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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-12771
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
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 546-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 31, 1999, the aggregate market value of the voting stock held
by non-affiliates of Registrant was $2,053,465,687. For the purpose of this
calculation, it is assumed that the Registrant's affiliates include the
Registrant's Board of Directors and certain of the employee benefit plans of the
Registrant and its subsidiaries. The Registrant disclaims the existence of any
control relationship between it and such employee benefit plans.
As of March 31, 1999, there were 57,667,204 shares of Registrant's Class A
Common Stock and 303,084 shares of Registrant's Class B Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the Company's 1999
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K Report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Science Applications International Corporation (the "Company") primarily
provides diversified professional and technical services involving the
application of scientific expertise, together with computer and systems
technology, to solve complex technical problems for a broad range of government
and commercial customers, both in the U.S. and abroad. Technical services
consist of basic and applied research services; design and development of
computer software; systems integration; systems engineering; technical
operational and management support services; environmental engineering; design
and integration of network systems; technical engineering and consulting support
services; Year 2000 services; and development of systems, policies, concepts and
programs.
Through its subsidiary, Telcordia Technologies, Inc. (formerly Bell
Communications Research, Inc.) ("Telcordia"), the Company is a global provider
of software, engineering and consulting services, advanced research and
development, technical training and other services to the telecommunications
industry.
In addition to providing technical services, the Company designs and
develops high-technology products. Products include custom designed and standard
hardware and software, such as automatic equipment identification technology,
sensors and nondestructive imaging instruments.
The Company provides technical services primarily in the vertical market
areas of "National Security," "Health Care," "Environment," "Energy,"
"Telecommunications," "Information Technology" and "Other," which includes the
Company's transportation, logistics, space and utilities business areas and
information technology support to federal civil agencies. The Company's
operating groups ("Groups") are divided into two segments, Regulated and
Non-Regulated, depending on the business processes and laws affecting the
operations of the Groups. Groups in the Regulated segment provide technical
services and products through contractual arrangements as either a prime
contractor or a subcontractor to other contractors, primarily for departments
and agencies of the U.S. Government, including the Department of Defense
("DOD"), Department of Energy ("DOE"), Department of Health and Human Services,
Department of Justice, Department of Transportation, Department of Treasury,
Department of Veterans Affairs ("VA"), Environmental Protection Agency and
National Aeronautics and Space Administration ("NASA"). Operations in the
Regulated segment are subject to specific regulatory accounting and contracting
guidelines such as "Cost Accounting Standards" and "Federal Acquisition
Regulations." Groups in the Non-Regulated segment provide technical services and
products primarily to customers in commercial markets. Generally, operations in
the Non-Regulated segment are not subject to specific regulatory accounting or
contracting guidelines.
While the Regulated and Non-Regulated segments represent the management
approach for making decisions and assessing performance, the Company's
decentralized marketing approach focuses on its key vertical markets. Marketing
decisions based on vertical markets are typically made at the lowest operational
level.
The Regulated segment includes business from all of the Company's vertical
market areas. The Non-Regulated segment includes business from all of the
Company's vertical market areas except for National Security and Space (which is
part of the "Other" vertical market). The percentage of revenues attributable to
the Regulated segment for fiscal years 1999, 1998 and 1997 were 58%, 74% and
88%, respectively. The percentage of revenues attributable to the Non-Regulated
segment for fiscal years 1999, 1998 and 1997 were 42%, 25% and 11%,
respectively. For certain other financial information regarding the Company's
reportable segments and geographic areas, see Note C of the Notes to
Consolidated Financial Statements beginning on page F-13 of this Form 10-K.
On February 12, 1999, the Company sold 4,500,000 shares of Class A Common
Stock of Network Solutions, Inc. ("NSI") in a secondary public offering. Prior
to the secondary offering, the Company had approximately a 72.3% ownership
interest in NSI, which represented approximately 96.3% of the combined voting
power of the outstanding stock of NSI. On March 23, 1999, NSI completed a
two-for-one stock split of
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its Class A Common Stock and Class B Common Stock. Subsequent to the stock
split, the Company currently owns 14,850,000 shares of NSI's Class B Common
Stock, which are entitled to ten votes per share. In connection with the
secondary offering, the Company expressed an intention to convert by May 31,
1999 its Class B Common Stock into an equal number of shares of NSI's Class A
Common Stock, which are entitled to one vote per share. Assuming the proposed
conversion of the Class B Common Stock, the Company's ownership and voting power
in NSI will be approximately 44.8%. NSI provides Internet domain name
registration services and Intranet consulting and network design and
implementation services.
The Company has a 60% interest in a joint venture, Informatica, Negocio y
Tecnologia, S.A. ("INTESA"), which was formed with Venezuela's national oil
company, Petroleos de Venezuela, S.A. INTESA provides information technology
services in Latin America.
The Company was originally incorporated as a California corporation in 1969
and was re-incorporated as a Delaware corporation in 1984. The principal office
and corporate headquarters of the Company are located in San Diego, California
at 10260 Campus Point Drive, San Diego, California 92121 and its telephone
number is (619) 546-6000. All references to the Company include, unless the
context indicates otherwise, its predecessor and subsidiary corporations.
TECHNICAL SERVICES
The Company provides technical services through its vertical market areas.
Technical services are sold to government and commercial customers in both the
Regulated and Non-Regulated segments, except that technical services in the
National Security and Space vertical markets are provided to government
customers and reported only in the Regulated segment.
National Security
The Company provides a wide array of national security-related technical
services to its government customers only in the Regulated segment. Such
services include advanced research and technology development, systems
engineering and systems integration and technical, operational and management
support services.
Health
The Company provides health-related technical services, including medical
information systems, technology development and research support services.
Environment
In the environmental area, the Company performs site assessments, remedial
investigations and feasibility studies, remedial actions, technology
evaluations, sampling, monitoring and regulatory compliance support and
training.
Energy
The Company provides energy-related technical services including safety
evaluations, security, reliability and availability engineering evaluations,
technical reviews, quality assurance, information systems, plant monitoring
systems and project management.
Telecommunications
In the telecommunications area, the Company provides interoperable network
design and implementation, new software and enhancements of existing software
for network management and operation, consulting and engineering services and
telecommunications software.
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Information Technology
The information technology-related technical services of the Company
include information technology outsourcing services, information protection and
electronic business security services, Intranet consulting and network design
services, as well as Internet domain name registration and other Internet
services through NSI.
Other Technical Services
The Company provides technical services in transportation, space, and
security systems management, including advanced traffic and intermodal freight
management, automated toll collection, material control and computer and
information security, engineering support for NASA's Space Shuttle and Space
Station programs, and undersea data collection, transmission and analysis
systems and services. The Company also provides technical services to law
enforcement agencies and educational organizations.
RESOURCES
The technical services and products provided by the Company to government
and commercial customers in both the Regulated and Non-Regulated segments
utilize a wide variety of resources which the Company anticipates will continue
to be available. A substantial portion of the computers and other equipment,
materials and subcontracted work required by the Company could be procured from
more than one supplier. However, with respect to certain products and programs,
the Company depends on a particular source or vendor. While a temporary or
permanent disruption in the supply of these materials or services could cause
inconvenience or delay or impact the profitability of the affected programs or
products, the Company believes it would not have a material adverse effect on
the financial condition or operations of the Company as a whole.
The availability of skilled employees who have the necessary education
and/or experience in specialized scientific and technological disciplines
remains critical to the future growth and profitability of the Company.
Competition for personnel in the commercial information technology area of the
Non-Regulated segment is intense. Because of the Company's growth and the
competition for experienced personnel, it has become more difficult to meet all
of the Company's needs for such employees in a timely manner. However, such
difficulties have not had a significant impact on the Company to date. The
Company intends to continue to devote significant resources to recruit and
retain qualified employees. Further, as an inducement, the Company maintains a
variety of benefit programs for its employees, including retirement and bonus
plans, group life, health, accident and disability insurance as well as the
opportunity to participate in the Company's employee ownership program. See
"Business -- Employees And Consultants" and "Market for Registrant's Common
Equity and Related Stockholder Matters -- The Limited Market."
MARKETING
The Company's marketing activities in both the Regulated and Non-Regulated
segments are focused on its key vertical markets and are primarily conducted by
its own professional staff of engineers, scientists, analysts and other
personnel. The Company's marketing approach for its technical services begins
with the development of information concerning the requirements of the U.S.
Government and other potential customers for the types of technical services
provided by the Company. Such information is gathered in the course of contract
performance, reviewing requests for competitive bids and from formal briefings,
participation in professional organizations and published literature. This
information is then evaluated and exchanged among marketing groups within the
Company (organized along functional, geographic and other lines) in order to
devise and implement, subject to management review and approval, the best means
of taking advantage of available business opportunities, including the
preparation of proposals responsive to the stated and perceived needs of
customers. The Company's products may be marketed with the assistance of
independent sales representatives.
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COMPETITION
The businesses in which the Company is engaged are highly competitive,
particularly in the business areas of telecommunications and information
technology outsourcing in the Non-Regulated segment. The Company has a large
number of competitors, some of which have been established longer and have
substantially greater financial resources and larger technical staffs than the
Company. Some of the other competitors, although smaller in size, are more
highly specialized and able to concentrate their resources on particular areas.
In addition, with respect to the Regulated segment, the U.S. Government's own
in-house capabilities and federal non-profit contract research centers also
compete with the Company because they perform certain types of services which
might otherwise be performed by the Company.
The primary competitive factors in the business areas in which the Company
is engaged are technical expertise, management and marketing competence and
price. The Company's continued success is dependent upon its ability to hire and
retain highly qualified scientists, engineers, technicians, management and
professional personnel who will provide superior service and performance on a
cost-effective basis.
SIGNIFICANT CUSTOMERS
During fiscal years 1999, 1998 and 1997, approximately 50%, 66% and 79%,
respectively, of the Company's consolidated revenues were attributable to prime
contracts (as more fully described below) with the U.S. Government, a
significant customer in the Regulated segment, or to subcontracts with other
contractors engaged in work for the U.S. Government.
No single customer or contract in the Non-Regulated segment accounted for
10% or more of consolidated revenues in fiscal years 1999, 1998 or 1997.
GOVERNMENT CONTRACTS
The U.S. Government is the Company's primary customer in the Regulated
segment. 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 if program requirements or budgetary constraints change. In the
event that a contract is terminated for convenience, the Company generally would
be reimbursed for its allowable costs through the date of termination and would
be paid a proportionate amount of the stipulated profit or fee attributable to
the work actually performed.
Modification, curtailment or termination of major programs or contracts of
the Company could have a material adverse effect on the financial condition or
results of the Company's operations. Although contract and program
modifications, curtailments or terminations have not had a material adverse
effect on the Company in the past, no assurance can be given that such
modifications, curtailments or terminations will not have a material adverse
effect on the financial condition or results of operations of the Company in the
future.
The Company's business with the U.S. Government and other customers is
generally performed under cost-reimbursement, time-and-materials or firm
fixed-price contracts. Under cost-reimbursement contracts, the customers
reimburse the Company for its direct costs and allocable indirect costs, plus a
fixed fee or incentive fee. Under time-and-materials contracts, the Company is
paid for labor hours at negotiated, fixed hourly rates and reimbursed for other
allowable direct costs at actual costs plus allocable indirect costs. Under firm
fixed-price contracts, the Company is required to provide stipulated products or
services for a fixed price. Because the Company assumes the risk of performing a
firm fixed-price contract at a set 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
contracts.
During fiscal years 1999, 1998 and 1997, approximately 60%, 63% and 59%,
respectively, of the Regulated segment revenues were derived from
cost-reimbursement contracts and approximately 15%, 18% and 19%,
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respectively, of the Regulated segment revenues were from firm fixed-price
contracts, with the balance from time-and-materials and fixed-price level of
effort contracts.
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 the Regulated segment revenues, exclusive of
related fees, at January 31, 1999 and 1998 were $18,863,000 and $14,094,000,
respectively. The Company expects to recover substantially all such costs;
however, no assurance can be given that the contracts or contract amendments
will be executed or that the related costs will be recovered.
Contract costs for services or products supplied to the U.S. Government,
including allocated indirect costs, are subject to audit and adjustments as a
result of negotiations between the Company and U.S. Government representatives.
Substantially all of the Company's indirect contract costs have been agreed upon
through fiscal year 1998. Contract revenues for subsequent years have been
recorded in amounts which are expected to be realized upon final settlement with
the U.S. Government. However, no assurance can be given that audits and
adjustments for subsequent years will not result in decreased revenues or
profits for those years.
PATENTS AND PROPRIETARY INFORMATION
Other than the business and operations of Telcordia described below, the
nature of the technical services and products provided by the Company is such
that the Company does not presently consider its competitive position to be
dependent upon patent protection. The Company claims a proprietary interest in
certain of its products, software programs, methodology and know-how. Such
proprietary information is protected by copyrights, trade secrets, licenses,
contracts and other means.
Telcordia's patent portfolio consists of more than 920 U.S. and foreign
patents. More than 200 of these patents have been licensed to organizations
worldwide. Telcordia has been granted patents across a wide range of
disciplines, including telecommunications transmission, services and operations,
optical networking, switching, wireless communications, protocols, architecture
and coding. The Company and Telcordia actively pursue opportunities to license
their technologies to third parties and evaluate potential spin-offs of
technologies that they have developed.
In connection with the performance of services for customers in the
Regulated segment, the U.S. Government has certain rights to data, computer
codes and related material developed by the Company under U.S. Government-funded
contracts and subcontracts. Generally, the U.S. Government may disclose such
information to third parties, including, in some instances, competitors. In the
case of subcontracts, the prime contractor may also have certain rights to the
programs and products developed by the Company under the subcontract.
BACKLOG
Backlog includes only the funded dollar amount of contracts in process and
does not include the dollar amount of projects for which the Company has been
given permission by the customer (i) to begin work but for which a formal
contract has not yet been entered into or (ii) to extend work under an existing
contract prior to the formal amendment or modification of the existing contract.
In these cases, either contract negotiations have not been completed or a
contract or contract amendment has not been executed. When a contract or
contract amendment is executed, the backlog will be increased by the difference
between the dollar value of the contract or contract amendment and the revenue
recognized to date.
The backlog for the Regulated segment at January 31, 1999 and 1998 amounted
to approximately $1,663,000,000 and $1,303,000,000, respectively, and the
backlog for the Non-Regulated segment at those dates amounted to approximately
$1,278,000,000 and $1,260,000,000, respectively. The Company expects that a
substantial portion of its backlog at January 31, 1999 will be recognized as
revenues prior to January 31,
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2000. Some contracts associated with the backlog are incrementally funded and
may continue for more than one year.
EMPLOYEES AND CONSULTANTS
As of January 31, 1999, the Company and its subsidiaries employed
approximately 35,200 persons. The Company also utilizes the services of
consultants to provide specialized technical and other services on specific
projects.
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. Competition for
personnel in the commercial information technology area of the Non-Regulated
Segment is intense. Because of the Company's growth and competition for
experienced personnel, it has become more difficult to meet all of the Company's
needs for such employees in a timely manner. However, such difficulties have not
had a significant impact on the Company to date. The Company intends to continue
to devote significant resources to recruit and retain qualified employees.
Management believes that employee ownership of the Company is a major factor in
the Company's ability to attract and retain qualified personnel.
None of the Company's employees are represented by a labor union. To date,
no strikes or work stoppages have been experienced and the Company considers its
relations with its employees to be good.
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
in your evaluation of us and our business. These are not the only risks and
uncertainties that we face. If any of these risks or uncertainties actually
occur, our business, financial condition or operating results could be
materially harmed and the price of our common stock could decline. All
references to "we," "us," or "our" in this section include the Company and its
subsidiaries.
RISKS RELATING TO OUR BUSINESS
A SUBSTANTIAL PERCENTAGE OF OUR REVENUE IS FROM U.S. GOVERNMENT CUSTOMERS AND
THE REGIONAL BELL OPERATING COMPANIES ("RBOCS")
We derive a substantial portion of our revenues from the U.S. Government in
our capacity as a prime contractor or a subcontractor. The percentage of total
revenues from the U.S. Government was 50% in 1999, 66% in 1998 and 79% in 1997.
Our revenues could be adversely impacted by a reduction in the overall level of
U.S. Government spending and by changes in its spending priorities from year to
year. Furthermore, even if the overall level of U.S. Government spending does
increase or remain stable, the budgets of the government agencies with whom we
do business may be deceased or our projects with them may not be sufficiently
funded, particularly because Congress usually appropriates funds for a given
project on a fiscal-year basis even though contract performance may take more
than one year. In addition, obtaining U.S. Government contracts continues to be
competitive as our revenue growth shifts toward contracts with lower
reimbursable costs.
Our wholly-owned subsidiary, Telcordia, has historically derived a majority
of its revenues from the RBOCs. In order for Telcordia to maintain or exceed
historical growth rates, it will need to continue to increase its market share
from the RBOCs and/or diversify its business by obtaining new customers. Loss of
business from the RBOCs could reduce revenues.
We have made progress in our efforts to diversify our business across a
greater number of customers. However, we still remain heavily dependent upon the
U.S. Government as our primary customer in our Regulated segment and our
Telcordia subsidiary depends heavily upon the RBOCs for its revenues. Our future
success and revenue growth will depend upon our ability to continue to expand
our customer base.
WE MAY NOT BE ABLE TO IMPLEMENT OUR ACQUISITION STRATEGY
We have historically supplemented our internal growth through acquisitions,
investments or joint ventures. We evaluate potential acquisitions, investments
and joint ventures on an ongoing basis. Our acquisition and investment strategy
poses many risks, including:
- We may not be able to compete successfully for available acquisition
candidates, complete future acquisitions and investments or accurately
estimate their financial effect on our business.
- Future acquisitions, investments and joint ventures may require us to
issue additional common stock, spend significant cash amounts or decrease
our operating income.
- We may have trouble integrating the acquired business and retaining their
personnel.
- Acquisitions, investments or joint ventures may disrupt our business and
distract our management from other responsibilities.
- To the extent that any of the businesses which we acquire or in which we
invest fail, our business could be harmed.
WE MAY LOSE REVENUE OR INCUR SIGNIFICANT COSTS IF YEAR 2000 COMPLIANCE ISSUES
ARE NOT PROPERLY ADDRESSED
Our evaluation of our computer systems showed that certain portions of our
software and systems require modification or replacement to address the Year
2000 issue. In addition, we are communicating with our critical service
providers, suppliers and vendors to determine the extent to which we are
vulnerable to those
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third parties' failure to remediate their own Year 2000 issues. If we do not
complete the necessary modifications to existing software and conversions to new
software, or are affected by third parties' failure to be Year 2000 ready, the
Year 2000 issue could have a material adverse impact on our consolidated
financial position, results of operations, cash flows or our ability to conduct
business. We also have an ongoing program to assess our exposure with respect to
our products and services. To date, we are not aware of any matters that would
have a material adverse effect on our consolidated financial position, results
of operations, cash flows or our ability to conduct business; however, we cannot
assure you that we will not be subject to material liability claims in the
future.
Our 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 customers, third party 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, we cannot assure you that these estimates will be
achieved and actual results could differ materially from those anticipated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE FACE INCREASING RISKS ASSOCIATED WITH OUR GROWING INTERNATIONAL BUSINESS
Our revenues from customers outside the U.S. have increased more rapidly
than our domestic revenues and are expected to continue to increase in the
future. Consequently, we are increasingly subject to the risks of conducting
business internationally. These risks include:
- unexpected changes in regulatory requirements;
- tariffs;
- political and economic instability;
- restrictive trade policies;
- inconsistent product regulation;
- cost of complying with a variety of laws; and
- licensing requirements.
We do not know the impact of such regulatory, geopolitical and other
factors on our business in the future.
We have transactions denominated in foreign currencies because some of our
business is conducted outside of the United States. In addition, our foreign
subsidiaries generally conduct business in foreign currencies. We are exposed to
fluctuations in exchange rates, which could result in losses and have a
significant impact on our results of operations. This risk may be significant
for entities such as INTESA that operate in a highly inflationary economy. Our
risks include the possibility of significant changes in exchange rates and the
imposition or modification of foreign exchange controls by either the U.S. or
applicable foreign governments. We have no control over the factors that
generally affect these risks, such as economic, financial and political events
and the supply and demand for the applicable currencies. We may use forward
foreign currency exchange rate contracts to hedge against movements in exchange
rates for contracts denominated in foreign currencies. We cannot assure you that
a significant fluctuation in exchange rates will not have a significant negative
impact on our results of operations.
DEPENDENCE UPON SERVICES OF DR. BEYSTER AND OTHER KEY PERSONNEL
Our success depends on the continued contributions of our founder and Chief
Executive Officer, J.R. Beyster (age 74), and, to a lesser extent, our other
executive officers. The loss of any of these key personnel could materially
affect our operations. We generally do not have long-term employment contracts
with these key personnel nor do we maintain "key man" life insurance policies.
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WE FACE RISKS RELATING TO GOVERNMENT CONTRACTS
The Government may Modify or Terminate our Contracts. Many of the U.S.
Government programs in which we participate as a contractor or subcontractor may
extend for several years; however, such programs are normally funded on an
annual basis. The U.S. Government may modify or terminate its contracts and
subcontracts at its convenience. Modification or termination of our major
programs or contracts could have a material adverse effect on our results of
operations and financial condition.
Our Business is Subject to Potential Government Inquiries and
Investigations. We are from time to time subject to certain U.S. Government
inquiries and investigations of our business practices due to our participation
in government contracts. We cannot assure you that any such inquiry or
investigation would not have a material adverse effect on our results of
operations and financial condition.
Our Contract Costs are Subject to Audits by Government Agencies. The costs
we incur on our U.S. Government contracts, including allocated indirect costs,
may be audited by U.S. Government representatives. These audits may result in
adjustments to our contract costs. We normally negotiate with the U.S.
Government representatives before settling on final adjustments to our contract
costs. Substantially all of our indirect contract costs have been agreed upon
through fiscal year 1998. We have recorded contract revenues in 1999 based upon
costs we expect to realize upon final audit. However, we do not know the outcome
of any future audits and adjustments and we may be required to reduce our
revenues or profits upon completion and final negotiation of these audits.
FAILURE TO CONTROL FIXED-PRICE CONTRACTS MAY RESULT IN REDUCED PROFITS OR LOSSES
The percent of our Regulated segment revenues from firm fixed-price
contracts was 15% for fiscal year 1999, 18% for fiscal year 1998 and 19% for
fiscal year 1997. The percent of our Non-Regulated segment revenues from firm
fixed-price contracts was 71% for fiscal year 1999, 73% for fiscal year 1998 and
66% for fiscal year 1997. Because we assume the risk of performing a firm
fixed-price contract at a set 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 such contracts.
PRE-CONTRACT COSTS MAY NOT BE RECOVERED
Any costs we incur prior to the execution of a contract or contract
amendment are incurred at our risk, and it is possible that the customer will
not reimburse us for such costs. At January 31, 1999, there were unbilled
receivables of $18,863,000 included in the Regulated segment revenues and
$2,117,000 included in the Non-Regulated segment revenues, exclusive of related
fees for such pre-contract costs. We cannot assure you that contracts or
contract amendments will be executed or that the related costs will be
recovered.
RISKS RELATING TO OUR INDUSTRY
WE MUST ATTRACT, TRAIN AND RETAIN SKILLED EMPLOYEES
The availability of highly trained and skilled professional, administrative
and technical personnel is critical to our future growth and profitability.
Competition for scientists, engineers, technicians, management and professional
personnel is intense and competitors aggressively recruit key employees. Because
of our growth and competition for experienced personnel, it has become more
difficult to meet all of our needs for such employees in a timely manner. We
intend to continue to devote significant resources to recruit, train and retain
qualified employees; however, we cannot assure you that we will be able to
attract and retain such employees on acceptable terms. Any failure to do so
could have a material adverse effect on our operations.
OUR FAILURE TO REMAIN COMPETITIVE COULD HARM OUR BUSINESS
Our business is highly competitive, particularly in the business areas of
telecommunications and information technology outsourcing in our Non-Regulated
segment. We compete with larger companies that have greater financial resources
and larger technical staffs. We also compete with smaller, more highly
specialized entities who are able to concentrate their resources on particular
areas. In the Regulated segment,
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we also compete with the U.S. Government's own in-house capabilities and federal
non-profit contract research centers. To continue our success, we must provide
superior service and performance on a cost-effective basis.
RISKS RELATING TO OUR STOCK
NO PUBLIC MARKET EXISTS FOR OUR STOCK AND STOCKHOLDERS' ABILITY TO SELL OUR
STOCK IS LIMITED
There is no public market for the Class A Common Stock. The limited market
maintained by our subsidiary, Bull, Inc., permits existing stockholders to offer
for sale our stock only on predetermined trade dates. Generally, there are four
trade dates each year. If there were insufficient buyers for the stock on any
trade date, our stockholders would not be able to sell stock in the trade. See
"Market for Registrant's Common Equity and Related Stockholder Matters -- The
Limited Market."
OUR STOCK PRICE IS DETERMINED BY OUR BOARD OF DIRECTORS AND IS NOT ESTABLISHED
BY MARKET FORCES
Our stock price is not determined by a trading market of bargaining buyers
and sellers. Our board of directors determines the price at which the Class A
Common Stock trades in the limited market pursuant to the formula and valuation
process described beginning on page 13. Our board of directors believes the
stock price represents a fair market value; however, we cannot assure you that
the stock price represents the value that would be obtained if our stock was
publicly traded. In addition, our board of directors generally has broad
discretion to modify the formula. The formula does not specifically include
variables reflecting all financial and valuation criteria that may be relevant.
The mechanical application of the formula, assuming a constant market factor,
tends to smooth the impact on the stock price of quarterly fluctuations in our
operating results because the formula takes into account our net income for the
four preceding quarters. See "Market for Registrant's Common Equity and Related
Stockholder Matters -- Price Range of Class A Common Stock and Class B Common
Stock."
FUTURE RETURNS ON OUR COMMON STOCK MAY DIFFER SIGNIFICANTLY FROM HISTORICAL
RETURNS
We cannot guarantee that the Class A Common Stock will not decline or will
provide returns in the future comparable to those achieved historically. See
"Market for Registrant's Common Equity and Related Stockholder Matters -- Price
Range of Class A Common Stock and Class B Common Stock."
CHANGES IN OUR BUSINESS MAY INCREASE VOLATILITY OF THE STOCK PRICE
The stock price could be subject to greater fluctuations than it has
experienced in the past. The increased volatility is expected to result from the
impact on our stock price of:
- Our ownership interest in NSI, a publicly traded and highly volatile
Internet company. As of March 31, 1999, we owned approximately 44.8% of
the outstanding common stock of NSI.
- The increase of our commercial and international business as a proportion
of our overall business and the greater volatility associated with
companies in such business areas.
- The impact of acquisitions, investments and joint ventures that we may
pursue in the future.
OUR STOCKHOLDERS' ABILITY TO SELL OR TRANSFER OUR COMMON STOCK IS RESTRICTED
Our certificate of incorporation limits our stockholders' ability to sell
or transfer shares of Class A Common Stock in some circumstances. These
restrictions include:
- our right of first refusal to purchase shares a stockholder offers to
sell to a third party; and
- our right to repurchase shares upon the termination of a stockholder's
affiliation with us.
The repurchase restriction does not apply to qualified employees who elect
to have us defer our repurchase rights for five years.
10
<PAGE> 12
RESTRICTIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE
TAKEOVER ATTEMPTS THAT YOU MIGHT FIND ATTRACTIVE
Our certificate of incorporation and bylaws may discourage or prevent
attempts to acquire control of us that are not approved by our board of
directors, including transactions in which stockholders might receive a premium
for their shares above the formula price. Our stockholders may view such a
takeover attempt favorably. In addition, the restrictions may make it more
difficult for our stockholders to elect directors.
FORWARD-LOOKING STATEMENT RISKS
YOU MAY NOT BE ABLE TO RELY ON FORWARD-LOOKING STATEMENTS
The information contained in this report includes some forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could cause our actual results, performance, achievements, or industry results
to be very different from the results, performance or achievements expressed or
implied by such forward-looking statements.
In addition, forward-looking statements depend upon assumptions, estimates
and dates that may not be correct or precise and involve known or unknown risks,
uncertainties and other factors. Accordingly, a forward-looking statement in
this report is not a prediction of future events or circumstances and those
future events or circumstances may not occur. Given these uncertainties, you are
warned not to rely on the forward-looking statements. A forward-looking
statement is usually identified by our use of certain terminology including
"believes," "expects," "may," "will," "should," "seeks," "pro forma,"
"anticipates" or "intends," or by discussions of strategy or intentions. We are
not undertaking any obligation to update these factors or to publicly announce
the results of any changes to our forward-looking statements due to future
events or developments.
ITEM 2. PROPERTIES
As of March 31, 1999, the Company conducted its operations in more than 400
offices located in 42 states, the District of Columbia and various foreign
countries and occupied a total of approximately 8,900,000 square feet of space.
The Company has significant locations in the San Diego, California, Washington,
D.C. and Piscataway, New Jersey metropolitan areas and occupies over 1,000,000
square feet of space in the San Diego, California and Piscataway, New Jersey
locations and over 2,000,000 square feet of space in the Washington, D.C. area.
At the primary location of the Company in San Diego, California, the
Company owns and occupies seven buildings totaling approximately 677,000 square
feet of space situated on 22.2 acres of land in the Golden Triangle area.
At the Company's McLean, Virginia location, the Company owns and occupies a
287,000 square foot building located on 10 acres of land and leases two
buildings containing a total of approximately 425,000 square feet of space. The
Company has certain rights to purchase these leased buildings. The Company has
also executed a lease to occupy an additional 195,000 square foot building in
McLean, Virginia, upon completion of this building scheduled for December 1999.
In addition, the Company owns and occupies a 62,000 square foot building on 2.6
acres of land in Reston, Virginia.
In the Chester, Piscataway and Red Bank, New Jersey areas, the Company owns
and occupies 13 buildings totaling approximately 725,000 square feet of space
situated on 206 acres of land. The Company also owns an additional 28 acres of
vacant land in Piscataway, New Jersey.
The Company also owns and occupies (a) a 62,500 square foot building on
approximately 13 acres of land in Virginia Beach, Virginia, (b) an 83,000 square
foot building on approximately 8.4 acres of land in Oak Ridge, Tennessee, (c)
two buildings totaling 79,400 square feet on 4.5 acres in Dayton, Ohio, (d) a
100,000 square foot building on 18 acres in Huntsville, Alabama, (e) a 95,500
square foot building on approximately 7.3 acres of land in Columbia, Maryland
and (f) a 23,700 square foot building on approxi-
11
<PAGE> 13
mately 3.1 acres of leased land in Richland, Washington. In addition, the
Company leases a 380,000 square foot building in Lisle, Illinois.
The nature of the Company's business is such that there is no practicable
way to relate occupied space to industry segments. The Company considers its
facilities suitable and adequate for its present needs. See Note M of the Notes
to Consolidated Financial Statements of the Company on page F-28 of this Form
10-K for information regarding commitments under leases.
ITEM 3. 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, is expected to have a material adverse effect on its
consolidated financial position, results of operations, cash flows or its
ability to conduct business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of General Instructions to Form 10-K,
the following list is included as an unnumbered Item in Part I of this Form 10-K
in lieu of being incorporated by reference to the Company's definitive Proxy
Statement used in connection with the solicitation of votes for the Company's
1999 Annual Meeting of Stockholders (the "1999 Proxy Statement").
The following is a list of the names and ages (as of April 9, 1999) of all
Executive Officers of the Company, indicating all positions and offices with the
Company held by each such person and each such person's principal occupation or
employment during at least the past five years. All such persons have been
elected to serve until their successors are elected or until their earlier
resignation or retirement. Except as otherwise noted, each of the persons listed
below has served in his present capacity for at least the past five years.
<TABLE>
<CAPTION>
NAME OF
EXECUTIVE OFFICER AGE POSITIONS WITH THE COMPANY AND PRIOR BUSINESS EXPERIENCE
- ----------------- --- --------------------------------------------------------
<S> <C> <C>
D. P. Andrews.... 54 Corporate Executive Vice President since January 1998 and a
Director since October 1996. Mr. Andrews has held various
positions with the Company since 1993, including serving as
Executive Vice President for Corporate Development from
October 1995 to January 1998. Prior to joining the Company,
Mr. Andrews served as Assistant Secretary of Defense from
1989 to 1993.
D. W. Baldwin.... 46 Senior Vice President and Treasurer since January 1997. Mr.
Baldwin has held various positions with the Company since
1978, including serving as a Senior Vice President since
1992.
J. R. Beyster.... 74 Chairman of the Board, Chief Executive Officer and a
Director of the Company since the Company was founded. Dr.
Beyster has served as President since June 1998.
D. A. Cox........ 51 Executive Vice President since January 1998. Mr. Cox has
held various positions with the Company since 1988,
including serving as a Sector Vice President from January
1996 to January 1998.
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
NAME OF
EXECUTIVE OFFICER AGE POSITIONS WITH THE COMPANY AND PRIOR BUSINESS EXPERIENCE
- ----------------- --- --------------------------------------------------------
<S> <C> <C>
J. E. Glancy..... 53 Corporate Executive Vice President since January 1994 and a
Director of the Company since July 1994. Dr. Glancy has held
various positions with the Company since 1976, including
serving as a Sector Vice President from 1991 to 1994.
J. D. Heipt...... 56 Senior Vice President for Administration and Secretary of
the Company since 1984. Mr. Heipt has held various positions
with the Company since 1979.
P. N. Pavlics.... 38 Senior Vice President since January 1997 and Controller of
the Company since 1993. Mr. Pavlics has held various
positions with the Company since 1985, including serving as
a Corporate Vice President from 1993 to January 1997.
S. D. Rockwood... 56 Executive Vice President of the Company since April 1997 and
Director of the Company since 1996. Dr. Rockwood has held
various positions with the Company since 1986, including
serving as a Sector Vice President from 1987 to April 1997.
W. A. Roper, 53 Senior Vice President and Chief Financial Officer of the
Jr............. Company since 1990.
R. A. 64 Executive Vice President of the Company since 1992. Mr.
Rosenberg...... Rosenberg has held various positions with the Company since
1987.
D. E. Scott...... 42 Senior Vice President since January 1997 and General Counsel
of the Company since 1992. Mr. Scott has held various
positions with the Company since 1987, including serving as
a Corporate Vice President from 1992 to January 1997.
R. C. Smith...... 57 Chief Executive Officer and a Director of Telcordia, a
wholly-owned subsidiary of the Company, since January 1998
and a Director of the Company since April 1998. Prior to
joining Telcordia, Mr. Smith was the Senior Vice President
--Quality Development and Public Relations for Sprint
Corporation from 1991 to January 1998.
E. A. Straker.... 61 Executive Vice President of the Company since 1994 and a
Director since 1992. Dr. Straker has held various positions
with the Company since 1971, including serving as a Sector
Vice President from 1986 to 1994.
J. H. Warner, 58 Corporate Executive Vice President of the Company since 1996
Jr............. and Director since 1988. Dr. Warner has held various
positions with the Company since 1973, including serving as
Executive Vice President from 1989 to 1996.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
THE LIMITED MARKET
Since its inception, the Company has followed a policy of remaining
essentially employee owned. As a result, there has never been a general public
market for any of the Company's securities. In order to provide liquidity for
its stockholders, however, the Company has maintained a limited secondary market
(the "Limited Market") through its wholly-owned, broker-dealer subsidiary, Bull,
Inc., which was organized in 1973 for the purpose of maintaining the Limited
Market.
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 which typically occur approximately two
weeks after meetings of the Company's Board of Directors (the "Board of
Directors") which are currently scheduled for January, April, July and October.
All shares of Class B Common Stock to be sold in the Limited Market must first
be converted into five times as many shares of Class A Common Stock. All sales
are made at the prevailing price of the Class A Common Stock determined
13
<PAGE> 15
by the Board of Directors pursuant to the valuation process described below.
Employees, consultants and directors of the Company who have been approved by
the Board of Directors or the Operating Committee of the Board of Directors may
subscribe to purchase up to a specified number of shares of Class A Common
Stock. In addition, the trustees or agents of the Company's Employee Stock
Retirement Plan ("ESRP"), Cash or Deferred Arrangement ("CODA"), the 1998
Employee Stock Purchase Plan, Stock Compensation Plan, Management Stock
Compensation Plan, Key Executive Stock Deferral Plan, the Telcordia Technologies
Savings and Security Plan and the Telcordia Technologies Savings Plan for
Salaried Employees (collectively, the "Telcordia Savings Plans"), the TransCore
Retirement Savings Plan of Syntonic Technology, Inc., a wholly-owned subsidiary
of the Company doing business as TransCore ("TransCore Savings Plan") and AMSEC
Corporation Employees 401(k) Profit Sharing Plan ("AMSEC Plan"), (collectively,
the "Benefit Plans") may also purchase shares of Class A Common Stock for their
respective trusts in the Limited Market. All sellers in the Limited Market
(other than the Company, ESRP, CODA, the Telcordia Savings Plans, the TransCore
Savings Plan and the AMSEC Plan) pay Bull, Inc. a commission equal to 2% of the
proceeds from such sales. No commission is paid by purchasers in the Limited
Market.
In the event that the aggregate number of shares offered for sale in the
Limited Market on any Trade Date is greater than the aggregate number of shares
sought to be purchased by authorized buyers, offers by stockholders to sell 500
or less shares of Class A Common Stock (or up to the first 500 shares if more
than 500 shares of Class A Common Stock are offered by any such stockholder)
will be accepted first. Offers to sell shares in excess of 500 shares of Class A
Common Stock will be accepted on a pro-rata basis determined by dividing the
total number of shares remaining under purchase orders by the total number of
shares remaining under sell orders. If, however, there are insufficient purchase
orders to support the primary allocation of 500 shares of Class A Common Stock
for each proposed seller, then the purchase orders will be allocated equally
among all of the proposed sellers up to the total number of shares offered for
sale.
The Company is 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 the number of shares offered for sale by stockholders exceeds
the number of shares sought to be purchased by authorized buyers, and the
Company, in its discretion, determines to make such purchases. In fiscal year
1998, the Company purchased 223,849 shares in the Limited Market which accounted
for 9.7% of the total shares purchased by all buyers in the Limited Market
during 1998. In fiscal year 1999, the Company did not purchase any shares in the
Limited Market as the number of shares offered by stockholders did not exceed
the number of shares sought to be purchased by authorized buyers.
During the 1999 and 1998 fiscal years, the trustees of the Company's CODA,
1995 Employee Stock Purchase Plan, 1998 Employee Stock Purchase Plan, the
Telcordia Savings Plans, the TransCore Savings Plan and the AMSEC Plan purchased
an aggregate of 2,998,237 shares and 1,496,518, respectively, in the Limited
Market. These purchases accounted for approximately 73.8% and 59.0% of the total
shares purchased by all buyers in the Limited Market during fiscal years 1999
and 1998, respectively. Such purchases may change in the future, depending on
the levels of participation in and contributions to such Plans and the extent to
which such contributions are invested in Class A Common Stock. To the extent
that purchases by the trustees of the Benefit Plans decrease and purchases by
the Company do not increase, the ability of stockholders to resell their shares
in the Limited Market will likely be adversely affected. Although all shares of
Class A Common Stock offered for sale were sold in the Limited Market on each
Trade Date occurring during the last two fiscal years, no assurance can be given
that a stockholder desiring to sell all or a portion of his or her shares of the
Company's Class A Common Stock on any Trade Date will be able to do so.
To the extent that the aggregate number of shares sought to be purchased by
authorized buyers exceeds the aggregate number of shares offered for sale by
stockholders, the Company may, but is not obligated to, sell authorized but
unissued shares of Class A Common Stock in the Limited Market. In fiscal years
1999 and 1998, the Company sold an aggregate of 2,625,675 and 927,657 shares of
Class A Common Stock, respectively, in the Limited Market or 64.6% and 36.6%,
respectively, of the total shares sold by all sellers in the Limited Market
during such years. To the extent that the Company chooses not to sell authorized
but unissued shares of Class A Common Stock in the Limited Market, the ability
of individuals to purchase shares
14
<PAGE> 16
on the Limited Market may be adversely affected. No assurance can be given that
an individual desiring to buy shares of the Company's Class A Common Stock in
any future trade will be able to do so.
PRICE RANGE OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The price of the Class A Common Stock (the "Formula Price") is established
by the Board of Directors pursuant to the valuation process which includes the
formula set forth below (the "Formula"). The Board of Directors sets the Market
Factor (as defined below) 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. The Stock
Policy Committee of the Board of Directors has been authorized by the Board of
Directors to review the Formula Price during the interim period between meetings
of the Board of Directors to ensure that the Formula Price continues to
represent a fair market value. The Board of Directors or the Stock Policy
Committee may, if deemed appropriate, modify the Formula Price or postpone a
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 "Business -- Risk Factors -- Our Stock Price is Determined by Our
Board of Directors and is Not Established by Market Forces."
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 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 table on
page 17.
The Formula Price of the Class A Common Stock, expressed as an equation, is
as follows:
<TABLE>
<S> <C> <C> <C>
Formula Price = E + 5.66 MP
--- -------
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 had always
exceeded the Book Value Floor, and the Book Value Floor was never 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
15
<PAGE> 17
in the accounting standards related to the calculation of earnings per share.
See "Business -- Risk Factors -- Our Stock Price is Determined by Our Board of
Directors and is Not Established by Market Forces."
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 independent directors, 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 factors it deems relevant. 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
Class A Common Stock is prepared by an independent appraisal firm. Valuation
input from the appraisal firm 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 has
authorized the Stock Policy Committee to review the Formula Price during the
interim period between meetings of the Board of Directors to ensure that the
Formula Price continues to represent a fair market value. If the Stock Policy
Committee deemed it appropriate to modify the Formula Price, it would use the
same valuation process used by the Board of Directors to determine the Formula
Price. 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.
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 value of the Market Factor could be subject to
greater fluctuations in the future than in the past due to a number of factors,
including (i) the distortive impact of one-time events not in the normal course
of business on the Company's earnings used to calculate the Formula Price, such
as the gain recognized by the Company in the first quarter of its fiscal year
2000 on the sale of NSI stock in the secondary offering, (ii) the volatility of
the stock price of the Class A Common Stock of NSI, a publicly-traded and highly
volatile Internet company in which the Company owns approximately 44.8%, and its
impact on the Formula Price, (iii) the increase of the Company's commercial and
international business as a proportion of the Company's overall business and the
greater volatility associated with companies in such business areas and (iv) the
impact of acquisitions, investments and joint ventures that the Company may
pursue. See "Business -- Risk Factors -- Changes in Our Business May Increase
Volatility of the Stock Price."
The following table sets forth information concerning the Formula Price for
the Class A Common Stock, the applicable price for the Class B Common Stock and
each of the variables contained in the Formula, including the Market Factor, in
effect for the periods beginning on the dates indicated. There can be no
assurance that the Class A Common Stock or the Class B Common Stock will in the
future provide returns
16
<PAGE> 18
comparable to historical returns. See "Business -- Risk Factors -- Future
Returns on Our Common Stock May Differ Significantly from Historical Returns."
<TABLE>
<CAPTION>
"W" OR PRICE PRICE
"E" OR "W(1)" WEIGHTED PER SHARE PER SHARE
MARKET STOCKHOLDERS OF SHARES "P" OR AVG. SHARES OF CLASS A OF CLASS B
DATE FACTOR EQUITY(1) OUTSTANDING(2) EARNINGS(3) OUTSTANDING(4) COMMON STOCK COMMON STOCK
---- ------ -------------- -------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
April 11, 1997.......... 2.40 $ 527,459,000 52,682,394 $ 63,680,000 52,308,789 $26.55 $132.75
July 11, 1997........... 2.70 559,284,000 53,556,198 67,459,000 52,695,291 30.01 150.05
October 10, 1997........ 3.20 583,211,000 54,369,492 70,701,000 53,229,203 34.78 173.90
January 9, 1998......... 3.60 663,811,000 55,148,817 71,804,000 53,993,996 39.13 195.65
April 10, 1998.......... 3.90 754,778,000 57,511,742 84,794,000 54,889,045 47.22 236.10
July 10, 1998........... 3.90 889,231,000 60,638,881 101,956,000 55,934,116 54.90 274.50
October 9, 1998......... 3.70 935,179,000 61,495,949 119,728,000 57,423,808 58.87 294.35
January 8, 1999......... 3.80 980,390,000 61,786,525 147,609,000 58,843,368 69.82 349.10
April 9, 1999........... 3.90 1,084,602,000 63,260,649 150,688,000 60,192,650 72.41 362.05
</TABLE>
- ---------------
(1) "E" or Stockholders Equity 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.
(2) "W(1)" or Shares Outstanding is the number of outstanding common shares and
common share equivalents at the end of the fiscal quarter immediately
preceding the date on which a price determination is to occur.
(3) "P" or Earnings is the earnings of the Company for the four fiscal quarters
immediately preceding the price determination.
(4) "W" or Weighted Average Shares Outstanding is the weighted average number of
outstanding common shares and common share equivalents for the four fiscal
quarters immediately preceding the price determination, as used by the
Company in computing diluted earnings per share.
HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
As of March 31, 1999, there were 24,105 holders of record of Class A Common
Stock and 154 holders of record of Class B Common Stock. As of such date,
approximately 92.3% of the Class A Common Stock and approximately 47.5% of the
Class B Common Stock were owned of record by current employees, directors and
consultants of the Company and their respective family members and by various
employee benefit plans of the Company and its subsidiaries.
