<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-12771
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3630868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(858) 826-6000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
As of November 30, 1999, the registrant had 235,643,986 shares of
Class A common stock, $.01 par value per share, issued and outstanding, and
295,734 shares of Class B common stock, $.05 par value per share, issued and
outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,421,756 $ 1,226,832 $ 3,967,046 $ 3,427,368
Costs and expenses:
Cost of revenues 1,082,711 948,856 3,047,837 2,705,293
Selling, general and
administrative expenses 237,544 179,354 637,712 477,757
----------- ----------- ----------- -----------
Operating income 101,501 98,622 281,497 244,318
Non-operating income (expense):
Interest expense (5,992) (8,588) (21,811) (23,314)
Interest income 11,525 6,001 41,276 13,445
Other income, net 20,890 3,478 18,765 1,551
Gain on sale of subsidiary common stock 698,374
Minority interest in income
of consolidated subsidiaries (12,364) (3,924) (27,325) (10,052)
----------- ----------- ----------- -----------
Income before income taxes 115,560 95,589 990,776 225,948
Provision for income taxes 48,073 48,415 412,163 108,641
----------- ----------- ----------- -----------
Net income $ 67,487 $ 47,174 $ 578,613 $ 117,307
=========== =========== =========== ===========
Earnings per share:
Basic $ .28 $ .21 $ 2.43 $ .53
=========== =========== =========== ===========
Diluted $ .26 $ .19 $ 2.25 $ .49
=========== =========== =========== ===========
Common equivalent shares:
Basic 239,666 223,958 238,458 220,354
=========== =========== =========== ===========
Diluted 257,997 243,337 257,526 238,434
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-1
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 459,553 $ 389,026
Restricted cash 5,211 16,396
Short-term investments 405,115 118,808
Receivables 1,216,647 1,139,809
Inventories 8,640 16,096
Prepaid expenses and other current assets 64,747 60,226
Deferred income taxes 192,063 136,164
----------- -----------
Total current assets 2,351,976 1,876,525
Property and equipment (less accumulated depreciation
of $288,143 and $241,615 at October 31, 1999
and January 31, 1999, respectively) 341,367 309,578
Land and buildings (less accumulated depreciation of
$36,075 and $29,525 at October 31, 1999
and January 31, 1999, respectively) 224,519 186,462
Goodwill (less accumulated amortization of
$88,836 and $81,763 at October 31, 1999
and January 31, 1999, respectively) 172,781 95,414
Other intangible assets (less accumulated amortization of
$31,785 and $19,407 at October 31, 1999
and January 31, 1999, respectively) 66,286 77,259
Prepaid pension assets 483,802 456,803
Other assets 241,973 170,505
----------- -----------
$ 3,882,704 $ 3,172,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 928,593 $ 1,084,202
Accrued payroll and employee benefits 378,851 309,421
Income taxes payable 171,395 65,547
Notes payable and current portion of long-term debt 51,214 47,882
----------- -----------
Total current liabilities 1,530,053 1,507,052
Long-term debt, net of current portion 128,065 143,051
Deferred income taxes 57,175 100,489
Other long-term liabilities 325,153 318,002
Commitments and contingencies (Note K)
Minority interest in consolidated subsidiaries 79,597 19,350
Stockholders' equity:
Common stock:
Class A, $.01 par value, 1,000,000 shares authorized; issued and
outstanding: 235,809 shares and 226,387 shares at
October 31, 1999 and January 31, 1999, respectively 2,358 2,264
Class B, $.05 par value, 5,000 shares authorized;
issued and outstanding: 296 shares and 303 shares at
October 31, 1999 and January 31, 1999, respectively 15 15
Additional paid-in capital 1,059,064 834,757
Retained earnings 717,136 271,379
Other stockholders' equity (36,497) (23,928)
Accumulated other comprehensive income 20,585 115
----------- -----------
Total stockholders' equity 1,762,661 1,084,602
----------- -----------
$ 3,882,704 $ 3,172,546
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-2
<PAGE> 5
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
OCTOBER 31, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 578,613 $ 117,307
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 160,444 124,798
Non-cash compensation 76,464 50,686
Minority interest in income of consolidated subsidiaries 27,562 8,632
Gain on sale of subsidiary common stock (698,374)
