<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 JULY 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
(619) 546-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
As of August 31, 1999, the registrant had 235,780,420 shares
of Class A common stock, $.01 par value per share, issued and outstanding, and
301,460 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 SIX MONTHS ENDED
--------------------------------- ----------------------------------
JULY 31, 1999 JULY 31, 1998 JULY 31, 1999 JULY 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 1,361,284 $ 1,192,156 $ 2,545,290 $ 2,200,536
Costs and expenses:
Cost of revenues 1,054,230 957,493 1,965,126 1,756,437
Selling, general and
administrative expenses 207,258 158,547 400,168 298,403
----------- ----------- ----------- -----------
Operating income 99,796 76,116 179,996 145,696
Non-operating income (expense):
Interest expense (7,225) (10,968) (15,819) (14,726)
Interest income 13,206 4,899 29,751 7,444
Other income (expense), net (1,963) 558 (2,125) (1,927)
Gain on sale of subsidiary common stock 698,374
Minority interest in income
of consolidated subsidiaries (8,461) (3,514) (14,961) (6,128)
----------- ----------- ----------- -----------
Income before income taxes 95,353 67,091 875,216 130,359
Provision for income taxes 32,648 30,996 364,090 60,226
----------- ----------- ----------- -----------
Net income $ 62,705 $ 36,095 $ 511,126 $ 70,133
=========== =========== =========== ===========
Earnings per share:
Basic $ .26 $ .16 $ 2.17 $ .32
=========== =========== =========== ===========
Diluted $ .24 $ .15 $ 2.00 $ .29
=========== =========== =========== ===========
Common equivalent shares:
Basic 238,176 222,933 235,730 218,787
=========== =========== =========== ===========
Diluted 256,657 241,761 254,782 237,151
=========== =========== =========== ===========
</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>
JULY 31, 1999 JANUARY 31, 1999
------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 288,527 $ 389,026
Restricted cash 4,277 16,396
Short-term investments 516,652 118,808
Receivables 1,025,846 1,139,809
Inventories 12,134 16,096
Prepaid expenses and other current assets 43,199 60,226
Deferred income taxes 174,514 136,164
----------- -----------
Total current assets 2,065,149 1,876,525
Property and equipment (less accumulated depreciation
of $293,356 and $241,615 at July 31, 1999
and January 31, 1999, respectively) 342,375 309,578
Land and buildings (less accumulated depreciation of
$33,853 and $29,525 at July 31, 1999
and January 31, 1999, respectively) 225,836 186,462
Goodwill (less accumulated amortization of
$91,175 and $81,763 at July 31, 1999
and January 31, 1999, respectively) 219,800 95,414
Other intangible assets (less accumulated amortization of
$27,462 and $19,407 at July 31, 1999
and January 31, 1999, respectively) 74,090 77,259
Prepaid pension assets 474,802 456,803
Other assets 204,216 170,505
----------- -----------
$ 3,606,268 $ 3,172,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 728,868 $ 1,084,202
Accrued payroll and employee benefits 296,702 309,421
Income taxes payable 175,725 65,547
Notes payable and current portion of long-term debt 54,807 47,882
----------- -----------
Total current liabilities 1,256,102 1,507,052
Long-term debt, net of current portion 129,011 143,051
Deferred income taxes 82,480 100,489
Other long-term liabilities 358,221 318,002
Commitments and contingencies (Note K)
Minority interest in consolidated subsidiaries 69,940 19,350
Stockholders' equity:
Common stock:
Class A, $.01 par value, 1,000,000 shares authorized; issued and
outstanding 235,364 shares and 226,387 shares at
July 31, 1999 and January 31, 1999, respectively) 2,354 2,264
Class B, $.05 par value, 5,000 shares authorized;
issued and outstanding (301 shares and 303 shares at
July 31, 1999 and January 31, 1999, respectively) 15 15
Additional paid-in capital 1,018,725 834,757
Retained earnings 699,819 271,379
Other stockholders' equity (23,763) (23,928)
Accumulated other comprehensive income 13,364 115
----------- -----------
Total stockholders' equity 1,710,514 1,084,602
----------- -----------
$ 3,606,268 $ 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>
SIX MONTHS ENDED
-------------------------------
JULY 31, 1999 JULY 31, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 511,126 $ 70,133
