-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SF/4pYmV/OmpMIL/xDT19ZEDwDSSpAKNs7fcm4vSz2NXbAp35D5PNotTuid7CRKF YN/0u/CCX7M/lRD7nFmJcg== 0000936392-98-000682.txt : 19980504 0000936392-98-000682.hdr.sgml : 19980504 ACCESSION NUMBER: 0000936392-98-000682 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980430 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENCE APPLICATIONS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000353394 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 953630868 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12771 FILM NUMBER: 98604854 BUSINESS ADDRESS: STREET 1: 10260 CAMPUS POINT DR STREET 2: LEGAL DEPT CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195466000 MAIL ADDRESS: STREET 1: LEGAL DEPT STREET 2: 10260 CAMPUS POINT DR CITY: SAN DIEGO STATE: CA ZIP: 92121 10-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996). FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM --------------- TO --------------- 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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION) 10260 CAMPUS POINT DRIVE, SAN DIEGO, CALIFORNIA 92121 (ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 546-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 31, 1998, the aggregate market value of the voting stock held by non-affiliates of Registrant was $1,050,466,293. For the purpose of this calculation, it is assumed that the Registrant's affiliates include the Registrant's Board of Directors and certain of the employee benefit plans of the Registrant and its subsidiaries. The Registrant disclaims the existence of any control relationship between it and such employee benefit plans. As of March 31, 1998, there were 52,612,683 shares of Registrant's Class A Common Stock and 314,173 shares of Registrant's Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement for the Company's 1998 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K Report. ================================================================================ 2 PART I ITEM 1. BUSINESS THE COMPANY Science Applications International Corporation (the "Company") provides diversified professional and technical services ("Technical Services") and designs, develops and manufactures high-technology products ("Products"). The Company's Technical Services and Products have been primarily sold to departments and agencies of the U.S. Government, including the Department of Defense ("DOD"), Department of Energy ("DOE"), Department of Transportation, Department of Veterans Affairs ("VA"), Environmental Protection Agency and National Aeronautics and Space Administration ("NASA"). Revenues generated from the sale of Technical Services and Products to the U.S. Government as a prime contractor or subcontractor accounted for approximately 66%, 79% and 83% of revenues in fiscal years 1998, 1997 and 1996, respectively. The balance of the Company's revenues were attributable to the sales of Technical Services and Products to foreign, state and local governments, commercial customers and others. On November 14, 1997, the Company completed its acquisition (the "Bellcore Acquisition") of all of the outstanding common stock of Bell Communications Research, Inc., a Delaware corporation ("Bellcore"), from the Regional Bell Operating Companies (the "RBOCs"). Upon completion of the Bellcore Acquisition, Bellcore became a wholly-owned subsidiary of SAIC. Bellcore is a global provider of software, engineering and consulting services, advanced research and development, technical training and other services to the telecommunications industry. With the completion of the Bellcore Acquisition, the Company's revenues attributable to the sales of Technical Services and Products to commercial customers are expected to increase substantially as a percentage of revenues. The percentage of revenues attributable to Technical Services has increased since fiscal year 1996 while Products revenues have correspondingly decreased. Technical Services revenues and Products revenues were 98% and 2% of total revenues, respectively, for fiscal year 1998; 94% and 6% of total revenues, respectively, for fiscal year 1997; and 94% and 6% of total revenues, respectively, for fiscal year 1996. In 1998, the Company sold a business unit which manufactured data display devices and "ruggedized" personal computers and which accounted for 49% of the Products revenue in 1997. The Company provides Technical Services primarily in the areas of "National Security," "Health," "Environment," "Energy," "Telecommunications," "Commercial Information Technology" and "Other Technical Services," the last of which includes the Company's transportation and space business areas. The percentage of Technical Services revenues attributable to National Security-related work has gradually declined to 37% of total revenues for fiscal year 1998. For fiscal year 1998, the Health, Environment, Energy, Telecommunications, Commercial Information Technology and Other Technical Services business areas accounted for 12%, 9%, 4%, 8%, 14% and 14%, respectively, of total revenues. For certain financial information regarding the Company's Technical Services and Products segments, see Note C of Notes to Consolidated Financial Statements of the Company set forth on page F-13 of this Form 10-K. In October 1997, the Company's ownership of the common stock of Network Solutions, Inc., a Delaware corporation ("NSI"), was reduced from 100% to approximately 76% as a result of NSI's initial public offering. Such ownership interest represents approximately 97% of the combined voting power of the outstanding common stock of NSI. NSI provides Internet domain name registration services and Intranet consulting and network design and implementation services. The Company has a 60% interest in a joint venture, Informatica, Negocio y Tecnologia, S.A. ("INTESA"), which was formed with Venezuela's national oil company, Petroleos de Venezuela, S.A. INTESA provides information technology services in Latin America. The Company was originally incorporated as a California corporation in 1969 and was re-incorporated as a Delaware corporation in 1984. The principal office and corporate headquarters of the Company are located in San Diego, California at 10260 Campus Point Drive, San Diego, California 92121 and its telephone number is (619) 546-6000. All references to the Company include, unless the context indicates otherwise, the Company and its predecessor and subsidiary corporations. 1 3 TECHNICAL SERVICES National Security The Company currently provides a wide array of national security-related Technical Services to its customers, including advanced research and technology development, systems engineering and systems integration and technical, operational and management support services. Examples of the Company's Technical Services in the national security area include the following: O Development and integration of command, control and intelligence applications software, middleware and data bases in client-server architectures to provide situational awareness and decision-aiding to military commanders and organizations; the range of services includes architectural definition, systems and software engineering, systems installation, training and site support. O Information and telecommunication system engineering and support services, including requirements analysis and acquisition support, computer system design, information and user environment modeling and data communication systems support. O Defense studies and analyses for various defense and intelligence agencies of the U.S. Government, including studies regarding conventional and nuclear warfare issues, treaty negotiation and verification, and the integration of military operational and technological considerations with defense policy issues. O Development of core technology for advanced distributed simulation and applications for the DOD and other government and commercial customers. O Support of numerous DOD test and evaluation requirements of ground, air, sea and space systems; assistance to the U.S. Air Force, U.S. Navy, U.S. Army, U.S. Marine Corps and the Office of the Secretary of Defense in assessing the military effectiveness and suitability of major communication, sensor, navigation, weapon and related systems that support primary service and/or joint service roles and missions. O Logistics engineering services and turnkey logistics information management systems for a wide variety of government customers. O Design, integration, implementation and operation of battlefield simulation training ranges on land, air and sea. O Systems engineering and technical assistance for cruise missiles, unmanned aerial vehicles, future aircraft and ballistic missile concepts; systems analysis of sensors for the detection and tracking of aircraft and ballistic missiles; and studies regarding the survivability of tactical aircraft and strategic missiles. O Support to the DOD in imagery collection, processing, exploitation and dissemination systems for digital processing, technology intelligence communications and information management. O Maintenance engineering and training, including field technical services and repair, electronic system design and hands-on operational support, primarily to the U.S. Navy. O Independent verification and validation and software quality assurance support services for shipboard combat systems, mission planning functions, operational flight software command and control processors, nuclear surety systems, soft copy imagery processing, data storage and dissemination systems and various submarine, surface ship and command, control and communications systems. O Engineering, environmental, quality assurance, integration and program support to the U.S. Army's chemical demilitarization and remediation activity. O System engineering, development, integration and related services for the intelligence community. 2 4 Health The Company provides health-related Technical Services to government and commercial customers, including medical information systems, technology development and research support services. Examples of the Company's Technical Services in the health area include the following: O Applied research, systems integration and customer support services to both commercial and federal health care clients, including research initiatives for the U.S. Advanced Research Projects Agency, developing and operating a nationwide health care frame relay-based telecommunications system for the VA and automating the information systems for the DOD's medical treatment facilities worldwide. O Information engineering, software development and program support for the Department of Health and Human Services and the National Institutes of Health. O Design, development and operation of health information networks for integrated healthcare delivery systems for commercial healthcare clients. O Research support services to the National Cancer Institute-Frederick Cancer Research and Development Center, including management and operations support, quality and safety operations, ongoing research and research support tasks. O Support to the U.S. Army in the biomedical area, including providing expert analysis, research planning, program design and review and topical research on a variety of military medical issues, including medical countermeasures to chemical and biological warfare, casualty care and battlefield hazards, as well as biomedical service and management of government facilities. O Preclinical product development services for the pharmaceutical, biotechnology and medical device community, including veterinary pathology, Food and Drug Administration requirements analysis, quality assurance and Good Laboratory Practices consulting, special toxicological assay development and performance, client site services, and the development and management of complete product development programs (virtual product development). Environment In the environmental area, the Company performs site assessments, remedial investigations and feasibility studies, remedial actions, technology evaluations, sampling, monitoring and regulatory compliance support and training. Examples of the Company's Technical Services in the environmental area include the following: O Management and technical support to the DOE for the characterization of the nation's first potential high-level waste repository, including the preparation and coordination of environmental assessments, field testing, technical evaluations, public information, quality assurance, information systems and training. O Solid and hazardous waste services to federal, state and local governments and the private sector, including environmental assessments, environmental impact statements, design engineering, remedial investigations and feasibility studies, remedial actions, regulatory and enforcement support, pollution prevention and engineering services. O Analysis of a broad range of environmental issues associated with the marine sciences such as ocean dumping, mineral exploration, global change, global ocean circulation and temperature trends. O Support associated with the development of treatment technologies, including treatability studies, development of protocols for technology evaluation, pollution prevention assessments, waste minimization and technology assessments. O Development and implementation of information systems. 3 5 Energy The energy-related Technical Services of the Company include safety evaluations, security, reliability and availability engineering evaluations, technical reviews, quality assurance, information systems, plant monitoring systems and project management. Examples of the Company's Technical Services in the energy area include the following: O Engineering and support services to nuclear, electric, gas and other utility operations in the areas of computer systems, information processing, configuration management, risk assessment, safety analysis, nuclear engineering, reliability and availability evaluations, simulator upgrades, energy policy analysis and alternative energy evaluation. O Support to DOE in planning, facility transitions, safety analysis, transportation, waste management, quality assurance, emergency preparedness and public outreach. O Design, fabrication and application of alternative energy sources such as solar generators and fuel cells. O Information systems services to the DOE, including collection, analysis and storage of energy information, the development of geographic information systems and the overall management of large computer facilities. O Support to DOE in fusion energy research, including facility management, computer system development and project management support in connection with an international thermonuclear experimental reactor. O Systems integration services to the utility industry, including design, development and installation of plant process computer systems, supervisory control and data acquisition (SCADA) systems and electronic security systems. O Management, operation and technical services for fossil energy research laboratories. Telecommunications Examples of the Company's Technical Services in the telecommunications area include the following: O Design and implementation of interoperable communications networking solutions to enable customers to plan, build, activate and service their networks. O New software products for the telecommunications industry and the maintenance and enhancement of existing software systems, customization of software and licensing of technology. O Consulting and engineering services for telecommunications providers, including the design and implementation of operating solutions for customers' telecommunications needs. O Research and development for the telecommunications industry. Commercial Information Technology Examples of the Company's Technical Services in the commercial information technology area include the following: O Information technology and automatic data processing outsourcing services for commercial clients. O Information protection and electronic business security services. O Internet domain name registration and related services provided by the Company's majority-owned subsidiary, NSI. O Intranet consulting and network design and implementation services. 4 6 Other Technical Services The Company provides Technical Services to government and commercial customers in such other areas as transportation and space. Examples of Other Technical Services provided by the Company include the following: O Development, installation and operation of computer and telecommunications systems for various transportation applications, including automated toll revenue collection, rail asset and freight management, intermodal terminal operation, advanced traffic and congestion management, rail electrification, traffic control, air traffic control, commercial vehicle electronic clearance and state motor vehicle registration. O Strategic planning, operational analysis and evaluation, surface transportation planning and engineering, software development and reengineering, safety and human factors research and hazardous material transportation safety. O Scientific and computing services to federal agencies involved in global change research, including processing, utilization and scientific analysis of space, airborne and ground-based remotely sensed data. O Security services for the U.S. Government and commercial customers, including material control and accountability, computer and information security, technical surveillance countermeasures, intrusion detection, access control and physical plant threat assessments and vulnerability analysis. O Safety, reliability and quality assurance engineering support for NASA's Space Shuttle and Space Station programs. O Undersea data collection and transmission systems and services, including deep water systems, telecommunications cable systems and hydrographic survey systems and other services in the areas of hydrography, physical oceanography, diving, vessel operation and management, marine studies and other maritime studies and analysis. PRODUCTS The Company designs, develops and manufactures high-technology Products for government and commercial customers. Examples of the Company's Products include the following: O Automatic equipment identification technology for rail, truck, air and sea transportation modes. O Digital and analog recording products, signal reconnaissance data processors and telecommunications products for the intelligence community. RESOURCES The Technical Services and Products provided by the Company utilize a wide variety of resources. The Company anticipates the continued availability of the resources required for the Technical Services and Products provided to customers. A substantial portion of the computers and other equipment, materials and subcontracted work required by the Company could be procured from alternate supply sources. However, with respect to certain products and programs, the Company depends on a particular source or vendor. While a temporary or permanent disruption in the supply of these materials or services could cause inconvenience or delay or impact the profitability of the affected programs or products, the Company believes it would not materially affect the profitability or operations of the Company as a whole. The availability of skilled employees who have the necessary education and/or experience in specialized scientific and technological disciplines remains critical to the future growth and profitability of the Company. Because of the Company's growth and the competitive business environment, it has become more difficult to meet all of the Company's needs for such employees in a timely manner. However, to date, such difficulties have not had a significant impact on the Company. The Company intends to continue to devote significant 5 7 resources to recruit and retain qualified employees. Further, as an inducement, the Company maintains a variety of benefit programs for its employees, including retirement and bonus plans, group life, health, accident and disability insurance and offers its employees the opportunity to participate in the Company's employee ownership program. See "Business -- Employees And Consultants" and "Market for Registrant's Common Equity and Related Stockholder Matters -- The Limited Market." MARKETING The Company's marketing activities are primarily conducted by its own professional staff of engineers, scientists, analysts and other personnel. The Company's marketing approach for its Technical Services begins with the development of information concerning the requirements of the U.S. Government and other potential customers for the types of Technical Services provided by the Company. Such information is gathered in the course of contract performance and from formal briefings, participation in professional organizations and published literature. This information is then evaluated and exchanged among marketing groups within the Company (organized along functional, geographic and other lines) in order to devise and implement, subject to management review and approval, the best means of taking advantage of available business opportunities, including the preparation of proposals responsive to the stated and perceived needs of customers. The Company's Products are marketed primarily through the Company's own sales force, which is augmented by independent sales representatives. COMPETITION The businesses in which the Company is engaged are highly competitive. The Company has a large number of competitors, some of which have been established longer and have substantially greater financial resources and larger technical staffs than the Company. Some of the other competitors, although smaller in size, are more highly specialized. In addition, the U.S. Government's own in-house capabilities and federal non-profit contract research centers are also competitors of the Company because they perform certain types of services which might otherwise be performed by the Company. The primary competitive factors in the business areas in which the Company is engaged are technical, management and marketing competence and price. The Company's continued success is dependent upon its ability to hire and retain highly qualified scientists, engineers, technicians, management and professional personnel who will provide superior service and performance on a cost-effective basis. SIGNIFICANT CUSTOMERS During the fiscal years ended January 31, 1998, 1997 and 1996, approximately 66%, 80% and 83%, respectively, of the Company's contract revenues from the Technical Services segment and approximately 53%, 61% and 80%, respectively, of the Company's contract revenues from the Products segment, were attributable to prime contracts with the U.S. Government or to subcontracts with other contractors engaged in work for the U.S. Government. In fiscal years 1998, 1997 and 1996, the U.S. Army accounted for approximately 11%, 16% and 22%, respectively, of consolidated revenues, the U.S. Navy accounted for approximately 8%, 10% and 9%, respectively, of consolidated revenues and the DOE accounted for approximately 5%, 7% and 10%, respectively, of consolidated revenues. During fiscal year 1996, approximately 10% of the Company's consolidated revenues were derived from one U.S. Government contract to automate the information systems for the DOD's medical treatment facilities worldwide. This contract was substantially completed in 1997. No other single contract in the Technical Services segment accounted for 10% or more of consolidated revenues in fiscal year 1996 and no single contract in the Technical Services segment accounted for 10% or more of consolidated revenues in fiscal years 1998 or 1997. 6 8 No single customer or contract in the Products segment accounted for 10% or more of consolidated revenues in fiscal years 1998, 1997 or 1996. GOVERNMENT CONTRACTS Many of the U.S. Government programs in which the Company participates as a contractor or subcontractor may extend for several years; however, such programs are normally funded on an annual basis. All U.S. Government contracts and subcontracts may be modified, curtailed or terminated at the convenience of the government if program requirements or budgetary constraints change. In the event that a contract is terminated for convenience, the Company generally would be reimbursed for its allowable costs through the date of termination and would be paid a proportionate amount of the stipulated profit or fee attributable to the work actually performed. Modification, termination or curtailment of major programs or contracts of the Company could have a material adverse effect on the results of the Company's operations. Although such contract and program terminations have not had a material adverse effect on the Company in the past, no assurance can be given that curtailments or terminations of U.S. Government programs or contracts will not have a material adverse effect on the Company in the future. The Company's business with the U.S. Government and other customers is generally performed under cost-reimbursement, time-and-materials, fixed-price level-of-effort or firm fixed-price contracts. Under cost-reimbursement contracts, the customers reimburse the Company for its direct costs and allocable indirect costs, plus a fixed fee or incentive fee. Under time-and-materials contracts, the Company is paid for labor hours at negotiated, fixed hourly rates and reimbursed for other allowable direct costs at actual costs plus allocable indirect costs. Under fixed-price level-of-effort contracts, the customer pays the Company for the actual labor hours provided to the customer at negotiated hourly rates. Under firm fixed-price contracts, the Company is required to provide stipulated products or services for a fixed price. Because the Company assumes the risk of performing a firm fixed-price contract at the stipulated price, the failure to accurately estimate ultimate costs or to control costs during performance of the work could result, and in some instances has resulted, in reduced profits or losses for particular firm fixed-price contracts. During the fiscal years ended January 31, 1998, 1997 and 1996, approximately 50%, 57% and 57%, respectively, of the Technical Services revenues were derived from cost-reimbursement type contracts and approximately 32%, 20% and 16%, respectively, of the Technical Services revenues were from firm fixed-price type contracts, with the balance from time-and-materials and fixed-price level-of-effort type contracts. In contrast, the majority of the Products revenues in these three years were derived from firm fixed-price type contracts. Any costs incurred by the Company prior to the execution of a contract or contract amendment are incurred at the Company's risk, and it is possible that such costs will not be reimbursed by the customer. Unbilled receivables in this category which were included in the Technical Services revenues and Product revenues, exclusive of related fees, at January 31, 1998 were $14,583,000 and $664,000, respectively. The Company expects to recover substantially all such costs; however, no assurance can be given that the contracts or contract amendments will be received or that the related costs will be recovered. Contract costs for services or products supplied to the U.S. Government, including allocated indirect costs, are subject to audit and adjustments by negotiations between the Company and U.S. Government representatives. Substantially all of the Company's indirect contract costs have been agreed upon through the fiscal year ended January 31, 1997. Contract revenues for subsequent years have been recorded in amounts which are expected to be realized upon final settlement. However, no assurance can be given that audits and adjustments for subsequent years will not result in decreased revenues or profits for those years. 7 9 PATENTS AND PROPRIETARY INFORMATION Bellcore's patent portfolio consists of more than 680 U.S. and foreign patents. More than 200 of these patents have been licensed to organizations worldwide. Bellcore has been granted patents across a wide range of disciplines, including telecommunications transmission, services and operations, optical networking, switching, wireless communications, protocols, architecture and coding. Bellcore also actively pursues additional opportunities to license its technologies to third parties and evaluates potential spin-offs of technologies that it has developed. Other than the business and operations of Bellcore, the nature of the Technical Services and Products provided by the Company is such that the Company does not presently consider its competitive position to be dependent upon patent protection. The Company claims a proprietary interest in certain of its products, software programs, methodology and know-how. Such proprietary information is protected by copyrights, trade secrets, licenses, contracts and other means. The U.S. Government has certain rights to data, computer codes and related material developed by the Company under U.S. Government-funded contracts and subcontracts. Generally, the U.S. Government may disclose such information to third parties, including, in some instances, competitors. In the case of subcontracts, the prime contractor may also have certain rights to the programs and products developed by the Company under the subcontract. BACKLOG Backlog includes only the funded dollar amount of contracts in process and does not include the dollar amount of projects for which the Company has been given permission by the customer (i) to begin work but for which a formal contract has not yet been entered into or (ii) to extend work under an existing contract prior to the formal amendment or modification of the existing contract. In these cases, either contract negotiations have not been completed or a contract or contract amendment has not been executed. When a contract or contract amendment is executed, the backlog will be increased by the difference between the dollar value of the contract or contract amendment and the revenue recognized to date. The backlog for the Technical Services segment at January 31, 1998 and 1997 amounted to approximately $2,520,000,000 and $1,112,000,000, respectively, and the backlog for the Products segment at those dates amounted to approximately $43,000,000 and $82,000,000, respectively. The Company expects that a substantial portion of its backlog at January 31, 1998 will be recognized as revenues prior to January 31, 1999. Some contracts associated with the backlog are incrementally funded and may continue for more than one year. EMPLOYEES AND CONSULTANTS As of January 31, 1998, the Company and its subsidiaries employed approximately 30,300 persons. The Company also utilizes the services of consultants to provide specialized technical and other services on specific projects. The highly technical and complex services and products provided by the Company are dependent upon the availability of professional, administrative and technical personnel having high levels of training and skills. Because of the Company's growth and competitive business environment, it has become more difficult to meet all of the Company's needs for such employees in a timely manner. However, to date, such difficulties have not had a significant impact on the Company. The Company intends to continue to devote significant resources to recruit and retain qualified employees. Management believes the Company's orientation towards employee ownership is a major factor in the Company's ability to attract and retain qualified personnel. None of the Company's employees are represented by a labor union. To date, no strikes or work stoppages have been experienced and the Company considers its relations with its employees to be good. 8 10 RISK FACTORS The following risk factors should be carefully considered in evaluating the Company and its business because such factors currently have a significant impact or may have a significant impact on the Company's business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements as a result of the following risk factors set forth below. CONCENTRATION OF REVENUE Revenues generated from the sale of the Company's Technical Services and Products to the U.S. Government as a prime contractor or subcontractor accounted for 66%, 79% and 83% of revenues in fiscal years 1998, 1997 and 1996, respectively. U.S. Government spending has declined in recent years, and the current Congress and presidential administration have indicated that they intend to further reduce U.S. Government spending. In addition, revenues from the U.S. Government continues to shift toward lower cost service type contracts. The loss of a substantial amount of government business could have a material adverse effect on the Company's results of operations and financial condition. In addition, Bellcore has historically derived substantially all of its revenues from the RBOCs. Although the Company has made progress in its efforts to diversify its business, it remains heavily dependent upon business with the U.S. Government and with the RBOCs, and there can be no assurances that the Company will be successful in expanding its customer base or that any new customers will place orders for the Company's Technical Services or Products in amounts comparable to those of the U.S. Government or the RBOCs. See "Business -- The Company" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." POTENTIAL IMPACT OF ACQUISITION OF BELLCORE On November 14, 1997, pursuant to a definitive agreement, the Company completed its acquisition of Bellcore, a global provider of software, engineering and consulting services, advanced research and development, technical training and other services to the telecommunications industry. As of January 31, 1998, Bellcore had approximately 5,400 employees and annual revenues of approximately $1 billion. The acquisition resulted in a substantial growth in both the employee base and commercial revenues of the Company. The Company financed a portion of the purchase price of Bellcore with debt financing. Such growth and additional debt may place a significant strain on the Company's management, operational and financial resources. There can be no assurance that the Company will be able to effectively manage the expansion of its operations or that the Company's systems, procedures or controls will be adequate to support the integration of the acquired business. Any inability to effectively integrate the acquired business or manage the growth could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON ACQUISITIONS FOR GROWTH A significant portion of the growth in the Company's revenues in recent years has been achieved through acquisitions of businesses that complement the Company's Technical Services and Products. Although the Company intends to make additional acquisitions in the future, the number and size of the acquisitions that the Company can complete may be limited due to the Company's acquisition of Bellcore. In addition, while the Company has been successful in identifying and consummating acquisitions in the past, there can be no assurance that it will be able to continue to make such acquisitions in the future at prices that it considers reasonable or, if the acquisitions are consummated, that the Company will be able to integrate the acquired businesses without adversely affecting the Company's results of operations and financial condition. YEAR 2000 COMPLIANCE The Company has commenced, and in some cases finalized, the evaluation of computer systems to