Net gain on sale of certain business assets (24,572) (3,775)
Other 15,882 8,526
Increase (decrease) in cash, excluding effects of acquisitions,
resulting from changes in:
Receivables (17,440) 38,274
Inventories 2,741 (564)
Prepaid expenses and other current assets (1,502) (22,844)
Progress payments (1,662) (8,502)
Deferred income taxes (107,720) (52,039)
Other assets (18,651) (35,758)
Accounts payable and accrued liabilities (152,589) (125,467)
Accrued payroll and employee benefits 60,064 76,827
Income taxes payable 158,763 38,114
Other long-term liabilities 420 2,353
--------- ---------
58,443 216,568
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (112,354) (47,698)
Expenditures for land and buildings (861) (1,509)
Acquisitions of businesses, net of cash acquired (219,665) (500)
Purchases of debt and equity securities available for sale (421,666) (67,688)
Proceeds from sale of debt and equity securities available for sale 121,229
Proceeds from sale of subsidiary common stock 729,000
Investments in affiliates (52,705) (2,851)
Proceeds from maturities (purchases) of debt securities held to maturity 8,000 (6,000)
Proceeds from sales of certain business assets 65,051 864
Proceeds from disposal of property and equipment 269 581
--------- ---------
116,298 (124,801)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt 773 14,372
Payments of notes payable and long-term debt (516) (25,879)
Principal payments on capital lease obligations (33,054) (20,892)
Net proceeds from subsidiary issuance of common stock 3,725 5,116
Dividends paid to minority interest (9,423) (7,096)
Sales of common stock 63,524 118,534
Repurchases of common stock (127,961) (88,213)
--------- ---------
(102,932) (4,058)
--------- ---------
Effect of exchange rate changes on cash (1,282) (2,436)
--------- ---------
Increase in cash and cash equivalents 70,527 85,273
Cash and cash equivalents at beginning of period 389,026 189,387
--------- ---------
Cash and cash equivalents at end of period $ 459,553 $ 274,660
========= =========
Supplemental schedule of non-cash investing and financing activities:
Shares of common stock exchanged upon exercise of stock options $ 29,588 $ 18,553
========= =========
Capital lease obligations for property and equipment $ 18,985 $ 36,555
========= =========
Fair value of assets acquired in acquisitions $ 307,191 $ 1,487
Cash paid in acquisitions (233,504) (912)
Issuance of common stock in acquisitions (18,506) --
--------- ---------
Liabilities assumed in acquisitions $ 55,181 $ 575
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 6
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION:
The accompanying financial information has been prepared in accordance with the
instructions to Form 10-Q and therefore does not necessarily include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The preparation of financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Estimates have been prepared on the basis of the most current
and best available information and actual results could differ from those
estimates.
Certain amounts from the three and nine months ended October 31, 1998 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three and nine months ended October 31, 1999.
In the opinion of management, the unaudited financial information as of October
31, 1999 and for the three and nine months ended October 31, 1999 and 1998
reflect all adjustments (which include only normal, recurring adjustments)
necessary for a fair presentation thereof. Operating results for the nine months
ended October 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2000. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's 1999 Annual Report on Form 10-K.
On April 9, 1999, the Company's Board of Directors approved a 4-for-1 stock
split of the Company's Class A Common Stock which was approved by the
stockholders on July 9, 1999 at the 1999 Annual Stockholders Meeting and became
effective August 31, 1999 for stockholders of record at that date. Stockholders'
equity has been retroactively restated to reflect the stock split for all
periods presented by reclassifying the par value of the additional shares
arising from the split from additional paid-in-capital to common stock. All
share and per-share data in the Condensed Consolidated Financial Statements and
Notes to Condensed Consolidated Financial Statements have been retroactively
restated to reflect the stock split for all periods presented.