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 80,180 82,401
Non-cash compensation 68,806 39,319
Gain on sale of subsidiary common stock (698,374)
Other 23,986 14,038
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables 213,987 62,847
Inventories 2,639 (1,342)
Prepaid expenses and other current assets 26,751 (34,577)
Progress payments (877) (10,258)
Deferred income taxes (61,790) (8,104)
Other assets (20,950) (25,336)
Accounts payable and accrued liabilities (379,124) (132,277)
Accrued payroll and employee benefits (22,644) (1,583)
Income taxes payable 149,446 (3,571)
Other long-term liabilities 29,027 26,869
--------- ---------
(77,811) 78,559
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (75,889) (25,373)
Expenditures for land and buildings (591) (73)
Acquisitions of businesses, net of cash acquired (217,462) (812)
Purchases of debt and equity securities available for sale (402,288) (39,316)
Proceeds from sale of subsidiary common stock 729,000
Investments in affiliates (13,965) (1,250)
Purchase of debt securities held to maturity (6,007)
Proceeds from sales of certain business assets 3,165 833
Proceeds from disposal of property and equipment 258 215
--------- ---------
22,228 (71,783)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt 731 5,008
Payments of notes payable and long-term debt (4,200) (1,402)
Principal payments on capital lease obligations (17,809) (11,705)
Net proceeds from issuance of subsidiary common stock 2,988 4,482
Dividends paid to minority interest (9,423) (7,096)
Sales of common stock 58,404 97,505
Repurchases of common stock (76,525) (43,595)
--------- ---------
(45,834) 43,197
--------- ---------
Effect of exchange rate changes on cash 918 (1,687)
--------- ---------
Decrease in cash and cash equivalents (100,499) (48,286)
Cash and cash equivalents at beginning of period 389,026 189,387
--------- ---------
Cash and cash equivalents at end of period $ 288,527 $ 237,673
========= =========
Supplemental schedule of non-cash investing and financing activities:
Shares of common stock exchanged upon exercise of stock options $ 24,067 $ 15,522
========= =========
Capital lease obligations for property and equipment $ 10,978 $ 17,718
========= =========
Fair value of assets acquired in acquisitions $ 300,252 $ 812
Cash paid in acquisitions (231,302) (812)
Issuance of common stock for assets acquired (3,717) --
--------- ---------
Liabilities assumed in acquisitions $ 65,233 $ --
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-3
<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 six months ended July 31, 1998 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three and six months ended July 31, 1999.
In the opinion of management, the unaudited financial information as of July 31,
1999 and for the three and six months ended July 31, 1999 and 1998 reflect all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof. Operating results for the six months ended July 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 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. Acquisitions completed in the six months ended July
31, 1999 are not considered significant business combinations and, therefore,
pro forma financial information is not presented. The aggregate effect of these
acquisitions was not material to the Company's consolidated financial
statements.
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 $579,000,000, $549,000,000 and $30,000,000 at
July 31, 1999, respectively. Other assets include $72,000,000 of the
available-for-sale securities as of July 31, 1999.
NOTE D - RECEIVABLES:
Receivables include $16,242,000 of costs incurred on projects for which the
Company has been requested by the customer to begin work under a new contract,
or extend work under an existing contract, but for which formal contracts or
contract modifications have not been executed at July 31, 1999.
NOTE E - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
(IN THOUSANDS)
<S> <C>
Inventories:
Contracts-in-process $ 4,893
Raw materials 7,241
-------
$12,134
=======
</TABLE>
I-4
<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 July 31, 1999 and the entire
$700,000,000 was available. Financial covenants required by the credit facility
have been maintained as of July 31, 1999.