ensure its operations will not be adversely impacted by Year 2000 software problems. The evaluation determined that certain portions of the Company's software and systems require modification or replacement. If the necessary modifications to existing software and conversions to new software are not made, or are not completed timely, 9 11 the Year 2000 issue could have a material adverse impact on the Company's consolidated financial position, results of operations, cash flows or its ability to conduct business. In addition, the Company has initiated communications with its critical service providers, suppliers and vendors to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. There can be no assurance that such failure would not have a material adverse effect on the Company's consolidated financial position, results of operations, cash flows or its ability to conduct business. Furthermore, the Company has implemented an on-going program to assess its exposure with respect to its products and services. To date, no matters have come to the attention of the Company's management that would have a material adverse effect on the Company's consolidated financial position, results of operations, cash flows or its ability to conduct business; however, there can be no assurance that the Company will not be subject to material liability claims in the future. The Company's assessment of the Year 2000 issue, including the costs of the project and the timing of completion are based on management's best estimates and input from third party customers, service providers, suppliers and vendors. These estimates were derived using numerous assumptions about future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ABSENCE OF A PUBLIC MARKET There is no public market for the Class A Common Stock. The Limited Market permits existing stockholders to offer for sale shares of Class A Common Stock any Trade Date (as such terms are defined on page 15). Generally, there are four Trade Dates each year. The Company and the trustees and agents of the Company's and certain of its subsidiaries' employee benefit plans are currently authorized, but not obligated, to purchase shares of Class A Common Stock in the Limited Market on any Trade Date, but only if and to the extent that they, in their discretion, determine to make such purchases. To the extent that purchases by such trustees, agents or the Company are not sufficient, the ability of stockholders to resell their shares in the Limited Market will likely be adversely affected. In each trade occurring during the last two fiscal years, all shares of Class A Common Stock offered for sale in the Limited Market were matched with buy orders and sold in the Limited Market. No assurance, however, can be given that a stockholder desiring to sell all or a portion of his or her shares of Class A Common Stock in any future trade will be able to do so. See "Market for Registrant's Common Equity and Related Stockholder Matters -- The Limited Market." CLASS A COMMON STOCK PRICE DETERMINED BY BOARD OF DIRECTORS The offering price and the price at which the Class A Common Stock trades in the Limited Market are not, and subsequent prices will not be, determined by the operation of a market of bargaining buyers and sellers. Instead, the price is a value established by the Board of Directors pursuant to the Formula and valuation process described on pages 16, 17 and 18 which the Board of Directors believes represents a fair market value. The Board of Directors generally has broad discretion to modify the Formula. The Formula was last modified in April 1998. The Formula does not specifically include variables reflecting all relevant financial and valuation criteria. The mechanical application of the Formula, assuming a constant Market Factor, tends to smooth the impact on the stock price of quarterly fluctuations in the Company's operating results because the Formula takes into account the net income of the Company for the four preceding quarters. See "Market for Registrant's Common Equity and Related Stockholder Matters -- Price Range of Class A Common Stock and Class B Common Stock." POSSIBLE VOLATILITY OF STOCK PRICE The Formula Price of the Class A Common Stock could be subject to greater fluctuations in the future than it has experienced in the past. The increased volatility is expected to result from a number of factors, including (i) plans to continue to increase the proportion of the Company's business involving private sector customers, international customers and information technology and the greater stock price volatility associated 10 12 with companies in such business areas, (ii) the financial leverage impact of current and any future debt levels of the Company as debt financing is used to finance acquisitions and for other purposes, (iii) the impact of other equity transactions that the Company may pursue, including public offerings of securities of the Company's subsidiaries or affiliates, and (iv) the volatility of the stock price of the Class A Common Stock of NSI, a publicly-traded security of a majority-owned subsidiary of the Company, and its impact on the Formula Price. As of March 13, 1998, the Company owned 100% of the outstanding Class B Common Stock of NSI, representing approximately 76% of the combined outstanding common stock of NSI. The NSI Class B Common Stock is convertible into NSI Class A Common Stock, subject to certain limitations. NO ASSURANCES REGARDING FUTURE RETURNS There can be no assurance that the Class A Common Stock will in the future provide returns comparable to historical returns or that the Formula Price will not decline. See "Market for Registrant's Common Equity and Related Stockholder Matters -- Price Range of Class A Common Stock and Class B Common Stock." COMPETITION The businesses in which the Company is engaged are highly competitive. The Company's competitors include larger organizations with substantially greater financial resources and larger technical staffs, smaller, more highly specialized entities, the U.S. Government's own in-house capabilities and federal non-profit contract research centers. The Company's continued success is dependent upon its ability to provide superior service and performance on a cost-effective basis. See "Business -- Competition." EARLY TERMINATION OF GOVERNMENT CONTRACTS Many of the U.S. Government programs in which the Company participates as a contractor or subcontractor may extend for several years; however, such programs are normally funded on an annual basis. All U.S. Government contracts and subcontracts may be modified, curtailed or terminated at the convenience of the government. Modification, termination or curtailment of major programs or contracts of the Company could have a material adverse effect on the Company's results of operations and financial condition. Although such contract and program modifications, terminations or curtailments have not had a material adverse effect on the Company in the past, no assurance can be given that they will not have such an effect in the future. POTENTIAL GOVERNMENT INQUIRIES AND INVESTIGATIONS The Company is from time to time subject to certain U.S. Government inquiries and investigations of its business practices. No assurance can be given that any such inquiry or investigation would not have a material adverse effect on the Company's results of operations and financial condition. CONTRACT REVENUES SUBJECT TO AUDITS BY GOVERNMENT AGENCIES Contract costs for services or products supplied to the U.S. Government, including allocated indirect costs, are subject to audit and adjustments by negotiations between the Company and U.S. Government representatives. Substantially all of the Company's indirect contract costs have been agreed upon through the fiscal year ended January 31, 1997. Contract revenues for subsequent years have been recorded in amounts which are expected to be realized upon final settlement. However, no assurance can be given that audits and adjustments for subsequent years will not result in decreased revenues or profits for those years. FIXED PRICE CONTRACT EXPOSURE During the fiscal years ended January 31, 1998, 1997 and 1996, 32%, 20% and 16%, respectively, of Technical Services revenues were from firm fixed-price type contracts, while the majority of Products revenues in these three years were derived from such contracts. Because the Company assumes the risk of performing a firm fixed-price contract at the stipulated price, the failure to accurately estimate ultimate costs or to control costs during performance of the work could result, and in some instances has resulted, in reduced profits or losses for particular firm fixed-price contracts. 11 13 AT RISK CONTRACT COSTS Any costs incurred by the Company prior to the execution of a contract or contract amendment are incurred at the Company's risk, and it is possible that such costs will not be reimbursed by the customer. Unbilled receivables in this category which were included in Technical Services revenues and Products revenues, exclusive of related fees, at January 31, 1998 were $14,583,000 and $664,000, respectively. The Company expects to recover substantially all such costs; however, no assurance can be given that the contracts or contract amendments will be received or that the related costs will be recovered. RISKS ASSOCIATED WITH INTERNATIONAL SALES AND CURRENCY EXCHANGES The Company conducts a portion of its business outside of the U.S. in transactions denominated in foreign currencies. As a result, the Company is exposed to fluctuations in exchange rates which could result in losses and, in turn, could adversely impact the Company's results of operations. Under the Company's current foreign currency management policy, the Company may use forward foreign currency exchange rate contracts to hedge against movements in exchange rates for contracts executed in foreign currencies. However, the Company generally does not hedge its exchange rate risks for its foreign subsidiaries, which generally conduct business in currencies other than the U.S. Dollar. Significant fluctuations in exchange rates in such countries could have a material adverse effect on the Company's results of operations. This risk may be significant for entities such as INTESA that operate in highly inflationary economies. To date, losses resulting from exchange rate fluctuations have not had a material adverse impact on the Company's results of operations; however, there can be no assurance that the Company's future results of operations will not be materially impacted by exchange rate fluctuations. NO CASH DIVIDENDS The Company has never declared or paid any cash dividends on its capital stock and no cash dividends on the Class A Common Stock or Class B Common Stock are contemplated in the foreseeable future. The Company's present intention is to retain any future earnings for use in its business. RESTRICTIONS ON CLASS A COMMON STOCK Certain of the shares of Class A Common Stock presently outstanding are, and all shares of Class A Common Stock offered by the Company will be, subject to certain restrictions (including a right of first refusal and a right of repurchase upon termination of employment or affiliation (except that qualified retiring employees may elect to have the Company defer its repurchase rights for five years) and other restrictions on their transferability) set forth in the Company's Certificate of Incorporation. DEPENDENCE UPON KEY PERSONNEL The Company's success will depend upon the continued contributions of its founder, J.R. Beyster, its officers and key personnel, the loss of which could materially adversely affect the Company's operations. The Company has not generally entered into long-term employment contracts with its officers and key employees. In addition, the Company does not maintain "key man" life insurance for its officers or key employees. ATTRACTION AND RETENTION OF SKILLED EMPLOYEES The highly technical and complex services and products provided by the Company are dependent upon the availability of professional, administrative and technical personnel having high levels of training and skills. Because of the Company's growth and competitive business environment, it has become more difficult to meet all of the Company's needs for such employees in a timely manner. Competition for such personnel is intense and competitors often employ aggressive tactics to recruit key employees. The Company intends to continue to devote significant resources to recruit and retain qualified employees; however, no assurance can be given that the Company will be able to attract and retain such employees on acceptable terms. Any failure to do so could have a material adverse effect on the Company's operations. 12 14 ANTI-TAKEOVER EFFECTS Consistent with and in furtherance of the Company's employee ownership philosophy, certain provisions of the Company's Certificate of Incorporation and Bylaws may discourage, delay or prevent attempts to acquire control of the Company that are not approved by the Company's Board of Directors. The provisions may, individually or collectively, have the effect of discouraging takeover attempts that some stockholders might deem to be in their best interests, including tender offers in which stockholders might receive a premium for their shares over the Formula Price, as well as making it more difficult for individual stockholders or a group of stockholders to elect directors. ITEM 2. PROPERTIES As of March 31, 1998, the Company conducted its operations in more than 370 offices and manufacturing and laboratory facilities located in 41 states, the District of Columbia and various foreign countries and occupied a total of approximately 7,900,000 square feet of space. The Company has principal locations in the San Diego, California, the Washington, D.C. and Piscataway, New Jersey metropolitan areas and occupies over 1,000,000 square feet of space in each of these locations. The Company owns and occupies seven buildings totaling approximately 677,000 square feet of space situated on 22.2 acres of land owned by the Company in the Golden Triangle area of San Diego, California. At the principal location of the Company in McLean, Virginia, the Company owns and occupies a 287,000 square foot building located on 10 acres of land and leases two buildings containing a total of approximately 425,000 square feet of space. The Company has certain rights to purchase these leased buildings. The Company has also executed a lease to occupy an additional 195,000 square foot building in McLean, Virginia, upon completion of this building scheduled for December 1999. In addition, the Company owns and occupies a 62,000 square foot building on 2.6 acres of land in Reston, Virginia. In the Chester, Piscataway and Red Bank, New Jersey areas, the Company owns and occupies 13 buildings totaling approximately 725,000 square feet of space situated on 206 acres of land. The Company also owns an additional 26 acres of vacant land in Piscataway, New Jersey. The Company also owns and occupies (a) a 62,500 square foot building on approximately 13 acres of land in Virginia Beach, Virginia, (b) an 83,000 square foot building on approximately 8.4 acres of land in Oak Ridge, Tennessee, (c) two buildings totaling 79,400 square feet on 4.5 acres in Dayton, Ohio, (d) a 100,000 square foot building on 18 acres in Huntsville, Alabama, (e) a 95,500 square foot building on approximately 7.3 acres of land in Columbia, Maryland and (f) a 23,700 square foot building on approximately 3.1 acres of leased land in Richland, Washington. The Company also leases a 30,000 square foot office building in Orlando, Florida and has an option to purchase this building. In addition, the Company leases a 380,000 square foot building in Lisle, Illinois. The nature of the Company's business is such that there is no practicable way to relate occupied space to industry segments. The Company considers its facilities suitable and adequate for its present needs. See Note M of Notes to Consolidated Financial Statements of the Company on page F-25 of this Form 10-K for information regarding commitments under leases. ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 13 15 EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of General Instructions to Form 10-K, the following list is included as an unnumbered Item in Part I of this Form 10-K in lieu of being incorporated by reference to the Company's definitive Proxy Statement used in connection with the solicitation of votes for the Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"). The following is a list of the names and ages (as of April 10, 1998) of all Executive Officers of the Company, indicating all positions and offices with the Company held by each such person and each such person's principal occupation or employment during at least the past five years. All such persons have been elected to serve until their successors are elected or until their earlier resignation or retirement. Except as otherwise noted, each of the persons listed below has served in his present capacity for at least the past five years.
NAME OF EXECUTIVE OFFICER AGE POSITIONS WITH THE COMPANY AND PRIOR BUSINESS EXPERIENCE ------------------------- --- -------------------------------------------------------- D. P. Andrews................ 53 Corporate Executive Vice President since January 1998 and a Director since October 1996. Mr. Andrews has held various positions with the Company since 1993, including serving as Executive Vice President for Corporate Development from October 1995 to January 1998. Prior to joining the Company, Mr. Andrews served as Assistant Secretary of Defense from 1989 to 1993. D. W. Baldwin................ 45 Senior Vice President and Treasurer since January 1997. Mr. Baldwin has held various positions with the Company since 1978, including serving as a Senior Vice President from 1992. J. R. Beyster................ 73 Chairman of the Board, Chief Executive Officer and a Director of the Company since the Company was founded and President of the Company until 1988. D. A. Cox.................... 50 Executive Vice President since January 1998. Mr. Cox has held various positions with the Company since 1988, including serving as a Sector Vice President from January 1996 to January 1998. J. E. Glancy................. 52 Corporate Executive Vice President since January 1994 and a Director of the Company since July 1994. Dr. Glancy has held various positions with the Company since 1976, including serving as a Sector Vice President from 1991 to 1994. J. D. Heipt.................. 55 Senior Vice President for Administration and Secretary of the Company since 1984. Mr. Heipt has held various positions with the Company since 1979. W. A. Owens.................. 57 President and Chief Operating Officer since February 1997. Mr. Owens will resign from these positions effective as of June 1, 1998. Mr. Owens also served as Vice Chairman of the Board from March 1996 to April 1998. Prior to joining the Company, Mr. Owens served as an Admiral in the U.S. Navy, serving as Vice Chairman of the Joint Chiefs of Staff from 1993 to 1997 and as the Deputy Chief of Naval Operations for Resources, Warfare Requirements and Assessments from 1991 to 1993. P. N. Pavlics................ 37 Senior Vice President since January 1997 and Controller of the Company since 1993. Mr. Pavlics has held various positions with the Company since 1985, including serving as a Corporate Vice President from 1993 to January 1997. S. D. Rockwood............... 55 Executive Vice President of the Company since April 1997 and Director of the Company since 1996. Dr. Rockwood has held various positions with the Company since 1986, including serving as a Sector Vice President from 1987 to April 1997. W. A. Roper, Jr.............. 52 Senior Vice President and Chief Financial Officer of the Company since 1990. R. A. Rosenberg.............. 63 Executive Vice President of the Company since 1992. Mr. Rosenberg has held various positions with the Company since 1987.
14 16
NAME OF EXECUTIVE OFFICER AGE POSITIONS WITH THE COMPANY AND PRIOR BUSINESS EXPERIENCE ------------------------- --- -------------------------------------------------------- D. E. Scott.................. 41 Senior Vice President since January 1997 and General Counsel of the Company since 1992. Mr. Scott has held various positions with the Company since 1987, including serving as a Corporate Vice President from 1992 to January 1997. R. C. Smith.................. 56 Chief Executive Officer and a Director of Bell Communications Research, Inc., a wholly-owned subsidiary of the Company ("Bellcore"), since January 1998 and a Director of the Company since April 1998. Prior to joining Bellcore, Mr. Smith was the Senior Vice President -- Quality Development and Public Relations for Sprint Corporation from 1991 to January 1998. E. A. Straker................ 60 Executive Vice President of the Company since 1994 and a Director since 1992. Dr. Straker has held various positions with the Company since 1971, including serving as a Sector Vice President from 1986 to 1994. J. H. Warner, Jr............. 57 Corporate Executive Vice President of the Company since 1996 and Director since 1988. Dr. Warner has held various positions with the Company since 1973, including serving as Executive Vice President from 1989 to 1996.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS THE LIMITED MARKET Since its inception, the Company has followed a policy of remaining essentially employee owned. As a result, there has never been a general public market for any of the Company's securities. In order to provide liquidity for its stockholders, however, the Company has maintained a limited secondary market (the "Limited Market") through its wholly-owned, broker-dealer subsidiary, Bull, Inc., which was organized in 1973 for the purpose of maintaining the Limited Market. The Limited Market permits existing stockholders to offer for sale shares of Class A Common Stock on predetermined days (each a "Trade Date"). Generally, there are four Trade Dates each year which typically occur approximately two weeks after Board of Directors' meetings which are currently scheduled for January, April, July and October. All shares of Class B Common Stock to be sold in the Limited Market must first be converted into five times as many shares of Class A Common Stock. All sales are made at the prevailing price of the Class A Common Stock determined by the Board of Directors pursuant to the valuation process described below. Employees, consultants and directors of the Company who have been approved by the Board of Directors or the Operating Committee of the Board of Directors may subscribe to purchase up to a specified number of shares of Class A Common Stock. In addition, the trustees or agents of the Company's Employee Stock Retirement Plan ("ESRP"), Cash or Deferred Arrangement ("CODA"), 1995 Employee Stock Purchase Plan, the 1998 Employee Stock Purchase Plan (if such plan is approved at the Company's 1998 Annual Meeting of Stockholders), Stock Compensation Plan, Management Stock Compensation Plan, Key Executive Stock Deferral Plan, the Bell Communications Research Savings and Security Plan and the Bell Communications Research Savings Plan for Salaried Employees (collectively, the "Bellcore Savings Plans") and the TransCore Retirement Savings Plan of Syntonic Technology, Inc., a wholly-owned subsidiary of the Company doing business as TransCore ("TransCore Savings Plan"), (collectively, the "Benefit Plans") may also purchase shares of Class A Common Stock for their respective trusts in the Limited Market. All sellers in the Limited Market (other than the Company, ESRP, CODA, the Bellcore Savings Plans and the TransCore Savings Plan) pay Bull, Inc. a commission equal to two percent of the proceeds from such sales. No commission is paid by purchasers in the Limited Market. In the event that the aggregate number of shares offered for sale in the Limited Market on any Trade Date is greater than the aggregate number of shares sought to be purchased by authorized buyers and the Company, offers by stockholders to sell 500 or less shares of Class A Common Stock (or up to the first 500 15 17 shares if more than 500 shares of Class A Common Stock are offered by any such stockholder) will be accepted first. Offers to sell shares in excess of 500 shares of Class A Common Stock will be accepted on a pro-rata basis determined by dividing the total number of shares remaining under purchase orders by the total number of shares remaining under sell orders. If, however, there are insufficient purchase orders to support the primary allocation of 500 shares of Class A Common Stock for each proposed seller, then the purchase orders will be allocated equally among all of the proposed sellers up to the total number of shares offered for sale. The Company is currently authorized, but not obligated, to purchase up to 1,250,000 shares of Class A Common Stock in the Limited Market on any Trade Date, but only if and to the extent that the number of shares offered for sale by stockholders exceeds the number of shares sought to be purchased by authorized buyers, and the Company, in its discretion, determines to make such purchases. In fiscal years 1998 and 1997, the Company purchased 223,849 shares and 117,163 shares, respectively, in the Limited Market. The Company's purchases in fiscal years 1998 and 1997 accounted for 9.7% and 6.6%, respectively, of the total shares purchased by all buyers in the Limited Market during such years. During the 1998 and 1997 fiscal years, the trustees of the Company's CODA, 1995 Employee Stock Purchase Plan, the Bellcore Savings Plans and the TransCore Savings Plan purchased an aggregate of 1,496,518 shares and 1,148,829, respectively, in the Limited Market. These purchases accounted for approximately 59.0% and 60.9% of the total shares purchased by all buyers in the Limited Market during fiscal years 1998 and 1997, respectively. Such purchases may change in the future, depending on the levels of participation in and contributions to such plans and the extent to which such contributions are invested in Class A Common Stock. To the extent that purchases by the trustees of the Benefit Plans decrease and purchases by the Company do not increase, the ability of stockholders to resell their shares in the Limited Market will likely be adversely affected. Although all shares of Class A Common Stock offered for sale were sold in the Limited Market on each Trade Date occurring during the last two fiscal years, no assurance can be given that a stockholder desiring to sell all or a portion of his or her shares of the Company's Class A Common Stock in any trade will be able to do so. To the extent that the aggregate number of shares sought to be purchased by authorized buyers exceeds the aggregate number of shares offered for sale by stockholders, the Company may, but is not obligated to, sell authorized but unissued shares of Class A Common Stock in the Limited Market. In fiscal years 1998 and 1997, the Company sold an aggregate of 927,657 and 85,505 shares of Class A Common Stock, respectively, in the Limited Market or 36.6% and 4.5%, respectively, of the total shares sold by all sellers in the Limited Market during such years. To the extent that the Company chooses not to sell authorized but unissued shares of Class A Common Stock in the Limited Market, the ability of individuals to purchase shares on the Limited Market may be adversely affected. No assurance can be given that an individual desiring to buy shares of the Company's Class A Common Stock in any future trade will be able to do so. PRICE RANGE OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK The price of the Class A Common Stock (the "Formula Price") is established by the Board of Directors pursuant to the valuation process which includes the formula set forth below (the "Formula"). The Board of Directors sets the Market Factor (as defined below) in the Formula at the value which causes the Formula to yield the price which the Board of Directors believes represents a fair market value. The Formula Price is the price at which the Class A Common Stock trades in the Limited Market and is reviewed by the Board of Directors at least four times each year, generally in conjunction with Board of Directors meetings which are currently scheduled for January, April, July and October. Pursuant to the Company's Certificate of Incorporation, the price applicable to shares of Class B Common Stock is equal to five times the Formula Price. See "Business -- Risk Factors -- Class A Common Stock Price Determined by Board of Directors." The following formula is used in determining the Formula Price: the price per share is equal to the sum of (i) a fraction, the numerator of which is the stockholders' equity of the Company at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur ("E") and the denominator of which is the number of outstanding common shares and common share equivalents at the end of such fiscal quarter ("W1") and (ii) a fraction, the numerator of which is 5.66 multiplied by the market factor ("M" or 16 18 "Market Factor"), multiplied by the earnings of the Company for the four fiscal quarters immediately preceding the price determination ("P"), and the denominator of which is the weighted average number of outstanding common shares and common share equivalents for those four fiscal quarters, as used by the Company in computing diluted earnings per share ("W"). The number of outstanding common shares and common share equivalents described above assumes the conversion of each share of Class B Common Stock into five shares of Class A Common Stock. The 5.66 multiplier is a constant which was first included in the Formula in March 1976 to cause the price generated by the Formula to equal the fair market value of the Class A Common Stock as determined by the Board of Directors following an amendment of the Formula. The 5.66 multiplier has not been assessed for change since that time. The Market Factor is a numerical factor which is reviewed and set by the Board of Directors as part of the valuation process. Historical values for each variable contained in the Formula are set forth in the table on page 18. The Formula Price of the Class A Common Stock, expressed as an equation, is as follows: Formula Price = E + 5.66 MP W1 W A valuation formula containing consideration of stockholder equity and earnings per share was first used by the Board of Directors in establishing the stock price of the Class A Common Stock in 1972. The Formula was amended in 1973, by inclusion of the Market Factor, to reflect the broad range of business, financial and market forces that also affect the fair market value of the Class A Common Stock. The Formula was modified by the Board of Directors on April 14, 1995 to delete a limitation that the Formula Price not be less than 90% of the net book value per share of the Class A Common Stock at the end of the quarter immediately preceding the date on which a price revision is to occur (the "Book Value Floor"). This modification was intended to ensure that the Formula Price would be a fair market value as required by law. The Formula Price has always exceeded the Book Value Floor, and the Book Value Floor has never been used to establish the Formula Price. The Formula was also modified by the Board of Directors on April 10, 1998 so that the Weighted Average Shares Outstanding or "W" was derived by reference to the Company's "diluted earnings per share" rather than by reference to the Company's "primary earnings per share." This modification was made to conform to changes in the accounting standards related to the calculation of earnings per share. See "Business -- Risk Factors -- Class A Common Stock Price Determined by Board of Directors." The Board of Directors has broad discretion to modify the Formula. Nevertheless, other than the quarterly review and possible modification of the Market Factor, the Board of Directors will not change the Formula unless (i) in the good faith exercise of its fiduciary duties and after consultation with the Company's independent accountants as to whether the change would result in a charge to earnings upon the sale of Class A Common Stock, the Board of Directors, including a majority of the directors who are not employees of the Company, determines that the Formula no longer results in a fair market value for the Class A Common Stock or (ii) a change in the Formula or the method of valuing the Class A Common Stock is required under applicable law. In determining the price of the Class A Common Stock, the Board of Directors considers the performance of the general securities markets and relevant industry groups, the historical financial performance of the Company versus comparable public companies, the prospects for the Company's future performance, general economic conditions, input from an independent appraisal firm and other relevant factors. The Board of Directors sets the Market Factor at the value which causes the Formula to yield a price equal to the Board of Directors' assessment of a fair market value for the Class A Common Stock. In conjunction with the Board of Directors' valuation process, an appraisal of Class A Common Stock is prepared by an independent appraisal firm for the committees administering the Company's and certain of its subsidiaries' qualified retirement plans. Valuation input from the appraiser is one of the factors considered by the Board of Directors in establishing the Formula Price. The Formula Price and Market Factor, as determined by the Board of Directors, remains in effect until subsequently changed by the Board of Directors. The Board of Directors believes that the valuation process results in a value which represents a fair market value for the Class A Common Stock within a broad range of financial criteria. 17 19 The value assigned by the Board of Directors to the Market Factor has been subject to larger and more frequent changes. Nonetheless, the Board of Directors continues to use the Formula in determining the Formula Price. The price of the Class A Common Stock and the Market Factor could be subject to greater fluctuations in the future than in the past due to a number of factors, including (i) plans to continue to increase the proportion of the Company's business involving private sector customers, international customers and information technology and the greater stock price volatility associated with companies in such business areas, (ii) the financial leverage impact of current and any future debt levels of the Company as debt financing is used to finance acquisitions and for other purposes, (iii) the impact of other equity transactions that the Company may pursue, including public offerings of securities of the Company's subsidiaries or affiliates, and (iv) the volatility of the stock price of the Class A Common Stock of NSI, a publicly-traded security of a majority-owned subsidiary of the Company, and its impact on the Formula Price. See "Business -- Risk Factors -- Possible Volatility of Stock Price." The following table sets forth information concerning the Formula Price for the Class A Common Stock, the applicable price for the Class B Common Stock and each of the variables contained in the Formula, including the Market Factor, in effect for the periods beginning on the dates indicated. There can be no assurance that the Class A Common Stock or the Class B Common Stock will in the future provide returns comparable to historical returns. See "Business -- Risk Factors -- No Assurances Regarding Future Returns."
