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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 JULY 31, 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 August 31, 2000, the Registrant had 228,465,392 shares of
Class A common stock, $.01 par value per share, issued and outstanding, and
288,612 shares of Class B common stock, $.05 par value per share, issued and
outstanding.
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PART I
FINANCIAL INFORMATION
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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, 2000 JULY 31, 1999 JULY 31, 2000 JULY 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 1,473,758 $ 1,361,284 $ 2,714,032 $ 2,545,290
Costs and expenses:
Cost of revenues 1,184,652 1,054,230 2,177,845 1,965,126
Selling, general and
administrative expenses 204,649 207,258 389,083 400,168
----------- ----------- ----------- -----------
Operating income 84,457 99,796 147,104 179,996
Non-operating income (expense):
Interest expense (5,186) (7,225) (10,967) (15,819)
Interest income 29,818 13,206 61,732 29,751
Other income (expense), net (Note I) 30,138 (1,963) 229,033 (2,125)
Gain on sale of affiliate common stock 2,390,899 3,853,202 698,374
Minority interest in income
of consolidated subsidiaries (3,205) (8,461) (5,951) (14,961)
----------- ----------- ----------- -----------
Income before income taxes 2,526,921 95,353 4,274,153 875,216
Provision for income taxes 951,494 32,648 1,624,178 364,090
----------- ----------- ----------- -----------
Net income $ 1,575,427 $ 62,705 $ 2,649,975 $ 511,126
=========== =========== =========== ===========
Earnings per share:
Basic $ 6.68 $ .26 $ 11.13 $ 2.17
=========== =========== =========== ===========
Diluted $ 6.17 $ .24 $ 10.30 $ 2.00
=========== =========== =========== ===========
Common equivalent shares:
Basic 235,714 238,176 238,002 235,730
=========== =========== =========== ===========
Diluted 255,272 256,657 257,169 254,782
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-2
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, 2000 JANUARY 31, 2000
------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 914,126 $ 669,320
Restricted cash 15,547 8,781
Short-term investments in marketable securities 697,739 424,609
Receivables 1,260,919 1,339,763
Prepaid expenses and other current assets 83,004 143,163
Deferred income taxes 73,373 173,987
----------- -----------
Total current assets 3,044,708 2,759,623
Property and equipment (less accumulated depreciation
of $322,908 and $306,754 at July 31, 2000
and January 31, 2000, respectively) 271,825 351,429
Land and buildings (less accumulated depreciation of
$41,295 and $36,619 at July 31, 2000
and January 31, 2000, respectively) 222,532 225,458
Goodwill (less accumulated amortization of
$64,158 and $55,208 at July 31, 2000
and January 31, 2000, respectively) 204,920 170,137
Other intangible assets (less accumulated amortization of
$43,738 and $34,089 at July 31, 2000
and January 31, 2000, respectively) 62,016 69,301
Long-term investments in marketable securities 2,540,149 181,285
Prepaid pension assets 516,452 492,802
Other assets 161,008 155,213
----------- -----------
$ 7,023,610 $ 4,405,248
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 914,566 $ 1,409,477
Accrued payroll and employee benefits 347,562 357,014
Income taxes payable 427,740 90,337
Notes payable and current portion of long-term debt 28,333 54,093
----------- -----------
Total current liabilities 1,718,201 1,910,921
Long-term debt, net of current portion 119,702 121,289
Deferred income taxes 914,327 74,412
Other long-term liabilities 263,226 360,362
Commitments and contingencies (Note J)
Minority interest in consolidated subsidiaries 19,803 107,982
Stockholders' equity:
Common stock:
Class A, $.01 par value, 1,000,000 shares authorized;
issued and outstanding (229,374 shares and 236,079 shares
at July 31, 2000 and January 31, 2000, respectively) 2,293 2,361
Class B, $.05 par value, 5,000 shares authorized;
issued and outstanding (290 shares and 296 shares at
July 31, 2000 and January 31, 2000, respectively) 15 15
Additional paid-in capital 1,361,096 1,082,727
Retained earnings 2,882,022 704,562
Other stockholders' equity (32,443) (31,387)
Accumulated other comprehensive (loss) income (224,632) 72,004