NOTE B - ACQUISITIONS AND INVESTMENTS IN AFFILIATES:
Acquisitions of certain business assets and companies 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 identifiable assets acquired has
been allocated to goodwill.
NOTE C - INVESTMENTS IN DEBT AND EQUITY SECURITIES:
The aggregate market value, cost basis and net unrealized gain of the
available-for-sale securities were $490,750,000, $449,022,000 and $41,728,000 at
October 31, 1999, respectively. Other assets include $86,986,000 of the
available-for-sale securities as of October 31, 1999.
NOTE D - RECEIVABLES:
Receivables include $36,037,000 of costs incurred on projects for which the
Company has been requested by the customer to begin work under a new contract,
or extend work under an existing contract, but for which formal contracts or
contract modifications have not been executed at October 31, 1999.
NOTE E - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
OCTOBER 31, 1999
----------------
(IN THOUSANDS)
<S> <C>
Inventories:
Contracts-in-process $ 3,735
Raw materials 4,905
---------
$ 8,640
=========
</TABLE>
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<PAGE> 7
NOTE F - NOTES PAYABLE:
The Company has a five-year unsecured reducing revolving credit facility of
$687,500,000 with a group of financial institutions which allow borrowings until
August 2002 and which was recently reduced according to the original terms.
Borrowings bear interest at the Company's option at various rates, based on the
base rate, bid rate or on margins over the CD rate or LIBOR. There were no
balances outstanding under the facility at October 31, 1999 and the entire
$687,500,000 was available. Financial covenants required by the credit facility
have been maintained as of October 31, 1999.
NOTE G - BUSINESS SEGMENT INFORMATION:
The following table summarizes interim segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31 NINE MONTHS ENDED OCTOBER 31
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
( in thousands)
<S> <C> <C> <C> <C>
Revenues:
Regulated $ 1,047,346 $ 876,402 $ 2,411,590 $ 2,061,847
Non-Regulated 590,660 537,692 1,623,724 1,426,057
----------- ----------- ----------- -----------
Total segment revenues 1,638,006 1,414,094 4,035,314 3,487,904
Corporate and other (216,250) (187,262) (68,268) (60,536)
----------- ----------- ----------- -----------
Total consolidated revenues $ 1,421,756 $ 1,226,832 $ 3,967,046 $ 3,427,368
=========== =========== =========== ===========
Income (loss) before income taxes:
Regulated $ 66,153 $ 49,091 $ 152,722 $ 123,378
Non-Regulated 78,926 72,569 171,744 163,021
----------- ----------- ----------- -----------
Total segment income before income taxes 145,079 121,660 324,466 286,399
Corporate and other (29,519) (26,071) 666,310 (60,451)
----------- ----------- ----------- -----------
Total income before income taxes $ 115,560 $ 95,589 $ 990,776 $ 225,948
=========== =========== =========== ===========
</TABLE>
For the nine months ended October 31, 1999, income before income taxes for the
Corporate and other segment includes the gain on the sale of NSI Class A Common
Stock as discussed in Note J.