'W' OR PRICE PRICE 'E' OR 'W(1)' WEIGHTED PER SHARE PER SHARE MARKET STOCKHOLDERS OR SHARES 'P' OR AVG. SHARES OF CLASS A OF CLASS B DATE FACTOR EQUITY(1) OUTSTANDING(2) EARNINGS(3) OUTSTANDING(4) COMMON STOCK COMMON STOCK ---- ------ ------------ -------------- ----------- -------------- ------------ ------------ April 12, 1996........ 1.80 459,097,000 50,848,815 57,296,000 51,306,036 $20.41 $102.05 July 12, 1996......... 2.00 476,734,000 51,526,715 57,601,000 51,594,455 $21.89 $109.45 October 11, 1996...... 2.10 482,172,000 51,418,186 58,657,000 51,830,619 $22.83 $114.15 January 10, 1997...... 2.40 507,235,000 52,094,779 62,098,000 52,003,218 $25.96 $129.80 April 11, 1997........ 2.40 527,459,000 52,682,394 63,680,000 52,308,789 $26.55 $132.75 July 11, 1997......... 2.70 559,284,000 53,556,198 67,459,000 52,695,291 $30.01 $150.05 October 10, 1997...... 3.20 583,211,000 54,369,492 70,701,000 53,229,203 $34.78 $173.90 January 9, 1998....... 3.60 663,811,000 55,148,817 71,804,000 53,993,996 $39.13 $195.65 April 10, 1998........ 3.90 754,778,000 57,511,742 84,794,000 54,889,045 $47.22 $236.10
- --------------- (1)"E" or Stockholders Equity is the stockholders' equity of the Company at the end of the fiscal quarter immediately preceding the date on which a price determination is to occur. (2)"W(1)" or Shares Outstanding is the number of outstanding common shares and common share equivalents at the end of that fiscal quarter. (3)"P" or Earnings is the earnings of the Company for the four fiscal quarters immediately preceding the price determination. (4)"W" or Weighted Average Shares Outstanding is the weighted average number of outstanding common shares and common share equivalents for the four fiscal quarters immediately preceding the price determination, as used by the Company in computing diluted earnings per share. HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK As of March 31, 1998, there were 18,558 holders of record of Class A Common Stock and 149 holders of record of Class B Common Stock. As of such date, approximately 93.0% of the Class A Common Stock and approximately 53.3% of the Class B Common Stock were owned of record by current employees, directors and consultants of the Company and their respective family members and by various employee benefit plans of the Company and its subsidiaries. 18 20 DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock and no cash dividends on the Class A Common Stock or Class B Common Stock are contemplated in the foreseeable future. The Company's present intention is to retain any future earnings for use in its business. ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from consolidated audited financial statements. The consolidated balance sheet at January 31, 1998 and 1997 and the related consolidated statements of income and of cash flows for the three years ended January 31, 1998 and notes thereto appear elsewhere in this Form 10-K. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED JANUARY 31 -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Revenues............................. $3,089,351 $2,402,224 $2,155,657 $1,921,880 $1,670,882 Cost of revenues..................... 2,623,339 2,094,447 1,875,183 1,686,970 1,475,485 Selling, general and administrative expenses........................... 301,093 191,836 173,742 146,083 120,387 Interest expense..................... 11,682 4,925 4,529 3,468 2,966 Other (income) expense, net.......... (15,864) (2,193) (111) 5,653 2,216 Minority interest in income of consolidated subsidiaries(1)....... 10,608 Provision for income taxes........... 73,699 49,529 45,018 30,654 28,328 ---------- ---------- ---------- ---------- ---------- Net income........................... $ 84,794 $ 63,680 $ 57,296 $ 49,052 $ 41,500 ========== ========== ========== ========== ========== Earnings per share(2): Basic.............................. $ 1.65 $ 1.30 $ 1.19 $ 1.05 $ .91 ========== ========== ========== ========== ========== Diluted............................ $ 1.55 $ 1.23 $ 1.14 $ 1.02 $ .89 ========== ========== ========== ========== ========== Common equivalent shares: Basic.............................. 51,349 49,157 48,143 46,605 45,403 ========== ========== ========== ========== ========== Diluted............................ 54,806 51,738 50,285 47,865 46,759 ========== ========== ========== ========== ==========
JANUARY 31 -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Total assets......................... $2,415,234 $1,012,462 $ 859,290 $ 752,584 $ 611,575 Working capital...................... 94,588 270,553 227,185 173,467 206,580 Long-term debt....................... 145,958 15,227 15,592 14,222 13,437 Long-term liabilities................ 313,677 29,114 18,524 14,733 11,623 Stockholders' equity................. $ 754,778 $ 527,459 $ 458,132 $ 386,760 $ 334,597
- --------------- (1) Relates to INTESA, the Company's consolidated 60%-owned joint venture, and NSI, the Company's consolidated 76%-owned subsidiary. (2) Earnings per share has been restated for 1997, 1996, 1995 and 1994 to conform with the new Statement of Financial Accounting Standards No. 128, "Earnings per Share." The Company has never declared or paid cash dividends on its capital stock and no cash dividends are presently contemplated. 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company provides diversified professional and technical services ("Technical Services") involving the application of scientific expertise, together with computer and systems technology, to solve complex technical problems for a broad range of government and commercial customers, both in the U.S. and abroad. In addition, the Company also designs, develops and manufactures high-technology products ("Products"). The Company's Technical Services and Products have been primarily sold to departments and agencies of the U.S. Government. During 1998, the Company completed several key transactions that have had positive impacts to its consolidated financial position, results of operations and cash flows and expanded the Company's business with commercial customers. On January 2, 1997, the Company formed a foreign joint venture, Informatica, Negocio y Tecnologia, S.A. ("INTESA"), with Venezuela's national oil company, Petroleos de Venezuela, S.A., to provide information technology services in Latin America. Accordingly, the Company consolidated its 60% majority interest in INTESA, whose fiscal year end is December 31, in its consolidated financial statements for the year ended January 31, 1998. Since Venezuela is considered a highly inflationary economy, the functional currency of INTESA is the U.S. dollar. Remeasurement gains or losses of this joint venture are recognized in the consolidated results of operations. On March 7, 1997, the Company sold the majority of the net assets of its SAIT business unit and recognized a gain of $4 million on the sale which is reflected in other income. SAIT manufactured data display devices and "ruggedized" personal computers which accounted for 49% of the Products revenue in 1997. On October 1, 1997, the Company and its subsidiary Network Solutions, Inc. (NSI) sold 3,795,000 shares of NSI Class A common stock in an initial public offering. The Company's net proceeds from the offering were $64 million resulting in a gain of $61 million which was recorded as additional paid-in- capital. Prior to the offering, NSI was a wholly-owned subsidiary of the Company. Upon completion of the offering, the Company has a 76% ownership interest in NSI, which represents 97% of the combined voting power of the outstanding common stock. NSI provides Internet domain name registration services and Intranet consulting and network design and implementation services. On November 14, 1997, the Company completed its acquisition (the "Bellcore Acquisition") of all the issued and outstanding common stock of Bell Communications Research, Inc. ("Bellcore") from the Regional Bell Operating Companies ("RBOCs"). Upon the closing of the Bellcore Acquisition, Bellcore became a wholly-owned subsidiary of the Company and approximately 5,500 Bellcore employees joined the Company. The acquisition has been accounted for under the purchase method of accounting and Bellcore's results of operations have been included in the financial statements from the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The excess purchase price over the net book value of assets acquired has been allocated to other identifiable intangible assets and goodwill. Bellcore is a global provider of software development, engineering and consulting services, advanced research and development, technical training and other services to the telecommunications industry. On January 29, 1998, the Company issued public debt securities with a principal amount of $100 million. These debt securities are ten year fixed rate notes with interest paid at 6.75%. Cash proceeds to the Company were $99 million. RESULTS OF OPERATIONS Revenues increased 29%, 11% and 12% in 1998, 1997 and 1996, respectively, over the prior year. INTESA, Bellcore and NSI were directly responsible for 21 percentage points of the increase in 1998. The remaining increase in revenues of 8 percentage points was attributable to internal growth in the traditional business areas. Revenues in 1998 from the Company's principal customer, the U.S. Government, continued to 20 22 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 markets, which typically involve lower cost service type contracts. The sale of Technical Services and Products to the U.S. Government as a prime contractor or subcontractor accounted for 66% of revenues in 1998, 79% in 1997 and 83% in 1996. The decrease from 1996 to 1998 is primarily attributable to growth in non-U.S. Government revenues as a result of the Company's efforts to increase revenues from commercial and international clients and state and local governments in the health, commercial information technology, telecommunications and transportation business areas. On an absolute basis, U.S. Government revenues increased 7% in 1998, 6% in 1997 and 8% in 1996. Non-U.S. Government revenues increased 109% in 1998, 40% in 1997 and 35% in 1996, over the prior year. The larger increase in non-U.S. Government revenues in 1998 is primarily attributable to the Bellcore Acquisition, INTESA and growth in NSI revenues over 1997. The following table summarizes revenues by contract type for the last three years:
YEAR ENDED JANUARY 31 ----------------------- 1998 1997 1996 ----- ----- ----- Contract type: Cost-reimbursement.......................................... 50% 54% 54% Time-and-materials and fixed-price level-of-effort.......... 18% 22% 26% Firm fixed-price............................................ 32% 24% 20% --- --- --- Total............................................. 100% 100% 100% === === ===
Cost-reimbursement contracts provide for the reimbursement of direct costs and allowable indirect costs, plus a fee or profit component. Time-and-materials ("T&M") contracts typically provide for the payment of negotiated fixed hourly rates for labor hours incurred plus reimbursement of other allowable direct costs at actual cost plus allocable indirect costs. Fixed-price level-of-effort ("FP-LOE") contracts are similar to T&M contracts since ultimately revenues are based upon the labor hours provided to the customer. Firm fixed-price contracts require the Company to provide stipulated products, systems or services for a fixed price. The Company assumes greater performance risk on firm fixed-price 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. The increase in revenues from firm fixed-price contracts and associated relative decrease in revenues from cost-reimbursement contracts from 1996 to 1998 result primarily from the Company's growth in non-U.S. Government revenues. The Company's non-U.S. Government customers typically do not contract on a cost- reimbursement basis. The Company's business is directly related to the receipt of contract awards and contract performance. There were 440 contracts with annual revenues greater than $1 million in 1998, compared with 412 and 349 such contracts in 1997 and 1996, respectively. These larger contracts represented 71% of the Company's revenues in 1998 compared to 75% in 1997 and 76% in 1996. Of these contracts, 39 contracts had individual revenues greater than $10 million in 1998 compared to 28 such contracts in 1997 and 21 in 1996. The remainder of the Company's revenues are derived from a large number of contracts with individual revenues less than $1 million. Although the Company has committed substantial resources and personnel required to pursue and perform larger contracts, the Company believes it also maintains a suitable environment for the performance of smaller, highly technical research and development contracts. These smaller programs often provide the foundation for the Company's success on larger procurements. 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 the end of 1998, the Company had 30,300 full-time employees compared to 20,900 and 19,500 at the end of 1997 and 1996, respectively. Material and subcontract ("M&S") revenues were $755 million in 1998, $667 million in 1997 and $616 million in 1996. As a percentage of total revenues, M&S revenues decreased to 25% in 1998 from 28% in 1997 and 29% in 1996. The decrease in 1998 is primarily attributable to faster growth in labor- 21 23 related revenues and the sale of SAIT, which decreased M&S revenues in 1998 and had accounted for 12% of M&S revenues in 1997. The revenue mix between the Technical Services segment and the Products segment was 98% and 2%, respectively, of consolidated revenues in 1998, 94% and 6%, respectively, in 1997 and 1996. Within the Technical Services segment, revenues are further classified between "National Security," "Health," "Environment," "Energy," "Telecommunications," "Commercial Information Technology" and "Other Technical Services." Other Technical Services includes the transportation, space and other business areas. National Security revenues were 37% of total revenues in 1998 compared to 44% in 1997 and 45% in 1996. Although National Security revenues declined as a percentage of total revenues, on an absolute basis, these revenues increased 10% in 1998, 8% in 1997 and 9% in 1996 over the prior year, in spite of declines in the overall defense market during these periods. The U.S. Government maintained funding in the National Security areas in which the Company believes it has strong capabilities, such as command, control, communications, computers, intelligence, surveillance and reconnaisance ("C4ISR"), research and development, training, logistics and simulation. Revenues in the Health business area were 12% of total revenues in 1998 and 14% in 1997 and 1996. Although Health revenues declined as a percentage of total revenues, on an absolute basis, these revenues have increased 9% in 1998, 10% in 1997 and 47% in 1996. In 1996, approximately 10% of consolidated revenues was derived from one U.S. government contract in the Health business area, which was substantially completed in 1997. However, to date, the Company has maintained and increased the level of its revenues in the Health business area through other contracts. Revenues from the Environment business were 9% of total revenues in 1998, 11% in 1997 and 13% in 1996. Energy revenues were 3% of total revenues in 1998, 4% in 1997 and 6% in 1996. The decreases in the Environment and Energy business areas primarily reflect the budget reductions and changing priorities of the Company's U.S. Government and commercial customers. Telecommunications revenues were 8% of total revenues in 1998 and 1% in 1997 and 1996. The increase in Telecommunications revenues in 1998 reflects the acquisition of Bellcore which primarily generates revenues in the Telecommunications segment. Commercial Information Technology revenues were 14% of total revenues in 1998, 4% in 1997 and 2% in 1996. The increase in Commercial Information Technology revenues reflects the Company's efforts to increase revenues from commercial and international clients in the information technology area. INTESA and NSI both contributed to the growth in Commercial Information Technology revenues. Other Technical Services revenues were 14% of total revenues in 1998, 15% in 1997 and 12% in 1996. The increase in Other Technical Services revenues as a percent of total revenues in 1997 compared to 1996 reflects the Company's expansion in the transportation business area and mirrors the country's shift of priorities and resources from defense programs to civilian programs in areas such as transportation. The Company expects this trend of shifting priorities of the country to continue. In order for the Company to maintain or exceed historical revenue growth rates, it will need to continue to increase its market share in the National Security business area and/or increase its revenues from the Health, Environment, Energy, Telecommunications, Commercial information technology and Other Technical Services business areas. Products revenues were 2% of total revenues in 1998 and 6% in 1997 and 1996. The decrease in product revenues as a percentage of total revenues is attributable to the sale of SAIT in 1998. The cost of revenues as a percentage of revenues was 85.1% in 1998, 87.2% in 1997 and 87.0% in 1996. The decrease in 1998 reflects the growth in commercial revenues from Bellcore, INTESA and NSI, which have more of their associated costs in SG&A as opposed to cost of revenues. SG&A expenses as a percentage of revenues were 9.8%, 8.0% and 8.1% in 1998, 1997 and 1996, respectively. SG&A is comprised of general and administrative ("G&A"), bid and proposal ("B&P") and independent research and development ("IR&D") expenses. G&A, B&P and IR&D increased as a percentage of revenues due to the growth in commercial revenues which have more of their associated costs in SG&A as opposed to cost of revenues. While the level of B&P activity and costs have historically fluctuated depending on the availability of bidding opportunities and resources, B&P costs have increased in relation to revenues in 1998. IR&D costs have also historically fluctuated depending on the stage of development for various hardware and software systems and have increased in relation to revenues in 1998. G&A costs as a 22 24 percentage of total revenues were 6.4% in 1998 compared to 5.6% in 1997 and 5.8% in 1996. The increase in G&A costs represents the combination of the growth in commercial business and increased acquisition costs incurred in connection with the Bellcore Acquisition. In 1998 and 1997, continued declining operating results of certain acquired companies made the recovery of certain goodwill unlikely as determined by the undiscounted cash flow method. The Company reduced goodwill by $2.9 million and $6.2 million to its estimated recoverable value in 1998 and 1997, respectively. The Company continues to closely monitor G&A expenses as part of an on-going program to control indirect costs. Operating profit margins by segment are strongly correlated to the Company's financial performance on the contracts within each segment. The operating profit margin in the Technical Services segment was 5.5% in 1998, 4.8% in 1997 and 5.0% in 1996. The National Security operating profit margin was 4.2% in 1998, 5.2% in 1997 and 5.0% in 1996. The lower operating profit margin in 1998 as compared to 1997 and 1996 was a result of overruns on certain firm fixed-price contracts in the National Security area. Health operating profit margin was 8.0% in 1998, 7.2% in 1997 and 6.1% in 1996. Environment operating profit margin was 4.5% in 1998, 2.1% in 1997 and 4.4% in 1996. The lower operating profit margin in 1997 was the result of losses on certain contracts in the local government and private sector markets. Energy operating profit margin was 4.7% in 1998, 5.7% in 1997 and 5.3% in 1996. Telecommunications operating profit margin was 11.3% in 1998, 11.8% in 1997 and 7.5% in 1996. The Telecommunications business area performance in 1998 is dominated by Bellcore. Commercial Information Technology operating profit margin was 6.6% in 1998, a loss of 6.1% in 1997 and profit of .4% in 1996. The loss in 1997 primarily relates to operating losses at NSI. The operating profit margin in Other Technical Services was 3.2% in 1998, 5.7% in 1997 and 4.4% in 1996. The decrease in Other Technical Services operating profit margin in 1998 was primarily attributable to overruns on certain firm fixed-price contracts. The operating profit margin in the Products segment was a loss of 1.9% in 1998, profit of 5.7% in 1997 and profit of 4.6% in 1996. The operating loss in 1998 was attributable to overruns on certain firm fixed-price contracts. In general, overall operating profit margins for the Company increased in 1998 compared to 1997 and 1996 despite overruns on certain firm fixed-price contracts. Interest expense in 1998, 1997 and 1996 primarily relates to interest on building mortgages, deferred compensation, capital lease obligations, notes payable and borrowings under the Company's revolving credit facilities. Increase in interest expense was primarily driven by an increase in the average borrowings outstanding during 1998 compared to 1997 and 1996. Average borrowings in 1998 increased as a result of financing the acquisition of Bellcore. Other income, net of other expense, was $16 million in 1998 compared to $2 million in 1997 and $111 thousand in 1996. The increase in other income represents a combination of effects. Primarily increasing other income was increased interest income and the gain on sale of SAIT and certain other business assets. Offsetting the increase in other income was a loss on the forward treasury lock agreements. The Company entered into these treasury lock agreements, totaling $200 million, in 1997 to manage exposure to fluctuations in interest rates on an anticipated, probable issuance of debt that was to be used to finance the Bellcore acquisition. Due to changes in market conditions, an unexpected decline in interest rates and availability of cash, the Company only issued $100 million of debt, thus resulting in the recognition of a loss in other expense. The provision for income taxes as a percentage of income before income taxes was 46.5% in 1998, 43.8% in 1997 and 44.0% in 1996. The higher effective tax rate in 1998 compared to 1997 and 1996 is primarily attributable to non-deductible goodwill amortization and non-deductible losses in foreign operations. The Bellcore Acquisition has resulted in a substantial growth in both employee base and commercial revenues in the period since November 14, 1997. Since the integration of Bellcore is still in its early stages, the growth and debt brought on by the acquisition could still place a significant strain on the Company's management, operational and financial resources if the Company does not effectively manage the expansion of its operations. There can be no assurance that the Company's systems, procedures or controls will be adequate to support the integration of Bellcore. Any inability to effectively integrate Bellcore or manage the growth could have a material adverse effect on the Company's results of operations and financial condition. As of January 31, 1998, the integration of Bellcore has not had an adverse effect on the Company. In addition, 23 25 Bellcore has historically derived substantially all of its revenues from the RBOCs. In order for Bellcore to maintain or exceed historical revenue growth rates, it will need to continue to increase its market share from its principal customers, the RBOCs, or diversify with new customers. As described in the Notes to Consolidated Financial Statements, during 1998, the Company adopted SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share ("EPS"). Dual presentation of basic and diluted EPS for all periods presented is required. Accordingly, EPS has been restated for 1997 and 1996 to conform with the new standard. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS is computed similar to basic EPS except that the weighted average number of shares of common stock outstanding is increased to include the effect of stock options and other stock awards granted to employees under stock-based compensation plans that were outstanding during the period. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements and will be adopted by the Company in 1999. SFAS No. 131 establishes new standards for reporting operating segment information in annual financial statements and reporting selected information about operating segments in interim financial statements. The Company will adopt SFAS No. 131 for the year ending January 31, 1999 and the interim period ending April 30, 2000. In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued and revises disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt SFAS No. 132 in 1999. Since these statements address disclosure and reporting issues, adoption of these statements will not have a material effect on the Company's consolidated financial position or results of operations. The Company has commenced, and in some cases finalized, the evaluation of computer systems to ensure its operations will not be adversely impacted by the Year 2000 software problems. In 1996, the Company initiated a program to prepare the Company's centralized internal computer systems and applications for the Year 2000. The evaluation determined that certain portions of the Company's software and systems required modification or replacement. Remediation efforts have begun, with testing and validation to be completed in 1999. The costs specifically associated with modifying internal-use software for the Year 2000 are expensed as incurred. The costs to modify internal-use software have not had, nor are they anticipated to have, a material adverse effect on the Company's consolidated financial position, results of operations, cash flows or its ability to conduct business. The Company has initiated communications with its critical service suppliers and vendors to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. There can be no assurance that such failure would not have a material adverse effect on the Company's systems, results of operations and ability to do business. Furthermore, the Company has implemented an on-going program to assess its exposure with respect to its products and services. As part of this program, the Company is meeting with its significant customers and discussing opportunities to perform additional services in order to resolve their Year 2000 issues. To date, no matters have come to the attention of the Company's management that would have a material adverse effect on its consolidated financial position, results of operations, cash flows or its ability to conduct business. The Company's assessment of the Year 2000 issue, including the costs of the project and timing of completion are based on management's best estimates and input from third party customers, service providers, suppliers and vendors. These estimates were derived using numerous assumptions about future events, including continued availability of certain resources, third party modifications plans and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. While the Company does not believe that the Year 2000 matters discussed above will have a material adverse effect on its consolidated financial position, results of operations, cash flows and its ability to conduct business, it is uncertain whether or to what extent the Company may be affected by such matters. 24 26 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. LIQUIDITY AND CAPITAL RESOURCES On August 20, 1997, the Company entered into two new credit facilities (the "Facilities") totaling $900 million with a group of financial institutions which provide for (i) a five-year reducing revolving credit facility of up to $700 million and (ii) a 364-day revolving credit facility of up to $200 million. The Facilities were entered into to provide funding for the Bellcore Acquisition and for general corporate purposes and replace the $105 million unsecured revolving credit facility. In January 1998, upon issuance of public debt securities, the Company terminated the 364-day revolving credit facility. The Company is subject to certain financial covenants under the terms of the credit facility and was in compliance with these covenants at the end of 1998. The Company's primary sources of liquidity continue to be funds provided by operations and the Five-Year revolving credit facility. In 1998, the issuance of public debt securities was a source of liquidity for the Company. At January 31, 1998 and 1997, there were no borrowings outstanding under either the new or old credit agreements, respectively, and cash and cash equivalents and short-term investments totaled $230 million and $45 million, respectively. Cash flows generated from operating activities were $351 million in 1998 compared to $111 million in 1997 and $53 million in 1996. Average revenue days outstanding decreased to 68 in 1998 from 74 in 1997 and 1996. The Company continues to actively monitor receivables with emphasis placed on collection activities and the negotiation of more favorable payment terms. Cash flows spent on investing activities were $397 million in 1998 compared to $57 million and $39 million in 1997 and 1996, respectively. The increase in spending on investing activities in 1998 and 1997 is primarily attributable to business acquisitions and the acquisition of capital assets. The primary use of cash in 1998 was the Bellcore Acquisition. Although the Company used $340 million of cash for acquisitions of certain business assets, net of cash acquired, in 1998, the Company also received proceeds of $48 million from the sale of SAIT and other smaller business assets. The Company spent $23 million for acquisitions of businesses in 1997 to complement the Company's capabilities in the areas of commercial information technology, transportation and national security. In 1996, $21 million was spent to acquire equity interests in commercial and international businesses. The Company intends to continue to make additional acquisitions and equity investments in the future. Capital expenditures, excluding land and buildings, were $52 million, $38 million and $31 million in 1998, 1997 and 1996, respectively, and are expected to be approximately $78 million for 1999. Expenditures for land and buildings were $18 million, $5 million and $1 million in 1998, 1997 and 1996, respectively, and are expected to be approximately $18 million for 1999. The Company generated $191 million from financing activities in 1998 compared to a use of cash of $31 million and $19 million in 1997 and 1996, respectively. In 1998, the primary sources of cash were the proceeds from issuing public debt securities, proceeds from the initial public offering of NSI common stock and proceeds from the sale of the Company's common stock. In 1997 and 1996, funds were utilized primarily for common stock repurchases and payments on long-term debt. The increase in common stock repurchases in 1997 from 1996 was primarily attributable to increased repurchases of common stock from the Company's Employee Stock Retirement Plan ("ESRP") in order for the ESRP to fund payouts to participants. The Company's cash flows from operations plus 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 as well as the issuance of Company common stock. EFFECTS OF INFLATION Over half of the Company's contracts are cost-reimbursement type contracts or are completed within one year. As a result, the Company has been able to anticipate increases in costs when pricing its contracts. Bids for longer term firm fixed-price and T&M type contracts typically include labor and other cost escalations in 25 27 amounts expected to be sufficient to cover cost increases over the period of performance. Consequently, because costs and revenues include an inflationary increase commensurate with the general economy, net income, as a percentage of revenues, has not been significantly impacted by inflation. As the Company expands into the international markets and into highly inflationary economies, movements in foreign currency exchange rates may impact the Company's results of operations. Currency exchange rate fluctuations may also affect the Company's competitive position as a result of its impact on the Company's profitability and the pricing offered to its non-U.S. customers. 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 or 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: a decrease in or the failure to increase business with the U.S. Government; the ability of the Company to effectively continue integrating Bellcore; the ability of Bellcore to maintain or increase its market share with the RBOCs (Bellcore's principal customers), or diversify with new customers; the ability of the Company to continue to identify and consummate additional acquisitions; the ability of the Company to competitively price its Technical Services and Products; the risk of early termination of U.S. Government contracts; the risk of losses or reduced profits on firm fixed-price contracts; a failure to obtain reimbursement for costs incurred prior to the execution of a contract or contract modification; audits of the Company's costs, including allocated indirect costs, by the U.S. Government; the ability of the Company and third party customers, service providers and suppliers to address the Year 2000 issue and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Consolidated Financial Statements of the Company attached hereto and listed on the Index to Consolidated Financial Statements set forth on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the executive officers of the Company, see "Executive Officers of the Registrant" at the end of Part I of this Form 10-K. For information with respect to the Directors of the Company, see "Election of Directors" appearing in the 1998 Proxy Statement, which information is incorporated by reference into this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION For information with respect to executive compensation, see the information set forth under the captions "Directors' Compensation," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in the 1998 Proxy Statement, which information (except for the information under the sub-captions "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Presentation") is incorporated by reference into this Form 10-K. 26 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information with respect to the security ownership of certain beneficial owners and management, see the information set forth under the caption "Beneficial Ownership of the Company's Securities" in the 1998 Proxy Statement, which information is incorporated by reference into this Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information with respect to the interests of the Company's management and others in certain transactions, see the information set forth under the caption "Certain Relationships and Related Transactions" in the 1998 Proxy Statement, which information is incorporated by reference into this Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 1. FINANCIAL STATEMENTS The Consolidated Financial Statements of the Company are attached hereto and listed on the Index to Consolidated Financial Statements set forth on page F-1 of this Form 10-K. 2. FINANCIAL STATEMENT SCHEDULES All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto. 3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3(a) Restated Certificate of Incorporation of the Registrant, as amended July 19, 1990. Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1991 (the "1991 10-K"). 3(b) Bylaws of the Registrant, as amended through April 11, 1997. Incorporated by reference to Exhibit 3(b) to Registrant's Annual Report on Form 10-K/A for the fiscal year ended January 31, 1997 (the "1997 10-K"). 10(a)* Registrant's Bonus Compensation Plan, as amended through October 2, 1996. 10(b)* Registrant's 1992 Stock Option Plan, as amended through October 2, 1996. 10(c)* Registrant's Stock Compensation Plan, as amended through December 30, 1997. 10(d)* Registrant's Management Stock Compensation Plan, as amended through December 30, 1997. 10(e)* 1995 Employee Stock Purchase Plan. Incorporated by reference to Annex II to the Registrant's Proxy Statement for the 1995 Annual Meeting of Stockholders as filed June 1995 with the SEC. 10(f)* 1995 Stock Option Plan, as amended through October 2, 1996. 10(g)* Registrant's Keystaff Deferral Plan, as amended through December 30, 1997. 10(h)* Registrant's Key Executive Stock Deferral Plan. Incorporated by reference to Exhibit 4(s) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996. 10(i)* Form of Alumni Agreement. Incorporated by reference to Exhibit 4(w) to the 1997 10-K. 10(j) Credit Agreement (multi-year facility) with Bank of America NT&SA, Morgan Guaranty Trust Company, Citicorp USA, Inc. and other financial institutions dated as of August 20, 1997. Incorporated by reference to Exhibit 10(d) to the Form 10-Q for the fiscal quarter ended July 31, 1997 ("July 1997 10-Q").