NOTE G - BUSINESS SEGMENT INFORMATION:
The following table summarizes interim segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31 SIX MONTHS ENDED JULY 31
------------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Regulated $ 717,240 $ 623,986 $1,364,244 $ 1,185,445
Non-Regulated 555,983 494,429 1,033,064 888,365
----------- ----------- ---------- -----------
Total segment revenues 1,273,223 1,118,415 2,397,308 2,073,810
Corporate and other 88,061 73,741 147,982 126,726
----------- ----------- ---------- -----------
Total consolidated revenues $ 1,361,284 $ 1,192,156 $2,545,290 $ 2,200,536
=========== =========== ========== ===========
Income (loss) before income taxes:
Regulated $ 45,105 $ 38,882 $ 86,569 $ 74,287
Non-Regulated 50,848 49,746 92,818 90,452
----------- ----------- ---------- -----------
Total segment income before income taxes 95,953 88,628 179,387 164,739
Corporate and other (600) (21,537) 695,829 (34,380)
----------- ----------- ---------- -----------
Total income before income taxes $ 95,353 $ 67,091 $ 875,216 $ 130,359
=========== =========== ========== ===========
</TABLE>
For the six months ended July 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 JULY 31 SIX MONTHS ENDED JULY 31
-------------------------- --------------------------
1999 1998 1999 1998
-------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 62,705 $ 36,095 $ 511,126 $ 70,133
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment (7,349) 2,097 13,848 5,989
Foreign currency translation adjustments (221) (751) (599) (1,098)
-------- --------- --------- --------
(7,570) 1,346 13,249 4,891
-------- --------- --------- --------
$ 55,135 $ 37,441 $ 524,375 $ 75,024
======== ========= ========= ========
</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 JULY 31 SIX MONTHS ENDED JULY 31
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $ 62,705 $ 36,095 $ 511,126 $ 70,133
Effect of:
Subsidiary preferred stock dividends (369) (375) (720) (688)
--------- --------- --------- ---------
Net income available to common
stockholders, as adjusted $ 62,336 $ 35,720 $ 510,406 $ 69,445
--------- --------- --------- ---------
Weighted average shares 238,176 222,933 235,730 218,787
--------- --------- --------- ---------
Basic EPS $ .26 $ .16 $ 2.17 $ .32
========= ========= ========= =========
DILUTED EPS:
Net income $ 62,705 $ 36,095 $ 511,126 $ 70,133
Effect of:
Subsidiary preferred stock dividends (369) (375) (720) (688)
Majority-owned subsidiary's
dilutive securities (110) (77) (91) (203)
--------- --------- --------- ---------
Net income available to common
stockholders, as adjusted $ 62,226 $ 35,643 $ 510,315 $ 69,242
--------- --------- --------- ---------
Weighted average shares 238,176 222,933 235,730 218,787
Effect of:
Stock options 18,098 17,914 18,621 17,440
Other stock awards 383 914 431 924
--------- --------- --------- ---------
Weighted average shares, as adjusted 256,657 241,761 254,782 237,151
--------- --------- --------- ---------
Diluted EPS $ .24 $ .15 $ 2.00 $ .29
========= ========= ========= =========
</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 are 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 its ability to conduct
business.
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 are 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.
RESULTS OF OPERATIONS
Revenues for the three and six months ended July 31, 1999 increased 14% and 16%,
respectively, compared to the same period of the prior year. Regulated segment
revenues as a percentage of consolidated revenues remained constant at 53% and
54% for the three and six months ended July 31, 1999, respectively, compared to
52% and 54% for the same periods of the prior year. Non-Regulated segment
revenues as a percentage of consolidated revenues also remained constant at 41%
for the three and six months ended July 31, 1999 compared to 41% and 40% for the
same periods of the prior year. On an absolute basis, Regulated and
Non-Regulated segment revenues increased 15% and 12% for the three months ended
July 31, 1999 and increased 15% and 16%, respectively, for the six months ended
July 31, 1999 over the same periods of the prior year. Telcordia, NSI and INTESA
primarily drove the growth in the Non-Regulated segment. For the three and six
months ended July 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 July 31, 1999, the Company had approximately
36,100 full-time employees compared to approximately 30,900 at July 31, 1998.