NOTE H - COMPREHENSIVE INCOME:
Comprehensive income, which combines net income, unrealized gains and losses on
the Company's available-for-sale securities and foreign currency translation
adjustments, consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 67,487 $ 47,174 $ 578,613 $ 117,307
Other comprehensive income, net of tax:
Unrealized gain/(loss) on securities, net of
reclassification adjustment 6,971 (859) 20,819 5,130
Foreign currency translation adjustments 250 (307) (349) (1,405)
--------- --------- --------- ---------
7,221 (1,166) 20,470 3,725
--------- --------- --------- ---------
$ 74,708 $ 46,008 $ 599,083 $ 121,032
========= ========= ========= =========
</TABLE>
I-5
<PAGE> 8
NOTE I - EARNINGS PER SHARE (EPS):
A summary of the elements included in the computation of basic and diluted EPS
is as follows (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $ 67,487 $ 47,174 $ 578,613 $ 117,307
Effect of:
Dilutive securities (351) (1,039)
--------- --------- --------- ---------
Net income available to common
stockholders, as adjusted $ 67,487 $ 46,823 $ 578,613 $ 116,268
--------- --------- --------- ---------
Weighted average shares 239,666 223,958 238,458 220,354
--------- --------- --------- ---------
Basic EPS $ .28 $ .21 $ 2.43 $ .53
========= ========= ========= =========
DILUTED EPS:
Net income $ 67,487 $ 47,174 $ 578,613 $ 117,307
Effect of:
Dilutive securities (351) (1,039)
Majority-owned subsidiary's
dilutive securities (131) (91) (160) (292)
--------- --------- --------- ---------
Net income available to common
stockholders, as adjusted $ 67,356 $ 46,732 $ 578,453 $ 115,976
--------- --------- --------- ---------
Weighted average shares 239,666 223,958 238,458 220,354
Effect of:
Stock options 18,050 19,001 18,688 17,699
Other stock awards 281 378 380 381
--------- --------- --------- ---------
vWeighted average shares, as adjusted 257,997 243,337 257,526 238,434
--------- --------- --------- ---------
Diluted EPS $ .26 $ .19 $ 2.25 $ .49
========= ========= ========= =========
</TABLE>
NOTE J - SALE OF SUBSIDIARY COMMON STOCK:
On February 12, 1999, the Company's NSI subsidiary completed a secondary
offering of 4,580,000 shares of its Class A Common Stock. Of the shares sold in
the offering, the Company sold 4,500,000 shares at $170 per share and received
proceeds, net of underwriters' commissions, of $729,000,000 and recognized a
gain on the sale of $698,374,000. On March 23, 1999, NSI completed a two-for-one
stock split of its Class A Common Stock and Class B Common Stock. After the
stock split, the Company held 14,850,000 shares of NSI Class B Common Stock,
which were entitled to ten votes per share and represented 44.7% ownership
interest in NSI and approximately 89% of the combined voting power. On June 3,
1999, the Company converted its 14,850,000 shares of NSI 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, thereby reducing its voting power to 44.7%.
NOTE K - COMMITMENTS AND CONTINGENCIES:
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or ability to conduct
business.
NOTE L - SALE OF BUSINESS ASSETS:
On September 3, 1999, the Company sold the net assets of its TransCore business
unit and recognized a gain on the sale of $22,700,000. The gain is reflected in
other income in the accompanying financial statements.
I-6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On February 12, 1999, the Company's subsidiary, NSI, completed a secondary
offering of 4,580,000 shares of its Class A Common Stock. Of the shares sold in
the offering, the Company sold 4,500,000 shares at $170 per share and received
proceeds, net of underwriter's commissions, of $729 million and recognized a
gain on the sale of approximately $698 million. On March 23, 1999, NSI completed
a two-for-one stock split of its Class A Common Stock and Class B Common Stock.
After the stock split, the Company held 14,850,000 shares of NSI Class B Common
Stock, which were entitled to ten votes per share and represented 44.7%
ownership interest in NSI and approximately 89% of the combined voting power. On
June 3, 1999, the Company converted its 14,850,000 shares of NSI 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 thereby reducing its voting power to 44.7%. With
the current composition of the NSI Board of Directors, the Company is deemed to
control the Board and, therefore, is required under existing accounting
literature to consolidate NSI's financial statements.
On April 9, 1999, the Company's Board of Directors approved a 4-for-1 stock
split of the Company's Class A Common Stock which was approved by the
stockholders on July 9, 1999 at the 1999 Annual Stockholders Meeting and became
effective August 31, 1999 for stockholders of record at that date. Class B
Common Stock was not split but had its relative voting and other rights
increased to maintain the relative rights of the Class A Common Stock and Class
B Common Stock.