----------- -----------
Total stockholders' equity 3,988,351 1,830,282
----------- -----------
$ 7,023,610 $ 4,405,248
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 31, 2000 JULY 31, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,649,975 $ 511,126
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 90,636 80,180
Non-cash compensation 76,468 68,806
Gain on sale of subsidiary common stock (3,853,202) (698,374)
Net (gain) loss on sales of investments and other business assets (220,413) 558
Other 7,416 23,428
Increase (decrease) in cash, excluding effects of acquisitions,
resulting from changes in:
Receivables 57,065 213,987
Prepaid expenses and other current assets 64,266 29,390
Progress payments (360) (877)
Deferred income taxes 975,533 (61,790)
Other assets (27,960) (20,950)
Accounts payable and accrued liabilities (204,561) (379,124)
Accrued payroll and employee benefits (343) (22,644)
Income taxes payable 333,176 149,446
Other long-term liabilities (7,255) 29,027
----------- -----------
(59,559) (77,811)
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment (38,759) (75,889)
Expenditures for land and buildings (232) (591)
Acquisitions of businesses, net of cash acquired (35,371) (217,462)
Purchases of debt and equity securities available-for-sale (659,795) (402,288)
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 (39,154) (13,965)
Proceeds from sales of certain business assets 150 3,165
Proceeds from disposal of property and equipment 77 258
----------- -----------
841,491 22,228
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt 731
Payments of notes payable and long-term debt (5,582) (4,200)
Principal payments on capital lease obligations (30,072) (17,809)
Net proceeds from issuance of subsidiary common stock 2,988
Dividends paid to minority interest (10,561) (9,423)
Sales of common stock 31,171 58,404
Repurchases of common stock (521,551) (76,525)
----------- -----------
(536,595) (45,834)
----------- -----------
Effect of exchange rate changes on cash (531) 918
----------- -----------
Increase (decrease) in cash and cash equivalents 244,806 (100,499)
Cash and cash equivalents at beginning of period 669,320 389,026
----------- -----------
Cash and cash equivalents at end of period $ 914,126 $ 288,527
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Common stock exchanged upon exercise of stock options $ 30,462 $ 24,067
=========== ===========
Capital lease obligations for property and equipment $ 5,856 $ 10,978
=========== ===========
Fair value of assets acquired in acquisitions $ 63,099 $ 300,252
Cash paid in acquisitions (35,371) (231,302)
Issuance of common stock for assets acquired (3,000) (3,717)
----------- -----------
Liabilities assumed in acquisitions $ 24,728 $ 65,233
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-4
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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.
Certain amounts from the three and six months ended July 31, 1999 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three and six months ended July 31, 2000.
In the opinion of management, the unaudited financial information as of July 31,
2000 and for the three and six months ended July 31, 2000 and 1999 reflect all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation thereof. Operating results for the six months ended July 31,
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 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
In December 1999, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
SAB No. 101 provides the SEC staff's views on applying generally accepted
accounting principles to selected revenue recognition issues. The Company will
adopt SAB No. 101 in the fourth quarter ending January 31, 2001 and does not
expect the adoption of SAB No. 101 to have a material impact on the Company's
consolidated financial position or results of operations.
NOTE C - RECEIVABLES:
Receivables include $20,988,000 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, 2000.
NOTE D - NOTES PAYABLE:
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 $650,000,000 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 July 31, 2000 and the entire
$650,000,000 was available. Financial covenants required by the credit facility
have been maintained as of July 31, 2000.
