<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-12771
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3630868
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 546-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- -----
As of August 31, 1998, the Registrant had 55,164,118 shares of Class A
common stock, $.01 par value per share, issued and outstanding, and 306,496
shares of Class B common stock, $.05 par value per share, issued and
outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
Item 1. Financial Statements
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Condensed Consolidated Statement of Income
(Unaudited, in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------- ---------------------------
July 31, 1998 July 31, 1997 July 31, 1998 July 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $1,192,156 $700,961 $2,200,536 $1,325,488
---------- -------- ---------- ----------
Costs and expenses:
Cost of revenues 957,493 614,282 1,756,437 1,161,585
Selling, general and
administrative expenses 158,547 54,497 298,403 99,920
---------- -------- ---------- ----------
Operating income 76,116 32,182 145,696 63,983
Interest expense 10,968 1,308 14,726 2,853
Other (income) expense, net (5,457) (4,046) (5,517) (5,563)
Minority interest in income
of consolidated subsidiaries 3,514 1,607 6,128 2,695
---------- -------- ---------- ----------
Income before income taxes 67,091 33,313 130,359 63,998
Provision for income taxes 30,996 14,990 60,226 28,799
---------- -------- ---------- ----------
Net income $ 36,095 $ 18,323 $ 70,133 $ 35,199
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Earnings per share:
Basic $ .64 $ .36 $ 1.27 $ .69
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Diluted $ .59 $ .34 $ 1.17 $ .65
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Common equivalent shares:
Basic 55,733 51,150 54,697 50,789
---------- -------- ---------- ----------
---------- -------- ---------- ----------
Diluted 60,440 53,971 59,288 53,808
---------- -------- ---------- ----------
---------- -------- ---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-2
<PAGE>
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheet
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
July 31, 1998 January 31, 1998
------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 237,673 $ 189,387
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . 54,199 25,344
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . 762,496 810,385
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 13,827 12,471
Prepaid expenses and other current assets. . . . . . . . . . . 150,501 75,846
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 60,624 62,367
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 1,279,320 1,175,800
Property and equipment (less accumulated depreciation
of $191,544 and $137,537 at July 31, 1998
and January 31, 1998, respectively). . . . . . . . . . . . . . 279,033 288,282
Land and buildings (less accumulated depreciation of
$25,220 and $17,864 at July 31, 1998
and January 31, 1998, respectively). . . . . . . . . . . . . . . 188,151 195,534
Goodwill (less accumulated amortization of
$72,161 and $56,623 at July 31, 1998
and January 31, 1998, respectively). . . . . . . . . . . . . . 90,561 106,757
Other intangible assets (less accumulated amortization of
$11,383 and $3,900 at July 31, 1998
and January 31, 1998, respectively). . . . . . . . . . . . . . 116,043 103,520
Prepaid pension assets . . . . . . . . . . . . . . . . . . . . . 440,210 424,108
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 118,081 121,233
----------- -----------
$ 2,511,399 $ 2,415,234
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . $ 670,100 $ 748,031
Accrued payroll and employee benefits. . . . . . . . . . . . . 258,753 262,408
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 27,370 37,761
Notes payable and current portion of long-term debt. . . . . . 40,685 33,012
----------- -----------
Total current liabilities. . .. . . . . . . . . . . . . . . 996,908 1,081,212
----------- -----------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 145,028 145,958
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . 100,426 111,941
Other long-term liabilities. . . . . . . . . . . . . . . . . . . 325,615 313,677
Commitments and contingencies (Note G)
Minority interest in consolidated subsidiaries . . . . . . . . . 8,243 7,668
Stockholders' equity:
Common stock:
Class A, $.01 par value
Authorized: 100,000 shares
Issued and outstanding:
July 31, 1998 - 55,136 shares . . . . . . . . . . . 551
January 31, 1998 - 51,931 shares . . . . . . . . . . 519
Class B, $.05 par value
Authorized: 5,000 shares
Issued and outstanding:
July 31, 1998 - 306 shares. . . . . . . . . . . . . . 16
