<PAGE> 1
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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 APRIL 30, 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 546-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [x] NO [ ]
As of May 31, 1999, the registrant had 58,541,246 shares of Class A
common stock, $.01 par value per share, issued and outstanding, and 302,394
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 STATEMENT OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
APRIL 30, 1999 APRIL 30, 1998
-------------- --------------
<S> <C> <C>
Revenues $ 1,184,006 $ 1,008,380
Costs and expenses:
Cost of revenues 910,896 798,944
Selling, general and administrative expenses 192,910 139,856
----------- -----------
Operating income 80,200 69,580
----------- -----------
Non-operating income (expense):
Interest expense (8,594) (3,758)
Interest income 16,545 2,545
Other income (expense), net (162) (2,485)
Gain on sale of subsidiary common stock 698,374
Minority interest in income of consolidated
subsidiaries (6,500) (2,614)
----------- -----------
Income before income taxes 779,863 63,268
Provision for income taxes 331,442 29,230
----------- -----------
Net income $ 448,421 $ 34,038
=========== ===========
Earnings per share:
Basic $ 7.69 $ .63
=========== ===========
Diluted $ 7.09 $ .59
=========== ===========
Common equivalent shares:
Basic 58,302 53,823
=========== ===========
Diluted 63,218 57,922
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-2
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, 1999 JANUARY 31, 1999
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 749,146 $ 389,026
Restricted cash 7,267 16,396
Short-term investments 528,566 118,808
Receivables 924,657 1,139,809
Inventories 15,570 16,096
Prepaid expenses and other current assets 72,344 60,226
Deferred income taxes 160,218 136,164
----------- -----------
Total current assets 2,457,768 1,876,525
Property and equipment (less accumulated depreciation
of $266,813 and $241,615 at April 30, 1999
and January 31, 1999, respectively) 321,694 309,578
Land and buildings (less accumulated depreciation of
$31,673 and $29,525 at April 30, 1999
and January 31, 1999, respectively) 184,361 186,462
Goodwill (less accumulated amortization of
$85,070 and $81,763 at April 30, 1999
and January 31, 1999, respectively) 135,398 95,414
Other intangible assets (less accumulated amortization of
$23,283 and $19,407 at April 30, 1999
and January 31, 1999, respectively) 77,911 77,259
Prepaid pension assets 465,975 456,803
Other assets 208,757 170,505
----------- -----------
$ 3,851,864 $ 3,172,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 840,263 $ 1,084,202
Accrued payroll and employee benefits 286,147 309,421
Income taxes payable 380,154 65,547
Notes payable and current portion of long-term debt 71,919 47,882
----------- -----------
Total current liabilities 1,578,483 1,507,052
----------- -----------
Long-term debt, net of current portion 137,525 143,051
Deferred income taxes 103,000 100,489
Other long-term liabilities 339,241 318,002
Commitments and contingencies (Note K)
Minority interest in consolidated subsidiaries 49,330 19,350
Stockholders' equity:
Common stock:
Class A, $.01 par value, 100,000 shares authorized;
issued and outstanding (58,521 shares and 56,597 shares at
April 30, 1999 and January 31, 1999, respectively) 585 566
Class B, $.05 par value, 5,000 shares authorized;
issued and outstanding (302 shares and 303 shares at
April 30, 1999 and January 31, 1999, respectively) 15 15
Additional paid-in capital 981,793 836,455
Retained earnings 664,892 271,379
Other stockholders' equity (23,934) (23,928)
Accumulated other comprehensive income 20,934 115
----------- -----------
Total stockholders' equity 1,644,285 1,084,602
----------- -----------
$ 3,851,864 $ 3,172,546
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
APRIL 30, 1999 APRIL 30, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 448,421 $ 34,038
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 38,908 41,062
Non-cash compensation 65,060 20,138
Gain on sale of subsidiary common stock (698,374)
Other 8,933 6,686
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables 210,760 (25,960)
Inventories (1,159) (278)
Prepaid expenses and other current assets (3,601) (21,798)
Progress payments 8,923 (5,869)
Deferred income taxes (35,021) 3,796