* Executive Compensation Plans and Arrangements 27 29
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10(k)* Letter Agreement dated January 18, 1996 between Registrant and W.A. Owens, as amended on March 30, 1998. 10(l)* Employment Agreement dated December 18, 1997 between Registrant and R.C. Smith, as amended on February 2, 1998. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants 27 Financial Data Schedule. 28(a) Annual Report of the Registrant's 1995 Employee Stock Purchase Plan for the plan year ended January 31, 1998. 28(b) Annual Report of the Registrant's Cash or Deferred Arrangement for the plan year ended December 31, 1997. 28(c) Annual Report of the Registrant's subsidiary's (Syntonic Technology, Inc. doing business as TransCore), TransCore Retirement Savings Plan for the plan year ended December 31, 1997. 28(d) Annual Report of the Bell Communications Research Savings and Security Plan for the plan year ended December 31, 1997. 28(e) Annual Report of the Bell Communications Research Savings Plan for Salaried Employees for the plan year ended December 31, 1997.
(b) REPORTS ON FORM 8-K IN THE FOURTH QUARTER OF THE FISCAL YEAR ENDED JANUARY 31, 1998: A Report on Form 8-K was filed on November 26, 1997. Disclosure was made under Item 2 -- Acquisition or Disposition of Assets. A Report on Form 8-K was filed on January 14, 1998. Disclosure was made under Item 5 -- Other Events. A Report on Form 8-K was filed on January 15, 1998. Disclosure was made under Item 5 -- Other Events, and Item 7 -- Financial Statements and Exhibits. * Executive Compensation Plans and Arrangements 28 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: April 10, 1998. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (Registrant) By /s/ J. R. BEYSTER ------------------------------------ J. R. Beyster Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. R. BEYSTER Chairman of the Board and April 10, 1998 - -------------------------------------------------------- Principal Executive Officer J. R. Beyster /s/ W. A. ROPER, JR. Principal Financial Officer April 10, 1998 - -------------------------------------------------------- W. A. Roper, Jr. /s/ P. N. PAVLICS Principal Accounting Officer April 10, 1998 - -------------------------------------------------------- P. N. Pavlics /s/ D. P. ANDREWS Director April 10, 1998 - -------------------------------------------------------- D. P. Andrews /s/ V. N. COOK Director April 10, 1998 - -------------------------------------------------------- V. N. Cook /s/ W. H. DEMISCH Director April 10, 1998 - -------------------------------------------------------- W. H. Demisch /s/ W. A. DOWNING Director April 10, 1998 - -------------------------------------------------------- W. A. Downing /s/ J. E. GLANCY Director April 10, 1998 - -------------------------------------------------------- J. E. Glancy /s/ B. R. INMAN Director April 10, 1998 - -------------------------------------------------------- B. R. Inman
29 31
SIGNATURE TITLE DATE --------- ----- ---- /s/ A. K. JONES Director April 10, 1998 - -------------------------------------------------------- A. K. Jones /s/ H. M. J. KRAEMER, JR. Director April 10, 1998 - -------------------------------------------------------- H. M. J. Kraemer, Jr. /s/ W. M. LAYSON Director April 10, 1998 - -------------------------------------------------------- W. M. Layson /s/ C. B. MALONE Director April 10, 1998 - -------------------------------------------------------- C. B. Malone /s/ J. W. MCRARY Director April 10, 1998 - -------------------------------------------------------- J. W. McRary /s/ S. D. ROCKWOOD Director April 10, 1998 - -------------------------------------------------------- S. D. Rockwood Director - -------------------------------------------------------- R. C. Smith /s/ E. A. STRAKER Director April 10, 1998 - -------------------------------------------------------- E. A. Straker /s/ M. E. TROUT Director April 10, 1998 - -------------------------------------------------------- M. E. Trout /s/ J. P. WALKUSH Director April 10, 1998 - -------------------------------------------------------- J. P. Walkush /s/ J. H. WARNER, JR. Director April 10, 1998 - -------------------------------------------------------- J. H. Warner, Jr. /s/ J. A. WELCH Director April 10, 1998 - -------------------------------------------------------- J. A. Welch /s/ J. B. WIESLER Director April 10, 1998 - -------------------------------------------------------- J. B. Wiesler /s/ A. T. YOUNG Director April 10, 1998 - -------------------------------------------------------- A. T. Young
30 32 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- REPORT OF INDEPENDENT ACCOUNTANTS........................... F-2 FINANCIAL STATEMENTS Consolidated Statement of Income for the three years ended January 31, 1998.......................................... F-3 Consolidated Balance Sheet at January 31, 1998 and 1997..... F-4 Consolidated Statement of Stockholders' Equity for the three years ended January 31, 1998.............................. F-5 Consolidated Statement of Cash Flows for the three years ended January 31, 1998.................................... F-6 Notes to Consolidated Financial Statements.................. F-7
Financial statement schedules are omitted because they are not applicable or the required information is shown on the consolidated financial statements or the notes thereto. F-1 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Science Applications International Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Science Applications International Corporation and its subsidiaries at January 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP San Diego, California April 3, 1998 F-2 34 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JANUARY 31 ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Revenues............................................... $3,089,351 $2,402,224 $2,155,657 Costs and expenses: Cost of revenues..................................... 2,623,339 2,094,447 1,875,183 Selling, general and administrative expenses......... 301,093 191,836 173,742 ---------- ---------- ---------- Operating income..................................... 164,919 115,941 106,732 ---------- ---------- ---------- Interest expense..................................... 11,682 4,925 4,529 Other (income) expense, net.......................... (15,864) (2,193) (111) Minority interest in income of consolidated subsidiaries...................................... 10,608 ---------- ---------- ---------- Income before income taxes............................. 158,493 113,209 102,314 Provision for income taxes............................. 73,699 49,529 45,018 ---------- ---------- ---------- Net income............................................. $ 84,794 $ 63,680 $ 57,296 ========== ========== ========== Earnings per share: Basic................................................ $ 1.65 $ 1.30 $ 1.19 ========== ========== ========== Diluted.............................................. $ 1.55 $ 1.23 $ 1.14 ========== ========== ========== Common equivalent shares: Basic................................................ 51,349 49,157 48,143 ========== ========== ========== Diluted.............................................. 54,806 51,738 50,285 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 35 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEET ASSETS
JANUARY 31 ------------------------ 1998 1997 ---------- ---------- (IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 189,387 $ 45,279 Restricted cash........................................... 25,344 14,456 Receivables............................................... 810,385 562,950 Inventories............................................... 12,471 33,983 Prepaid expenses and other current assets................. 75,846 17,392 Deferred income taxes..................................... 62,367 37,155 ---------- ---------- Total current assets.............................. 1,175,800 711,215 Property and equipment...................................... 288,282 89,027 Land and buildings.......................................... 195,534 96,768 Goodwill.................................................... 106,757 59,569 Other intangible assets..................................... 103,520 Prepaid pension assets...................................... 424,108 Other assets................................................ 121,233 55,883 ---------- ---------- $2,415,234 $1,012,462 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.................. $ 748,031 $ 273,481 Accrued payroll and employee benefits..................... 262,408 131,234 Income taxes payable...................................... 37,761 16,859 Notes payable and current portion of long-term debt....... 33,012 19,088 ---------- ---------- Total current liabilities......................... 1,081,212 440,662 ---------- ---------- Long-term debt.............................................. 145,958 15,227 Deferred income taxes....................................... 111,941 Other long-term liabilities................................. 313,677 29,114 Commitments and contingencies (Note N)...................... Minority interest in consolidated subsidiaries.............. 7,668 Stockholders' equity, per accompanying statement: Class A Common Stock, $.01 par value...................... 519 480 Class B Common Stock, $.05 par value...................... 16 16 Additional paid-in capital................................ 538,760 304,658 Retained earnings......................................... 237,588 232,562 Other stockholders' equity................................ (22,105) (10,257) ---------- ---------- Total stockholders' equity........................ 754,778 527,459 ---------- ---------- $2,415,234 $1,012,462 ========== ==========
See accompanying notes to consolidated financial statements. F-4 36 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK --------------------------------- CLASS A CLASS B --------------- --------------- 100,000,000 5,000,000 SHARES SHARES OTHER AUTHORIZED AUTHORIZED ADDITIONAL STOCK- --------------- --------------- PAID-IN RETAINED HOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ------ ------ ---------- -------- -------- (IN THOUSANDS) Balance at January 31, 1995............... 45,243 $452 343 $17 $201,568 $189,043 $ (4,320) Issuances of common stock............... 4,115 41 52,600 Repurchases of common stock............. (2,449) (24) (11) (11,456) (30,479) Income tax benefit from employee stock transactions.......................... 7,143 Foreign currency translation adjustment............................ (161) Unearned stock compensation............. (3,588) Net income.............................. 57,296 ------ ---- --- --- -------- -------- -------- Balance at January 31, 1996............... 46,909 469 332 17 249,855 215,860 (8,069) Issuances of common stock............... 4,123 41 60,540 Repurchases of common stock............. (3,019) (30) (6) (1) (16,168) (46,978) Income tax benefit from employee stock transactions.......................... 10,431 Foreign currency translation adjustment............................ 1,279 Unearned stock compensation............. (3,467) Net income.............................. 63,680 ------ ---- --- --- -------- -------- -------- Balance at January 31, 1997............... 48,013 480 326 16 304,658 232,562 (10,257) Issuances of common stock............... 7,207 72 178,977 Repurchases of common stock............. (3,289) (33) (12) (22,489) (79,768) Net unrealized loss on securities available for sale.................... (3,691) Income tax benefit from employee stock transactions.......................... 16,950 Foreign currency translation adjustment............................ (3,744) Unearned stock compensation............. (4,413) Sale of minority interest in subsidiary............................ 60,664 Net income.............................. 84,794 ------ ---- --- --- -------- -------- -------- Balance at January 31, 1998............... 51,931 $519 314 $16 $538,760 $237,588 $(22,105) ====== ==== === === ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 37 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31 -------------------------------- 1998 1997 1996 ---------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 84,794 $ 63,680 $ 57,296 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 69,860 50,359 35,380 Non-cash compensation................................... 31,051 22,654 13,224 Minority interest in income of consolidated subsidiaries........................................... 10,524 Equity in income of unconsolidated affiliates........... (1,326) (2,253) (233) Net (gain) on sales of certain business assets.......... (6,341) Loss on disposal of property and equipment.............. 3,096 895 1,385 Income tax benefit from employee stock transactions..... 16,950 10,431 7,143 Increase (decrease) in cash, excluding effects of acquisitions, resulting from changes in: Receivables........................................... (25,159) (36,134) (71,908) Inventories........................................... 7,262 8,111 (13,257) Prepaid expenses and other current assets............. (10,852) (4,496) 2,029 Progress payments..................................... (465) (25,138) 10,660 Deferred income taxes................................. (56,772) (18,202) 1,583 Other assets.......................................... (45,930) (9,628) (4,816) Accounts payable and accrued liabilities.............. 185,111 46,678 4,701 Accrued payroll and employee benefits................. 10,477 (8,188) 12,637 Income taxes payable.................................. 15,251 1,223 (2,774) Other long-term liabilities........................... 63,073 10,751 (195) ---------- -------- -------- 350,604 110,743 52,855 ---------- -------- -------- Cash flows from investing activities: Expenditures for property and equipment................... (52,450) (37,709) (30,704) Expenditures for land and buildings....................... (17,633) (4,555) (1,233) Acquisitions of certain business assets, net of cash acquired................................................ (340,165) (23,151) 1,475 Purchase of debt securities available for sale............ (40,200) Proceeds from sales of certain business assets............ 47,974 Proceeds from disposal of property and equipment.......... 5,192 727 332 Investments in affiliates................................. (21,367) Proceeds from sale of debt securities available for sale.................................................... 7,576 12,478 ---------- -------- -------- (397,282) (57,112) (39,019) ---------- -------- -------- Cash flows from financing activities: Proceeds from notes payable and issuance of long-term debt.................................................... 108,993 3,729 1,856 Payments of notes payable and long-term debt.............. (17,943) (8,200) (6,397) Principal payments on capital lease obligations........... (8,416) (967) (1,113) Net proceeds from sale of minority interest in subsidiary.............................................. 63,528 Sales of common stock..................................... 128,775 19,720 14,834 Repurchases of common stock............................... (83,526) (45,399) (28,454) ---------- -------- -------- 191,411 (31,117) (19,274) ---------- -------- -------- Effect of exchange rate changes on cash................... (625) ---------- Increase (decrease) in cash and cash equivalents.......... 144,108 22,514 (5,438) Cash and cash equivalents at beginning of year............ 45,279 22,765 28,203 ---------- -------- -------- Cash and cash equivalents at end of year.................. $ 189,387 $ 45,279 $ 22,765 ========== ======== ======== Supplemental schedule of non-cash investing and financing activities: Repurchases of common stock upon exercise of stock options................................................. $ 18,551 $ 17,778 $ 13,505 ========== ======== ======== Capital lease obligations for property and equipment...... $ 61,258 $ 38 $ 2,408 ========== ======== ======== Long-term mortgage assumed upon purchase of land and building................................................ $ 6,919 ======== Fair value of assets acquired in acquisitions of certain business assets......................................... $1,246,129 $ 41,881 $ 28,840 Cash paid in the acquisitions of certain business assets.................................................. (467,902) (24,809) (328) Issuance of common stock for assets acquired.............. (10,673) ---------- -------- -------- Liabilities assumed in acquisitions of certain business assets.................................................. $ 778,227 $ 17,072 $ 17,839 ========== ======== ========
See accompanying notes to consolidated financial statements. F-6 38 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consolidation The consolidated financial statements include the accounts of Science Applications International Corporation and all majority- and wholly-owned U.S. and international subsidiaries (collectively referred to as "the Company"). All significant intercompany transactions and accounts have been eliminated in consolidation. Investments in affiliates and corporate joint ventures owned twenty to fifty percent and over which the Company exercises significant influence are accounted for under the equity method. Other investments are generally carried at cost. Outside investors' interest in the majority-owned subsidiaries is reflected as minority interest. Certain of the Company's majority- and wholly-owned subsidiaries have fiscal years ending December 31. The financial position and results of operations of these subsidiaries are included in the Company's consolidated financial statements as of and for the year ended January 31, 1998. There were no material intervening events since December 31, 1997 which would materially affect the consolidated financial position or results of operations. On January 2, 1997, the Company formed a joint venture, Informatica, Negocio y Tecnologia, S.A. ("INTESA"), with Venezuela's national oil company, Petroleos de Venezuela, S.A. ("PDVSA"), to provide information technology services in Latin America. Accordingly, the Company consolidated its 60% majority interest in INTESA, whose fiscal year end is December 31, in the consolidated financial statements for the year ended January 31, 1998. Use of estimates 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. Fair value of financial instruments It is management's belief that the carrying amounts shown for the Company's financial instruments, which include cash and cash equivalents, short-term investments, equity securities, long-term receivables and long-term debt, are reasonable estimates of their related fair values. The carrying amount of cash and cash equivalents and short-term investments approximates fair value because of the short maturity of those instruments. The fair value of equity securities are based upon quoted market prices. The fair value of long-term receivables is estimated by discounting the expected future cash flows at interest rates commensurate with the creditworthiness of customers and other third parties. The fair value of long-term debt is estimated based on quoted market prices for similar instruments and current rates offered to the Company for similar debt with the same remaining maturities. Contract revenues The Company's revenues result from contract services performed for commercial customers and the U.S. Government or from subcontracts with other contractors engaged in work for the U.S. Government under a variety of contracts, some of which provide for reimbursement of cost plus fees and others which are fixed-price or time-and-materials type contracts. Generally, revenues and fees on these contracts are recognized as services are performed, using the percentage-of-completion method of accounting, primarily based on contract costs incurred to date compared with total estimated costs at completion. The Company also derives revenues from software license fees, maintenance contracts and registration services. Software license fees are F-7 39 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognized when the software has been shipped and there are no significant obligations remaining. Revenues from maintenance contracts are recognized over the term of the respective contracts as maintenance services are provided. Revenues from registration services are recognized on a straight-line basis over the life of the registration term. Revenues from the sale of manufactured products are recorded when the products are shipped. The Company provides for anticipated losses on contracts by a charge to income during the period in which the losses are first identified. Unbilled receivables are stated at estimated realizable value. Contract costs on U.S. Government contracts, including indirect costs, are subject to audit and adjustment by negotiations between the Company and government representatives. Substantially all of the Company's indirect contract costs have been agreed upon through 1997. Contract revenues on U.S. Government contracts have been recorded in amounts that are expected to be realized upon final settlement. Cash and cash equivalents Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. Of the $189,387,000 and $45,279,000 total cash and cash equivalents at January 31, 1998 and 1997, respectively, $175,821,000 and $16,161,000, respectively, was invested in commercial paper, institutional money market funds and time deposits. Investment securities Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity or available for sale and are recorded at amortized cost and fair value, respectively. As of January 31, 1998, the Company had $175,821,000 in debt securities classified as cash equivalents held to maturity, $40,200,000 of debt securities classified as available for sale which are included in other current assets and $5,768,000 of equity securities classified as available for sale which are included in other assets. As of January 31, 1997, the Company had $16,161,000 in debt securities classified as cash equivalents held to maturity. Gross unrealized losses on the Company's available for sale securities were $3,691,000 as of January 31, 1998. Restricted cash The Company's majority-owned subsidiary Network Solutions, Inc. ("NSI") had an agreement with the National Science Foundation ("NSF") which required NSI to set aside 30% of the cash collections from domain name registrations to be reinvested for the enhancement of the intellectual infrastructure of the Internet. On March 12, 1998, effective April 1, 1998, the NSF amended the agreement to eliminate this requirement and reduce domain name registration fees. The Company also has a contract to provide support services to the National Cancer Institute's Frederick Cancer Research and Development Center ("Center"). As part of the contract, the Company is responsible for paying for materials, equipment and other direct costs of the Center through the use of a restricted cash account which is pre-funded by the U.S. Government. Inventories Inventories are valued at the lower of cost or market. Cost is determined using the moving average and first-in, first-out methods. Buildings, property and equipment Depreciation and amortization of buildings and related improvements are provided using the straight-line method over estimated useful lives of thirty to forty years and ten years, respectively. Depreciation and F-8 40 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amortization of property and equipment are provided over the estimated useful lives of the assets, primarily using a declining-balance method. The useful lives are three to ten years for equipment and the shorter of the useful lives or the terms of the leases for leasehold improvements. Additions to property and equipment together with major renewals and betterments are capitalized. Maintenance, repairs and minor renewals and betterments are charged to expense. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized. Long-lived assets The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. Goodwill and other intangible assets Goodwill represents the excess of the purchase cost over the fair value of net assets acquired in an acquisition. Goodwill and other identifiable intangible assets are amortized on a straight line method generally over three to fifteen years. The carrying value of the Company's goodwill and other intangible assets are reviewed when the facts and circumstances suggest that they may be permanently impaired. If the review indicates that the intangible assets may not be recoverable, as determined by the undiscounted cash flow method, the assets will be reduced to their estimated recoverable value. Amortization of goodwill and other intangible assets amounted to $16,653,000, $16,839,000 and $11,044,000 in 1998, 1997 and 1996, respectively. Accumulated amortization was $60,523,000 and $43,870,000 at January 31, 1998 and 1997, respectively. During 1998 and 1997, there was evidence that events and changes in circumstances made recovery of certain goodwill unlikely. It was estimated that $2,878,000 and $6,154,000 of the carrying value of goodwill was impaired; accordingly, those amounts were charged to income in 1998 and 1997, respectively, and included in selling, general and administrative expense. Income taxes Income taxes are provided utilizing the liability method. The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Additionally, under the liability method, changes in tax rates and laws will be reflected in income in the period such changes are enacted. Stock-based compensation Effective February 1, 1996, the Company adopted Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair value of the Company's stock as determined by the Board of Directors at the date of grant over the amount an employee must pay to acquire the stock. Pro forma disclosures of net income and earnings per share, as if the fair value-based method prescribed by SFAS No. 123 had been applied in measuring compensation expense, are presented in Note L. Common stock and earnings per share Class A and Class B Common Stock are collectively referred to as common stock in the Notes to Consolidated Financial Statements unless otherwise indicated. A general public market for the Company's F-9 41 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock does not exist. Periodic determinations of the price of the common stock are made by the Board of Directors pursuant to a valuation process which includes a stock price formula. Valuation input from an independent appraisal firm is one of the factors considered by the Board of Directors in establishing the stock price. The Board of Directors believes that the valuation process results in a value which represents a fair market value for the Class A Common Stock within a broad range of financial criteria. The Board of Directors reserves the right to alter the formula and valuation process. The Company adopted SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share ("EPS"). Dual presentation of basic and diluted EPS for all periods presented is required. Accordingly, EPS has been restated for 1997 and 1996 to conform with the new standard (Note K). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS is computed similar to basic EPS except that the weighted average number of shares of common stock outstanding is increased to include the effect of stock options and other stock awards granted to employees under stock-based compensation plans that were outstanding during the period. Other financial instruments The Company initiates hedging activities by entering into currency exchange agreements consisting principally of currency forward contracts to minimize revenue and cost variations which could result from fluctuations in currency exchange rates. These instruments, consistent with the underlying purchase or sale commitments, typically mature within seven years of origination. In the event of an early termination of a currency agreement designated as a hedge, the gain or loss will continue to be deferred and will be included in the settlement of the underlying transaction. At January 31, 1998, the Company had approximately $8,359,000 of foreign currency forward exchange contracts in British pounds sterling, French francs, German marks, Australian dollars and Spanish pesetas outstanding with net deferred gains of $103,000. In January 1997, the Company entered into forward treasury lock agreements for a total of $200,000,000. Such agreements were entered into to manage exposure to fluctuations in interest rates on an anticipated, probable issuance of debt that was to be used to finance the acquisition of Bell Communications Research, Inc. ("Bellcore"). The agreements terminated in January 1998 resulting in losses. Due to changes in market conditions, an unexpected decline in interest rates and availability of cash, in January 1998, the Company only issued ten year fixed rate notes with a principal amount of $100,000,000. Therefore, a loss of $9,047,000 was recorded as other expense upon termination of the agreement and a loss of $9,356,000 was deferred, included in long-term debt and is being amortized to interest expense over the life of the fixed rate notes (Note J). Concentration of credit risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments, foreign currency forward exchange contracts and long- term receivables. The Company invests its excess cash principally in U.S. Government and municipal debt securities and commercial paper and has established guidelines relative to diversification and maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Concentrations of credit risk with respect to receivables are limited because the Company's principal customers are the Regional Bell Operating Companies, various agencies of the U.S. Government and commercial customers engaged in work for the U.S. government. The credit risk with the U.S. Government is limited and the financial strength of the Regional Bell Operating Companies limits the risk on those receivables. F-10 42 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Foreign currency Financial statements of international subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of stockholders' equity. The functional currency of the Company's foreign subsidiaries that operate in highly inflationary economies (INTESA and SAIC de Mexico) is the U.S. dollar. The monetary assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses are translated at the average exchange rate for the period, and non-monetary assets and liabilities are translated at historical rates. Resulting remeasurement gains or losses of these foreign subsidiaries are recognized in the consolidated results of operations. Recently issued accounting pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements and will be adopted by the Company in 1999. SFAS No. 131 establishes new standards for reporting operating segment information in annual financial statements and reporting selected information about operating segments in interim financial statements. The Company will adopt SFAS No. 131 for the year ending January 31, 1999 and the interim period ending April 30, 2000. In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued and revises disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt SFAS No. 132 in 1999. Since these statements address disclosure and reporting issues, adoption of the statements will not have a material effect on the Company's consolidated financial position or results of operations. Issuance of stock by subsidiary Gains or losses on issuances of unissued shares of stock by a subsidiary are recorded directly to additional paid-in capital. On October 1, 1997, the Company and its subsidiary NSI completed an initial public offering of 3,795,000 shares of NSI Class A Common Stock. The initial offering price was $18 per share with net proceeds to the Company of $63,528,000 resulting in a gain of $60,664,000 which was recorded as additional paid-in capital. Prior to the offering, NSI was a wholly-owned subsidiary of the Company. Upon completion of the offering, the Company has a 76% ownership interest in NSI, which represents 97% of the combined voting power of the outstanding common stock. NSI provides Internet domain name registration services and Intranet consulting and network design and implementation services. Reclassifications Certain amounts from previous years have been reclassified in the consolidated financial statements to conform to the 1998 presentation. NOTE B -- ACQUISITIONS AND INVESTMENTS IN AFFILIATES: The carrying value of the Company's equity investments was $28,990,000 and $28,979,000 at January 31, 1998 and 1997, respectively, which includes the unamortized excess of the Company's investments over its equity in the underlying net assets of $10,891,000 and $13,333,000, respectively. The Company has made acquisitions of certain business assets and companies which have been accounted for by the purchase method of accounting. The operations of the companies and businesses F-11 43 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 assets acquired has been allocated to goodwill. On November 14, 1997, the Company completed its acquisition of all the issued and outstanding common stock of Bellcore, a global provider of communications software, engineering, and professional services, pursuant to a definitive acquisition agreement dated November 20, 1996, as amended. Bellcore was previously owned by the Regional Bell Operating Companies ("RBOCs"), which include Ameritech, Bell Atlantic, Bell South, NYNEX, Pacific Telesis Group, SBC Communications, and US WEST or their affiliates. The aggregate purchase price was approximately $467,133,000, including deferred transaction costs, and was funded from the Company's available cash on hand and from bank borrowings, including borrowings under the Company's revolving credit facilities (Note F). The Company is in final negotiations and does not anticipate a material change to the purchase price or assets acquired and liabilities assumed. The acquisition is being accounted for under the purchase method of accounting and the results of operations for Bellcore have been included in the financial statements from the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The excess purchase price over the net book value of assets acquired has been allocated to other identifiable intangible assets and goodwill, which will be amortized on a straight-line basis over periods of three to fifteen years. Following is a summary of the purchase price allocation to record assets and liabilities at estimated fair value (dollar amounts in thousands): Cash payment to Bellcore owners............................. $ 459,100 Deferred acquisition costs................................ 8,033 --------- Total purchase price...................................... 467,133 --------- Elimination of book value of net assets acquired: Common Stock........................................... (128,199) Accumulated deficit.................................... 45,645 Other stockholders' equity............................. (5,548) --------- Net equity............................................. (88,102) --------- Excess of purchase price over net book value........... $ 379,031 ========= Allocation of excess purchase price over net book value: Amount assigned to property and equipment.............. $ 12,946 Amount assigned to land and buildings.................. 45,787 Amount assigned to excess pension plan assets at fair value over the projected benefit obligation........... 398,235 Deferred tax assets -- non-current..................... 15,202 Deferred tax liabilities -- non-current................ (219,893) Amount assigned to OPEB liabilities in excess of the fair value of plan assets............................. (38,123) Other adjustments, net of deferred taxes............... (3,159) Amount assigned to identifiable intangible assets...... 105,900 Amount assigned to goodwill............................ 62,136 --------- $ 379,031 =========
F-12 44 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following unaudited pro forma summary information presents the consolidated results of operations as if the acquisition had been completed at the beginning of the periods presented and are not necessarily indicative of the results of operations of the consolidated Company that might have occurred had the acquisition been completed at the beginning of the periods specified, nor are they necessarily indicative of future operating results. Up to the date of closing, Bellcore derived its revenues principally from the RBOCs, who operated in a regulatory environment, under service agreements which provided for recovery of certain regulatory costs, including return on investment. Furthermore, Bellcore's net income had been based on a statutory return on its asset base while owned by the RBOCs. In addition to reflecting Bellcore's results of operations while owned by the RBOCs, the pro forma amounts give effect to certain adjustments, including the amortization of intangibles and goodwill, additional depreciation expense, increased interest expense and income tax effects.