During the quarter ended October 31, 1999, the Company sold the net assets of
its TransCore business unit and recognized a gain on the sale of $22.7 million
which is reflected in other income. In addition, the Company invested $29
million for equity interests in various entities.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended October 31, 1999 increased 16%
compared to the same periods of the prior year. Regulated segment revenues as a
percentage of consolidated revenues remained relatively consistent at 74% and
61% for the three and nine months ended October 31, 1999, respectively, compared
to 71% and 60% for the same periods of the prior year. Non-Regulated segment
revenues as a percentage of consolidated revenues were 42% and 41% for the three
and nine months ended October 31, 1999, respectively, compared to 44% and 42%
for the same periods of the prior year. On an absolute basis, Regulated and
Non-Regulated segment revenues increased 20% and 10% for the three months ended
October 31, 1999, respectively, and increased 17% and 14%, respectively, for the
nine months ended October 31, 1999 over the same periods of the
prior year. Telcordia, NSI and INTESA primarily drove the growth in the
Non-Regulated segment. Political and economic changes in Latin America could
negatively impact the Company's Non-Regulated segment operations in that region.
For the three and nine months ended October 31, 1999,
Regulated segment revenues 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 market, which typically involve lower cost
service type contracts.
Revenues on the Company's contracts are generated from the efforts of its
technical staff as well as the pass through of costs for material and
subcontract efforts, which primarily occur on large, multi-year system
integration type contracts. At October 31, 1999, the Company had approximately
35,600 full-time employees compared to approximately 32,100 at October 31, 1998.
Material and subcontract ("M&S") revenues were $273 million and $731 million for
the three and nine months ended October 31, 1999, respectively, compared to $235
million and $645 million for the same periods of the prior year. As a percentage
of total revenues, M&S revenues were 19% and 18% for the three and nine months
ended October 31, 1999, respectively, compared to 19% for the same
periods of the prior year.
The percentage of the Company's revenues attributable to the higher risk, firm
fixed-price ("FFP") contracts decreased to 38% for the nine months ended October
31, 1999 compared to 41% for the same period of the prior year. For the year
ended January 31, 1999, revenues from FFP contracts were 39%. The Company
assumes greater performance risk on FFP contracts and the failure to accurately
estimate ultimate costs or to control costs during performance of the work may
result in reduced profits or losses. Fixed-price level-of-effort ("FP-LOE") and
time-and-materials ("T&M") type contracts represented 28% and 21% of revenues
for the nine months ended October 31, 1999 and 1998, respectively, while cost
reimbursement contracts were 34% and 38% for the same periods, respectively.
The cost of revenues as a percentage of revenues decreased to 76.2% and 76.8%
for the three and nine months ended October 31, 1999, respectively, compared to
77.3% and 78.9% for the same periods of the prior year. The decrease reflects
generally improved operating performance and margins at Telcordia and margin
improvements at NSI related to achieving economies of scale due to the growth of
NSI's subscription-based domain name registration business. Cost of revenues as
a percentage of revenues, excluding Telcordia, NSI and INTESA, was 88.1% and
88.0% for the three and nine months ended October 31, 1999, respectively,
compared to 90.9% and 89.0% for the same periods of the prior year and also
reflected improved operating performance in the Company's traditional business
areas.