January 31, 1998 - 314 shares. . . . . . . . . . . . . 16
Additional paid-in capital . . . . . . . . . . . . . . . . . . 693,545 538,760
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 260,031 237,588
Other stockholders' equity . . . . . . . . . . . . . . . . . . (16,733) (14,983)
Accumulated other comprehensive income . . . . . . . . . . . . (2,231) (7,122)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . 935,179 754,778
----------- -----------
$ 2,511,399 $ 2,415,234
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-3
<PAGE>
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Condensed Consolidated Statement of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended
-----------------------------
July 31, 1998 July 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,133 $ 35,199
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 82,401 22,518
Non-cash compensation. . . . . . . . . . . . . . . . . . . . 39,319 22,431
Other non-cash items . . . . . . . . . . . . . . . . . . . . 14,038 (1,625)
Income tax benefit from employee stock transactions. . . . . 13,526 5,203
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . 62,847 9,363
Inventories. . . . . . . . . . . . . . . . . . . . . . . . (1,342) 3,355
Prepaid expenses and other current assets. . . . . . . . . (34,577) (4,420)
Progress payments. . . . . . . . . . . . . . . . . . . . . (10,258) 5,041
Deferred income taxes. . . . . . . . . . . . . . . . . . . (8,104) (12,220)
Other assets . . . . . . . . . . . . . . . . . . . . . . . (25,336) (6,964)
Accounts payable and accrued liabilities . . . . . . . . . (132,277) 14,658
Accrued payroll and employee benefits. . . . . . . . . . . (1,583) 40,400
Income taxes payable . . . . . . . . . . . . . . . . . . . (17,097) 4,763
Other long-term liabilities. . . . . . . . . . . . . . . . 26,869 2,764
---------- ---------
78,559 140,466
---------- ---------
Cash flows from investing activities:
Expenditures for property and equipment. . . . . . . . . . . . (25,373) (19,927)
Expenditures for land and buildings. . . . . . . . . . . . . . (73) (16,476)
Acquisitions of certain business assets, net of cash acquired. (812) (725)
Purchases of debt and equity securities available for sale . . (39,316)
Purchases of debt securities held to maturity. . . . . . . . . (6,007)
Proceeds from sales of certain business assets . . . . . . . . 833 47,030
Proceeds from disposal of property and equipment . . . . . . . 215 3,829
Investments in unconsolidated affiliates . . . . . . . . . . . (1,250)
---------- ---------
(71,783) 13,731
---------- ---------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt . . 15,297 1,853
Payments of notes payable and long-term debt . . . . . . . . . (11,691) (14,323)
Principal payments on capital lease obligations. . . . . . . . (11,705) (642)
Net proceeds from issuance of subsidiary common stock. . . . . 4,482
Dividends paid to minority interest. . . . . . . . . . . . . . (7,096)
Sales of common stock. . . . . . . . . . . . . . . . . . . . . 97,505 32,714
Repurchases of common stock. . . . . . . . . . . . . . . . . . (43,595) (37,408)
---------- ---------
43,197 (17,806)
---------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . (1,687) (453)
---------- ---------
Increase in cash and cash equivalents. . . . . . . . . . . . . 48,286 135,938
Cash and cash equivalents at beginning of period . . . . . . . 189,387 45,279
---------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . $ 237,673 $ 181,217
---------- ---------
---------- ---------
Supplemental schedule of non-cash investing and
financing activities:
Repurchases of common stock upon exercise of stock options . $ 15,522 $ 13,951
---------- ---------
---------- ---------
Capital lease obligations for property and equipment . . . . $ 17,718 $ 3,153
---------- ---------
---------- ---------
Fair value of assets acquired in acquisitions of certain
business assets. . . . . . . . . . . . . . . . . . . . . . . $ 812 $ 643
Cash paid in the acquisitions of certain business assets . . (812) (625)
---------- ---------
Liabilities assumed in acquisitions of certain business assets $ -- $ 18
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-4
<PAGE>
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A -BASIS OF PRESENTATION:
The accompanying financial information has been prepared in accordance with
the instructions to Form 10-Q and therefore does not necessarily include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The preparation of financial statements, in
conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingencies at the date of the
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Estimates have been prepared on the basis of the
most current and best available information and actual results could differ
from those estimates.