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NOTE E - BUSINESS SEGMENT INFORMATION:
The following table summarizes interim segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31 SIX MONTHS ENDED JULY 31
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Regulated $ 815,532 $ 717,240 $ 1,571,774 $ 1,364,244
Non-Regulated 527,478 555,983 981,443 1,033,064
----------- ----------- ----------- -----------
Total segment revenues 1,343,010 1,273,223 2,553,217 2,397,308
Corporate and other 130,748 88,061 160,815 147,982
----------- ----------- ----------- -----------
Total consolidated revenues $ 1,473,758 $ 1,361,284 $ 2,714,032 $ 2,545,290
=========== =========== =========== ===========
Income (loss) before income taxes:
Regulated $ 49,403 $ 45,105 $ 91,236 $ 86,569
Non-Regulated 63,467 50,848 96,515 92,818
----------- ----------- ----------- -----------
Total segment income before income taxes 112,870 95,953 187,751 179,387
Corporate and other 2,414,051 (600) 4,086,402 695,829
----------- ----------- ----------- -----------
Total income before income taxes $ 2,526,921 $ 95,353 $ 4,274,153 $ 875,216
=========== =========== =========== ===========
</TABLE>
For the three and six months ended July 31, 2000, income before income taxes for
the Corporate and other segment includes the gains on transactions with NSI
Class A Common Stock as discussed in Note H. For the six months ended July 31,
1999, 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 F - 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
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 1,575,427 $ 62,705 $ 2,649,975 $ 511,126
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities (263,185) (7,349) (262,759) 13,848
Reclassification adjustment (4,962) (31,529)
Foreign currency translation adjustments (1,672) (221) (2,348) (599)
----------- ----------- ----------- -----------
(269,819) (7,570) (296,636) 13,249
----------- ----------- ----------- -----------
Total comprehensive income $ 1,305,608 $ 55,135 $ 2,353,339 $ 524,375
=========== =========== =========== ===========
</TABLE>
I-6
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NOTE G - 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
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $1,575,427 $ 62,705 $2,649,975 $ 511,126
Effect of:
Subsidiary preferred stock dividends (369) (720)
---------- ---------- ---------- ----------
Net income available to common
stockholders, as adjusted $1,575,427 $ 62,336 $2,649,975 $ 510,406
---------- ---------- ---------- ----------
Weighted average shares 235,714 238,176 238,002 235,730
---------- ---------- ---------- ----------
Basic EPS $ 6.68 $ .26 $ 11.13 $ 2.17
========== ========== ========== ==========
DILUTED EPS:
Net income $1,575,427 $ 62,705 $2,649,975 $ 511,126
Effect of:
Subsidiary preferred stock dividends (369) (720)
Majority-owned subsidiary's
dilutive securities (110) (91)
---------- ---------- ---------- ----------
Net income available to common
stockholders, as adjusted $1,575,427 $ 62,226 $2,649,975 $ 510,315
---------- ---------- ---------- ----------
Weighted average shares 235,714 238,176 238,002 235,730
Effect of:
Stock options 19,220 18,098 18,913 18,621
Other stock awards 338 383 254 431
---------- ---------- ---------- ----------
Weighted average shares, as adjusted 255,272 256,657 257,169 254,782
---------- ---------- ---------- ----------
Diluted EPS $ 6.17 $ .24 $ 10.30 $ 2.00
========== ========== ========== ==========
</TABLE>
NOTE H- SALE OF AFFILIATE 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. Upon completion of this secondary offering and giving effect to NSI's
2-for-1 stock split, the Company held 16,300,000 shares of NSI Class A Common
Stock which represented a 22.6% interest in NSI. With the recomposition of the
NSI Board of Directors and the ownership interest in NSI, the Company, in the
first quarter ended April 30, 2000, no longer consolidated NSI's financial
statements and instead began recognizing its proportionate share of NSI's net
income under the equity method of accounting.
On June 8, 2000, NSI merged and became a wholly-owned subsidiary of VeriSign,
Inc. ("VeriSign"), a publicly traded company and leading provider of Internet
trust services. As a result of this transaction, the Company recognized a gain
before income taxes of $2,390,899,000 and holds approximately 9% of VeriSign's
outstanding shares.
I-7
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NOTE I - OTHER INCOME (EXPENSE):
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.
On July 24, 2000, Telcordia sold a business unit in exchange for equity
securities of a publicly traded company and recognized a gain before income
taxes of $30,267,000, which is reflected in other income in the accompanying
financial statements.