YEAR ENDED JANUARY 31 -------------------------- 1998 1997 ----------- ----------- (UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) Revenues............................................ $3,934,411 $3,412,075 ========== ========== Net income.......................................... $ 66,037 $ 28,595 ========== ========== Basic earnings per share............................ $ 1.29 $ .58 ========== ========== Diluted earnings per share.......................... $ 1.20 $ .55 ========== ==========
NOTE C -- BUSINESS SEGMENT INFORMATION: The Company provides diversified professional and technical services involving the application of scientific expertise, together with computer and systems technology, to solve complex technical problems for a broad range of government and commercial customers, both in the U.S. and abroad. The skills of the professional staff encompass a variety of scientific and technical disciplines and the management structure is based upon broad technological groupings, not necessarily related to any particular industry, line of business, geographical area, market or class of customer. For purposes of analyzing and understanding the Company's financial statements, its operations have historically been classified into two broad segments: Technical Services and Products. The Technical Services segment is further classified between the National Security, Health, Environment, Energy, Telecommunications, Commercial Information Technology and Other business areas. The Telecommunications and Commercial Information Technology business areas were reported in the Other business area in 1997 and 1996 and have been reclassified to conform with the 1998 presentation. Other business areas include transportation and space. In 1998, the Company sold a business unit which manufactured data display devices and "ruggedized" personal computers and which accounted for 49% of the Products revenue in 1997. Technical Services consist of basic and applied research services; design and development of computer software; systems integration; systems engineering; technical operational and management support services; environmental engineering; design and integration of network systems; technical engineering and consulting support services; and development of new and existing systems, polices, concepts and programs. Products include custom designed and standard hardware and software products such as automatic equipment identification technology, sensors and nondestructive imaging instruments. These products typically incorporate Company developed hardware and software, as well as hardware and software manufactured by others. F-13 45 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Industry segment information is as follows:
YEAR ENDED JANUARY 31 -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Contract revenues: Technical Services -- National Security................. $1,148,150 $1,047,831 $ 967,797 Health............................ 361,773 333,294 304,225 Environment....................... 292,940 266,673 279,143 Energy............................ 106,880 107,690 136,610 Telecommunications................ 259,062 27,304 27,864 Commercial Information Technology...................... 430,003 105,598 45,146 Other............................. 420,419 368,338 263,073 Products............................. 70,124 145,496 131,799 ---------- ---------- ---------- Total revenues......................... $3,089,351 $2,402,224 $2,155,657 ========== ========== ========== Operating income (loss): Technical Services -- National Security................. $ 48,396 $ 54,117 $ 48,720 Health............................ 28,773 23,948 18,612 Environment....................... 13,328 5,624 12,313 Energy............................ 5,026 6,092 7,174 Telecommunications................ 29,223 3,213 2,087 Commercial Information Technology...................... 28,284 (6,406) 194 Other............................. 13,247 21,012 11,631 Products............................. (1,358) 8,341 6,001 ---------- ---------- ---------- Operating income....................... $ 164,919 $ 115,941 $ 106,732 ========== ========== ========== Identifiable assets: Technical Services -- National Security................. $ 286,639 $ 218,415 $ 212,376 Health............................ 94,606 146,307 118,456 Environment....................... 63,300 60,659 71,130 Energy............................ 33,562 23,648 31,007 Telecommunications................ 1,013,010 3,026 5,887 Commercial Information Technology...................... 391,038 116,894 18,524 Other............................. 133,104 114,126 83,082 Products............................. 32,133 55,195 58,632 ---------- ---------- ---------- 2,047,392 738,270 599,094 Corporate and other assets............. 367,842 274,192 260,196 ---------- ---------- ---------- Total assets........................... $2,415,234 $1,012,462 $ 859,290 ========== ========== ==========
Because of the nature of the Company's business, sales between segments are not material. Segment operating results reflect general corporate expense allocations because all such expenses are allocated to individual cost objectives by the Company, as required by Government Cost Accounting Standards. Certain wholly-owned and majority-owned subsidiaries operate in a particular industry segment, and therefore, all of their assets are identifiable to that particular industry segment. Identifiable assets of certain other operations F-14 46 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consist of receivables, inventories and intangible assets. All other assets of these operations are either corporate in nature, are not identifiable with particular segments or are not material. Capital expenditures and depreciation and amortization are not identified as to certain industry segments for similar reasons. During 1998, 1997 and 1996, approximately 66%, 79% and 83%, respectively, of the Company's contract revenues were attributable to prime contracts with the U.S. Government or to subcontracts with other contractors engaged in work for the U.S. Government. In 1996, approximately 10% of the Company's consolidated revenues were derived from one U.S. Government contract in the Health business area, which was a contract to automate the information systems for the Department of Defense's medical treatment facilities worldwide. This contract was substantially completed in 1997. No single contract had revenues greater than 10% of the Company's consolidated revenues in 1998 and 1997. Revenues, operating income and identifiable assets from international subsidiaries were $312,412,000, $14,888,000 and $245,096,000, respectively, in 1998. Such amounts were not material in 1997 and 1996. Revenues, operating income and identifiable assets from domestic operations were $2,776,939,000, $150,031,000 and $1,802,296,000 in 1998. Corporate and other assets were $367,842,000 in 1998. NOTE D -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
JANUARY 31 -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Inventories: Contracts-in-process, less progress payments of $315 at January 31, 1997........................................ $ 5,095 $ 13,161 Raw materials............................................. 7,376 20,822 -------- -------- $ 12,471 $ 33,983 ======== ======== Prepaid expenses and other current assets: Prepaid expenses.......................................... $ 21,916 $ 10,936 Short-term investments.................................... 40,200 Other..................................................... 13,730 6,456 -------- -------- $ 75,846 $ 17,392 ======== ======== Property and equipment at cost: Computers and other equipment............................. $335,674 $182,160 Office furniture and fixtures............................. 30,911 20,291 Leasehold improvements.................................... 59,234 17,064 -------- -------- 425,819 219,515 Less accumulated depreciation and amortization............ 137,537 130,488 -------- -------- $288,282 $ 89,027 ======== ======== Land and buildings at cost: Buildings and improvements................................ $167,437 $ 87,235 Land...................................................... 45,259 22,275 Land held for future use.................................. 702 702 -------- -------- 213,398 110,212 Less accumulated depreciation and amortization............ 17,864 13,444 -------- -------- $195,534 $ 96,768 ======== ======== Other assets: Investment in affiliates.................................. $ 28,990 $ 28,979 Related party receivable (Note H)......................... 51,135 Other long-term receivables............................... 31,765 Other..................................................... 9,343 26,904 -------- -------- $121,233 $ 55,883 ======== ========
F-15 47 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JANUARY 31 -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Accounts payable and accrued liabilities: Accounts payable.......................................... $178,315 $112,560 Other accrued liabilities................................. 264,364 94,578 Collections in excess of revenues on uncompleted contracts............................................... 305,352 66,343 -------- -------- $748,031 $273,481 ======== ======== Accrued payroll and employee benefits: Salaries, bonuses and amounts withheld from employees' compensation............................................ $154,244 $ 63,018 Accrued vacation.......................................... 82,922 52,138 Accrued contributions to employee benefit plans........... 25,242 16,078 -------- -------- $262,408 $131,234 ======== ======== Other long-term liabilities: Other postretirement benefits............................. $124,423 Accrued pension liability................................. 40,954 Accrued other employee benefits........................... 22,062 Deferred revenue.......................................... 26,897 $ 9,439 Deferred compensation..................................... 23,245 19,664 Other..................................................... 76,096 11 -------- -------- $313,677 $ 29,114 ======== ========
NOTE E -- RECEIVABLES: Receivables consist of the following:
JANUARY 31 -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Receivables, primarily U.S. Government and RBOCs, less allowance for doubtful accounts of $36,184 and $18,048 at January 31, 1998 and 1997, respectively: Billed...................................................... $652,644 $435,864 Unbilled, less progress payments of $17,141 and $17,291 at January 31, 1998 and 1997, respectively................... 132,349 101,326 Contract retentions......................................... 25,392 25,760 -------- -------- $810,385 $562,950 ======== ========
Unbilled receivables at January 31, 1998 and 1997 include $15,247,000 and $13,976,000, respectively, related to 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. These amounts have been included in Technical Services revenues. The balance of unbilled receivables consist of costs and fees billable on contract completion or other specified events, the majority of which is expected to be billed and collected within one year. Contract retentions are billed when the Company has negotiated final indirect rates with the U.S. Government and, once billed, are subject to audit and approval by outside third parties. Consequently, the timing of collection of retention balances is outside the Company's control. Based on the Company's historical experience, the majority of the retention balance is expected to be collected beyond one year. NOTE F -- REVOLVING CREDIT FACILITIES: In August 1997, the Company entered into two new credit facilities ("Facilities") totaling $900,000,000 with a group of financial institutions which provide for (i) a five-year reducing revolving credit facility of up to $700,000,000 and (ii) a 364-day revolving credit facility of up to $200,000,000. These Facilities were entered F-16 48 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) into to provide funding for the acquisition of Bellcore and for general corporate purposes and replaced the $105,000,000 unsecured revolving credit loan agreements. In January 1998, upon issuance of long-term notes (Note J), the Company terminated the 364-day revolving credit facility. Borrowings under the remaining $700,000,000 facility ("Credit Facility") are unsecured and 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. The Company pays a facility fee on the total commitment amount. Certain financial covenants required by the Credit Facility, such as, requiring the Company to maintain certain levels of net worth and an interest coverage ratio, as well as limitation on indebtedness have been maintained as of January 31, 1998. There were no balances outstanding under any credit agreements at January 31, 1998 and 1997. As of January 31, 1998, the entire $700,000,000 was available under the most restrictive debt covenants of the credit facility. The maximum amounts outstanding were $320,000,000, $31,000,000 and $43,000,000 in 1998, 1997 and 1996, respectively. The average amount outstanding was $38,228,000, $2,299,000 and $9,380,000 during 1998, 1997 and 1996, respectively. The weighted average interest rate in 1998, 1997 and 1996 was 6.0%, 5.9% and 6.4% respectively, based upon average daily balances. NOTE G -- EMPLOYEE BENEFIT PLANS: The Company has one principal Profit Sharing Retirement Plan ("PSRP") in which eligible employees participate. Participants' interests vest 25% per year in the third through sixth year of service. Participants also become fully vested upon reaching age 59 1/2, permanent disability or death. Contributions charged to income under the PSRP were $18,929,000, $10,167,000 and $23,355,000 for 1998, 1997 and 1996, respectively. The Company has an Employee Stock Retirement Plan ("ESRP"), formerly known as the Employee Stock Ownership Plan, in which eligible employees participate. Cash contributions to the ESRP are based upon amounts determined annually by the Board of Directors and are allocated to participants' accounts based on their annual compensation. The Company recognizes compensation expense as the fair value of the Company common stock or cash in the year of contribution. The vesting requirements for the ESRP are the same as the PSRP. Shares of Company common stock distributed from the ESRP bear a limited put option that, if exercised, would require the Company to repurchase the shares at their then current fair value. At January 31, 1998, the ESRP held 15,681,000 shares of Class A Common Stock and 30,000 shares of Class B Common Stock with a combined fair value of $619,467,000. Contributions charged to income under the Plan were $22,072,000, $29,492,000 and $10,259,000 for 1998, 1997 and 1996, respectively. The Company has one principal Cash or Deferred Arrangement (CODA) which allows eligible participants to defer a portion of their income through contributions. Such deferrals are fully vested, are not taxable to the participant until distributed from the CODA upon termination, retirement, permanent disability or death and may be matched by the Company. The Company's matching contributions to the CODA of $14,454,000, $9,567,000 and $11,535,000 were charged to income in 1998, 1997 and 1996, respectively. Effective January 1, 1995, the Company's matching contributions to employees hired on or after such date are subject to the same vesting requirements as the PSRP, while the Company's matching contributions for employees hired prior to such date remain fully vested. In connection with the acquisition of Bellcore, the Company also sponsors two contributory savings plans which allow eligible Bellcore employees to defer a portion of their pre-tax income through contributions and contribute a portion of their income on an after-tax basis. Such deferrals are fully vested, are not taxable to the participant until distributed upon termination, retirement, permanent disability or death and may be matched by the Company. The Company's matching contributions charged to income were $2,800,000 in 1998. The Company has two principal bonus compensation plans, the Bonus Compensation Plan and the Success Sharing Plan ("SSP"), which provide for bonuses to reward outstanding performance. The SSP was assumed in connection with the acquisition of Bellcore in 1998. Bonuses are paid in the form of cash, fully F-17 49 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) vested shares of Class A Common Stock or vesting shares of Class A Common Stock. Awards of vesting shares of Class A common stock vest at the rate of 20%, 20%, 20% and 40% after one, two, three and four years, respectively. The amounts charged to income under these plans were $49,587,000, $32,359,000 and $25,868,000 for 1998, 1997 and 1996, respectively. The Company has a Stock Compensation Plan and Management Stock Compensation Plan, together referred to as the "Stock Compensation Plans." The Stock Compensation Plans provide for awards of share units to eligible employees, which share units generally correspond to shares of Class A Common Stock which are held in trust for the benefit of participants. Participants' interests in these share units vest on a seven year schedule at the rate of one-third at the end of each of the fifth, sixth and seventh years following the date of the award. The fair market value of shares awarded under these plans are recorded as unearned compensation which is included in stockholders' equity. The unearned amounts are amortized to expense over the vesting period. The amounts charged to income under these plans were $1,688,000, $1,282,000 and $686,000 for 1998, 1997 and 1996, respectively. The Company also has an Employee Stock Purchase Plan ("ESPP") which allows eligible employees to purchase shares of the Company's Class A Common Stock, with the Company contributing currently 10% of the existing fair market value. There are no charges to income under this plan. However, the proforma effect on net income and earnings per share of compensation expense under SFAS No. 123, "Accounting for Stock-Based Compensation" has been disclosed in Note L. The Company has two deferred compensation plans. The Keystaff Deferral Plan is maintained for the benefit of key executives and directors, pursuant to which eligible participants may elect to defer a portion of their compensation. The Company makes no contributions to the accounts of participants under this plan but does credit participant accounts for deferred compensation amounts and interest earned on such deferred compensation. Interest is accrued based on the Moody's Seasoned Corporate Bond Rate (7.0% in 1998). Deferred balances will generally be paid upon the later of the attainment of age 65, ten years of plan participation or retirement, unless participants obtain approval for an early pay-out. The Key Executive Stock Deferral Plan is maintained for the benefit of directors and certain key executives. Eligible participants may elect to defer a portion of their compensation into a trust established by the Company which invests in shares of Class A Common Stock. The Company makes no contributions to the accounts of participants. Deferred balances will generally be paid upon retirement or termination. NOTE H -- PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS: In connection with the acquisition of Bellcore, the Company assumed assets and liabilities related to two noncontributory defined benefit pensions plans covering eligible management and support staff employees of Bellcore. The Company accounts for these benefit plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"). Benefits are based on a stated percentage of final average pay formula for the management plan and a flat-dollar amount per years of service for the support staff plan. All of the assets of the plans, which are primarily equity and fixed income securities, are held in a master trust administered by the Company. In general, the Company's policy is to fund these plans based on legal requirements, tax considerations and investment opportunities. F-18 50 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net pension income for the two plans consisted of the following:
YEAR ENDED JANUARY 31, 1998 ----------------- (IN THOUSANDS) Service cost................................................ $ 5,183 Interest cost on projected benefit obligation............... 14,753 Return on plan assets....................................... (60,084) Net amortization and deferral............................... 33,387 Other....................................................... 63 ----------- Net pension income.......................................... $ (6,698) ===========
The following sets forth the plans' funded status and amounts recorded in the Company's consolidated balance sheet:
JANUARY 31, 1998 ----------------- (IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $779,669.................................................. $ 867,512 =========== Projected benefit obligation................................ (1,019,628) Plan assets at fair value................................... 1,474,418 ----------- Plan assets in excess of projected benefit obligation....... 454,790 Unrecognized net gain....................................... (30,682) ----------- Prepaid pension assets...................................... $ 424,108 ===========
The assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: 5% graded weighted average annual rate of increase in compensation levels, 7% discount rate and 9% rate of return on assets. In addition to assuming the assets and liabilities of the Bellcore pension plans, the Company also assumed assets and liabilities for postretirement health and life insurance benefits for retired U.S. employees and their dependents. The Company accounts for these benefit plans in accordance with SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106"). Plan assets are held in two Voluntary Employee Benefit Association trusts. In general, the Company's policy is to annually contribute to the trusts an amount determined by management, limited in part by tax limitations. Net postretirement benefits expense for the plans consisted of the following:
YEAR ENDED JANUARY 31, 1998 ---------------------------------- HEALTH LIFE INSURANCE TOTAL ------ --------------- ------- (IN THOUSANDS) Future service cost............................... $ 744 $ 175 $ 919 Interest cost..................................... 2,066 499 2,565 Return on plan assets............................. (555) (1,830) (2,385) Net amortization and deferral..................... 414 1,029 1,443 ------ ------- ------- Net postretirement benefits expense............... $2,669 $ (127) $ 2,542 ====== ======= =======
F-19 51 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following sets forth the plans' funded status and amounts recorded in the Company's consolidated balance sheet:
JANUARY 31, 1998 -------------------------------------- HEALTH LIFE INSURANCE TOTAL --------- -------------- --------- (IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation Retirees......................................... $ (63,720) $(17,520) $ (81,240) Other fully eligible participants................ (4,080) (120) (4,200) Other active participants........................ (74,696) (16,775) (91,471) --------- -------- --------- (142,496) (34,415) (176,911) Plan assets at fair value.......................... 12,489 44,243 56,732 --------- -------- --------- Plan assets less than accumulated benefit obligation....................................... (130,007) 9,828 (120,179) Unrecognized net gain.............................. (1,219) (1,003) (2,222) --------- -------- --------- Accrued postretirement benefits.................... $(131,226) $ 8,825 $(122,401) ========= ======== =========
The assumptions used in determining the actuarial present value of projected benefit obligation were as follows: 5% graded weighted average annual rate of increase in compensation levels, 7% discount rate and 8.2% long-term weighted average rate of return on assets. The assumed health care trend rates used to measure the expected cost of benefits covered by the plan was 8% in 1998. This rate is assumed to decrease 1/2% a year to 5% in 2004 and remain at that level thereafter. A one-percentage point increase in the assumed health care trend rates would increase the accumulated postretirement benefit obligations by $22,100,000 and the total of the service and interest cost components of net postretirement benefits expense by $500,000. On January 2, 1997, approximately 1,500 employees transferred from PDVSA to INTESA. Under Venezuelan law, INTESA assumed the existing employee benefit plans, including a defined benefit pension plan. Under the terms of the joint venture agreement, PDVSA agreed to fund the projected benefit obligation of the pension plan and the accumulated postretirement benefit obligation of the postretirement benefit plans over 10 years. The obligation of PDVSA to fund these benefits has been reflected as a related party receivable and included in other assets in the Company's consolidated balance sheet. The plans are accounted for in accordance with the requirements of SFAS No. 87 and SFAS No. 106. Benefits are based upon years of service and compensation during the twelve months of accredited service earned immediately before retirement. All of the assets of the pension plan, receivable and cash, are not currently held in a trust. PDVSA has agreed to fund this obligation by December 31, 2006 either through direct payments to INTESA or direct contributions to a trust. Net pension expense consisted of the following:
YEAR ENDED JANUARY 31, 1998 ----------- (IN THOUSANDS) Service cost................................................ $ 3,308 Interest cost on projected benefit obligation............... 12,953 ------- Pension expense............................................. $16,261 =======
F-20 52 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following sets forth the plan's funded status and amounts recorded in the Company's consolidated balance sheet:
JANUARY 31, 1998 ----------- (IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $9,185.................................................... $(23,352) Projected compensation increases............................ (30,346) -------- Projected benefit obligation................................ (53,698) Plan assets at fair value................................... -------- Projected benefit obligation in excess of plan assets....... (53,698) Other....................................................... (34) Unrecognized prior service cost............................. 1,999 Unrecognized transition asset............................... 6,150 -------- Accrued pension liability................................... $(45,583) ========
The assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: increase in future compensation levels of 7%, weighted-average discount rate of 10% and rate of return on assets of 12%. In addition to the pension benefits described above, certain postretirement benefits were also transferred to INTESA for health and life insurance benefits for the PDVSA employees who transferred to INTESA. Eligibility for the plans and participant cost sharing is dependent upon the participant's age at retirement, years of service and retirement date. The Company accounts for these benefit plans in accordance with SFAS No. 106. The accrued postretirement benefits liability and net postretirement benefits expense were $2,022,000 and $318,000, respectively, as of and for the year ended January 31, 1998. NOTE I -- INCOME TAXES: The provision for income taxes includes the following:
YEAR ENDED JANUARY 31 ------------------------------- 1998 1997 1996 -------- -------- ------- (IN THOUSANDS) Current: Federal........................................... $ 87,755 $ 56,258 $36,281 State............................................. 21,097 13,374 8,693 Foreign........................................... 8,397 767 347 Deferred: Federal........................................... (35,880) (17,113) (158) State............................................. (6,641) (3,718) (82) Foreign........................................... (1,029) (39) (63) -------- -------- ------- $ 73,699 $ 49,529 $45,018 ======== ======== =======
F-21 53 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. Deferred tax assets (liabilities) are comprised of the following:
JANUARY 31 --------------------- 1998 1997 --------- -------- (IN THOUSANDS) Income recognition: Contractually billable method............................. $ 75,023 $ 25,787 Completed contract method................................. 2,118 2,165 Accrued vacation pay........................................ 24,241 18,872 Deferred compensation....................................... 14,743 9,511 Vesting stock bonuses....................................... 11,539 7,782 Accrued liabilities......................................... 7,079 5 State taxes................................................. 8,538 Other....................................................... 4,947 5,433 --------- -------- Total deferred tax assets......................... 148,228 69,555 --------- -------- Employee benefit plan contributions......................... (125,653) (9,581) Depreciation and amortization............................... (61,942) (2,390) Foreign Earnings............................................ (7,450) (181) Other....................................................... (2,757) (2,478) --------- -------- Total deferred tax liabilities.................... (197,802) (14,630) --------- -------- Net deferred tax asset (liability).......................... $ (49,574) $ 54,925 ========= ========
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax (35%) to income before income taxes follows:
YEAR ENDED JANUARY 31 ----------------------------- 1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Amount computed at statutory rate..................... $55,472 $39,623 $35,810 State income taxes, net of federal tax benefit........ 9,396 6,276 5,597 Nondeductible meals and entertainment................. 3,143 2,567 2,409 Losses of foreign subsidiaries........................ 3,113 987 305 Revision of prior years' tax estimates................ (589) (1,875) (371) Other................................................. 3,164 1,951 1,268 ------- ------- ------- $73,699 $49,529 $45,018 ======= ======= =======
Other assets include deferred income taxes of $17,770,000 at January 31, 1997. Income taxes paid in 1998, 1997 and 1996 amounted to $82,905,000, $59,196,000 and $32,785,000, respectively. F-22 54 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE J -- LONG-TERM DEBT: Long-term debt consists of the following:
