<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 APRIL 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-12771
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3630868
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(858) 826-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of May 31, 2000, the registrant had 232,589,268 shares of Class A
common stock, $.01 par value per share, issued and outstanding, and 291,208
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
---------------------------------
APRIL 30, 2000 APRIL 30, 1999
-------------- --------------
<S> <C> <C>
Revenues $ 1,240,274 $ 1,184,006
Costs and expenses:
Cost of revenues 993,193 910,896
Selling, general and administrative expenses 184,434 192,910
----------- -----------
Operating income 62,647 80,200
----------- -----------
Non-operating income (expense):
Interest expense (5,781) (8,594)
Interest income 31,914 16,545
Other income (expense), net (Note I) 198,895 (162)
Gain on sale of subsidiary common stock 1,462,303 698,374
Minority interest in income of consolidated
subsidiaries (2,746) (6,500)
----------- -----------
Income before income taxes 1,747,232 779,863
Provision for income taxes 672,684 331,442
----------- -----------
Net income $ 1,074,548 $ 448,421
=========== ===========
Earnings per share:
Basic $ 4.47 $ 1.92
=========== ===========
Diluted $ 4.13 $ 1.77
=========== ===========
Common equivalent shares:
Basic 240,341 233,209
=========== ===========
Diluted 259,910 252,872
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, 2000 JANUARY 31, 2000
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,773,781 $ 669,320
Restricted cash 6,659 8,781
Short-term investments in marketable securities 287,895 424,609
Receivables 1,207,646 1,339,763
Prepaid expenses and other current assets 88,385 143,163
Deferred income taxes 70,387 173,987
----------- -----------
Total current assets 3,434,753 2,759,623
Property and equipment (less accumulated depreciation
of $313,223 and $306,754 at April 30, 2000
and January 31, 2000, respectively) 280,890 351,429
Land and buildings (less accumulated depreciation of
$38,964 and $36,619 at April 30, 2000
and January 31, 2000, respectively) 224,695 225,458
Goodwill (less accumulated amortization of
$58,132 and $55,208 at April 30, 2000
and January 31, 2000, respectively) 169,341 170,137
Other intangible assets (less accumulated amortization of
$38,071 and $34,089 at April 30, 2000
and January 31, 2000, respectively) 65,715 69,301
Long-term investments in marketable securities 366,069 181,285
Prepaid pension assets 505,132 492,802
Other assets 301,435 155,213
----------- -----------
$ 5,348,030 $ 4,405,248
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 902,014 $ 1,409,477
Accrued payroll and employee benefits 316,814 357,014
Income taxes payable 656,827 90,337
Notes payable and current portion of long-term debt 36,945 54,093
----------- -----------
Total current liabilities 1,912,600 1,910,921
Long-term debt, net of current portion 118,496 121,289
Deferred income taxes 202,039 74,412
Other long-term liabilities 259,723 360,362
Commitments and contingencies (Note H)
Minority interest in consolidated subsidiaries 17,271 107,982
Stockholders' equity:
Common stock:
Class A, $.01 par value, 1,000,000 shares authorized; issued and
outstanding (233,159 shares and 236,079 shares at
April 30, 2000 and January 31, 2000, respectively) 2,331 2,361
Class B, $.05 par value, 5,000 shares authorized;
issued and outstanding (294 shares and 296 shares at
April 30, 2000 and January 31, 2000, respectively) 15 15
Additional paid-in capital 1,336,499 1,082,727
Retained earnings 1,486,414 704,562
Other stockholders' equity (32,545) (31,387)
Accumulated other comprehensive income 45,187 72,004
----------- -----------
Total stockholders' equity 2,837,901 1,830,282
----------- -----------
$ 5,348,030 $ 4,405,248
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
APRIL 30, 2000 APRIL 30, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,074,548 $ 448,421
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 44,087 38,908
Non-cash compensation 69,219 65,060
Gain on sale of subsidiary common stock (1,462,303) (698,374)
Net gain on sales of investments and other business assets (191,222) (1,083)
Other 3,240 10,016
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables 105,469 210,760
Prepaid expenses and other current assets 28,797 (4,760)
Progress payments 729 8,923
Deferred income taxes 105,365 (35,021)
Other assets (188,804) (10,095)
Accounts payable and accrued liabilities (207,536) (235,439)
Accrued payroll and employee benefits (30,997) (24,259)
Income taxes payable 542,057 348,960
Other long-term liabilities 2,884 9,981
----------- ---------
(104,467) 131,998