DIVIDEND POLICY
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 payment of any future dividends
will be at the discretion of the Board of Directors and will depend upon, among
other things, future earnings, capital requirements, the Company's general
financial conditions and general business conditions.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from the audited consolidated financial
statements. The consolidated balance sheet at January 31, 1999 and 1998 and the
related consolidated statements of income and of cash flows for the three years
ended January 31, 1999 and notes thereto appear elsewhere in this Form 10-K.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
------------------------------------------------------------------
1999(1) 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues..................... $4,740,433 $3,089,351 $2,402,224 $2,155,657 $1,921,880
Cost of revenues............. 3,732,890 2,623,339 2,094,447 1,875,183 1,686,970
Selling, general and
administrative expenses.... 684,905 301,093 191,836 173,742 146,083
Interest expense............. 33,813 11,682 4,925 4,529 3,468
Other (income) expense,
net........................ (17,012) (15,864) (2,193) (111) 5,653
Minority interest in income
of consolidated
subsidiaries............... 17,842 10,608
Provision for income taxes... 137,307 73,699 49,529 45,018 30,654
---------- ---------- ---------- ---------- ----------
Net income................... $ 150,688 $ 84,794 $ 63,680 $ 57,296 $ 49,052
========== ========== ========== ========== ==========
Earnings per share:
Basic...................... $ 2.68 $ 1.65 $ 1.30 $ 1.19 $ 1.05
========== ========== ========== ========== ==========
Diluted.................... $ 2.46 $ 1.55 $ 1.23 $ 1.14 $ 1.02
========== ========== ========== ========== ==========
Common equivalent shares:
Basic...................... 55,621 51,349 49,157 48,143 46,605
========== ========== ========== ========== ==========
Diluted.................... 60,304 54,806 51,738 50,285 47,865
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets............................ $3,172,546 $2,415,234 $1,012,462 $859,290 $752,584
Working capital......................... 369,473 94,588 270,553 227,185 173,467
Long-term debt.......................... 143,051 145,958 15,227 15,592 14,222
Long-term liabilities................... 318,002 313,677 29,114 18,524 14,733
Stockholders' equity.................... 1,084,602 754,778 527,459 458,132 386,760
</TABLE>
- ---------------
(1) 1999 revenues include a full year of operations for Telcordia which was
acquired in the fourth quarter of 1998.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company primarily provides diversified professional and technical
services involving the application of scientific expertise, together with
computer and systems technology, to solve complex technical problems for a broad
range of government and commercial customers, both in the U.S. and abroad.
Through its subsidiary, Telcordia, the Company is a global provider of software,
engineering and consulting services, advanced research and development,
technical training and other services to the telecommunications industry. In
addition to providing technical services, the Company designs and develops
high-technology products. Product revenues were 1% of total revenues in 1999, 2%
in 1998 and 6% in 1997.
The Company completed the acquisition of Telcordia in the fourth quarter of
1998. Consequently, the 1999 consolidated financial statements reflect the first
full year of operations for Telcordia.
The Company's subsidiary, NSI, continued to experience growth in its
business and have a positive impact to the Company's consolidated financial
position and results of operations. Subsequent to the year ended January 31,
1999, on February 9, 1999, NSI announced a secondary offering of 4,580,000
shares of Class A Common Stock. Of the shares sold in the offering, the Company
sold 4,500,000 shares at $170 per share. On February 12, 1999, the Company
received net proceeds from the offering of $729 million. In connection with the
offering, the Company expressed an intention to convert its shares of NSI Class
B Common Stock, which are entitled to ten votes per share, into an equal number
of shares of NSI Class A Common Stock, which are entitled to one vote per share.
On March 23, 1999, NSI completed a two-for-one stock split of its Class A Common
Stock and Class B Common Stock. Assuming the proposed conversion of NSI Class B
Common Stock, the Company's ownership and voting power in NSI would be
approximately 44.8%.
RESULTS OF OPERATIONS
Revenues increased 53%, 29% and 11% in 1999, 1998 and 1997, respectively,
over the prior year. INTESA, Telcordia and NSI were responsible for 37
percentage points of the increase in 1999. The remaining increase in revenues of
16 percentage points was attributable to internal growth in the Company's
traditional business areas. Revenues in 1999 from the Company's principal
customer, the U.S. Government, 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 markets, which typically involve
lower cost service type contracts.
Revenues from the U.S. Government as a prime contractor or subcontractor
accounted for 50% of revenues in 1999, 66% in 1998 and 79% in 1997. The
continued decrease from 1997 to 1999 is primarily attributable to growth in
non-U.S. Government revenues as a result of the Company's efforts to increase
revenues from commercial and international clients and state and local
governments in the health, commercial information technology, telecommunications
and transportation business areas. On an absolute basis, U.S. Government
revenues increased 17% in 1999, 7% in 1998 and 6% in 1997 over the respective
prior year. Non-U.S. Government revenues increased 124% in 1999, 109% in 1998
and 40% in 1997 over the respective prior year. The significant increase in
non-U.S. Government revenues in 1999 is primarily attributable to a full year of
operations for Telcordia compared to 1998 and growth in INTESA and NSI revenues
over 1998.
The following table summarizes revenues by contract type for the last three
years:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Contract type:
Cost-reimbursement.......................................... 37% 50% 54%
Time-and-materials and fixed-price level-of-effort.......... 24% 18% 22%
Firm fixed-price............................................ 39% 32% 24%
--- --- ---
Total.................................................. 100% 100% 100%
=== === ===
</TABLE>
19
<PAGE> 21
Cost-reimbursement contracts provide for the reimbursement of direct costs
and allowable indirect costs, plus a fee or profit component. Time-and-materials
("T&M") contracts typically provide for the payment of negotiated fixed hourly
rates for labor hours incurred plus reimbursement of other allowable direct
costs at actual cost plus allocable indirect costs. Fixed-price level-of-effort
("FP-LOE") contracts are similar to T&M contracts since ultimately revenues are
based upon the labor hours provided to the customer. Firm fixed-price contracts
require the Company to provide stipulated products, systems or services for a
fixed price. The Company assumes greater performance risk on firm fixed-price
contracts and the failure to accurately estimate ultimate costs or to control
costs during performance of the work may result in reduced profits or losses.
The increase in revenues from firm fixed-price contracts and associated relative
decrease in revenues from cost-reimbursement contracts from 1997 to 1999 result
primarily from the Company's growth in non-U.S. Government revenues. The
Company's non-U.S. Government customers typically do not contract on a cost-
reimbursement basis.
As more fully discussed in the Notes to Consolidated Financial Statements,
the Company's operating groups ("Groups") are divided into two segments,
Regulated and Non-Regulated, depending on the business processes and laws
affecting the operations of the Groups. Groups in the Regulated segment provide
technical services and products through contractual arrangements as either a
prime contractor or subcontractor to other contractors, primarily for
departments and agencies of the U.S. Government. Operations in the Regulated
segment are subject to specific regulatory accounting and contracting guidelines
such as "Cost Accounting Standards" and "Federal Acquisition Regulations."
Groups in the Non-Regulated segment provide technical services and products
primarily to customers in commercial markets. Generally, operations in the
Non-Regulated segment are not subject to specific regulatory or contracting
guidelines.
Regulated segment revenues as a percentage of consolidated revenues were
58%, 74% and 88% in 1999, 1998 and 1997, respectively. Non-Regulated segment
revenues as a percentage of consolidated revenues were 42%, 25% and 11% in 1999,
1998 and 1997, respectively. The decrease in revenues as a percentage of
consolidated revenues in the Regulated segment reflects the faster growth in the
Non-Regulated segment particularly in the telecommunications and information
technology markets. Although the Regulated segment revenues have decreased as a
percentage of consolidated revenues, on an absolute basis, these revenues
increased 20% in 1999, 8% in 1998 and 9% in 1997. Non-Regulated segment
revenues, on an absolute basis, have increased 154% in 1999, 190% in 1998 and
34% in 1997. Telcordia, INTESA and NSI primarily drove the growth in the
Non-Regulated segment in 1999 and 1998.
The Company's business is directly related to the receipt of contract
awards and contract performance. There were 685 contracts, which include 181 of
Telcordia's contracts, with annual revenues greater than $1 million in 1999,
compared with 440 and 412 such contracts in 1998 and 1997, respectively. These
larger contracts represented 71% of the Company's revenues in 1999 and 1998 and
75% in 1997. Of these contracts, 55 contracts had individual revenues greater
than $10 million in 1999 compared to 39 such contracts in 1998 and 28 in 1997.
The remainder of the Company's revenues are derived from a large number of
contracts with individual revenues less than $1 million. Although the Company
has committed substantial resources and personnel required to pursue and perform
larger contracts, the Company believes it also maintains a suitable environment
for the performance of smaller, highly technical research and development
contracts. These smaller programs often provide the foundation for the Company's
success on larger procurements. 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 the end of 1999, the Company
had 33,000 full-time employees compared to 30,300 and 20,900 at the end of 1998
and 1997, respectively. Material and subcontract ("M&S") revenues were $998
million in 1999, $755 million in 1998 and $667 million in 1997. As a percentage
of total revenues, M&S revenues decreased to 21% in 1999 from 25% in 1998 and
28% in 1997. The decrease as a percentage of revenues in 1999 is primarily
attributable to Telcordia, whose revenues are generated primarily from technical
services of its technical staff, and from the sale in 1998 of a business unit
which accounted for 12% of M&S revenues in 1997.
The cost of revenues as a percentage of revenues was 78.8% in 1999, 84.9%
in 1998 and 87.2% in 1997. The decrease as a percentage of revenues in 1999
reflects the growth in commercial revenues from Telcordia,
20
<PAGE> 22
INTESA and NSI, which have more of their associated costs in selling, general
and administrative ("SG&A") as opposed to cost of revenues. In addition,
Telcordia and NSI have higher operating profit margins than the Company's
traditional business areas. Cost of revenues as a percentage of revenues,
excluding Telcordia, INTESA and NSI, was 89.3% in 1999, 88.3% in 1998 and 87.3%
in 1997.
SG&A expenses as a percentage of revenues were 14.5%, 9.8% and 8.0% in
1999, 1998 and 1997, respectively. 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 due to the growth in commercial revenues which have more of their
associated costs in SG&A as opposed to cost of revenues. SG&A costs as a
percentage of revenues, excluding Telcordia, INTESA and NSI, were 7.5%, 7.6% and
7.8% in 1999, 1998 and 1997, respectively. 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 to 5.1% of revenues in
1999 compared to 2.6% in 1998 and 1.9% in 1997. The increase is primarily driven
by Telcordia and NSI. IR&D costs have also historically fluctuated depending on
the stage of development for various hardware and software systems and have
increased to 2.5% of revenues in 1999 compared to .8% in 1998 and .5% in 1997.
The increase is primarily attributable to Telcordia. G&A costs as a percentage
of total revenues were 6.8% in 1999 compared to 6.4% in 1998 and 5.6% in 1997.
The increase in G&A costs represents the combination of the growth in commercial
business and increased goodwill amortization associated with the acquisition of
Telcordia. In 1999, 1998 and 1997, continued declining operating results of
certain acquired companies indicated that the goodwill might not be recoverable.
The Company considered the future undiscounted cash flows of these entities in
assessing recoverability of the goodwill and reduced goodwill by $13.4 million,
$2.9 million and $6.2 million to its estimated recoverable value in 1999, 1998
and 1997, respectively. The Company continues to closely monitor G&A expenses as
part of an on-going program to control indirect costs.
Operating profit margins (operating income as a percentage of revenues) by
segment are strongly correlated to the Company's financial performance on the
contracts within each segment. The operating profit margin in the Regulated
segment was 5.2% in 1999, 5.9% in 1998 and 6.3% in 1997. The lower operating
profit margin in the Regulated segment in 1999 compared to 1998 was attributable
to an increase in discretionary investments made in the marketing and bid and
proposal areas. The lower operating profit margin in 1998 compared to 1997 was a
result of overruns on certain firm fixed-price contracts. In the Non-Regulated
segment, operating profit margin was 10.4% in 1999, 6.4% in 1998 and a loss of
1.7% in 1997. The increase in operating profit margin in the Non-Regulated
segment in 1999 compared to 1998 is attributable to performance in the
telecommunications and information technology business area at Telcordia, INTESA
and NSI as well as operating profit margin improvement in certain foreign
subsidiaries which had losses in 1998. Operating profit margin in 1998 improved
over 1997 primarily due to Telcordia, INTESA and NSI but also reflected losses
in certain foreign subsidiaries. The loss in 1997 primarily relates to operating
losses at NSI.
Interest expense in 1999, 1998 and 1997 primarily relates to interest on
the Company's outstanding public debt securities, a building mortgage, deferred
compensation arrangements, capital lease obligations and notes payable. Increase
in interest expense was primarily driven by an increase in deferred compensation
balances, capital lease obligations and the public debt securities which were
issued at the end of 1998.
Other income, net of other expense, was $17 million in 1999 compared to $16
million in 1998 and $2 million in 1997. Included in other income in 1999 is
interest income of $22 million, gain on sale of business assets of $4 million,
an equity loss in an affiliate of $6 million and an other-than-temporary loss on
a marketable equity security of $3 million. While overall other income in 1999
remained relatively constant with 1998, interest income increased as a result of
increased average balances in cash equivalents and short and long-term
marketable investments.
The provision for income taxes as a percentage of income before income
taxes was 47.7% in 1999, 46.5% in 1998 and 43.8% in 1997. The higher effective
tax rate in 1999 compared to 1998 and 1997 is primarily attributable to
non-deductible goodwill amortization and a reassessment of certain tax positions
related to the Company's on-going appeals process with the IRS for fiscal years
1988 through 1993.
21
<PAGE> 23
As described in the Notes to Consolidated Financial Statements, during
1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
and SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits." As more fully discussed in the Notes to Consolidated Financial
Statements, all three standards resulted in changes in presentation and
disclosure. However, adoption of these standards did not have an impact on the
Company's consolidated financial position or results of operations. All
applicable prior years have been restated in the consolidated financial
statements and footnote disclosures to conform to these new standards.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use," which defines the
characteristics of internal-use software and provides guidance on when costs
should be capitalized and when they should be expensed as incurred. The Company
will adopt SOP 98-1 effective for the fiscal year beginning February 1, 1999.
Upon adoption, the Company will be required to capitalize certain costs on a
prospective basis that were expensed as incurred under current accounting
practice. The Company does not expect the adoption of SOP 98-1 to have a
material impact to its consolidated financial position or results of operations.
Additionally, in June 1998, the Financial Accounting Standards Board issued 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 an entity to 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 in the first quarter ending April 30, 2000. Based on the
types of derivative instruments the Company currently has, the Company does not
expect the adoption of SFAS No. 133 to have a material impact to the Company's
consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity continue to be funds provided by
operations and a five-year revolving credit facility. In 1998, the issuance of
public debt securities was a source of liquidity for the Company. At January 31,
1999 and 1998, there were no borrowings outstanding under the credit facility
and cash and cash equivalents and short-term investments totaled $508 million
and $230 million, respectively. Cash flows generated from operating activities
were $380 million in 1999 compared to $351 million in 1998 and $111 million in
1997. Telcordia has favorable payment terms on a majority of its annual
maintenance contracts. Average revenue days outstanding for the Company,
excluding Telcordia, decreased to 63 in 1999 from 68 in 1998 and 74 in 1997. The
Company continues to actively monitor receivables with emphasis placed on
collection activities and the negotiation of more favorable payment terms.
Cash flows spent on investing activities were $223 million in 1999 compared
to $397 million and $57 million in 1998 and 1997, respectively. The decrease in
spending on investing activities in 1999 is primarily attributable to the types
and sizes of business acquisitions completed. In 1997, the Company completed a
greater number of acquisitions and investments in affiliates than in 1998.
However, these were smaller in size compared to the acquisition of Telcordia in
1998. In addition, in 1999, NSI utilized its cash to make investments in debt
and equity securities. Although the Company used $340 million of cash for
acquisitions of certain business assets, net of cash acquired, in 1998, the
Company also received proceeds of $48 million from the sale of certain business
units and certain other smaller business assets. The Company spent $23 million
for acquisitions of businesses in 1997 to complement the Company's capabilities
in the areas of information technology, transportation and national security.
The Company intends to continue to make additional acquisitions and equity
investments in the future. Capital expenditures, excluding land and buildings,
were $85 million, $52 million and $38 million in 1999, 1998 and 1997,
respectively, and are expected to be approximately $90 million for 2000.
Expenditures for land and buildings were $3 million, $18 million and $5 million
in 1999, 1998 and 1997, respectively, and are expected to be approximately $53
million for 2000.
The Company generated $43 million from financing activities in 1999 and
$191 million in 1998 compared to a use of cash of $31 million in 1997. In 1999,
cash was primarily generated from sales of the Company's
22
<PAGE> 24
stock and primarily used for repurchases of common stock. In 1998, the primary
sources of cash were the proceeds from issuing public debt securities, proceeds
from the initial public offering of NSI common stock and proceeds from the sale
of the Company's common stock, while the primary use of cash was for repurchases
of common stock. In 1997, funds were utilized primarily for common stock
repurchases and payments on long-term debt. The increase in common stock
repurchases from 1997 through 1999 was primarily attributable to increased
repurchases of common stock from the Company's Employee Stock Retirement Plan
("ESRP") in order for the ESRP to fund payouts to participants.
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 the sale of the
Company's common stock.
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, is expected to have a material adverse effect on its
consolidated financial position, results of operations, cash flows or its
ability to conduct business.
EFFECTS OF INFLATION
The Company's cost-reimbursement type contracts are generally completed
within one year. As a result, the Company has been able to anticipate increases
in costs when pricing its contracts. Bids for longer term firm fixed-price and
T&M type contracts typically include labor and other cost escalations in amounts
expected to be sufficient to cover cost increases over the period of
performance. Consequently, because costs and revenues include an inflationary
increase commensurate with the general economy, net income, as a percentage of
revenues, has not been significantly impacted by inflation. As the Company
expands into the international markets and into highly inflationary economies,
movements in foreign currency exchange rates may impact the Company's results of
operations. Currency exchange rate fluctuations may also affect the Company's
competitive position in international markets as a result of its impact on the
Company's profitability and the pricing offered to its non-U.S. customers.
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 or 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: a decrease in or
the failure to increase business with the U.S. Government; the ability of the
Company to continue to identify and consummate additional acquisitions; the
ability of the Company to competitively price its technical services and
products; the risk of early termination of U.S. Government contracts; the risk
of losses or reduced profits on firm fixed-price contracts; a failure to obtain
reimbursement for costs incurred prior to the execution of a contract or
contract modification; audits of the Company's costs, including allocated
indirect costs, by the U.S. Government; the ability of the Company and third
party customers, service providers and suppliers to address the Year 2000 issue
and other uncertainties, all of which are difficult to predict and many of which
are beyond the control of the Company. 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.
23
<PAGE> 25
YEAR 2000
The statements in the following section constitute a "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
YEAR 2000 PLAN -- In 1996, the Company initiated a program to prepare the
Company's centralized internal computer systems and applications for the Year
2000. The program has evolved into a risk-based plan designed to minimize risk
to the Company's consolidated financial position, results of operations, cash
flows and its ability to conduct business. The Company has established a
Corporate Year 2000 Committee, which reports to an executive management team and
the Board of Directors, to oversee, monitor and coordinate the Company-wide Year
2000 effort. The plan focuses on information technology ("IT") systems, non-IT
systems, critical service suppliers and vendors ("business partners"), and the
Company's services and products.
IT SYSTEMS -- The Company has established a six-phase program intended to
ensure that its IT systems are Year 2000 compliant. IT systems include
internally developed software, software obtained from third parties, databases,
mainframe computers, servers, and network and related hardware. Phases one
through four of the program, which have been completed, consist of planning the
project, increasing internal awareness of Year 2000 issues, developing and
assessing an inventory of IT systems for Year 2000 issues and renovating
impacted IT systems. Phases five and six, expected to be completed during the
third quarter of the Company's fiscal 2000, consist of testing impacted IT
systems and implementing the appropriate solutions for any identified problems.
The Company completed the remediation of its critical internal systems,
including its internal core financial accounting systems, and those systems are
currently in production for the Company's fiscal year 2000 that began on
February 1, 1999. The Company has also implemented a Company-wide program to
test and, if necessary, replace computer desktops, laptops and internal
communications network equipment and associated software. In addition, the
Company's subsidiaries that do not use the core financial accounting systems of
the Company are testing and remediating their internal systems for Year 2000
issues. As of this date, no matters have come to the attention of management
that would indicate that these subsidiaries will not meet their plan to be Year
2000 compliant.
NON-IT SYSTEMS -- The Company has inventoried and assessed its non-IT
systems in Company-owned or controlled facilities that may contain embedded
technology, such as those found in elevators, telephone systems and security and
access systems. Company-owned or controlled sites are typically the largest
sites and although they represent only 6% of the Company's facilities in number,
these sites serve 45% of the Company's workforce. To date, 89% of systems
identified as having Year 2000 issues have been remediated or replaced. On-going
remediation is scheduled for a few remaining systems; however, these systems are
not critical and are not expected to cause an interruption to the Company's
business continuity.
The Company has engaged in communications with its lessors and customers
regarding Year 2000 issues with non-IT systems in leased or customer facilities
and has provided its lessors with Year 2000 awareness information regarding
embedded systems. The scope of the Company's involvement varies depending upon
access to the facility and the extent of cooperation received from the lessors
and customers. Due to the difficulty encountered in receiving timely and
complete responses from certain lessors to its inquiries, the Company intends to
pursue inventory, assessment, remediation and risk evaluation of identified
critical leased facilities through the end of 1999. The Company cannot control
Year 2000 compliance in leased and customer facilities and must depend upon the
cooperation of these third parties. Based upon representations of lessors
received to date, the Company has not identified any critical issues related to
non-IT systems that would cause a material interruption to its business.
BUSINESS PARTNER AND CUSTOMER YEAR 2000 IMPACTS -- The Company's operations
are dependent to varying degrees on the Year 2000 compliance of its business
partners. Its significant business partners include, but are not limited to, the
Company's suppliers and subcontractors, utility companies, banking partners,
payroll processing vendor, insurance and benefit providers, the retirement
plans' fund managers and trustees, and property management firms. The Company
has initiated communications with its business partners and is reviewing the
websites and public filings with the Securities and Exchange Commission of its
business partners to determine their Year 2000 readiness and the extent to which
the Company is vulnerable to their
24
<PAGE> 26
failure to be Year 2000 compliant. Although the Company has made inquiries of
most of its business partners, this effort has not been completed and the
Company has not received responses from all contacted business partners.
However, to date, the Company is not aware of any material exposure to Year 2000
problems attributable to its business partners. The Company continues to monitor
the Year 2000 readiness of its business partners in order to assess its own
state of readiness and develop any appropriate contingency plans. In addition,
in certain circumstances, the Company has upgraded software and systems to
address Year 2000 compatibility issues with its business partners. The ability
of the Company's business partners to be Year 2000 compliant is beyond the
Company's control. Accordingly, the Company can give no assurances that its
business partners and other third parties will be Year 2000 compliant or that
the systems of such third parties will be compatible with the Company's systems.
Failure of such third party systems to be compliant or compatible could have a
material adverse effect on the Company's results of operations and ability to do
business.
The Company is substantially dependent upon the effectiveness of its
customers' systems, principally those of the U.S. Government, for the
administration of contracts and payment of the Company's invoices. The Company
is continuing to monitor its major U.S. Government payment offices to understand
the current status of their Year 2000 issues and remediation efforts. Although
there could be a number of impacts, a primary concern is delays in contract
payments if the Company's customers were to experience Year 2000 problems. This
could require a temporary increase in working capital to fund operations.
Although the Company has substantial borrowing capacity available under its
current revolving credit facilities which expire in August 2002, the Company
will further evaluate the potential cash flow impact of a delay in contract
payments and determine if additional steps are necessary to ensure that
sufficient contingency financing is available.
IMPACT ON INTERNATIONAL OPERATIONS -- As of January 31, 1999, approximately
9% of consolidated revenues was derived from the Company's international
operations, primarily in Venezuela and to a lesser extent, the United Kingdom.
In addition, the majority of the revenues in Venezuela were derived from one
customer. Foreign countries and businesses located within these countries may
not be applying adequate resources to address the Year 2000 issue. In addition,
the status of Year 2000 readiness in such countries can be difficult to
ascertain. To the extent that foreign countries and businesses are not Year 2000
compliant, the Company's international operations may be adversely affected.
PRODUCTS AND SERVICES -- The Company's Telcordia subsidiary derives
significant revenues from the licensing of its software and from the sale of
software development, maintenance and other services associated with its
software. These software products are used in the network operations and support
of telecommunications carriers and other communications services providers in
the United States and foreign countries. Telcordia has completed its assessment
and remediation program for its proprietary software products and expects to
complete testing during the third quarter of 1999. The Company has also
implemented an on-going program to assess its exposure, if any, with respect to
its other products and services. To date, no matters concerning Year 2000
compliance issues for the Company's products and services have come to the
attention of the Company's management that are expected to have a material
adverse effect on its consolidated financial position, results of operations,
cash flows or its ability to conduct business.
YEAR 2000 REMEDIATION COSTS -- The Company currently has varied procedures
for tracking costs and a formalized process for reporting costs associated with
remediating internal IT and non-IT systems. All costs, except long-lived assets,
are expensed as incurred. These costs include the cost of system replacements,
hardware, software, internal labor and outside consulting and programming
services. To date, the Company has spent approximately $7.5 million on this
remediation which includes amounts expensed and amounts spent for capital
assets. The Company expects to spend approximately $7 million to complete its
internal remediation efforts. The majority of the future costs relate to
replacement of hardware.
RISKS OF YEAR 2000 ISSUES -- While the Company expects to resolve Year 2000
issues within its control without material adverse impact on results of
operations, cash flows or its ability to conduct business, there can be no
assurances as to the ultimate success of the program. Uncertainties exist as to
the Company's ability to detect and successfully resolve all Year 2000 problems.
Uncertainties also exist concerning the preparedness
25
<PAGE> 27
and readiness of the Company's business partners to avoid Year 2000 related
service and delivery interruptions. The "most reasonably likely worst case
scenario for the Company" could include interruption of the Company's business,
lost or delayed revenues, Company, vendor or subcontractor non-performance and
delays, potential litigation with customers, suppliers or vendors with respect
to Year 2000 compliance of products and services, performance problems with
administrative and financial accounting systems, service problems with the
payroll vendor and utilities in Company-owned and leased facilities,
interruptions of subcontract services and products from vendors who are an
integral component of the Company's performance on contracts, increases in
general and administrative costs until the problems are resolved, delays in
payments by customers, and higher interest expense. With respect to the
communications software products of the Company's Telcordia subsidiary, even if
those software products themselves accurately process Year 2000 dates,
communications service providers who use those products could experience Year
2000 failures in other areas and systems, which failures could cause a
degradation of overall service levels. Such failures could affect the users of
those services. In addition, customers of the Company may direct significant
resources to addressing their own Year 2000 issues which could result in
reductions or delays in the licensing or purchase of the Company's services and
software products.
CONTINGENCY PLANS -- The Company is currently developing contingency plans
for IT and non-IT systems, focusing on the Company's internal systems and its
dependence on its business partners. The contingency plans are under development
and are expected to be completed by August 1, 1999. Due to the potentially far
reaching consequences of the Year 2000 problem and the speculative nature of
contingency planning, it is uncertain whether the Company's contingency plans,
once developed, will adequately address the impacts of Year 2000 problems on the
Company's operations.
YEAR 2000 FORWARD LOOKING STATEMENTS -- The foregoing statements as to
costs, dates, intent, belief and current expectations of the Company or its
officers with respect to Year 2000 issues are forward looking and are made in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on the Company's best estimates
and expectations given the information available at the date hereof and may be
updated as additional information becomes available. In addition, such
statements are not guarantees of future results or outcomes 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 Company's ability to identify and address
all Year 2000 issues associated with its IT and non-IT systems; the
representations, preparedness and readiness of the Company's business partners;
unanticipated expenses or delays on the part of the Company or its customers,
service providers, suppliers and vendors, and the ability of the Company to
develop and execute a comprehensive contingency plan to cover its "most
reasonably likely worst case" scenario. Due to such uncertainties and risks
surrounding Year 2000 issues, the Company's assessment of the Year 2000 issue,
including the costs of the program and timing of completion, are based on
management's best estimates and input from customers, service providers,
suppliers and vendors. These estimates were derived using numerous assumptions
about future events, including continued availability of certain resources,
third party modification plans and other factors. However, the Company cautions
that it is impossible to predict the impact of certain factors that are not
within the control of the Company and there can be no assurances that these
estimates will be achieved and actual results could differ materially from those
anticipated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which are inherent in the
Company's financial instruments which arise from transactions entered into in
the normal course of business. The following information about the Company's
market sensitive financial instruments contains forward-looking statements.
INTEREST RATE RISK -- The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio, short
and long-term receivables and long-term debt obligations.
The Company primarily enters into debt obligations to support capital
expenditures, working capital needs and merger and acquisition activity.
Investment policies have been established to protect the safety, liquidity
and after-tax yield of invested funds. Such policies establish guidelines on
acceptable instruments in which to invest and maximum maturity
26
<PAGE> 28
dates. They also require diversification in the investment portfolios by
establishing maximum amounts that may be invested in designated instruments. The
Company does not use derivative financial instruments in its investment
portfolio. The Company's policy requires that all investments mature in three
years or less. Strategic investments may have characteristics that differ from
those described above.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including debt
obligations, short and long-term receivables and short-term investments. For
debt obligations, short and long-term receivables and short-term investments,
the table presents principal cash flows in U.S. dollars and related weighted
average interest rates by expected maturity dates.
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
-----------
JANUARY 31,
AMOUNTS IN THOUSANDS 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
-------------------- -------- ------ ------ ------ ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents
Fixed rate (USD)............ $342,375 $342,375 $342,714
Average interest rate..... 5.03%
Fixed rate (VEB)(1)......... $ 29,251 $ 29,251 $ 29,251
Average interest rate..... 40.90%
Short-term investments
Fixed rate (USD)............ $118,085 $118,085 $118,158
Average interest rate..... 5.70%
Long-term investments
Fixed rate (USD)............ $9,350 $ 9,350 $ 9,377
Average interest rate..... 5.67%
Fixed rate (CAD)(2)......... $12,727 $ 12,727 $ 12,727
Average interest rate..... 8.00%
Short-term receivables
Fixed rate (USD)............ $ 1,592 $ 1,592 $ 950
Average interest rate..... 7.70%
Long-term receivable
Fixed rate (FRF)(3)......... $ 634 $ 696 $ 634 $ 1,964 $ 1,964
Average interest rate..... 10.00% 10.00% 10.00%
Long-term debt
Fixed rate (USD)............ $ 2,630 $ 129 $ 72 $ 76 $ 81 $100,597 $103,585 $104,584
Average interest rate..... 8.22% 8.25% 8.25% 8.25% 8.25% 8.26%
Variable rate (USD)......... $ 110 $ 130 $ 150 $ 200 $ 240 $ 5,910 $ 6,740 $ 6,740
Average interest rate..... 6.78% 6.78% 6.78% 6.78% 6.78% 6.78%
Fixed rate (AUD)(4)......... $ 93 $ 93 $ 92 $ 278 $ 278
Average interest rate..... 4.43% 4.43% 4.43%
</TABLE>
- ---------------
(1) Venezuelan bolivar denominated
(2) Canadian dollar denominated
(3) French franc denominated
(4) Australian dollar denominated
FOREIGN CURRENCY RISK -- Although the majority of the Company's
transactions are in U.S. dollars, some transactions are based in various foreign
currencies. The Company's objective in managing its exposure to foreign currency
exchange rate fluctuations is to mitigate adverse fluctuations in earnings and
cash flows associated with foreign currency exchange rate fluctuations. The
policy allows for actively managing cash flows, anticipated transactions and
firm commitments through the use of natural hedges and forward foreign exchange
contracts. The principal currencies hedged as of January 31, 1999 are the French
franc, British pounds sterling, German mark and the Australian dollar. The
Company does not use foreign currency derivative instruments for trading
purposes.
To perform sensitivity analysis, the Company assesses the risk of loss in
fair values from the impact of hypothetical changes in foreign currency exchange
rates on market sensitive instruments. The market values for foreign exchange
forward contracts are computed based upon spot rates in effect on January 31,
1999. The differences that result from comparing hypothetical foreign exchange
rates and actual spot rates as of January 31, 1999 are the hypothetical gains
and losses associated with foreign currency risk.
A 10% adverse movement in levels of foreign currency exchange rates
relative to the U.S. dollar as of January 31, 1999, with all other variables
held constant, would result in a decrease in the fair values of the forward
foreign exchange contracts by $779,000.
27
<PAGE> 29
EQUITY PRICE RISK -- At January 31, 1999, the quoted fair value of the
Company's available-for-sale equity securities was approximately $18.6 million.
The aggregate unrealized gain from these investments was $7.0 million. The
market risk associated with these equity investments is the potential loss in
fair value resulting from a decrease in market prices. A 10% decrease in market
prices, with all other variables held constant, would result in a decrease in
the fair value of the equity investments of approximately $1.9 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements of the Company attached hereto
and listed on the Index to Consolidated Financial Statements set forth on page
F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 16, 1998, the Company notified PricewaterhouseCoopers LLP that
it was dismissing such firm as its independent accountants effective upon the
completion of the audit of the January 31, 1999 financial statements of the
Company. On November 17, 1998, the Company notified Deloitte & Touche LLP that
it will engage such firm as its new independent accountants upon completion of
the audit of the January 31, 1999 financial statements. The decision to change
accountants was approved by the Audit Committee of the Company's Board of
Directors.
During the fiscal years ended January 31, 1999 and January 31, 1998 and
through the date of this report, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or audit scope or procedure which disagreements,
if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have
caused them to make reference to the subject matter of such disagreement in
their reports on the financial statements for such years. The reports of
PricewaterhouseCoopers LLP on the financial statements for the fiscal years
ended January 31, 1999 and January 31, 1998 did not contain an adverse opinion
or a disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the fiscal years ended January 31, 1999 and January 31, 1998 and
through the date of this report, Deloitte & Touche LLP has not been engaged as
an independent accountant to audit either the Company's financial statements or
the financial statements of any of its subsidiaries, nor has it been consulted
regarding the application of the Company's accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Registrant's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Company, see
"Executive Officers of the Registrant" at the end of Part I of this Form 10-K.
For information with respect to the Directors of the Company, see "Election of
Directors" appearing in the 1999 Proxy Statement, which information is
incorporated by reference into this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
For information with respect to executive compensation, see the information
set forth under the captions "Directors' Compensation," "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation" in the 1999
Proxy Statement, which information (except for the information under the
sub-captions "Compensation Committee Report on Executive Compensation" and
"Stockholder Return Performance Presentation") is incorporated by reference into
this Form 10-K.
28
<PAGE> 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information with respect to the security ownership of certain
beneficial owners and management, see the information set forth under the
caption "Beneficial Ownership of the Company's Securities" in the 1999 Proxy
Statement, which information is incorporated by reference into this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information with respect to the interests of the Company's management
and others in certain transactions, see the information set forth under the
caption "Certain Relationships and Related Transactions" in the 1999 Proxy
Statement, which information is incorporated by reference into this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company are attached hereto
and listed on the Index to Consolidated Financial Statements set forth on page
F-1 of this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
3(a) Restated Certificate of Incorporation of the Registrant, as
amended July 19, 1990. Incorporated by reference to Exhibit
3(a) to Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1991 (the "1991 10-K").
3(b) Bylaws of the Registrant, as amended through April 11, 1997.
Incorporated by reference to Exhibit 3(b) to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended
January 31, 1997 (the "1997 10-K").
4(a) Form of Indenture between Registrant and The Chase Manhattan
Bank, as Trustee. Incorporated by reference to Exhibit 4.1
to Registrant's Amendment No. 1 to Form S-3 Registration
Statement No. 333-37117, filed on November 19, 1997.
10(a)* Registrant's Bonus Compensation Plan, as amended through
October 2, 1996. Incorporated by reference to Exhibit 10(a)
to Registrant's 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 amended through
October 2, 1996. Incorporated by reference to Exhibit 10(b)
to the 1998 10-K.
10(c)* Registrant's Stock Compensation Plan, as amended through
September 30, 1998.
10(d)* Registrant's Management Stock Compensation Plan, as amended
through September 30, 1998.
10(e)* 1995 Employee Stock Purchase Plan. Incorporated by reference
to Annex II to the Registrant's Proxy Statement for the 1995
Annual Meeting of Stockholders as filed June 1995 with the
SEC.
10(f)* 1995 Stock Option Plan, as amended through October 2, 1996.
Incorporated by reference to Exhibit 10(f) to the 1998 10-K.
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10(g)* Registrant's Keystaff Deferral Plan, as amended through
December 30, 1997. Incorporated by reference to Exhibit
10(g) to the 1998 10-K.
10(h)* Registrant's Key Executive Stock Deferral Plan. Incorporated
by reference to Exhibit 4(s) to Registrant's Annual Report
on Form 10-K for the fiscal year ended January 31, 1996.
10(i)* Form of Alumni Agreement. Incorporated by reference to
Exhibit 4(w) to the 1997 10-K.
10(j) Credit Agreement (multi-year facility) with Bank of America
NT&SA, Morgan Guaranty Trust Company, Citicorp USA, Inc. and
other financial institutions dated as of August 20, 1997.
Incorporated by reference to Exhibit 10(d) to the Form 10-Q
for the fiscal quarter ended July 31, 1997 ("July 1997
10-Q").
10(k)* Employment Agreement dated December 18, 1997 between
Registrant and R.C. Smith, as amended on February 2, 1998.
Incorporated by reference to Exhibit 10(l) to the 1998 10-K.
10(l)* Registrant's 1998 Stock Option Plan. Incorporated by
reference to Annex I to the Registrant's Proxy 1998
Statement for the 1998 Annual Meeting of Stockholders as
filed May 28, 1998 with the SEC (the "1998 Proxy").
10(m)* Registrant's 1998 Employee Stock Purchase Plan. Incorporated
by reference to Annex II to the 1998 Proxy.
16 Letter regarding change in certifying accountant, dated
November 23, 1998, from PricewaterhouseCoopers LLP to the
SEC. Incorporated by reference to Exhibit 16 to the Form 8-K
filed on November 23, 1998 with the SEC.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
28(a) Annual Report of the Registrant's Cash or Deferred
Arrangement for the plan year ended December 31, 1998.
28(b) Annual Report of the Registrant's subsidiary's (Syntonic
Technology, Inc. doing business as TransCore), TransCore
Retirement Savings Plan for the plan year ended December 31,
1998.
28(c) Annual Report of the Bell Communications Research Savings
and Security Plan for the plan year ended December 31, 1998.
28(d) Annual Report of the Bell Communications Research Savings
Plan for Salaried Employees for the plan year ended December
31, 1998.
</TABLE>
- ---------------
* Executive Compensation Plans and Arrangements
(b) REPORTS ON FORM 8-K IN THE FOURTH QUARTER OF THE FISCAL YEAR ENDED JANUARY
31, 1999:
A Report on Form 8-K was filed on November 23, 1998. Disclosure was made
under Item 4 -- Changes in Registrant's Certifying Accountant, and Item
7 -- Financial Statements and Exhibits.
A Report on Form 8-K was filed on January 13, 1999. Disclosure was made
under Item 5 -- Other Events.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 9, 1999.
SCIENCE APPLICATIONS INTERNATIONAL
CORPORATION
(Registrant)
By /s/ J. R. BEYSTER
------------------------------------
J. R. Beyster
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. R. BEYSTER Chairman of the Board and April 9, 1999
- ----------------------------------------------------- Principal Executive Officer
J. R. Beyster
/s/ W. A. ROPER, JR. Principal Financial Officer April 9, 1999
- -----------------------------------------------------
W. A. Roper, Jr.
/s/ P. N. PAVLICS Principal Accounting Officer April 9, 1999
- -----------------------------------------------------
P. N. Pavlics
/s/ D. P. ANDREWS Director April 9, 1999
- -----------------------------------------------------
D. P. Andrews
/s/ V. N. COOK Director April 9, 1999
- -----------------------------------------------------
V. N. Cook
/s/ W. H. DEMISCH Director April 9, 1999
- -----------------------------------------------------
W. H. Demisch
/s/ D. W. DORMAN Director April 9, 1999
- -----------------------------------------------------
D. W. Dorman
/s/ W. A. DOWNING Director April 9, 1999
- -----------------------------------------------------
W. A. Downing
/s/ J. E. GLANCY Director April 9, 1999
- -----------------------------------------------------
J. E. Glancy
/s/ B. R. INMAN Director April 9, 1999
- -----------------------------------------------------
B. R. Inman
/s/ A. K. JONES Director April 9, 1999
- -----------------------------------------------------
A. K. Jones
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. M. J. KRAEMER, JR. Director April 9, 1999
- -----------------------------------------------------
H. M. J. Kraemer, Jr.
/s/ C. B. MALONE Director April 9, 1999
- -----------------------------------------------------
C. B. Malone
/s/ J. W. MCRARY Director April 9, 1999
- -----------------------------------------------------
J. W. McRary
/s/ S. D. ROCKWOOD Director April 9, 1999
- -----------------------------------------------------
S. D. Rockwood
/s/ L. A. SIMPSON Director April 9, 1999
- -----------------------------------------------------
L. A. Simpson
/s/ R. C. SMITH, JR. Director April 9, 1999
- -----------------------------------------------------
R. C. Smith, Jr.
/s/ E. A. STRAKER Director April 9, 1999
- -----------------------------------------------------
E. A. Straker
Director
- -----------------------------------------------------
M. E. Trout
/s/ J. P. WALKUSH Director April 9, 1999
- -----------------------------------------------------
J. P. Walkush
/s/ J. H. WARNER, JR. Director April 9, 1999
- -----------------------------------------------------
J. H. Warner, Jr.
/s/ J. A. WELCH Director April 9, 1999
- -----------------------------------------------------
J. A. Welch
/s/ J. B. WIESLER Director April 9, 1999
- -----------------------------------------------------
J. B. Wiesler
/s/ A. T. YOUNG Director April 9, 1999
- -----------------------------------------------------
A. T. Young
</TABLE>
32
<PAGE> 34
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS........................... F-2
FINANCIAL STATEMENTS
Consolidated Statement of Income for the three years ended
January 31, 1999.......................................... F-3
Consolidated Balance Sheet at January 31, 1999 and 1998..... F-4
Consolidated Statement of Stockholders' Equity and
Comprehensive Income for the three years ended January 31,
1999...................................................... F-5
Consolidated Statement of Cash Flows for the three years
ended January 31, 1999.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts............ F-30
</TABLE>
All other financial statement schedules are omitted because they are not
applicable or the required information is shown on the consolidated financial
statements or the notes thereto.
F-1
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Science Applications International Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Science Applications International Corporation and its subsidiaries
at January 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Diego, California
April 2, 1999
F-2
<PAGE> 36
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................... $4,740,433 $3,089,351 $2,402,224
Costs and expenses:
Cost of revenues..................................... 3,732,890 2,623,339 2,094,447
Selling, general and administrative expenses......... 684,905 301,093 191,836
---------- ---------- ----------
Operating income..................................... 322,638 164,919 115,941
---------- ---------- ----------
Interest expense..................................... 33,813 11,682 4,925
Other (income) expense, net.......................... (17,012) (15,864) (2,193)
Minority interest in income of consolidated
subsidiaries...................................... 17,842 10,608
---------- ---------- ----------
Income before income taxes............................. 287,995 158,493 113,209
Provision for income taxes............................. 137,307 73,699 49,529
---------- ---------- ----------
Net income............................................. $ 150,688 $ 84,794 $ 63,680
========== ========== ==========
Earnings per share:
Basic................................................ $ 2.68 $ 1.65 $ 1.30
========== ========== ==========
Diluted.............................................. $ 2.46 $ 1.55 $ 1.23
========== ========== ==========
Common equivalent shares:
Basic................................................ 55,621 51,349 49,157
========== ========== ==========
Diluted.............................................. 60,304 54,806 51,738
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 37
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 389,026 $ 189,387
Restricted cash........................................... 16,396 25,344
Receivables............................................... 1,139,809 810,385
Inventories............................................... 16,096 12,471
Prepaid expenses and other current assets................. 179,034 75,846
Deferred income taxes..................................... 136,164 62,367
---------- ----------
Total current assets................................. 1,876,525 1,175,800
Property and equipment...................................... 309,578 288,282
Land and buildings.......................................... 186,462 195,534
Goodwill.................................................... 95,414 106,757
Other intangible assets..................................... 77,259 103,520
Prepaid pension assets...................................... 456,803 424,108
Other assets................................................ 170,505 121,233
---------- ----------
$3,172,546 $2,415,234
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $1,084,202 $ 748,031
Accrued payroll and employee benefits..................... 309,421 262,408
Income taxes payable...................................... 65,547 37,761
Notes payable and current portion of long-term debt....... 47,882 33,012
---------- ----------
Total current liabilities............................ 1,507,052 1,081,212
---------- ----------
Long-term debt.............................................. 143,051 145,958
Deferred income taxes....................................... 100,489 111,941
Other long-term liabilities................................. 318,002 313,677
Commitments and contingencies (Note N)......................