JANUARY 31 ------------------- 1998 1997 -------- ------- (IN THOUSANDS) 6.75% Notes payable......................................... $ 89,800 Capital lease obligations................................... 55,897 $ 2,516 Mortgages payable collateralized by real property........... 6,830 19,214 Other notes payable......................................... 26,443 12,585 -------- ------- 178,970 34,315 Less current portion........................................ 33,012 19,088 -------- ------- $145,958 $15,227 ======== =======
In January 1998, the Company issued $100,000,000 of 6.75% notes ("6.75% Notes") under a shelf registration statement filed with the Securities and Exchange Commission. The 6.75% Notes are due February 1, 2008 with interest payable semi-annually beginning August 1, 1998 and were issued with a nominal discount. The Company used the proceeds to repay certain short-term indebtedness, including obligations assumed in connection with the acquisition of Bellcore and for general corporate purposes. The Company amortizes the note discount, underwriter's fees and commissions and the loss on the forward treasury lock agreement (Note A) to interest expense which results in an effective interest rate of 8.3% over the term of the 6.75% Notes. The Company is subject to certain restrictions such as limitations on liens, on sale and leaseback transactions and on consolidation, merger, and sale of assets. As of January 31, 1998, the Company was in compliance with the restrictions. During 1997, the Company assumed a $6,919,000 mortgage note in connection with the purchase of land and a building. Terms of the note include quarterly payments of principal and interest until December 2016. Interest is adjusted annually and was 6.8% in 1998. Additionally, the Company has various other notes payable with interest rates from 4.3% to 8.0% that are due over the next eleven years. Maturities of long-term debt, excluding capital lease obligations, are as follows:
YEAR ENDING JANUARY 31 (IN THOUSANDS) ---------------------- -------------- 1999........................................................ $ 13,502 2000........................................................ 12,043 2001........................................................ 300 2002........................................................ 324 2003........................................................ 276 2004 and after.............................................. 96,628 -------- $123,073 ========
F-23 55 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K -- EARNINGS PER SHARE: A summary of the elements included in the computation of basic and diluted EPS is as follows (in thousands, except per-share amounts):
YEAR ENDED JANUARY 31 --------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------- ------------------------------- ------------------------------- PER-SHARE PER-SHARE PER-SHARE NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT ---------- ------ --------- ---------- ------ --------- ---------- ------ --------- Net income........... $84,794 $63,680 $57,296 Basic EPS............ 51,349 $1.65 49,157 $1.30 48,143 $1.19 ===== ===== ===== Dilutive Securities: Stock options...... 3,412 2,498 2,083 Other stock awards........... 45 83 59 ------ ------ ------ Diluted EPS.......... 54,806 $1.55 51,738 $1.23 50,285 $1.14 ====== ===== ====== ===== ====== =====
For 1998, 1997 and 1996, 22,000, 4,000 and 7,000 options outstanding were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares and their effect would be antidilutive. NOTE L -- COMMON STOCK AND OPTIONS: The Company has options outstanding under two stock option plans, the 1995 Stock Option Plan ("1995 Plan") and the 1992 Stock Option Plan ("1992 Plan"). Under the 1995 Plan and 1992 Plan, options are granted at prices not less than the fair market value at the date of grant and for terms not greater than ten years. Options granted under these two plans generally become exercisable 20%, 20%, 20%, and 40% after one, two, three and four years. No options have been granted under the 1992 Plan after July 31, 1995, the date the 1992 plan terminated. The Company makes no charge to income in connection with these plans. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for stock option awards granted in 1998, 1997 and 1996 and for shares issued under the ESPP in 1998, consistent with the methodology prescribed by SFAS No. 123, net income in 1998, 1997 and 1996 would have been reduced by $10,328,000, $4,797,000 and $2,273,000, respectively. Basic earnings per share would have been reduced by $.20, $.10 and $.05 per share in 1998, 1997 and 1996, respectively, and diluted earnings per share would have been reduced by $.17, $.08 and $.04 per share in 1998, 1997 and 1996, respectively. These amounts were determined using weighted-average per share fair values of options granted in 1998, 1997 and 1996 of $7.88, $5.30 and $4.59, respectively. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996; no dividend yield, no volatility, risk free interest rates ranging from 5.3% to 9.3% and expected lives of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company meets the definition of a non-public company for the purposes of calculating fair value and, therefore, assumes no volatility in the fair value calculation. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock-based compensation plans. F-24 56 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of changes in outstanding options under the plans during the three years ended January 31, 1998, is as follows:
SHARES OF CLASS A SHARES OF CLASS A COMMON STOCK COMMON STOCK WEIGHTED-AVERAGE EXERCISABLE UNDER UNDER OPTIONS EXERCISE PRICE OPTIONS ----------------- ---------------- ----------------- (IN THOUSANDS) (IN THOUSANDS) January 31, 1995..................... 11,653 $11.86 4,014 Options granted.................... 3,383 $16.33 Options canceled................... (493) $12.62 Options exercised.................. (2,226) $ 9.96 ------ January 31, 1996..................... 12,317 $13.39 4,467 Options granted.................... 3,606 $20.27 Options canceled................... (640) $15.16 Options exercised.................. (2,454) $10.76 ------ January 31, 1997..................... 12,829 $15.73 4,429 Options granted.................... 4,647 $29.75 Options canceled................... (629) $19.22 Options exercised.................. (2,619) $12.26 ------ January 31, 1998..................... 14,228 $20.80 4,380 ======
As of January 31, 1998, 17,764,000 shares of Class A Common Stock were reserved for issuance upon exercise of options which are outstanding or which may be granted. The Company has agreed to make available for issuance, purchase or options approximately 441,000 shares of Class A Common Stock to employees, prospective employees and consultants, generally contingent upon commencement of employment or the occurrence of certain events. The selling price of shares and the exercise price of options are fair market value at the date such shares are purchased or options are granted. A summary of options outstanding as of January 31, 1998 is as follows:
WEIGHTED WEIGHTED AVERAGE RANGE OF OPTIONS AVERAGE REMAINING OPTIONS WEIGHTED-AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE - --------------------- ----------- -------------- ---------------- ----------- ---------------- (OPTIONS OUTSTANDING AND EXERCISABLE, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) $12.01 to $13.12..... 1,359 $12.37 .5 1,359 $12.37 $14.19 to $15.07..... 2,344 $14.38 1.4 1,338 $14.38 $15.72 to $18.27..... 2,794 $16.33 2.4 1,066 $16.34 $19.33 to $22.83..... 3,226 $20.27 3.4 617 $20.29 $25.96 to $39.13..... 4,505 $29.82 4.6 ------ ----- 14,228 4,380 ====== =====
NOTE M -- LEASES: The Company occupies most of its facilities under operating leases. Most of the leases require the Company to pay maintenance and operating expenses such as taxes, insurance and utilities and also contain renewal options extending the leases from one to twenty years. Certain of the leases contain purchase options and provisions for periodic rate escalations to reflect cost-of-living increases. Certain equipment, primarily computer-related, is leased under short-term or cancelable operating leases. Rental expenses for facilities and equipment totaled $90,012,000, $68,334,000 and $63,282,000 in 1998, 1997 and 1996, respectively. F-25 57 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has a seven year operating lease for a general purpose office building, with an option to purchase the building at the end of the initial seven year term. If the purchase option is not exercised, the Company may be required to pay certain supplemental rental payments if proceeds from the sale of the building to an unrelated buyer are below specified amounts. The maximum supplemental rental payment which could be required is $28,809,000. On February 2, 1998, the Company entered into an operating lease for land and general purpose office facilities with an initial term of five and one-half years and an option for the Company to purchase the property. If the purchase option is not exercised, the Company may be required to pay certain supplemental rental payments if proceeds from the sale of the property to an unrelated buyer are below specified amounts. The maximum supplemental rental payment which could be required is $43,040,000. Assets acquired under capital leases and included in property and equipment, and land and buildings consist of the following:
JANUARY 31 ------------------- 1998 1997 -------- ------- (IN THOUSANDS) Computers and other equipment............................... $ 65,016 $ 2,370 Office furniture and fixtures............................... 777 109 Buildings and improvements.................................. 1,760 1,760 -------- ------- 67,553 4,239 Less accumulated amortization............................... (13,384) (2,272) -------- ------- $ 54,169 $ 1,967 ======== =======
Minimum rental commitments, primarily for facilities, under all non-cancelable operating leases and capital leases in effect at January 31, 1998, as well as the operating lease entered into on February 2, 1998, are payable as follows (in thousands):
YEAR ENDING JANUARY 31 CAPITAL OPERATING ---------------------- -------- --------- 1999........................................................ $ 28,215 $ 73,025 2000........................................................ 25,506 56,951 2001........................................................ 16,613 43,122 2002........................................................ 813 34,779 2003........................................................ 28,902 2004 and after.............................................. 30,127 -------- -------- Total minimum lease payments................................ 71,147 $266,906 ======== Amount representing interest................................ (15,250) -------- Present value of net minimum capital lease payments......... 55,897 Current portion............................................. (19,510) -------- Long-term obligations under capital leases at January 31, 1998...................................................... $ 36,387 ========
The Company's joint venture, INTESA, had capital lease obligations totaling $49,951,000, of which $16,432,000 was classified as current portion of long-term debt as of January 31, 1998. These capital lease obligations of the joint venture are non-recourse debt to the Company. NOTE N -- COMMITMENTS AND CONTINGENCIES: Other commitments at January 31, 1998 include outstanding letters of credit aggregating $27,930,000, principally related to guarantees on contracts with commercial and foreign customers, and outstanding surety bonds aggregating $124,419,000, principally related to performance and payment type bonds. F-26 58 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE O -- SUPPLEMENTARY INCOME STATEMENT INFORMATION: Charges to costs and expenses for depreciation and amortization of buildings, property and equipment and capital leases were $52,021,000, $31,790,000 and $25,956,000 for 1998, 1997 and 1996, respectively. The Company expensed $23,202,000, $11,145,000 and $10,258,000 of independent research and development costs during 1998, 1997 and 1996, respectively. Total interest paid in 1998, 1997 and 1996 amounted to $8,786,000, $3,495,000 and $2,746,000, respectively. The components of other (income) expense, net, in the accompanying consolidated statement of income are as follows:
YEAR ENDED JANUARY 31 ------------------------------ 1998 1997 1996 -------- ------- ------- (IN THOUSANDS) Interest income.................................... $(12,752) $(1,453) $(1,288) Loss on treasury lock agreement.................... 9,047 Gain on sale of certain business assets............ (6,341) Equity in income of unconsolidated affiliates...... (1,326) (2,253) (233) Other (income) expense, net........................ (4,492) 1,513 1,410 -------- ------- ------- $(15,864) $(2,193) $ (111) ======== ======= =======
F-27 EX-10.A 2 EXHIBIT 10.A 1 EXHIBIT 10.A SCIENCE APPLICATIONS INTERNATIONAL CORPORATION 1984 BONUS COMPENSATION PLAN SECTION I PURPOSE 1.01 Purpose. The purpose of the 1984 Bonus Compensation Plan (the "Plan") is to further the success of the Company by providing special financial rewards in addition to regular salaries to those officers, directors, and employees of the Company and its subsidiaries most responsible for the continued success of the Company. SECTION II DEFINITIONS 2.01 Unless otherwise required by the context, the terms used in the Plan shall have the meanings set forth in this Section II. 2.02 Annual Salary. "Annual Salary" means an officer's, director's, or employee's total wages (including paid absences) during the Performance Year, exclusive of any bonus or other fringe benefits that such person may receive. 2.03 Board of Directors. "Board of Directors" means the Board of Directors of the Company. 2.04 Bonus Compensation Rate. "Bonus Compensation Rate" means the Bonus Compensation Rate negotiated with the Federal Government as an element of the Company's Fringe Rate. 2.05 Committee. "Committee" means the Bonus Compensation Committee of the Board of Directors of the Company as referred to in Section IX of the Plan. 2.06 Common Stock. "Common Stock" means the common stock, $.05 par value, of the Company, or in the event the common stock of the Company shall consist of more than one class, then it shall mean the class of such common stock as shall be designated by the Board of Directors. 1 2 2.07 Company. "Company" shall mean Science Applications International Corporation and any Subsidiary of Science Applications International Corporation which shall be designated from time to time by the Board of Directors or the Committee as being eligible to participate in the Plan. 2.08 Eligible Compensation. "Eligible Compensation" means the total annual salaries of all officers, directors and employees of the Company and its subsidiaries. 2.09 Fiscal Year. "Fiscal Year" shall mean the fiscal year of the Company. 2.10 Fringe Rate. "Fringe Rate" means the rate which the Company shall be entitled to charge for employee fringe benefits under contracts with the Federal Government as such rate shall be negotiated from time to time. 2.11 Group. "Group" means the major operating groups of the Company as such shall be designated by the Company's management from time to time. 2.12 Group Bonus Fund. "Group Bonus Fund" means the aggregate amount which may be allocated to any particular Group for the payment of bonuses under the Plan with regard to any Performance Year. 2.13 Group Labor Dollars. "Group Labor Dollars" means aggregate base salaries paid by any Group, whether direct or indirect, exclusive of amounts attributable to fringe benefits but before reduction of any amount on account of (i) any withholding, such as income taxes or social security taxes, (ii) health and welfare payments, or (iii) any moving and relocation reimbursements. 2.14 Group Planned Financial Performance. "Group Planned Financial Performance" means the planned performance for any Group with regard to any Performance Year as set forth in the approved annual plan for that Group. 2.15 Group Planned Profit Rate. "Group Planned Profit Rate" is a rate determined by dividing the Group Profit set forth in the Group Planned Financial Performance by the Group Revenue set forth in the Group Planned Financial Performance. 2.16 Group Profit. "Group Profit" means the profit before tax attributable to any Group which shall be determined in accordance with the Company's accounting practices and shall be Net Fees attributable to that Group less Unallowables, interest charges attributable to that Group and net unfavorable Rate Variances. In the case of net favorable Rate Variances, the amount of such variances shall be added to Net Fees for the Group. Rates for which the Rate Variances shall be computed shall include the Group's overhead expenses, bid and proposal expenses, general and administrative expenses attributable to the Group and sick leave. Rate Variances shall be calculated 2 3 from the rates approved in the Group's annual plan. Other income or expenses attributable to the Group shall be added or deducted as appropriate. 2.17 Group Revenues. "Group Revenues" means revenues attributable to each Group as determined in accordance with the Company's accounting practices. 2.18 Net Fees. "Net Fees" means negotiated contract fees adjusted for contract overruns and underruns. 2.19 Operating Committee. "Operating Committee" shall mean the Operating Committee of the Board of Directors. 2.20 Participant. A "Participant" shall mean each such person who is selected to receive a bonus under the Plan. Every officer, director or employee of the Company or its subsidiaries shall be eligible to receive a bonus under the Plan. 2.21 Performance Year. "Performance Year" means the Fiscal Year during which the performance of the Company or a Group is used to determine the amounts of awards which may be available under the Plan. 2.22 President. "President" means the person serving in the office of the president of the Company if the Board of Directors has not designated another officer to be the chief executive officer of the Company. If, however, the Board of Directors shall have designated another officer of the Company to be the chief executive officer of the Company, then the person designated as such chief executive officer shall be deemed to be the President for the purposes of the Plan. 2.23 President's Bonus Fund. "President's Bonus Fund" means that portion of the Company Bonus Fund which may be awarded as bonuses under the Plan by the President in regard to any Performance Year as provided in Section V of the Plan. 2.24 Profit. "Profit" means the net income of the Company for any Performance Year as certified by the Company's independent public accountants before provision for federal taxes and incentive compensation awards under the Plan. 2.25 Rate Variances. "Rate Variances" means variances from the rates established for overhead expenses, bid and proposal expenses, general and administrative expenses and sick leave expenses as set forth in the approved annual plan for the Group for the Performance Year. 2.26 Spot Bonus. "Spot Bonus" means special bonuses payable to individuals pursuant to Section VII of the Plan and which are intended to reward such individuals for extraordinary efforts or special achievements on a timely basis. 3 4 2.27 Unallowables. "Unallowables" means costs incurred by the Company which are not deemed to be reimbursable costs pursuant to the Company's Contracts with the Federal Government. SECTION III COMPANY BONUS FUND 3.01 Company Bonus Fund. The Company Bonus Fund for each Performance Year shall be an amount not in excess of 7% of Eligible Compensation for such Performance Year and shall be the aggregate of the Group Bonus Funds, the President's Bonus Fund and any additional funds allocated from Profit as the Operating Committee shall determine. The Board of Directors shall have the authority to change the percentage of Eligible Compensation which shall be used to determine the maximum amount of the Company Bonus Fund from time to time. 3.02 Composition of Company Bonus Fund. The Company Bonus Fund shall be comprised of the aggregate of the Group Bonus Funds and the President's Bonus Fund. The Group Bonus Funds shall constitute 70% of the Company Bonus Fund and the President's Bonus Fund shall constitute 30% of the Company Bonus Fund. Notwithstanding the foregoing, the President's Bonus Fund may be increased by any additional funds allocated from Profit as the Operating Committee shall determine. 4.01 General Policy. The determination of the amount and distribution of the Group Bonus Fund is intended to reflect and reward the performance of each of the Company's various Groups as well as the overall performance of the Company. As an aide in accomplishing this aim, a Group Bonus Formula shall be used to determine the amount of each Group's Group Bonus Fund for each Performance Year. The amount of the Group Bonus Fund as calculated pursuant to the Group Bonus Formula is intended merely to provide a guide in determining the amount of the Group Bonus Fund actually established for each Group for each Performance Year. The Committee shall have the authority to establish for each Group the actual amount of that Group's Group Bonus Fund which amount may be equal to, in excess of or less than the amount of the Group Bonus Fund which would be determined under the Group Bonus Formula. In exercising this discretion, the Committee shall consider, among other things, the Company's overall financial performance, and other special situations in the Performance Year. 4 5 4.02 Group Bonus Formula. The Group Bonus Formula is intended to reflect the following criteria: (i) a minimum Group Bonus Fund for each Group so that individual performance within the Group may be rewarded notwithstanding the Group's overall performance; (ii) a maximum amount of Group Bonus Fund for each Group so as to avoid an inordinate drain on the Company's profit; (iii) a provision for awarding bonuses to a Group for Group Profit exceeding 3% of Group Revenue while providing greater incentive for Group Profit exceeding 6% of Group Revenue; (iv) a procedure for an automatic adjustment to reflect the Bonus Compensation Rate negotiated as an element of the Company's Fringe Rate Agreement with the Federal Government; and (v) a procedure for relating each Group's Group Bonus Fund to such Group's Group Planned Financial Performance. Accordingly, the Group Bonus Formula is expressed as follows: B = .0238L + .3 {R(P/R - .06)} when P >= .06R and B <= .061L B = .01L {1 + 46(P/R - .03)} when .03R >= P < .06R B = .01L when P < .03R where: B represents the Group Bonus Fund, L represents Group Labor Dollars, P represents Group Profits, and R represents Group Revenues. The minimum Group Bonus Fund is represented by 1% of Group Labor Dollars and the maximum Group Bonus Fund is represented by 6.1% of Group Labor Dollars. An illustration of the application of the Group Bonus Formula assuming various Group Profits ranging from 3% through 12% of Group Revenue is attached as Table I and Table II to the Plan. If, at the beginning of any Performance Year, the Bonus Compensation Rate, the Fringe Rate, or the Group Planned Profit Rate change, then the numerical coefficients set forth in the Group Bonus Formula may be adjusted so that the aggregate Group Bonus Funds do not exceed the amount permitted under the Company Bonus Fund. SECTION V PRESIDENT'S BONUS FUND 5.01 Purpose of President's Bonus Fund. The President's Bonus Fund is primarily intended to provide awards to deserving Participants (i) in the Company's top level of management, (ii) engaged in Corporate Development activities, (iii) serving in the Office of the President, and (iv) serving in Corporate Administration. The President's Bonus Fund may also be utilized to provide bonus awards to especially deserving Participants who are not otherwise rewarded, to encourage stock redistribution, to 5 6 correct any inequities in the amount of the Group Bonus Funds of the various Groups, or for other special awards. 5.02 Amount of President's Bonus Fund. The President's Bonus Fund for any Performance Year is determined indirectly as a function of the aggregate amount of the Group Bonus Funds for the Performance Year. The President's Bonus Fund shall be an amount equal to 30% of the Company Bonus Fund with the aggregate of the Group Bonus Funds to be an amount equal to 70% of the Company Bonus Fund. Notwithstanding the foregoing, the President's Bonus Fund may be increased by any additional funds allocated from Profit as the Operating Committee shall determine. SECTION VI DISTRIBUTION OF COMPANY BONUS FUND 6.01 Group Bonus Fund Recommendations. Within 45 days following the end of the Performance Year and/or from time to time during the Performance Year, each Group Manager shall submit to the Committee written recommendations for the payment of bonuses to members of that Group Manager's Group out of the Group's Group Bonus Fund. The total amount of such bonus recommendations shall be based upon application of the Group Bonus Formula to the Company's financial statements for the Performance Year. 6.02 President's Bonus Fund Recommendations. Within 45 days following the end of the Performance Year and/or from time to time during the Performance Year, the President shall submit to the Committee written recommendations for the payment of bonuses to Participants who are to receive bonuses paid out of the President's Bonus Fund. 6.03 Internal Group Administration. Each Group Manager shall be responsible for the implementation and operation of the Plan within that Group Manager's Group. The method of such implementation and operation within the Group is not prescribed by the Plan. The Group Manager may implement the distribution of payments under the Plan within the Group to meet the business goals of that Group; however, the total bonuses payable within the Group must be made within the limitations set forth in the Plan. If a Group Manager elects to apply the Group Bonus Formula or a similar formula to the administration of the Plan within the Group so as to allocate the Group's Group Bonus Fund between different divisions, operations or other identifiable entities within the Group, consideration must be given to the overhead rate differentials between those entities due to the allocation of management and administration overhead. Consideration must also be given to the need to reward individuals for technical performance for work unrelated to financial performance. 6 7 6.04 Approvals. All individual bonuses to be awarded from the Group Bonus Fund must be recommended in writing by the Group Manager to the Committee and all individual bonuses to be awarded out of the President's Bonus Fund must be in writing from the President to the Committee. The Committee must approve all individual bonuses awarded out of the Group Bonus Fund and the President's Bonus Fund except that any bonus payable to the President must be approved by the Board of Directors and any bonus payable to the other Committee members must be approved by the President. Notwithstanding the foregoing, no member of the Committee shall be eligible to receive a bonus that is payable in Common Stock. No individual shall be advised of a bonus recommendation until such bonus shall have been approved by the Group Manager or the President, as appropriate, and the Committee. 6.05 Recommendation Format. Written bonus recommendations submitted by the Group Manager or the President to the Committee may be in memorandum form or on an appropriate recommendation form as prescribed by the Committee from time to time. SECTION VII SPOT BONUSES 7.01 Spot Bonus Awards. Spot Bonuses may be awarded under the Plan at any time. Spot Bonuses shall be awarded by the Group Manager or the President (i) to reward extraordinary effort or special achievement for which the timeliness of the award is particularly important, (ii) are payable in cash only and in amounts of $1,000 or less, (iii) are normally deliverable within one week, and (iv) require the prior written approval of only the Group Manager in regard to Spot Bonuses to be payable to a Participant in the Group Manager's Group or by the President in regard to Spot Bonuses to be payable to any other Participant. The award of a Spot Bonus by the Group Manager or the President will be subsequently reviewed by the Committee. 7.02 Accounting for Spot Bonuses. Spot Bonuses paid during the Performance Year will be charged to the Group's 1% minimum Group Bonus Fund or the President's Bonus Fund, as appropriate, for the Performance Year. SECTION VIII PAYMENT OF BONUSES 8.01 Time of Payment. Payment of the annual bonus awards shall be made as soon as practicable after the decision by the Committee to make payment of any bonus. Bonus 7 8 awards made during the Performance Year shall be charged to the Company Bonus Fund or the President's Bonus Fund as appropriate for such Performance Year pursuant to the provisions of Section 3.01. Payment of Spot Bonuses shall be made within seven working days following the date of approval of such Spot Bonus by the Group Manager or the President. 8.02 Form of Payment. Bonuses awarded under the Plan, except for Spot Bonuses, shall be payable in cash or Common Stock or a combination of cash and Common Stock within the sole discretion of the Committee. 8.03 Stock Restriction Agreement. To the extent that any bonus awarded under the Plan is paid in Common Stock, as a condition to the receipt of such bonus, the Participant shall be required to execute and deliver a stock restriction agreement in such form and upon such terms and conditions, including, but not limited to, the granting of a right of first refusal to the Company regarding such Common Stock and a right on the part of the Company to repurchase such Common Stock from the Participant upon the Participant's termination of affiliation with the Company, as the Committee, in its sole discretion, shall deem appropriate. 8.04 Forfeiture of Shares. To the extent that any bonus awarded under the Plan is paid in shares of Common Stock, such shares may be issued subject to forfeiture, in whole or in part, in accordance with a vesting schedule which the Committee may, in its sole discretion, establish. 8.05 Valuing Common Stock. To the extent that bonuses awarded under the Plan are paid in Common Stock, the per share value of such Common Stock shall be based upon the Formula Price for the Common Stock in effect at the time the bonus is awarded. The bonus will be deemed to have been awarded on the date the Committee approves the granting of the bonus. 8.06 Individual Bonus Awards. Any bonus award to a Participant with respect to a Performance Year, other than a Spot Bonus, shall generally be made within the following guidelines.