----------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (16,527) (31,271)
Expenditures for land and buildings (64) (46)
Acquisitions of businesses, net of cash acquired (10,757) (50,328)
Purchases of debt and equity securities available-for-sale (32,761) (411,742)
Proceeds from sale of debt and equity securities available-for-sale 25,000
Proceeds from sale of subsidiary common stock 1,589,575 729,000
Investments in affiliates (9,017) (495)
Proceeds from sales of certain business assets 298 2,084
Proceeds from disposal of property and equipment 16 100
----------- ---------
1,545,763 237,302
----------- ---------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt 91 18,122
Payments of notes payable and long-term debt (2,121) (821)
Principal payments on capital lease obligations (22,884) (9,138)
Net proceeds from issuance of subsidiary common stock 1,809
Dividends paid to minority interest (10,561) (9,423)
Sales of common stock 25,701 39,626
Repurchases of common stock (326,053) (49,961)
----------- ---------
(335,827) (9,786)
----------- ---------
Effect of exchange rate changes on cash (1,008) 606
----------- ---------
Increase in cash and cash equivalents 1,104,461 360,120
Cash and cash equivalents at beginning of period 669,320 389,026
----------- ---------
Cash and cash equivalents at end of period $ 1,773,781 $ 749,146
=========== =========
Supplemental schedule of non-cash investing and financing activities:
Shares of common stock exchanged upon exercise of stock options $ 17,820 $ 15,690
=========== =========
Capital lease obligations for property and equipment $ 2,964 $ 7,274
=========== =========
Fair value of assets acquired in acquisitions $ 20,293 $ 71,190
Cash paid in acquisitions (10,757) (51,667)
Issuance of common stock in acquisitions (3,000)
----------- ---------
Liabilities assumed in acquisitions $ 6,536 $ 19,523
=========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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.
As discussed in Note G, the Company no longer consolidates NSI's financial
statements and has instead recognized its proportionate share of NSI's net
income under the equity method of accounting for the three months ended April
30, 2000.
Certain amounts from the three months ended April 30, 1999 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three months ended April 30, 2000.
In the opinion of management, the unaudited financial information as of April
30, 2000 and for the three months ended April 30, 2000 and 1999 reflect all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof. Operating results for the three months ended April
30, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending January 31, 2001. For further information, refer to the
consolidated financial statements and footnotes included in the Company's 2000
Annual Report on Form 10-K.
NOTE B - RECEIVABLES:
Receivables include $21,332,000 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, 2000.
NOTE C - REVOLVING CREDIT FACILITY:
The Company has a five-year unsecured reducing revolving credit facility with a
group of financial institutions which allow borrowings until August 2002 and
which was reduced to $662,500,000 in accordance to the original terms.
Borrowings bear interest at the Company's option at various rates, based on the
base rate, bid rate or on margins over the CD rate or LIBOR. There were no
balances outstanding under the facility at April 30, 2000 and the entire
$662,500,000 was available. Financial covenants required by the credit facility
have been maintained as of April 30, 2000.
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<PAGE> 7
NOTE D - BUSINESS SEGMENT INFORMATION:
The following table summarizes interim segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30
---------------------------
2000 1999
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Regulated $ 756,242 $ 647,004
Non-Regulated 453,965 477,081
---------- ----------
Total segment revenues 1,210,207 1,124,085
Corporate and other 30,067 59,921
---------- ----------
Total consolidated revenues $1,240,274 $1,184,006
========== ==========
Income before income taxes:
Regulated $ 41,833 $ 41,464
Non-Regulated 33,048 41,970
---------- ----------
Total segment income before income taxes 74,881 83,434
Corporate and other 1,672,351 696,429
---------- ----------
Total income before income taxes $1,747,232 $ 779,863
========== ==========
</TABLE>
Included in Corporate and other income before income taxes for the three months
ended April 30, 2000 are the gains on the transactions discussed in Note G and
Note I. For the same period of the prior year, included in corporate and other
income before income taxes was the gain on the sale of NSI Class A Common Stock
which was completed in February 1999.