Certain amounts from the three and six months ended July 31, 1997 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three and six months ended July 31, 1998.
In the opinion of management, the unaudited financial information for the
three and six months ended July 31, 1998 and 1997 reflect all adjustments
(which include only normal, recurring adjustments) necessary for a fair
presentation thereof. Operating results for the three and six months ended
July 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's 1998 Annual Report on Form 10-K.
NOTE B - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 also requires that changes in the
derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. The Company
will adopt SFAS No. 133 for the first quarter ending April 30, 2000. The
Company has not determined what impact, if any, the adoption of SFAS No. 133
will have on the Company's consolidated financial position or results of
operations.
NOTE C - RESTRICTED CASH:
The Company's majority-owned subsidiary, Network Solutions, Inc. ("NSI") had
an agreement with the National Science Foundation ("NSF") which required NSI
to set aside 30% of the cash collections from domain name registrations to be
reinvested for the enhancement of the intellectual infrastructure of the
Internet. Effective April 1,1998, the NSF amended the agreement to eliminate
this requirement and reduce domain name registration fees. The Company also
has a contract to provide support services to the National Cancer Institute's
Frederick Cancer Research and Development Center ("Center"). As part of the
contract, the Company is responsible for paying for materials, equipment and
other direct costs of the Center through the use of a restricted cash account
which is pre-funded by the U.S. Government.
NOTE D - RECEIVABLES:
Unbilled accounts receivable include $15,248,000 of costs incurred on
projects for which the Company has been requested by the customer to begin
work under a new contract, or extend work under an existing contract, but for
which formal contracts or contract modifications have not been executed at
July 31, 1998.
I-5
<PAGE>
NOTE E - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
July 31, 1998
--------------
(in thousands)
<S> <C>
Inventories:
Contracts-in-process $ 7,833
Raw materials 5,994
--------
$ 13,827
--------
--------
Prepaid expenses and other current assets:
Prepaid expenses $ 41,328
Short-term investments 79,516
Other 29,657
--------
$150,501
--------
--------
</TABLE>
NOTE F - NOTES PAYABLE:
The Company has a five-year unsecured reducing revolving credit facility of
$700,000,000 with a group of banks which allow borrowings until August 2002.
Borrowings bear interest at the Company's option at various rates, based on
the base rate, bid rate or on margins over the CD rate or LIBOR. There were
no balances outstanding under the facility at July 31, 1998 and the entire
$700,000,000 was available.
NOTE G - COMMITMENTS AND CONTINGENCIES:
The Company is involved in various investigations, claims and lawsuits
arising in the normal conduct of its business, none of which, in the opinion
of the Company's management, will have a material adverse effect on its
consolidated financial position, results of operations, cash flows or its
ability to conduct business.
NOTE H - COMPREHENSIVE INCOME:
Effective February 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the annual financial
statements with the same prominence as other annual financial statements.