Category of Participant's Minimum Amount Maximum Amount Employment of Bonus (if any) of Bonus - -------------------- -------------------- -------------------- Operations Manager 5% of Annual Salary 25% of Annual Salary Division Manager 5% of Annual Salary 20% of Annual Salary Others 1 Week's Salary 15% of Annual Salary
8 9 Recommendations for bonus awards outside these guidelines must be accompanied by a written justification from the Group Manager or the President unless such recommendation has been previously coordinated with the Committee. SECTION IX ADMINISTRATION 9.01 The Committee. The Plan shall be administered by the Committee which shall consist of not less than two directors appointed by the Board of Directors, each of whom shall satisfy the requirements of Rule 16b-3, as amended, under the Securities Exchange Act of 1934 (the "Exchange Act"). The Committee may appoint a separate committee with respect to Participants who are not subject to Section 16 of the Exchange Act. 9.02 Authority of the Committee. The Committee shall be authorized to interpret the terms and provisions of the Plan and to adopt such rules and regulations for the administration of the Plan as it may, in its sole discretion, deem advisable. Without limiting the generality of the foregoing, and subject to the terms, provisions and conditions of the Plan, the Committee is authorized to: (a) Approve the Participants who shall receive bonus awards under the Plan. (b) Prescribe the form, which shall be consistent with the Plan, of the documents, if any, evidencing awards granted under the Plan, including the stock restriction agreement referred to in Section 8.03 of the Plan. (c) Approve the amount of bonuses to be awarded to any Participant under the Plan and the form of payment of such bonuses. SECTION X AMENDMENT OR TERMINATION 10.01 Amendment or Termination. The Plan may, at any time or from time to time, be amended, or may, at any time, be terminated, by either the stockholders of the Company or by the Board of Directors subject only to the provisions of Section 10.02 below. 10.02 Restriction on Amendment or Termination. No amendment or termination of the Plan by either the stockholders of the Company or the Board of Directors shall, without the 9 10 Participant's consent, affect any bonus award theretofore made to such Participant under the Plan. SECTION XI MISCELLANEOUS 11.01 Certain Conditions and Limitations. The award of a bonus under the Plan may be effected only if the Committee determines that the award or the payment of such award complies with applicable securities and other laws. The Company may, but shall not be required to, register or qualify under applicable securities laws, at the Company's expense, any or all of the interests in the Plan and shares of Common Stock awarded or paid pursuant to the Plan. 11.02 Other Compensation or Incentive Arrangements. The Plan is not intended as, and shall not be deemed a substitute for, or preclude continuance or establishment of, incentive compensation, profit participation or bonus plans of subsidiaries, divisions, or other operating entities of the Company or any other plan, practice, or arrangement for the payment of compensation or fringe benefits, including, without limitation, commissions, prizes, production or similar bonuses, retirement, profit sharing, group insurance, stock purchase or stock bonus plans or any other bonus plans or arrangements, that may now or hereafter be in effect for employees generally or any group or class of employees or employee, and any such plan, practice or arrangement may be continued or authorized and payments thereunder made independently of the Plan. 11.03 Continuation of Employment. Nothing contained in the Plan, or in the award of any bonus pursuant to the Plan, shall confer upon any employee any right to continue in the employ of the Company or interfere in any way with the right of the Company to reduce such employee's compensation from the rate in existence at the time of the granting of a bonus under the Plan. 11.04 No Vested Interest in the Plan. No Participant nor any employee of the Company, nor any person claiming under or through any of them, nor any other person, shall have any right or interest, whether vested or otherwise, in the Plan or its continuance, or in or to the payment of any award under the Plan, whether such award be vested, contingent or otherwise, unless and until all the terms and conditions of the Plan or any rules and regulations of the Committee thereunder and of any instrument executed pursuant thereto affecting such award and its payment, shall be fully complied with as specifically provided in the Plan and the rules and regulations of the Committee thereunder. No rights under the Plan, contingent or otherwise, shall be assignable or subject to any encumbrance, pledge or charge of any nature, except as may be specifically authorized by the Committee. 10 11 11.05 Issuance of Common Stock. Any shares of Common Stock as payment, in whole or in part, of any bonus awarded under the Plan may be purchased by the Company in the limited internal market established and maintained by the Company or may be issued from the treasury stock of the Company or from the authorized but unissued Common Stock of the Company. 11.06 Non-Transferability. Except as specifically provided in the Plan, no interest in or payment under the Plan shall be transferable by the Participant other than by will or by the laws of descent and distribution. 11.07 Tax Withholding. The Company shall have the right to deduct from any payment of bonuses awarded under the Plan or from any other compensation payable to the Participant receiving such bonus, any sums required by Federal, state or local tax law to be withheld with respect to such bonus payment. There is no obligation under the Plan that any Participant or other person be advised of the existence of any such tax or the amount which the Company will be so required to withhold. 11.08 Term of the Plan. Subject to approval by a majority of the holders of the outstanding common stock of the Company, the Plan is effective as of February 1, 1984. 11.09 Governing Law. The Plan, and any awards made under the Plan, shall be governed by, and be construed in accordance with, the laws of the State of Delaware. 11 12 TABLE I GROUP BONUS FORMULA ILLUSTRATION ASSUMING GROUP REVENUE OF $10M & GROUP LABOR DOLLARS OF $4.2M
Group Profit as a % of Group Revenue (Dollars in Thousands) ------------------------------------------------------------------------------------------- 3% & less 4% 5% 6% 8% 10% 12% ------- ------- ------- ------- ------- ------- ------- Group Revenues ............... $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 Costs at Provisional Rates .................... 9,200 9,200 9,200 9,200 9,200 9,200 9,200 ------------------------------------------------------------------------------------------- Net Fees ..................... $ 800 $ 800 $ 800 $ 800 $ 800 $ 800 $ 800 Unallowables ................. -5 -5 -5 -5 -5 -5 -5 Interest ..................... -100 -100 -100 -100 -100 -100 -100 Overhead Variance ............ -300 -225 -150 -75 +75 +225 +400 B&P Variance ................. -55 -40 -25 -10 +20 +50 +75 G&A Variance ................. -30 -20 -10 -- +20 +20 +20 Sickleave Variance ........... -10 -10 -10 -10 0 +20 +20 Other ........................ -- -- -- -- -10 -10 -10 - ------------------------------------------------------------------------------------------------------------------------------- Group Profit Before Taxes .................... $ 300 $ 400 $ 500 $ 600 $ 800 $ 1,000 $ 1,200 =========================================================================================== % of Revenues ................ 3% 4% 5% 6% 8% 10% 12% - ------------------------------------------------------------------------------------------------------------------------------- (A) Bonus Base ($4.2M x .01) ............ $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 - ------------------------------------------------------------------------------------------------------------------------------- (B) Earnable Add: 46(P/R - .03) Base ...... $ -- $ 19 $ 39 $ 58 $ 58 $ 58 $ 58 Add: 30% Profit 6% ........... -- -- -- -- 60 120 180 - ------------------------------------------------------------------------------------------------------------------------------- (B) Total Earned ............. $ -- $ 19 $ 39 $ 58 $ 118 $ 178 $ 238 (A+B) Total Group Bonus Fund . 42 61 81 100 160 220 280 Total Group Bonus Funds to be Distributed ........ 42 61 81 100 160 220 256 - ------------------------------------------------------------------------------------------------------------------------------- Bonus Distributed as a % of Group Labor Dollars ... 1.0% 1.5% 1.9% 2.4% 3.8% 5.2% 6.1%
12 13 TABLE II GROUP BONUS FUND GENERATED PER GROUP BONUS FORMULA ($10 MILLION GROUP REVENUE WITH TOTAL GROUP LABOR DOLLARS OF $4.2 MILLION) [GRAPH] GROUP PROFIT BEFORE TAXES AS A PERCENTAGE OF GROUP REVENUE EX-10.B 3 EXHIBIT 10.B 1 EXHIBIT 10.B SCIENCE APPLICATIONS INTERNATIONAL CORPORATION 1992 STOCK OPTION PLAN 1. PURPOSE Science Applications International Corporation (the "Company") hereby establishes the Science Applications International Corporation 1992 Stock Option Plan (the "Plan"). The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means by which the Company and its Subsidiaries shall be able to attract and retain qualified key employees, directors and consultants and provide such personnel with an opportunity to participate in the increased value of the Company which their effort, initiative and skill have helped produce. 2. DEFINITIONS (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Class A Common Stock of the Company, par value $.01. (d) "Committee" shall mean the Company's Stock Option Committee responsible for administering the Plan. (e) "Employee/Optionee" shall mean an Optionee who is an employee of the Company or any Subsidiary. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Exercise Price" shall mean the price per share at which an Option may be exercised, as determined by the Committee and as specified in the Optionee's option agreement. (h) "Formula Price" shall mean the price per share of Common Stock as established by the Board from time to time. (i) "Option" shall mean an option to purchase Common Stock granted pursuant to the Plan. (j) "Optionee" shall mean any person who holds an Option pursuant to the Plan. 1 2 (k) "Plan" shall mean this Science Applications International Corporation 1992 Stock Option Plan, as it may be amended from time to time. (l) "Purchase Price" shall mean at any particular time the Exercise Price times the number of shares for which an Option is being exercised. (m) "Subsidiary" as used in the Plan means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations, other than the last corporation in such chain, owns at least fifty percent (50%) of the total voting power in one of the other corporations in such chain. 3. ADMINISTRATION (a) The Committee. The Plan shall be administered by the Committee which shall consist of not less than two directors appointed by the Board, each of whom shall satisfy the requirements of Rule 16b-3, as amended, of the Exchange Act. No member of the Committee shall be liable for any action or determination in respect thereto, if made in good faith. The Committee may appoint a separate committee with respect to Optionees who are not subject to Section 16 of the Exchange Act. (b) Powers of the Committee. Subject to the provisions of the Plan, the Committee shall have the authority, in its discretion and on behalf of the Company: (i) to grant Options; (ii) to determine the Exercise Price per share of Options to be granted; (iii) to determine the individuals to whom, and the time or times at which, Options shall be granted and the number of shares for which an Option will be exercisable; (iv) to interpret the Plan; (v) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vi) to determine the terms and provisions of each Option granted and, with the consent of the Optionee, to modify or amend each Option; (vii) to accelerate or defer, with the consent of the Optionee, the exercise date of any Option; (viii) with the consent of the Optionee, to reprice, cancel and regrant, or otherwise adjust the Exercise Price of an Option previously granted by the Committee; and 2 3 (ix) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) Committee Discretion. In exercising its authority, the Committee shall have the broadest possible discretion and the Committee's determinations under the Plan made in good faith shall be binding and conclusive on Optionees and other persons claiming entitlements under the Plan. In no event shall a Committee determination with respect to a particular Optionee or provision of the Plan be binding with respect to any other Optionee (even if similarly situated) nor with respect to any future determinations regarding the same or other provisions of the Plan. 4. ELIGIBILITY The individuals who shall be eligible to participate in the Plan and to receive Options hereunder shall be such key employees, directors and consultants of the Company and its Subsidiaries as the Committee shall from time to time determine. The Committee may designate one or more directors who are not eligible for participation in the Plan for a specified period of time. No Option shall be granted to any person who, at the time the Option is granted, owns (including stock owned by application of the constructive ownership rules of Section 425(d) of the Code) stock possessing more than 10% of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. 5. STOCK SUBJECT TO THE PLAN Options may be granted permitting the purchase of the aggregate of not more than 12,000,000 shares of the Company's Common Stock, subject to adjustment pursuant to Section 10 hereof. These shares may consist either in whole or in part of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury. If an Option granted under this Plan is surrendered, expires or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to any such Option but as to which the Option ceases to be exercisable shall be available for Options to be granted under the Plan. 6. STOCK OPTIONS (a) Non-Qualified Options. The Options granted pursuant to the Plan shall be non-qualified stock options and specifically not incentive stock options as that term is used in the Code. (b) Option Agreements. Options shall be evidenced by written option agreements between the Optionee and the Company in such form as the Committee shall from time to time determine. No Option or purported Option shall be a valid and binding obligation of the Company unless previously granted by the Committee and evidenced in writing by such an option agreement. Appropriate officers of the Company are hereby authorized to execute and deliver option agreements in the name of the Company, as directed from time to time by the Committee. 3 4 (c) Exercise Price. The Exercise Price at which Options may be granted under the Plan shall be not less than one hundred percent (100%) of the fair market value of the Common Stock on the day the Option is granted, but may be less than the Exercise Price or Prices of previously granted Options, whether in effect, canceled or expired. As long as the Company's Common Stock is not listed on any national securities exchange or traded on a regular basis (as determined by the Company's Board or a Committee of the Board to which the Board has delegated the authority to make such determination) on the over-the-counter market, fair market value may be taken as the Formula Price as in effect at the date of grant. (d) Date of Grant. The Committee shall, after it approves the granting of an Option to a participant, cause the participant to be notified of such action. The date on which the Committee approves the granting of an Option shall be considered the date on which such Option is granted. (e) Terms of Exercise. The right to purchase shares covered by any Option or Options under the Plan shall be exercisable only in accordance with the terms and conditions of the grant to such Optionee. The Committee may, in its discretion, provide that such Option or Options may be exercised in whole or in part in installments, cumulative or otherwise, for any period or periods of time specified by the Committee of not more than ten years from the date of the grant of the Option. Subject to the provisions of Paragraph 9, that portion of an Option which is exercisable or an installment basis may not be exercised prior to the expiration of the applicable installment period. (f) Non-Transferability. An Option granted under the Plan may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the Optionee to whom granted, may be exercised only by such Optionee or his conservator or other legal representative. 7. EXPIRATION AND TERMINATION (a) Expiration of Option. Each Option and all rights and obligations thereunder shall, subject to the provisions of Paragraph 9, expire on a date to be determined by the Committee, such date, however, in no event to be later than ten (10) years from the date an Option is granted. (b) Termination of Employment or Affiliation. Subject to the provisions of Paragraph 9, that portion of an Option which is exercisable on an installment basis may not be exercised unless the Optionee shall continue in the employ or affiliation of the Company or any of its Subsidiaries during the entire period to which such installment relates. Except as set forth below in Paragraphs 7(c) through (e) or otherwise set forth in an option agreement, all Options granted to an Optionee under this Plan shall terminate and no longer be exercisable as of the date such Optionee ceases to be employed or affiliated with the Company or any Subsidiary; provided, however, the Committee in its discretion may extend the period of time that such Optionee may exercise such Optionee's Options, but in no event may the Committee extend such period of time 4 5 beyond the expiration date of the Options or beyond ten (10) years from the date of grant of such Options. (c) Termination Due to Retirement or Permanent Total Disability. In the event an Employee/Optionee's employment with the Company or any Subsidiary shall terminate as the result of normal retirement, permanent total disability or early retirement under the terms of a retirement or pension plan maintained by the Company and in which such Employee/Optionee is a participant, such Employee/Optionee may, at any time within ninety (90) days after such termination of employment, exercise such Employee/Optionee's Options to the extent that the Employee/Optionee was entitled to exercise them on the date of such termination of employment, unless such Options would expire pursuant to their terms at an earlier date, in which case such Options shall remain exercisable only until the earlier expiration date. (d) Death. If an Optionee dies while in the employ or affiliation of the Company or of a Subsidiary without having fully exercised such Optionee's Options, such Options may, within one (1) year of the Optionee's death (or within such shorter period as may be specified in the Option by the Committee), be exercised by the person or persons to whom the Optionee's rights under the Option shall pass by will or by the applicable laws of descent and distribution to the extent that such deceased Optionee was entitled to exercise the Options on the date of death, unless such Options would expire pursuant to their terms at an earlier date, in which case such Options shall remain exercisable only until the earlier expiration date. (e) Leaves of Absence. An Employee/Optionee who is on a leave of absence pursuant to the terms of the Company's Administrative Policy No. B-11 "Unpaid Personal Leave of Absence" or any amended or replacement policy thereof, shall not, during the period of any such absence be deemed, by virtue of such absence alone, to have terminated such Employee/Optionee's employment with the Company or any Subsidiary except as the Committee may otherwise expressly provide. Except as otherwise determined by the Committee, unless such Employee/Optionee is on a Medical Leave (as hereinafter defined), all rights which such Employee/Optionee would have had to exercise Options granted hereunder will be suspended during the period of such leave of absence. Upon such Employee/Optionee's return to the Company or any Subsidiary all rights to exercise Options shall be restored to the extent such Options are exercisable at that time. The Committee in its discretion may permit the exercise, while on a leave of absence, of Options which would otherwise expire or may defer the expiration date of such Options, but not beyond ten (10) years from their date of grant. An Employee/Optionee who is on a Medical Leave shall have all rights to exercise such Employee/Optionee's Options that such Employee/Optionee would have had if such Employee/Optionee were not on a Medical Leave. For purposes of this Paragraph 7(e), "Medical Leave" shall be defined as a leave of absence for medical reasons which shall begin after ninety-one (91) consecutive calendar days of total disability leave and shall remain in effect until the earlier of a release by the attending physician for the Employee/Optionee to return to work or until the termination of employment. 5 6 8. EXERCISE OF OPTIONS (a) The Purchase Price shall be paid in full when the Option is exercised. The Purchase Price may be paid in whole or in part in (i) cash or (ii) whole shares of Common Stock of the Company evidenced by negotiable certificates, valued at the Formula Price in effect on the date of exercise; provided, however, that unless an exception is granted by the Secretary of this Corporation, shares of Common Stock of the Company acquired through the exercise of a stock option must have been owned by the Optionee for at least six months before such shares of Common Stock may be used to pay the Purchase Price. The Company or any Subsidiary shall be entitled to deduct from other compensation payable to each Optionee any sums required by federal, state or local tax law to be withheld with respect to the exercise of an Option but, in the alternative, may require the Optionee or other person exercising the Option to pay, or the Optionee or such other persons may pay, such sums to the employer corporation at the time of such exercise. The Committee shall have the authority in its discretion to allow withholding on exercise of an Option to be satisfied by withholding from the shares to be issued upon the exercise of the Option a number of shares, valued at the Formula Price in effect on the date of exercise of the Option, equal in value to the withholding requirement. (b) An Optionee shall have no rights as a shareholder of the Company with respect to any shares for which his or her Option is exercised until the date of exercise of such Option and the issuance of a stock certificate for such shares. No adjustment shall be made for dividends, ordinary or extraordinary or whether in currency, securities or other property, distributions, or other rights for which the record date is prior to the date such stock certificate is issued. 9. CHANGE IN CONTROL Notwithstanding any provision of Paragraph 7 above to the contrary, any Option granted pursuant to the Plan shall, in the case of a Change In Control (as hereinafter defined) of the Company, become fully exercisable as to all shares of Common Stock to which it relates from and after the date of such Change In Control. For purposes of this Paragraph 9, the term "Change in Control" shall be deemed to occur upon any "person" (as defined in Section 13(d) of the Exchange Act), other than the Company or any Subsidiary or employee benefit plan or trust maintained by the Company or any Subsidiary, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of the Common Stock of the Company outstanding at such time, without the prior approval of the Board. 10. CAPITAL ADJUSTMENTS The aggregate number of shares of the Company's Common Stock subject to this Plan, the maximum number of shares as to which Options may be granted to any one Optionee hereunder, and the number of shares and the Exercise Price shall be appropriately adjusted, as determined by the Committee in its discretion, for any increase or decrease in the number of shares of Common Stock which the Company has issued resulting from any stock split, stock dividend, combination 6 7 of shares or any other change, or any exchange for other securities or any reclassification, reorganization, redesignation, recapitalization, or otherwise. 11. NO EMPLOYMENT OBLIGATION An Employee/Optionee's employment with the Company or a Subsidiary is not for any specified term and may be terminated by such Employee/Optionee or by the Company or a Subsidiary at any time, for any reason, with or without cause. Nothing in this Plan or in any option agreement pursuant to this Plan shall confer upon any Optionee any right to continue in the employ of, or affiliation with, the Company or a Subsidiary nor constitute any promise or commitment by the Company or a Subsidiary regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. 12. GOVERNMENT AND STOCK EXCHANGE REGULATIONS The Company shall not be required to issue any shares upon the exercise of any Option unless and until the Company has fully complied with any then applicable requirements by the Securities and Exchange Commission, the California Corporations Commissioner, or other regulatory agencies having jurisdiction, and of any exchanges upon which Common Stock of the Company may be listed. Upon the exercise of an Option at a time when there is not in effect a registration statement under the Securities Act of 1933 or a similar statute (the "Act") relating to the stock issuable upon exercise thereof and available for delivery a prospectus meeting the requirements of Section 10(a)(3) of said Act, or if the rules or interpretations of the Securities and Exchange Commission so require, the stock may be issued only if the holder represents and warrants in writing to the Company that the shares purchased are being acquired for investment and not with a view to distribution thereof. 13. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN The Board or the Operating Committee of the Board may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board or the Operating Committee may deem advisable in order that Options granted thereunder shall conform to any change in the law, or in any other respect which the Board or the Operating Committee may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without the approval of the holders of outstanding shares of the Company having a majority of the general voting power, (i) except as specified in Paragraph 10, increase the maximum number of shares for which Options may be granted under the Plan, (ii) change the provisions of Paragraph 6(c) relating to the establishment of the Exercise Price other than to change the manner of determination the fair market value of the Company's Common Stock to conform with any then applicable provisions of the Code or regulations issued thereunder, or (iii) permit the granting 7 8 of Options to members of the Committee. No Option may be granted during any suspension, or after termination of the Plan. 14. NO IMPLIED RIGHTS OR OBLIGATIONS The Company, in establishing and maintaining this Plan as a voluntary and unilateral undertaking, expressly disavows the creation of any rights in Optionees or others claiming entitlements under the Plan or any obligations on the part of the Company, any Subsidiary or the Committee, except as expressly provided herein. 15. EFFECTIVE DATE The effective date of the Plan shall be July 10, 1992. 16. TERMINATION DATE Unless the Plan shall have been previously terminated by the Board or the Operating Committee of the Board, the Plan shall terminate on July 31, 1995, except as to Options theretofore granted and outstanding under the Plan at that date, and no Option shall be granted after that date. 8 EX-10.C 4 EXHIBIT 10.C 1 EXHIBIT 10.C SCIENCE APPLICATIONS INTERNATIONAL CORPORATION STOCK COMPENSATION PLAN Effective as of January 1, 1997 2 TABLE OF CONTENTS Page ---- PURPOSE........................................................................1 ARTICLE I DEFINITIONS ...............................................................1 1.1 Account ................................................................1 1.2 Award ..................................................................1 1.3 Awarding Authority .....................................................1 1.4 Beneficiary ............................................................1 1.5 Board ..................................................................1 1.6 Committee ..............................................................1 1.7 Company.................................................................1 1.8 Company Stock ..........................................................1 1.9 Distribution ...........................................................2 1.10 Employee ...............................................................2 1.11 Participant ............................................................2 1.12 Plan ...................................................................2 1.13 Share Unit .............................................................2 1.14 Trust ..................................................................2 1.15 Trustee ................................................................2 ARTICLE II PARTICIPATION AND AWARDS ..................................................2 2.1 Designation by Awarding Authority ......................................2 2.2 Awarding Authority to Make Awards ......................................2 2.3 Awards to be Held in Trust .............................................2 2.4 Vesting and Forfeiture .................................................3 ARTICLE III TRUST FUND.................................................................3 3.1 Trust Fund Established..................................................3 3.2 Company, Committee and Trustee Not Responsible for Adequacy of Fund ...................................3 ARTICLE IV ACCOUNTING PROCEDURES .....................................................4 4.1 Committee to Maintain Accounts .........................................4 4.2 Accounting Procedures ..................................................4 4.3 Invasion of Trust by Creditors .........................................4 4.4 Trust Expenses..........................................................4
- i - 3 ARTICLE V RIGHTS IN ACQUIRED STOCK .................................................4 5.1 Power to Vote Stock Rests with Trustee .................................4 5.2 Tender Offers ..........................................................4 5.3 Dividends ..............................................................4 ARTICLE VI DISTRIBUTION OF ACCOUNTS .................................................5 6.1 Time of Distribution ...................................................5 6.2 Form of Distribution ...................................................5 6.3 Beneficiary Designation ................................................5 6.4 Distribution to Guardian ...............................................6 6.5 Withholding of Taxes....................................................6 ARTICLE VII ACCELERATION OF DISTRIBUTION AND VESTING .................................6 7.1 Termination of Employment or Death .....................................6 7.2 Change in Control ......................................................6 7.3 Hardship ...............................................................7 ARTICLE VIII PLAN TERMINATION AND AMENDMENT ...........................................7 8.1 Termination and Amendment ..............................................7 ARTICLE IX PLAN ADMINISTRATION ......................................................7 9.1 Committee ..............................................................7 9.2 Committee Powers .......................................................8 9.3 Plan Expenses ..........................................................9 9.4 Reliance Upon Documents and Opinions ...................................9 9.5 Requirement of Proof ..................................................10 9.6 Limitation on Liability ...............................................10 9.7 Indemnification .......................................................10 ARTICLE X MISCELLANEOUS PROVISIONS ................................................11 10.1 Restrictions on Plan Interest .........................................11 10.2 No Enlargement of Employee Rights .....................................11 10.3 Rights of Repurchase and First Refusal for the Company..........................................12 10.4 Mailing of Payments ...................................................12 10.5 Inability to Locate Participant or Beneficiary ........................12 10.6 Governing Law .........................................................12 10.7 Records ...............................................................12 10.8 Illegality of Particular Provision ....................................12 10.9 Receipt or Release ....................................................12 10.10 Arbitration .......................................................... 13