NOTE J - 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-8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During the six months ended July 31, 2000, the Company decreased its ownership
in its subsidiary NSI through a series of transactions. On February 11, 2000,
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. Upon completion of this secondary offering and
giving effect to NSI's 2-for-1 stock split, the Company held 16,300,000 shares
of NSI Class A Common Stock which represented a 22.6% interest in NSI. With the
recomposition of the NSI Board of Directors and the ownership interest in NSI,
the Company, in the first quarter ended April 30, 2000, no longer consolidated
NSI's financial statements ("deconsolidation") and instead began recognizing its
proportionate share of NSI's net income under the equity method of accounting.
On June 8, 2000, NSI merged and became a wholly-owned subsidiary of VeriSign,
Inc. ("VeriSign"), a publicly traded company and leading provider of Internet
trust services. As a result of this transaction, the Company recognized a gain
before income taxes of $2.4 billion and 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 and six months ended July 31, 2000 increased 8% and 7%,
respectively, compared to the same periods of the prior year. Excluding NSI's
revenues, revenues increased 12% and 10% for the three and six months ended July
31, 2000, respectively, 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 55% and 58% for the three and six
months ended July 31, 2000, respectively, compared to 53% and 54% for the same
periods of the prior year and increased 14% and 15%, respectively, over the same
periods 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 and six months ended July 31, 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 36%
for the three and six months ended July 31, 2000, compared to 41% for the same
periods of the prior year 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 July 31, 2000, the Company had approximately
38,100 full-time employees compared to approximately 36,100 at July 31, 1999.
Material and subcontract ("M&S") revenues were $279 million and $480 million for
the three and six months ended July 31, 2000, respectively, compared to $273
million and $459 million for the same periods of the prior year. As a percentage
of total revenues, M&S revenues were 19% and 18% for the three and six months
ended July 31, 2000, respectively, compared to 20% and 18% for the same periods
of the prior year.
The percentage of the Company's revenues attributable to the higher risk, firm
fixed-price ("FFP") contracts decreased to 38% for the six months ended July 31,
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 24% of revenues
for the six months ended July 31, 2000 and 1999, respectively, while cost
reimbursement contracts were 34% and 35% for the same periods, respectively.
Cost of revenues as a percentage of revenues increased to 80.4% and 80.2% for
the three and six months ended July 31, 2000, respectively, compared to 77.4%
and 77.2% for the same periods of the prior year. Excluding NSI in the prior
year, cost of revenues as a percentage of revenues were 78.9% and 78.6% for the
three and six months ended July 31, 1999, respectively. The increase as a
percentage of revenues is primarily attributable to overruns on certain FFP
contracts at Telcordia and lower than historical margins on certain other
contracts at INTESA and Telcordia. Cost of revenues as a percentage of revenues,
excluding Telcordia, NSI and INTESA, was 88.2% and 88.0% for the three and six
months ended July 31, 2000 compared to 88.3% and 87.9% for the same periods 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 13.9% and 14.3% for the three and six months ended July 31, 2000,
respectively compared to 15.2% and 15.7% for the same periods of the prior year.
The decrease is primarily attributable to the deconsolidation of NSI; excluding
NSI, SG&A expenses as a percentage of revenues for the three and six months
ended July 31, 1999 were 14.1% and 14.7%, respectively, compared to 13.9% and
14.3% for the same periods this year.
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<PAGE> 11
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% for the three and six months ended July 31, 2000,
respectively, compared to 8.2% for the same periods of the prior year. 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 and six months ended July 31, 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 and six months ended
July 31, 2000 and 1999. In the Non-Regulated segment, operating profit margin
was 12% and 10% for the three and six months ended July 31, 2000, respectively,
and included the gain discussed in "Other Income" below. Excluding this gain,
Non-Regulated segment operating profit margin was 6% and 7% for the three and
six months ended July 31, 2000, respectively, compared to 9% for the same
periods of the prior year. 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, operating
losses and reduced profit margins in certain commercial and foreign business
units and overruns on certain FFP contracts at Telcordia.
Interest expense of $5 million and $11 million for the three and six months
ended July 31, 2000, 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 $30 million and $62 million for the three and six months
ended July 31, 2000, respectively, increased $17 million and $32 million,
respectively, over the same periods 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 and six months ended July 31, 2000
primarily due to the sale of NSI common stock, which occurred in the first
quarter ended April 30, 2000.
