upon and subject to the foregoing, I am of the opinion that:
1. The Company Shares that are being offered and sold directly by the
Company have been duly authorized for issuance and when certificates therefor
have been duly executed, delivered and paid for, will be legally issued, fully
paid and nonassessable.
2. Any shares of Class A Common Stock sold by stockholders through the
limited market maintained by Bull, Inc. which are attributed to the Company have
been duly authorized for issuance and legally issued and are fully paid and
nonassessable.
3. The Company Shares that are being issued pursuant to the Employee
Plans have been duly authorized for issuance and, when certificates therefor
have been duly executed, delivered and paid for in accordance with the terms of
the Employee Plans, will be legally issued, fully paid and nonassessable;
provided, however, that with respect to the 1998 Stock Option Plan and the 1998
Employee Stock Purchase Plan, my opinion is subject to such plans being duly
approved by the Company's stockholders at the annual meeting of stockholders.
4. The Selling Stockholder Shares have been duly authorized and are
legally issued, fully paid and nonassessable.
I hereby consent to the use of my name in the Registration Statement
under the caption "Legal Matters" and to the filing of this opinion as an
exhibit to the Registration Statement. In giving such consent, I do not thereby
admit that I come within the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations of the Commission
thereunder.
Very truly yours,
/s/ Douglas E. Scott
Senior Vice President
and General Counsel
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
April 3, 1998 appearing on page F-2 of Science Applications International
Corporation's Annual Report on Form 10-K for the year ended January 31, 1998. We
also consent to the incorporation by reference in such Prospectus of our report
dated February 27, 1998 appearing on page F-2 of the Annual Report on Form 11-K
of the Science Applications International Corporation Employee Stock Purchase
Plan for the year ended January 31, 1998. We also consent to the incorporation
by reference in such Prospectus of our report dated April 3, 1998 appearing on
page F-2 of the Annual Report on Form 11-K of the Science Applications
International Corporation Cash or Deferred Arrangement for the year ended
December 31, 1997. We also consent to the incorporation by reference in such
Prospectus of our report dated April 3, 1998 appearing on page F-2 of the Annual
Report on Form 11-K of the TransCore Retirement Savings Plan for the year ended
December 31, 1997. We also consent to the incorporation by reference in such
Prospectus of our report dated April 3, 1998 appearing on page F-2 of the Annual
Report on Form 11-K of the Bell Communications Research Savings and Security
Plan for the year ended December 31, 1997. We also consent to the incorporation
by reference in such Prospectus of our report dated April 3, 1998 appearing on
page F-2 of the Annual Report on Form 11-K of the Bell Communications Research
Savings Plan for Salaried Employees for the year ended December 31, 1997. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ PRICE WATERHOUSE LLP
San Diego, California
April 29, 1998
<PAGE> 1
EXHIBIT 23(c)
May 4, 1998
Board of Directors
Science Applications International Corporation
10260 Campus Point Drive
San Diego, California 92121
Re: Form S-3 Registration Statement
Dear Directors:
We hereby consent to all references to our firm in the Registration
Statement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the Securities Act.
Very truly yours,
/s/ Baker & McKenzie
<PAGE> 1
Exhibit 23(d)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Science Applications International Corporation on Form S-3 of our report dated
February 12, 1997, on our audits of the consolidated financial statements of
Bell Communications Research, Inc. 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 Science Applications International Corporation's Current Reports on
Form 8-K dated July 11, 1997 and September 19, 1997. We also consent to the
reference to our firm under the caption "Experts".
/S/COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
April 29, 1998