NOTE E - 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
---------------------------
2000 1999
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net income $ 1,074,548 $ 448,421
Other comprehensive income, net of tax:
Unrealized gain on securities 425 21,197
Reclassification adjustment (26,566)
Foreign currency translation adjustments (676) (378)
----------- ---------
(26,817) 20,819
----------- ---------
Comprehensive income $ 1,047,731 $ 469,240
=========== =========
</TABLE>
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<PAGE> 8
NOTE F - 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
---------------------------
2000 1999
----------- ---------
<S> <C> <C>
BASIC EPS:
Net income $ 1,074,548 $ 448,421
Effect of:
Subsidiary preferred stock dividends (351)
----------- ---------
Net income available to common
stockholders, as adjusted $ 1,074,548 $ 448,070
----------- ---------
Weighted average shares
240,341 233,209
----------- ---------
Basic EPS $ 4.47 $ 1.92
=========== =========
DILUTED EPS:
Net income $ 1,074,548 $ 448,421
Effect of:
Subsidiary preferred stock dividends (351)
Majority-owned subsidiary's
dilutive securities (19)
----------- ---------
Net income available to common
stockholders, as adjusted $ 1,074,548 $ 448,051
----------- ---------
Weighted average shares
240,341 233,209
Effect of:
Stock options
19,399 19,184
Other stock awards
170 479
----------- ---------
Weighted average shares, as adjusted 259,910 252,872
----------- ---------
Diluted EPS $ 4.13 $ 1.77
=========== =========
</TABLE>
NOTE G - SALE OF SUBSIDIARY COMMON STOCK:
On February 11, 2000, the Company's subsidiary NSI completed a secondary
offering of 8,889,500 shares of its Class A Common Stock. Of the shares sold in
the offering, the Company sold 6,700,000 shares, NSI sold 2,159,500 shares and
other selling stockholders sold 30,000 shares at $247 per share before deducting
underwriting commissions of $9.75 per share. The Company received net proceeds
from the offering of $1,589,575,000 and recognized a gain on the sale before
income taxes of $1,462,303,000. In addition, the Company recognized a gain from
the shares sold by NSI by recording $132,377,000 directly to additional paid-in
capital. On February 15, 2000, NSI announced a 2-for-1 stock split effective
March 10, 2000. Upon completion of this secondary offering and giving effect to
the stock split, the Company owned 16,300,000 shares of NSI Class A Common Stock
which represents a 22.6% interest in NSI. With the recomposition of the NSI
Board of Directors and the current ownership interest in NSI, the Company no
longer consolidates NSI's financial statements and has instead recognized its
proportionate share of NSI's net income under the equity method of accounting
for the three months ended April 30, 2000.
On March 6, 2000, NSI entered into a merger agreement with VeriSign,
Inc. ("VeriSign"), a publicly traded company and leading provider of Internet
trust services, pursuant to which VeriSign would acquire NSI and NSI would
become a wholly-owned subsidiary of VeriSign. The transaction closed on June 8,
2000. Under the merger agreement, VeriSign issued 1.075 shares of VeriSign
common stock for each share of NSI stock (after giving effect to the 2-for-1
split of NSI common stock
I-7
<PAGE> 9
completed on March 10, 2000). As a result of this transaction, Company holds
approximately 9% of VeriSign's outstanding shares.
NOTE H - COMMITMENTS AND CONTINGENCIES:
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or ability to conduct
business.