Other income, net, was $30 million and $229 million for the three and six months
ended July 31, 2000, respectively, compared to an expense of $2 million for the
same periods of the prior year. In addition to the gain on the Solect
transaction discussed in the "Overview," in July 2000, Telcordia sold a business
unit in exchange for equity securities of a public company and recognized a gain
before income taxes of $30 million.
Minority interest in income of consolidated subsidiaries was $3 million and $6
million for the three and six months ended July 31, 2000, respectively, compared
to $8 million and $15 million for the same periods of the prior year. The
decrease is attributable to the deconsolidation of NSI. Offsetting the decrease
is the minority interest in 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
37.7% and 38.0% for the three and six months ended July 31, 2000, respectively,
compared to 34.2%and 41.6% for the same periods 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 July 31, 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
$1.6 billion and $1.1 billion, respectively. Cash flows used in operating
activities were $60 million and $78 million for the six months ended July 31,
2000 and 1999, respectively.
Cash flows generated from investing activities were $841 million for the six
months ended July 31, 2000 compared to $22 million for the same period of the
prior year. For the six months ended July 31, 2000, cash was primarily generated
from the sale of shares of NSI common stock in the first quarter ended April 30,
2000 and used to purchase investments in debt and equity securities and make
investments in other companies throughout the six months ended July 31, 2000.
The Company used $537 million for financing activities for the six months ended
July 31, 2000 compared to $46 million for the same period of the prior year. The
primary use of cash for the six months ended July 31, 2000 was for repurchases
of $265 million of the Company's common stock held by terminated employees in
the Company's CODA plans. In addition, the Company continued to repurchase its
common stock from employees upon termination, repurchase its common stock from
its other retirement and profit sharing plans as well as participate in the
quarterly stock trades as a buyer for shares being offered for sale by its
stockholders.
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.
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<PAGE> 12
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
SAB No. 101 provides the SEC staffs views on applying generally accepted
accounting principles to selected revenue recognition issues. The Company will
adopt SAB No. 101 in the fourth quarter ending January 31, 2001 and does not
expect the adoption of SAB No. 101 to have a material impact on the Company's
consolidated financial position or results of operations.
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.
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<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.
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. The majority of these funds are
invested in cash equivalents and short-term investments.
FOREIGN CURRENCY RISK
There were no material changes from January 31, 2000.
EQUITY PRICE RISK
On June 8, 2000, the merger of NSI and VeriSign was completed as discussed in
the notes to the condensed consolidated financial statements. As a result of the
merger, the Company holds approximately 9% of VeriSign's outstanding shares
which have market risk similar to the Company's other available-for-sale equity
securities.
At July 31, 2000, the fair value of the Company's available-for-sale equity
securities was approximately $2.5 billion. The aggregate net unrealized loss
from these investments was $216 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 $254 million.
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
(a) The Annual Meeting of Stockholders of the registrant was held on July 14,
2000.
(b) All of the Directors nominated by management in registrant's 2000 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:
<TABLE>
<CAPTION>
Number of Votes of Common Stock
Withhold
Director For Authority
------------- ----------- ---------
<S> <C> <C>
D. P. Andrews 177,107,305 4,475,337
W. H. Demisch 177,450,005 4,475,337
J. E. Glancy 175,007,937 4,475,337
H. M. J. Kraemer, Jr. 176,879,003 4,475,337
C. B. Malone 176,808,959 4,475,337
J. A. Welch 175,114,971 4,475,337
</TABLE>
(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 July 5, 2000, Item 5, Other events
(ii) Form 8-K filed July 20, 2000, Item 5, Other events
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<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: September 14, 2000 /s/ W. A. Roper
--------------------------------------------
Corporate Executive Vice President and
Chief Financial Officer and
as a duly authorized officer
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<PAGE> 16
EXHIBIT INDEX
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FISCAL QUARTER ENDED JULY 31, 2000
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
------- ----------------------- ----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
II-3