Other assets (10,095) (12,581)
Accounts payable and accrued liabilities (235,439) (46,030)
Accrued payroll and employee benefits (24,259) (18,269)
Income taxes payable 348,960 (21,168)
Other long-term liabilities 9,981 10,809
--------- ---------
131,998 (35,424)
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (31,271) (10,239)
Expenditures for land and buildings (46) (11)
Acquisitions of businesses, net of cash acquired (50,328) (375)
Purchases of debt and equity securities available for sale (411,742) (38,833)
Proceeds from sale of subsidiary common stock 729,000
Investments in affiliates (495)
Purchase of debt securities held to maturity (6,000)
Proceeds from sales of certain business assets 2,084
Proceeds from disposal of property and equipment 100 38
--------- ---------
237,302 (55,420)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt 18,122 2,482
Payments of notes payable and long-term debt (821) (712)
Principal payments on capital lease obligations (9,138) (4,744)
Net proceeds from issuance of subsidiary common stock 1,809 253
Dividends paid to minority interest (9,423) (7,096)
Sales of common stock 39,626 90,514
Repurchases of common stock (49,961) (24,277)
--------- ---------
(9,786) 56,420
--------- ---------
Effect of exchange rate changes on cash 606 (258)
--------- ---------
Increase (decrease) in cash and cash equivalents 360,120 (34,682)
Cash and cash equivalents at beginning of period 389,026 189,387
--------- ---------
Cash and cash equivalents at end of period $ 749,146 $ 154,705
========= =========
Supplemental schedule of non-cash investing and financing activities:
Shares of common stock exchanged upon exercise of stock options $ 15,690 $ 10,200
========= =========
Capital lease obligations for property and equipment $ 7,274 $ 9,371
========= =========
Fair value of assets acquired in acquisitions $ 71,190 $ 375
Cash paid in acquisitions $ (51,667) $ (375)
--------- ---------
Liabilities assumed in acquisitions $ 19,523 $ --
========= =========
</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 months ended April 30, 1998 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three months ended April 30, 1999.
In the opinion of management, the unaudited financial information as of April
30, 1999 and for the three months ended April 30, 1999 and 1998 reflect all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof. Operating results for the three months ended April
30, 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.
NOTE B - INVESTMENTS IN DEBT AND EQUITY SECURITIES:
During April 1999, the Company increased its investment in available-for-sale
debt and equity securities to $599,000,000. The aggregate market value, cost
basis and net unrealized gain of the available-for-sale securities were
$599,000,000, $556,000,000 and $43,000,000 at April 30, 1999, respectively.
Other assets include $70,000,000 of the available-for-sale securities as of
April 30, 1999.
NOTE C - RESTRICTED CASH:
The Company has a contract to provide support services to the National Cancer
Institute's Frederick Cancer Research and Development Center ("Center"). As part
of the contract, the Company is responsible for paying for materials, equipment
and other direct costs of the Center through the use of a restricted cash
account which is pre-funded by the U.S. Government. In addition, cash collected
from PDVSA for the INTESA pension plan and postretirement benefit obligations
are restricted as it relates to funding of these future obligations.
NOTE D - RECEIVABLES:
Receivables include $26,198,000 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 April 30, 1999.
NOTE E - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
APRIL 30, 1999
--------------
(IN THOUSANDS)
<S> <C>
Inventories:
Contracts-in-process $ 8,454
Raw materials 7,116
-------
$15,570
=======
</TABLE>
I-5
<PAGE> 7
NOTE F - NOTES PAYABLE:
The Company has a five-year unsecured reducing revolving credit facility of
$700,000,000 with a group of financial institutions which allow borrowings until
August 2002. Borrowings bear interest at the Company's option at various rates,
based on the base rate, bid rate or on margins over the CD rate or LIBOR. There
were no balances outstanding under the facility at April 30, 1999 and the entire
$700,000,000 was available. Financial covenants required by the credit facility
have been maintained as of April 30, 1999.