NOTE I - SUPPLEMENTARY INCOME STATEMENT INFORMATION:
On April 5, 2000, Solect Technology Group Inc. ("Solect"), an entity in which
the Company held an investment, was acquired by Amdocs Limited ("Amdocs"), a
publicly traded company. In connection with this transaction, the Company
exchanged its equity interest in Solect for an approximate 2% equity interest in
Amdocs. The Company recognized a gain before income taxes of $191,222,000 on the
transaction, which is reflected in other income in the accompanying financial
statements.
I-8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On February 11, 2000, the Company's subsidiary NSI completed a secondary
offering of 8,889,500 shares of its Class A Common Stock. Of the shares sold in
the offering, the Company sold 6,700,000 shares, NSI sold 2,159,500 shares and
other selling stockholders sold 30,000 shares at $247 per share before deducting
underwriting commissions of $9.75 per share. The Company received net proceeds
from the offering of $1.6 billion and recognized a gain on the sale before
income taxes of $1.5 billion. In addition, the Company recognized a gain from
the shares sold by NSI by recording $132 million directly to additional paid-in
capital. On February 15, 2000, NSI announced a 2-for-1 stock split effective
March 10, 2000. Upon completion of this secondary offering and giving effect to
the stock split, the Company owned 16,300,000 shares of NSI Class A Common Stock
which represents a 22.6% interest in NSI. With the recomposition of the NSI
Board of Directors and the current ownership interest in NSI, the Company no
longer consolidates NSI's financial statements ("deconsolidation") and has
instead recognized its proportionate share of NSI's net income under the equity
method of accounting for the three months ended April 30, 2000.
On March 6, 2000, NSI entered into a merger agreement with VeriSign, Inc.
("VeriSign"), a publicly traded company and leading provider of Internet trust
services, pursuant to which VeriSign would acquire NSI and NSI would become a
wholly-owned subsidiary of VeriSign. The transaction closed on June 8, 2000.
Under the merger agreement, VeriSign issued 1.075 shares of VeriSign common
stock for each share of NSI stock (after giving effect to the 2-for-1 split of
NSI common stock completed on March 10, 2000). As a result of this transaction,
the Company holds approximately 9% of VeriSign's outstanding shares.
On April 5, 2000, Solect Technology Group Inc. ("Solect"), an entity in which
the Company held an investment, was acquired by Amdocs Limited ("Amdocs"), a
publicly traded company. In connection with this transaction, the Company
exchanged its equity interest in Solect for an approximate 2% equity interest in
Amdocs. The Company recognized a gain before income taxes of $191 million on the
transaction, which is reflected in other income in the accompanying financial
statements.
RESULTS OF OPERATIONS
Revenues for the three months ended April 30, 2000 increased 5% compared to the
same period of the prior year. Excluding NSI's revenues, revenues increased 8%
which was primarily attributable to growth at Telcordia and in the Company's
traditional business areas. Regulated segment revenues as a percentage of
consolidated revenues were 61% and 55% for the three months ended April 30, 2000
and 1999, respectively, and increased 17% over the same period of the prior year
as a result of growth in the Company's traditional business areas with
departments and agencies of the U.S. Government and through acquisitions. For
the three months ended April 30, 2000, Regulated segment revenues from the
Company's principal customer, the U.S. Government, continued to shift toward the
service type contracts which are competitively priced utilizing lower cost
structures. 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 these lower cost service type contracts. Non-Regulated segment
revenues as a percentage of consolidated revenues were 37% and 40% for the three
months ended April 30, 2000 and 1999, respectively, and decreased 5% as a result
of the deconsolidation of NSI, lower revenues at INTESA and the impact of the
sale of the TransCore business unit which was completed in the third quarter of
the prior year. However, offsetting the decrease in revenues in the
Non-Regulated segment was growth at Telcordia and in certain other commercial
and international markets.
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, 2000, the Company had approximately
37,000 full-time employees compared to approximately 34,000 at April 30, 1999.
Material and subcontract ("M&S") revenues were $201 million and $185 million for
the three months ended April 30, 2000 and 1999, respectively. As a percentage of
total revenues, M&S revenues remained constant at 16% for the three months ended
April 30, 2000 and 1999.