Material and subcontract ("M&S") revenues were $273 million and $459 million for
the three and six months ended July 31, 1999, respectively, compared to $219
million and $383 million for the same periods of the prior year. As a percentage
of total revenues, M&S revenues were 20% and 18% for the three and six months
ended July 31, 1999, respectively, compared to 18% and 17% 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 41% for the six months ended July 31,
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 24% and 19% of revenues
for the six months ended July 31, 1999 and 1998, respectively, while cost
reimbursement contracts were 35% and 38% for the same periods, respectively.
The cost of revenues as a percentage of revenues decreased to 77.4% and 77.2%
for the three and six months ended July 31, 1999, respectively, compared to
80.3% and 79.8% 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 88.3% and
87.9% for the three and six months ended July 31, 1999 compared to 88.3% and
88.0% for the same periods of the prior year.
SG&A expenses as a percentage of revenues were 15.2% and 15.7% for the three and
six months ended July 31, 1999, respectively compared to 13.3% and 13.6% 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 remained
relatively constant at 6.8% and 7.2% for the three and six months ended July 31,
1999, respectively, compared to 6.8% and 7.0% for the same periods of the prior
year. Marketing and B&P costs have increased to 6.2% of revenues for the three
and six months ended July 31, 1999 compared to 4.8% and 5.0% 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 have increased to 2.3% of revenues for the three and six months ended July
31, 1999 compared to 1.7% and 1.6%, 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 six months ended
July 31, 1999, and 1998. In the Non-Regulated segment, operating profit margin
was 9% for the
I-7
<PAGE> 10
three and six months ended July 31, 1999, compared to 10% for the same periods
of the prior year.
Interest expense for the three and six months ended July 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 six
months ended July 31, 1999 increased $8 and $22 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.
The provision for income taxes as a percentage of income before income taxes was
34.2% and 41.6% for the three and six months ended July 31, 1999, respectively,
compared to 46.2% for the same periods of the prior year. The lower effective
tax rate for the three and six months ended July 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 six months ended July 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 has provided an additional source of
liquidity for the Company. At July 31, 1999 and 1998, there were no borrowings
outstanding under the credit facility and cash and cash-equivalents and
short-term investments totaled $805 million and $317 million, respectively.
Cash flows used in operating activities were $78 million for the six months
ended July 31, 1999 compared to a use of cash from operating activities of $79
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 $22 million for the six
months ended July 31, 1999 compared to a use of cash of $72 million for the same
period of the prior year. For the six months ended July 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 and acquire businesses.
The Company used $46 million in cash from financing activities for the six
months ended July 31, 1999 compared to a source of cash of $43 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 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
I-8
<PAGE> 11
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 substantially
completed with the exception of testing and implementing solutions for
identified problems of three systems which are expected to be completed by the
end of Calendar 1999.
Except for the three systems noted, 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 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, 92% 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 appropriate contingency
plans. In addition, in certain circumstances, the Company has upgraded software
and systems to address Year 2000 compatibility issues with its business
partners. The ability of the Company's business partners to be Year 2000
compliant is beyond the Company's control. Accordingly, the Company can give no
assurances that its business partners and other third parties will be Year 2000
compliant or that the systems of such third parties will be compatible with the
Company's systems. Failure of such third party systems to be compliant or
compatible could have a material adverse effect on the Company's results of
operations and ability to do business.