NOTE G - BUSINESS SEGMENT INFORMATION:
The following table summarizes interim segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30
-----------------------------
1999 1998
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Regulated $ 647,004 $ 561,459
Non-Regulated 477,081 393,936
---------- -----------
Total segment revenues 1,124,085 955,395
Corporate and other 59,921 52,985
---------- -----------
Total consolidated revenues $1,184,006 $ 1,008,380
========== ===========
Income (loss) before income taxes:
Regulated $ 41,464 $ 35,405
Non-Regulated 41,970 40,706
---------- -----------
Total segment income before income taxes 83,434 76,111
Corporate and other 696,429 (12,843)
---------- -----------
Total income before income taxes $ 779,863 $ 63,268
========== ===========
</TABLE>
Included in Corporate and other income before income taxes for the three months
ended April 30, 1999 is 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 APRIL 30
---------------------------
1999 1998
--------- --------
UNAUDITED
(IN THOUSANDS)
<S> <C> <C>
Net income $ 448,421 $ 34,038
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment 21,197 3,892
Foreign currency translation adjustments (378) (347)
--------- --------
20,819 3,545
--------- --------
Comprehensive income $ 469,240 $ 37,583
========= ========
</TABLE>
I-6
<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 APRIL 30
---------------------------
1999 1998
--------- -------
<S> <C> <C>
BASIC EPS:
Net income $ 448,421 $34,038
Effect of:
Subsidiary preferred stock dividends (351)
--------- ---------
Net income available to common
stockholders, as adjusted $ 448,070 $34,038
--------- -------
Weighted average shares 58,302 53,823
--------- -------
Basic EPS $ 7.69 $ .63
========= =======
DILUTED EPS:
Net income $ 448,421 $34,038
Effect of:
Subsidiary preferred stock dividends (351)
Majority-owned subsidiary's
dilutive securities (19)
--------- -------
Net income available to common
stockholders, as adjusted $ 448,051 $34,038
--------- -------
Weighted average shares 58,302 53,823
Effect of:
Stock options 4,796 3,997
Other stock awards 120 102
--------- -------
Weighted average shares, as adjusted 63,218 57,922
--------- -------
Diluted EPS $ 7.09 $ .59
========= =======
</TABLE>
NOTE J - SALE OF SUBSIDIARY COMMON STOCK:
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 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. As of April
30, 1999, the Company held 14,850,000 shares of NSI Class B Common Stock, which
are entitled to ten votes per share and represented 44.7% ownership interest in
NSI and approximately 89% of the combined voting power. In connection with the
secondary offering, the Company expressed an intention to convert 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. On June 3, 1999, the Company converted its
14,850,000 shares of NSI Class B Common Stock 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 its ability to conduct
business.
I-7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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.
As of April 30, 1999, the Company held 14,850,000 shares of NSI Class B Common
Stock, which are entitled to ten votes per share and represented 44.7% ownership
interest in NSI and approximately 89% of the combined voting power. In
connection with the secondary offering, the Company expressed an intention to
convert 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. On June 3, 1999, the
Company converted its 14,850,000 shares of NSI Class B Common Stock 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.
RESULTS OF OPERATIONS
Revenues for the three months ended April 30, 1999 increased 17% compared to the
same period of the prior year. The growth in revenues was generated almost
equally from business in the Regulated and Non-Regulated segment (49% and 47%,
respectively). Regulated segment revenues as a percentage of consolidated
revenues were 55% and 56% for the three months ended April 30, 1999 and 1998,
respectively. Non-Regulated segment revenues as a percentage of consolidated
revenues were 40% and 39% for the three months ended April 30, 1999 and 1998,
respectively. On an absolute basis, Regulated and Non-Regulated segment revenues
increased 15% and 21% over the same period of the prior year, respectively.
Telcordia, NSI and INTESA primarily drove the growth in the Non-Regulated
segment. For the three months ended April 30, 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 April 30, 1999, the Company had approximately
34,000 full-time employees compared to approximately 29,900 at April 30, 1998.
Material and subcontract ("M&S") revenues were $185 million and $164 million for
the three months ended April 30, 1999 and 1998, respectively. As a percentage of
total revenues, M&S revenues remained constant at 16% for the three months ended
April 30, 1999 and 1998.
The percentage of the Company's revenues attributable to the higher risk, firm
fixed-price ("FFP") contracts decreased to 41% for the three months ended April
30, 1999 compared to 43% 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 22% and 16% of revenues
for the three months ended April 30, 1999 and 1998, respectively, while cost
reimbursement contracts were 37% and 41% for the same periods, respectively.
The cost of revenues as a percentage of revenues decreased to 76.9% for the
three months ended April 30, 1999 from 79.2% for the same period of the prior
year. The decrease reflects the growth in commercial revenues from Telcordia,
NSI and INTESA, 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, NSI and INTESA, was 87.5% for the three months ended April
30, 1999 compared to 87.7% for the same period of the prior year.
SG&A expenses as a percentage of revenues were 16.3% and 13.9% for the three
months ended April 30, 1999 and 1998, respectively. SG&A is comprised of general
and administrative ("G&A"), bid and proposal ("B&P") and independent research
and development ("IR&D") expenses. 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 6.2% of revenues for
the three months ended April 30, 1999 compared to 5.2% for the same period of
the prior year and was 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 2.4% of revenues for the
three months ended April 30, 1999 compared to 1.5% for the same period of the
prior year and was primarily driven by Telcordia and NSI. G&A costs as a
percentage of revenues were 7.7% for the three months ended April 30, 1999
compared to 7.2% for the same period of the prior year. The
I-8
<PAGE> 10
increase in G&A costs is primarily attributable to the growth in commercial
revenues which have more of their associated costs in G&A as opposed to cost of
revenues.