The percentage of the Company's revenues attributable to the higher risk, firm
fixed-price ("FFP") contracts decreased to 38% for the three months ended April
30, 2000 compared to 41% for the same period of the prior year. For the year
ended January 31, 2000, revenues from FFP contracts were 41%. The Company
assumes greater performance risk on FFP contracts and the failure to accurately
estimate ultimate costs or to control costs during performance of the work may
result in reduced profits or losses. Fixed-price level-of-effort ("FP-LOE") and
time-and-materials ("T&M") type contracts represented 28% and 22% of revenues
for the three months ended April 30, 2000 and 1999, respectively, while cost
reimbursement contracts were 34% and 37% for the same periods, respectively.
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<PAGE> 11
The cost of revenues as a percentage of revenues increased to 80.1% for the
three months ended April 30, 2000 from 76.9% for the same period of the prior
year. The increase as a percentage of revenues is primarily attributable to
INTESA and Telcordia where margins on certain contracts are lower than
historical margins. Cost of revenues as a percentage of revenues, excluding
Telcordia, NSI and INTESA, was 87.9% for the three months ended April 30, 2000
compared to 87.5% for the same period of the prior year.
Selling, general and administrative ("SG&A") expenses are comprised of general
and administrative ("G&A"), bid and proposal ("B&P") and independent research
and development ("IR&D") expenses. SG&A expenses as a percentage of revenues
were 14.8% and 16.3% for the three months ended April 30, 2000 and 1999,
respectively. The decrease is primarily attributable to the deconsolidation of
NSI; excluding NSI, SG&A expenses as a percentage of revenues were 14.9% and
14.8% for the three months ended April 30, 2000 and 1999, respectively. SG&A
expenses as a percentage of revenues, excluding NSI, Telcordia and INTESA, all
of which have more of their associated costs in SG&A as opposed to cost of
revenues, were 8.5% and 8.0% for the three months ended April 30, 2000 and 1999,
respectively. G&A costs have decreased as certain commercial and international
subsidiaries monitor their cost during a slower growth period while marketing
and B&P costs have increased in the Company's traditional business areas,
Telcordia and commercial business areas. IR&D costs have historically fluctuated
depending on the stage of development for various hardware and software systems
and decreased slightly as a percentage of revenues for the three months ended
April 30, 2000.
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, 2000 and 1999. In the Non-Regulated segment, operating profit margin
decreased to 7% compared to 9% for the three months ended April 30, 2000 and
1999, respectively. This decrease in operating profit margin was primarily
attributable to the deconsolidation of NSI, greater than expected operating
losses in a business that was acquired in the prior year and operating losses
and reduced profit margins in certain commercial and foreign business units.
Interest expense of $6 million and $9 million for the three months ended April
30, 2000 and 1999, respectively, 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 decrease in
interest expense is primarily driven by a decrease in capital lease obligations
at INTESA.
Interest income of $32 million for the three months ended April 30, 2000
increased from $17 million for the same period of the prior year due to higher
average cash, cash equivalents and short-term investments. The Company increased
its cash available for investment in the three months ended April 30, 2000
primarily from the sale of NSI common stock.
Other income, net, was $199 million for the three months ended April 30, 2000
compared to an expense of $162 thousand for the same period of the prior year.
The increase is primarily attributable to the gain on the Solect transaction
discussed in the "Overview."
Minority interest in income of consolidated subsidiaries was $3 million and $7
million for the three months ended April 30, 2000 and 1999, respectively. The
decrease is attributable to the deconsolidation of NSI. Offsetting the decrease
is the minority interest for a joint venture, Amsec LLC, which was formed in the
second quarter of the prior year.