The Company is substantially dependent upon the effectiveness of its customers'
systems, principally those of the U.S. Government, for the administration of
contracts and payment of the Company's invoices. The Company is continuing to
monitor its major U.S. Government payment offices to understand the current
status of their Year 2000 issues and remediation efforts. Although there could
be a number of impacts, a primary concern is delays in contract payments if the
Company's customers were to experience Year 2000 problems. This could require a
temporary increase in working capital to fund operations. Although the Company
has substantial borrowing capacity available under its current revolving credit
facilities which expire in August 2002, the Company will further evaluate the
potential cash flow impact of a delay in contract payments and determine if
additional steps are necessary to ensure that sufficient contingency financing
is available.
IMPACT ON INTERNATIONAL OPERATIONS -- As of July 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. 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 has substantially
completed testing of these products. Telecordia expects to finish 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
I-9
<PAGE> 12
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 $10 million on this
remediation which includes amounts expensed and amounts spent for capital
assets. The Company expects to spend approximately $6 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 has developed a common approach to contingency
planning which is being used to develop contingency plans for its IT and non-IT
systems, focusing on the Company's internal systems and its dependence on its
business partners, suppliers and vendors. The Company has developed drafts of
the contingency plan which address the core IT systems, non-IT systems including
power and communications and the Company's dependence on its key business
partners. Management is reviewing these drafts and expects to have its
contingency plans completed by the end of October 1999. In addition, the
Company's common approach to contingency planning is being utilized by the
Company's operating groups to assist in the development of a company-wide
contingency plan. Due to the potentially far reaching consequences of the Year
2000 problem and the speculative nature of contingency planning, it is uncertain
whether the Company's contingency plans, once developed, will adequately address
the impacts of Year 2000 problems on the Company's operations.
YEAR 2000 FORWARD LOOKING STATEMENTS -- The foregoing statements as to costs,
dates, intent, belief and current expectations of the Company or its officers
with respect to Year 2000 issues are forward looking and are made in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such statements are based on the Company's best estimates and expectations
given the information available at the date hereof and may be updated as
additional information becomes available. In addition, such statements are not
guarantees of future results or outcomes and involve risks and uncertainties,
and actual results may differ materially from those in the forward-looking
statements as a result of various factors. Some of these factors include, but
are not limited to, the Company's ability to identify and address all Year 2000
issues associated with its IT and non-IT systems; the representations,
preparedness and readiness of the Company's business partners; unanticipated
expenses or delays on the part of the Company or its customers, service
providers, suppliers and vendors, and the ability of the Company to develop and
execute a comprehensive contingency plan to cover its "most reasonably likely
worst case" scenario. Due to such uncertainties and risks surrounding Year 2000
issues, the Company's assessment of the Year 2000 issue, including the costs of
the program and timing of completion, are based on management's best estimates
and input from customers, service providers, suppliers and vendors. These
estimates were derived using numerous assumptions about future events, including
continued availability of certain resources, third party modification plans and
other factors. However, the Company cautions that it is impossible to predict
the impact of certain factors that are not within the control of the Company and
there can be no assurances that these estimates will be achieved and actual
results could differ materially from those anticipated.
I-10
<PAGE> 13
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 six months ended July 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 July 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
Investments in equity securities increased approximately $30 million due to
unrealized gains on an available-for-sale equity security.
I-11
<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
(a) The Annual Meeting of Stockholders of the registrant was held on July 9,
1999.
(b) All of the Directors nominated by management in registrant's 1999 Proxy
Statement were elected and no solicitation in opposition to management's
nominees was made.
(c) At the Annual Meeting, the stockholders of the registrant approved the
following:
(i) the election of the following Directors by the votes set forth below:
II-1
<PAGE> 15
<TABLE>
<CAPTION>
Number of Votes of Common Stock
---------------------------------
Withhold
Director For Authority
-------- --- ---------
<S> <C> <C>
J. R. Beyster 47,834,916 696,823
W. A. Downing 46,168,481 696,823
A. K. Jones 46,251,839 696,823
J. W. McRary 44,373,419 696,823
S. D. Rockwood 46,133,369 696,823
L. A. Simpson 46,443,128 696,823
R. C. Smith 46,364,074 696,823
J. P. Walkush 45,908,017 696,823
</TABLE>
(ii) proposal to amend the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of Class A Common Stock from
100,000,000 shares to 1,000,000,000 shares with 45,198,280 shares of the
Class A Common Stock and Class B Common Stock voting together as a single
class voting for the proposal, 1,364,032 shares voting against and 319,168
shares abstaining and 44,297,210 shares of the Class A Common Stock voting
as a separate class voting for the proposal, 1,244,775 shares voting
against and 317,895 shares abstaining.