Minority interest in consolidated subsidiaries.............. 19,350 7,668
Stockholders' equity, per accompanying statement:
Class A Common Stock, $.01 par value...................... 566 519
Class B Common Stock, $.05 par value...................... 15 16
Additional paid-in capital................................ 836,455 538,760
Retained earnings......................................... 271,379 237,588
Other stockholders' equity................................ (23,928) (14,983)
Accumulated other comprehensive income.................... 115 (7,122)
---------- ----------
Total stockholders' equity........................... 1,084,602 754,778
---------- ----------
$3,172,546 $2,415,234
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 38
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
CLASS A CLASS B
--------------- ---------------
100,000,000 5,000,000
SHARES SHARES OTHER ACCUMULATED
AUTHORIZED AUTHORIZED ADDITIONAL STOCK- OTHER COMPRE-
--------------- --------------- PAID-IN RETAINED HOLDERS' COMPREHENSIVE HENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY INCOME INCOME
------ ------ ------ ------ ---------- --------- -------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996.... 46,909 $469 332 $17 $249,855 $ 215,860 $ (7,103) $ (966)
Net income................... 63,680 $ 63,680
Other comprehensive income... 1,279 1,279
Issuances of common stock.... 4,123 41 60,540
Repurchases of common
stock...................... (3,019) (30) (6) (1) (16,168) (46,978)
Income tax benefit from
employee stock
transactions............... 10,431
Unearned stock
compensation............... (3,467)
------ ---- --- --- -------- --------- -------- ------- --------
Balance at January 31, 1997.... 48,013 480 326 16 304,658 232,562 (10,570) 313 $ 64,959
========
Net income................... 84,794 $ 84,794
Other comprehensive income... (7,435) (7,435)
Issuances of common stock.... 7,207 72 178,977
Repurchases of common
stock...................... (3,289) (33) (12) (22,489) (79,768)
Income tax benefit from
employee stock
transactions............... 16,950
Unearned stock
compensation............... (4,413)
Sale of minority interest in
subsidiary................. 60,664
------ ---- --- --- -------- --------- -------- ------- --------
Balance at January 31, 1998.... 51,931 519 314 16 538,760 237,588 (14,983) (7,122) $ 77,359
========
Net income................... 150,688 $150,688
Other comprehensive income... 7,237 7,237
Issuances of common stock.... 7,449 75 286,246
Repurchases of common
stock...................... (2,783) (28) (11) (1) (29,298) (115,594)
Income tax benefit from
employee stock
transactions............... 34,118
Unearned stock
compensation............... 876 (7,699)
Issuance of subsidiary
stock...................... 5,753
Dividends on subsidiary
preferred stock............ (1,303)
Notes receivable for sales of
common stock............... (1,246)
------ ---- --- --- -------- --------- -------- ------- --------
Balance at January 31, 1999.... 56,597 $566 303 $15 $836,455 $ 271,379 $(23,928) $ 115 $157,925
====== ==== === === ======== ========= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 39
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 150,688 $ 84,794 $ 63,680
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 164,327 69,860 50,359
Non-cash compensation................................... 53,566 31,051 22,654
Minority interest in income of consolidated
subsidiaries.......................................... 18,537 10,524
Equity in loss (income) of unconsolidated affiliates.... 4,185 (1,326) (2,253)
Net gain on sales of certain business assets............ (3,749) (6,341)
Loss on disposal of property and equipment.............. 4,811 3,096 895
Other non-cash items.................................... 9,480
Income tax benefit from employee stock transactions..... 34,118 16,950 10,431
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables........................................... (311,119) (25,159) (36,134)
Inventories........................................... (3,611) 7,262 8,111
Prepaid expenses and other current assets............. (25,790) (10,852) (4,496)
Progress payments..................................... (9,915) (465) (25,138)
Deferred income taxes................................. (85,045) (56,772) (18,202)
Other assets.......................................... (47,386) (45,930) (9,628)
Accounts payable and accrued liabilities.............. 330,181 185,111 46,678
Accrued payroll and employee benefits................. 48,825 10,477 (8,188)
Income taxes payable.................................. 26,299 15,251 1,223
Other long-term liabilities........................... 22,038 63,073 10,751
---------- ---------- ----------
380,440 350,604 110,743
---------- ---------- ----------
Cash flows from investing activities:
Expenditures for property and equipment................... (84,994) (52,450) (37,709)
Expenditures for land and buildings....................... (2,818) (17,633) (4,555)
Acquisitions of certain business assets, net of cash
acquired................................................ (4,884) (340,165) (23,151)
Purchase of debt and equity securities available for
sale.................................................... (99,480) (40,200)
Purchase of debt securities held to maturity.............. (9,350)
Proceeds from sales of certain business assets............ 864 47,974
Proceeds from disposal of property and equipment.......... 785 5,192 727
Investments in affiliates................................. (22,993)
Proceeds from sale of debt securities available for
sale.................................................... 7,576
---------- ---------- ----------
(222,870) (397,282) (57,112)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term
debt.................................................... 909 108,993 3,729
Payments of notes payable and long-term debt.............. (12,793) (17,943) (8,200)
Principal payments on capital lease obligations........... (30,029) (8,416) (967)
Net proceeds from issuance of subsidiary stock............ 10,274 63,528
Dividends paid to minority interest shareholders.......... (7,096)
Sales of common stock..................................... 200,789 128,775 19,720
Repurchases of common stock............................... (118,846) (83,526) (45,399)
---------- ---------- ----------
43,208 191,411 (31,117)
---------- ---------- ----------
Effect of exchange rate changes on cash................... (1,139) (625)
---------- ---------- ----------
Increase in cash and cash equivalents..................... 199,639 144,108 22,514
Cash and cash equivalents at beginning of year............ 189,387 45,279 22,765
---------- ---------- ----------
Cash and cash equivalents at end of year.................. $ 389,026 $ 189,387 $ 45,279
========== ========== ==========
Supplemental schedule of non-cash investing and financing
activities:
Repurchases of common stock upon exercise of stock
options................................................. $ 26,075 $ 18,551 $ 17,778
========== ========== ==========
Capital lease obligations for property and equipment...... $ 56,153 $ 61,258 $ 38
========== ========== ==========
Long-term mortgage assumed upon purchase of land and
building................................................ $ 6,919
==========
Fair value of assets acquired in acquisitions of certain
business assets......................................... $ 10,645 $1,246,129 $ 41,881
Cash paid in the acquisitions of certain business
assets.................................................. (5,648) (467,902) (24,809)
Issuance of common stock for assets acquired.............. (1,526)
---------- ---------- ----------
Liabilities assumed in acquisitions of certain business
assets.................................................. $ 3,471 $ 778,227 $ 17,072
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 40
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The consolidated financial statements include the accounts of Science
Applications International Corporation and all majority- and wholly-owned U.S.
and international subsidiaries (collectively referred to as "the Company"). All
significant intercompany transactions and accounts have been eliminated in
consolidation. Investments in affiliates and corporate joint ventures owned 20%
to 50% and over which the Company exercises significant influence are accounted
for under the equity method. Investments in other companies are generally
carried at cost. Outside investors' interest in the majority-owned subsidiaries
is reflected as minority interest.
Certain of the Company's majority- and wholly-owned subsidiaries have
fiscal years ending December 31. The financial position and results of
operations of these subsidiaries are included in the Company's consolidated
financial statements as of and for the year ended January 31, 1999. There were
no material intervening events for such subsidiaries since December 31, 1998
which would materially affect the consolidated financial position or results of
operations.
On January 2, 1997, the Company formed a joint venture, Informatica,
Negocio y Tecnologia, S.A. ("INTESA"), with Venezuela's national oil company,
Petroleos de Venezuela, S.A. ("PDVSA"), to provide information technology
services in Latin America. Effective in 1998, the Company consolidated its 60%
majority interest in INTESA, whose fiscal year end is December 31, in the
consolidated financial statements.
Use of estimates
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.
Fair value of financial instruments
It is management's belief that the carrying amounts shown for the Company's
financial instruments, which include cash and cash equivalents, short-term
investments, equity securities, long-term receivables, long-term investments and
long-term debt, are reasonable estimates of their related fair values. The
carrying amount of cash and cash equivalents and short-term investments
approximates fair value because of the short maturity of those instruments. The
fair value of equity securities are based upon quoted market prices. The fair
value of long-term receivables is estimated by discounting the expected future
cash flows at interest rates commensurate with the creditworthiness of customers
and other third parties. The fair value of long-term debt is estimated based on
quoted market prices for similar instruments and current rates offered to the
Company for similar debt with the same remaining maturities.
Contract revenues
The Company's revenues result from contract services performed for
commercial customers and the U.S. Government or from subcontracts with other
contractors engaged in work for the U.S. Government under a variety of
contracts, some of which provide for reimbursement of cost plus fees and others
which are fixed-price or time-and-materials type contracts. Generally, revenues
and fees on these contracts are recognized as services are performed, using the
percentage-of-completion method of accounting, primarily based on contract costs
incurred to date compared with total estimated costs at completion. The Company
also derives revenues from software license fees, maintenance contracts and
registration services. Software license fees are generally recognized when the
software has been accepted and there are no significant obligations remaining.
Revenues
F-7
<PAGE> 41
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from maintenance contracts are recognized over the term of the respective
contracts as maintenance services are provided. Revenues from registration
services are recognized on a straight-line basis over the life of the
registration term. Amounts billed but not recognized as revenue under certain
types of contracts are deferred in the accompanying consolidated balance sheet.
Revenues from the sale of manufactured products are recorded when the products
are shipped.
The Company provides for anticipated losses on contracts by a charge to
income during the period in which the losses are first identified. Unbilled
receivables are stated at estimated realizable value. Contract costs on U.S.
Government contracts, including indirect costs, are subject to audit and
adjustment by negotiations between the Company and government representatives.
Substantially all of the Company's indirect contract costs have been agreed upon
through 1998. Contract revenues on U.S. Government contracts have been recorded
in amounts that are expected to be realized upon final settlement.
Cash and cash equivalents
Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less. Of the $389,026,000 and $189,387,000 total
cash and cash equivalents at January 31, 1999 and 1998, respectively,
$371,626,000 and $175,821,000, respectively, was invested in commercial paper,
institutional money market funds and time deposits.
Investments in debt and equity securities
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. At January 31, 1999, debt and equity
securities are classified as either available-for-sale or held-to-maturity and
reflected as short and long-term investments. Available-for-sale securities are
carried at market value and held-to-maturity debt securities are carried at
amortized cost. The difference between cost and market value, net of related tax
effects, is recorded in the "accumulated other comprehensive income" component
of stockholders' equity. Realized gains and losses on the sale of
available-for-sale securities are determined using the adjusted cost of the
specific securities sold.
Available-for-sale securities are primarily investments in commercial
paper, money market funds, term notes and common stock of publicly traded
companies. The aggregate market value, cost basis, and gross unrealized gains of
available-for-sale debt and equity securities are $150,353,000 $143,664,000 and
$6,689,000, respectively, at January 31, 1999. Held-to-maturity debt securities
are investments in high rated corporate bonds with amortized costs of
$9,350,000, at January 31, 1999, which approximates market value. All
held-to-maturity investments have contractual maturity terms of less than two
years.
Aggregate market value, cost basis and unrealized losses of
available-for-sale debt and equity securities was $45,968,000, $49,659,000 and
$3,691,000, respectively, at January 31, 1998.
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. As of January 31,
1999, NSI had cumulatively disbursed all set aside funds collected and
associated interest earned for a total of $62,300,000 to the NSF at their
direction. 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
F-8
<PAGE> 42
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pre-funded by the U.S. Government. Additionally, as discussed in Note H, cash
collected from PDVSA for the INTESA pension plan and postretirement benefit
obligations are restricted as it relates to funding of the future obligations.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the moving average and first-in, first-out methods.
Buildings, property and equipment
Depreciation and amortization of buildings and related improvements are
provided using the straight-line method over estimated useful lives of thirty to
forty years and the shorter of the lease term or ten years, respectively.
Depreciation and amortization of property and equipment are provided over the
estimated useful lives of the assets, primarily using a declining-balance
method. The useful lives are three to ten years for equipment.
Additions to property and equipment together with major renewals and
betterments are capitalized. Maintenance, repairs and minor renewals and
betterments are charged to expense. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation or amortization are removed
from the accounts and any resulting gain or loss is recognized.
Long-lived assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset.
Goodwill and other intangible assets
Goodwill represents the excess of the purchase cost over the fair value of
net assets acquired in an acquisition. Goodwill and other identifiable
intangible assets are amortized on a straight line basis over three to fifteen
years. Amortization of goodwill and other intangible assets, including
impairment losses, amounted to $40,647,000, $16,653,000 and $16,839,000 in 1999,
1998 and 1997, respectively. Accumulated amortization was $101,170,000 and
$60,523,000 at January 31, 1999 and 1998, respectively. In 1999, 1998 and 1997,
the Company recognized impairment losses of $13,378,000, $2,878,000 and
$6,154,000, respectively, which were included in selling, general and
administrative expense.
Income taxes
Income taxes are provided utilizing the liability method. The liability
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities. Additionally, under the
liability method, changes in tax rates and laws will be reflected in income in
the period such changes are enacted.
Stock-based compensation
In 1997, the Company adopted Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." As permitted under this
standard, the Company elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation expense for stock options is
measured as the excess, if any, of the fair value of the Company's stock as
determined by the Board of Directors at the date of grant over the amount an
employee must pay to
F-9
<PAGE> 43
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquire the stock. Pro forma disclosures of net income and earnings per share,
as if the fair value-based method prescribed by SFAS No. 123 had been applied in
measuring compensation expense, are presented in Note L.
Common stock and earnings per share
Class A and Class B Common Stock are collectively referred to as common
stock in the Notes to Consolidated Financial Statements unless otherwise
indicated. A general public market for the Company's common stock does not
exist. Periodic determinations of the price of the common stock are made by the
Board of Directors pursuant to a valuation process which includes a stock price
formula. Valuation input from an independent appraisal firm is one of the
factors considered by the Board of Directors in establishing the stock price.
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. The Board of Directors reserves the right to alter
the formula and valuation process.
In 1998, the Company adopted SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of shares of common stock outstanding. Diluted EPS is
computed similar to basic EPS except that the weighted average number of shares
of common stock outstanding is increased to include the effect of stock options
and other stock awards granted to employees under stock-based compensation plans
that were outstanding during the period.
Derivative financial instruments
The Company initiates hedging activities by entering into currency exchange
agreements consisting principally of currency forward contracts to minimize
revenue and cost variations which could result from fluctuations in currency
exchange rates. These instruments, consistent with the underlying purchase or
sale commitments, typically mature within seven years of origination. In the
event of an early termination of a currency agreement designated as a hedge, the
gain or loss will continue to be deferred and will be included in the settlement
of the underlying transaction. At January 31, 1999, the Company had
approximately $10,726,000 of foreign currency forward exchange contracts in
British pounds sterling, French francs, Japanese yen, Irish punts and Australian
dollars outstanding with net deferred gains of $154,000.
In 1997, the Company entered into forward treasury lock agreements for a
total of $200,000,000. Such agreements were entered into to manage exposure to
fluctuations in interest rates on an anticipated, probable issuance of debt that
was to be used to finance the acquisition of Telcordia Technologies, Inc.
("Telcordia") (formerly Bellcore). The agreements terminated in 1998 resulting
in losses. Due to changes in market conditions, an unexpected decline in
interest rates and availability of cash, in 1998, the Company only issued ten
year fixed rate notes with a principal amount of $100,000,000. Therefore, a loss
of $9,047,000 was recorded as other expense upon termination of the agreement
and a loss of $9,356,000 was deferred, included in long-term debt and is being
amortized to interest expense over the life of the fixed rate notes (Note J).
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents, accounts
receivable, short and long-term investments, foreign currency forward exchange
contracts and long-term receivables.
The Company invests its excess cash principally in U.S. Government and
municipal debt and equity securities and commercial paper and has established
guidelines relative to diversification and maturities in an effort to maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates.
F-10
<PAGE> 44
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of credit risk with respect to receivables are limited
because the Company's principal customers are the Regional Bell Operating
Companies ("RBOCs"), various agencies of the U.S. Government and commercial
customers engaged in work for the U.S. Government. The credit risk with the U.S.
Government is limited and the financial strength of the RBOCs limits the risk on
those receivables.
Foreign currency
Financial statements of international subsidiaries, for which the
functional currency is the local currency, are translated into U.S. dollars
using the exchange rate at each balance sheet date for assets and liabilities
and a weighted average exchange rate for revenues, expenses, gains and losses.
Translation adjustments are recorded as accumulated other comprehensive income
in stockholders' equity. The functional currency of the Company's foreign
subsidiaries that operate in highly inflationary economies (INTESA and SAIC de
Mexico) is the U.S. dollar. The monetary assets and liabilities of these foreign
subsidiaries are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date. Revenues, expenses, gains and losses are translated at
the average exchange rate for the period, and non-monetary assets and
liabilities are translated at historical rates. Resulting remeasurement gains or
losses of these foreign subsidiaries are recognized in the consolidated results
of operations.
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. The adoption did not have an effect on
net income or total stockholders' equity. 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 these requirements.
The components of other comprehensive income, net of tax effects, were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
---------------------------
1999 1998 1997
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation adjustments, net of tax.... $ (459) $(3,744) $1,279
Unrealized gain (loss) on securities, net of tax and
reclassification adjustment........................... 7,696 (3,691)
------ ------- ------
$7,237 $(7,435) $1,279
====== ======= ======
</TABLE>
Recently issued accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use," which defines the
characteristics of internal-use software and provides guidance on when costs
should be capitalized and when they should be expensed as incurred. The Company
will adopt SOP 98-1 effective for the fiscal year beginning February 1, 1999.
Upon adoption, the Company will be required to capitalize certain costs on a
prospective basis that were expensed as incurred under current accounting
practice. The Company does not expect the adoption of SOP 98-1 to have a
material impact on its consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued 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 an entity to 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
F-11
<PAGE> 45
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations unless specific hedge accounting criteria are met. The Company will
adopt SFAS No. 133 effective for the first quarter ending April 30, 2000. Based
on the types of derivative instruments the Company currently has, the Company
does not expect the adoption of SFAS No. 133 to have a material impact on the
Company's consolidated financial position or results of operations.
Issuance of stock by subsidiary
Gains or losses on issuances of unissued shares of stock by a subsidiary
are recorded directly to additional paid-in capital. On October 1, 1997, the
Company and its subsidiary NSI completed an initial public offering of 3,795,000
shares of NSI Class A Common Stock. The initial offering price was $18 per share
with net proceeds to the Company of $63,528,000 resulting in a gain of
$60,664,000 which was recorded as additional paid-in capital. Prior to the
offering, NSI, a provider of Internet domain name registration services and
Intranet consulting and network design and implementation services, was a
wholly-owned subsidiary of the Company. Upon completion of the initial offering,
the Company had a 76% ownership interest in NSI, which represented 97% of the
combined voting power of the outstanding common stock. As shares of NSI Class A
Common Stock are issued pursuant to NSI employee stock compensation plans, the
Company's ownership interest in NSI is diluted. As of January 31, 1999, the
Company had a 72.3% ownership in NSI. Subsequent to the year ended January 31,
1999, the Company further reduced its ownership level in NSI in a secondary
offering (Note P).
Reclassifications
Certain amounts from previous years have been reclassified in the
consolidated financial statements to conform to the 1999 presentation.
NOTE B -- ACQUISITIONS AND INVESTMENTS IN AFFILIATES:
The carrying value of the Company's equity and cost method investments was
$41,279,000 and $23,222,000 at January 31, 1999 and 1998, respectively, which
includes the unamortized excess of the Company's equity investments over its
equity in the underlying net assets of $9,718,000 and $10,891,000, respectively.
The Company has made acquisitions of certain business assets and companies
which have been accounted for by the purchase method of accounting. The
operations of the companies and businesses acquired have been included in the
accompanying consolidated financial statements from their respective dates of
acquisition. The excess of the purchase price over fair value of the net assets
acquired has been allocated to goodwill. As all 1999 acquisitions are not
considered significant business combinations, pro forma financial information is
not presented.
On November 14, 1997, the Company acquired all the issued and outstanding
common stock of Telcordia. The acquisition was accounted for under the purchase
method of accounting and the results of operations for Telcordia have been
included in the financial statements from the date of acquisition. The purchase
price was allocated to the assets acquired and liabilities assumed based upon
their estimated fair values. The final aggregate purchase price of $467,794,000
exceeded the fair value of net assets acquired by $142,948,000. The excess
purchase price was recorded as goodwill of $67,948,000 and other intangible
assets of $75,000,000. These intangible assets are being amortized on a
straight-line basis over periods of three to fifteen years.
The following unaudited pro forma summary information presents the
consolidated results of operations as if the acquisition had been completed at
the beginning of the periods presented and are not necessarily indicative of the
results of operations of the consolidated Company that might have occurred had
the acquisition been completed at the beginning of the periods specified, nor
are they necessarily indicative of
F-12
<PAGE> 46
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future operating results. Up to the date of closing, Telcordia derived its
revenues principally from the RBOCs, who operated in a regulatory environment,
under service agreements which provided for recovery of certain regulatory
costs, including return on investment. Furthermore, Telcordia's net income had
been based on a statutory return on its asset base while owned by the RBOCs. In
addition to reflecting Telcordia's results of operations while owned by the
RBOCs, the pro forma amounts give effect to certain adjustments, including the
amortization of intangibles and goodwill, additional depreciation expense,
increased interest expense and income tax effects.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
--------------------------
1998 1997
----------- -----------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C>
Revenues............................................ $3,934,411 $3,412,075
========== ==========
Net income.......................................... $ 66,037 $ 28,595
========== ==========
Basic earnings per share............................ $ 1.29 $ .58
========== ==========
Diluted earnings per share.......................... $ 1.20 $ .55
========== ==========
</TABLE>
NOTE C -- BUSINESS SEGMENT INFORMATION:
Effective February 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes new standards for reporting operating segment information in annual
financial statements and reporting selected information about operating segments
in interim financial statements. Since SFAS No. 131 addresses disclosure and
reporting issues, adoption of the statement did not affect the Company's
consolidated financial position or results of operations. Segment information
for all prior years presented herein have been restated to conform to SFAS No.
131.
The Company primarily provides diversified professional and technical
services involving the application of scientific expertise, together with
computer and systems technology, to solve complex technical problems for a broad
range of government and commercial customers, both in the U.S. and abroad.
Technical services consist of basic and applied research services; design and
development of computer software; systems integration; systems engineering;
technical operational and management support services; environmental
engineering; design and integration of network systems; technical engineering
and consulting support services; Year 2000 services; and development of systems,
policies, concepts and programs. Through its subsidiary, Telcordia, the Company
is a global provider of software, engineering and consulting services, advanced
research and development, technical training and other services to the
telecommunications industry. In addition to providing technical services, the
Company designs and develops high-technology products. Products include custom
designed and standard hardware and software, such as automatic equipment
identification technology, sensors and nondestructive imaging instruments.
Product revenues represented 1%, 2% and 6% of consolidated revenues in 1999,
1998 and 1997, respectively.
The implementation of SFAS No. 131 results in the use of a management
approach in identifying segments of an enterprise. The management approach is
based on the way management organizes the operating segments within the Company
for making decisions and assessing performance. However, the Company's marketing
approach focuses on key vertical markets such as "National Security," "Health
Care," "Environment," "Energy," "Telecommunications," "Information Technology"
and "Other," which includes the Company's transportation, logistics, space and
utilities business areas. Marketing decisions based on these key vertical
markets are made at the lowest operational level.
The Company's operating groups ("Groups"), on which performance is
assessed, aggregate into two reportable segments, Regulated and Non-Regulated,
depending on the business processes and laws affecting
F-13
<PAGE> 47
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the operations of the Group. Groups in the Regulated segment provide technical
services and products through contractual arrangements as either a prime
contractor or subcontractor to other contractors, primarily for departments and
agencies of the U.S. Government. Operations in the Regulated segment are subject
to specific regulatory accounting and contracting guidelines such as Cost
Accounting Standards and Federal Acquisition Regulations. Groups in the
Non-Regulated segment provide technical services and products primarily to
customers in commercial markets. Generally, operations in the Non-Regulated
segment are not subject to specific regulatory accounting or contracting
guidelines. Groups and entities that do not provide technical services, which
includes the Company's Corporate Offices, are not aggregated into these
reportable segments.
The Company evaluates performance and allocates resources based on income
or loss from operations before tax. Asset information is not a component of the
Company's evaluation of the Groups. However, the Company allocates an internal
interest charge or credit ("Cost of Capital") to each Group based on an internal
formula which utilizes certain identifiable asset data in calculating the Cost
of Capital. Interest expense, as reported in the consolidated financial
statements, is generally recorded at the corporate level. In addition, the
Company does monitor capital expenditures by Groups.
The accounting policies of the reportable segments are essentially the same
as those described in Note A. General corporate expense allocations are
reflected in the segment operating results because all such expenses are
allocated to individual cost objectives by the Company, as required by
Government Cost Accounting Standards. Certain adjustments made at the
consolidated level are not allocated to the Groups for internal reporting
purposes. Because of the nature of the Company's business, sales between
segments are not material and are recorded at cost.
The following table summarizes the segment information:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Regulated.................................... $2,742,918 $2,294,899 $2,116,597
Non-Regulated................................ 1,988,564 782,720 270,330
---------- ---------- ----------
Total segment revenues......................... 4,731,482 3,077,619 2,386,927
Corporate and other.......................... 8,951 11,732 15,297
---------- ---------- ----------
Total consolidated revenues.................... $4,740,433 $3,089,351 $2,402,224
========== ========== ==========
Income (Loss) before income taxes:
Regulated.................................... $ 143,133 $ 134,536 $ 133,395
Non-Regulated................................ 207,008 50,038 (4,727)
---------- ---------- ----------
Total segment income before income taxes....... 350,141 184,574 128,668
Corporate and other.......................... (62,146) (26,081) (15,459)
---------- ---------- ----------
Total income before income taxes............... $ 287,995 $ 158,493 $ 113,209
========== ========== ==========
</TABLE>
F-14
<PAGE> 48
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of Capital:
Regulated.................................... $ (5,452) $ (8,605) $ (1,651)
Non-Regulated................................ 797 1,130 2,448
---------- ---------- ----------
Total segment Cost of Capital.................. (4,655) (7,475) 797
Corporate and other.......................... 4,655 7,475 (797)
---------- ---------- ----------
Total consolidated Cost of Capital............. $ -- $ -- $ --
========== ========== ==========
Depreciation and amortization:
Regulated.................................... $ 32,002 $ 29,995 $ 27,724
Non-Regulated................................ 127,664 36,409 17,427
---------- ---------- ----------
Total segment depreciation and amortization.... 159,666 66,404 45,151
Corporate and other.......................... 4,661 3,456 5,208
---------- ---------- ----------
Total consolidated depreciation and
amortization................................. $ 164,327 $ 69,860 $ 50,359
========== ========== ==========
Capital expenditures:
Regulated.................................... $ 19,779 $ 22,663 $ 23,809
Non-Regulated................................ 62,197 25,458 6,724
---------- ---------- ----------
Total segment capital expenditures............. 81,976 48,121 30,533
Corporate and other.......................... 5,836 21,962 11,731
---------- ---------- ----------
Total consolidated capital expenditures........ $ 87,812 $ 70,083 $ 42,264
========== ========== ==========
</TABLE>
The following table summarizes geographic information:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
United States................................ $4,321,635 $2,776,938 $2,338,781
Venezuela.................................... 312,706 225,347 471
United Kingdom............................... 69,193 60,661 42,588
Other International.......................... 36,899 26,405 20,384
---------- ---------- ----------
Total consolidated revenues.................... $4,740,433 $3,089,351 $2,402,224
========== ========== ==========
Long-lived assets:
United States................................ $1,153,191 $1,111,582 $ 295,907
Venezuela.................................... 124,821 108,295 67
United Kingdom............................... 5,443 5,648 3,861
Other International.......................... 12,566 13,909 1,412
---------- ---------- ----------
Total consolidated long-lived assets........... $1,296,021 $1,239,434 $ 301,247
========== ========== ==========
</TABLE>
During 1999, 1998 and 1997, approximately 50%, 66% and 79%, respectively,
of the Company's consolidated revenues were attributable to prime contracts with
the U.S. Government or to subcontracts with other contractors engaged in work
for the U.S. Government and are reflected in the Regulated segment
F-15
<PAGE> 49
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues. No single contract or customer had revenues greater than 10% of the
Company's consolidated revenues in 1999, 1998 and 1997.
NOTE D -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
JANUARY 31
----------------------
1999 1998
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Contracts-in-process...................................... $ 8,543 $ 5,095
Raw materials............................................. 7,553 7,376
---------- --------
$ 16,096 $ 12,471
========== ========
Prepaid expenses and other current assets:
Prepaid expenses.......................................... $ 46,930 $ 21,916
Short-term investments.................................... 118,808 40,200
Other..................................................... 13,296 13,730
---------- --------
$ 179,034 $ 75,846
========== ========
Property and equipment at cost:
Computers and other equipment............................. $ 437,150 $335,674
Office furniture and fixtures............................. 38,514 30,911
Leasehold improvements.................................... 75,529 59,234
---------- --------
551,193 425,819
Less accumulated depreciation and amortization............ 241,615 137,537
---------- --------
$ 309,578 $288,282
========== ========
Land and buildings at cost:
Buildings and improvements................................ $ 169,832 $167,437
Land...................................................... 45,453 45,259
Land held for future use.................................. 702 702
---------- --------
215,987 213,398
Less accumulated depreciation and amortization............ 29,525 17,864
---------- --------
$ 186,462 $195,534
========== ========
Other assets:
Investment in affiliates.................................. $ 41,279 $ 23,222
Related party receivable (Note H)......................... 43,237 51,135
Long-term investments..................................... 40,895 5,768
Other long-term receivables............................... 31,805 31,765
Other..................................................... 13,289 9,343
---------- --------
$ 170,505 $121,233
========== ========
</TABLE>
F-16
<PAGE> 50
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31
----------------------
1999 1998
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities:
Accounts payable.......................................... $ 207,330 $178,315
Other accrued liabilities................................. 270,233 220,575
Deferred revenue.......................................... 413,004 43,789
Collections in excess of revenues on uncompleted
contracts.............................................. 193,635 305,352
---------- --------
$1,084,202 $748,031
========== ========
Accrued payroll and employee benefits:
Salaries, bonuses and amounts withheld from employees'
compensation........................................... $ 130,906 $154,244
Accrued vacation.......................................... 99,826 82,922
Accrued contributions to employee benefit plans........... 78,689 25,242
---------- --------
$ 309,421 $262,408
========== ========
Other long-term liabilities:
Other postretirement benefits............................. $ 135,962 $124,423
Accrued pension liability................................. 40,956 40,954
Accrued other employee benefits........................... 11,490 22,062
Deferred revenue.......................................... 35,823 26,897
Deferred compensation..................................... 26,483 23,245
Other..................................................... 67,288 76,096
---------- --------
$ 318,002 $313,677
========== ========
</TABLE>
NOTE E -- RECEIVABLES:
Receivables consist of the following:
<TABLE>
<CAPTION>
JANUARY 31
----------------------
1999 1998
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Receivables, primarily U.S. Government and RBOCs, less
allowance for doubtful accounts of $40,829 and $36,184 at
January 31, 1999 and 1998, respectively:
Billed.................................................... $ 937,541 $652,644
Unbilled, less progress payments of $7,226 and $17,141 at
January 31, 1999 and 1998, respectively................ 177,798 132,349
Contract retentions....................................... 24,470 25,392
---------- --------
$1,139,809 $810,385
========== ========
</TABLE>
Unbilled receivables at January 31, 1999 and 1998 include $20,980,000 and
$15,247,000, respectively, related to 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. The balance of unbilled
receivables consist of costs and fees billable on contract completion or other
specified events, the majority of which is expected to be billed and collected
within one year. Contract retentions are billed when the Company has negotiated
final indirect rates with the U.S. Government and, once billed, are subject to
audit and approval by outside third parties. Consequently,
F-17
<PAGE> 51
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the timing of collection of retention balances is outside the Company's control.
Based on the Company's historical experience, the majority of the retention
balance is expected to be collected beyond one year.
NOTE F -- REVOLVING CREDIT FACILITIES:
The Company has a five-year reducing revolving credit facility of up to
$700,000,000 ("Credit Facility") with a group of financial institutions.
Borrowings under the Credit Facility are unsecured and 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. The Company pays a facility fee on the total
commitment amount. Certain financial covenants required by the Credit Facility,
such as requiring the Company to maintain certain levels of net worth and an
interest coverage ratio, as well as limitation on indebtedness, have been
maintained as of January 31, 1999.
There was no balance outstanding under the Credit Facility at January 31,
1999 and 1998. As of January 31, 1999, the entire $700,000,000 was available
under the most restrictive debt covenants of the Credit Facility and during
1999, the Company did not borrow under the Credit Facility. In 1998 and 1997,
the maximum amounts outstanding were $320,000,000 and $31,000,000, respectively.
During 1998 and 1997, the average amounts outstanding were $38,228,000 and
$2,299,000, respectively. The weighted average interest rate in 1998 and 1997
was 6.0% and 5.9% respectively, based upon average daily balances.
NOTE G -- EMPLOYEE BENEFIT PLANS:
The Company has one principal Profit Sharing Retirement Plan ("PSRP") in
which eligible employees participate. Participants' interests vest 25% per year
in the third through sixth year of service. Participants also become fully
vested upon reaching age 59 1/2, permanent disability or death. Contributions
charged to income under the PSRP were $23,122,000, $18,929,000 and $10,167,000
for 1999, 1998 and 1997, respectively.
The Company has an Employee Stock Retirement Plan ("ESRP"), formerly known
as the Employee Stock Ownership Plan, in which eligible employees participate.
Cash or stock contributions to the ESRP are based upon amounts determined
annually by the Board of Directors and are allocated to participants' accounts
based on their annual compensation. The Company recognizes compensation expense
as the fair value of the Company common stock or cash in the year of
contribution. The vesting requirements for the ESRP are the same as the PSRP.
Shares of Company common stock distributed from the ESRP bear a limited put
option that, if exercised, would require the Company to repurchase the shares at
their then current fair value. At January 31, 1999, the ESRP held 15,718,000
shares of Class A Common Stock and 29,000 shares of Class B Common Stock with a
combined fair value of $1,107,642,000. Contributions charged to income under the
Plan were $25,820,000, $22,072,000 and $29,492,000 for 1999, 1998 and 1997,
respectively.
The Company has one principal Cash or Deferred Arrangement (CODA) which
allows eligible participants to defer a portion of their income through
contributions. Such deferrals are fully vested, are not taxable to the
participant until distributed from the CODA upon termination, retirement,
permanent disability or death and may be matched by the Company. The Company's
matching contributions to the CODA charged to income were $15,829,000,
$14,454,000 and $9,567,000 for 1999, 1998 and 1997, respectively.
In connection with the acquisition of Telcordia, the Company also sponsors
two contributory savings plans which allow eligible Telcordia employees to defer
a portion of their pre-tax income through contributions and contribute a portion
of their income on an after-tax basis. Such deferrals are fully vested, are not
taxable to the participant until distributed upon termination, retirement,
permanent disability or death and may be matched by the Company. The Company's
matching contributions charged to income were $17,200,000 and $2,800,000 for
1999 and 1998, respectively.
The Company has two principal bonus compensation plans, the Bonus
Compensation Plan and the Annual Incentive Plan ("AIP"), which provide for
bonuses to reward outstanding performance. The AIP was assumed in connection
with the acquisition of Telcordia in 1998. Bonuses are paid in the form of cash,
fully
F-18
<PAGE> 52
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vested shares of Class A Common Stock or vesting shares of Class A Common Stock.
Awards of vesting shares of Class A Common Stock vest at the rate of 20%, 20%,
20% and 40% after one, two, three and four years, respectively. The amounts
charged to income under these plans were $120,373,000, $49,587,000 and
$32,359,000 for 1999, 1998 and 1997, respectively.
The Company has a Stock Compensation Plan and Management Stock Compensation
Plan, together referred to as the "Stock Compensation Plans." The Stock
Compensation Plans provide for awards of share units to eligible employees,
which share units generally correspond to shares of Class A Common Stock which
are held in trust for the benefit of participants. Participants' interests in
these share units vest on a seven year schedule at the rate of one-third at the
end of each of the fifth, sixth and seventh years following the date of the
award. The fair market value of shares awarded under these plans are recorded as
unearned compensation which is included in stockholders' equity. The unearned
amounts are amortized to expense over the vesting period. The amounts charged to
income under these plans were $2,606,000, $1,688,000 and $1,282,000 for 1999,
1998 and 1997, respectively.
The Company also has an Employee Stock Purchase Plan ("ESPP") which allows
eligible employees to purchase shares of the Company's Class A Common Stock,
with the Company contributing currently 10% of the existing fair market value.
There are no charges to income under this plan. However, the proforma effect on
net income and earnings per share of compensation expense under SFAS No. 123,
"Accounting for Stock-Based Compensation" has been disclosed in Note L.
The Company has two deferred compensation plans. The Keystaff Deferral Plan
is maintained for the benefit of key executives and directors, pursuant to which
eligible participants may elect to defer a portion of their compensation. The
Company makes no contributions to the accounts of participants under this plan
but does credit participant accounts for deferred compensation amounts and
interest earned on such deferred compensation. Interest is accrued based on the
Moody's Seasoned Corporate Bond Rate (6.7% in 1999). Deferred balances will
generally be paid upon the later of the attainment of age 65, ten years of plan
participation or retirement, unless participants obtain approval for an early
pay-out. The Key Executive Stock Deferral Plan is maintained for the benefit of
directors and certain key executives. Eligible participants may elect to defer a
portion of their compensation into a trust established by the Company which
invests in shares of Class A Common Stock. The Company makes no contributions to
the accounts of participants. Deferred balances will generally be paid upon
retirement or termination.
NOTE H -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:
In 1999, the Company adopted SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits." Accordingly, 1998 and 1997 data has
been restated to conform to the new standard. This new standard revises
disclosures about pension and other postretirement benefit plans and does not
change the accounting for these types of plans. Adoption of the standard had no
effect on the Company's consolidated results of operations, financial position
or results of operations.
In connection with the acquisition of Telcordia in 1998, the Company
assumed assets and liabilities related to five noncontributory defined benefit
pension plans covering eligible management and support staff employees of
Telcordia and assumed assets and liabilities for postretirement health and life
insurance benefits for retired U.S. employees and their dependents. The Company
accounts for these benefit plans in accordance with SFAS No. 87, "Employers'
Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Prior to the adoption of SFAS No.
132, the Telcordia non-qualified pension plans were considered immaterial and
not included in the pension disclosure. In accordance
F-19
<PAGE> 53
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with SFAS No. 132, all the qualified and non-qualified pension plans are
disclosed in the aggregate and prior year's disclosures have been restated.
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
PENSION BENEFITS OTHER THAN PENSIONS
----------------------- -----------------------
YEAR ENDED JANUARY 31
--------------------------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning
of year........................... $1,030,604 $1,022,128 $ 176,911 $ 175,709
Service cost......................... 25,078 3,180 4,409 551
Interest cost........................ 72,672 8,946 11,939 1,539
Plan participants' contributions..... 199 153
Actuarial (gain) loss................ 40,372 (675) 241
Net portability transfers paid during
the year.......................... (5,228)
Gross benefits paid.................. (46,139) (3,650) (9,229) (1,282)
---------- ---------- --------- ---------
Net benefit obligation at end of
year................................. $1,117,359 $1,030,604 $ 183,554 $ 176,911
========== ========== ========= =========
Change in plan assets:
Fair value of plan assets at
beginning of year................. $1,474,418 $1,428,622 $ 56,732 $ 55,850
Actual return on plan assets......... 282,518 49,404 10,776 2,011
Employer contributions............... 1,437 42 255
Plan participants' contributions..... 199 153
Net portability transfers paid during
the year.......................... (5,228)
Gross benefits paid.................. (46,139) (3,650) (9,229) (1,282)
---------- ---------- --------- ---------
Fair value of plan assets at end of
year................................. $1,707,006 $1,474,418 $ 58,733 $ 56,732
========== ========== ========= =========
Funded status at end of year:.......... $ 589,647 $ 443,814 $(124,821) $(120,179)
Unrecognized net actuarial gain........ (144,374) (30,674) (9,286) (2,222)
Contributions in January............... 59 33 34
---------- ---------- --------- ---------
Prepaid (accrued) benefit cost......... $ 445,332 $ 413,173 $(134,073) $(122,401)
========== ========== ========= =========
Weighted-average assumptions:
Discount rate........................ 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets....... 9.00% 9.00% 8.63% 8.20%
Rate of compensation increase........ 5.00% 5.00% 5.00% 5.00%
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 5% for 2004 and remain at that level thereafter.
F-20
<PAGE> 54
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENT
BENEFITS OTHER
PENSION BENEFITS THAN PENSIONS
-------------------- ----------------
YEAR ENDED JANUARY 31
----------------------------------------
1999 1998 1999 1998
--------- -------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost................................ $ 25,078 $ 5,299 $ 4,409 $ 919
Interest cost............................... 72,672 14,912 11,939 2,565
Expected return on assets................... (128,766) (26,697) (4,388) (942)
Amortization of actuarial loss.............. 74
--------- -------- ------- ------
Net periodic benefit cost..................... $ (30,942) $ (6,486) $11,960 $2,542
========= ======== ======= ======
</TABLE>
The Company sponsors five noncontributory defined benefit pension plans.
Two of these plans are funded qualified plans, the Management Pension Plan and
the Support Staff Pension Plan. Benefits are based on a stated percentage of
final average pay formula for the management plans and a flat-dollar amount per
years of service for the Support Staff Pension Plan. All of the assets of the
qualified plans, which are primarily equities (international and domestic) and
fixed income securities are held in a master trust administered by the Company.
The Company's policy is to fund the "Qualified" plans based on legal
requirements, tax considerations and investment opportunities. The Company
utilizes a hybrid method for amortizing investment gains and losses. This method
fully recognizes gains and losses for fixed income securities and amortizes
gains and losses on all other asset classes over three years.
The Company provides three unfunded non-qualified benefits to certain
members of management. One of these plans provides benefits that replace
benefits not available in the qualified plans due to design or legal
limitations. The other two plans offer additional pension benefits to certain
employees based on job level. The projected benefit obligation and accumulated
benefit obligation of these plans, which had accumulated benefit obligations in
excess of plan assets, were $13,397,000 and $6,337,000, respectively, as of
December 31, 1998, the plans' year end, and $10,976,000 and $4,688,000,
respectively, as of December 31, 1997. The non-qualified plans are unfunded and
therefore have no assets.
The Company offers certain postretirement medical and life insurance
benefits to substantially all retired employees. Currently, all of the plan
assets are held in two Voluntary Employee Benefit Association (VEBA) trusts.
Telcordia did not make any contributions to the VEBA trusts during the year. The
Company's funding policy is to contribute annually an amount determined by
management, based on federal income tax limitations.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
ONE- ONE-
PERCENTAGE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total service and interest cost
components..................................... $ 1,637 $ (1,367)
Effect on postretirement benefit obligation...... $15,620 $(13,239)
</TABLE>
On January 2, 1997, when the Company formed the INTESA joint venture with
PDVSA, approximately 1500 employees transferred from PDVSA to INTESA. Under
Venezuelan law, INTESA assumed the existing employee benefit plans, including a
defined benefit pension plan. Under the terms of the joint venture agreement,
PDVSA agreed to fund the projected benefit obligation of the pension plan and
accumulated
F-21
<PAGE> 55
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
postretirement benefit obligation of the postretirement benefit plans over ten
years. The obligation of PDVSA to fund these benefits has been reflected as a
related party receivable and included in other assets in the Company's
consolidated balance sheet. The plans are accounted for in accordance with the
requirements of SFAS No. 87 and SFAS No. 106.
Benefits are based upon years of service and compensation during the twelve
months of accredited service earned immediately before retirement. The majority
of the assets of the pension plan, receivables and cash, are not currently held
in a trust. PDVSA had initially agreed to fund this obligation by December 31,
2006. Per the terms of an amended agreement, PDVSA will fund this obligation by
January 31, 2007 either through direct payments to INTESA or direct
contributions to a trust.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at beginning of year............... $ 53,698
Transfer of obligation.................................... $ 31,566
Service cost.............................................. 4,697 3,308
Interest cost............................................. 12,106 12,953
Actuarial (gains) losses.................................. (5,534) 6,330
Amendments................................................ 2,058
Early retirement window................................... (8,133)
Translation............................................... (5,805) (2,517)
-------- --------
Net benefit obligation at end of year....................... $ 51,029 $ 53,698
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year............
Actuarial return on plan assets........................... $ 1,611
Employer contributions.................................... 9,868
Plan participant contributions............................ 1,251
Gross benefits paid....................................... (7,739)
Translation............................................... (125)
--------
Fair value of plan assets at end of year.................... $ 4,866
========
Funded status at end of year................................ $(46,163) $(53,698)
Unrecognized net actuarial (gains) losses................. (1,283) 6,150
Unrecognized prior service cost........................... 1,587 1,999
Other..................................................... (34)
-------- --------
Accrued benefit cost........................................ $(45,859) $(45,583)
======== ========
Weighted average assumptions:
Discount rate............................................. 10% 10%
Salary increases.......................................... 7% 7%
Expected rate of return on assets......................... 12% 12%
Components of net periodic pension cost:
Service cost.............................................. $ 4,697 $ 3,308
Interest cost............................................. 12,105 12,953
Expected return on assets................................. (1,066)
Amortization of:
Prior service cost..................................... 203
Actuarial losses....................................... 627
-------- --------
Net periodic pension cost................................... 16,566 16,261
Cost of special termination benefits...................... (145)
-------- --------
Total pension cost.......................................... $ 16,421 $ 16,261
======== ========
</TABLE>
F-22
<PAGE> 56
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the pension benefits described above, certain postretirement
benefits were also transferred to INTESA for health and life insurance benefits
for the PDVSA employees who transferred to INTESA. Eligibility for the plans and
participant cost sharing is dependent upon the participant's age at retirement,
years of service and retirement date. The Company accounts for these benefit
plans in accordance with SFAS No. 106. The accrued postretirement benefits
liability was $2,125,000 and $2,022,000 as of January 31, 1999 and 1998,
respectively. Net postretirement benefits expense was $329,000 and $318,000 for
the year ended January 31, 1999 and 1998, respectively.
NOTE I -- INCOME TAXES:
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $135,996 $87,755 $56,258
State.............................................. 33,379 21,097 13,374
Foreign............................................ 13,313 8,397 767
Deferred:
Federal............................................ (36,303) (35,880) (17,113)
State.............................................. (7,930) (6,641) (3,718)
Foreign............................................ (1,148) (1,029) (39)
-------- ------- -------
$137,307 $73,699 $49,529
======== ======= =======
</TABLE>
Deferred income taxes are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes. Deferred
tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred revenue............................................ $ 108,717 $ 60,736
Accrued vacation pay........................................ 28,122 24,241
Deferred compensation....................................... 13,423 15,108
Vesting stock bonuses....................................... 22,240 11,539
Accrued liabilities......................................... 28,995 20,393
State taxes................................................. 4,182 8,538
Other....................................................... 14,868 8,041
--------- ---------
Total deferred tax assets......................... 220,547 148,596
--------- ---------
Employee benefit plan contributions......................... (138,252) (125,653)
Depreciation and amortization............................... (26,238) (61,942)
Investment in subsidiaries and affiliates................... (14,629) (7,841)
Other....................................................... (5,753) (2,734)
--------- ---------
Total deferred tax liabilities.................... (184,872) (198,170)
--------- ---------
Net deferred tax asset (liability).......................... $ 35,675 $ (49,574)
========= =========
</TABLE>
F-23
<PAGE> 57
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax (35%) to income before income taxes
follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Amount computed at statutory rate.................... $100,798 $55,472 $39,623
State income taxes, net of federal tax benefit....... 16,542 9,396 6,276
Nondeductible meals, travel and entertainment........ 4,546 3,143 2,567
(Income) losses of foreign subsidiaries.............. (2,181) 3,113 987
Revision of prior years' tax estimates............... 4,961 (589) (1,875)
Other................................................ 12,641 3,164 1,951
-------- ------- -------
$137,307 $73,699 $49,529
======== ======= =======
</TABLE>
Income taxes paid in 1999, 1998 and 1997 amounted to $180,866,000,
$82,905,000 and $59,196,000, respectively.