For interim periods, only a total for comprehensive income shall be reported
in the condensed financial statements. SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130. Comprehensive income as defined by SFAS
No. 130 consisted of the following:
<TABLE>
<CAPTION>
Three months ended July 31 Six months ended July 31
-------------------------- ------------------------
1998 1997 1998 1997
------- ------- --------- --------
<S> <C> <C> <C> <C>
(in thousands)
Net income $36,095 $18,323 $70,133 $35,199
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment 2,097 5,989
Foreign currency translation adjustments (751) 937 (1,098) 296
------- ------- ------- -------
1,346 937 4,891 296
------- ------- ------- -------
$37,441 $19,260 $75,024 $35,495
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
I-6
<PAGE>
NOTE I - EARNINGS PER SHARE (EPS):
A summary of the elements included in the computation of basic and diluted EPS
is as follows (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
Three months ended July 31 Six months ended July 31
-------------------------- --------------------------
1998 1997 1998 1997
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $36,095 $18,323 $70,133 $35,199
Effect of:
Subsidiary preferred stock dividends (375) -- (688) --
------- ------- ------- -------
Net income available to common
stockholders, as adjusted $35,720 $18,323 $69,445 $35,199
------- ------- ------- -------
Weighted average shares 55,733 51,150 54,697 50,789
------- ------- ------- -------
Basic EPS $ .64 $ .36 $ 1.27 $ .69
------- ------- ------- -------
------- ------- ------- -------
DILUTED EPS:
Net income $36,095 $18,323 $70,133 $35,199
Effect of:
Subsidiary preferred stock dividends (375) -- (688) --
Majority-owned subsidiary's
dilutive securities (77) -- (203) --
------- ------- ------- -------
Net income available to common
stockholders, as adjusted $35,643 $18,323 $69,242 $35,199
------- ------- ------- -------
Weighted average shares 55,733 51,150 54,697 50,789
Effect of:
Stock options 4,478 2,769 4,360 2,966
Other stock awards 229 52 231 53
------- ------- ------- -------
Weighted average shares, as adjusted 60,440 53,971 59,288 53,808
------- ------- ------- -------
Diluted EPS $ .59 $ .34 $ 1.17 $ .65
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
I-7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the three and six months ended July 31, 1998 increased 70% and
66%, respectively, compared to the same periods of the prior year, primarily
driven by the Company's commercial business. Of the total increase, 50 and
46 percentage points of the increase for the three and six months ended July
31, 1998, respectively, were directly attributable to Bellcore, a subsidiary
which was acquired on November 14, 1997, Network Solutions, Inc. ("NSI"), a
majority-owned subsidiary, and INTESA, a joint venture. The remaining
increase in revenues of 20% for the same periods was attributable to
internal growth in the traditional business areas which continued to shift
toward lower cost service type contracts. This trend reflects the
increasingly competitive business environment in the Company's traditional
business areas, as well as the Company's increased success in the engineering
and field services market, which typically involve lower cost contracts.
Revenues on the Company's contracts are generated from the efforts of its
technical staff as well as the pass through of costs for material and
subcontract efforts, which primarily occur on large, multi-year system
integration type contracts. At July 31, 1998, the Company had approximately
30,900 full-time employees compared to approximately 22,700 at July 31, 1997.
Material and subcontract ("M&S") revenues were $219 million and $383 million
for the three and six months ended July 31, 1998, respectively, compared to
$164 million and $321 million for the same periods of the prior year. As a
percentage of total revenues, M&S revenues have decreased to 18% and 17% for
the three and six months ended July 31, 1998, respectively, compared to 23%
and 24% for the same periods of the prior year.
Revenues by contract type indicate that the percentage of the Company's
revenues attributable to higher risk, firm fixed-price ("FFP") contracts
increased to 43% for the six months ended July 31, 1998 from 29% for same
period of the prior year. The increase in revenues from FFP contracts is
primarily driven by Bellcore. As of the year ended January 31, 1998,
revenues from FFP contracts were 32% and only included Bellcore revenues for
the period from November 14, 1997 to January 31, 1998. In addition, growth in
other non-U.S. Government revenues contributed to the increase in revenues
from FFP contracts. The Company's non-U.S. Government customers typically do
not contract on a cost-reimbursement basis. The Company assumes greater
performance risk on FFP contracts and the failure to accurately estimate
ultimate cost or to control costs during performance of the work may result
in reduced profits or losses. Fixed-price level-of-effort and
time-and-materials type contracts increased slightly to 19% of revenues for
the six months ended July 31, 1998 from 17% for the same period in the prior
year, while cost reimbursement contracts were 38% and 54% for the same
periods, respectively.
The cost of revenues as a percentage of revenues decreased to 80.3% and 79.8%
for the three and six months ended July 31, 1998, respectively, compared to
87.6% for the same periods of the prior year. The decrease reflects the
growth in commercial revenues from Bellcore, INTESA and NSI, which have more
of their associated costs in selling, general and administrative costs
("SG&A") as opposed to cost of revenues.