SG&A expenses as a percentage of revenues were 16.7% and 16.1% for the three and
nine months ended October 31, 1999, respectively compared to 14.6% and 13.9% for
the same periods of the prior year. SG&A is comprised of general and
administrative ("G&A"), marketing, bid and proposal ("B&P"), and independent
research and development ("IR&D") expenses. G&A costs as a percentage of
revenues increased to 9.2% and 8.0% for the three and nine months ended October
31, 1999, respectively, compared to 6.5% and 6.8% for the same periods of the
prior year. The increase in G&A costs was primarily attributable to increased
goodwill amortization from acquisitions completed in the three and nine months
ended October 31, 1999 and the impairment of goodwill and
I-7
<PAGE> 10
certain other intangible assets. During the three months ended October 31, 1999,
the Company assessed the recoverability of goodwill and other intangible assets
of a business unit in the Non-Regulated segment, which was acquired in March
1999 and represented .3% of total consolidated revenues and 1.5% of total
consolidated assets. As a result of this assessment, an impairment loss of $28.4
million was recognized in G&A expense. The factors leading the Company to assess
the recoverability were greater-than-expected operating losses since the time of
acquisition and the loss of a major contract procurement. The assessment of the
expected future undiscounted cash flows indicated that an impairment existed.
The impairment loss was quantified by estimating the current fair value of the
business unit using the discounted cash flow method. Marketing and B&P costs
have increased to 5.7% and 6.0% of revenues for the three and nine months ended
October 31, 1999, respectively, compared to 5.2% and 5.1% for the same periods
of the prior year and were primarily driven by higher marketing and proposal
costs at Telcordia and NSI. IR&D costs have historically fluctuated depending on
the stage of development for various hardware and software systems and were 1.8%
and 2.1% of revenues for the three and nine months ended October 31, 1999,
respectively, compared to 2.9% and 2.0%, respectively, for the same periods of
the prior year and were primarily driven by Telcordia and NSI.
Operating profit margins (income before income taxes 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 remained constant at 6% for the three and nine months
ended October 31, 1999 and 1998. In the Non-Regulated segment, operating profit
margin also remained constant at 13% and 11% for the three and nine
months ended October 31, 1999, respectively, compared to the
same periods of the prior year.
Interest expense for the three and nine months ended October 31, 1999 and 1998
primarily relates to interest on the Company's outstanding public debt
securities, a building mortgage, deferred compensation arrangements, capital
lease obligations and notes payable. Interest income for the three and nine
months ended October 31, 1999 increased $6 and $28 million, respectively, over
the same period of the prior year and was primarily attributable to increases in
cash, cash equivalents and short-term investments which resulted from the
proceeds from the sale of NSI common stock.
Minority interest in income of consolidated subsidiaries increased by $8 million
and $17 million for the three and nine months ended October 31, 1999,
respectively, over the same periods of the prior year. The increase was
primarily attributable to the formation of a joint venture whereby the minority
shareholder owns 45.0% and an increase in minority
ownership in NSI due to the sale of NSI common stock by the Company in the
secondary offering in February 1999.
The provision for income taxes as a percentage of income before income taxes was
41.6% for the three and nine months ended October 31, 1999 compared to 50.6% and
48.1% for the same periods of the prior year. The lower effective tax rate for
the three and nine months ended October 31, 1999 reflects the preliminary
resolution of certain tax positions related to the Company's on-going appeals
process with the IRS for fiscal years 1988 through 1993. In addition, a lower
tax rate on the gain on the sale of NSI common stock reduces the overall
effective tax rate for the three and nine months ended October 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity continue to be funds provided by
operations and the five-year revolving credit facility. In addition, the
proceeds from the sale of NSI common stock in February 1999 has provided an
additional source of liquidity for the Company. At October 31, 1999 and January
31, 1999, there were no borrowings outstanding under the credit facility and
cash and cash-equivalents and short-term investments totaled $865 million and
$508 million, respectively.
Cash flows generated from operating activities were $58 million for the nine
months ended October 31, 1999 compared to cash generated from operating
activities of $217 million for the same period of the prior year. The decrease
in cash generated from operating activities was primarily attributable to
greater income tax payments related to the gain on sale of NSI common stock. The
Company actively monitors receivables with emphasis placed on collection
activities and the negotiation of more favorable payment terms.