(iii) proposal to amend the Company's Restated Certificate of
Incorporation to split each outstanding share of Class A Common Stock into
four shares of Class A Common Stock with 45,456,497 shares of the Class A
Common Stock and Class B Common Stock voting together as a single class
voting for the proposal, 1,184,175 shares voting against and 240,807
shares abstaining and 44,554,655 shares of the Class A Common Stock voting
as a separate class voting for the proposal, 1,065,452 shares voting
against and 239,773 shares abstaining.
(iv) proposal to amend the Company's Restated Certificate of Incorporation
to increase the relative voting rights of each share of Class B Common
Stock to maintain the relative rights of the Class A Common Stock and
Class B Common Stock with 45,111,360 shares of the Class A Common Stock
and Class B Common Stock voting together as a single class voting for the
proposal, 1,306,452 shares voting against and 463,667 shares abstaining
and 44,247,561 shares of the Class A Common Stock voting as a separate
class voting for the proposal, 1,150,277 shares voting against and 462,041
shares abstaining.
(v) proposal to amend the Company's Restated Certificate of Incorporation
to clarify the treatment of employees of the Company's subsidiaries under
the Company's right of repurchase upon termination of affiliation pursuant
to Article Fourth with 45,160,231 shares of the Class A Common Stock and
Class B Common Stock voting together as a single class voting for the
proposal, 1,204,912 shares voting against and 516,336 shares abstaining
and 44,299,482 shares of the Class A Common Stock voting as a separate
class voting for the proposal, 1,048,867 shares voting against and 511,531
shares abstaining.
(vi) proposal to approve the 1999 Stock Incentive Plan with 45,158,579
shares voting for the plan, 976,434 shares voting against and 746,467
shares abstaining; and
(vii) proposal to approve the restatement of the 1984 Bonus Compensation
Plan with 44,512,373 shares voting for the plan, 1,311,798 shares voting
against and 1,057,309 shares abstaining.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K.
During the fiscal quarter for which this report is filed, the following
report(s) on Form 8-K were filed by the Registrant:
(i) Form 8-K filed September 13, 1999, Item 5, Other events and Item 7,
Financial Statements and Exhibits
(ii) Form 8-K filed July 14, 1999, Item 5, Other events
II-2
<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: September 14, 1999 /s/ W. A. Roper
-----------------------------------------
Senior Vice President and
Chief Financial Officer and
as a duly authorized officer
II-3
<PAGE> 17
EXHIBIT INDEX
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FISCAL QUARTER ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
- ------ ----------------------- ----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
s
II-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND RELATED CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JULY 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 292,804
<SECURITIES> 516,652
<RECEIVABLES> 1,025,846
<ALLOWANCES> 107,961
<INVENTORY> 12,134
<CURRENT-ASSETS> 2,065,149
<PP&E> 895,420
<DEPRECIATION> 327,209
<TOTAL-ASSETS> 3,606,268
<CURRENT-LIABILITIES> 1,256,102
<BONDS> 129,011
0
0
<COMMON> 2,369
<OTHER-SE> 1,708,145
<TOTAL-LIABILITY-AND-EQUITY> 3,606,268
<SALES> 0
<TOTAL-REVENUES> 2,545,290
<CGS> 0
<TOTAL-COSTS> 1,965,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,819
<INCOME-PRETAX> 875,216
<INCOME-TAX> 364,090
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 511,126
<EPS-BASIC> 2.17
<EPS-DILUTED> 2.00
</TABLE>