SG&A expenses as a percentage of revenues for the three and six months ended
July 31, 1998 increased to 13.3% and 13.6%, respectively, compared to 7.8%
and 7.5% for the same periods of the prior year. SG&A is comprised of
general and administrative ("G&A"), bid and proposal ("B&P") and independent
research and development ("IR&D") expenses. G&A, B&P and IR&D increased as a
percentage of revenues for the three and six months ended July 31, 1998
compared to the same periods of the prior year due to growth in commercial
revenues which have more of their associated costs in SG&A as opposed to cost
of revenues. While the level of B&P activity and costs have historically
fluctuated depending on the availability of bidding opportunities and
resources, B&P costs have increased in relation to revenues for three and six
months ended July 31, 1998. IR&D costs have also historically fluctuated
depending on the stage of development for various hardware and software
systems and have also increased in relation to revenues for the three and
six months ended July 31, 1998. G&A costs as a percentage of revenues were
6.8% and 7.0% for the three and six months ended July 31, 1998, respectively,
compared to 5.7% and 5.5% for the same periods of the prior year. The
increase in G&A costs represents the combination of growth in commercial
business, increased amortization costs of goodwill and intangible assets
associated with the Bellcore acquisition and losses from
I-8
<PAGE>
the impairment of goodwill. For the three and six months ended July 31,
1998, certain events and circumstances indicated that the recovery of certain
goodwill was unlikely. For the three and six months ended July 31, 1998, the
Company reduced goodwill by $4.9 million and $9.2 million, respectively, to
its estimated recoverable value as determined by the excess of carrying
amount over the estimated fair value.
Interest expense for the three and six months ended July 31, 1998 and 1997
primarily relates to interest on a building mortgage, deferred compensation
arrangements, capital lease obligations and notes payable. The increase in
interest expense is primarily driven by an increase in deferred compensation
balances, capital lease obligations and the issuance of public debt
securities.
Other income, net of other expense, was $5 million and $6 million for the
three and six months ended July 31, 1998, respectively, compared to $4
million and $6 million for the same periods of the prior year. The primary
components of other income, net of other expense, for the six months ended
July 31, 1998 are interest income of $7 million and an other-than temporary
loss on an equity security of $3 million during the three months ended April 30,
1998.
The provision for income taxes as a percentage of income before income taxes
was 46.2% for the three and six months ended July 31, 1998 compared to 45%
for the same periods of the prior year. The higher effective tax rate is
primarily attributable to non-deductible goodwill amortization.
The Company is involved in various investigations, claims and lawsuits
arising in the normal conduct of its business, none of which, in the opinion
of the Company's management, will have a material adverse effect on its
consolidated financial position, results of operations or its ability to
conduct business.
The Company has recognized the need to ensure its operations will not be
adversely impacted by the Year 2000 software problems. In 1996, the Company
initiated a program to prepare the Company's computer systems and
applications for its fiscal year 2000 which begins on February 1, 1999.
Remediation, testing and validation continue as planned towards completion in
1999. The costs to modify internal-use software have not had, nor are they
anticipated to have, a material adverse effect on the Company's financial
position, results of operations, cash flows or its ability to conduct
business. In addition, the Company is addressing Year 2000 issues with its
critical service suppliers and vendors and is assessing its exposure with
respect to its products and services. No material or adverse matters have
come to the Company's attention which would change its assessment of the
impact of Year 2000 software issues as discussed in "Management's Discussion
and Analysis of Financial Condition and Operating Results" in the Company's
1998 Annual Report on Form 10-K.
Liquidity and Capital Resources
The Company's primary sources of liquidity continue to be funds provided by
operations and the five-year revolving credit facility. At July 31, 1998 and
1997 there were no borrowings outstanding under the credit facility and cash,
cash equivalents and short-term investments were $317 million and $181 million,
respectively.
Operating activities continued to generate cash for the six months ended July
31, 1998. The Company actively monitors receivables with emphasis placed on
collection activities and the negotiation of more favorable payment terms.
Cash spent on investing activities were $72 million for the six months ended
July 31, 1998 compared to a source of cash of $14 million for the same period
of the prior year. The increase in spending on investing activities for the
six months ended
I-9
<PAGE>
July 31, 1998 is primarily attributable to the purchases of debt and equity
securities by NSI. For the same period in the prior year, cash was primarily
generated from the sale of net assets of the SAIT business unit, while cash
was also used for the purchase of land and buildings.