Cash flows generated from investing activities were $116 million for the nine
months ended October 31, 1999 compared to a use of cash of $125 million for the
same period of the prior year. For the nine months ended October 31, 1999, cash
was primarily generated from the sale of shares of NSI common stock and used to
purchase investments in debt and equity securities, acquire businesses and make
investments in other businesses.
The Company used $103 million in cash for financing activities for the nine
months ended October 31, 1999 compared to a use of cash of $4 million for the
same period for the prior year. The primary uses of cash were for repurchases of
the Company's common stock and payments on capital lease obligations.
The Company's existing cash, cash equivalents, short-term investments, cash
flows from operations and 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 and from sales 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, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or ability to conduct
business.
I-8
<PAGE> 11
FORWARD-LOOKING INFORMATION
The foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements,
including statements regarding the intent, belief or current expectations of the
Company and its officers with respect to, among other things, trends affecting
the Company's financial condition or results of operation and the impact of
competition. Such statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those in the forward-looking statements as a result of various factors. Some of
these factors include, but are not limited to the risk factors set forth in the
Company's 1999 Annual Report on Form 10-K. Due to such uncertainties and risks,
readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.
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. The six phases consist of planning
the project, increasing internal awareness of Year 2000 issues, developing and
assessing an inventory of IT systems for Year 2000 issues, renovating impacted
IT systems, testing impacted IT systems and implementing the appropriate
solutions for any identified problems. IT systems include internally developed
software, software obtained from third parties, databases, mainframe computers,
servers, and network and related hardware. All phases of the program have been
completed, however the Company intends to continue to monitor the program to
address any unanticipated issues.
The Company completed the remediation of its critical internal systems,
including its internal core financial accounting systems, and those systems are
currently in use for the Company's fiscal year 2000 that began on February 1,
1999. The Company intends to continue to monitor and address issues that may
arise as it continues to use the remediated systems. 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 have substantially completed 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, all of the systems
identified as having Year 2000 issues have been remediated or replaced, except
for two access control systems, which are not critical and are not expected to
cause an interruption to the Company's business. One of these systems is
currently being upgraded and the other will employ a date setback workaround.
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
continue to pursue inventory, assessment, remediation and risk evaluation of
identified critical leased facilities through the end of calendar 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 communicated 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 failure to be Year 2000 compliant. Although the
Company has made inquiries of most of its business partners, 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 update 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.
I-9
<PAGE> 12
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. The Company has
contingent financing resources available, including revolving credit facilities
which expire in August 2002, cash and investments in short-term investment
portfolios and public equity securities. The Company does not anticipate cash
flow problems which would materially affect its business. The Company believes
its contingent financing resources will be sufficient to meet its needs,
however, the Company is unable to predict the extent of any problems which may
arise and may not be able to meet all of its working capital needs with the
resources currently available to it.
IMPACT ON INTERNATIONAL OPERATIONS -- As of October 31, 1999, approximately 7%
of consolidated revenues was derived from the Company's international
operations, primarily in Venezuela and to a lesser extent, the United Kingdom.
The majority of the revenues in Venezuela were derived from one customer. In
addition, the Company's Telcordia subsidiary has entered into a contract with
future performance obligations in South Africa. Foreign countries and businesses
located within foreign countries may not be applying adequate resources to
address the Year 2000 issue. In addition, the status of Year 2000 readiness in
foreign 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,
remediation and testing program for its proprietary software products. The
Company has also implemented an on-going program to assess its exposure, if any,
with respect to its other products and services, including those acquired in
connection with recent business acquisitions made by the Company 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.
However, the Company can give no assurances that the systems of its customers
will be Year 2000 compatible with the Company's products and services.
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 $13 million on this
remediation which includes amounts expensed and amounts spent for capital
assets. The Company expects to spend approximately $1.5 million to complete its
internal efforts.