NOTE J -- LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
6.75% Notes payable......................................... $ 90,489 $ 89,800
Capital lease obligations................................... 79,586 55,897
Mortgages payable collateralized by real property........... 6,740 6,830
Other notes payable......................................... 14,118 26,443
-------- --------
190,933 178,970
Less current portion........................................ 47,882 33,012
-------- --------
$143,051 $145,958
======== ========
</TABLE>
In January 1998, the Company issued $100,000,000 of 6.75% notes ("6.75%
Notes") under a shelf registration statement filed with the Securities and
Exchange Commission. The 6.75% Notes are due February 1, 2008 with interest
payable semi-annually beginning August 1, 1998 and were issued with a nominal
discount. The Company used the proceeds to repay certain short-term
indebtedness, including obligations assumed in connection with the acquisition
of Telcordia and for general corporate purposes. The Company amortizes the note
discount, underwriter's fees and commissions and the loss on the forward
treasury lock agreement (Note A) to interest expense which results in an
effective interest rate of 8.3% over the term of the 6.75% Notes. The Company is
subject to certain restrictions such as limitations on liens, on sale and
leaseback transactions and on consolidation, merger, and sale of assets. As of
January 31, 1999, the Company was in compliance with the restrictions.
During 1997, the Company assumed a $6,919,000 mortgage note in connection
with the purchase of land and a building. Terms of the note include quarterly
payments of principal and interest until December 2016. Interest is adjusted
annually and was 6.6% in 1999. Additionally, the Company has various other notes
payable with interest rates from 4.3% to 9.3% that are due over the next ten
years.
F-24
<PAGE> 58
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt, excluding capital lease obligations, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31 (IN THOUSANDS)
- ---------------------- --------------
<S> <C>
2000.............................................. $ 13,044
2001.............................................. 395
2002.............................................. 314
2003.............................................. 276
2004.............................................. 321
2005 and after.................................... 96,997
--------
$111,347
========
</TABLE>
NOTE K -- EARNINGS PER SHARE:
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>
YEAR ENDED JANUARY 31
---------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
PER-SHARE PER-SHARE PER-SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- ------ --------- ---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income.............. $150,688 $84,794 $63,680
Effect of:
Subsidiary preferred
stock dividends..... (1,777)
--------
Net income available to
common stockholders,
as adjusted........... 148,911 84,794 63,680
Basic EPS............... 55,621 $2.68 51,349 $1.65 49,157 $1.30
===== ===== =====
Effect of:
Majority-owned
subsidiary's
dilutive
securities.......... (428)
--------
Net income available to
common stockholders,
as adjusted........... $148,483 $84,794 $63,680
======== ======= =======
Effect of dilutive
securities:
Stock options......... 4,555 3,412 2,498
Other stock awards.... 128 45 83
------ ------ ------
Diluted EPS............. 60,304 $2.46 54,806 $1.55 51,738 $1.23
====== ===== ====== ===== ====== =====
</TABLE>
In 1998 and 1997, 22,000 and 4,000 options outstanding, respectively, were
not included in the computation of diluted EPS because the exercise price was
greater than the average market price of the common shares and their effect
would be antidilutive. There were no antidilutive options in 1999.
NOTE L -- COMMON STOCK AND OPTIONS:
The Company has options outstanding under three stock option plans, the
1998 Stock Option Plan ("1998 Plan"), which was adopted on July 10, 1998, the
1995 Stock Option Plan ("1995 Plan") and the 1992 Stock Option Plan ("1992
Plan"). Under the 1998 Plan, 1995 Plan and 1992 Plan, options are granted at
prices not less than the fair market value at the date of grant and for terms
not greater than ten years. Options granted under these three plans generally
become exercisable 20%, 20%, 20%, and 40% after one, two, three and four years,
respectively. No options were granted under the 1992 Plan after July 31, 1995,
the date the
F-25
<PAGE> 59
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1992 Plan terminated nor were any options granted under the 1995 Plan after July
31, 1998, the date the 1995 Plan terminated.
If the Company had elected to recognize compensation expense based upon the
fair value at the grant dates for stock option awards granted in 1999, 1998 and
1997 and for shares issued under the ESPP in 1999 and 1998, consistent with the
methodology prescribed by SFAS No. 123, net income in 1999, 1998 and 1997 would
have been reduced by $14,958,000, $10,328,000 and $4,797,000, respectively.
Basic earnings per share would have been reduced by $.27, $.20, and $.10 per
share in 1999, 1998 and 1997, respectively, and diluted earnings per share would
have been reduced by $.21, $.17 and $.08 per share in 1999, 1998 and 1997,
respectively. These amounts were determined using weighted-average per share
fair values of options granted in 1999, 1998 and 1997 of $11.13, $7.88 and
$5.30, respectively. The fair value for these options was estimated at the date
of grant using the Black-Scholes option pricing model with the following
assumptions for 1999, 1998 and 1997: no dividend yield, no volatility, risk free
interest rates ranging from 4.6% to 6.8% and expected lives of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. The Company meets the definition of a non-public company for the
purposes of calculating fair value and, therefore, assumes no volatility in the
fair value calculation. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock-based
compensation plans.
A summary of changes in outstanding options under the plans during the
three years ended January 31, 1999, is as follows:
<TABLE>
<CAPTION>
SHARES OF CLASS A
SHARES OF CLASS A COMMON STOCK
COMMON STOCK WEIGHTED-AVERAGE EXERCISABLE UNDER
UNDER OPTIONS EXERCISE PRICE OPTIONS
----------------- ---------------- -----------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
January 31, 1996..................... 12,317 $13.39 4,467
Options granted.................... 3,606 $20.27
Options canceled................... (640) $15.16
Options exercised.................. (2,454) $10.76
------
January 31, 1997..................... 12,829 $15.73 4,429
Options granted.................... 4,647 $29.75
Options canceled................... (629) $19.22
Options exercised.................. (2,619) $12.26
------
January 31, 1998..................... 14,228 $20.80 4,380
Options granted.................... 3,265 $47.30
Options canceled................... (544) $29.89
Options exercised.................. (2,656) $14.49
------
January 31, 1999..................... 14,293 $27.68 4,772
======
</TABLE>
As of January 31, 1999, 21,708,000 shares of Class A Common Stock were
reserved for issuance upon exercise of options which are outstanding or which
may be granted. The Company has agreed to make available for issuance, purchase
or options approximately 313,000 shares of Class A Common Stock to employees,
prospective employees and consultants, generally contingent upon commencement of
employment
F-26
<PAGE> 60
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or the occurrence of certain events. The selling price of shares and the
exercise price of options are fair market value at the date such shares are
purchased or options are granted.
A summary of options outstanding as of January 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
RANGE OF OPTIONS AVERAGE REMAINING OPTIONS WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------------- ----------- -------------- ---------------- ----------- ----------------
(OPTIONS OUTSTANDING AND EXERCISABLE, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
$14.19 to $15.07.......... 1,560 $14.39 .5 1,560 $14.39
$15.72 to $18.27.......... 2,441 $16.32 1.4 1,338 $16.32
$19.33 to $22.83.......... 2,963 $20.26 2.4 1,091 $20.28
$25.96 to $39.13.......... 4,198 $29.80 3.6 783 $29.97
$39.13 to $58.87.......... 3,131 $47.33 4.5
------ -----
14,293 4,772
====== =====
</TABLE>
NOTE M -- LEASES:
The Company occupies most of its facilities under operating leases. Most of
the leases require the Company to pay maintenance and operating expenses such as
taxes, insurance and utilities and also contain renewal options extending the
leases from one to twenty years. Certain of the leases contain purchase options
and provisions for periodic rate escalations to reflect cost-of-living
increases. Certain equipment, primarily computer-related, is leased under
short-term or cancelable operating leases. Rental expenses for facilities and
equipment totaled $113,320,000, $90,012,000 and $68,334,000 in 1999, 1998 and
1997, respectively.
The Company has a seven year operating lease for a general purpose office
building, with an option to purchase the building at the end of the initial
seven year term. If the purchase option is not exercised, the Company may be
required to pay certain supplemental rental payments if proceeds from the sale
of the building to an unrelated buyer are below specified amounts. The maximum
supplemental rental payment which could be required is $28,809,000. In 1999, the
Company entered into an operating lease for land and general purpose office
facilities with an initial term of five and one-half years and an option for the
Company to purchase the property. If the purchase option is not exercised, the
Company may be required to pay certain supplemental rental payments if proceeds
from the sale of the property to an unrelated buyer are below specified amounts.
The maximum supplemental rental payment which could be required is $43,040,000.
Assets acquired under capital leases and included in property and
equipment, and land and buildings consist of the following:
<TABLE>
<CAPTION>
JANUARY 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Computers and other equipment......................... $123,817 $ 65,016
Office furniture and fixtures......................... 5,084 777
Buildings and improvements............................ 1,760 1,760
-------- --------
130,661 67,553
Less accumulated amortization......................... 45,196 13,384
-------- --------
$ 85,465 $ 54,169
======== ========
</TABLE>
F-27
<PAGE> 61
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum rental commitments, primarily for facilities, under all
non-cancelable operating leases and capital leases in effect at January 31, 1999
are payable as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31 CAPITAL OPERATING
- ---------------------- -------- ---------
<S> <C> <C>
2000.................................................. $ 51,591 $ 90,815
2001.................................................. 42,325 67,876
2002.................................................. 11,757 53,040
2003.................................................. 53 43,728
2004.................................................. 22,414
2005 and after........................................ 22,148
-------- --------
Total minimum lease payments.......................... 105,726 $300,021
========
Amount representing interest.......................... (26,140)
--------
Present value of net minimum capital lease payments... 79,586
Current portion....................................... (34,838)
--------
Long-term obligations under capital leases at January
31, 1999............................................ $ 44,748
========
</TABLE>
The Company's joint venture, INTESA, had capital lease obligations totaling
$75,474,000, of which $32,181,000 was classified as current portion of long-term
debt as of January 31, 1999. These capital lease obligations of the joint
venture are non-recourse debt to the Company.
NOTE N -- COMMITMENTS AND CONTINGENCIES:
Other commitments at January 31, 1999 include outstanding letters of credit
aggregating $42,848,000, principally related to guarantees on contracts with
commercial and foreign customers, and outstanding surety bonds aggregating
$147,565,000, principally related to performance and payment type bonds.
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, is expected to have a material adverse effect on its
consolidated financial position, results of operations, cash flows or its
ability to conduct business.
NOTE O -- SUPPLEMENTARY INCOME STATEMENT INFORMATION:
Charges to costs and expenses for depreciation and amortization of
buildings, property and equipment and assets acquired under capital leases were
$122,507,000, $52,021,000 and $31,790,000 for 1999, 1998 and 1997, respectively.
Included in selling, general and administrative expenses are independent
research and development costs of $119,805,000, $23,202,000 and $11,145,000 in
1999, 1998 and 1997, respectively.
Total interest paid in 1999, 1998 and 1997 amounted to $28,815,000,
$8,786,000, and $3,495,000, respectively.
F-28
<PAGE> 62
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of other (income) expense, net, in the accompanying
consolidated statement of income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income..................................... $(21,897) $(12,752) $(1,453)
Loss on treasury lock agreement..................... 9,047
Gain on sale of certain business assets............. (3,749) (6,341)
Equity in loss (income) of unconsolidated
affiliates........................................ 4,185 (1,326) (2,253)
Other expense (income), net......................... 4,449 (4,492) 1,513
-------- -------- -------
$(17,012) $(15,864) $(2,193)
======== ======== =======
</TABLE>
NOTE P -- SUBSEQUENT EVENT:
On February 9, 1999, NSI announced a secondary offering of 4,580,000 shares
of Class A Common Stock. Of the shares sold in the offering, the Company sold
4,500,000 shares at $170 per share. On February 12, 1999, the Company received
net proceeds from the offering of $729,000,000. On March 23, 1999, NSI completed
a two-for-one stock split of its Class A Common Stock and Class B Common Stock.
Subsequent to the stock split, the Company currently owns 14,850,000 shares of
NSI Class B Common Stock, which are entitled to ten votes per share.
F-29
<PAGE> 63
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- ----------------------------------------- ---------- ------------------------- ---------- -----------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (1) DEDUCTIONS END OF YEAR
- ----------------------------------------- ---------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 1997
Allowance for uncollectible accounts... $ 1,878 $ 6,446 $19,270 $ (9,546) $18,048
Year ended January 31, 1998
Allowance for uncollectible accounts... $18,048 $14,182 $45,762 $(41,808) $36,184
Year ended January 31, 1999
Allowance for uncollectible accounts... $36,184 $ 7,755 $68,480 $(71,590) $40,829
</TABLE>
- ---------------
(1) Charged primarily to allowance for deferred revenues.
F-30
<PAGE> 1
EXHIBIT 10(c)
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
STOCK COMPENSATION PLAN
Effective as of January 1, 1997
(Amended 9/30/98)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURPOSE ........................................................................1
ARTICLE I DEFINITIONS. .........................................................1
1.1 Account ................................................................1
1.2 Award ..................................................................1
1.3 Awarding Authority .....................................................1
1.4 Beneficiary ............................................................1
1.5 Board ..................................................................1
1.6 Committee ..............................................................1
1.7 Company.................................................................1
1.8 Company Stock ..........................................................2
1.9 Distribution ...........................................................2
1.10 Employee ...............................................................2
1.11 Participant ............................................................2
1.12 Plan ...................................................................2
1.13 Share Unit .............................................................2
1.14 Trust ..................................................................2
1.15 Trustee ................................................................2
ARTICLE II PARTICIPATION AND AWARDS .............................................2
2.1 Designation by Awarding Authority ......................................2
2.2 Awarding Authority to Make Awards ......................................2
2.3 Awards to be Held in Trust .............................................3
2.4 Vesting and Forfeiture .................................................3
ARTICLE III TRUST FUND................................................................3
3.1 Trust Fund Established..................................................3
3.2 Company, Committee and Trustee
Not Responsible for Adequacy of Fund ..................................4
ARTICLE IV ACCOUNTING PROCEDURES .....................................................4
4.1 Committee to Maintain Accounts .........................................4
4.2 Accounting Procedures ..................................................4
4.3 Invasion of Trust by Creditors .........................................4
4.4 Trust Expenses..........................................................4
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V RIGHTS IN ACQUIRED STOCK .............................................4
5.1 Power to Vote Stock Rests with Trustee .................................4
5.2 Tender Offers ..........................................................5
5.3 Dividends ..............................................................5
ARTICLE VI DISTRIBUTION OF ACCOUNTS ..................................................5
6.1 Time of Distribution ...................................................5
6.2 Form of Distribution ...................................................5
6.3 Beneficiary Designation ................................................5
6.4 Distribution to Guardian ...............................................6
6.5 Withholding of Taxes....................................................6
ARTICLE VII ACCELERATION OF DISTRIBUTION AND VESTING .................................7
7.1 Termination of Employment or Death .....................................7
7.2 Change in Control ......................................................7
7.3 Hardship ...............................................................7
ARTICLE VIII PLAN TERMINATION AND AMENDMENT ..........................................7
8.1 Termination and Amendment ..............................................7
ARTICLE IX PLAN ADMINISTRATION .....................................................8
9.1 Committee ..............................................................8
9.2 Committee Powers .......................................................8
9.3 Plan Expenses ..........................................................9
9.4 Reliance Upon Documents and Opinions ..................................10
9.5 Requirement of Proof ..................................................10
9.6 Limitation on Liability ...............................................10
9.7 Indemnification .......................................................10
ARTICLE X MISCELLANEOUS PROVISIONS ............................................11
10.1 Restrictions on Plan Interest .........................................11
10.2 No Enlargement of Employee Rights .....................................12
10.3 Rights of Repurchase and
First Refusal for the Company.........................................12
10.4 Mailing of Payments ...................................................12
10.5 Inability to Locate Participant or Beneficiary ........................12
10.6 Governing Law .........................................................13
10.7 Records ...............................................................13
10.8 Illegality of Particular Provision ....................................13
10.9 Receipt or Release ....................................................13
10.10 Arbitration .......................................................... 13
</TABLE>
-ii-
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
STOCK COMPENSATION PLAN
PURPOSE
This Plan is an unfunded compensation arrangement established effective
on April 3, 1996 by Science Applications International Corporation ("SAIC") to
make deferred awards of company stock to selected employees.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in the Plan they shall have the
meaning specified below, unless the context indicates clearly to the contrary.
1.1 Account. The bookkeeping account established for an Employee
pursuant to Article IV to record the number of Share Units awarded to the
Employee and the vesting thereof.
1.2 Award. The award of Share Units in the Trust to an Employee pursuant
to the Plan.
1.3 Awarding Authority. The individual or group of individuals appointed
by the Board to make Awards pursuant to the Plan.
1.4 Beneficiary. The person or persons properly designated by the
Participant, in accordance with Section 6.3, to receive the benefits provided
herein upon death of the Participant.
1.5 Board. The Board of Directors of Science Applications International
Corporation.
1.6 Committee. The committee appointed by the Board to administer the
Plan. Members of the Committee shall be eligible to receive Awards under the
Plan at the discretion of the Awarding Authority.
1.7 Company. Science Applications International Corporation, a Delaware
corporation, and any subsidiary thereof, the participation in this Plan of the
Employees of which is approved by the Awarding Authority.
-1-
<PAGE> 5
1.8 Company Stock. The Class A Common Stock of Science Applications
International Corporation.
1.9 Distribution. Payment of the vested balance in a Participant's
Account from the Trust to the Participant or the Participant's Beneficiary.
1.10 Employee. A salaried employee of the Company.
1.11 Participant. An Employee designated by the Committee to receive an
Award under the Plan.
1.12 Plan. The Science Applications International Corporation Stock
Compensation Plan as set forth herein and as amended from time to time by the
Board.
1.13 Share Unit. The interest of a Participant in a share of Company
Stock held in the Participant's Account in the Trust.
1.14 Trust. The Science Applications International Corporation Stock
Compensation Plan Trust established by the Company to hold all assets awarded to
Participants under the Plan.
1.15 Trustee. State Street Bank or such successor trustee as shall be
appointed pursuant to the Trust.
ARTICLE II
PARTICIPATION AND AWARDS
2.1 Designation by Awarding Authority. The Awarding Authority in its
sole discretion shall designate those Employees who are to receive Awards under
the Plan. The Awarding Authority's designation of an Employee for a particular
Award shall not require the Awarding Authority to make any further Awards to
such Employee.
2.2 Awarding Authority to Make Awards. The Awarding Authority shall make
Awards under the Plan by determining a number of Share Units to be credited to
those Employees whom the Awarding Authority has selected for participation in
the Plan corresponding to a specified number of shares of Company Stock
allocated in the Trust to such Employees, and by establishing an Account in
favor of such Employees in accordance with Article IV to hold such Share Units.
A separate Account shall be established for each Award. Each Account shall be
subject to a vesting schedule specified by the Awarding Authority. The amount,
timing and vesting of each Award shall be decided in the Awarding Authority's
sole
-2-
<PAGE> 6
discretion, and the Awarding Authority may apply different terms to Awards made
to different Employees as well as to different Awards made to the same Employee.
2.3 Awards to be Held in Trust. Within a reasonable period of time
following the date of an Award, SAIC shall contribute to the Trust Company Stock
or an amount of money sufficient to purchase shares of Company Stock
corresponding to the Share Units made in such Award. The Trustee shall apply
such contribution toward the purchase of Company Stock in accordance with the
directions of the Committee and the terms of the Trust. To the extent any such
Award is made to an Employee of an affiliate of SAIC, SAIC may charge the cost
of the corresponding Trust contribution to such affiliate as agreed between SAIC
and the affiliate.
2.4 Vesting and Forfeiture. Each Account shall be subject to a vesting
schedule, not to exceed seven (7) years, established by the Awarding Authority.
Vesting shall cease upon termination of the Participant's employment with the
Company for any reason other than the death of the Participant. For purposes of
the Plan, an Employee's leave of absence exceeding thirty (30) days other than
(i) a leave of absence caused by the Employee's disability, as defined under the
terms of any of the Company's short-term or long-term disability plans, (ii) a
qualified military leave as determined by the Committee, or (iii) a family or
medical leave covered by federal or state family/medical leave acts, shall be
considered a termination of employment effective on the thirtieth day of such
leave of absence. An Employee's change in status to that of consulting employee
shall also be considered a termination of employment for purposes of the Plan.
Further, an Employee's change in status to a part-time Employee, which status
exists for an aggregate period or periods (whether or not consecutive) of six
months, shall be considered a termination of employment as of the end of such
six-month period. For this purpose "part-time Employee" shall mean an Employee
whose scheduled work week is less than 30 hours. In the event of death of a
Participant, all of the Participant's Account(s) shall become immediately
vested. The unvested portion of a Participant's Accounts upon a termination of
employment shall be immediately forfeited by the Participant, and the shares of
Company Stock represented by such unvested portion shall be returned to the
Company or reallocated in accordance with the Committee's directions and the
terms of the Trust.
ARTICLE III
TRUST FUND
3.1 Trust Fund Established. The Company has established the Trust
pursuant to a trust agreement under which the Trustee will hold and administer
in trust all assets deposited with the Trustee in accordance with the terms of
this Plan. The Board shall have the authority to select and remove the Trustee
to act under the Trust agreement, and to enter into new or amended trust
agreements as it deems advisable.
-3-
<PAGE> 7
3.2 Company, Committee and Trustee Not Responsible for Adequacy of Trust
Fund. Neither the Company, Committee nor Trustee shall be liable or responsible
for the adequacy of the Trust Fund to meet and discharge any or all payments and
liabilities hereunder. All Plan benefits will be paid only from the Trust
assets, and neither the Company, the Committee nor the Trustee shall have any
duty or liability to furnish the Trust with any funds, securities or other
assets except as expressly provided in Section 2.3 hereof.
ARTICLE IV
ACCOUNTING PROCEDURES
4.1 Committee to Maintain Accounts. The Committee shall open and
maintain a separate Account with respect to each Award made under the Plan for
purposes of keeping a record of the assets held in Trust for each Participant
and for recording the vesting status of each Award.
4.2 Accounting Procedures. The Committee shall establish and may amend
from time to time accounting procedures for the purpose of making allocations,
Distributions, valuations and adjustments to Accounts provided for in this
Article IV. A Participant or Beneficiary shall have no contractual or other
right to have a particular accounting procedure or convention apply, or continue
to apply, and the Committee shall be free to alter any such procedure or
convention without obligation to any Participant or Beneficiary.
4.3 Invasion of Trust by Creditors. If assets of the Trust should be
reduced due to action of the Company's Creditors, as provided in the Trust
document, the Committee shall reduce each Account on a pro rata basis to reflect
such reduction in Trust assets, and the Company shall have no obligation to
replace such lost assets.
4.4 Trust Expenses. Expenses of the Trust which are not paid by the
Company shall be applied to reduce each Account on a pro rata basis.
ARTICLE V
RIGHTS IN ACQUIRED STOCK
5.1 Power to Vote Stock Rests With Trustee. The power to vote any stock
held by the Trustee shall rest solely with the Trustee, who shall vote such
stock in the same proportion that the other shareholders vote their shares of
Company Stock. For purposes of this Section 5.1, Company Stock shall include
both Class A and Class B Common Stock.
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<PAGE> 8
5.2 Tender Offers. In the case of a tender offer for the Company Stock,
the Trustee shall tender the shares of Company Stock held by the Trust only if
more than fifty percent (50%) of the shares of Company Stock held outside the
Trust are tendered by the shareholders.
5.3 Dividends. All dividends on Company Stock held in Trust shall be
held by the Trustee and reinvested as directed by the Committee. The Committee
shall allocate such dividends among the Accounts pro rata to the shares
allocated to each Account.
ARTICLE VI
DISTRIBUTION OF ACCOUNTS
6.1 Time of Distribution. Subject to the acceleration provisions of
Article VII, a Participant's Account shall be Distributed as follows:
(a) If the Participant files an election in a manner prescribed
by the Committee within ninety (90) days following the date of the Award
contained in the Account, the Participant's Account shall be distributed as it
becomes vested, with each payment to be made within a reasonable period of time
following the date of vesting of the portion of the Account to be paid.
(b) If the Participant fails to make the election described in
subsection (a), the Participant's Account shall be distributed in full within a
reasonable period of time following the seventh anniversary of the date of the
Award contained in such Account.
6.2 Form of Distribution. Each distribution shall be made in the form of
Company Stock unless the Committee determines, in its sole discretion, that
distribution of Company Stock is impossible or creates adverse impact on the
Company, in which case the Committee may determine to make the distribution in
cash. A Participant shall have no right to request a cash distribution.
6.3 Beneficiary Designation.
(a) Upon forms provided by the Committee, each Participant shall
designate in writing the Beneficiary or Beneficiaries whom such Participant
desires to receive the benefits of this Plan, if any, payable in the event of
such Participant's death. A Participant may from time to time change his or her
designated Beneficiary or Beneficiaries without the consent of such Beneficiary
or Beneficiaries by filing a new designation in writing with the Committee;
provided, however, that if a married Participant wishes to designate an
individual other than his or her spouse as Beneficiary, such designation shall
not be effective unless consented to in writing by the spouse. Notwithstanding
the foregoing, spousal consent shall not be necessary if it is established to
the satisfaction of the Committee that there is no spouse
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<PAGE> 9
of the Participant or that the required consent cannot be obtained because the
spouse cannot be located or is legally incompetent. The Company may rely upon
the designation of Beneficiary or Beneficiaries last filed by the Participant in
accordance with the terms of this Plan.
(b) If the designated Beneficiary does not survive the
Participant, or if there is no valid Beneficiary designation, amounts payable
under the Plan shall be paid to the Participant's spouse, or if there is no
surviving spouse, then to the duly appointed and currently acting personal
representative of the Participant's estate. If there is no personal
representative of the Participant's estate duly appointed and acting in that
capacity within sixty (60) days after the Participant's death, then all payments
due under the Plan shall be payable to the person or persons who can verify by
affidavit or court order to the satisfaction of the Committee that they are
legally entitled to receive the benefits specified hereunder pursuant to the
laws of intestate succession or other statutory provision in effect at the
Participant's death in the state in which the Participant resided.
6.4 Distribution to Guardian. If the Committee shall find that any
person to whom any payment is payable under this Plan is unable to care for his
or her affairs because of illness or accident, or is a minor, a payment due
(unless a prior claim therefor shall have been made by a duly appointed guardian
or other legal representative) may be paid to the spouse, a child, a parent, or
a brother or sister, or to any custodian, conservator or other fiduciary
responsible for the management and control of such person's financial affairs in
such manner and proportions as the Committee may determine. Any such payment
shall be a complete discharge of the liabilities of the Trust under this Plan.
6.5 Withholding of Taxes. To the extent any Distribution from the Trust
is subject to withholding taxes, the Committee may require, as a condition to
the payment of such Distribution, that the Participant or Beneficiary who is
eligible for the Distribution:
(a) make payment to the Company in the form of a check for such
withholding taxes; or
(b) consent to the withholding of shares of Company Stock by the
Trustee sufficient in value to satisfy such withholding taxes, in which case
such shares shall be delivered to the Company which shall make the appropriate
tax withholding.
The Committee may offer either or both of these options to the Participant or
Beneficiary in the Committee's sole discretion.
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<PAGE> 10
ARTICLE VII
ACCELERATION OF DISTRIBUTION AND VESTING
7.1 Termination of Employment or Death. Unless sooner distributed in
accordance with Section 6.1, the vested portion of a Participant's Accounts
shall be distributed from the Trust as soon as practicable following termination
of the Participant's employment with the Company for any reason, including
death. Termination of employment shall include certain leaves of absence and
changes in status as specified in Section 2.4. The Participant and Beneficiary
shall forfeit any unvested portion of the Accounts at the time of such
termination or death.
7.2 Change in Control. Every Account shall become fully vested and shall
be immediately distributed to the Participants to whom such Accounts belong,
upon the occurrence of a Change in Control (as hereinafter defined) of the
Company. A Change in Control shall be deemed to occur upon any "person" (as
defined in Section 3(a)(9) of the Securities Exchange Act of 1934), other than
the Company, any subsidiary or any employee benefit plan or trust maintained by
the Company or subsidiary becoming the beneficial owner (as defined in Rule
13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of
more than 25% of the Company Stock outstanding at such time, without the prior
approval of the Board. For purposes of the foregoing, a subsidiary is any
corporation in an unbroken chain of corporations beginning with the Company if
each of the corporations, other than the last corporation in such chain, owns at
least fifty percent (50%) of the total voting power in one of the other
corporations in such chain.
7.3 Hardship. Notwithstanding the provisions of Section 6.1 hereof, a
Participant shall be entitled to request a hardship Distribution of all or any
portion of the vested portion of his or her Account(s). A Participant must make
a written request for a hardship Distribution, stating the reasons such
withdrawal is necessary because of a financial hardship. The Committee, in its
sole discretion, shall determine whether or not to grant the hardship
Distribution of such Participant's Account(s) and, in so doing, may rely on the
Participant's statements, and a hardship Distribution may be approved without
further investigation unless the Committee has reason to believe such statements
are false.
ARTICLE VIII
PLAN TERMINATION AND AMENDMENT
8.1 Termination and Amendments. The Plan shall continue until all
amounts have been distributed in accordance with the terms of the Plan.
Notwithstanding the foregoing sentence, the Board retains the right to amend or
terminate the Plan for any reason, including but not limited to adverse changes
in accounting rules or tax laws or the bankruptcy,
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<PAGE> 11
receivership or dissolution of the Company. In the event of a Plan amendment or
termination, benefits will either be paid out when due under the terms of the
Plan or as soon as possible as determined by the Committee in its sole
discretion. To the extent feasible, the Committee shall use its best efforts to
avoid adversely affecting the rights of any existing Participants in the Plan,
but the Committee shall be under no specific duty or obligation in this regard.
ARTICLE IX
PLAN ADMINISTRATION
9.1 Committee. The Plan shall be administered by the Committee. Subject
to the provisions of the Plan and the authority granted hereunder to the
Awarding Authority, the Committee shall have exclusive power to determine the
manner and time of Awards and payment of benefits to the extent herein provided
and to exercise any other discretionary powers granted to the Committee pursuant
to the Plan. The decisions or determinations by the Committee shall be final and
binding upon all parties, including shareholders, Participants and other
Employees. Without limiting the generality of the foregoing, the Committee shall
have the authority to determine whether a termination of employment has occurred
for purposes of the Plan's vesting and forfeiture provisions, and such
determinations need not be uniformly applied as among Employees. The Committee
shall have the authority to interpret the Plan, to make factual findings and
determinations, to adopt and revise rules and regulations relating to the Plan
and to make any other determinations which it believes necessary or advisable
for the administration of the Plan. The Committee's discretion in these matters
shall be as broad and unfettered as permitted by law.
9.2 Committee Powers. The Committee shall have all powers necessary to
supervise the administration of the Plan and control its operations. In addition
to any powers and authority conferred on the Committee elsewhere in the Plan or
by law, the Committee shall have, by way of illustration and not by way of
limitation, the following powers and authority:
(a) To designate agents to carry out responsibilities relating to
the Plan;
(b) To employ such legal, actuarial, medical, accounting,
clerical and other assistance as it may deem appropriate in carrying out the
provisions of this Plan;
(c) To administer, interpret, construe and apply this Plan and to
decide all questions which may arise or which may be raised under this Plan by
any Employee, Participant, Beneficiary or other person whomsoever, including but
not limited to all questions relating to eligibility to participate in the Plan,
determination of Awards and the amount of benefits to which any Participant may
be entitled;
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<PAGE> 12
(d) To establish rules and procedures from time to time for the
conduct of its business and for the administration and effectuation of its
responsibilities under the Plan;
(e) To establish claims procedures, and to make forms available
for filing of such claims, and to provide the name of the person or persons with
whom such claims should be filed. The Committee shall establish procedures for
action upon claims initially made and the communication of a decision to the
claimant promptly and, in any event, not later than sixty (60) days after the
date of the claim; the claim may be deemed by the claimant to have been denied
for purposes of further review described below in the event a written decision
is not furnished to the claimant within such sixty (60) day period. Every claim
for benefits which is denied shall be denied by written notice setting forth in
a manner calculated to be understood by the claimant (1) the specific reason or
reasons for the denial, (2) specific reference to any provisions of this Plan on
which denial is based, (3) description of any additional material or information
necessary for the claimant to perfect his claim with an explanation of why such
material or information is necessary, and (4) an explanation of the procedure
for further reviewing the denial of the claim under the Plan. The Committee
shall establish a procedure for review of claim denials, such review to be
undertaken by the Committee. The review given after denial of any claim shall be
a full and fair review with the claimant or his duly authorized representative
having one hundred eighty (180) days after receipt of denial of his claim to
request such review, having the right to review all pertinent documents and the
right to submit issues and comments in writing. The Committee shall establish a
procedure for issuance of a decision by the Committee not later than sixty (60)
days after receipt of a request for review from a claimant unless special
circumstances, such as the need to hold a hearing, require a longer period of
time, in which case a decision shall be rendered as soon as possible but not
later than one hundred twenty (120) days after receipt of the claimant's request
for review. The decision on review shall be in writing and shall include
specific reasons for the decision written in a manner calculated to be
understood by the claimant with specific reference to any provisions of this
Plan on which the decision is based; and
(f) To perform or cause to be performed such further acts as it
may deem to be necessary, appropriate, or convenient in the efficient
administration of the Plan.
Any action taken in good faith by the Committee in the exercise
of authority conferred upon it by this Plan shall be conclusive and binding upon
the Participants and their beneficiaries. All discretionary powers conferred
upon the Committee shall be absolute.
9.3 Plan Expenses. Members of the Committee shall serve as such without
compensation from the Plan, but may receive compensation from the Company for so
serving. All Plan administration expenses shall be borne by the Company or the
Trust as determined by the Committee in its sole discretion.
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<PAGE> 13
9.4 Reliance Upon Documents and Opinions.
(a) The members of the Committee, the Board, and the Company
shall be entitled to rely upon any:
(i) Tables, valuations, computations, estimates,
certificates, opinions and reports furnished by any consultant, or firm
or corporation which employs one or more consultants or advisors; and
(ii) Computations, estimates and reports furnished by any
consultants or consulting firms.
(b) The members of the Committee, the Board, and the Company
shall be fully protected and shall not be liable in any manner whatsoever for
anything done or action taken or suffered in reliance upon any such consultant,
firm, or corporation which employs one or more consultants or counsel.
(c) Any and all such things done or such actions taken or
suffered by the Committee, the Board, and the Company in so relying shall be
conclusive and binding on all Employees, Participants, Beneficiaries and any
other persons whomsoever, except as otherwise provided by law.
(d) The Committee may, but is not required to, rely upon all
records of the Company with respect to any matter or thing whatsoever, and may
likewise treat such records as conclusive with respect to all Employees,
Participants, Beneficiaries and any other persons whomsoever, except as
otherwise provided by law.
9.5 Requirement of Proof. The Committee, the Board, or the Company may
require satisfactory proof of any matter under this Plan from or with respect to
any Employee, Participant or Beneficiary, and no such person shall acquire any
rights or be entitled to receive any benefits under this Plan until such proof
shall be furnished as so required.
9.6 Limitation on Liability. No employee or director of the Company and
no other person shall be subject to any liability by reason of or arising from
his or her participation in the establishment or administration or operation of
the Plan unless he or she acts fraudulently or in bad faith.
9.7 Indemnification.
(a) To the extent permitted by law, the Company shall indemnify
each member of the Awarding Authority, of the Committee, and any other employee
or director of the Company who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed proceeding, whether civil,
criminal, administrative, or investigative, by
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<PAGE> 14
reason of his or her conduct in the performance in connection with the
establishment or administration of the Plan or any amendment or termination of
the Plan.
(b) This indemnification shall apply against expenses including,
without limitation, attorneys fees and any expenses of establishing a right to
indemnification hereunder, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with such proceeding, except in
relation to matters as to which he or she has acted fraudulently or in bad faith
in the performance of such duties.
(c) The termination of any proceeding by judgment, order,
settlement, conviction, upon a plea of nolo contendere or its equivalent shall
not, in and of itself, create a presumption that the person acted fraudulently
or in bad faith in the performance of his or her duties.
(d) Expenses incurred in defending any such proceeding may be
advanced by the Company prior to the final disposition of such proceeding, upon
receipt of an undertaking by or on behalf of the recipient to repay such amount,
unless it shall be determined ultimately that the recipient is entitled to be
indemnified as authorized in this Section 9.7.
(e) The right of indemnification set forth in this Section 9.7
shall be in addition to any other right to which any Awarding Authority member,
Committee member or other person may be entitled as a matter of law, by
corporate bylaws or otherwise.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Restrictions on Plan Interest.
(a) A Participant's interest in this Plan shall be limited to his
or her Account in the Trust and he or she shall have no other interest in any
assets of the Company nor any right as against the Company, Awarding Authority
or Committee for payment of benefits under this Plan.
(b) None of the benefits, payments, proceeds, claims or rights
hereunder of any Participant or Beneficiary shall be subject to any claim of any
creditor of such Participant or Beneficiary and in particular the same shall not
be subject to attachment, garnishment, or other legal process by any creditor of
such Participant or Beneficiary.
(c) A Participant or Beneficiary shall not have any right to
alienate, anticipate, commute, pledge, encumber, or assign any of the benefits
or payments or proceeds which he or she may expect to receive, contingently or
otherwise, under the Plan.
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<PAGE> 15
(d) A Participant's and Beneficiary's interest in this Plan and
his or her Account in the Trust are subject to the claims of the Company's
creditors as provided in the Trust. Each Participant and Beneficiary shall,
however, be considered a general creditor of the Company with respect to the
assets held in his or her Account in the Trust, so that if the Company should
become insolvent, the Participant or Beneficiary will have a claim against the
Trust assets equal to that of the Company's other general creditors (regardless
of whether such assets are removed from the trust by a trustee in bankruptcy).
10.2 No Enlargement of Employee Rights.
(a) This Plan is strictly a voluntary undertaking on the part of
the Company and shall not be deemed to constitute a contract between the Company
and any Employee, or to be consideration for, or an inducement to, or a
condition of, the employment of any Employee.
(b) An Employee's employment with the Company is not for any
specified term and may be terminated by such Employee or by the Company at any
time for any reason, with or without cause. Nothing in this Plan or in any
agreement pursuant to this Plan shall confer upon any Employee or Participant
any right to continue in the employ of or affiliation with the Company nor
constitute any promise or commitment by the Company regarding future positions,
future work assignments, future compensation or any other term or condition of
employment or affiliation.
(c) No person shall have any right to any benefits under this
Plan, except to the extent expressly provided herein.
(d) The Plan is not intended to nor shall it be deemed to be a
Plan providing retirement income or resulting in the deferral of income by
employees for periods extending to the termination of covered employment or
beyond.
10.3 Rights of Repurchase and First Refusal for the Company. Any Company
Stock distributed from the Plan shall be subject to a right of repurchase and
right of first refusal by the Company. The terms and conditions of the right of
repurchase and right of first refusal shall be those applied to Company Stock by
the Certificate of Incorporation of Science Applications International
Corporation, as in effect from time to time.
10.4 Mailing of Payments. All payments under the Plan shall be delivered
in person or mailed to the last address of the Participant (or, in the case of
the death of the Participant to that of any other person entitled to such
payments under the terms of the Plan). Each Participant shall be responsible for
furnishing the Committee with his or her correct current address and the correct
current name and address of his or her Beneficiary.
10.5 Inability to Locate Participant or Beneficiary. In the event that
the Committee is unable to locate a Participant or Beneficiary to whom benefits
are payable hereunder after
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<PAGE> 16
mailing a notice to the Participant's or Beneficiary's last known address, and
such inability lasts for a period of three (3) years, then any remaining
benefits payable hereunder shall be forfeited to the Company and no Participant
or Beneficiary shall have any right to further benefits from the Plan, even if
subsequently located.
10.6 Governing Law. All legal questions pertaining to the Plan shall be
determined in accordance with the laws of the State of California.
10.7 Records. The records of the Company with respect to the Plan shall
be conclusive on all Participants, Beneficiaries, and all other persons
whomsoever.
10.8 Illegality of Particular Provision. If any particular provision of
this Plan shall be found to be illegal or unenforceable, such provision shall
not affect the other provisions thereof, but the Plan shall be construed in all
respect as if such invalid provision were omitted.
10.9 Receipt or Release. Any payment to any Participant or Beneficiary
in accordance with the provisions of this Plan shall, to the extent thereof, be
in full satisfaction of all claims against the Awarding Authority, the Committee
and the Company, and the Committee may require such Participant or Beneficiary,
as a condition precedent to such payment, to execute a receipt and release to
such effect.
10.10 Arbitration. The Committee's written decision on review of a
denial of benefits, as provided in Section 9.2(e), shall be final, conclusive
and binding on all Participants, Beneficiaries and Employees of the Company.
Notwithstanding the foregoing, any person disputing such a written decision
shall submit such dispute to binding Arbitration pursuant to the rules of the
American Arbitration Association, to be held in San Diego County. The losing
party in such arbitration proceedings shall bear the costs of arbitration, and
each party shall bear its own attorneys' fees.
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EXHIBIT 10(d)
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
MANAGEMENT STOCK COMPENSATION PLAN
Effective as of January 1, 1997
(Amended 9/30/98)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURPOSE ........................................................................1
ARTICLE I DEFINITIONS. .........................................................1
1.1 Account ................................................................1
1.2 Award ..................................................................1
1.3 Awarding Authority .....................................................1
1.4 Beneficiary ............................................................1
1.5 Board ..................................................................1
1.6 Committee ..............................................................1
1.7 Company.................................................................1
1.8 Company Stock ..........................................................2
1.9 Distribution ...........................................................2
1.10 Employee ...............................................................2
1.11 Participant ............................................................2
1.12 Plan ...................................................................2
1.13 Share Unit .............................................................2
1.14 Trust ..................................................................2
1.15 Trustee ................................................................2
ARTICLE II PARTICIPATION AND AWARDS .............................................2
2.1 Designation by Awarding Authority ......................................2
2.2 Awarding Authority to Make Awards ......................................2
2.3 Awards to be Held in Trust .............................................3
2.4 Vesting and Forfeiture .................................................3
ARTICLE III TRUST FUND................................................................3
3.1 Trust Fund Established .................................................3
3.2 Company, Committee and Trustee
Not Responsible for Adequacy of Trust Fund ............................3
ARTICLE IV ACCOUNTING PROCEDURES .....................................................4
4.1 Committee to Maintain Accounts .........................................4
4.2 Accounting Procedures ..................................................4
4.3 Invasion of Trust by Creditors .........................................4
4.4 Trust Expenses .........................................................4
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V RIGHTS IN ACQUIRED STOCK .............................................4
5.1 Power to Vote Stock Rests with Trustee .................................4
5.2 Tender Offers ..........................................................4
5.3 Dividends ..............................................................5
ARTICLE VI DISTRIBUTION OF ACCOUNTS .................................................5
6.1 Time of Distribution ...................................................5
6.2 Form of Distribution ...................................................5
6.3 Beneficiary Designation ................................................5
6.4 Distribution to Guardian ...............................................6
6.5 Withholding of Taxes....................................................6
ARTICLE VII ACCELERATION OF DISTRIBUTION AND VESTING .................................6
7.1 Termination of Employment or Death .....................................6
7.2 Change in Control ......................................................7
7.3 Hardship ...............................................................7
ARTICLE VIII PLAN TERMINATION AND AMENDMENT ..........................................7
8.1 Termination and Amendments .............................................7
ARTICLE IX PLAN ADMINISTRATION .......................................................8
9.1 Committee ..............................................................8
9.2 Committee Powers .......................................................8
9.3 Plan Expenses ..........................................................9
9.4 Reliance Upon Documents and Opinions ...................................9
9.5 Requirement of Proof ..................................................10
9.6 Limitation on Liability ...............................................10
9.7 Indemnification .......................................................10
ARTICLE X MISCELLANEOUS PROVISIONS ............................................11
10.1 Restrictions on Plan Interest .........................................11
10.2 No Enlargement of Employee Rights .....................................11
10.3 Rights of Repurchase and
First Refusal for the Company.........................................12
10.4 Mailing of Payments ...................................................12
10.5 Inability to Locate Participant or Beneficiary ........................12
10.6 Governing Law .........................................................12
10.7 Records ...............................................................12
10.8 Illegality of Particular Provision ....................................12
10.9 Receipt or Release ....................................................12
10.10 Arbitration ...........................................................13
</TABLE>
ii
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
MANAGEMENT STOCK COMPENSATION PLAN
PURPOSE
This Plan is an unfunded compensation arrangement established effective
on April 3, 1996, by Science Applications International Corporation ("SAIC") to
make deferred awards of company stock to selected management and highly
compensated employees.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in the Plan they shall have the
meaning specified below, unless the context indicates clearly to the contrary.
1.1 Account. The bookkeeping account established for an Employee
pursuant to Article IV to record the number of Share Units awarded to the
Employee and the vesting thereof.
1.2 Award. The award of Share Units in the Trust to an Employee pursuant
to the Plan.
1.3 Awarding Authority. The individual or group of individuals appointed
by the Board to make Awards pursuant to the Plan.
1.4 Beneficiary. The person or persons properly designated by the
Participant, in accordance with Section 6.3, to receive the benefits provided
herein upon death of the Participant.
1.5 Board. The Board of Directors of Science Applications International
Corporation.
1.6 Committee. The committee appointed by the Board to administer the
Plan. Members of the Committee shall be eligible to receive Awards under the
Plan at the discretion of the Awarding Authority.
1.7 Company. Science Applications International Corporation, a Delaware
corporation, and any subsidiary thereof, the participation in this Plan of the
Employees of which is approved by the Awarding Authority.
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<PAGE> 5
1.8 Company Stock. The Class A Common Stock of Science Applications
International Corporation.
1.9 Distribution. Payment of the vested balance in a Participant's
Account from the Trust to the Participant or the Participant's Beneficiary.
1.10 Employee. A management or highly compensated employee of the
Company, as determined by the Committee.
1.11 Participant. An Employee designated by the Committee to receive an
Award under the Plan.
1.12 Plan. The Science Applications International Corporation Stock
Compensation Plan for Management Employees as set forth herein and as amended
from time to time by the Board.
1.13 Share Unit. The interest of a Participant in a share of Company
Stock held in the Participant's Account in the Trust.
1.14 Trust. The Science Applications International Corporation Stock
Compensation Plan Trust established by the Company to hold all assets awarded to
Participants under the Plan.
1.15 Trustee. State Street Bank or such successor trustee as shall be
appointed pursuant to the Trust.
ARTICLE II
PARTICIPATION AND AWARDS
2.1 Designation by Awarding Authority. The Awarding Authority in its
sole discretion shall designate those Employees who are to receive Awards under
the Plan. The Awarding Authority's designation of an Employee for a particular
Award shall not require the Awarding Authority to make any further Awards to
such Employee.
2.2 Awarding Authority to Make Awards. The Awarding Authority shall make
Awards under the Plan by determining a number of Share Units to be credited to
those Employees whom the Awarding Authority has selected for participation in
the Plan corresponding to a specified number of shares of Company Stock
allocated in the Trust to such Employees, and by establishing an Account in
favor of such Employees in accordance with Article IV to hold such Share Units.