The Company generated cash of $43 million from financing activities for the
six months ended July 31, 1998 compared to a use of cash of $18 million for
the same period of the prior year. The source of cash for the six months
ended July 31, 1998 was primarily attributable to proceeds from the sale of
the Company's stock. In addition, INTESA had bank borrowings of $14 million
for short-term operating needs.
The Company's cash flows from operations plus borrowing capacity are expected
to provide sufficient funds for the Company's operations, common stock
repurchases, capital expenditures and future long-term debt requirements. In
addition, acquisitions and equity investments in the future are expected to
be financed from operations and borrowing capacity as well as with the
issuance of Company common stock.
Forward-looking Information
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, including statements regarding the intent, belief or current
expectations of the Company and its officers with respect to, among other
things, trends affecting the Company's financial condition or results of
operation and the impact of competition. Such statements are not guarantees
of future performance and involve risks and uncertainties, and actual results
may differ materially from those in the forward-looking statements as a
result of various factors. Some of these factors include, but are not
limited to the risk factors set forth in the Company's 1998 Annual Report on
Form 10-K. Due to such uncertainties and risks, readers are cautioned not to
place undue reliance on such forward-looking statements, which speak only as
of the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
I-10
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations or its ability to conduct business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the registrant was held on July 10,
1998.
(b) All of the directors nominated by management in registrant's 1998 Proxy
Statement were elected and no solicitation in opposition to management's
nominees was made.
(c) At the Annual Meeting, the stockholders of the registrant approved the
following:
(i) the election of the following Directors by the votes set forth below:
<TABLE>
<CAPTION>
Number of Votes of Common Stock
-------------------------------
Withhold
Director For Authority
-------- ------------- -------------
<S> <C> <C>
D. W. Dorman 43,489,309 604,011
B. R. Inman 42,776,659 604,011
E. A. Straker 42,973,951 604,011
M.E. Trout 43,060,596 604,011
J. H. Warner, Jr. 43,671,384 604,011
J. B. Wiesler 42,910,142 604,011
A. T. Young 43,239,632 604,011
</TABLE>
(ii) the approval of the 1998 Stock Option Plan with 42,566,475 shares
voting for the plan, 674,546 shares voting against and 523,228 shares
abstaining;
(iii) the approval of the 1998 Employee Stock Purchase Plan with
43,139,268 shares voting for the plan, 210,217 shares voting against and
414,763 shares abstaining; and
(iv) the appointment of PricewaterhouseCoopers LLP as registrant's
independent accountants for the year ending January 31, 1999 with 41,996,401
shares voting for the proposal, 1,343,281 shares voting against and 424,566
shares abstaining.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K.
During the fiscal quarter for which this report is filed, the
following report on Form 8-K was filed by the Registrant:
(I) Form 8-K filed July 16, 1998, Item 5, Other Events
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
Date: September 14, 1998 /s/ W. A. Roper
-----------------------------
Senior Vice President and
Chief Financial Officer and
as a duly authorized officer
II-2
<PAGE>
Exhibit Index
Science Applications International Corporation
Fiscal Quarter Ended July 31, 1998
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
- ------- ------------------------------ ------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
II-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JULY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 291,872
<SECURITIES> 79,516
<RECEIVABLES> 762,496
<ALLOWANCES> 31,136
<INVENTORY> 13,827
<CURRENT-ASSETS> 1,279,320
<PP&E> 683,948
<DEPRECIATION> 216,764
<TOTAL-ASSETS> 2,511,399
<CURRENT-LIABILITIES> 996,908
<BONDS> 145,028
0
0
<COMMON> 567
<OTHER-SE> 934,612
<TOTAL-LIABILITY-AND-EQUITY> 2,511,399
<SALES> 0
<TOTAL-REVENUES> 2,200,536
<CGS> 0
<TOTAL-COSTS> 1,756,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,726
<INCOME-PRETAX> 130,359
<INCOME-TAX> 60,226
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,133
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.17
</TABLE>