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 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 developed a common approach to contingency
planning which it used to develop contingency plans for its IT and non-IT
systems. The contingency plan addresses the core IT systems, non-IT systems
including power and communications and the Company's dependence on its key
business partners, suppliers and vendors. In addition, the Company's operating
groups and various corporate departments have prepared individual contingency
plans. The Company is preparing to address any potential business services
disruptions, equipment failures and local or regional Year 2000 effects by
developing Incident Response Centers (IRCs) at three locations to be operational
during the rollover period of December 31, 1999 through January 3, 2000. The
Company plans to have several hundred people, either on-site or on-call, at the
IRCs and at customer sites to address Year 2000-related issues. Alternative work
sites with backup power have been identified for corporate operations and are
being reserved as needed at the IRCs. In addition, the Company's Telcordia
subsidiary plans to have four control centers in place, staffed by several
hundred people and operational 24 hours a day during the rollover period
December 30, 1999 through January 4, 2000. The contingency plan provides for
Company employees to be able to ascertain the status of their specific
facilities during the rollover
I-10
<PAGE> 13
period by calling a toll-free number or accessing a Site Status web page on the
Company's intranet. The Company will continue to test, review and update its
contingency plans on a regular basis. Due to the potentially far reaching
consequences of the Year 2000 problem and the speculative nature of contingency
planning, there can be no assurance that the Company's contingency plans will
adequately address all of 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.
I-11
<PAGE> 14
ITEM 3. 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.
During the nine months ended October 31, 1999, the Company expanded its
investment policy to allow for investments in additional types of instruments,
such as asset-backed securities and mortgage-backed securities, and to extend
maximum maturity dates.
At October 31, 1999, the Company's exposure to market risk when compared to the
fiscal year ended January 31, 1999 changed in the following manner:
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. Interest rates remained relatively consistent
with amounts disclosed in the Company's 1999 Annual Report on Form 10-K.
However, the Company invested the majority of the $729 million proceeds from the
sale of shares of NSI common stock in cash equivalents and short-term
investments, which in turn increased the amount of assets subject to market risk
due to interest rate changes.
FOREIGN CURRENCY RISK
There were no material changes from January 31, 1999.
EQUITY PRICE RISK
At October 31, 1999, the quoted fair value of the Company's available-for-sale
equity securities was approximately $73.5 million. The aggregate unrealized gain
from these investments was $45.5 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 fair value of the equity instruments of
approximately $7.3 million.
I-12
<PAGE> 15
II-1
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or ability to conduct
business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K.
During the fiscal quarter for which this report is filed, the
following report(s) on Form 8-K were filed by the Registrant:
(i) Form 8-K filed September 13, 1999, Item 5, Other events
(ii) Form 8-K filed October 15, 1999, Item 5, Other events
II-1
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
Date: December 15, 1999 /s/ W. A. Roper
----------------------------
Executive Vice President and
Chief Financial Officer and
as a duly authorized officer
II-2
<PAGE> 17
EXHIBIT INDEX
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FISCAL QUARTER ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
- ------- ----------------------- ----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
II-3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED OCTOBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 464,764
<SECURITIES> 405,115
<RECEIVABLES> 1,216,647
<ALLOWANCES> 109,207
<INVENTORY> 8,640
<CURRENT-ASSETS> 2,351,976
<PP&E> 890,104
<DEPRECIATION> 324,218
<TOTAL-ASSETS> 3,882,704
<CURRENT-LIABILITIES> 1,530,053
<BONDS> 128,065
0
0
<COMMON> 2,373
<OTHER-SE> 1,760,288
<TOTAL-LIABILITY-AND-EQUITY> 3,882,704
<SALES> 0
<TOTAL-REVENUES> 3,967,046
<CGS> 0
<TOTAL-COSTS> 3,047,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,811
<INCOME-PRETAX> 990,776
<INCOME-TAX> 412,163
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 578,613
<EPS-BASIC> 2.43
<EPS-DILUTED> 2.25
</TABLE>