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 months ended April
30, 1999 and 1998. In the Non-Regulated segment, operating profit margin
remained relatively constant at 9% and 10% for the three months ended April 30,
1999 and 1998, respectively.
Interest expense for the three months ended April 30, 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. The $5 million increase in interest expense is primarily
driven by an increase in deferred compensation balances and capital lease
obligations. Interest income for the three months ended April 30, 1999 increased
$14 million over the same period of the prior year and was primarily
attributable to increases in cash, cash equivalents and short-term investments.
The provision for income taxes as a percentage of income before income taxes was
42.5% for the three months ended April 30, 1999 compared to 46.2% for the same
period of the prior year. The lower effective tax rate is primarily attributable
to the lower tax rate on the gain on sale of NSI common stock as compared to the
overall effective tax rate of the Company.
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 has provided an additional source of
liquidity for the Company. At April 30, 1999 and 1998, there were no borrowings
outstanding under the credit facility and cash and cash-equivalents and
short-term investments totaled $1,278 million and $234 million, respectively.
Cash flows generated from operating activities were $132 million for the three
months ended April 30, 1999 compared to a use of cash from operating activities
of $35 million for the same period of the prior year. 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 $237 million for the three
months ended April 30, 1999 compared to a use of cash of $55 million for the
same period of the prior year. For the three months ended April 30, 1999, cash
was primarily generated from the sale of shares of NSI common stock and used to
purchase investments in debt and equity securities and acquire businesses.
The Company used $10 million in cash from financing activities for the three
months ended April 30, 1999 compared to a source of cash of $56 million for the
same period for the prior year. The primary use of cash was for repurchases of
the Company's common stock.
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 its ability to conduct
business.
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
I-9
<PAGE> 11
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. 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 year 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 use 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, 90% 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 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 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 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
I-10
<PAGE> 12
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 April 30, 1999,
approximately 8% 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 $8
million on this remediation which includes amounts expensed and amounts spent
for capital assets. The Company expects to spend approximately $8 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 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
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<PAGE> 13
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 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 three months ended April 30, 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 April 30, 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 rate risk remained relatively
consistent with amounts disclosed in the Company's 1999 Annual Report on Form
10-K except for the following:
(i) INTESA had outstanding short-term bank borrowings of approximately $18
million dollars. Due to the high rate of inflation and the economy in
Venezuela, interest rates on the bank borrowings range from 27% to 34%
per year.
(ii) In connection with the sale of shares of NSI common stock, the Company
received cash proceeds of $729 million. These funds are invested in cash
equivalents and short-term investments.
FOREIGN CURRENCY RISK
There were no material changes from January 31, 1999.
EQUITY PRICE RISK
Investments in equity securities increased approximately $39 million due to
unrealized gains on an available-for-sale equity security.
I-12
<PAGE> 14
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 its ability to conduct
business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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/A filed May 4, 1999, Item 4, Changes in Registrant's
Certifying Accountant
(ii) Form 8-K filed April 14, 1999, Item 5, Other events
(iii) Form 8-K filed February 17, 1999, Item 2, Acquisitions or
Dispositions of Assets
I-13
<PAGE> 15
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: June 14, 1999 /s/ W. A. Roper
----------------------------------------
Senior Vice President and
Chief Financial Officer and
as a duly authorized officer
I-2
<PAGE> 16
EXHIBIT INDEX
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FISCAL QUARTER ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
------- ----------------------- ----------
<S> <C>
27 Financial Data Schedule
</TABLE>
I-3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 756,413
<SECURITIES> 528,566
<RECEIVABLES> 924,657
<ALLOWANCES> 69,118
<INVENTORY> 15,570
<CURRENT-ASSETS> 2,457,768
<PP&E> 804,541
<DEPRECIATION> 298,486
<TOTAL-ASSETS> 3,851,864
<CURRENT-LIABILITIES> 1,578,483
<BONDS> 137,525
0
0
<COMMON> 600
<OTHER-SE> 1,643,685
<TOTAL-LIABILITY-AND-EQUITY> 3,851,864
<SALES> 0
<TOTAL-REVENUES> 1,184,006
<CGS> 0
<TOTAL-COSTS> 910,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,594
<INCOME-PRETAX> 779,863
<INCOME-TAX> 331,442
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 448,421
<EPS-BASIC> 7.69
<EPS-DILUTED> 7.09
</TABLE>