A separate Account shall be established for each Award. Each Account shall be
subject to a vesting schedule specified by the Awarding Authority. The amount,
timing and vesting of each Award shall be decided in the Awarding Authority's
sole
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<PAGE> 6
discretion, and the Awarding Authority may apply different terms to Awards
made to different Employees as well as to different Awards made to the same
Employee.
2.3 Awards to be Held in Trust. Within a reasonable period of time
following the date of an Award, SAIC shall contribute to the Trust Company Stock
or an amount of money sufficient to purchase shares of Company Stock
corresponding to the Share Units made in such Award. The Trustee shall apply
such contribution toward the purchase of Company Stock in accordance with the
directions of the Committee and the terms of the Trust. To the extent any such
Award is made to an Employee of an affiliate of SAIC, SAIC may charge the cost
of the corresponding Trust contribution to such affiliate as agreed between SAIC
and the affiliate.
2.4 Vesting and Forfeiture. Each Account shall be subject to a vesting
schedule, not to exceed seven (7) years, established by the Awarding Authority.
Vesting shall cease upon termination of the Participant's employment with the
Company for any reason other than the death of the Participant. For purposes of
the Plan, an Employee's leave of absence exceeding thirty (30) days other than
(i) a leave of absence caused by the Employee's disability, as defined under the
terms of any of the Company's short-term or long-term disability plans, (ii) a
qualified military leave as determined by the Committee, or (iii) a family or
medical leave covered by federal or state family/medical leave acts, shall be
considered a termination of employment effective on the thirtieth day of such
leave of absence. An Employee's change in status to that of consulting employee
shall also be considered a termination of employment for purposes of the Plan.
Further, an Employee's change in status to a part-time Employee, which status
exists for an aggregate period or periods (whether or not consecutive) of six
months, shall be considered a termination of employment as of the end of such
six-month period. For this purpose "part-time Employee" shall mean an Employee
whose scheduled work week is less than 30 hours. In the event of the death of a
Participant, all of the Participant's Accounts shall become immediately vested.
The unvested portion of a Participant's Accounts upon termination of employment
shall be immediately forfeited by the Participant, and the shares of Company
Stock represented by such unvested portion shall be returned to the Company or
reallocated in accordance with the Committee's directions and the terms of the
Trust.
ARTICLE III
TRUST FUND
3.1 Trust Fund Established. The Company has established the Trust
pursuant to a trust agreement under which the Trustee will hold and administer
in trust all assets deposited with the Trustee in accordance with the terms of
this Plan. The Board shall have the authority to select and remove the Trustee
to act under the Trust agreement, and to enter into new or amended trust
agreements as it deems advisable.
3.2 Company, Committee and Trustee Not Responsible for Adequacy of Trust
Fund. Neither the Company, Committee nor Trustee shall be liable or responsible
for the
-3-
<PAGE> 7
adequacy of the Trust Fund to meet and discharge any or all payments and
liabilities hereunder. All Plan benefits will be paid only from the Trust
assets, and neither the Company, the Committee nor the Trustee shall have any
duty or liability to furnish the Trust with any funds, securities or other
assets except as expressly provided in Section 2.3 hereof.
ARTICLE IV
ACCOUNTING PROCEDURES
4.1 Committee to Maintain Accounts. The Committee shall open and
maintain a separate Account with respect to each Award made under the Plan for
purposes of keeping a record of the assets held in Trust for each Participant
and for recording the vesting status of each Award.
4.2 Accounting Procedures. The Committee shall establish and may amend
from time to time accounting procedures for the purpose of making allocations,
Distributions, valuations and adjustments to Accounts provided for in this
Article IV. A Participant or Beneficiary shall have no contractual or other
right to have a particular accounting procedure or convention apply, or continue
to apply, and the Committee shall be free to alter any such procedure or
convention without obligation to any Participant or Beneficiary.
4.3 Invasion of Trust by Creditors. If assets of the Trust should be
reduced due to action of the Company's Creditors, as provided in the Trust
document, the Committee shall reduce each Account on a pro rata basis to reflect
such reduction in Trust assets, and the Company shall have no obligation to
replace such lost assets.
4.4 Trust Expenses. Expenses of the Trust which are not paid by the
Company shall be applied to reduce each Account on a pro rata basis.
ARTICLE V
RIGHTS IN ACQUIRED STOCK
5.1 Power to Vote Stock Rests With Trustee. The power to vote any stock
held by the Trustee shall rest solely with the Trustee, who shall vote such
stock in the same proportion that the other shareholders vote their shares of
Company Stock. For purposes of this Section 5.1, Company Stock shall include
both Class A and Class B Common Stock.
5.2 Tender Offers. In the case of a tender offer for the Company Stock,
the Trustee shall tender the shares of Company Stock held by the Trust only if
more than fifty percent (50%) of the shares of Company Stock held outside the
Trust are tendered by the shareholders.
-4-
<PAGE> 8
5.3 Dividends. All dividends on Company Stock held in Trust shall be
held by the Trustee and reinvested as directed by the Committee. The Committee
shall allocate such dividends among the Accounts pro rata to the shares
allocated to each Account.
ARTICLE VI
DISTRIBUTION OF ACCOUNTS
6.1 Time of Distribution. Subject to the acceleration provisions of
Article VII, a Participant's Account shall be Distributed as follows:
(a) The vested portion of the Participant's Account shall be
distributed within a reasonable period of time following the date (i) it becomes
vested, or (ii) the Participant's employment with the Company terminates
(including upon a leave of absence or change in status as specified in Section
2.4), as elected by the Participant in a manner prescribed by the Committee
within ninety (90) days following the date of the Award contained in the
Account. Such election shall be irrevocable. In addition to executing an
election, the Participant may also be required to execute an agreement with the
Company, on a form prescribed by the Committee, relating to the Company's right
of repurchase of Company Stock and such other matters as the Committee shall
prescribe.
(b) If the Participant fails to make the election described in
subsection (a), the Participant's Account shall be distributed in full within a
reasonable period of time following the seventh anniversary of the date of the
Award contained in such Account.
6.2 Form of Distribution. Each distribution shall be made in the form of
Company Stock unless the Committee determines, in its sole discretion, that
distribution of Company Stock is impossible or creates adverse impact on the
Company, in which case the Committee may determine to make the distribution in
cash. A Participant shall have no right to request a cash distribution.
6.3 Beneficiary Designation.
(a) Upon forms provided by the Committee, each Participant shall
designate in writing the Beneficiary or Beneficiaries whom such Participant
desires to receive the benefits of this Plan, if any, payable in the event of
such Participant's death. A Participant may from time to time change his or her
designated Beneficiary or Beneficiaries without the consent of such Beneficiary
or Beneficiaries by filing a new designation in writing with the Committee;
provided, however, that if a married Participant wishes to designate an
individual other than his or her spouse as Beneficiary, such designation shall
not be effective unless consented to in writing by the spouse. Notwithstanding
the foregoing, spousal consent shall not be necessary if it is established to
the satisfaction of the Committee that there is no spouse of the Participant or
that the required consent cannot be obtained because the spouse cannot be
-5-
<PAGE> 9
located or is legally incompetent. The Company may rely upon the designation of
Beneficiary or Beneficiaries last filed by the Participant in accordance with
the terms of this Plan.
(b) If the designated Beneficiary does not survive the
Participant, or if there is no valid Beneficiary designation, amounts payable
under the Plan shall be paid to the Participant's spouse, or if there is no
surviving spouse, then to the duly appointed and currently acting personal
representative of the Participant's estate. If there is no personal
representative of the Participant's estate duly appointed and acting in that
capacity within sixty (60) days after the Participant's death, then all payments
due under the Plan shall be payable to the person or persons who can verify by
affidavit or court order to the satisfaction of the Committee that they are
legally entitled to receive the benefits specified hereunder pursuant to the
laws of intestate succession or other statutory provision in effect at the
Participant's death in the state in which the Participant resided.
6.4 Distribution to Guardian. If the Committee shall find that any
person to whom any payment is payable under this Plan is unable to care for his
or her affairs because of illness or accident, or is a minor, a payment due
(unless a prior claim therefor shall have been made by a duly appointed guardian
or other legal representative) may be paid to the spouse, a child, a parent, or
a brother or sister, or to any custodian, conservator or other fiduciary
responsible for the management and control of such person's financial affairs in
such manner and proportions as the Committee may determine. Any such payment
shall be a complete discharge of the liabilities of the Trust under this Plan.
6.5 Withholding of Taxes. To the extent any Distribution from the Trust
is subject to withholding taxes, the Committee may require, as a condition to
the payment of such Distribution, that the Participant or Beneficiary who is
eligible for the Distribution:
(a) make payment to the Company in the form of a check for such
withholding taxes; or
(b) consent to the withholding of shares of Company Stock by the
Trustee sufficient in value to satisfy such withholding taxes, in which case
such shares shall be delivered to the Company which shall make the appropriate
tax withholding.
The Committee may offer either or both of these options to the Participant or
Beneficiary in the Committee's sole discretion.
ARTICLE VII
ACCELERATION OF DISTRIBUTION AND VESTING
7.1 Termination of Employment or Death. Unless sooner distributed in
accordance with Section 6.1, and notwithstanding any provision to the contrary
in Section 6.1, the vested portion of a Participant's Accounts shall be
distributed from the Trust as soon as practicable
-6-
<PAGE> 10
following termination of the Participant's employment with the Company for any
reason, including death. Termination of employment shall include certain leaves
of absence and changes in status as specified in Section 2.4. The Participant
and Beneficiary shall forfeit any unvested portion of the Accounts at the time
of such termination or death.
7.2 Change in Control. Every Account shall become fully vested and shall
be immediately distributed to the Participants to whom such Accounts belong,
upon the occurrence of a Change in Control (as hereinafter defined) of the
Company. A Change in Control shall be deemed to occur upon any "person" (as
defined in Section 3(a)(9) of the Securities Exchange Act of 1934), other than
the Company, a subsidiary or any employee benefit plan or trust maintained by
the Company or a subsidiary becoming the beneficial owner (as defined in Rule
13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of
more than 25% of the Company Stock outstanding at such time, without the prior
approval of the Board. For purposes of the foregoing, a subsidiary is any
corporation in an unbroken chain of corporations beginning with the Company if
each of the corporations, other than the last corporation in such chain, owns at
least fifty percent (50%) of the total voting power in one of the other
corporations in such chain.
7.3 Hardship. Notwithstanding the provisions of Section 6.1 hereof, a
Participant shall be entitled to request a hardship Distribution of all or any
portion of the vested portion of his or her Account(s). A Participant must make
a written request for a hardship Distribution, stating the reasons such
withdrawal is necessary because of a financial hardship. The Committee, in its
sole discretion, shall determine whether or not to grant the hardship
Distribution of such Participant's Account(s) and, in so doing, may rely on the
Participant's statements, and a hardship Distribution and vesting acceleration
may be approved without further investigation unless the Committee has reason to
believe such statements are false.
ARTICLE VIII
PLAN TERMINATION AND AMENDMENT
8.1 Termination and Amendments. The Plan shall continue until all
amounts have been distributed in accordance with the terms of the Plan.
Notwithstanding the foregoing sentence, the Board retains the right to amend or
terminate the Plan 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 a Plan amendment or termination, benefits will
either be paid out when due under the terms of the Plan or as soon as possible
as determined by the Committee in its sole discretion. To the extent feasible,
the Committee shall use its best efforts to avoid adversely affecting the rights
of any existing Participants in the Plan, but the Committee shall be under no
specific duty or obligation in this regard.
-7-
<PAGE> 11
ARTICLE IX
PLAN ADMINISTRATION
9.1 Committee. The Plan shall be administered by the Committee. Subject
to the provisions of the Plan and the authority granted hereunder to the
Awarding Authority, the Committee shall have exclusive power to determine the
manner and time of Awards and payment of benefits to the extent herein provided
and to exercise any other discretionary powers granted to the Committee pursuant
to the Plan. The decisions or determinations by the Committee shall be final and
binding upon all parties, including shareholders, Participants and other
Employees. Without limiting the generality of the foregoing, the Committee shall
have the authority to determine whether a termination of employment has occurred
for purposes of the Plan's vesting and forfeiture provisions, and such
determinations need not be uniformly applied as among Employees. The Committee
shall have the authority to interpret the Plan, to make factual findings and
determinations, to adopt and revise rules and regulations relating to the Plan
and to make any other determinations which it believes necessary or advisable
for the administration of the Plan. The Committee's discretion in these matters
shall be as broad and unfettered as permitted by law.
9.2 Committee Powers. The Committee shall have all powers necessary to
supervise the administration of the Plan and control its operations. In addition
to any powers and authority conferred on the Committee elsewhere in the Plan or
by law, the Committee shall have, by way of illustration and not by way of
limitation, the following powers and authority:
(a) To designate agents to carry out responsibilities relating to
the Plan;
(b) To employ such legal, actuarial, medical, accounting,
clerical and other assistance as it may deem appropriate in carrying out the
provisions of this Plan;
(c) To administer, interpret, construe and apply this Plan and to
decide all questions which may arise or which may be raised under this Plan by
any Employee, Participant, Beneficiary or other person whomsoever, including but
not limited to all questions relating to eligibility to participate in the Plan,
determination of Awards and the amount of benefits to which any Participant may
be entitled;
(d) To establish rules and procedures from time to time for the
conduct of its business and for the administration and effectuation of its
responsibilities under the Plan;
(e) To establish claims procedures, and to make forms available
for filing of such claims, and to provide the name of the person or persons with
whom such claims should be filed. The Committee shall establish procedures for
action upon claims initially made and the communication of a decision to the
claimant promptly and, in any event, not later than sixty (60) days after the
date of the claim; the claim may be deemed by the claimant to have been denied
for purposes of further review described below in the event a written decision
is not furnished to the claimant within such sixty (60) day period. Every claim
for benefits which
-8-
<PAGE> 12
is denied shall be denied by written notice setting forth in a manner calculated
to be understood by the claimant (1) the specific reason or reasons for the
denial, (2) specific reference to any provisions of this Plan on which denial is
based, (3) description of any additional material or information necessary for
the claimant to perfect his claim with an explanation of why such material or
information is necessary, and (4) an explanation of the procedure for further
reviewing the denial of the claim under the Plan. The Committee shall establish
a procedure for review of claim denials, such review to be undertaken by the
Committee. The review given after denial of any claim shall be a full and fair
review with the claimant or his duly authorized representative having one
hundred eighty (180) days after receipt of denial of his claim to request such
review, having the right to review all pertinent documents and the right to
submit issues and comments in writing. The Committee shall establish a procedure
for issuance of a decision by the Committee not later than sixty (60) days after
receipt of a request for review from a claimant unless special circumstances,
such as the need to hold a hearing, require a longer period of time, in which
case a decision shall be rendered as soon as possible but not later than one
hundred twenty (120) days after receipt of the claimant's request for review.
The decision on review shall be in writing and shall include specific reasons
for the decision written in a manner calculated to be understood by the claimant
with specific reference to any provisions of this Plan on which the decision is
based; and
(f) To perform or cause to be performed such further acts as it
may deem to be necessary, appropriate, or convenient in the efficient
administration of the Plan.
Any action taken in good faith by the Committee in the exercise
of authority conferred upon it by this Plan shall be conclusive and binding upon
the Participants and their beneficiaries. All discretionary powers conferred
upon the Committee shall be absolute.
9.3 Plan Expenses. Members of the Committee shall serve as such without
compensation from the Plan, but may receive compensation from the Company for so
serving. All Plan administration expenses shall be borne by the Company or the
Trust as determined by the Committee in its sole discretion.
9.4 Reliance Upon Documents and Opinions.
(a) The members of the Committee, the Board, and the Company
shall be entitled to rely upon any:
(i) Tables, valuations, computations, estimates,
certificates, opinions and reports furnished by any consultant, or firm
or corporation which employs one or more consultants or advisors; and
(ii) Computations, estimates and reports furnished by any
consultants or consulting firms.
(b) The members of the Committee, the Board, and the Company
shall be fully protected and shall not be liable in any manner whatsoever for
anything done or action
-9-
<PAGE> 13
taken or suffered in reliance upon any such consultant, firm, or corporation
which employs one or more consultants or counsel.
(c) Any and all such things done or such actions taken or
suffered by the Committee, the Board, and the Company in so relying shall be
conclusive and binding on all Employees, Participants, Beneficiaries and any
other persons whomsoever, except as otherwise provided by law.
(d) The Committee may, but is not required to, rely upon all
records of the Company with respect to any matter or thing whatsoever, and may
likewise treat such records as conclusive with respect to all Employees,
Participants, Beneficiaries and any other persons whomsoever, except as
otherwise provided by law.
9.5 Requirement of Proof. The Committee, the Board, or the Company may
require satisfactory proof of any matter under this Plan from or with respect to
any Employee, Participant or Beneficiary, and no such person shall acquire any
rights or be entitled to receive any benefits under this Plan until such proof
shall be furnished as so required.
9.6 Limitation on Liability. No employee or director of the Company and
no other person shall be subject to any liability by reason of or arising from
his or her participation in the establishment or administration or operation of
the Plan unless he or she acts fraudulently or in bad faith.
9.7 Indemnification.
(a) To the extent permitted by law, the Company shall indemnify
each member of the Awarding Authority, of the Committee, and any other employee
or director of the Company who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed proceeding, whether civil,
criminal, administrative, or investigative, by reason of his or her conduct in
the performance in connection with the establishment or administration of the
Plan or any amendment or termination of the Plan.
(b) This indemnification shall apply against expenses including,
without limitation, attorneys fees and any expenses of establishing a right to
indemnification hereunder, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with such proceeding, except in
relation to matters as to which he or she has acted fraudulently or in bad faith
in the performance of such duties.
(c) The termination of any proceeding by judgment, order,
settlement, conviction, upon a plea of nolo contendere or its equivalent shall
not, in and of itself, create a presumption that the person acted fraudulently
or in bad faith in the performance of his or her duties.
(d) Expenses incurred in defending any such proceeding may be
advanced by the Company prior to the final disposition of such proceeding, upon
receipt of an
-10-
<PAGE> 14
undertaking by or on behalf of the recipient to repay such amount, unless it
shall be determined ultimately that the recipient is entitled to be indemnified
as authorized in this Section 9.7.
(e) The right of indemnification set forth in this Section 9.7
shall be in addition to any other right to which any Awarding Authority member,
Committee member or other person may be entitled as a matter of law, by
corporate bylaws or otherwise.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Restrictions on Plan Interest.
(a) A Participant's interest in this Plan shall be limited to his
or her Account in the Trust and he or she shall have no other interest in any
assets of the Company nor any right as against the Company, Awarding Authority
or Committee for payment of benefits under this Plan.
(b) None of the benefits, payments, proceeds, claims or rights
hereunder of any Participant or Beneficiary shall be subject to any claim of any
creditor of such Participant or Beneficiary and in particular the same shall not
be subject to attachment, garnishment, or other legal process by any creditor of
such Participant or Beneficiary.
(c) A Participant or Beneficiary shall not have any right to
alienate, anticipate, commute, pledge, encumber, or assign any of the benefits
or payments or proceeds which he or she may expect to receive, contingently or
otherwise, under the Plan.
(d) A Participant's and Beneficiary's interest in this Plan and
his or her Account in the Trust are subject to the claims of the Company's
creditors as provided in the Trust. Each Participant and Beneficiary shall,
however, be considered a general creditor of the Company with respect to the
assets held in his or her Account in the Trust, so that if the Company should
become insolvent, the Participant or Beneficiary will have a claim against the
Trust assets equal to that of the Company's other general creditors (regardless
of whether such assets are removed from the trust by a trustee in bankruptcy).
10.2 No Enlargement of Employee Rights.
(a) This Plan is strictly a voluntary undertaking on the part of
the Company and shall not be deemed to constitute a contract between the Company
and any Employee, or to be consideration for, or an inducement to, or a
condition of, the employment of any Employee.
(b) An Employee's employment with the Company is not for any
specified term and may be terminated by such Employee or by the Company at any
time for any reason, with or without cause. Nothing in this Plan or in any
agreement pursuant to this Plan shall
-11-
<PAGE> 15
confer upon any Employee or Participant any right to continue in the employ of
or affiliation with the Company nor constitute any promise or commitment by the
Company regarding future positions, future work assignments, future compensation
or any other term or condition of employment or affiliation.
(c) No person shall have any right to any benefits under this
Plan, except to the extent expressly provided herein.
(d) The Plan is not intended to nor shall it be deemed to be a
Plan providing retirement income or resulting in the deferral of income by
employees for periods extending to the termination of covered employment or
beyond.
10.3 Rights of Repurchase and First Refusal for the Company. Any Company
Stock distributed from the Plan shall be subject to a right of repurchase and
right of first refusal by the Company, as well as any conditions, limitations,
or restrictions contained in an agreement signed at the time of the election.
The terms and conditions of the right of repurchase and right of first refusal
shall be those applied to Company Stock by the Certificate of Incorporation of
Science Applications International Corporation, as in effect from time to time.
10.4 Mailing of Payments. All payments under the Plan shall be delivered
in person or mailed to the last address of the Participant (or, in the case of
the death of the Participant to that of any other person entitled to such
payments under the terms of the Plan). Each Participant shall be responsible for
furnishing the Committee with his or her correct current address and the correct
current name and address of his or her Beneficiary.
10.5 Inability to Locate Participant or Beneficiary. In the event that
the Committee is unable to locate a Participant or Beneficiary to whom benefits
are payable hereunder after mailing a notice to the Participant's or
Beneficiary's last known address, and such inability lasts for a period of three
(3) years, then any remaining benefits payable hereunder shall be forfeited to
the Company and no Participant or Beneficiary shall have any right to further
benefits from the Plan, even if subsequently located.
10.6 Governing Law. All legal questions pertaining to the Plan shall be
determined in accordance with the laws of the State of California.
10.7 Records. The records of the Company with respect to the Plan shall
be conclusive on all Participants, Beneficiaries, and all other persons
whomsoever.
10.8 Illegality of Particular Provision. If any particular provision of
this Plan shall be found to be illegal or unenforceable, such provision shall
not affect the other provisions thereof, but the Plan shall be construed in all
respect as if such invalid provision were omitted.
10.9 Receipt or Release. Any payment to any Participant or Beneficiary
in accordance with the provisions of this Plan shall, to the extent thereof, be
in full satisfaction of all claims against the Awarding Authority, the Committee
and the Company, and the
-12-
<PAGE> 16
Committee may require such Participant or Beneficiary, as a condition precedent
to such payment, to execute a receipt and release to such effect.
10.10 Arbitration. The Committee's written decision on review of a
denial of benefits, as provided in Section 9.2(e), shall be final, conclusive
and binding on all Participants, Beneficiaries and Employees of the Company.
Notwithstanding the foregoing, any person disputing such a written decision
shall submit such dispute to binding Arbitration pursuant to the rules of the
American Arbitration Association, to be held in San Diego County. The losing
party in such arbitration proceedings shall bear the costs of arbitration, and
each party shall bear its own attorneys' fees.
-13-
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
AMSEC Corporation
Andrew Palmer & Associates Limited
(subsidiary of SAIC Limited)
A W Software und Technologie GmbH
Bellcore International, Inc.
(subsidiary of Telcordia Technologies, Inc.)
Bellcore International Pty. Ltd.
(subsidiary of Telcordia Technologies, Inc.)
Bellcore Ventures, Inc.
(subsidiary of Telcordia Technologies, Inc.)
Bull, Inc.
Campus Point Realty Corporation
CommSource, Inc.
(subsidiary of Telcordia Technologies, Inc.)
Database Service Management, Inc.
(subsidiary of Telcordia Technologies, Inc.)
General Sciences Corporation
Global Integrity Corporation
Hicks & Associates, Inc.
JHK & Associates, Inc. dba TransCore
JMD Development Corporation dba JDA
Network Solutions, Inc.
Oacis Healthcare Holdings Corporation
Pathology Associates International Corporation
1
<PAGE> 2
PT Science Applications International Corporation Indonesia
R.E. Wright Environmental, Inc.
Sachse Engineering Associates, Inc.
SAIC (Bermuda) Ltd.
SAIC Colombia, Limitada
SAIC Commercial Enterprises, Inc.
SAIC de Mexico, S.A. de C.V.
SAIC Engineering, Inc.
SAIC Engineering of North Carolina, Inc.
SAIC Engineering of Ohio, Inc.
SAIC Europe Limited
SAIC Global Technology Corporation
SAIC in Novosibirsk
SAIC Limited
(subsidiary of SAIC Europe Limited)
SAIC-MIR
SAIC Services, Inc.
SAIC Ukraine Corporation
Science Applications (Greece) Ltd.
Science Applications International (Barbados) Corporation
Science Applications International Corporation
(SAIC Canada)
Science Applications International Corporation de Venezuela, S.A.
2
<PAGE> 3
Science Applications International Corporation
(Singapore) Pte. Ltd.
Science Applications International Deutschland GmbH
Science Applications International, Europe S.A.
Science Applications International Germany GmbH
Science Applications International Pty. Ltd.
Science Applications International Technology
Soliant, Inc.
(subsidiary of Telcordia Technologies, Inc.)
Syntonic Technology, Inc. dba TransCore
Systems Control Technology, Inc.
Telcordia Technologies, Inc.
(formerly Bell Communications Research, Inc.)
Tenth Mountain Systems, Inc.
3
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-37117 and
No. 333-51755) and Form S-4 (No. 333-51523) and in the Registration Statements
on Form S-8 (No. 333-34335, No. 333-40251 and No. 333-67663) of Science
Applications International Corporation of our report dated April 2, 1999
appearing on page F-2 of this Annual Report on Form 10-K. We also hereby consent
to the incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Form S-3 (No. 333-37117 and No. 333-51755) and Form
S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No.
333-34335, No. 333-40251 and No. 333-67663) of Science Applications
International Corporation of our report dated April 15, 1999 relating to the
Science Applications International Corporation Cash or Deferred Arrangement
appearing on page 1 of Exhibit 28(a) of this Annual Report on Form 10-K. We also
hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-37117 and
No. 333-51755) and Form S-4 (No. 333-51523) and in the Registration Statements
on Form S-8 (No. 333-34335, No. 333-40251 and No. 333-67663) of Science
Applications International Corporation of our report dated April 2, 1999
relating to the TransCore Retirement Savings Plan appearing on page 1 of Exhibit
28(b) of this Annual Report on Form 10-K. We also hereby consent to the
incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Form S-3 (No. 333-37117 and No. 333-51755) and Form
S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No.
333-34335, No. 333-40251 and No. 333-67663) of Science Applications
International Corporation of our report dated March 26, 1999 relating to the
Bell Communications Research Savings and Security Plan appearing on page 1 of
Exhibit 28(c) of this Annual Report on Form 10-K. We also hereby consent to the
incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Form S-3 (No. 333-37117 and No. 333-51755) and Form
S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No.
333-34335, No. 333-40251 and No. 333-67663) of Science Applications
International Corporation of our report dated March 26, 1999 relating to the
Bell Communications Research Savings Plan For Salaried Employees appearing on
page 1 of Exhibit 28(d) of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
April 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and related consolidated statements of income and
cash flows for the year ended January 31, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 405,422
<SECURITIES> 118,808
<RECEIVABLES> 1,139,809
<ALLOWANCES> 40,829
<INVENTORY> 16,096
<CURRENT-ASSETS> 1,876,525
<PP&E> 767,180
<DEPRECIATION> 271,140
<TOTAL-ASSETS> 3,172,546
<CURRENT-LIABILITIES> 1,507,052
<BONDS> 143,051
0
0
<COMMON> 581
<OTHER-SE> 1,084,021
<TOTAL-LIABILITY-AND-EQUITY> 3,172,546
<SALES> 0
<TOTAL-REVENUES> 4,740,433
<CGS> 0
<TOTAL-COSTS> 3,732,890
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,813
<INCOME-PRETAX> 287,995
<INCOME-TAX> 137,307
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,688
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.46
</TABLE>
<PAGE> 1
EXHIBIT 28(a)
Securities and Exchange Commission
Washington, D.C., 20549
Form 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the calendar year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
(Full title of the plan)
Science Applications International Corporation
10260 Campus Point Drive, San Diego, California 92121
(Name of issuer of the securities held pursuant to
the Plan and the address of its principal executive office)
<PAGE> 2
SIGNATURE
The Plan. Pursuant to the requirements of the Securities Exchange Act
of 1934, the Science Applications International Corporation Retirement Plans
Committee duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
Date: April 27, 1999 BY: /s/ DANIEL W. BALDWIN
------------------ ----------------------------------------
Daniel W. Baldwin
Senior Vice President
and Treasurer
Retirement Plans Committee
<PAGE> 3
SCIENCE APPLICATIONS INTERNATIONAL
CORPORATION CASH OR DEFERRED
ARRANGEMENT
REPORT, FINANCIAL STATEMENTS AND
ADDITIONAL INFORMATION
DECEMBER 31, 1998 AND 1997
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants 1
Financial Statements:
Statement of Net Assets Available for Benefits 2
Statement of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4 - 12
Additional Information:*
Schedule I - Schedule of Assets Held for Investment Purposes 13
Schedule II - Schedule of Loans or Fixed Income Obligations 14 - 18
Schedule III- Schedule of Reportable Transactions 19
</TABLE>
* Other schedules required by Section 2520.103-10 of the Department of Labor
Rules and Regulations for Reporting and Disclosure under ERISA have been
omitted because they are not applicable.
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Retirement Plans Committee
and Participants of the Science Applications
International Corporation Cash or Deferred Arrangement
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the net assets available for benefits
of the Science Applications International Corporation Cash or Deferred
Arrangement (the Plan) at December 31, 1998 and 1997, and the changes in net
assets available for benefits for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Plan's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information included in
Schedules I through III is presented for purposes of additional analysis and is
not a required part of the basic financial statements but is additional
information required by ERISA. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
April 15, 1999
1
<PAGE> 6
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Investments, at fair market value:
Mutual funds $ 488,699,000 $ 412,896,000
SAIC Common Stock 512,183,000 264,309,000
Short-term investments 170,000 296,000
Participant loans 24,581,000 21,569,000
-------------- --------------
1,025,633,000 699,070,000
-------------- --------------
Receivables:
Participant contributions 2,511,000 2,599,000
Company contributions 432,000 1,362,000
-------------- --------------
2,943,000 3,961,000
-------------- --------------
Total assets 1,028,576,000 703,031,000
-------------- --------------
LIABILITIES
Accrued Plan expenses 28,000 88,000
-------------- --------------
Net assets available for benefits $1,028,548,000 $ 702,943,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 7
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
ADDITIONS TO NET ASSETS
Investment income:
Mutual funds:
Dividends and interest $ 25,573,000 $ 34,349,000
Realized gain 16,373,000 8,726,000
Unrealized appreciation 18,976,000 19,930,000
SAIC Common Stock:
Unrealized appreciation 194,389,000 87,106,000
Interest 1,614,000 1,405,000
Participant contributions 93,405,000 77,427,000
Company contributions 14,783,000 15,168,000
-------------- --------------
Total additions 365,113,000 244,111,000
-------------- --------------
DEDUCTIONS FROM NET ASSETS
Distributions to participants 39,144,000 31,371,000
Plan expenses 364,000 151,000
-------------- --------------
Total deductions 39,508,000 31,522,000
-------------- --------------
Net increase 325,605,000 212,589,000
Net assets at beginning of year 702,943,000 490,354,000
-------------- --------------
Net assets at end of year $1,028,548,000 $ 702,943,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 8
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - PLAN DESCRIPTION
GENERAL
The Science Applications International Corporation Cash or Deferred Arrangement
(the "Plan" or "CODA") was established on September 18, 1982 and became
effective January 1, 1983. The authority to administer the Plan is vested in the
Retirement Plans Committee (the "Committee") whose members are the Named
Fiduciaries for purposes of Section 402(a) of the Employee Retirement Income
Security Act of 1974, as amended. Generally, employees of Science Applications
International Corporation (the "Company" or "SAIC") and its subsidiaries are
eligible to participate in the Plan upon commencing employment, except for
employees in groups or units designated as ineligible. The following description
of the Plan provides only general information. Participants should refer to the
Plan document for a more complete description of the Plan's provisions.
The Plan consists of a Deferred Fund which is the fund in which assets acquired
by the Plan in its function as a qualified Cash or Deferred Arrangement are held
and accounted for. The Plan permits participants to elect to defer up to 18% of
their eligible compensation, as defined, for the Plan year and to have such
deferred amount contributed directly by the Company to the Deferred Fund for the
benefit of the participants. Such contributions are limited under Section 402(g)
of the Internal Revenue Code (the "Code") to $10,000 for the year ended December
31, 1998 and $9,500 for the year ended December 31, 1997. Amounts deferred by
participants, including rollovers from qualified plans, totaled $93,405,000 and
$77,427,000 for the years ended December 31, 1998 and 1997, respectively.
In addition to amounts deferred by participants, the Company, at its discretion,
may make a matching contribution equal to a specified percentage of the
aggregate amounts deferred by participants. The match is only provided on
eligible participant deferrals of up to 10% of compensation. In 1998 and 1997,
the Company contributed 50% of the first $2,000 of a participant's annual
deferred compensation and 15% of such deferred compensation above $2,000 for an
annual total of $14,783,000 and $15,168,000, respectively. During 1998 and 1997,
the Company matching contribution was allocated to the SAIC Stock Fund. Also,
the Company, at its discretion, may make an additional contribution to the
Deferred Fund for the benefit of non-highly compensated participants in order to
comply with Section 401(k)(3) of the Code. The Company made no additional
contributions for the benefit of non-highly compensated participants during 1998
and 1997.
The Company's contribution to the Deferred Fund is to be paid in cash unless the
Company's Board of Directors determines to make the contribution in shares of
Class A Common Stock or another form. Contributions to the Deferred Fund shall
not exceed the maximum amount deductible by the Company for Federal income tax
purposes.
Employees hired prior to January 1, 1995 are immediately eligible for the
Company matching contributions. Employees hired on or after January 1, 1995, who
have elected to participate, are eligible for Company matching contributions if
they have attained age 21 and have both twelve calendar months of employment and
850 hours of service, as defined.
Participants may elect to borrow up to 50% of their vested plan balance, up to a
maximum of $50,000, excluding amounts invested in the SAIC Stock Fund. Upon this
election, the loan balance is transferred from the applicable investment fund(s)
to a separate loan fund (participant loans) until repayment. Participants are
permitted to transfer to the Plan their account balances from a previous
employer's qualified retirement plan.
The participant's interest in the Deferred Fund account will be paid in a single
distribution to the participant or their designated beneficiary upon termination
of employment with the Company, retirement, permanent disability or death. A
participant may not make withdrawals from the Deferred Fund accounts while
employed with the Company prior to attaining age 59 1/2 unless the Committee
determines the participant is incurring financial hardship. After attaining age
59 1/2, a participant may make withdrawals even if still employed with the
Company. Distributions from the Deferred Fund are paid in cash. After attaining
age 59 1/2 and after termination of employment, a participant may make a
one-time distribution election of investments held in the Vanguard investment
funds and defer distribution of balances held in the SAIC Stock Fund.
-4-
<PAGE> 9
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
VESTING
A participant's interest in the employee deferral portion of the Deferred Fund
account is 100% vested at all times. A participant's interest in the Company
matching contribution is 100% vested if the participant was hired prior to
January 1, 1995. If the participant was hired on or after January 1, 1995, the
participant's interest in the Company matching contribution vests at the rate of
25% per year in years three through six, becoming fully vested after six years
of service, as defined. Participants are deemed fully vested upon reaching age
59 1/2, permanent disability or death. Forfeitures, arising from participants
withdrawing from the Plan prior to achieving 100% vesting, are applied to the
Company's matching contribution. There were $550,000 in Plan forfeitures applied
against Company matching contributions in 1998 and no Plan forfeitures applied
against Company matching contributions in 1997.
INVESTMENT PROGRAMS
The investment programs offered to participants in the Deferred Fund allow
participants to choose among thirteen investment funds offered by the Vanguard
Group of Investment Companies. Participants are also allowed to direct a portion
of their investment into Class A Common Stock of the Company. Such investment
into the SAIC Stock Fund can be exchanged into one of the Vanguard Funds subject
to certain restrictions.
THE VANGUARD FUNDS OFFERED WERE AS FOLLOWS:
1. Vanguard Fixed Income Securities Fund - GNMA Portfolio, which invests in
fixed income securities guaranteed by the U.S. Government;
2. Vanguard Index Trust - 500 Portfolio, which invests in common stocks;
3. Vanguard Money Market Reserves - Prime Portfolio, which invests in money
market instruments;
4. Vanguard Fixed Income Securities Fund - Short-Term Federal Portfolio, which
invests in U.S. government obligations;
5. Vanguard/ Wellesley Income Fund, which invests in fixed income securities
and common stocks;
6. Vanguard/Windsor Fund, which invests in common stocks;
7. Vanguard International Growth Portfolio, which invests in common stocks of
companies based outside the United States;
8. Vanguard U.S. Growth Portfolio, which invests in common stocks;
9. Vanguard Fixed Income Securities Fund - Intermediate-Term Corporate
Portfolio, which invests primarily in investment grade corporate bonds;
10. Vanguard LIFEStrategy Income Fund, which invests in common stocks, bonds
and short term reserves; (Discontinued in 1998)
11. Vanguard LIFEStrategy Conservative Growth Fund, which invests in common
stocks, bonds and short term reserves;
12. Vanguard LIFEStrategy Moderate Growth Fund, which invests in common stocks
and bonds;
13. Vanguard LIFEStrategy Growth Fund, which invests in common stocks and
bonds; and
14. Vanguard Small Cap Index Fund, which invests in common stocks.
-5-
<PAGE> 10
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
Separate Deferred Fund accounts are established for each investment program
selected by a participant. Participants may elect to transfer their existing
account balances at any time among the Vanguard investment funds and/or alter
the allocations of future contributions among any of the investment alternatives
under rules prescribed by the Committee.
PLAN TERMINATION
Although the Company has not expressed any intent to terminate the Plan, it
reserves the right to suspend or discontinue contributions to the Plan or to
terminate the Company's participation in the Plan at any time. In the event of
termination, a distribution of the participants' Deferred Fund account balances
will be made in accordance with the Plan provisions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accompanying financial statements are prepared on the accrual basis of
accounting.
INVESTMENT VALUATION AND INCOME, GAINS AND LOSSES
VANGUARD FUNDS
Deposits to the Vanguard Funds are used to buy shares from the respective
investment fund. Vanguard Fund shares are valued at the net asset value per
share as of each valuation date.
Investment transactions are accounted for on the date the shares in the fund are
purchased or sold. Realized and unrealized gains and losses are computed based
on the market value at the beginning of the year or purchase price if purchased
during the year.
SAIC COMMON STOCK
A general public market for the Company's Common Stock does not exist;
therefore, the fair market value of the Common Stock is determined pursuant to a
stock price formula and valuation process which includes an appraisal prepared
by an independent appraisal firm. Periodic determinations of fair market value
of the Common Stock are made by the Board of Directors, with the assistance of
the independent appraisal firm. The Board of Directors reserves the right to
alter the formula.
The gains or losses realized on distributions of investments and the increases
or decreases in unrealized appreciation are calculated as the difference between
the current fair market value and the fair market value of the investments at
the beginning of the year or purchase price if purchased during the year. As of
December 31, 1998 and 1997, the fair market value of the Company's Class A
Common Stock was $58.87 per share and $34.78 per share and the Plan held
approximately 8,700,000 shares and 7,599,000 shares, respectively. It is the
policy of the Committee to keep the SAIC Stock Fund invested primarily in Common
Stock, except for estimated reserves for use in distributions and investment
exchanges by participants. Such reserves are invested in the Vanguard Money
Market Reserves - Prime Portfolio mutual fund. If reserves in the SAIC Stock
Fund are less than the amount required at any given time to make requested
distributions and investment changes, investment exchanges out of the SAIC Stock
Fund by participants may have to be deferred.
-6-
<PAGE> 11
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
SHORT-TERM INVESTMENTS
At December 31, 1998, short-term investments consist primarily of a retail
account invested in Vanguard Money Market Reserves Prime Portfolio, which
invests in short-term money market instruments. Vanguard Fiduciary Trust Company
("VFTC") became the Plan's Trustee in February 1998.
At December 31, 1997, short-term investments consisted primarily of State Street
Bank and Trust Short-Term Investment Fund, which invested in short-term money
market instruments. At December 31, 1997, State Street Bank and Trust Company
was the Plan's Trustee.
CONTRIBUTIONS
Participant contributions and Company matching contributions are accrued based
upon the amounts deferred by participants at year end which are received by the
Trustee subsequent to year end. Additional Company contributions are accrued
based upon the amounts determined by the Company's Board of Directors (Note 1).
DISTRIBUTIONS TO PARTICIPANTS
Distributions to participants are recorded when paid. Generally, upon
termination or retirement, participants will receive their vested account
balance in a single lump sum payment following their termination or retirement
date. Benefits to be paid at a future date as elected by terminated or retired
participants are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
INVESTMENT FUND
Vanguard GNMA $ 4,686,000 $ 4,465,000
Vanguard Index 22,709,000 12,396,000
Vanguard Prime 6,828,000 7,514,000
Vanguard Wellesley 7,152,000 5,011,000
Vanguard Windsor 23,780,000 21,776,000
Vanguard Intl. Growth 5,992,000 5,179,000
Vanguard U.S. Growth 10,211,000 4,276,000
Vanguard Int. Corporate Bond 437,000 265,000
Vanguard STFED 3,240,000 3,453,000
Vanguard LS Income -- 94,000
Vanguard LS Cons. Growth 654,000 166,000
Vanguard LS Mod. Growth 1,384,000 367,000
Vanguard LS Growth 2,047,000 891,000
Vanguard Small Cap Index 111,000 --
SAIC CODA Stock 92,688,000 36,053,000
Participant Loans 908,000 2,771,000
------------ ------------
Total $182,827,000 $104,677,000
============ ============
</TABLE>
These amounts are reflected as liabilities in the Plan's Form 5500.
-7-
<PAGE> 12
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE EXPENSES OF THE PLAN
All expenses incurred in the administration of the Plan are paid out of Plan
assets unless the Company elects to pay such costs. Fees totaling $72,000 and
$88,000 were paid or accrued to the Trustee by the Plan during 1998 and 1997,
respectively. Other Plan expenses totaling $272,000 and $63,000 were paid or
accrued by the Plan during 1998 and 1997, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3 - TAX STATUS
The Plan is intended to qualify under Section 401(a) of the Code. In addition,
the Deferred Fund of the Plan is intended to be a "Qualified Cash or Deferred
Arrangement" under Section 401(k) of the Code. Accordingly, the Plan is not
subject to Federal income taxes.
The Plan received a favorable determination letter from the Internal Revenue
Service during January 1997 indicating that the Plan and related trust, as
amended, are designed in accordance with applicable sections of the Code.
NOTE 4 - PARTY-IN-INTEREST TRANSACTIONS
Transactions involving cash, securities or assets of the Company, the Trustee or
other affiliated persons are considered to be party-in-interest transactions
under Section 2520.103-10 of the Department of Labor Rules and Regulations for
Reporting and Disclosure. The Plan invests in shares of mutual funds managed by
an affiliate of VFTC. VFTC acts as trustee for only those investments as defined
by the Plan. In addition, the SAIC Common Stock Fund purchases shares of SAIC
Class A Common Stock. Transactions in such investments qualify as
party-in-interest transactions which are exempt from the prohibited transactions
rules.
NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND
Financial information by investment fund as of December 31, 1998 and 1997, and
for the years then ended are shown on the following pages.
-8-
<PAGE> 13
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD
GNMA INDEX PRIME WELLESLEY WINDSOR INT'L GROWTH
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Mutual funds $ 23,807,000 $ 126,895,000 $ 42,441,000 $ 40,048,000 $ 116,900,000 $ 29,877,000
SAIC Common Stock
Short-term investments
Participant loans
-------------- -------------- -------------- -------------- -------------- --------------
23,807,000 126,895,000 42,441,000 40,048,000 116,900,000 29,877,000
-------------- -------------- -------------- -------------- -------------- --------------
Receivables:
Participant contribution 62,000 444,000 837,000 141,000 343,000 126,000
Company contribution 404,000
-------------- -------------- -------------- -------------- -------------- --------------
Total receivables 62,000 444,000 1,241,000 141,000 343,000 126,000
-------------- -------------- -------------- -------------- -------------- --------------
Total assets 23,869,000 127,339,000 43,682,000 40,189,000 117,243,000 30,003,000
-------------- -------------- -------------- -------------- -------------- --------------
LIABILITIES
Accrued Plan expenses
-------------- -------------- -------------- -------------- -------------- --------------
Net assets available
for benefits $ 23,869,000 $ 127,339,000 $ 43,682,000 $ 40,189,000 $ 117,243,000 $ 30,003,000
============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD VANGUARD
VANGUARD VANGUARD VANGUARD LS CONS. LS MOD. VANGUARD
U.S. GROWTH INT. CORP. STFED GROWTH GROWTH LS GROWTH
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Mutual funds $ 58,519,000 $ 4,351,000 $ 16,910,000 $ 4,581,000 $ 9,075,000 $ 13,044,000
SAIC Common Stock
Short-term investments
Participant loans
-------------- -------------- -------------- -------------- -------------- --------------
58,519,000 4,351,000 16,910,000 4,581,000 9,075,000 13,044,000
-------------- -------------- -------------- -------------- -------------- --------------
Receivables:
Participant contribution 268,000 15,000 46,000 26,000 73,000 114,000
Company contribution
-------------- -------------- -------------- -------------- -------------- --------------
Total receivables 268,000 15,000 46,000 26,000 73,000 114,000
-------------- -------------- -------------- -------------- -------------- --------------
Total assets 58,787,000 4,366,000 16,956,000 4,607,000 9,148,000 13,158,000
-------------- -------------- -------------- -------------- -------------- --------------
LIABILITIES
Accrued Plan expenses
-------------- -------------- -------------- -------------- -------------- --------------
Net assets available
for benefits $ 58,787,000 $ 4,366,000 $ 16,956,000 $ 4,607,000 $ 9,148,000 $ 13,158,000
============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD SAIC VANGUARD
SMALL COMMON PARTICIPANT RETAIL
CAP INDEX STOCK LOANS ACCOUNT TOTAL
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments:
Mutual funds $ 2,251,000 $ 488,699,000
SAIC Common Stock $ 512,183,000 512,183,000
Short-term investments 170,000 170,000
Participant loans $ 24,581,000 24,581,000
-------------- -------------- -------------- -------------- --------------
2,251,000 512,353,000 24,581,000 1,025,633,000
-------------- -------------- -------------- -------------- --------------
Receivables:
Participant contribution 16,000 2,511,000
Company contribution $ 28,000 432,000
-------------- -------------- -------------- -------------- --------------
Total receivables 16,000 28,000 2,943,000
-------------- -------------- -------------- -------------- --------------
Total assets 2,267,000 512,353,000 24,581,000 28,000 1,028,576,000
-------------- -------------- -------------- -------------- --------------
LIABILITIES
Accrued Plan expenses 28,000 28,000
-------------- -------------- -------------- -------------- --------------
Net assets available
for benefits $ 2,267,000 $ 512,353,000 $ 24,581,000 $ -- $1,028,548,000
============== ============== ============== ============== ==============
</TABLE>
-9-
<PAGE> 14
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD
GNMA INDEX 500 PRIME WELLESLEY WINDSOR INT'L GROWTH
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Mutual funds $ 22,141,000 $ 90,256,000 $ 37,244,000 $ 33,775,000 $134,811,000 $ 28,870,000
SAIC Common Stock
Short-term investments
Participant loans
------------ ------------ ------------ ------------ ------------ ------------
22,141,000 90,256,000 37,244,000 33,775,000 134,811,000 28,870,000
------------ ------------ ------------ ------------ ------------ ------------
Receivables:
Participant contributions 81,000 446,000 730,000 165,000 521,000 182,000
Company contributions 1,305,000
Interest income
------------ ------------ ------------ ------------ ------------ ------------
81,000 446,000 2,035,000 165,000 521,000 182,000
------------ ------------ ------------ ------------ ------------ ------------
Total assets 22,222,000 90,702,000 39,279,000 33,940,000 135,332,000 29,052,000
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES
Accrued Plan expenses
------------ ------------ ------------ ------------ ------------ ------------
Net assets available
for benefits $ 22,222,000 $ 90,702,000 $ 39,279,000 $ 33,940,000 $135,332,000 $ 29,052,000
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD VANGUARD
VANGUARD VANGUARD VANGUARD VANGUARD LS CONS. LS MOD.