The provision for income taxes as a percentage of income before income taxes was
38.5% for the three months ended April 30, 2000 compared to 42.5% for the same
period of the prior year. The lower effective tax rate reflects the resolution
of certain tax positions related to the Company's on-going appeals process with
the IRS for fiscal years 1988 through 1993 and certain tax elections that apply
to open tax years. In addition, a lower effective tax rate on the gain on the
sale of NSI common stock contributed to reducing the overall effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity continue to be funds provided by
operations and a five-year revolving credit facility. In addition, the proceeds
from the sale of NSI common stock in February 2000 provided an additional source
of liquidity for the Company. At April 30, 2000 and January 31, 2000, there were
no borrowings outstanding under the credit facility and cash and
cash-equivalents and short-term investments in marketable securities totaled
$2.1 billion and $1.1 billion, respectively. Cash flows used in operating
activities were $104 million for the three months ended April 30, 2000 compared
to cash flows generated from operating activities of $132 million for the same
period of the prior year.
Cash flows generated from investing activities were $1.5 billion for the three
months ended April 30, 2000 compared to $237
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<PAGE> 12
million for the same period of the prior year. For the three months ended April
30, 2000, cash was primarily generated from the sale of shares of NSI common
stock and used to purchase investments in debt and equity securities and make
investments in other companies.
The Company used $336 million in cash for financing activities for the three
months ended April 30, 2000 compared to $10 million for the same period for the
prior year. The primary use of cash for the three months ended April 30, 2000
was for repurchases of $205 million of the Company's common stock held by
terminated employees in the Company's CODA plan.
The Company's existing cash, cash equivalents, short-term investments in
marketable securities, cash flows from operations and borrowing capacity are
expected to provide sufficient funds for the Company's operations, common stock
repurchases, capital expenditures, future long-term debt requirements,
acquisitions of businesses and equity investments.
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or ability to conduct
business.
YEAR 2000
As discussed in the Company's Form 10-K for the fiscal year ended January 31,
2000 and as of the date of this filing, the Company has not encountered any
material Year 2000 issues with its information technology ("IT") systems, non-IT
systems, critical service suppliers and vendors, or the Company's services and
products and does not expect to incur material costs in the future attributable
to Year 2000 related issues.
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 2000 Annual Report on Form 10-K. Due to such uncertainties and risks,
readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which are inherent in the
Company's financial instruments which arise from transactions entered into in
the normal course of business. The following information about the Company's
market sensitive financial instruments contains forward-looking statements.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio, short and long-term receivables
and long-term debt obligations. Interest rates remained relatively consistent
with amounts disclosed in the Company's 2000 Annual Report on Form 10-K, except
for the following:
- In connection with the sale of shares of NSI common stock, the Company
received cash proceeds of $1.6 billion. These funds are invested in cash
equivalents.
FOREIGN CURRENCY RISK
There were no material changes from January 31, 2000.
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EQUITY PRICE RISK
At April 30, 2000, the fair value of the Company's available-for-sale equity
securities was approximately $363.8 million. The aggregate net unrealized gain
from these investments was $77.5 million. The market risk associated with these
equity investments is the potential loss in fair value resulting from a decrease
in market prices. A 10% decrease in market prices, with all other variables held
constant, would result in a decrease in fair value of the equity instruments of
approximately $36.4 million.
Subsequent to the three months ended April 30, 2000, as discussed in the notes
to condensed consolidated financial statements, on June 8, 2000, the merger of
NSI and VeriSign was completed. As a result of the merger, the Company holds
approximately 17.5 million shares of VeriSign common stock which will have
market risk similar to the Company's other available-for-sale equity
securities. The Company will record this transaction in the second quarter
ending July 31,2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or ability to conduct
business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K.
During the fiscal quarter for which this report is filed, the following
report(s) on Form 8-K were filed by the Registrant:
(i) Form 8-K filed April 19, 2000, Item 5, Other events
(ii) Form 8-K filed February 18, 2000, Item 2, Acquisitions or Dispositions
of Assets
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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, 2000 /s/ W. A. Roper
--------------------------------------
Corporate Executive Vice President and
Chief Financial Officer and
as a duly authorized officer
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EXHIBIT INDEX
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FISCAL QUARTER ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
------- --------------------------------------------------------------- ----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
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