U.S. GROWTH INT. CORP. STFED LS INCOME GROWTH GROWTH
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Mutual funds $ 30,388,000 $ 2,471,000 $ 15,450,000 $ 676,000 $ 2,615,000 $ 5,675,000
SAIC Common Stock
Short-term investments
Participant loans
------------ ------------ ------------ ------------ ------------ ------------
30,388,000 2,471,000 15,450,000 676,000 2,615,000 5,675,000
------------ ------------ ------------ ------------ ------------ ------------
Receivables:
Participant contributions 217,000 14,000 62,000 21,000 60,000
Company contributions
Interest income
------------ ------------ ------------ ------------ ------------ ------------
217,000 14,000 62,000 21,000 60,000
------------ ------------ ------------ ------------ ------------ ------------
Total assets 30,605,000 2,485,000 15,512,000 676,000 2,636,000 5,735,000
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES
Accrued Plan expenses
------------ ------------ ------------ ------------ ------------ ------------
Net assets available
for benefits $ 30,605,000 $ 2,485,000 $ 15,512,000 $ 676,000 $ 2,636,000 $ 5,735,000
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD SAIC COMMON PARTICIPANT STATE STREET
LS GROWTH STOCK LOANS STIF TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments:
Mutual funds $ 8,347,000 $ 177,000 $412,896,000
SAIC Common Stock 264,309,000 264,309,000
Short-term investments $ 296,000 296,000
Participant loans $ 21,569,000 21,569,000
------------ ------------ ------------ ------------ ------------
8,347,000 264,486,000 21,569,000 296,000 699,070,000
------------ ------------ ------------ ------------ ------------
Receivables:
Participant contributions 100,000 2,599,000
Company contributions 57,000 1,362,000
Interest income
------------ ------------ ------------ ------------ ------------
100,000 57,000 3,961,000
------------ ------------ ------------ ------------ ------------
Total assets 8,447,000 264,486,000 21,569,000 353,000 703,031,000
------------ ------------ ------------ ------------ ------------
LIABILITIES
Accrued Plan expenses 88,000 88,000
------------ ------------ ------------ ------------ ------------
Net assets available
for benefits $ 8,447,000 $264,486,000 $ 21,569,000 $ 265,000 $702,943,000
============ ============ ============ ============ ============
</TABLE>
-10-
<PAGE> 15
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE
FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Vanguard Vanguard Vanguard Vanguard Vanguard
GNMA Index 500 Prime Wellesley Windsor
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 1,491,000 $ 1,874,000 $ 1,696,000 $ 3,690,000 $ 10,324,000
Realized gain (loss) 134,000 7,235,000 165,000 770,000 3,882,000
Unrealized (depreciation)
appreciation (101,000) 17,992,000 9,000 (411,000) (12,174,000)
SAIC Common Stock:
Realized gain
Unrealized appreciation
Interest
Participant contributions 2,463,000 16,831,000 23,306,000 5,154,000 14,599,000
Company contributions 14,685,000
-------------- -------------- -------------- -------------- --------------
Total additions 3,987,000 43,932,000 39,861,000 9,203,000 16,631,000
-------------- -------------- -------------- -------------- --------------
Deductions from net assets
Distributions to participants 1,563,000 4,722,000 2,528,000 1,850,000 5,688,000
Plan expenses
-------------- -------------- -------------- -------------- --------------
Total deductions 1,563,000 4,722,000 2,528,000 1,850,000 5,688,000
-------------- -------------- -------------- -------------- --------------
Net increase (decrease) prior to
exchanges 2,424,000 39,210,000 37,333,000 7,353,000 10,943,000
Exchanges (777,000) (2,573,000) (32,930,000) (1,104,000) (29,032,000)
-------------- -------------- -------------- -------------- --------------
Net increase (decrease) 1,647,000 36,637,000 4,403,000 6,249,000 (18,089,000)
Net assets available for benefits
Beginning of year 22,222,000 90,702,000 39,279,000 33,940,000 135,332,000
-------------- -------------- -------------- -------------- --------------
End of year $ 23,869,000 $ 127,339,000 $ 43,682,000 $ 40,189,000 $ 117,243,000
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Vanguard Vanguard Vanguard Vanguard Vanguard
Int'l Growth U.S. Growth Int. Corp. STFED LS Income
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 587,000 $ 3,566,000 $ 226,000 $ 888,000 $ 37,000
Realized gain (loss) 1,405,000 1,901,000 11,000 19,000 65,000
Unrealized (depreciation)
appreciation 2,739,000 8,845,000 6,000 174,000 (25,000)
SAIC Common Stock:
Realized gain
Unrealized appreciation
Interest
Participant contributions 4,729,000 9,108,000 594,000 1,762,000
Company contributions
-------------- -------------- -------------- -------------- -------------
Total additions 9,460,000 23,420,000 837,000 2,843,000 77,000
-------------- -------------- -------------- -------------- -------------
Deductions from net assets
Distributions to participants 1,411,000 1,707,000 243,000 1,116,000 18,000
Plan expenses
-------------- -------------- -------------- -------------- -------------
Total deductions 1,411,000 1,707,000 243,000 1,116,000 18,000
-------------- -------------- -------------- -------------- -------------
Net increase (decrease) prior to
exchanges 8,049,000 21,713,000 594,000 1,727,000 59,000
Exchanges (7,098,000) 6,469,000 1,287,000 (283,000) (735,000)
-------------- -------------- -------------- -------------- -------------
Net increase (decrease) 951,000 28,182,000 1,881,000 1,444,000 (676,000)
Net assets available for benefits
Beginning of year 29,052,000 30,605,000 2,485,000 15,512,000 676,000
-------------- -------------- -------------- -------------- -------------
End of year $ 30,003,000 $ 58,787,000 $ 4,366,000 $ 16,956,000 $ -
============== ============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
Vanguard Vanguard Vanguard
LS Cons. LS Mod. Vanguard Small SAIC Common
Growth Growth LS Growth Cap Index Stock
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 220,000 $ 372,000 $ 439,000 $ 163,000
Realized gain (loss) 85,000 209,000 518,000 (26,000)
Unrealized (depreciation)
appreciation 250,000 687,000 1,130,000 (145,000)
SAIC Common Stock:
Realized gain
Unrealized appreciation $ 194,389,000
Interest
Participant contributions 1,094,000 2,859,000 4,153,000 623,000 6,130,000
Company contributions
-------------- -------------- -------------- -------------- --------------
Total additions 1,649,000 4,127,000 6,240,000 615,000 200,519,000
-------------- -------------- -------------- -------------- --------------
Deductions from net assets
Distributions to participants 220,000 296,000 897,000 9,000 15,285,000
Plan expenses
-------------- -------------- -------------- -------------- --------------
Total deductions 220,000 296,000 897,000 9,000 15,285,000
-------------- -------------- -------------- -------------- --------------
Net increase (decrease) prior to
exchanges 1,429,000 3,831,000 5,343,000 606,000 185,234,000
Exchanges 542,000 (418,000) (632,000) 1,661,000 62,633,000
-------------- -------------- -------------- -------------- --------------
Net increase (decrease) 1,971,000 3,413,000 4,711,000 2,267,000 247,867,000
Net assets available for benefits
Beginning of year 2,636,000 5,735,000 8,447,000 264,486,000
-------------- -------------- -------------- -------------- --------------
End of year $ 4,607,000 $ 9,148,000 $ 13,158,000 $ 2,267,000 $ 512,353,000
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Vanguard
Participant Retail State Street
Loans Account STIF Total
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 25,573,000
Realized gain (loss) 16,373,000
Unrealized (depreciation)
appreciation 18,976,000
SAIC Common Stock:
Realized gain
Unrealized appreciation 194,389,000
Interest $ 1,613,000 $ 1,000 1,614,000
Participant contributions 93,405,000
Company contributions 98,000 14,783,000
-------------- ----------- ------------ --------------
Total additions 1,613,000 99,000 365,113,000
-------------- ----------- ------------ --------------
Deductions from net assets
Distributions to participants 1,591,000 39,144,000
Plan expenses 116,000 $ 248,000 364,000
-------------- ----------- ------------ --------------
Total deductions 1,591,000 116,000 248,000 39,508,000
-------------- ----------- ------------ --------------
Net increase (decrease) prior to
exchanges 22,000 (17,000) (248,000) 325,605,000
Exchanges 2,990,000 17,000 (17,000)
-------------- ----------- ------------ --------------
Net increase (decrease) 3,012,000 (265,000) 325,605,000
Net assets available for benefits
Beginning of year 21,569,000 265,000 702,943,000
-------------- ----------- ------------ --------------
End of year $ 24,581,000 $ - $ - $1,028,548,000
============== =========== ============ ==============
</TABLE>
-11-
<PAGE> 16
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR
BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD
GNMA INDEX 500 PRIME WELLESLEY WINDSOR
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 1,436,000 $ 1,830,000 $ 1,683,000 $ 3,671,000 $ 21,478,000
Realized gain (loss) 55,000 3,310,000 102,000 468,000 2,702,000
Unrealized (depreciation)
appreciation 374,000 15,705,000 18,000 1,321,000 (1,003,000)
SAIC Common Stock:
Realized gain
Unrealized appreciation
Interest
Participant contributions 2,089,000 10,260,000 16,445,000 4,081,000 12,698,000
Company contributions 15,139,000
------------- ------------- ------------- ------------- -------------
Total additions 3,954,000 31,105,000 33,387,000 9,541,000 35,875,000
------------- ------------- ------------- ------------- -------------
Deductions from net assets
Distributions to participants 1,073,000 3,660,000 3,143,000 1,485,000 5,793,000
Plan expenses
------------- ------------- ------------- ------------- -------------
Total deductions 1,073,000 3,660,000 3,143,000 1,485,000 5,793,000
------------- ------------- ------------- ------------- -------------
Net increase prior to exchanges 2,881,000 27,445,000 30,244,000 8,056,000 30,082,000
Exchanges (279,000) 4,416,000 (22,329,000) (254,000) 3,031,000
------------- ------------- ------------- ------------- -------------
Net increase (decrease) 2,602,000 31,861,000 7,915,000 7,802,000 33,113,000
Net assets available for benefits
Beginning of year 19,620,000 58,841,000 31,364,000 26,138,000 102,219,000
------------- ------------- ------------- ------------- -------------
End of year $ 22,222,000 $ 90,702,000 $ 39,279,000 $ 33,940,000 $ 135,332,000
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD
INT'L GROWTH U.S. GROWTH INT. CORP. STFED LS INCOME
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 1,234,000 $ 1,173,000 $ 119,000 $ 903,000 $ 43,000
Realized gain (loss) 866,000 980,000 3,000 (14,000) 26,000
Unrealized (depreciation)
appreciation (1,212,000) 3,364,000 35,000 45,000 29,000
SAIC Common Stock:
Realized gain
Unrealized appreciation
Interest
Participant contributions 4,702,000 5,037,000 326,000 1,629,000 141,000
Company contributions
------------- ------------- ------------- ------------- -------------
Total additions 5,590,000 10,554,000 483,000 2,563,000 239,000
------------- ------------- ------------- ------------- -------------
Deductions from net assets
Distributions to participants 1,730,000 1,291,000 106,000 798,000 164,000
Plan expenses
------------- ------------- ------------- ------------- -------------
Total deductions 1,730,000 1,291,000 106,000 798,000 164,000
------------- ------------- ------------- ------------- -------------
Net increase prior to exchanges 3,860,000 9,263,000 377,000 1,765,000 75,000
Exchanges 22,000 1,784,000 570,000 (747,000) 146,000
------------- ------------- ------------- ------------- -------------
Net increase (decrease) 3,882,000 11,047,000 947,000 1,018,000 221,000
Net assets available for benefits
Beginning of year 25,170,000 19,558,000 1,538,000 14,494,000 455,000
------------- ------------- ------------- ------------- -------------
End of year $ 29,052,000 $ 30,605,000 $ 2,485,000 $ 15,512,000 $ 676,000
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
VANGUARD VANGUARD
LS CONS. LS MOD. VANGUARD SAIC COMMON PARTICIPANT
GROWTH GROWTH LS GROWTH STOCK LOANS
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 128,000 $ 252,000 $ 328,000 $ 71,000
Realized gain (loss) 34,000 66,000 128,000
Unrealized (depreciation)
appreciation 136,000 415,000 703,000
SAIC Common Stock:
Realized gain
Unrealized appreciation 87,106,000
Interest $ 1,347,000
Participant contributions 427,000 1,225,000 2,135,000 497,000 183,000
Company contributions
------------- ------------- ------------- ------------- -------------
Total additions 725,000 1,958,000 3,294,000 87,674,000 1,530,000
------------- ------------- ------------- ------------- -------------
Deductions from net assets
Distributions to participants 217,000 434,000 339,000 10,419,000 719,000
Plan expenses
------------- ------------- ------------- ------------- -------------
Total deductions 217,000 434,000 339,000 10,419,000 719,000
------------- ------------- ------------- ------------- -------------
Net increase prior to exchanges 508,000 1,524,000 2,955,000 77,255,000 811,000
Exchanges 931,000 1,827,000 1,546,000 23,262,000 3,758,000
------------- ------------- ------------- ------------- -------------
Net increase (decrease) 1,439,000 3,351,000 4,501,000 100,517,000 4,569,000
Net assets available for benefits
Beginning of year 1,197,000 2,384,000 3,946,000 163,969,000 17,000,000
------------- ------------- ------------- ------------- -------------
End of year $ 2,636,000 $ 5,735,000 $ 8,447,000 $ 264,486,000 $ 21,569,000
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
STATE STREET
STIF TOTAL
------------- -------------
<S> <C> <C>
Additions to net assets
Investment income:
Mutual funds:
Dividends and interest $ 34,349,000
Realized gain (loss) 8,726,000
Unrealized (depreciation)
appreciation 19,930,000
SAIC Common Stock:
Realized gain
Unrealized appreciation 87,106,000
Interest $ 58,000 1,405,000
Participant contributions 15,552,000 77,427,000
Company contributions 29,000 15,168,000
------------- -------------
Total additions 15,639,000 244,111,000
------------- -------------
Deductions from net assets
Distributions to participants 31,371,000
Plan expenses 151,000 151,000
------------- -------------
Total deductions 151,000 31,522,000
------------- -------------
Net increase prior to exchanges 15,488,000 212,589,000
Exchanges (17,684,000)
------------- -------------
Net increase (decrease) (2,196,000) 212,589,000
Net assets available for benefits
Beginning of year 2,461,000 490,354,000
------------- -------------
End of year $ 265,000 $ 702,943,000
============= =============
</TABLE>
-12-
<PAGE> 17
ADDITIONAL INFORMATION
SCHEDULE I
SCIENCE APPLICATION INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27a FORM 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
DESCRIPTION OF SHARES COST OF CURRENT
IDENTITY OF ISSUE INVESTMENT OR UNITS ASSET VALUE
<S> <C> <C> <C> <C>
Mutual funds:
The Vanguard Group of
Investment Companies *
Vanguard Fixed Income
Securities Fund -
GNMA Portfolio 2,278,000 $23,239,000 $ 23,807,000
Vanguard Index Trust -
500 Portfolio 1,114,000 76,062,000 126,895,000
Vanguard Money Market Reserves-
Prime Portfolio 42,611,000 42,611,000 42,611,000
Vanguard/Wellesley
Income Fund 1,811,000 37,458,000 40,048,000
Vanguard/Windsor Fund 7,508,000 116,646,000 116,900,000
Vanguard Int'l Growth Portfolio 1,592,000 24,980,000 29,877,000
Vanguard U.S. Growth Portfolio 1,561,000 44,231,000 58,519,000
Vanguard Int. Term Corporate
Bond Portfolio 434,000 4,315,000 4,351,000
Vanguard Fixed Income
Securities Fund -
Short-Term Federal
Portfolio 1,648,000 16,744,000 16,910,000
Vanguard LIFEStrategy
Conservative Growth
Fund 311,000 4,176,000 4,581,000
Vanguard LIFEStrategy
Moderate Growth Fund 538,000 7,894,000 9,075,000
Vanguard LIFEStrategy
Growth Fund 694,000 11,009,000 13,044,000
Vanguard Small Cap Index Fund 106,000 2,396,000 2,251,000
------------ --------------
411,761,000 488,869,000
Common Stock:
SAIC* Class A 8,700,000 317,810,000 512,183,000
Participant Loans Due Jan. 1999 to Dec. 2023; 6% - 10.5% 24,581,000
------------ --------------
$729,571,000 $1,025,633,000
============ ==============
</TABLE>
* Represents a party-in-interest.
-13-
<PAGE> 18
ADDITIONAL INFORMATION
SCHEDULE II
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27b FORM 5500 - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED DETAILED DESCRIPTION OF LOSS INCLUDING DATES OF MAK-
ORIGINAL DURING REPORTING YEAR UNPAID ING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE
AMOUNT --------------------- BALANCE AT OF COLLATERAL, ANY REGURGITATION OF THE LOAN AND THE
IDENTITY AND ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR TERMS OF THE RENEGOTIATION AND OTHER MATERIAL ITEMS
<S> <C> <C> <C> <C> <C>
Steven J. Adamus $ 4,000 - - $ 8 Loan date: 12/13/96; Maturity date: 12/4/98;
8440 Rumex Lane Interest rate: 8%; Collateral: Vested Balance
San Diego, CA 92129
Thomas I. Ahart $ 500 - - $ 500 Loan date: 6/12/98; Maturity date: 8/28/98;
12385 Copenhagen Ct. Interest rate: 7%; Collateral: Vested Balance
Reston, VA 20191
Medhat T. Azzazy $ 11,000 $ 265 $ 1 $ 208 Loan date: 8/26/94; Maturity date: 8/15/97;
32292 Ridgeway Ave. Interest rate: 8%; Collateral: Vested Balance
Laguna Niguel, CA 92677
Medhat T. Azzazy $ 6,000 $ 157 $ 15 $ 2,380 Loan date: 9/22/95; Maturity date: 9/11/98;
32292 Ridgeway Ave. Interest rate: 8%; Collateral: Vested Balance
Laguna Niguel, CA 92677
Delores J. Bolweg $ 1,050 - - $ 677 Loan date: 1/24/97; Maturity date: 7/3/98;
P.O. Box 2964 Interest rate: 8%; Collateral: Vested Balance
Reston, VA 20195
Timothy B. Bougan $ 6,000 $ 761 $ 22 $ 354 Loan date: 8/26/94; Maturity date: 8/14/98;
4027 Mary Louise Dr. Interest rate: 8%; Collateral: Vested Balance
Panama City, FL 32405
Lorilee Brownell $ 5,632 - - $ 1,047 Loan date: 4/21/96; Maturity date: 4/10/98;
P.O. Box 200 A-1400 Interest rate: 9%; Collateral: Vested Balance
Vienna
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OVERDUE*
-------------------------
IDENTITY AND ADDRESS OF OBLIGOR PRINCIPAL INTEREST
<S> <C> <C>
Steven J. Adamus $ 8 -
8440 Rumex Lane
San Diego, CA 92129
Thomas I. Ahart $ 500 -
12385 Copenhagen Ct.
Reston, VA 20191
Medhat T. Azzazy $ 208 -
32292 Ridgeway Ave.
Laguna Niguel, CA 92677
Medhat T. Azzazy $ 2,380 -
32292 Ridgeway Ave.
Laguna Niguel, CA 92677
Delores J. Bolweg $ 677 -
P.O. Box 2964
Reston, VA 20195
Timothy B. Bougan $ 354 -
4027 Mary Louise Dr.
Panama City, FL 32405
Lorilee Brownell $ 1,047 -
P.O. Box 200 A-1400
Vienna
</TABLE>
-14-
<PAGE> 19
ADDITIONAL INFORMATION
SCHEDULE II
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27b FORM 5500 - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED DETAILED DESCRIPTION OF LOSS INCLUDING DATES OF MAK-
ORIGINAL DURING REPORTING YEAR UNPAID ING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE
AMOUNT --------------------- BALANCE AT OF COLLATERAL, ANY REGURGITATION OF THE LOAN AND THE
IDENTITY AND ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR TERMS OF THE RENEGOTIATION AND OTHER MATERIAL ITEMS
<S> <C> <C> <C> <C> <C>
Lorilee Brownell $ 6,000 - - $ 2,888 Loan date: 9/20/96; Maturity date: 9/11/98;
P.O. Box 200 A-1400 Interest rate: 8%; Collateral: Vested Balance
Vienna
Rhonda R. Callander $ 1,233 $ 132 $ 5 $ 107 Loan date: 10/22/93; Maturity date: 8/14/98;
1029 Lake Colony Ln. Interest rate: 8%; Collateral: Vested Balance
Vestiva Hills, AL 35242
Rhonda R. Callander $ 5,582 $ 361 $ 5 $ 369 Loan date: 8/26/94; Maturity date: 10/09/98;
1029 Lake Colony Ln. Interest rate: 9%; Collateral: Vested Balance
Vestiva Hills, AL 35242
Donna D. Crull $ 630 $ 159 $ 3 $ 129 Loan date: 5/02/97; Maturity date: 1/30/98;
103 Windy Cove Apt H Interest rate: 8%; Collateral: Vested Balance
Hampton, VA 23666
Christine Dunham $ 2,000 $ 618 $ 23 $ 454 Loan date: 6/27/97; Maturity date: 6/19/98;
723 Walker St. Interest rate: 8%; Collateral: Vested Balance
Aberdeen, MD 21001
Lisa M. Frank $ 850 $ 528 $ 17 $ 68 Loan date: 9/05/97; Maturity date: 8/28/98;
13545 Highland Mews Place Interest rate: 8%; Collateral: Vested Balance
Herndon, VA 20171
Susan C. Haverland $ 6,600 $1,578 $ 66 $ 1,073 Loan date: 9/20/96; Maturity date: 9/11/98;
1380 Pepper Villa Dr. Interest rate: 7%; Collateral: Vested Balance
El Cajon, CA 92021
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OVERDUE*
-------------------------
IDENTITY AND ADDRESS OF OBLIGOR PRINCIPAL INTEREST
<S> <C> <C>
Lorilee Brownell $ 2,888 -
P.O. Box 200 A-1400
Vienna
Rhonda R. Callander $ 107 -
1029 Lake Colony Ln.
Vestiva Hills, AL 35242
Rhonda R. Callander $ 369 -
1029 Lake Colony Ln.
Vestiva Hills, AL 35242
Donna D. Crull $ 129 -
103 Windy Cove Apt H
Hampton, VA 23666
Christine Dunham $ 454 -
723 Walker St.
Aberdeen, MD 21001
Lisa M. Frank $ 68 -
13545 Highland Mews Place
Herndon, VA 20171
Susan C. Haverland $ 1,073 -
1380 Pepper Villa Dr.
El Cajon, CA 92021
</TABLE>
-15-
<PAGE> 20
ADDITIONAL INFORMATION
SCHEDULE II
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27b FORM 5500 - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED DETAILED DESCRIPTION OF LOSS INCLUDING DATES OF MAK-
ORIGINAL DURING REPORTING YEAR UNPAID ING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE
AMOUNT --------------------- BALANCE AT OF COLLATERAL, ANY REGURGITATION OF THE LOAN AND THE
IDENTITY AND ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR TERMS OF THE RENEGOTIATION AND OTHER MATERIAL ITEMS
<S> <C> <C> <C> <C> <C>
Carl Levine $10,774 - - $ 6,690 Loan date: 6/25/93; Maturity date: 6/03/98;
1501 E. Grand Ave. #3405 Interest rate: 6%; Collateral: Vested Balance
Escondido, CA 92027
Carl Levine $13,974 - - $ 13,364 Loan date:6/14/93 ; Maturity date:6/3/98 ;
1501 E. Grand Ave. #3405 Interest rate: 10%; Collateral: Vested Balance
Escondido, CA 92027
Dana A. Madalon $ 6,000 $ 1,071 $ 56 $ 527 Loan date: 8/27/93; Maturity date: 8/14/98;
1614 32nd St. N.W. Interest rate: 6%; Collateral: Vested Balance
Washington D.C. 20007
Barbara McGann $ 8,000 - - $ 273 Loan date: 10/03/97; Maturity date: 9/25/98;
1995 St. James Rd. Interest rate: 8%; Collateral: Vested Balance
Marriotsville, MD 21104
Sandra A. Oravec $ 9,724 $1,526 $ 51 $ 495 Loan date: 11/26/93; Maturity date: 11/20/98;
6201 North 18th St. Interest rate: 6%; Collateral: Vested Balance
Arlington, VA 22205
Noble E. Oxford $15,000 - - $ 6,050 Loan date: 6/25/93; Maturity date: 6/20/97;
508 Kountze Mem. Dr. Interest rate: 6%; Collateral: Vested Balance
Bellevue, NE 68005
Noble E. Oxford $ 3,000 - - $ 1,742 Loan date: 8/26/94; Maturity date: 8/15/97;
508 Kountze Mem. Dr. Interest rate: 8%; Collateral: Vested Balance
Bellevue, NE 68005
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OVERDUE*
-------------------------
IDENTITY AND ADDRESS OF OBLIGOR PRINCIPAL INTEREST
<S> <C> <C>
Carl Levine $ 6,690 -
1501 E. Grand Ave. #3405
Escondido, CA 92027
Carl Levine $ 13,364 -
1501 E. Grand Ave. #3405
Escondido, CA 92027
Dana A. Madalon $ 527 -
1614 32nd St. N.W.
Washington D.C. 20007
Barbara McGann $ 273 -
1995 St. James Rd.
Marriotsville, MD 21104
Sandra A. Oravec $ 495 -
6201 North 18th St.
Arlington, VA 22205
Noble E. Oxford $ 6,050 -
508 Kountze Mem. Dr.
Bellevue, NE 68005
Noble E. Oxford $ 1,742 -
508 Kountze Mem. Dr.
Bellevue, NE 68005
</TABLE>
-16-
<PAGE> 21
ADDITIONAL INFORMATION
SCHEDULE II
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27b FORM 5500 - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED DETAILED DESCRIPTION OF LOSS INCLUDING DATES OF MAK-
ORIGINAL DURING REPORTING YEAR UNPAID ING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE
AMOUNT --------------------- BALANCE AT OF COLLATERAL, ANY REGURGITATION OF THE LOAN AND THE
IDENTITY AND ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR TERMS OF THE RENEGOTIATION AND OTHER MATERIAL ITEMS
<S> <C> <C> <C> <C> <C>
John Reed $ 20,500 $ 81 $ 377 $ 19,670 Loan date: 3/20/98; Maturity date: 2/10/23;
3832 Larchwood Drive Interest rate: 7%; Collateral: Vested Balance
Virginia Beach, VA 23456
Sharon G. Roberts $ 2,215 - - $ 1,110 Loan date: 7/21/95; Maturity date: 8/18/95;
27403 Carl Drive Interest rate: 8%; Collateral: Vested Balance
Harvest, AL 35749
Christina M. Sargent $ 2,020 $ 729 $ 84 $ 125 Loan date: 2/21/98; Maturity date: 9/11/98;
11208 Chestnut Grove #312 Interest rate: 8%; Collateral: Vested Balance
Reston, VA 20190
Brian E. Shapleigh $ 4,300 $ 136 - $ 48 Loan date: 4/19/96; Maturity date: 4/10/98;
10208 Rodgers Road Interest rate: 7%; Collateral: Vested Balance
Fairfax, VA 22030
Jon C. Shotwell $ 6,004 $1,242 $ 58 $ 936 Loan date: 10/27/95; Maturity date: 10/23/98;
9533 Mandeville Rd. Interest rate: 8%; Collateral: Vested Balance
Santee, CA 92071
John Skinner $ 25,000 $ 7,500 - $ 17,353 Loan date: 2/21/97; Maturity date: 1/14/22;
1272 Old Highway Interest rate: 8%; Collateral: Vested Balance
98 Unit 701
Destin, FL 32541-7024
Marian L. Terry $ 5,759 - - $ 4,643 Loan date: 5/27/94; Maturity date: 3/15/96;
8017 Jade Coast Road Interest rate: 7%; Collateral: Vested Balance
San Diego, CA 92126
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OVERDUE*
-------------------------
IDENTITY AND ADDRESS OF OBLIGOR PRINCIPAL INTEREST
<S> <C> <C>
John Reed $ 19,670 -
3832 Larchwood Drive
Virginia Beach, VA 23456
Sharon G. Roberts $ 1,110 -
27403 Carl Drive
Harvest, AL 35749
Christina M. Sargent $ 125 -
11208 Chestnut Grove #312
Reston, VA 20190
Brian E. Shapleigh $ 48 -
10208 Rodgers Road
Fairfax, VA 22030
Jon C. Shotwell $ 936 -
9533 Mandeville Rd.
Santee, CA 92071
John Skinner $ 17,353 -
1272 Old Highway
98 Unit 701
Destin, FL 32541-7024
Marian L. Terry $ 4,643 -
8017 Jade Coast Road
San Diego, CA 92126
</TABLE>
-17-
<PAGE> 22
ADDITIONAL INFORMATION
SCHEDULE II
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27b FORM 5500 - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED DETAILED DESCRIPTION OF LOSS INCLUDING DATES OF MAK-
ORIGINAL DURING REPORTING YEAR UNPAID ING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE
AMOUNT --------------------- BALANCE AT OF COLLATERAL, ANY REGURGITATION OF THE LOAN AND THE
IDENTITY AND ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR TERMS OF THE RENEGOTIATION AND OTHER MATERIAL ITEMS
<S> <C> <C> <C> <C> <C>
Dorena S. Vogel $ 6,000 $ 847 $ 169 $ 3,406 Loan date: 7/23/93; Maturity date: 7/17/98;
P.O. Box 9 Interest rate: 6%; Collateral: Vested Balance
Genoa, NV 89411
Anita L. West $ 550 $ 206 $ 14 $ 344 Loan date: 12/26/97; Maturity date: 12/18/98;
7689 S. Danforth Ave. Interest rate: 8%; Collateral: Vested Balance
Tucson, AZ 85747
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OVERDUE*
-------------------------
IDENTITY AND ADDRESS OF OBLIGOR PRINCIPAL INTEREST
<S> <C> <C>
Dorena S. Vogel $ 3,406 -
P.O. Box 9
Genoa, NV 89411
Anita L. West $ 344 -
7689 S. Danforth Ave.
Tucson, AZ 85747
</TABLE>
* During 1999, the Company received additional payments and/or intends to
instruct the Plan's recordkeeper to issue Forms 1099 to the obligors
listed above in the amount of any principal balance outstanding.
-18-
<PAGE> 23
ADDITIONAL INFORMATION
SCHEDULE III
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CASH OR DEFERRED ARRANGEMENT
ITEM 27d FORM 5500 - SCHEDULE OF REPORTABLE TRANSACTIONS*
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF PURCHASE SELLING LEASE EXPENSE COST OF
PARTY INVOLVED DESCRIPTION OF ASSET TRANSACTIONS PRICE PRICE RENTAL INCURRED ASSET
- ------------------ ----------------------------- ------------ ----------- ------------ ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
The Vanguard Group Vanguard Index Trust -
500 Portfolio 250 $37,116,000
The Vanguard Group Vanguard Index Trust -
500 Portfolio 251 $25,703,000 $18,471,000
The Vanguard Group Vanguard Money Market
Reserves - Prime Portfolio 400 $72,036,000
The Vanguard Group Vanguard Money Market
Reserves - Prime Portfolio 260 $67,012,000 $66,847,000
The Vanguard Group Vanguard U.S. Growth Portfolio 248 $27,511,000
The Vanguard Group Vanguard U.S. Growth Portfolio 244 $10,125,000 $ 8,227,000
The Vanguard Group Vanguard Windsor Fund 218 $31,135,000
The Vanguard Group Vanguard Windsor Fund 252 $40,755,000 $36,867,000
The Vanguard Group SAIC Common Stock 60 $73,251,000
The Vanguard Group SAIC Common Stock 68 $20,407,000 $ 7,390,000
</TABLE>
<TABLE>
<CAPTION>
CURRENT
VALUE ON
TRANSACTION NET GAIN
PARTY INVOLVED DESCRIPTION OF ASSET DATE OR LOSS
- ------------------ ----------------------------- ----------- ------------
<S> <C> <C> <C>
The Vanguard Group Vanguard Index Trust -
500 Portfolio $37,116,000
The Vanguard Group Vanguard Index Trust -
500 Portfolio $25,703,000 $ 7,232,000
The Vanguard Group Vanguard Money Market
Reserves - Prime Portfolio $72,036,000
The Vanguard Group Vanguard Money Market
Reserves - Prime Portfolio $67,012,000 $ 165,000
The Vanguard Group Vanguard U.S. Growth Portfolio $27,511,000
The Vanguard Group Vanguard U.S. Growth Portfolio $10,125,000 $ 1,898,000
The Vanguard Group Vanguard Windsor Fund $31,135,000
The Vanguard Group Vanguard Windsor Fund $40,755,000 $ 3,888,000
The Vanguard Group SAIC Common Stock $73,251,000
The Vanguard Group SAIC Common Stock $20,407,000 $13,017,000
</TABLE>
*Transactions or series of transactions in excess of 5 percent of the current
value of the Plan's assets as of December 31, 1997 as defined in Section
2520.103-6 of the Department of Labor Rules and Regulations for Reporting
and Disclosure under ERISA.
-19-
<PAGE> 1
EXHIBIT 28(b)
Securities and Exchange Commission
Washington, D.C. 20549
Form 11-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the calendar year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
TRANSCORE RETIREMENT SAVINGS PLAN
(Full title of the plan)
7611 Derry Street
Harrisburg, PA 17111
Plan's telephone number, including area code (717) 561-2400
Science Applications International Corporation
10260 Campus Point Drive, San Diego, California
92121 (Name of issuer of the securities held
pursuant to the plan and the address of its
principal executive office)
Registrant's telephone number, including area code (619) 546-6000
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the trustee (or other persons who administer the Plan) have duly caused this
annual report to be signed on its behalf by the undersigned hereunto duly
authorized.
TRANSCORE RETIREMENT SAVINGS PLAN
Date: April 27, 1999 BY: /s/ JOHN M. WORTHINGTON
------------------ ----------------------------------------
John M. Worthington
President and
Chief Executive Officer
<PAGE> 3
TRANSCORE
RETIREMENT SAVINGS PLAN
REPORT, FINANCIAL STATEMENTS AND
ADDITIONAL INFORMATION
DECEMBER 31, 1998 AND 1997
<PAGE> 4
TRANSCORE RETIREMENT SAVINGS PLAN
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 1
Financial Statements:
Statement of Net Assets Available for Plan Benefits, with Fund Information 2-3
as of December 31, 1998 and 1997
Statements of Changes in Net Assets Available for Plan Benefits, with Fund 4-5
Information for the Years Ended December 31, 1998 and 1997
Notes to Financial Statements 6-8
Additional Information*:
Schedule I: Schedule of Assets Held for Investment Purposes at
December 31, 1998 9
Schedule II: Schedule of Loans or Fixed Income Obligations at
December 31, 1998 10
Schedule III: Schedule of Reportable Transactions for the Year Ended
December 31, 1998 11
</TABLE>
* Other supplemental schedules required by Section 2520.103-10 of the
Department of Labor Rules and Regulations for Reporting and Disclosure
under ERISA have been omitted because they are not applicable.
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Plan Administrator and Participants
of the TransCore Retirement Savings Plan
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the net assets available for plan
benefits of the TransCore Retirement Savings Plan (the Plan) at December 31,
1998 and 1997, and the changes in net assets available for plan benefits for
each of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Plan's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information included in
Schedules I through III is presented for purposes of additional analysis and is
not a required part of the basic financial statements but is additional
information required by ERISA. The Fund Information in the statement of net
assets available for plan benefits and the statement of changes in net assets
available for plan benefits is presented for purposes of additional analysis
rather than to present the net assets available for plan benefits and changes in
net assets available for plan benefits of each fund. Schedules I through III and
the Fund Information have been subjected to the auditing procedures applied in
the audits of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
April 2, 1999
<PAGE> 6
TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
DECEMBER 31, 1998
FUND INFORMATION
----------------
<TABLE>
<CAPTION>
MONEY
SHORT-TERM LONG-TERM MARKET WELLESLEY
FEDERAL GNMA CORPORATE PRIME INCOME WELLINGTON
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND FUND
----------- ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value
Science Applications International
Corporation Common Stock
(cost $2,274,158)
Vanguard Mutual Funds
(cost $9,568,523) $ 229,090 $ 228,689 $ 1,020,616(a) $ 705,469 $ 583,142 $ 2,826,710(a)
Short-term investments and cash
(cost $64,579)
Loans to participants - principal
balance
----------- ----------- ----------- --------- --------- -----------
Net assets available for
plan benefits $ 229,090 $ 228,689 $ 1,020,616 $ 705,469 $ 583,142 $ 2,826,710
=========== =========== =========== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
INDEX INTERNATIONAL SAIC
500 WINDSOR II GROWTH LOAN COMMON
PORTFOLIO FUND PORTFOLIO FUND STOCK TOTAL
----------- ----------- ------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value
Science Applications International
Corporation Common Stock
(cost $2,274,158) $ 5,222,276(a) $ 5,222,276
Vanguard Mutual Funds
(cost $9,568,523) $ 2,341,882(a) $ 2,501,021(a) $ 862,904(a) 11,299,523
Short-term investments and cash
(cost $64,579) 64,955 64,955
Loans to participants - principal
balance $ 73,841 73,841
----------- ----------- --------- -------- ----------- -----------
Net assets available for
plan benefits $ 2,341,882 $ 2,501,021 $ 862,904 $ 73,841 $ 5,287,231 $16,660,595
=========== =========== ========= ======== =========== ===========
</TABLE>
(a) Represents 5% or more of the net assets available for benefits.
See accompanying notes to the financial statements.
-2-
<PAGE> 7
TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION
DECEMBER 31, 1997
FUND INFORMATION
----------------
<TABLE>
<CAPTION>
MONEY
SHORT-TERM LONG-TERM MARKET WELLESLEY
FEDERAL GNMA CORPORATE PRIME INCOME WELLINGTON
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND FUND
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value
Science Applications International
Corporation Common Stock
(cost $1,392,907)
Vanguard Mutual Funds
(cost $7,684,316) $ 153,289 $ 230,780 $ 968,620(a) $ 737,374(a) $ 495,658 $2,634,417(a)
Short-term investments and cash
(cost $77,650)
Loans to participants - principal
balance
---------- ---------- ---------- ---------- ---------- ----------
Net assets available for
plan benefits $ 153,289 $ 230,780 $ 968,620 $ 737,374 $ 495,658 $2,634,417
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INDEX INTERNATIONAL SAIC
500 WINDSOR II GROWTH LOAN COMMON
PORTFOLIO FUND PORTFOLIO FUND STOCK TOTAL
---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value
Science Applications International
Corporation Common Stock
(cost $1,392,907) $2,563,314 $ 2,563,314
Vanguard Mutual Funds
(cost $7,684,316) $1,368,292(a) $1,750,943(a) $ 699,077(a) 9,038,450
Short-term investments and cash
(cost $77,650) 77,983 77,983
Loans to participants - principal
balance $ 87,480 87,480
---------- ---------- ---------- ---------- ---------- -----------
Net assets available for
plan benefits $1,368,292 $1,750,943 $ 699,077 $ 87,480 $2,641,297 $11,767,227
========== ========== ========== ========== ========== ===========
</TABLE>
(a) Represents 5% or more of the net assets available for benefits.
See accompanying notes to the financial statements.
-3-
<PAGE> 8
TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1998
FUND INFORMATION
----------------
<TABLE>
<CAPTION>
MONEY
SHORT-TERM LONG-TERM MARKET WELLESLEY
FEDERAL GNMA CORPORATE PRIME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest
Dividends $ 10,236 $ 14,724 $ 82,787 $ 38,106 $ 55,420
Net appreciation (depreciation) in
fair value of investments 1,733 277 1,836 5,840
------------ ------------ ------------ ------------ ------------
Total investment income 11,969 15,001 84,623 38,106 61,260
Contributions:
TransCore Company contributions 7,263 9,655 16,631 28,941 18,972
Participant contributions 26,803 37,999 61,534 64,498 77,626
Rollover contributions 487 1,070 2,677 36,830 6,017
------------ ------------ ------------ ------------ ------------
Total additions 46,522 63,725 165,465 168,375 163,875
------------ ------------ ------------ ------------ ------------
Withdrawals (4,031) (40,671) (80,569) (26,220) (33,265)
Net transfers among funds 33,310 (25,145) (32,900) (174,060) (43,126)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) 75,801 (2,091) 51,996 (31,905) 87,484
Net assets available for plan benefits:
Beginning of year 153,289 230,780 968,620 737,374 495,658
------------ ------------ ------------ ------------ ------------
End of year $ 229,090 $ 228,689 $ 1,020,616 $ 705,469 $ 583,142
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
MONEY
INDEX INTERNATIONAL
WELLINGTON 500 WINDSOR II GROWTH LOAN
FUND PORTFOLIO FUND PORTFOLIO FUND
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest $ 4,988
Dividends $ 312,847 $ 33,409 $ 249,238 $ 17,110
Net appreciation (depreciation) in
fair value of investments (1,047) 431,343 73,020 104,359
------------ ------------ ------------ ------------ ------------
Total investment income 311,800 464,752 322,258 121,469 4,988
Contributions:
TransCore Company contributions 49,784 71,846 87,544 28,503
Participant contributions 208,079 332,822 379,646 119,334
Rollover contributions 9,346 57,060 32,928 4,458
------------ ------------ ------------ ------------ ------------
Total additions 579,009 926,480 822,376 273,764 4,988
------------ ------------ ------------ ------------ ------------
Withdrawals (140,369) (57,573) (78,976) (14,071) (2,333)
Net transfers among funds (246,347) 104,683 6,678 (95,866) (16,294)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) 192,293 973,590 750,078 163,827 (13,639)
Net assets available for plan benefits:
Beginning of year 2,634,417 1,368,292 1,750,943 699,077 87,480
------------ ------------ ------------ ------------ ------------
End of year $ 2,826,710 $ 2,341,882 $ 2,501,021 $ 862,904 $ 73,841
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SAIC
COMMON
STOCK TOTAL
------------ ------------
<S> <C> <C>
Investment income:
Interest $ 4,988
Dividends 813,877
Net appreciation (depreciation) in
fair value of investments $ 1,863,903 2,481,264
------------ ------------
Total investment income 1,863,903 3,300,129
Contributions:
TransCore Company contributions 70,849 389,988
Participant contributions 303,933 1,612,274
Rollover contributions 50,583 201,456
------------ ------------
Total additions 2,289,268 5,503,847
------------ ------------
Withdrawals (132,401) (610,479)
Net transfers among funds 489,067 --
------------ ------------
Net increase (decrease) 2,645,934 4,893,368
Net assets available for plan benefits:
Beginning of year 2,641,297 11,767,227
------------ ------------
End of year $ 5,287,231 $ 16,660,595
============ ============
</TABLE>
See accompanying notes to the financial statements.
-4-
<PAGE> 9
TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997
FUND INFORMATION
----------------
<TABLE>
<CAPTION>
MONEY
SHORT-TERM LONG-TERM MARKET WELLESLEY
FEDERAL GNMA CORPORATE PRIME INCOME WELLINGTON
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND FUND
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Interest
Dividends $ 8,330 $ 12,709 $ 70,346 $ 36,331 $ 54,610 $ 221,363
Net appreciation (depreciation) in
fair value of investments 412 4,077 47,723 30,294 257,960
----------- ----------- ----------- ----------- ----------- -----------
Total investment income 8,742 16,786 118,069 36,331 84,904 479,323
Contributions:
TransCore Company contributions 8,810 11,813 20,538 24,109 23,042 60,293
Participant contributions 31,430 41,242 68,823 80,321 87,831 232,456
Rollover contributions 4,818 21,468 29,821 3,926 16,287
----------- ----------- ----------- ----------- ----------- -----------
Total additions 53,800 91,309 207,430 170,582 199,703 788,359
----------- ----------- ----------- ----------- ----------- -----------
Withdrawals (8,415) (9,272) (83,688) (26,684) (3,675) (192,213)
Net transfers among funds (6,160) 6,079 (50,346) (68,800) (95,025) 20
----------- ----------- ----------- ----------- ----------- -----------
Net increase 39,225 88,116 73,396 75,098 101,003 596,166
Net assets available for plan benefits:
Beginning of year 114,064 142,664 895,224 662,276 394,655 2,038,251
----------- ----------- ----------- ----------- ----------- -----------
End of year $ 153,289 $ 230,780 $ 968,620 $ 737,374 $ 495,658 $ 2,634,417
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
INDEX INTERNATIONAL SAIC
500 WINDSOR II GROWTH LOAN COMMON
PORTFOLIO FUND PORTFOLIO FUND STOCK TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest $ 6,051 $ 6,051
Dividends $ 26,075 $ 154,631 $ 29,254 613,649
Net appreciation (depreciation) in
fair value of investments 245,064 211,482 (17,145) $ 892,863 1,672,730
----------- ----------- ----------- ----------- ----------- -----------
Total investment income 271,139 366,113 12,109 6,051 892,863 2,292,430
Contributions:
TransCore Company contributions 81,923 93,641 35,341 64,327 423,837
Participant contributions 350,700 388,771 146,388 243,369 1,671,331
Rollover contributions 58,868 56,110 15,415 39,015 245,728
----------- ----------- ----------- ----------- ----------- -----------
Total additions 762,630 904,635 209,253 6,051 1,239,574 4,633,326
----------- ----------- ----------- ----------- ----------- -----------
Withdrawals (145,176) (176,640) (7,450) (13,207) (285,368) (951,788)
Net transfers among funds 113,486 91,973 (12,869) 16,018 5,624 --
----------- ----------- ----------- ----------- ----------- -----------
Net increase 730,940 819,968 188,934 8,862 959,830 3,681,538
Net assets available for plan benefits:
Beginning of year 637,352 930,975 510,143 78,618 1,681,467 8,085,689
----------- ----------- ----------- ----------- ----------- -----------
End of year $ 1,368,292 $ 1,750,943 $ 699,077 $ 87,480 $ 2,641,297 $11,767,227
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
-5-
<PAGE> 10
TRANSCORE RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF RETIREMENT SAVINGS PLAN
THE PLAN
The following description of the TransCore Retirement Savings Plan (the "Plan")
provides only general information. Participants should refer to the Plan
agreement for a more comprehensive description of the Plan's provisions.
The Plan is a defined contribution plan that became effective January 1, 1986.
The Plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974 (ERISA) and the Internal Revenue Code.
The purpose of the Plan is to encourage and assist employees in following a
systematic savings program suited to their individual objectives, and to provide
an opportunity for employees to become stockholders of Science Application
International Corporation (SAIC). TransCore (the "Company") is a wholly-owned
subsidiary of SAIC. Any employee of the Company who was hired before April 1,
1986 or any employee who has completed at least one year of continuous service,
as determined in accordance with the Company's service rules, or who has been
compensated for 1,000 or more hours in a period of 12 consecutive months is
eligible for participation.
Eligible employees may participate in the Plan by authorizing the Company to
make monthly salary deferrals. The Plan permits participants to elect to defer
up to 15% of their compensation. The Company will match 50% of the participant's
salary deferrals on the first 4% of eligible compensation. At the discretion of
the Board of Directors, the Company may also make additional profit-sharing
contributions. All of the above savings and elections are subject to regulatory
and Plan limitations.
A participant's vested percentage in the matching and profit-sharing
contribution accounts are as follows:
<TABLE>
<CAPTION>
VESTED
YEARS OF SERVICE PERCENTAGE
---------------- ----------
<S> <C>
Less than one year 0
After one year, but less than two years 20
After two years, but less than three years 40
After three years, but less than four years 60
After four years, but less than five years 80
After five years 100
</TABLE>
The nonvested portion of a participant's profit-sharing contribution account is
forfeited at the end of the Plan year in which termination occurs and is
reallocated as additional profit-sharing contributions to the remaining eligible
participants. The nonvested portion of a participant's matching contribution
account is forfeited at the participant's date of termination and is used to
reduce future employer matching contributions to the Plan. Participants who
retire may withdraw their vested balances in a lump sum payment at any time
prior to attaining the age of 70 1/2.
Participants may borrow up to one-half of their vested account balances subject
to certain minimum and maximum loan limitations. All approved loans require the
participant to pledge the vested portion of their account balance as collateral.
The loan must be repaid in regular installments through payroll deductions over
a period not to exceed five years.
-6-
<PAGE> 11
TRANSCORE RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
INVESTMENT FUNDS
Participants may allocate contributions among fund options at their discretion.
Participants may transfer balances between all funds with the exception of the
SAIC Common Stock Fund, which can receive amounts only through contributions.
The investment options offered by the Plan are described below.
VANGUARD FUNDS
Each of the following mutual funds has its own investment objectives and is
subject to varying degrees of risk.
- - Short-Term Federal Portfolio - Seeks a high level of interest income and
modest fluctuations in share price by investing primarily in short-term
securities issued by the U.S. government and its agencies.
- - GNMA Portfolio - Seeks a high-level of interest income by investing in a
broad range of mortgage-backed securities issued by the Government National
Mortgage Association.
- - Long-Term Corporate Portfolio - Seeks a high and stable level of interest
income by investing in a widely diversified group of long-term bonds.
- - Money Market Prime Portfolio - Seeks interest income and a stable share
price by investing in short-term, high quality money market instruments
issued by financial institutions, non-financial corporations and the U.S.
government and its agencies.
- - Wellesley Income Fund - Seeks a high level of income and long-term growth
of income by investing in high-quality long-term and intermediate-term
bonds and dividend-paying stocks.
- - Wellington Fund - Seeks long-term growth of capital and income by investing
in stocks and bonds.
- - Index 500 Portfolio - Seeks long-term growth of capital by investing in the
shares of companies included in the Standard & Poor's 500 index.
- - Windsor II - Seeks long-term growth of capital by investing in a
diversified group of out-of-favor stocks of large capitalization companies.
- - International Growth Portfolio - Seeks long-term growth of capital by
investing in stocks of high quality, seasoned companies outside of the
United States.
LOAN FUND
This fund represents the principal balance of amounts loaned to participants.
SAIC COMMON STOCK FUND
This fund purchases shares of SAIC Class A Common stock.
ADMINISTRATION
The designated Trustee of the Plan is Vanguard Fiduciary Trust Company (VFTC).
The administration of the Plan is vested in the Company, which may designate one
or more persons to operate and administer the Plan. Expenses of administering
the Plan are paid by the Company.
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA.
-7-
<PAGE> 12
TRANSCORE RETIREMENT SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION AND INCOME RECOGNITION
The accompanying financial statements are prepared on the accrual basis of
accounting.
Investments in the Vanguard mutual funds and short-term investments are valued
at quoted market prices, which represent the net asset values of shares held by
the Plan at year-end. Loans to participants are valued at cost, which
approximates fair value. SAIC Common Stock is carried at fair market value. A
general public market does not exist for SAIC's Common Stock; therefore, the
fair market value of SAIC's Common Stock is determined by the Board of Directors
pursuant to a stock price formula and valuation process which includes an
appraisal prepared by an independent firm. The Board of Directors of SAIC
reserves the right to alter the formula.
Investment income is recorded when earned.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Plan Administrator to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized and unrealized gains and losses are calculated based upon the
historical cost of assets. Such gains and losses are computed on a current value
basis for the Form 5500. Accordingly, this difference may result in
classification differences between realized and unrealized gains and losses.
NOTE 3 - INCOME TAX STATUS
The TransCore Retirement Savings Plan is a qualified plan pursuant to Section
401(a) of the Internal Revenue Code (the "Code") and the related Trust is exempt
from federal taxation under Section 401(a) of the Code. A favorable tax
determination letter dated March 24, 1994 has been received by the Plan. The
Plan has been amended since receiving this determination letter. However, the
Plan administrator believes that the Plan is designed and currently being
operated in compliance with the applicable provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal income taxes in the
accompanying financial statements.
NOTE 4 - PARTY-IN-INTEREST TRANSACTIONS
Transactions involving cash, securities or assets of the Company, SAIC, the
Trustee or other affiliated persons are considered to be party-in-interest
transactions under Section 2520.103-10 of the Department of Labor Rules and
Regulations for Reporting and Disclosure. The Plan invests in shares of mutual
funds managed by an affiliate of VFTC. VFTC acts as trustee for only those
investments as defined by the Plan. In addition, the SAIC Common Stock Fund
purchases shares of SAIC class A common stock. Transactions in such investments
qualify as party-in-interest transactions which are exempt from the prohibited
transaction rules.
NOTE 5 - SUBSEQUENT EVENT
Effective January 1, 1999, the Plan was amended with respect to the Company's
matching contribution. Starting in 1999, one-half of the match made on behalf of
each employee will be invested in the SAIC Common Stock Fund, while the
remainder will be invested pursuant to the employee's investment elections.
-8-
<PAGE> 13
ADDITIONAL INFORMATION
SCHEDULE I
TRANSCORE RETIREMENT SAVINGS PLAN
FORM 5500 ITEM 27(a) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES CURRENT
IDENTITY OF ISSUE DESCRIPTION OR UNITS COST VALUE
- ----------------- ----------- -------- ---- -----
Mutual Funds:
The Vanguard Group
<S> <C> <C> <C> <C>
of Investment Vanguard Short-Term Federal Portfolio 22,328 $ 224,748 $ 229,090
Companies *
Vanguard GNMA Portfolio 21,884 222,501 228,689
Vanguard Long-Term Corporate Portfolio 109,862 939,450 1,020,616
Vanguard Money Market Prime Portfolio 705,469 705,469 705,469
Vanguard Wellesley Income Fund 26,363 538,301 583,142
Vanguard Wellington Fund 96,310 2,364,205 2,826,710
Vanguard Index 500 Portfolio 20,552 1,630,622 2,341,882
Vanguard Windsor II Fund 83,786 2,194,749 2,501,021
Vanguard International Growth Portfolio 45,972 748,478 862,904
Participant Loans Due May 1999 to October 2003; 0 73,841
7.4% - 12%
Common Stock:
Science Applications
International Class A Common Stock 88,709 2,274,158 5,222,276
Corporation *
Short-Term Investments
and Cash 64,439 64,579 64,955
----------- ------------
Total Investment Portfolio $11,907,260 $ 16,660,595
=========== ============
</TABLE>
* Represents a party-in-interest.
-9-
<PAGE> 14
ADDITIONAL INFORMATION
SCHEDULE II
TRANSCORE RETIREMENT SAVINGS PLAN
FORM 5500 ITEM 27(b) - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DETAILED DESCRIPTION OF LOANS INCLUDING
DATE OF MAKING AND MATURITY, INTEREST RATE,
ORIGINAL AMOUNT RECEIVED UNPAID THE TYPE AND VALUE OF COLLATERAL, ANY
IDENTITY AND AMOUNT DURING REPORTING YEAR BALANCE AT RENEGOTIATION OF THE LOAN AND THE TERMS OF
ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR THE RENEGOTIATION AND OTHER MATERIAL ITEMS
- ------------------ ------- --------- -------- ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Deborah Hoffman
314 Dimpsey Road Loan date: 4/25/95; Maturity date: 7/6/00;
Hallifax, VA 17032 $ 4,400 $ - $ - $ 4,001 Interest rate: 9%; Collateral: vested account balance
</TABLE>
<TABLE>
<CAPTION>
IDENTITY AND AMOUNT OVERDUE
ADDRESS OF OBLIGOR PRINCIPAL INTEREST
- ------------------ --------- --------
<S> <C> <C>
Deborah Hoffman
314 Dimpsey Road
Hallifax, VA 17032 $ 4,001 $ -
</TABLE>
-10-
<PAGE> 15
ADDITIONAL INFORMATION
SCHEDULE III
TRANSCORE RETIREMENT SAVINGS PLAN
FORM 5500 ITEM 27(d) - SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
TRANSACTIONS OR SERIES OF TRANSACTIONS IN EXCESS OF 5%
OF THE CURRENT VALUE OF PLAN ASSETS AS OF JANUARY 1, 1998
<TABLE>
<CAPTION>
CONTRACT CURRENT
VALUE/ VALUE ON
PARTY DESCRIPTION NUMBER OF PURCHASE SELLING COST OF TRANSACTION GAIN ON
INVOLVED OF ASSET TRANSACTIONS PRICE PRICE ASSET DATE TRANSACTION
-------- -------- ------------ ----- ----- ----- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
SAIC SAIC Common Stock Fund 35 $ 1,373,525 $ 1,373,525
29 $ 591,499 $ 505,348 $ 591,499 $ 86,151
Vanguard Wellington Fund 50 $ 809,337 $ 809,337
37 $ 615,996 $ 508,088 $ 615,996 $107,908
Vanguard Index 500 Portfolio Fund 70 $ 742,969 $ 742,969
30 $ 200,722 $ 168,818 $ 200,722 $ 31,904
Vanguard Windsor II Fund 61 $ 946,862 $ 946,862
38 $ 269,804 $ 209,880 $ 269,804 $ 59,924
Vanguard Prime Money Mkt. 76 $ 351,065 $ 351,065 --
33 $ 382,970 $ 382,970 $ 382,970
</TABLE>
-11-
<PAGE> 1
Exhibit 28(c)
Securities and Exchange Commission
Washington, D.C., 20549
Form 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the calendar year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN
(Full Title of Plan)
Bell Communications Research, Inc.
445 South Street, Morristown NJ 07960 (Name of
issuer of the securities held pursuant to
the Plan and the address of its principal executive office)
<PAGE> 2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Departmental Benefits Committee of the Bell Communications Research Savings and
Security Plan, duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
DATE 4-14-99 s/ Gwendolyn P. Taylor
------------------------------------
Gwendolyn P. Taylor
Employees Benefit Committee
<PAGE> 3
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
__________
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
<PAGE> 4
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
----------
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for
Benefits, with Fund Information
as of December 31, 1998 and 1997 2-3
Statement of Changes in Net Assets Available
for Benefits, with Fund Information
for the years ended December 31, 1998 and 1997 4-5
NOTES TO FINANCIAL STATEMENTS 6-10
SUPPLEMENTAL SCHEDULES:
Schedule I: Item 27a - Schedule of Assets Held for Investment Purposes
as of December 31, 1998 11-13
Schedule II: Item 27d - Schedule of Reportable Transactions
for the year ended December 31, 1998 14
</TABLE>
Other schedules required by Section 2520.103-10 of the Department of Labor Rules
and Regulations for Reporting and Disclosure under the Employee Retirement
Income Security Act of 1974 have been omitted because they are not applicable.
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and the Administrative Committee
of the Bell Communications Research Savings and Security Plan
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
presents fairly, in all material respects, the net assets available for benefits
of the Bell Communications Research Savings and Security Plan (the Plan) at
December 31, 1998 and 1997, and the changes in net assets available for benefits
for the years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Plan's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information included in
Schedules I and II is presented for purposes of additional analysis and is not a
required part of the basic financial statements but is additional information
required by the Employee Retirement Income Security Act. The fund information in
the statements of net assets available for benefits and the statements of
changes in net assets available for benefits is presented for purposes of
additional analysis rather than to present the net assets available for benefits
and the changes in net assets available for benefits of each fund. Schedules I
and II and the fund information have been subjected to the auditing procedures
applied in the audits of the basic financial statements, and in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/PRICEWATERHOUSECOOPERS LLP
New York, New York
March 26, 1999
1
<PAGE> 6
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
AS OF DECEMBER 31, 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
Non
Participant
Directed Participant Directed
------------ -------------------------------------------------------------------------
SAIC Bellcore Bellcore Bellcore
Non SAIC SAIC Telephone Diversified Interest Vanguard
Exchangeable Stock Exchangeable Equity Telephone Income 500 Index
Stock Purchase Stock Fund Portfolio Fund Fund
------------ -------- ------------ --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $2,323 $350
Diversified Telephone Portfolio
common shares
SAIC common shares $84 $662
Shares in registered
investment companies $1,309
Temporary cash investments $49 4 8 $343
--- --- ---- ------ ---- ------ ------
84 49 666 2,323 358 343 1,309
Investment contracts with insurance
companies, at contract value: 2,980
--- --- ---- ------ ---- ------ ------
Total investments 84 49 666 2,323 358 3,323 1,309
Receivables:
Company contributions 21
Loans to participants
Securities 122 32
Interest 2
--- --- ---- ------ ---- ------ ------
Total Assets $84 $70 $666 $2,447 $358 $3,355 $1,309
=== === ==== ====== ==== ====== ======
LIABILITIES:
Securities payable $148
--- --- ---- ------ ---- ------ ------
Total liabilities 148
--- --- ---- ------ ---- ------ ------
Net assets available for benefits $84 $70 $666 $2,299 $358 $3,355 $1,309
=== === ==== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
----------------------------------------------------------------------------------
Vanguard Vanguard
International Vanguard Vanguard Total Bond Vanguard Vanguard
Growth Explorer PRIMECAP Market Index Wellington Windsor II
Fund Fund Fund Fund Fund Fund
------------- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares
Diversified Telephone Portfolio
common shares
SAIC common shares
Shares in registered
investment companies $214 $114 $510 $144 $843 $902
Temporary cash investments
---- ---- ---- ---- ---- ----
214 114 510 144 843 902
Investment contracts with insurance
companies, at contract value:
---- ---- ---- ---- ---- ----
Total investments 214 114 510 144 843 902
Receivables:
Company contributions
Loans to participants
Securities
Interest
---- ---- ---- ---- ---- ----
Total Assets $214 $114 $510 $144 $843 $902
==== ==== ==== ==== ==== ====
LIABILITIES:
Securities payable
---- ---- ---- ---- ---- ----
Total liabilities
---- ---- ---- ---- ---- ----
Net assets available for benefits $214 $114 $510 $144 $843 $902
==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
----------------------
Loan
Fund Total
---- -----
<S> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $2,673
Diversified Telephone Portfolio
common shares
SAIC common shares 746
Shares in registered
investment companies 4,036
Temporary cash investments 404
---- -------
7,859
Investment contracts with insurance
companies, at contract value: 2,980
---- -------
Total investments 10,839
Receivables:
Company contributions 21
Loans to participants $227 227
Securities 154
Interest 2
---- -------
Total Assets $227 $11,243
==== =======
LIABILITIES:
Securities payable $148
---- -------
Total liabilities 148
---- -------
Net assets available for benefits $227 $11,095
==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
-2-
<PAGE> 7
SAVINGS AND SECURITY PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
AS OF DECEMBER 31, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Participant Directed
----------------------------------------------------------------------------------------
Bellcore Bellcore Bellcore Vanguard
SAIC SAIC Telephone Diversified Interest Vanguard International
Stock Exchangeable Equity Telephone Income 500 Index Growth
Purchase Stock Fund Portfolio Fund Fund Fund
-------- ------------ -------- ----------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $2,707
Diversified Telephone Portfolio
common shares $285
SAIC common shares $155
Shares in registered
investment companies $1,318 $351
Temporary cash investments $14 17 40 4 $134
--- ---- ------ ---- ------ ------ ----
14 172 2,747 289 134 1,318 351
Investment contracts with insurance
companies, at contract value: 3,098
--- ---- ------ ---- ------ ------ ----
Total investments 14 172 2,747 289 3,232 1,318 351
Receivables:
Company contributions 60
Loans to participants
Securities 25 2
Interest 4 1
--- ---- ------ ---- ------ ------ ----
Total Assets $74 $172 $2,776 $292 $3,232 $1,318 $351
=== ==== ====== ==== ====== ====== ====
LIABILITIES:
Securities payable $12 $11
--- ---- ------ ---- ------ ------ ----
Total liabilities 12 11
--- ---- ------ ---- ------ ------ ----
Net assets available for benefits $74 $172 $2,764 $292 $3,221 $1,318 $351
=== ==== ====== ==== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
---------------------------------------------------------------------------------
Vanguard
Vanguard Vanguard Total Bond Vanguard Vanguard
Explorer PRIMECAP Market Index Wellington Windsor II Loan
Fund Fund Fund Fund Fund Fund Total
-------- -------- ------------ ---------- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $2,707
Diversified Telephone Portfolio
common shares 285
SAIC common shares 155
Shares in registered
investment companies $130 $503 $49 $1,081 $1,062 4,494
Temporary cash investments 209
---- ---- --- ------ ------ ---- -------
130 503 49 1,081 1,062 7,850
Investment contracts with insurance
companies, at contract value: 3,098
---- ---- --- ------ ------ ---- -------
Total investments 130 503 49 1,081 1,062 10,948
Receivables:
Company contributions 60
Loans to participants $253 253
Securities 27
Interest 5
---- ---- --- ------ ------ ---- -------
Total Assets $130 $503 $49 $1,081 $1,062 $253 $11,293
==== ==== === ====== ====== ==== =======
LIABILITIES:
Securities payable $23
---- ---- --- ------ ------ ---- -------
Total liabilities 23
---- ---- --- ------ ------ ---- -------
Net assets available for benefits $130 $503 $49 $1,081 $1,062 $253 $11,270
==== ==== === ====== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
-3-
<PAGE> 8
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
Non
Participant
Directed Participant Directed
------------ ---------------------------------------------------------------------------
SAIC Bellcore Bellcore Bellcore
Non SAIC SAIC Telephone Diversified Interest Vanguard
Exchangeable Stock Exchangeable Equity Telephone Income 500 Index
Stock Purchase Stock Fund Portfolio Fund Fund
------------ -------- ------------ --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment income
Dividends $68 $6 $203 $22
Interest 2
Net change in appreciation
(depreciation) of investments $12 $1 $227 868 128 318
--- --- ---- ------ ---- ------ ------
Total investment earnings 12 1 227 938 134 203 340
--- --- ---- ------ ---- ------ ------
Contributions
Employee allotments 49 128 133 68
Employer Contributions 153 82 32 16
--- --- ---- ------ ---- ------ ------
153 131 128 165 84
--- --- ---- ------ ---- ------ ------
Transfer of participants' balances, net (76) 151 223 (878) (12) 210 149
--- --- ---- ------ ---- ------ ------
Total additions (deductions) 89 283 578 60 122 578 573
--- --- ---- ------ ---- ------ ------
Deductions from net assets attributable to:
Distributions to participants 5 287 84 524 56 442 582
Administrative expenses 1 2
--- --- ---- ------ ---- ------ ------
Net increase (decrease) 84 (4) 494 (465) 66 134 (9)
Net assets available for benefits:
Beginning of year 74 172 2,764 292 3,221 1,318
--- --- ---- ------ ---- ------ ------
End of year $84 $70 $666 $2,299 $358 $3,355 $1,309
=== === ==== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
-----------------------------------------------------------------------------
Vanguard Vanguard
International Vanguard Vanguard Total Bond Vanguard Vanguard
Growth Explorer PRIMECAP Market Index Wellington Windsor II
Fund Fund Fund Fund Fund Fund
------------- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment income
Dividends $4 $1 $19 $6 $95 $89
Interest
Net change in appreciation
(depreciation) of investments 39 1 86 2 22 74
---- ---- ---- ---- ---- ----
Total investment earnings 43 2 105 8 117 163
---- ---- ---- ---- ---- ----
Contributions
Employee allotments 20 8 40 10 59 51
Employer Contributions 3 1 7 1 10 10
---- ---- ---- ---- ---- ----
23 9 47 11 69 61
---- ---- ---- ---- ---- ----
Transfer of participants' balances, net (62) 4 19 81 128 206
---- ---- ---- ---- ---- ----
Total additions (deductions) 4 15 171 100 314 430
---- ---- ---- ---- ---- ----
Deductions from net assets attributable to:
Distributions to participants 141 31 164 5 552 590
Administrative expenses
---- ---- ---- ---- ---- ----
Net increase (decrease) (137) (16) 7 95 (238) (160)
Net assets available for benefits:
Beginning of year 351 130 503 49 1,081 1,062
---- ---- ---- ---- ---- ----
End of year $214 $114 $510 $144 $843 $902
==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
----------------
Loan
Fund Total
---- ------
<S> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment income
Dividends $513
Interest $20 22
Net change in appreciation
(depreciation) of investments 1,778
---- -------
Total investment earnings 20 2,313
---- -------
Contributions
Employee allotments 566
Employer Contributions 315
---- -------
881
---- -------
Transfer of participants' balances, net (143)
---- -------
Total additions (deductions) (123) 3,194
---- -------
Deductions from net assets attributable to:
Distributions to participants (97) 3,366
Administrative expenses 3
---- -------
Net increase (decrease) (26) (175)
Net assets available for benefits:
Beginning of year 253 11,270
---- -------
End of year $227 $11,095
==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<PAGE> 9
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Participant Directed
---------------------------------------------------------------------------------------
Bellcore Bellcore Bellcore Vanguard
SAIC SAIC Telephone Diversified Interest Vanguard International
Stock Exchangeable Equity Telephone Income 500 Index Growth
Purchase Stock Fund Portfolio Fund Fund Fund
-------- ------------ --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment income
Dividends $99 $6 $229 $26 $15
Interest 3
Net change in appreciation
(depreciation) of investments 998 91 272 (3)
--- ---- ------ ---- ------ ------ ----
Total investment earnings 1,100 97 229 298 12
--- ---- ------ ---- ------ ------ ----
Contributions
Participant $1 139 174 120 67
Company 72 41 73 31 13
--- ---- ------ ---- ------ ------ ----
73 180 247 151 80
--- ---- ------ ---- ------ ------ ----
Transfer of participants' balances, net 1 $172 (817) (42) (453) 285 5
--- ---- ------ ---- ------ ------ ----
Total additions (deductions) 74 172 463 55 23 734 97
--- ---- ------ ---- ------ ------ ----
Deductions from net assets attributable to:
Distributions to participants 544 3 728 247 70
Administrative expenses 1 2
--- ---- ------ ---- ------ ------ ----
Net increase (decrease) 74 172 (82) 52 (707) 487 27
Net assets available for benefits:
Beginning of year 2,846 240 3,928 831 324
--- ---- ------ ---- ------ ------ ----
End of year $74 $172 $2,764 $292 $3,221 $1,318 $351
=== ==== ====== ==== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
-------------------------------------------------------------------------------------
Vanguard
Vanguard Vanguard Total Bond Vanguard Vanguard
Explorer PRIMECAP Market Index Wellington Windsor II Loan
Fund Fund Fund Fund Fund Fund Total
-------- -------- ------------ ---------- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment income
Dividends $12 $13 $2 $91 $94 $587
Interest $20 23
Net change in appreciation
(depreciation) of investments (4) 30 1 108 123 1,616
---- ---- --- ------ ------ ---- -------
Total investment earnings 8 43 3 199 217 20 2,226
---- ---- --- ------ ------ ---- -------
Contributions
Participant 16 16 5 47 96 14 695
Company 4 6 2 21 20 283
---- ---- --- ------ ------ ---- -------
20 22 7 68 116 14 978
---- ---- --- ------ ------ ---- -------
Transfer of participants' balances, net 49 386 8 228 340 (162)
---- ---- --- ------ ------ ---- -------
Total additions (deductions) 77 451 18 495 673 (128) 3,204
---- ---- --- ------ ------ ---- -------
Deductions from net assets attributable to:
Distributions to participants 15 36 199 182 (109) 1,915
Administrative expenses 3
---- ---- --- ------ ------ ---- -------
Net increase (decrease) 62 415 18 296 491 (19) 1,286
Net assets available for benefits:
Beginning of year 68 88 31 785 571 272 9,984
---- ---- --- ------ ------ ---- -------
End of year $130 $503 $49 $1,081 $1,062 $253 $11,270
==== ==== === ====== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
-5-
<PAGE> 10
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
NOTES TO FINANCIAL STATEMENTS
----------
A. PLAN DESCRIPTION:
The Bell Communications Research Savings and Security Plan (the Plan) was
established by Bell Communications Research (the Company) to provide a
convenient way for non-salaried employees to save on a regular and long
term basis. On November 14, 1997, the Company was sold to Science
Applications International Corporation (SAIC). Prior to the sale, the
Company was owned by the Regional Bell Operating Companies (RBOC's).
The following description of the Plan provides only general information.
Participants should refer to the Plan Prospectus for a more complete
description of the Plan's provisions.
1. General. The Plan is a defined contribution plan covering all
non-salaried employees of the Company who have one month of service
and are age twenty-one or older. It is subject to the provisions of
the Employee Retirement Income Security Act of 1974 (ERISA).
2. Contributions. Each year, participants may contribute up to 16 percent
of pretax annual compensation, as defined in the Plan. Participants
may also contribute amounts representing distributions from other
qualified defined benefit or contribution plans. After one year of
service, the Company contributes 70 percent of the first 6 percent of
compensation that a participant contributes to the Plan. In addition,
after one year of service, the Company makes a contribution of a 1/2
percent of compensation on behalf of each participant. Effective
November 14, 1997, this automatic contribution is deposited into the
SAIC Stock Purchase Fund until the following quarterly trade and then
into SAIC stock. This fund and related investment option were also
established upon the sale of the Company. Prior to the sale of the
Company, the automatic contribution was deposited according to each
participant's asset allocation at that time; for participants who did
not make a voluntary contribution, the automatic contribution was
deposited into the Interest Income Fund. The contribution is made
during the first quarter for participant earnings of the previous
calendar year. These automatic Company contributions are immediately
vested. Effective with the sale of the Company, 50 percent of Company
contributions are invested in SAIC stock and 50 percent are invested
in accordance with each participant's directed allocation.
Contributions are subject to certain IRS limitations.
3. Participant Accounts. Each participant's account is credited with the
participant's contribution and allocations of the Company's
contribution and Fund earnings, and each participant's account is
charged with an allocation of administrative expenses. Allocations are
based on participant earnings or account balances, as defined. The
benefit to which a participant is entitled is the benefit that can be
provided from the participant's vested account.
4. Vesting. Participants are immediately vested in their contributions
and the automatic Company contribution, plus actual earnings thereon.
Vesting in the Company's matching contribution plus actual earnings
thereon is based on years of continuous service. A participant is 100
percent vested after five years of credited service.
5. Investment Options. The Plan is comprised of the following
investments:
VANGUARD TOTAL BOND MARKET INDEX FUND: This participant directed
fund invests in United States treasury obligations, federal
agency mortgage backed obligations and investment grade corporate
obligations. Effective October 27, 1998, the fund name changed
from the Vanguard Total Bond Market Portfolio to the Vanguard
Total Bond Market Index Fund.
VANGUARD EXPLORER FUND: This participant directed fund invests in
the common stock of a diversified group of small capitalization
companies.
VANGUARD 500 INDEX FUND: This participant directed fund invests
in all of the 500 stocks that make up the Standard & Poor's 500
Composite Stock Price Index. Effective October 27, 1998, the fund
name changed from the Vanguard Index Trust-500 Portfolio to the
Vanguard 500 Index Fund.
-6-
<PAGE> 11
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
NOTES TO FINANCIAL STATEMENTS, continued
----------
VANGUARD INTERNATIONAL GROWTH FUND: This participant directed
fund invests in the common stocks of companies based outside of
the United States. Effective October 27, 1998, the fund name
changed from the Vanguard International Growth Portfolio to the
Vanguard International Growth Fund.
VANGUARD / PRIMECAP FUND: This participant directed fund invests
in the common stock of medium capitalization companies.
VANGUARD / WELLINGTON FUND: This participant directed fund
invests approximately 65 percent of its assets in common stocks
and the remaining 35 percent in bonds.
VANGUARD / WINDSOR II: This participant directed fund invests in
the common stock of large capitalization companies.
SAIC EXCHANGEABLE STOCK FUND: As previously stated, this fund was
created upon the sale of the Company to SAIC. This fund invests
primarily in SAIC class A common stock and is participant
directed to the extent that participant contributions were used
to purchase SAIC stock.
SAIC NON EXCHANGEABLE STOCK FUND: This fund was created upon the
sale of the Company to SAIC. This is a non-participant directed
fund created to invest 50% of the company matching contribution
in SAIC class A common stock.
The SAIC STOCK PURCHASE FUND is not a participant directed
investment option; it is a temporary holding fund designed to
hold respective participant and Company contributions until the
following SAIC common stock quarterly trade date. Pending the
quarterly trade, the respective contributions are invested in the
Vanguard Money Market Reserves Portfolio.
BELLCORE INTEREST INCOME FUND: This participant directed fund
invests primarily in investment contracts issued by insurance
companies and banks.
BELLCORE - DIVERSIFIED TELEPHONE PORTFOLIO STOCK FUND: This fund
invests primarily in common stock and has been frozen to new
participant directed contributions since 1984.
BELLCORE - TELEPHONE EQUITY FUND STOCK FUND: This fund invests in
the common stock of the RBOC's. Upon the sale of the Company to
SAIC, the fund was frozen to new participant directed
contributions.
6. Participant Loans Receivable. Participants may borrow from their fund
accounts a minimum of $1,000 up to a maximum of the lesser of (a)
$50,000 less the participant's highest outstanding loan balance during
the preceding one year period; or (b) 50 percent of their vested
account balance. Additionally, loans may not exceed the vested value
of the participant's Plan account less their vested amounts in the
SAIC Stock Fund. Loan transactions are treated as a transfer to (from)
the investment fund from (to) the Loan Fund. Loan terms range from 12
to 56 months. The loans are secured by the balance in the
participant's account and bear interest at a rate commensurate with
local prevailing rates as determined quarterly by the Plan
administrator. Interest rates ranged from 7 to 10 percent during 1998
and 1997. Principal and interest is paid ratably through monthly
payroll deductions.
7. Payment of Benefits. On termination of service other than by death, a
participant may elect to receive either a lump-sum amount equal to the
value of the participant's vested interest in his or her account, or
annual installments not to exceed the life expectancy of the
participant and spouse, if applicable. For termination of service due
to death, a beneficiary may receive the value of the vested interest
in his or her account as a lump-sum distribution, or in two annual
installments, if the participant has so elected.
-7-
<PAGE> 12
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
NOTES TO FINANCIAL STATEMENTS, continued
----------
8. Forfeited Accounts. Forfeited accounts are used to reduce future
Company contributions. Company contributions were reduced by $1,000
during 1998 and 1997.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - The accompanying financial statements have been
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Investment Valuation and Income Recognition- The Plan's investments are
valued at fair value, except for its investment contracts which are valued
at contract value (Note C).
Shares of registered investment companies are valued at quoted market
prices which represent the net asset value of shares held by the Plan at
year end. Quoted market prices for the value of the common shares of each
company in the Telephone Equity Fund and the Diversified Telephone
Portfolio are obtained on the basis of the closing price on the New York
Stock Exchange on the year end date or, if no sales were made on that
date, at the closing price on the New York Stock Exchange on the next
preceding day on which sales were made.
Participant notes receivable are valued at outstanding principal balance
which approximates fair value.
A general public market for the Company's common stock does not exist;
therefore, the fair value of the common stock is determined pursuant to a
stock price formula and valuation process which includes an appraisal
prepared by an independent appraisal firm. Periodic determinations of fair
value of the common stock are made by the SAIC Board of Directors, with
the assistance of the independent appraisal firm. The SAIC Board of
Directors reserves the right to alter the formula.
The gains or losses realized on distributions of investments and the
increases or decreases in unrealized appreciation are calculated as the
difference between the current fair value and the fair value of the
investments at the beginning of the year, or purchase price if purchased
during the year. As of December 31, 1998, the fair value of the Company's
Class A Common Stock was $58.87 per share and the Plan held approximately
12,663 shares.
It is the policy of the company to keep the SAIC Common Stock Fund
invested primarily in common stock, except for estimated reserves for use
in distributions and investment exchanges by participants. Such reserves
are invested in the Vanguard Prime Money Market fund. If reserves in the
SAIC Common Stock Fund are less than the amount required at any given time
to take required distributions and investment changes, investment
exchanges out of the SAIC Common Stock Fund by participants may have to be
deferred.
Purchases and sales of securities are reflected as of the trade date.
Investments are valued on a daily basis. Dividend income is recorded on
the ex-dividend date. Interest earned on investments is recorded on the
accrual basis.
Payment of Benefits- Benefits are recorded when paid.
-8-
<PAGE> 13
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
NOTES TO FINANCIAL STATEMENTS, continued
----------
C. INVESTMENT CONTRACTS WITH INSURANCE COMPANIES:
The plan maintains investments in fully benefit-responsive investment
contracts with a number of insurance companies and banks. (Benefit
responsiveness is the extent to which contract terms permit and require
withdrawals at contract value for benefit payments, loans, or transfers to
other investment options offered to the participants by the Plan).The
accounts are credited with earnings of the underlying investments
(principally bank certificates of deposit, and other fixed income
products) and charged for Plan withdrawals and administrative expenses.
The contracts are included in the financial statements at contract value,
which approximates fair value, as reported to the Plan by the respective
provider. Contract value represents contributions made under the contract,
plus earnings, less plan withdrawals and administrative expenses. See Item
27a of the supplemental schedules for a complete list of all contracts
held in the fund.
Approximately 27 percent of total net assets at December 31, 1998 and
1997, were invested in investment contracts. These contracts are subject
to credit risk. If any of the companies fails to perform on the contracts
held, the asset value of the Interest Income Fund, and therefore the Plan,
could be adversely impaired.
The Bankers Trust contract did not meet the investment criteria of the
portfolio and was replaced with a new contract with CDC Capital, Inc.,
during 1998.
D. PARTIES-IN-INTEREST:
Transactions involving cash, securities or assets of the Company, the
Trustee or other affiliated persons are considered to be party-in-interest
transactions under Section 2520.103-10 of the Department of Labor Rules
and Regulations for Reporting and Disclosure. Reportable party-in-interest
transactions for the years ended December 31, 1998 and 1997 are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
Number Number of
of Shares Transactions Cost
<S> <C> <C> <C>
INVESTMENT SALES
SAIC Class A Common Stock 113 2 $5,344
INVESTMENT PURCHASES
SAIC Class A Common Stock 11,308 4 $500,857
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------
Number Number of
of Shares Transactions Cost
<S> <C> <C> <C>
INVESTMENT PURCHASES
SAIC Class A Common Stock 4,458 1 $155,060
</TABLE>
Certain Plan investments are investment funds; and are shares of mutual
funds managed by The Vanguard Group. Vanguard Fiduciary Trust Company is
the trustee as defined by the Plan, and therefore these transactions
qualify as party-in-interest.
There were no known prohibited transactions with known parties in interest
as defined in ERISA Section 3(14) and regulations thereunder, including
those transactions set forth in ERISA Sections 406 and 407(a) and Internal
Revenue Code Section 4975(c). There was no known relationship in which The
Vanguard Fiduciary Trust Company had any direct or indirect financial
interest which would affect its capacity to perform the necessary
calculations.
Fees paid by the Plan for administrative expenses and investment
management services amounted to $3,000 for 1998 and 1997. All other Plan
expenses are paid by the Company.
-9-
<PAGE> 14
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
NOTES TO FINANCIAL STATEMENTS, continued
----------
E. PLAN TERMINATION POLICY:
The Company intends to continue the Plan indefinitely, but reserves the
right to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants would become 100 percent vested in their accounts; Company
contributions would not be subject to forfeiture.
F. RECONCILIATION TO FORM 5500:
There are no reconciling items from the Statement of Net Assets Available
for Benefits per the financial statements to the Form 5500.
G. TAX STATUS:
On April 11, 1986, the Internal Revenue Service had determined that the
Plan is qualified under the requirements of Section 401(a) of the Internal
Revenue Code and is exempt from Federal income taxes under Section 501(a)
of the Code. The Plan obtained its latest determination letter on August
1, 1995, in which the Internal Revenue Service stated that the Plan, as
amended through December 21, 1994, was in compliance with the applicable
requirements of the Internal Revenue Code. The Plan has been amended since
receiving such determination letter. However, the Plan administrator and
the Plan's counsel believe that the Plan is currently designed and is
being operated in compliance with the applicable requirements of the
Internal Revenue Code. Accordingly, no provision for income taxes has been
included in the Plan's financial statements.
H. SUBSEQUENT EVENTS:
The Telephone Equity Fund (TEF) closed on January 31, 1999, and any
remaining balances that were held in TEF were automatically defaulted to
the Interest Income Fund on February 1, 1999.
Effective March 9, 1999, the Company changed its name to Telcordia
Technologies.
Effective March 17, 1999, the name of the Plan was changed to Telcordia
Technologies Savings and Security Plan.
-10-
<PAGE> 15
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
SCHEDULE 1: ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
TELEPHONE EQUITY FUND
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------
NUMBER FAIR
NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE
--------------------------------- --------- ---- ------
<S> <C> <C> <C>
Common Shares:
Ameritech Corporation 6,680 $115 $423
Bell Atlantic Corporation 8,492 207 482
BellSouth Corporation 7,659 104 382
SBC Communications, Inc. 13,661 214 733
US West Communications, Inc. 4,684 233 303
Total Common Shares 873 2,323
---- ------
Total Telephone Equity Fund Investments $873 $2,323
==== ======
</TABLE>
DIVERSIFIED TELEPHONE PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
NUMBER FAIR
NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE
--------------------------------- --------- ---- -----
<S> <C> <C> <C>
Common Shares:
AT&T Corporation 788 $9 $59
Air Touch Communications, Inc. 175 1 13
Ameritech Corporation 647 4 41
Bell Atlantic Corporation 781 7 44
BellSouth Corporation 1,121 6 56
Lucent Technologies Corporation 512 4 56
Media One Group 207 2 10
NCR Corporation 50 1 2
SCB Communication, Inc. 1,028 5 55
US West Communications, Inc. 212 10 14
Total Common Shares 49 350
Temporary cash investments 8
--- ----
Total Diversified Telephone Portfolio Investments $49 $358
=== ====
</TABLE>
-11-
<PAGE> 16
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
SCHEDULE 1: ITEM 27A - SCHEDULE OF ASSETS HELD FOR
INVESTMENT PURPOSES, Continued
INTEREST INCOME FUND
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRINCIPAL CONTRACT FAIR
Name of Issuer and Title of Issue AMOUNT VALUE VALUE
- --------------------------------- --------- -------- -----
<S> <C> <C> <C>
Contracts with Insurance Companies:
AIG
6.95% due 5/15/01 $90 $90 $90
AIG FP
7.15% due 6/30/01 $45 $45 $45
Allstate
5.55% due 1/15/03 $114 $114 $114
Caisse Des Depots
6.47% 12/31/01 $153 $153 $153
CDC Capital, Inc.
4.93% due 11/15/03 $114 $114 $114
Deutsche Bank
6.57% due 3/21/01 $90 $90 $90
6.56% due 3/31/00 $90 $90 $90
6.52% no maturity date $116 $116 $116
John Hancock
6.93% due 11/15/01 $84 $84 $84
6.35% due 8/15/02 $61 $61 $61
Morgan Garuanty
6.59% due 9/30/01 $52 $52 $52
New York Life Insurance Company
7.05% due 4/15/00 $136 $136 $136
7.20% due 7/31/99 $187 $187 $187
Principal Mutual Life Insurance
7.71% due 10/31/99 $185 $185 $185
7.02 due 4/15/00 $84 $84 $84
Rabobank Nederland
6.74% no maturity date $90 $90 $90
5.93% 12/31/00 $181 $181 $181
Sun Life Insurance Company of America
6.65% due 3/31/99 $327 $327 $327
7.19% due 6/30/99 $215 $215 $215
Union Bank of Switzerland
7.33% no maturity date $211 $211 $211
7.35% no maturity date $205 $205 $205
6.66% no maturity date $150 $150 $150
------ ------ ------
Total Contracts with Insurance Companies $2,980 $2,980 $2,980
Temporary Cash Investments $343 $343 $343
------ ------ ------
Total Interest Income Fund Investments $3,323 $3,323 $3,323
====== ====== ======
</TABLE>
-12-
<PAGE> 17
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
SCHEDULE 1: ITEM 27a - SCHEDULE OF ASSETS HELD FOR
INVESTMENT PURPOSES, Continued
VANGUARD MUTUAL FUNDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
NUMBER FAIR
NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE
--------------------------------- --------- ---- -----
<S> <C> <C> <C>
* Vanguard 500 Index Fund 11,483 $829 $1,309
* Vanguard Explorer Fund 2,014 $109 $114
* Vanguard International Growth Fund 11,398 $184 $214
* Vanguard PRIMECAP Fund 10,690 $423 $510
* Vanguard Total Bond Market Index 14,009 $142 $144
* Vanguard Wellington Fund 28,723 $763 $843
* Vanguard Windsor II Fund 30,231 $818 $902
</TABLE>
LOAN FUND
(Dollars in Thousands)
Participant Loans $227 $227
<TABLE>
<CAPTION>
SAIC FUNDS
(Dollars in Thousands)
<S> <C> <C> <C>
* SAIC Exchangeable
SAIC Class A Common Stock 11,239 $442 $662
Temporary Cash Investments $4 $4
---- ----
Total SAIC Exchangeable Stock Fund $446 $666
* SAIC Non Exchangeable
SAIC Class A Common Stock 1,424 $71 $84
---- ----
Total SAIC Exchangeable Stock Fund $71 $84
* SAIC Stock Purchase Fund
Temporary Cash Investments $49 $49
---- ----
Total SAIC Stock Stock Fund $49 $49
</TABLE>
* Represents party-in-interest
-13-
<PAGE> 18
BELL COMMUNICATIONS RESEARCH
SAVINGS AND SECURITY PLAN
SCHEDULE II: Item 27d - Schedule of Reportable Transactions*
Series of Transactions
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
INDENTITY OF PARTY DESCRIPTION OF NUMBER OF PURCHASE SELLING COST OF
INVOLVED ASSETS TRANSACTIONS PRICE PRICE ASSET
------------------- -------------- ------------ -------- ----- -----
<S> <C> <C> <C> <C> <C>
The Vanguard Group Vanguard 500 Index Trust 61 $416,911.22
The Vanguard Group Vanguard 500 Index Trust 64 $743,954.56 $551,300.47
The Vanguard Group Vanguard Wellington Fund 53 452,890.12
The Vanguard Group Vanguard Wellington Fund 56 712,702.00 606,365.96
The Vanguard Group Vanguard Windsor II Fund 60 442,739.44
The Vanguard Group Vanguard Windsor II Fund 44 677,171.98 529,165.00
The Vanguard Group Interest Income Fund 89 1,004,361.05
The Vanguard Group Interest Income Fund 107 869,253.18 869,253.18
N/A Telephone Equity Fund 69 1,334,024.54 664,070.04
</TABLE>
<TABLE>
<CAPTION>
INDENTITY OF PARTY CURRENT VALUE ON NET
INVOLVED TRANSACTION DATE GAIN/(LOSS)
------------------- ---------------- -----------
<S> <C> <C>
The Vanguard Group $416,911.22
The Vanguard Group 743,954.56 $192,654.09
The Vanguard Group 452,890.12
The Vanguard Group 712,702.00 106,336.04
The Vanguard Group 442,739.44
The Vanguard Group 677,171.98 148,006.98
The Vanguard Group 1,004,361.05
The Vanguard Group 869,253.18
N/A 1,334,024.54 669,954.50
</TABLE>
* Transactions or series of transactions in excess of 5 percent of the current
value of the Plan's assets as of December 31,1998 as defined in Section
2520.103-106 of the Department of Labor Rules and Regulations for Reporting and
Disclosure under ERISA.
-14-
<PAGE> 1
Exhibit 28(d)
Securities and Exchange Commission
Washington, D.C., 20549
Form 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the calendar year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES
(Full Title of Plan)
Bell Communications Research, Inc.
445 South Street, Morristown NJ 07960 (Name of
issuer of the securities held pursuant to
the Plan and the address of its principal executive office)
<PAGE> 2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Departmental Benefits Committee of the Bell Communications Research Savings Plan
for Salaried Employees, duly caused this annual report to be signed on its
behalf by the undersigned hereunto duly authorized.
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
DATE 4-14-99 /s/ Gwendolyn P. Taylor
-----------------------------------------
Gwendolyn P. Taylor
Employee Benefit Committee
<PAGE> 3
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
__________
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
<PAGE> 4
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
----------
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS
FINANCIAL STATEMENTS:
Statements of Net Assets Available for
Benefits, with Fund Information
as of December 31, 1998 and 1997 2-3
Statement of Changes in Net Assets Available
for Benefits, with Fund Information
for the years ended December 31, 1998 and 1997 4-5
NOTES TO FINANCIAL STATEMENTS 6-10
SUPPLEMENTAL SCHEDULES:
Schedule I: Item 27a - Schedule of Assets Held for Investment Purposes
as of December 31, 1998 11-13
Schedule II: Item 27b - Schedule of Loans of Fixed Income Obligations
as of December 31, 1998 14
Schedule III: Item 27d - Schedule of Reportable Transactions
for the year ended December 31, 1998 15
</TABLE>
Other schedules required by section 2520.103-10 of the Department of Labor
Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974 have been omitted because they are not
applicable.
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and the Administrative Committee
of the Bell Communications Research Savings Plan for Salaried Employees
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
presents fairly, in all material respects, the net assets available for benefits
of the Bell Communications Research Savings Plan for Salaried Employees (the
Plan) at December 31, 1998 and 1997, and the changes in net assets available for
benefits for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Plan's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information included in
Schedules I through III is presented for purposes of additional analysis and is
not a required part of the basic financial statements but is additional
information required by the Employee Retirement Income Security Act. The fund
information in the statements of net assets available for benefits and the
statements of changes in net assets available for benefits is presented for
purposes of additional analysis rather than to present the net assets available
for benefits and the changes in net assets available for benefits of each fund.
Schedules I through III and the fund information have been subjected to the
auditing procedures applied in the audits of the basic financial statements, and
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/PRICEWATERHOUSECOOPERS LLP
New York, New York
March 26, 1999
<PAGE> 6
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
AS OF DECEMBER 31, 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
Non
Participant
Directed Participant Directed
---------------------------------------------------------------------------------
SAIC Bellcore Bellcore Bellcore
Non SAIC SAIC Telephone Diversified Interest
Exchangeable Stock Exchangeable Equity Telephone Income
Stock Purchase Stock Fund Portfolio Fund
------------ --------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $101,287
Diversified Telephone Portfolio
common shares $24,199
SAIC Common Shares $7,741 $151,052
Shares in Registered
Investment Companies
Temporary cash investments 14 $3,004 974 560 $26,653
------ ------ -------- -------- ------- --------
7,755 3,004 152,026 101,287 24,759 26,653
Investment contracts with insurance
companies, at contract value 235,355
------ ------ -------- -------- ------- --------
Total investments 7,755 3,004 152,026 101,287 24,759 262,008
Receivables:
Company Contributions 2,427 79
Participant Contributions 421 361
Loans to participants
Securities 5,343 2,574
Dividends
Interest 10 4 103 33
------ ------ -------- -------- ------- --------
Total assets 7,755 5,862 152,030 106,733 24,792 265,022
LIABILITIES:
Securities payable 6,502 89
Trustee fees payable 14 3 16
------ ------ -------- -------- ------- --------
Total liabilities 6,516 92 16
------ ------ -------- -------- ------- --------
Net assets available for plan benefits $7,755 $5,862 $152,030 $100,217 $24,700 $265,006
====== ====== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
-----------------------------------------------------------------------------
Vanguard Vanguard
International Vanguard Vanguard Vanguard Total Bond Vanguard
Growth 500 Index Explorer PRIMECAP Market Index Wellington
Fund Fund Fund Fund Fund Fund
------------- --------- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares
Diversified Telephone Portfolio
common shares
SAIC Common Shares
Shares in Registered
Investment Companies $49,833 $343,936 $15,710 $76,594 $26,247 $77,639
Temporary cash investments
------- -------- ------- ------- ------- -------
49,833 343,936 15,710 76,594 26,247 77,639
Investment contracts with insurance
companies, at contract value
------- -------- ------- ------- ------- -------
Total investments 49,833 343,936 15,710 76,594 26,247 77,639
Receivables:
Company Contributions 27 137 14 63 11 47
Participant Contributions 148 750 80 348 69 245
Loans to participants
Securities
Dividends
Interest
------- -------- ------- ------- ------- -------
Total assets 50,008 344,823 15,804 77,005 26,327 77,931
LIABILITIES:
Securities payable
Trustee fees payable
------- -------- ------- ------- ------- -------
Total liabilities
------- -------- ------- ------- ------- -------
Net assets available for plan benefits $50,008 $344,823 $15,804 $77,005 $26,327 $77,931
======= ======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
----------------------------------
Vanguard
Windsor II Loan
Fund Fund Total
---------- ----- -----
<S> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $ 101,287
Diversified Telephone Portfolio
common shares 24,199
SAIC Common Shares 158,793
Shares in Registered
Investment Companies $126,446 716,405
Temporary cash investments 31,205
-------- ------- ----------
126,446 1,031,889
Investment contracts with insurance
companies, at contract value 235,355
-------- ------- ----------
Total investments 126,446 1,267,244
Receivables:
Company Contributions 76 2,881
Participant Contributions 409 2,831
Loans to participants $10,145 10,145
Securities 7,917
Dividends
Interest 150
-------- ------- ----------
Total assets 126,931 10,145 1,291,168
LIABILITIES:
Securities payable 6,591
Trustee fees payable 33
-------- ------- ----------
Total liabilities 6,624
-------- ------- ----------
Net assets available for plan benefits $126,931 $10,145 $1,284,544
======== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
-2-
<PAGE> 7
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
AS OF DECEMBER 31, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Participant Directed
--------------------------------------------------------------------------------
Bellcore Bellcore Bellcore Vanguard
SAIC SAIC Telephone Diversified Interest International
Stock Exchangeable Equity Telephone Income Growth
Purchase Stock Fund Portfolio Fund Fund
-------- ------------ --------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $153,496
Diversified Telephone Portfolio
common shares $18,332
SAIC Common Shares $40,899
Shares in Registered
Investment Companies $48,410
Temporary cash investments $1,244 4,385 2,345 250 $9,973
------ ------- -------- ------- -------- -------
1,244 45,284 155,841 18,582 9,973 48,410
Investment contracts with insurance
companies, at contract value 232,236
------ ------- -------- ------- -------- -------
Total investments 1,244 45,284 155,841 18,582 242,209 48,410
Receivables:
Company Contributions 1,603
Loans to participants
Securities 13 1,430 167
Dividends
Interest 3 9 209 39
------ ------- -------- ------- -------- -------
Total assets 2,850 45,306 157,480 18,788 242,209 48,410
LIABILITIES:
Securities payable 690 799
Trustee fees payable 21 2 14
------ ------- -------- ------- -------- -------
Total liabilities 711 2 813
------ ------- -------- ------- -------- -------
Net assets available for plan benefits $2,850 $45,306 $156,769 $18,786 $241,396 $48,410
====== ======= ======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
--------------------------------------------------------------------------
Vanguard
Vanguard Vanguard Vanguard Total Bond Vanguard Vanguard
500 Index Explorer PRIMECAP Market Index Wellington Windsor II
Fund Fund Fund Fund Fund Fund
--------- -------- ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares
Diversified Telephone Portfolio
common shares
SAIC Common Shares
Shares in Registered
Investment Companies $266,802 $15,252 $51,583 $11,854 $62,721 $104,619
Temporary cash investments
-------- ------- ------- ------- ------- --------
266,802 15,252 51,583 11,854 62,721 104,619
Investment contracts with insurance
companies, at contract value
-------- ------- ------- ------- ------- --------
Total investments 266,802 15,252 51,583 11,854 62,721 104,619
Receivables:
Company Contributions
Loans to participants
Securities
Dividends
Interest
-------- ------- ------- ------- ------- --------
Total assets 266,802 15,252 51,583 11,854 62,721 104,619
LIABILITIES:
Securities payable
Trustee fees payable
-------- ------- ------- ------- ------- --------
Total liabilities
-------- ------- ------- ------- ------- --------
Net assets available for plan benefits $266,802 $15,252 $51,583 $11,854 $62,721 $104,619
======== ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
-----------------------
Loan
Fund Total
----- -----
<S> <C> <C>
ASSETS:
Investments, at fair value:
Telephone Equity Fund common shares $153,496
Diversified Telephone Portfolio
common shares 18,332
SAIC Common Shares 40,899
Shares in Registered
Investment Companies 561,241
Temporary cash investments 18,197
------- ----------
792,165
Investment contracts with insurance
companies, at contract value 232,236
------- ----------
Total investments 1,024,401
Receivables:
Company Contributions 1,603
Loans to participants $10,113 10,113
Securities 1,610
Dividends
Interest 260
------- ----------
Total assets 10,113 1,037,987
LIABILITIES:
Securities payable 1,489
Trustee fees payable 37
------- ----------
Total liabilities 1,526
------- ----------
Net assets available for plan benefits $10,113 $1,036,461
======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
-3-
<PAGE> 8
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
AS OF DECEMBER 31, 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
Non
Participant
Directed Participant Directed
-------------- ---------------------------------------------------------------
SAIC Bellcore Bellcore Bellcore
Non SAIC SAIC Telephone Diversified Interest
Exchangeable Stock Exchangeable Equity Telephone Income
Stock Purchase Stock Fund Portfolio Fund
------------ -------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment Income
Dividends $3,894 $408 $15,812
Interest 100 22
Net appreciation in fair value of
investments $1,202 $87 $50,722 46,992 9,273
------ ------ -------- -------- ------- --------
Total investment earnings 1,202 87 50,722 50,986 9,703 15,812
------ ------ -------- -------- ------- --------
Contributions
Participant 5,658 6,989 37 6,607
Company 6,621 9,741 1,203
------ ------ -------- -------- ------- --------
6,621 15,399 6,989 37 7,810
------ ------ -------- -------- ------- --------
Transfer of participants' balances, net (18) 918 49,368 (96,308) (2,563) 17,684
------ ------ -------- -------- ------- --------
Total additions (deductions) 7,805 16,404 107,079 (45,285) 7,140 41,306
Deductions from net assets attributable to:
Distributions to participants 50 13,392 355 11,213 1,216 17,511
Administrative expenses 54 10 185
------ ------ -------- -------- ------- --------
Net increase (decrease) 7,755 3,012 106,724 (56,552) 5,914 23,610
Net assets available for plan benefits:
Beginning of year 2,850 45,306 156,769 18,786 241,396
------ ------ -------- -------- ------- --------
End of year $7,755 $5,862 $152,030 $100,217 $24,700 $265,006
====== ====== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
--------------------------------------------------------------------------------
Vanguard Vanguard
International Vanguard Vanguard Vanguard Total Bond Vanguard
Growth 500 Index Explorer PRIMECAP Market Index Wellington
Fund Fund Fund Fund Fund Fund
------------- --------- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment Income
Dividends $1,002 $5,168 $128 $2,867 $1,099 $8,290
Interest
Net appreciation in fair value of
investments 6,666 69,501 611 11,826 221 (611)
------- -------- ------- ------- ------- -------
Total investment earnings 7,668 74,669 739 14,693 1,320 7,679
------- -------- ------- ------- ------- -------
Contributions
Participant 2,392 11,637 1,317 5,715 1,441 4,158
Company 419 1,885 205 895 139 625
------- -------- ------- ------- ------- -------
2,811 13,522 1,522 6,610 1,580 4,783
------- -------- ------- ------- ------- -------
Transfer of participants' balances, net (6,129) 9,333 (816) 8,155 12,298 6,899
------- -------- ------- ------- ------- -------
Total additions (deductions) 4,350 97,524 1,445 29,458 15,198 19,361
Deductions from net assets attributable to:
Distributions to participants 2,751 19,500 892 4,035 725 4,145
Administrative expenses 1 3 1 1 6
------- -------- ------- ------- ------- -------
Net increase (decrease) 1,598 78,021 552 25,422 14,473 15,210
Net assets available for plan benefits:
Beginning of year 48,410 266,802 15,252 51,583 11,854 62,721
------- -------- ------- ------- ------- -------
End of year $50,008 $344,823 $15,804 $77,005 $26,327 $77,931
======= ======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
----------------------------------
Vanguard
Windsor II Loan
Fund Fund Total
---------- ---- -----
<S> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment Income
Dividends $12,804 $51,472
Interest $890 1,012
Net appreciation in fair value of
investments 4,314 200,804
-------- ------- ----------
Total investment earnings 17,118 890 253,288
-------- ------- ----------
Contributions
Participant 6,651 69 52,671
Company 1,046 22,779
-------- ------- ----------
7,697 69 75,450
-------- ------- ----------
Transfer of participants' balances, net 7,235 (6,056)
-------- ------- ----------
Total additions (deductions) 32,050 (5,097) 328,738
Deductions from net assets attributable to:
Distributions to participants 9,735 (5,129) 80,391
Administrative expenses 3 264
-------- ------- ----------
Net increase (decrease) 22,312 32 248,083
Net assets available for plan benefits:
Beginning of year 104,619 10,113 1,036,461
-------- ------- ----------
End of year $126,931 $10,145 $1,284,544
======== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<PAGE> 9
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Participant Directed
--------------------------------------------------------------------------
Bellcore Bellcore Bellcore
SAIC SAIC Telephone Diversified Interest
Stock Exchangeable Equity Telephone Income
Purchase Stock Fund Portfolio Fund
-------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment Income
Dividends $5,759 $424 $16,638
Interest 179 18
Net appreciation in fair value of
investments $4 $9 56,254 6,075
------ ------- -------- ------- --------
Total investment earnings 4 9 62,192 6,517 16,638
------ ------- -------- ------- --------
Contributions
Participant 431 4,272 6,707
Company 2,574 1,582 2,331
------ ------- -------- ------- --------
3,005 5,854 9,038
------ ------- -------- ------- --------
Transfer of participants' balances, net (159) 45,297 (60,839) (2,260) (24,318)
------ ------- -------- ------- --------
Total additions (deductions) 2,850 45,306 7,207 4,257 1,358
Deductions from net assets attributable to:
Distributions to participants 10,931 822 21,154
Administrative expenses 72 8 172
------ ------- -------- ------- --------
Net increase (decrease) 2,850 45,306 (3,796) 3,427 (19,968)
Net assets available for plan benefits:
Beginning of year 160,565 15,359 261,364
------ ------- -------- ------- --------
End of year $2,850 $45,306 $156,769 $18,786 $241,396
====== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
-------------------------------------------------------------------------
Vanguard Vanguard
International Vanguard Vanguard Vanguard Total Bond
Growth 500 Index Explorer PRIMECAP Market Index
Fund Fund Fund Fund Fund
------------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment Income
Dividends $2,052 $5,523 $1,483 $1,737 $574
Interest
Net appreciation in fair value of
investments 239 60,101 114 5,108 243
------- -------- ------- ------- -------
Total investment earnings 2,291 65,624 1,597 6,845 817
------- -------- ------- ------- -------
Contributions
Participant 3,082 9,835 1,314 3,791 578
Company 1,009 3,185 358 932 158
------- -------- ------- ------- -------
4,091 13,020 1,672 4,723 736
------- -------- ------- ------- -------
Transfer of participants' balances, net (3,324) 6,350 2,783 27,577 3,312
------- -------- ------- ------- -------
Total additions (deductions) 3,058 84,994 6,052 39,145 4,865
Deductions from net assets attributable to:
Distributions to participants 3,592 14,494 503 1,876 533
Administrative expenses 2 3 1
------- -------- ------- ------- -------
Net increase (decrease) (536) 70,497 5,548 37,269 4,332
Net assets available for plan benefits:
Beginning of year 48,946 196,305 9,704 14,314 7,522
------- -------- ------- ------- -------
End of year $48,410 $266,802 $15,252 $51,583 $11,854
======= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Participant Directed
----------------------------------------------------------
Vanguard Vanguard
Wellington Windsor II Loan
Fund Fund Fund Total
----------- ----------- ----- -----
<S> <C> <C> <C> <C>
Additions (deductions) to net assets
attributable to:
Investment Income
Dividends $5,201 $9,352 $48,743
Interest $870 1,067
Net appreciation in fair value of
investments 5,811 15,233 149,191
------- -------- ------- ----------
Total investment earnings 11,012 24,585 870 199,001
------- -------- ------- ----------
Contributions
Participant 3,221 5,272 92 38,595
Company 1,042 1,689 14,860
------- -------- ------- ----------
4,263 6,961 92 53,455
------- -------- ------- ----------
Transfer of participants' balances, net 4,869 6,996 (6,284)
------- -------- ------- ----------
Total additions (deductions) 20,144 38,542 (5,322) 252,456
Deductions from net assets attributable to:
Distributions to participants 3,300 5,273 (4,918) 57,560
Administrative expenses 4 1 263
------- -------- ------- ----------
Net increase (decrease) 16,840 33,268 (404) 194,633
Net assets available for plan benefits:
Beginning of year 45,881 71,351 10,517 841,828
------- -------- ------- ----------
End of year $62,721 $104,619 $10,113 $1,036,461
======= ======== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
-5-
<PAGE> 10
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
----------
A. PLAN DESCRIPTION:
The Bell Communications Research Savings Plan for Salaried Employees (the
Plan) was established by Bell Communications Research (the Company) to
provide a convenient way for employees to save on a regular and long term
basis. On November 14, 1997, the Company was sold to Science Applications
International Corporation (SAIC). Prior to the sale, the Company was
owned by the Regional Bell Operating Companies (RBOC's). Changes to the
Plan as a result of the sale are noted below.
The following description of the Plan provides only general information.
Participants should refer to the Plan Prospectus for a more complete
description of the Plan's provisions.
1. General. The Plan is a defined contribution plan covering all
salaried employees of the Company who have one month of service
and are age twenty-one or older. It is subject to the provisions
of the Employee Retirement Income Security Act of 1974 (ERISA).
2. Contributions. Each year, participants may contribute up to 16
percent of pretax annual compensation, as defined in the Plan.
Participants may also contribute amounts representing
distributions from other qualified defined benefit or contribution
plans. After one year of service, the Company contributes 70
percent of the first 6 percent of compensation that a participant
contributes to the Plan. In addition, after one year of service,
the Company makes a contribution of a 1/2 percent of compensation
on behalf of each participant. Effective November 14, 1997, this
automatic contribution is deposited into the SAIC Stock Purchase
Fund until the quarterly trade date and then into SAIC stock. This
fund and related investment option were also established upon the
sale of the Company. Prior to the sale of the Company, the
automatic Company contribution was deposited according to a
participant's asset allocation at that time; for participants who
did not make a voluntary contribution, the automatic contribution
was deposited in the Interest Income Fund. The contribution is
made during the first quarter for employee earnings of the
previous calendar year. These automatic Company contributions are
immediately vested. Effective with the sale of the Company, 50
percent of Company contributions are invested in SAIC stock and 50
percent are invested in accordance with each participant's
directed allocation. Contributions are subject to certain IRS
limitations.
3. Participant Accounts. Each participant's account is credited with
the participant's contribution and allocations of the Company's
contribution and fund earnings, and each participant's account is
charged with an allocation of administrative expenses. Allocations
are based on participant earnings, as defined. The benefit to
which a participant is entitled is the benefit that can be
provided from the participant's vested account.
4. Vesting. Participants are immediately vested in their
contributions and the automatic Company contribution, plus actual
earnings thereon. Vesting in the Company's matching contribution
and actual earnings thereon is based on years of continuous
service. A participant is 100 percent vested after five years of
credited service.
5 Investment Options. The Plan is comprised of the following
investments:
VANGUARD TOTAL BOND MARKET INDEX FUND: This participant directed
fund invests in United States treasury obligations, federal
agency mortgage backed obligations and investment grade corporate
obligations. Effective October 27, 1998, the fund name changed
from the Vanguard Total Bond Market Portfolio to the Vanguard
Total Bond Market Index Fund.
VANGUARD EXPLORER FUND: This participant directed fund invests in
the common stock of a diversified group of small capitalization
companies.
VANGUARD 500 INDEX FUND: This participant directed fund invests
in all of the 500 stocks that make up the Standard & Poor's 500
Composite Stock Price Index. Effective October 27, 1998, the fund
name changed from the Vanguard Index Trust-500 Portfolio to the
Vanguard 500 Index Fund.
-6-
<PAGE> 11
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS, continued
----------
VANGUARD INTERNATIONAL GROWTH FUND: This participant directed
fund invests in the common stocks of companies based outside of
the United States. Effective October 27, 1998, the fund name
changed from the Vanguard International Growth Portfolio to the
Vanguard International Growth Fund.
VANGUARD / PRIMECAP FUND: This participant directed fund invests
in the common stock of medium capitalization companies.
VANGUARD / WELLINGTON FUND: This participant directed fund
invests approximately 65 percent of its assets in common stocks
and the remaining 35 percent in bonds.
VANGUARD / WINDSOR II: This participant directed fund invests in
the common stock of large capitalization companies.
SAIC EXCHANGEABLE STOCK FUND: As previously stated, this fund was
created upon the sale of the Company to SAIC. This fund invests
primarily in SAIC class A common stock and is participant
directed to the extent that participant contributions were used
to purchase SAIC stock.
SAIC NON EXCHANGEABLE STOCK FUND: This fund was created upon the
sale of the Company to SAIC. This is a non-participant directed
fund created to invest 50% of the company matching contribution
in SAIC class A common stock.
The SAIC STOCK PURCHASE FUND is not a participant directed
investment option; it is a temporary holding fund designed to
hold respective participant and Company contributions until the
following SAIC common stock quarterly trade date. Pending the
quarterly trade, the respective contributions are invested in the
Vanguard Money Market Reserves Portfolio.
BELLCORE INTEREST INCOME FUND: This participant directed fund
invests primarily in investment contracts issued by insurance
companies and banks.
BELLCORE - DIVERSIFIED TELEPHONE PORTFOLIO STOCK FUND: This fund
invests primarily in common stock and has been frozen to new
participant directed contributions since 1984.
BELLCORE - TELEPHONE EQUITY FUND STOCK FUND: This fund invests in
the common stock of the RBOC's. Upon the sale of the Company to
SAIC, the fund was frozen to new participant directed
contributions.
6. Participant Loans Receivable. Participants may borrow from their
fund accounts a minimum of $1,000 up to a maximum of the lesser of
(a) $50,000 less the participant's highest outstanding loan
balance during the preceding one year period; or (b) 50 percent of
their vested account balance. Additionally, loans also may not
exceed the vested value of the participant's Plan account less
vested amounts in the SAIC Stock Fund within the Plan. Loan terms
range from 12 to 56 months. The loans are secured by the balance
in the participant's account and bear interest at a rate
commensurate with local prevailing rates as determined monthly by
the Plan administrator. Interest rates ranged from 7 to 10 percent
during 1998 and 1997. Principal and interest is paid ratably
through monthly payroll deductions.
7. Payment of Benefits. On termination of service other than by
death, a participant may elect to receive either a lump-sum amount
equal to the value of the participant's vested interest in his or
her account, or installments for a period not to exceed the life
expectancy of the participant and spouse, if applicable. For
termination of service due to death, a beneficiary may receive the
value of the vested interest in his or her account as a lump-sum
distribution, or in two annual installments, if the participant
had so elected.
-7-
<PAGE> 12
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS, continued
----------
8. Forfeited Accounts. Forfeited accounts are used to reduce future
Company contributions. Company contributions were reduced by
$168,000 and $345,000 in 1998 and 1997, respectively.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - The accompanying financial statements have been
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Investment Valuation and Income Recognition- The Plan's investments are
valued at fair value, except for its investment contracts which are
valued at contract value (Note C).
Shares of registered investment companies are valued at quoted market
prices which represent the net asset value of shares held by the Plan at
year end. Quoted market prices for the value of the common shares of each
company in the Telephone Equity Fund and the Diversified Telephone
Portfolio are obtained on the basis of the closing price on the New York
Stock Exchange on the year end date or, if no sales were made on that
date, at the closing price on the New York Stock Exchange on the next
preceding day on which sales were made.
Participant notes receivable are valued at outstanding principal balance
which approximates fair value.
A general public market for the SAIC class A common shares does not
exist; therefore, the fair value of the shares is determined pursuant to
a stock price formula and valuation process which includes an appraisal
prepared by an independent appraisal firm. Periodic determinations of
fair value of the common stock are made by the SAIC Board of Directors,
with the assistance of the independent appraisal firm. The SAIC Board of
Directors reserves the right to alter the formula.
The gains and losses realized on distributions of investments and the
increases or decreases in unrealized appreciation are calculated as the
difference between the current fair value and the fair value of the
investments at the beginning of the year, or purchase price if purchased
during the year. As of December 31, 1998, the fair value of the SAIC
Company's Class A Common Stock was $58.87 and the Plan held approximately
2,697,346 shares.
It is the policy of the Company to keep the SAIC Common Stock Fund
invested primarily in common stock, except for estimated reserves for use
in distributions and investment exchanges by participants. Such reserves
are invested in the Vanguard Prime Money Market Fund. If reserves in the
SAIC Common Stock Fund are less than the amount required at any given
time to make required distributions and investment changes, investment
exchanges out of the SAIC Common Stock Fund by participants may have to
be deferred.
Purchases and sales of securities are reflected as of the trade date.
Investments are valued on a daily basis. Dividend income is recorded on
the ex-dividend date. Interest earned on investments is recorded on the
accrual basis.
Payment of Benefits- Benefits are recorded when paid.
C. INVESTMENT CONTRACTS WITH INSURANCE COMPANIES:
The Plan maintains investments in fully benefit-responsive investment
contracts with a number of insurance companies and banks. (Benefit
responsiveness is the extent to which contract terms permit and require
withdrawals at contract value for benefit payments, loans, or transfers to
other investment options offered to the participants by the Plan). The
accounts are credited with earnings on the underlying investments
(principally bank certificates of deposit and other fixed income products)
and charged for Plan withdrawals and administrative expenses. The contracts
are included in the financial statements at contract value, which
approximates fair value, as reported to the Plan by the provider. Contract
value
-8-
<PAGE> 13
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS, continued
----------
represents contributions made under the contract, plus earnings, less Plan
withdrawals and administrative expenses. See Item 27a of the supplemental
schedules for a complete list of all contracts held in the Plan.
Approximately 18 percent and 22 percent of total net assets at December 31,
1998 and 1997, respectively, were invested in investment contracts. These
contracts are subject to credit risk. If any of the companies fails to
perform on the contracts held, the asset value of the Interest Income Fund,
and therefore the Plan, could be adversely impaired.
On July 16, 1991, Mutual Benefit Life Insurance Company (MBL) was placed in
rehabilitation under the direction of the Insurance Commissioner and
Attorney General of the State of New Jersey. A Plan of Rehabilitation was
approved by the Superior Court of New Jersey on January 24, 1994. This Plan
provides that the full amount of principal as of July 16, 1991 plus accrued
interest is guaranteed by a combination of the Life Insurance Company
Guarantee Corporation of New York (LICGCNY) and an insurance company
consortium. Interest was credited at contract rates through December 31,
1991. Interest for 1992 and subsequent years will be credited at rates
which are based upon the assets' investment performance but not less than
approximately 1 percent on the total assets. At December 31, 1998, MBL paid
14.40 percent and 5.10 percent on the respective contracts that the Plan
currently holds. Amounts which are guaranteed by LICGCNY funds will be
completely distributed on or about June 1, 1999. Payouts may be deferred
after that date by the consortium, but all payments must be made by
December 31, 2010. Mutual Benefit related assets represent approximately 3
percent of the total Interest Income Fund assets and less than 1 percent of
total Plan assets.
The Bankers Trust contract did not meet the investment criteria of the
portfolio and was replaced with a new contract with CDC Capital, Inc.
during 1998.
D. PARTIES-IN-INTEREST:
Transactions involving cash, securities or assets of the Company, the
Trustee or other affiliated persons are considered to be party-in-interest
transactions under Section 2520.103-10 of the Department of Labor Rules
and Regulations for Reporting and Disclosure. Reportable party-in-interest
transactions for the years ended December 31, 1998 and 1997 are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------
Number Number of
of Shares Transactions Cost
<S> <C> <C> <C>
INVESTMENT SALES
SAIC Class A Common Stock 41,424 4 $2,021,267
INVESTMENT PURCHASES
SAIC Class A Common Stock 1,518,316 4 $66,338,708
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------
Number Number of
of Shares Transactions Cost
<S> <C> <C> <C>
INVESTMENT PURCHASES
SAIC Class A Common Stock 1,175,927 1 $40,898,764
</TABLE>
Certain Plan investments are shares of mutual funds managed by The
Vanguard Group. Vanguard Fiduciary Trust Company is the trustee as defined
by the Plan, and therefore these transactions qualify as
party-in-interest. There were no known prohibited transactions with known
parties in interest as defined in ERISA Section 3(14) and regulations
thereunder, including those transactions set forth in ERISA Sections 406
and 407(a) and Internal Revenue
-9-
<PAGE> 14
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS, continued
----------
Code Section 4975(c). There was no known relationship in which The
Vanguard Fiduciary Trust Company had any direct or indirect financial
interest which would affect its capacity to perform the necessary
calculations.
Fees paid by the Plan for administrative expenses and investment
management services amounted to $264,000 and $263,000 for 1998 and 1997,
respectively. All other Plan expenses are paid by the Company.
E. PLAN TERMINATION POLICY:
The Company intends to continue the Plan indefinitely, but reserves the
right to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. If the Plan were to be
terminated, participants would be fully vested in their accounts; Company
contributions would not be subject to forfeiture.
F. RECONCILIATION TO FORM 5500:
The following is a reconciliation of net assets available for benefits per
the financial statements to the Form 5500:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Net assets available for benefits per the financial
statements $1,284,544 $1,036,461
Amounts allocated to withdrawing participants 0 (1,115)
---------- ----------
Net assets available for benefits per the Form 5500 $1,284,544 $1,035,346
========== ==========
</TABLE>
The following is a reconciliation of benefits paid to participants per the
financial statements to the Form 5500:
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C>
Benefits paid to participants per the financial statements $80,391
Add: Amounts allocated to withdrawing participants at December 31, 1998 0
Less: Amounts allocated to withdrawing participants at December 31, 1997 (1,115)
-------
Benefits paid to participants per the Form 5500 $79,276
=======
</TABLE>
Amounts allocated to withdrawing participants are recorded on Form 5500
for benefit claims that have been processed and approved for payment prior
to December 31 but not yet paid as of that date.
G. TAX STATUS:
On April 11, 1986, the Internal Revenue Service had determined that the
Plan is qualified under the requirements of Section 401(a) of the Internal
Revenue Code and is exempt from Federal income taxes under Section 501(a)
of the Code. The Plan obtained its latest determination letter on July 19,
1995, in which the Internal Revenue Service stated that the Plan, as
amended through December 21, 1994, was in compliance with the applicable
requirements of the Internal Revenue Code. The Plan has been amended since
receiving such determination letter. However, the Plan administrator and
the Plan's counsel believe that the Plan is currently designed and is
being operated in compliance with the applicable requirements of the
Internal Revenue Code. Accordingly, no provision for income taxes has been
included in the Plan's financial statements.
H. SUBSEQUENT EVENTS:
The Telephone Equity Fund (TEF) closed on January 31, 1999, and any
remaining balances that were held in TEF were automatically defaulted to
the Interest Income Fund on February 1, 1999.
Effective March 9, 1999, the Company changed its name to Telcordia
Technologies.
Effective March 17, 1999, the name of the Plan was changed to Telcordia
Technologies Savings Plan for Salaried Employees
-10-
<PAGE> 15
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
SCHEDULE 1: ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
TELEPHONE EQUITY FUND
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
NUMBER FAIR
NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE
--------------------------------- --------- ---- -----
<S> <C> <C> <C>
Common Shares:
Ameritech Corporation 291,272 $4,997 $18,459
Bell Atlantic Corporation 370,246 9,043 21,035
BellSouth Corporation 333,948 4,523 16,656
SBC Communications, Inc. 595,619 9,337 31,940
US West Communications, Inc. 204,214 10,160 13,197
Total Common Shares 38,060 101,287
------- --------
Total Telephone Equity Fund Investments $38,060 $101,287
======= ========
</TABLE>
DIVERSIFIED TELEPHONE PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
NUMBER FAIR
NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE
--------------------------------- --------- ---- -----
<S> <C> <C> <C>
Common Shares:
AT&T Corporation 54,467 $639 $4,099
Air Touch Communications, Inc. 12,118 71 874
Ameritech Corporation 44,671 262 2,831
Bell Atlantic Corporation 53,976 517 3,067
BellSouth Corporation 77,460 425 3,863
Lucent Technologies Corporation 35,394 262 3,893
Media One Group 14,322 142 673
NCR Corporation 3,435 32 143
SCB Communication, Inc. 71,011 370 3,808
US West Communications, Inc. 14,663 710 948
Total Common Shares 3,430 24,199
Temporary cash investments 560
------ -------
Total Diversified Telephone Portfolio Investments $3,430 $24,759
====== =======
</TABLE>
-11-
<PAGE> 16
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
SCHEDULE 1: ITEM 27A - SCHEDULE OF ASSETS HELD FOR
INVESTMENT PURPOSES, Continued
INTEREST INCOME FUND
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRINCIPAL CONTRACT FAIR
NAME OF ISSUER AND TITLE OF ISSUE AMOUNT VALUE VALUE
- --------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Contracts with Insurance Companies:
AIG
6.95% due 5/15/01 $4,687 $4,687 $4,687
AIG FP
7.15% due 6/30/01 $9,431 $9,431 $9,431
Allstate
5.55% due 1/15/03 $11,916 $11,916 $11,916
Caisse Des Depots
6.47% 12/31/01 $15,965 $15,965 $15,965
CDC Capital, Inc.
4.93% due 11/15/03 $11,957 $11,957 $11,957
Deutsche Bank
6.57% due 3/21/01 $9,435 $9,435 $9,435
6.56% due 3/31/00 $9,411 $9,411 $9,411
6.52% no maturity date $12,160 $12,160 $12,160
John Hancock
6.93% due 11/15/01 $8,827 $8,827 $8,827
6.35% due 8/15/02 $6,414 $6,414 $6,414
Morgan Guaranty
6.59% due 9/30/01 $5,460 $5,460 $5,460
Mutual Benefit Life Insurance Company
14.40% due 4/1/99 $6,288 $6,288 $6,288
14.40% due 4/1/99 $421 $421 $421
5.10% due 4/1/99 $1,321 $1,321 $1,321
5.10% due 4/1/99 $88 $88 $88
New York Life Insurance Company
7.05% due 4/15/00 $7,215 $7,215 $7,215
7.20% due 7/31/99 $9,326 $9,326 $9,326
Principal Mutual Life Insurance
7.71% due 10/31/99 $9,354 $9,354 $9,354
7.02 due 4/15/00 $4,415 $4,415 $4,415
Rabobank Nederland
6.74% no maturity date $9,410 $9,410 $9,410
5.93% 12/31/00 $18,864 $18,864 $18,864
Sun Life Insurance Company of America
6.65% due 3/31/99 $15,970 $15,970 $15,970
7.19% due 6/30/99 $10,723 $10,723 $10,723
Union Bank of Switzerland
7.33% no maturity date $10,345 $10,345 $10,345
7.35% no maturity date $10,314 $10,314 $10,314
6.66% no maturity date $15,638 $15,638 $15,638
-------- -------- --------
Total Contracts with Insurance Companies $235,355 $235,355 $235,355
Temporary Cash Investments $26,653 $26,653 $26,653
-------- -------- --------
Total Interest Income Fund Investments $262,008 $262,008 $262,008
======== ======== ========
</TABLE>
-12-
<PAGE> 17
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
SCHEDULE 1: ITEM 27A - SCHEDULE OF ASSETS HELD FOR
INVESTMENT PURPOSES, Continued
VANGUARD MUTUAL FUNDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------
NUMBER FAIR
NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE
--------------------------------- --------- ---- -----
<S> <C> <C> <C>
* Vanguard 500 Index Fund 3,018,308 $189,936 $343,936
* Vanguard Explorer Fund 277,026 $15,188 $15,710
* Vanguard International Growth Fund 2,654,932 $41,252 $49,833
* Vanguard PRIMECAP Fund 1,607,081 $61,505 $76,594
* Vanguard Total Bond Market Index 2,555,669 $25,911 $26,247
* Vanguard Wellington Fund 2,645,294 $71,011 $77,639
* Vanguard Windsor II Fund 4,236,045 $104,998 $126,446
</TABLE>
LOAN FUND
(Dollars in Thousands)
Participant Loans $10,145 $10,145
SAIC FUNDS
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
* SAIC Exchangeable
SAIC Class A Common Stock 2,565,858 $100,830 $151,052
Temporary Cash Investments $974 $974
-------- --------
Total SAIC Exchangeable Stock Fund $101,804 $152,026
* SAIC Non Exchangeable
SAIC Class A Common Stock 131,488 $6,552 $7,741
Temporary Cash Investments $14 $14
-------- --------
Total SAIC Exchangeable Stock Fund $6,566 $7,755
* SAIC Stock Purchase Fund
Temporary Cash Investments $3,004 $3,004
-------- --------
Total SAIC Stock Stock Fund $3,004 $3,004
</TABLE>
* Represents party-in-interest
-13-
<PAGE> 18
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
SCHEDULE II: ITEM 27b - SCHEDULE OF LOANS FOR FIXED INCOME OBLIGATIONS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED UNPAID
ORIGINAL DURING REPORTING YEAR BALANCE AT
NAME AND ADDRESS LOAN AMOUNT PRINCIPAL INTEREST END OF YEAR
---------------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Lu, Bei $ 4,000.00 $ - $ - $ 3,710.19
11 Harness Ln
Marlboro, NJ 07746
Giovia, Michael F $ 5,035.00 $ 884.28 $ 38.12 $ 681.28
31 Devon Dr
Manalapan, NJ 07726
Kaetan, Karl L. $ 7,000.00 $ - $ - $ 1,971.09
1 Larison Ln
Ringoes, NJ 08110
Brewer, Patricia $16,200.00 $ - $ - $ 8,207.64
25 Fordham Rd
Somerset, NJ 08730
Bersey, Stephen D $12,592.44 $1,268.98 $397.46 $ 7,849.03
405 Laurel Ave
Brielle, NJ 08873
Bagarozy, Douglas A $ 9,634.43 $ 866.67 $110.77 $ 2,779.16
12509 Nieman Rd
Overland Park, KS 66213 $13,000.00 $1,005.38 $394.86 $ 8,932.46
Borroum, Theodore $15,400.00 $1,123.38 $634.99 $10,581.40
131B Rutgers Rd
Piscataway, NJ 08843 $ 7,600.00 $ 802.62 $384.30 $ 6,476.62
Chambers, Robin D $ 5,104.06 $ 624.24 $ 34.56 $ 645.05
1514 Willever St
Plainfield, NJ 07063 $ 4,847.73 $ 318.23 $ 109.45 $ 3,349.97
Lapallo, George $13,000.00 $ 225.57 $ 64.31 $ 7,689.70
13 Addison Rd
Howell, NJ 07773
Robb, Scott A $ 2,030.00 $ - $ - $ 625.49
35 Washington Valley Rd
Warren, NJ 07059 $ 3,000.00 $ - $ - $ 2,090.46
Doro, Ignazio J. $ 5,035.00 $ 227.56 $ 3.62 $ 229.34
05050 East St
Winfield, IL 60190
Segelstein, David J. $ 3,071.65 $ - $ - $ 364.31
8 Fair Ln
Aberdeen, NJ 07747
</TABLE>
<TABLE>
<CAPTION>
AMOUNT OVERDUE*
NAME AND ADDRESS DETAILED DESCRIPTION OF LOSS PRINCIPAL INTEREST
---------------- ---------------------------- --------- ---------
<S> <C> <C> <C>
Lu, Bei Loan date- 6/13/97; Loan Maturity-2/14/02; $2,896.22 $ 813.97
11 Harness Ln Interest rate-9.5%, Collateral - vested balance
Marlboro, NJ 07746
Giovia, Michael F Loan date-7/01/96; Loan Maturity-6/28/98; $ 670.76 $ 10.52
31 Devon Dr Interest rate-9.25%, Collateral - vested balance
Manalapan, NJ 07726
Kaetan, Karl L. Loan date-07/29/94; Loan Maturity-8/19/99; $1,881.54 $ 89.55
1 Larison Ln Interest rate-8.25%, Collateral - vested balance
Ringoes, NJ 08110
Brewer, Patricia Loan date-8/21/95; Loan Maturity-08/19/99; $7,418.60 $ 789.04
25 Fordham Rd Interest rate-9.75%, Collateral - vested balance
Somerset, NJ 08730
Bersey, Stephen D Loan date-5/30/96; Loan Maturity-6/30/01; $6,810.94 $1,038.09
405 Laurel Ave Interest rate-9.25%, Collateral - vested balance
Brielle, NJ 08873
Bagarozy, Douglas A Loan date-3/22/95; Loan Maturity-03/22/99; $2,626.00 $ 153.16
12509 Nieman Rd Interest rate-10%, Collateral - vested balance
Overland Park, KS 66213 Loan date-11/13/96; Loan Maturity-11/12/00; $7,788.06 $1,144.40
Interest rate-9.25%, Collateral - vested balance
Borroum, Theodore Loan date-2/18/97 Loan Maturity-2/18/01; $9,225.80 $1,355.60
131B Rutgers Rd Interest rate-9.25%, Collateral - vested balance
Piscataway, NJ 08843 Loan date-9/9/97; Loan Maturity-5/7/02; $5,200.04 $1,276.58
Interest rate-9.5%, Collateral - vested balance
Chambers, Robin D Loan date-7/31/97; Loan Maturity-7/28/98; $ 631.30 $ 13.75
1514 Willever St Interest rate-10%, Collateral - vested balance
Plainfield, NJ 07063 Loan date-8/8/96; Loan Maturity-01/04/06; $2,850.82 $ 499.15
Interest rate-9.25%, Collateral - vested balance
Lapallo, George Loan date-11/3/95; Loan Maturity-7/4/00; $6,683.00 $1,006.70
13 Addison Rd Interest rate-9.75%, Collateral - vested balance
Howell, NJ 07773
Robb, Scott A Loan date-8/7/95; Loan Maturity-8/5/98; $ 596.14 $ 29.35
35 Washington Valley Rd Interest rate-10%, Collateral - vested balance
Warren, NJ 07059 Loan date-10/17/96; Loan Maturity-10/14/99; $1,883.04 $ 207.42
Interest rate-9.25%, Collateral - vested balance
Doro, Ignazio J. Loan date- 2/20/96; Loan Maturity-2/19/98; $ 227.50 $ 1.84
05050 East St Interest rate-9.50%, Collateral - vested balance
Winfield, IL 60190
Segelstein, David J. Loan date-12/31/92; Loan Maturity-7/31/96; $ 283.06 $ 81.25
8 Fair Ln Interest rate-7.50%, Collateral - vested balance
Aberdeen, NJ 07747
</TABLE>
-14-
<PAGE> 19
BELL COMMUNICATIONS RESEARCH
SAVINGS PLAN FOR SALARIED EMPLOYEES
SCHEDULE III: ITEM 27d - Schedule of Reportable Transactions*
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
INDENTITY OF PARTY DESCRIPTION OF NUMBER OF PURCHASE
INVOLVED ASSETS TRANSACTIONS PRICE
<S> <C> <C> <C>
The Vanguard Group Vanguard 500 Index Trust 250 $102,814,961.45
The Vanguard Group Vanguard 500 Index Trust 252
The Vanguard Group Vanguard International Growth Fund 231 86,428,823.33
The Vanguard Group Vanguard International Growth Fund 242
The Vanguard Group Vanguard PRIMECAP Fund 246 40,900,628.23
The Vanguard Group Vanguard PRIMECAP Fund 244
The Vanguard Group Vanguard Wellington Fund 226 34,257,730.68
The Vanguard Group Vanguard Wellington Fund 233
The Vanguard Group Vanguard Windsor II Fund 247 53,049,890.63
The Vanguard Group Vanguard Windsor II Fund 246
The Vanguard Group Interest Income Fund 256 201,770,245.18
The Vanguard Group Interest Income Fund 252
N/A Telephone Equity Fund 16 38,410.82
N/A Telephone Equity Fund 247
N/A SAIC Exchangeable Stock Fund 35 57,894,177.62
N/A SAIC Exchangeable Stock Fund 29
</TABLE>
<TABLE>
<CAPTION>
INDENTITY OF PARTY SELLING COST OF CURRENT VALUE ON NET
INVOLVED PRICE ASSET TRANSACTION DATE GAIN/(LOSS)
<S> <C> <C> <C> <C>
The Vanguard Group $102,814,961.45
The Vanguard Group $ 95,182,416.69 $ 75,124,116.00 95,182,416.69 $20,058,300.69
The Vanguard Group 86,428,823.33
The Vanguard Group 91,671,400.15 89,228,145.98 91,671,400.15 2,443,254.17
The Vanguard Group 40,900,628.23
The Vanguard Group 27,715,908.23 25,867,867.72 27,715,908.23 1,848,040.51
The Vanguard Group 34,257,730.68
The Vanguard Group 18,727,556.81 16,673,393.96 18,727,556.81 2,054,162.85
The Vanguard Group 53,049,890.63
The Vanguard Group 35,537,107.08 30,744,745.21 35,537,107.08 4,792,361.87
The Vanguard Group 201,770,245.18
The Vanguard Group 178,908,320.54 178,908,320.54 178,908,320.54
N/A 38,410.82
N/A 103,580,873.17 50,343,121.31 103,580,873.17 53,237,751.86
N/A 57,894,177.62
N/A 1,892,344.10 1,508,898.73 1,892,344.10 383,445.37
</TABLE>
* Transactions or series of transactions in excess of 5 percent of the current
value of the Plan's assets as of December 31,1998 as defined in Section
2520.103-106 of the Department of Labor Rules and Regulations for Reporting and
Disclosure under ERISA.
-15-