- ii - 4 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION STOCK COMPENSATION PLAN PURPOSE This Plan is an unfunded compensation arrangement established effective on April 3, 1996 by Science Applications International Corporation ("SAIC") to make deferred awards of company stock to selected employees. ARTICLE I DEFINITIONS Whenever the following terms are used in the Plan they shall have the meaning specified below, unless the context indicates clearly to the contrary. 1.1 Account. The bookkeeping account established for an Employee pursuant to Article IV to record the number of Share Units awarded to the Employee and the vesting thereof. 1.2 Award. The award of Share Units in the Trust to an Employee pursuant to the Plan. 1.3 Awarding Authority. The individual or group of individuals appointed by the Board to make Awards pursuant to the Plan. 1.4 Beneficiary. The person or persons properly designated by the Participant, in accordance with Section 6.3, to receive the benefits provided herein upon death of the Participant. 1.5 Board. The Board of Directors of Science Applications International Corporation. 1.6 Committee. The committee appointed by the Board to administer the Plan. Members of the Committee shall be eligible to receive Awards under the Plan at the discretion of the Awarding Authority. 1.7 Company. Science Applications International Corporation, a Delaware corporation, and any subsidiary thereof, the participation in this Plan of the Employees of which is approved by the Awarding Authority. 1.8 Company Stock. The Class A Common Stock of Science Applications International Corporation. - 1 - 5 1.9 Distribution. Payment of the vested balance in a Participant's Account from the Trust to the Participant or the Participant's Beneficiary. 1.10 Employee. A salaried employee of the Company. 1.11 Participant. An Employee designated by the Committee to receive an Award under the Plan. 1.12 Plan. The Science Applications International Corporation Stock Compensation Plan as set forth herein and as amended from time to time by the Board. 1.13 Share Unit. The interest of a Participant in a share of Company Stock held in the Participant's Account in the Trust. 1.14 Trust. The Science Applications International Corporation Stock Compensation Plan Trust established by the Company to hold all assets awarded to Participants under the Plan. 1.15 Trustee. State Street Bank or such successor trustee as shall be appointed pursuant to the Trust. ARTICLE II PARTICIPATION AND AWARDS 2.1 Designation by Awarding Authority. The Awarding Authority in its sole discretion shall designate those Employees who are to receive Awards under the Plan. The Awarding Authority's designation of an Employee for a particular Award shall not require the Awarding Authority to make any further Awards to such Employee. 2.2 Awarding Authority to Make Awards. The Awarding Authority shall make Awards under the Plan by determining a number of Share Units to be credited to those Employees whom the Awarding Authority has selected for participation in the Plan corresponding to a specified number of shares of Company Stock allocated in the Trust to such Employees, and by establishing an Account in favor of such Employees in accordance with Article IV to hold such Share Units. A separate Account shall be established for each Award. Each Account shall be subject to a vesting schedule specified by the Awarding Authority. The amount, timing and vesting of each Award shall be decided in the Awarding Authority's sole discretion, and the Awarding Authority may apply different terms to Awards made to different Employees as well as to different Awards made to the same Employee. 2.3 Awards to be Held in Trust. Within a reasonable period of time following the date of an Award, SAIC shall contribute to the Trust Company Stock or an amount of money sufficient - 2 - 6 to purchase shares of Company Stock corresponding to the Share Units made in such Award. The Trustee shall apply such contribution toward the purchase of Company Stock in accordance with the directions of the Committee and the terms of the Trust. To the extent any such Award is made to an Employee of an affiliate of SAIC, SAIC may charge the cost of the corresponding Trust contribution to such affiliate as agreed between SAIC and the affiliate. 2.4 Vesting and Forfeiture. Each Account shall be subject to a vesting schedule, not to exceed seven (7) years, established by the Awarding Authority. Vesting shall cease upon termination of the Participant's employment with the Company for any reason other than the death of the Participant. For purposes of the Plan, an Employee's leave of absence exceeding thirty (30) days other than (i) a leave of absence caused by the Employee's disability, as defined under the terms of any of the Company's short-term or long-term disability plans, (ii) a qualified military leave as determined by the Committee, or (iii) a family or medical leave covered by federal or state family/medical leave acts, shall be considered a termination of employment effective on the thirtieth day of such leave of absence. An Employee's change in status to that of consulting employee shall also be considered a termination of employment for purposes of the Plan. Further, an Employee's change in status to a part-time Employee, which status exists for an aggregate period or periods (whether or not consecutive) of six months, shall be considered a termination of employment as of the end of such six-month period. For this purpose "part-time Employee" shall mean an Employee whose scheduled work week is less than 30 hours. In the event of death of a Participant, all of the Participant's Account(s) shall become immediately vested. The unvested portion of a Participant's Accounts upon a termination of employment shall be immediately forfeited by the Participant, and the shares of Company Stock represented by such unvested portion shall be returned to the Company or reallocated in accordance with the Committee's directions and the terms of the Trust. ARTICLE III TRUST FUND 3.1 Trust Fund Established. The Company has established the Trust pursuant to a trust agreement under which the Trustee will hold and administer in trust all assets deposited with the Trustee in accordance with the terms of this Plan. The Board shall have the authority to select and remove the Trustee to act under the Trust agreement, and to enter into new or amended trust agreements as it deems advisable. 3.2 Company, Committee and Trustee Not Responsible for Adequacy of Trust Fund. Neither the Company, Committee nor Trustee shall be liable or responsible for the adequacy of the Trust Fund to meet and discharge any or all payments and liabilities hereunder. All Plan benefits will be paid only from the Trust assets, and neither the Company, the Committee nor the Trustee shall have any duty or liability to furnish the Trust with any funds, securities or other assets except as expressly provided in Section 2.3 hereof. - 3 - 7 ARTICLE IV ACCOUNTING PROCEDURES 4.1 Committee to Maintain Accounts. The Committee shall open and maintain a separate Account with respect to each Award made under the Plan for purposes of keeping a record of the assets held in Trust for each Participant and for recording the vesting status of each Award. 4.2 Accounting Procedures. The Committee shall establish and may amend from time to time accounting procedures for the purpose of making allocations, Distributions, valuations and adjustments to Accounts provided for in this Article IV. A Participant or Beneficiary shall have no contractual or other right to have a particular accounting procedure or convention apply, or continue to apply, and the Committee shall be free to alter any such procedure or convention without obligation to any Participant or Beneficiary. 4.3 Invasion of Trust by Creditors. If assets of the Trust should be reduced due to action of the Company's Creditors, as provided in the Trust document, the Committee shall reduce each Account on a pro rata basis to reflect such reduction in Trust assets, and the Company shall have no obligation to replace such lost assets. 4.4 Trust Expenses. Expenses of the Trust which are not paid by the Company shall be applied to reduce each Account on a pro rata basis. ARTICLE V RIGHTS IN ACQUIRED STOCK 5.1 Power to Vote Stock Rests With Trustee. The power to vote any stock held by the Trustee shall rest solely with the Trustee, who shall vote such stock in the same proportion that the other shareholders vote their shares of Company Stock. For purposes of this Section 5.1, Company Stock shall include both Class A and Class B Common Stock. 5.2 Tender Offers. In the case of a tender offer for the Company Stock, the Trustee shall tender the shares of Company Stock held by the Trust only if more than fifty percent (50%) of the shares of Company Stock held outside the Trust are tendered by the shareholders. 5.3 Dividends. All dividends on Company Stock held in Trust shall be held by the Trustee and reinvested as directed by the Committee. The Committee shall allocate such dividends among the Accounts pro rata to the shares allocated to each Account. - 4 - 8 ARTICLE VI DISTRIBUTION OF ACCOUNTS 6.1 Time of Distribution. Subject to the acceleration provisions of Article VII, a Participant's Account shall be Distributed as follows: (a) If the Participant files an election in a manner prescribed by the Committee within ninety (90) days following the date of the Award contained in the Account, the Participant's Account shall be distributed as it becomes vested, with each payment to be made within a reasonable period of time following the date of vesting of the portion of the Account to be paid. (b) If the Participant fails to make the election described in subsection (a), the Participant's Account shall be distributed in full within a reasonable period of time following the seventh anniversary of the date of the Award contained in such Account. 6.2 Form of Distribution. Distributions shall be made in the form of Company Stock or cash, or part Company Stock and part cash, as the Committee shall determine in its sole discretion. 6.3 Beneficiary Designation. (a) Upon forms provided by the Committee, each Participant shall designate in writing the Beneficiary or Beneficiaries whom such Participant desires to receive the benefits of this Plan, if any, payable in the event of such Participant's death. A Participant may from time to time change his or her designated Beneficiary or Beneficiaries without the consent of such Beneficiary or Beneficiaries by filing a new designation in writing with the Committee; provided, however, that if a married Participant wishes to designate an individual other than his or her spouse as Beneficiary, such designation shall not be effective unless consented to in writing by the spouse. Notwithstanding the foregoing, spousal consent shall not be necessary if it is established to the satisfaction of the Committee that there is no spouse of the Participant or that the required consent cannot be obtained because the spouse cannot be located or is legally incompetent. The Company may rely upon the designation of Beneficiary or Beneficiaries last filed by the Participant in accordance with the terms of this Plan. (b) If the designated Beneficiary does not survive the Participant, or if there is no valid Beneficiary designation, amounts payable under the Plan shall be paid to the Participant's spouse, or if there is no surviving spouse, then to the duly appointed and currently acting personal representative of the Participant's estate. If there is no personal representative of the Participant's estate duly appointed and acting in that capacity within sixty (60) days after the Participant's death, then all payments due under the Plan shall be payable to the person or persons who can verify by affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive - 5 - 9 the benefits specified hereunder pursuant to the laws of intestate succession or other statutory provision in effect at the Participant's death in the state in which the Participant resided. 6.4 Distribution to Guardian. If the Committee shall find that any person to whom any payment is payable under this Plan is unable to care for his or her affairs because of illness or accident, or is a minor, a payment due (unless a prior claim therefor shall have been made by a duly appointed guardian or other legal representative) may be paid to the spouse, a child, a parent, or a brother or sister, or to any custodian, conservator or other fiduciary responsible for the management and control of such person's financial affairs in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of the Trust under this Plan. 6.5 Withholding of Taxes. To the extent any Distribution from the Trust is subject to withholding taxes, the Committee may require, as a condition to the payment of such Distribution, that the Participant or Beneficiary who is eligible for the Distribution: (a) make payment to the Company in the form of a check for such withholding taxes; or (b) consent to the withholding of shares of Company Stock by the Trustee sufficient in value to satisfy such withholding taxes, in which case such shares shall be delivered to the Company which shall make the appropriate tax withholding. The Committee may offer either or both of these options to the Participant or Beneficiary in the Committee's sole discretion. ARTICLE VII ACCELERATION OF DISTRIBUTION AND VESTING 7.1 Termination of Employment or Death. Unless sooner distributed in accordance with Section 6.1, the vested portion of a Participant's Accounts shall be distributed from the Trust as soon as practicable following termination of the Participant's employment with the Company for any reason, including death. Termination of employment shall include certain leaves of absence and changes in status as specified in Section 2.4. The Participant and Beneficiary shall forfeit any unvested portion of the Accounts at the time of such termination or death. 7.2 Change in Control. Every Account shall become fully vested and shall be immediately distributed to the Participants to whom such Accounts belong, upon the occurrence of a Change in Control (as hereinafter defined) of the Company. A Change in Control shall be deemed to occur upon any "person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934), other than the Company, any subsidiary or any employee benefit plan or trust maintained by the Company or subsidiary becoming the beneficial owner (as defined in Rule 13d-3 under the - 6 - 10 Securities Exchange Act of 1934), directly or indirectly, of more than 25% of the Company Stock outstanding at such time, without the prior approval of the Board. For purposes of the foregoing, a subsidiary is any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations, other than the last corporation in such chain, owns at least fifty percent (50%) of the total voting power in one of the other corporations in such chain. 7.3 Hardship. Notwithstanding the provisions of Section 6.1 hereof, a Participant shall be entitled to request a hardship Distribution of all or any portion of the vested portion of his or her Account(s). A Participant must make a written request for a hardship Distribution, stating the reasons such withdrawal is necessary because of a financial hardship. The Committee, in its sole discretion, shall determine whether or not to grant the hardship Distribution of such Participant's Account(s) and, in so doing, may rely on the Participant's statements, and a hardship Distribution may be approved without further investigation unless the Committee has reason to believe such statements are false. ARTICLE VIII PLAN TERMINATION AND AMENDMENT 8.1 Termination and Amendments. The Plan shall continue until all amounts have been distributed in accordance with the terms of the Plan. Notwithstanding the foregoing sentence, the Board retains the right to amend or terminate the Plan for any reason, including but not limited to adverse changes in accounting rules or tax laws or the bankruptcy, receivership or dissolution of the Company. In the event of a Plan amendment or termination, benefits will either be paid out when due under the terms of the Plan or as soon as possible as determined by the Committee in its sole discretion. To the extent feasible, the Committee shall use its best efforts to avoid adversely affecting the rights of any existing Participants in the Plan, but the Committee shall be under no specific duty or obligation in this regard. ARTICLE IX PLAN ADMINISTRATION 9.1 Committee. The Plan shall be administered by the Committee. Subject to the provisions of the Plan and the authority granted hereunder to the Awarding Authority, the Committee shall have exclusive power to determine the manner and time of Awards and payment of benefits to the extent herein provided and to exercise any other discretionary powers granted to the Committee pursuant to the Plan. The decisions or determinations by the Committee shall be final and binding upon all parties, including shareholders, Participants and other Employees. Without limiting the generality of the foregoing, the Committee shall have the authority to determine whether a termination of employment has occurred for purposes of the Plan's vesting - 7 - 11 and forfeiture provisions, and such determinations need not be uniformly applied as among Employees. The Committee shall have the authority to interpret the Plan, to make factual findings and determinations, to adopt and revise rules and regulations relating to the Plan and to make any other determinations which it believes necessary or advisable for the administration of the Plan. The Committee's discretion in these matters shall be as broad and unfettered as permitted by law. 9.2 Committee Powers. The Committee shall have all powers necessary to supervise the administration of the Plan and control its operations. In addition to any powers and authority conferred on the Committee elsewhere in the Plan or by law, the Committee shall have, by way of illustration and not by way of limitation, the following powers and authority: (a) To designate agents to carry out responsibilities relating to the Plan; (b) To employ such legal, actuarial, medical, accounting, clerical and other assistance as it may deem appropriate in carrying out the provisions of this Plan; (c) To administer, interpret, construe and apply this Plan and to decide all questions which may arise or which may be raised under this Plan by any Employee, Participant, Beneficiary or other person whomsoever, including but not limited to all questions relating to eligibility to participate in the Plan, determination of Awards and the amount of benefits to which any Participant may be entitled; (d) To establish rules and procedures from time to time for the conduct of its business and for the administration and effectuation of its responsibilities under the Plan; (e) To establish claims procedures, and to make forms available for filing of such claims, and to provide the name of the person or persons with whom such claims should be filed. The Committee shall establish procedures for action upon claims initially made and the communication of a decision to the claimant promptly and, in any event, not later than sixty (60) days after the date of the claim; the claim may be deemed by the claimant to have been denied for purposes of further review described below in the event a written decision is not furnished to the claimant within such sixty (60) day period. Every claim for benefits which is denied shall be denied by written notice setting forth in a manner calculated to be understood by the claimant (1) the specific reason or reasons for the denial, (2) specific reference to any provisions of this Plan on which denial is based, (3) description of any additional material or information necessary for the claimant to perfect his claim with an explanation of why such material or information is necessary, and (4) an explanation of the procedure for further reviewing the denial of the claim under the Plan. The Committee shall establish a procedure for review of claim denials, such review to be undertaken by the Committee. The review given after denial of any claim shall be a full and fair review with the claimant or his duly authorized representative having one hundred eighty (180) days after receipt of denial of his claim to request such review, having the right to review all pertinent documents and the right to submit issues and comments in writing. The Committee shall establish a procedure for issuance of a decision by the Committee not later than - 8 - 12 sixty (60) days after receipt of a request for review from a claimant unless special circumstances, such as the need to hold a hearing, require a longer period of time, in which case a decision shall be rendered as soon as possible but not later than one hundred twenty (120) days after receipt of the claimant's request for review. The decision on review shall be in writing and shall include specific reasons for the decision written in a manner calculated to be understood by the claimant with specific reference to any provisions of this Plan on which the decision is based; and (f) To perform or cause to be performed such further acts as it may deem to be necessary, appropriate, or convenient in the efficient administration of the Plan. Any action taken in good faith by the Committee in the exercise of authority conferred upon it by this Plan shall be conclusive and binding upon the Participants and their beneficiaries. All discretionary powers conferred upon the Committee shall be absolute. 9.3 Plan Expenses. Members of the Committee shall serve as such without compensation from the Plan, but may receive compensation from the Company for so serving. All Plan administration expenses shall be borne by the Company or the Trust as determined by the Committee in its sole discretion. 9.4 Reliance Upon Documents and Opinions. (a) The members of the Committee, the Board, and the Company shall be entitled to rely upon any: (i) Tables, valuations, computations, estimates, certificates, opinions and reports furnished by any consultant, or firm or corporation which employs one or more consultants or advisors; and (ii) Computations, estimates and reports furnished by any consultants or consulting firms. (b) The members of the Committee, the Board, and the Company shall be fully protected and shall not be liable in any manner whatsoever for anything done or action taken or suffered in reliance upon any such consultant, firm, or corporation which employs one or more consultants or counsel. (c) Any and all such things done or such actions taken or suffered by the Committee, the Board, and the Company in so relying shall be conclusive and binding on all Employees, Participants, Beneficiaries and any other persons whomsoever, except as otherwise provided by law. (d) The Committee may, but is not required to, rely upon all records of the Company with respect to any matter or thing whatsoever, and may likewise treat such records as - 9 - 13 conclusive with respect to all Employees, Participants, Beneficiaries and any other persons whomsoever, except as otherwise provided by law. 9.5 Requirement of Proof. The Committee, the Board, or the Company may require satisfactory proof of any matter under this Plan from or with respect to any Employee, Participant or Beneficiary, and no such person shall acquire any rights or be entitled to receive any benefits under this Plan until such proof shall be furnished as so required. 9.6 Limitation on Liability. No employee or director of the Company and no other person shall be subject to any liability by reason of or arising from his or her participation in the establishment or administration or operation of the Plan unless he or she acts fraudulently or in bad faith. 9.7 Indemnification. (a) To the extent permitted by law, the Company shall indemnify each member of the Awarding Authority, of the Committee, and any other employee or director of the Company who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding, whether civil, criminal, administrative, or investigative, by reason of his or her conduct in the performance in connection with the establishment or administration of the Plan or any amendment or termination of the Plan. (b) This indemnification shall apply against expenses including, without limitation, attorneys fees and any expenses of establishing a right to indemnification hereunder, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, except in relation to matters as to which he or she has acted fraudulently or in bad faith in the performance of such duties. (c) The termination of any proceeding by judgment, order, settlement, conviction, upon a plea of nolo contendere or its equivalent shall not, in and of itself, create a presumption that the person acted fraudulently or in bad faith in the performance of his or her duties. (d) Expenses incurred in defending any such proceeding may be advanced by the Company prior to the final disposition of such proceeding, upon receipt of an undertaking by or on behalf of the recipient to repay such amount, unless it shall be determined ultimately that the recipient is entitled to be indemnified as authorized in this Section 9.7. (e) The right of indemnification set forth in this Section 9.7 shall be in addition to any other right to which any Awarding Authority member, Committee member or other person may be entitled as a matter of law, by corporate bylaws or otherwise. - 10 - 14 ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Restrictions on Plan Interest. (a) A Participant's interest in this Plan shall be limited to his or her Account in the Trust and he or she shall have no other interest in any assets of the Company nor any right as against the Company, Awarding Authority or Committee for payment of benefits under this Plan. (b) None of the benefits, payments, proceeds, claims or rights hereunder of any Participant or Beneficiary shall be subject to any claim of any creditor of such Participant or Beneficiary and in particular the same shall not be subject to attachment, garnishment, or other legal process by any creditor of such Participant or Beneficiary. (c) A Participant or Beneficiary shall not have any right to alienate, anticipate, commute, pledge, encumber, or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently or otherwise, under the Plan. (d) A Participant's and Beneficiary's interest in this Plan and his or her Account in the Trust are subject to the claims of the Company's creditors as provided in the Trust. Each Participant and Beneficiary shall, however, be considered a general creditor of the Company with respect to the assets held in his or her Account in the Trust, so that if the Company should become insolvent, the Participant or Beneficiary will have a claim against the Trust assets equal to that of the Company's other general creditors (regardless of whether such assets are removed from the trust by a trustee in bankruptcy). 10.2 No Enlargement of Employee Rights. (a) This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for, or an inducement to, or a condition of, the employment of any Employee. (b) An Employee's employment with the Company is not for any specified term and may be terminated by such Employee or by the Company at any time for any reason, with or without cause. Nothing in this Plan or in any agreement pursuant to this Plan shall confer upon any Employee or Participant any right to continue in the employ of or affiliation with the Company nor constitute any promise or commitment by the Company regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. (c) No person shall have any right to any benefits under this Plan, except to the extent expressly provided herein. - 11 - 15 (d) The Plan is not intended to nor shall it be deemed to be a Plan providing retirement income or resulting in the deferral of income by employees for periods extending to the termination of covered employment or beyond. 10.3 Rights of Repurchase and First Refusal for the Company. Any Company Stock distributed from the Plan shall be subject to a right of repurchase and right of first refusal by the Company. The terms and conditions of the right of repurchase and right of first refusal shall be those applied to Company Stock by the Certificate of Incorporation of Science Applications International Corporation, as in effect from time to time. 10.4 Mailing of Payments. All payments under the Plan shall be delivered in person or mailed to the last address of the Participant (or, in the case of the death of the Participant to that of any other person entitled to such payments under the terms of the Plan). Each Participant shall be responsible for furnishing the Committee with his or her correct current address and the correct current name and address of his or her Beneficiary. 10.5 Inability to Locate Participant or Beneficiary. In the event that the Committee is unable to locate a Participant or Beneficiary to whom benefits are payable hereunder after mailing a notice to the Participant's or Beneficiary's last known address, and such inability lasts for a period of three (3) years, then any remaining benefits payable hereunder shall be forfeited to the Company and no Participant or Beneficiary shall have any right to further benefits from the Plan, even if subsequently located. 10.6 Governing Law. All legal questions pertaining to the Plan shall be determined in accordance with the laws of the State of California. 10.7 Records. The records of the Company with respect to the Plan shall be conclusive on all Participants, Beneficiaries, and all other persons whomsoever. 10.8 Illegality of Particular Provision. If any particular provision of this Plan shall be found to be illegal or unenforceable, such provision shall not affect the other provisions thereof, but the Plan shall be construed in all respect as if such invalid provision were omitted. 10.9 Receipt or Release. Any payment to any Participant or Beneficiary in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Awarding Authority, the Committee and the Company, and the Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. - 12 - 16 10.10 Arbitration. The Committee's written decision on review of a denial of benefits, as provided in Section 9.2(e), shall be final, conclusive and binding on all Participants, Beneficiaries and Employees of the Company. Notwithstanding the foregoing, any person disputing such a written decision shall submit such dispute to binding Arbitration pursuant to the rules of the American Arbitration Association, to be held in San Diego County. The losing party in such arbitration proceedings shall bear the costs of arbitration, and each party shall bear its own attorneys' fees. - 13 - EX-10.D 5 EXHIBIT 10.D 1 EXHIBIT 10.D SCIENCE APPLICATIONS INTERNATIONAL CORPORATION MANAGEMENT STOCK COMPENSATION PLAN Effective as of January 1, 1997 2 TABLE OF CONTENTS Page ---- PURPOSE .......................................................................1 ARTICLE I DEFINITIONS ...............................................................1 1.1 Account ................................................................1 1.2 Award ..................................................................1 1.3 Awarding Authority .....................................................1 1.4 Beneficiary ............................................................1 1.5 Board ..................................................................1 1.6 Committee ..............................................................1 1.7 Company.................................................................1 1.8 Company Stock ..........................................................1 1.9 Distribution ...........................................................1 1.10 Employee ...............................................................2 1.11 Participant ............................................................2 1.12 Plan ...................................................................2 1.13 Share Unit .............................................................2 1.14 Trust ..................................................................2 1.15 Trustee ................................................................2 ARTICLE II PARTICIPATION AND AWARDS ..................................................2 2.1 Designation by Awarding Authority ......................................2 2.2 Awarding Authority to Make Awards ......................................2 2.3 Awards to be Held in Trust .............................................2 2.4 Vesting and Forfeiture .................................................3 ARTICLE III TRUST FUND.................................................................3 3.1 Trust Fund Established .................................................3 3.2 Company, Committee and Trustee Not Responsible for Adequacy of Trust Fund .............................3 ARTICLE IV ACCOUNTING PROCEDURES .....................................................4 4.1 Committee to Maintain Accounts .........................................4 4.2 Accounting Procedures ..................................................4 4.3 Invasion of Trust by Creditors .........................................4 4.4 Trust Expenses .........................................................4
i 3 ARTICLE V RIGHTS IN ACQUIRED STOCK .................................................4 5.1 Power to Vote Stock Rests with Trustee .................................4 5.2 Tender Offers ..........................................................4 5.3 Dividends ..............................................................4 ARTICLE VI DISTRIBUTION OF ACCOUNTS .................................................5 6.1 Time of Distribution ...................................................5 6.2 Form of Distribution ...................................................5 6.3 Beneficiary Designation ................................................5 6.4 Distribution to Guardian ...............................................6 6.5 Withholding of Taxes....................................................6 ARTICLE VII ACCELERATION OF DISTRIBUTION AND VESTING .................................6 7.1 Termination of Employment or Death .....................................6 7.2 Change in Control ......................................................6 7.3 Hardship ...............................................................7 ARTICLE VIII PLAN TERMINATION AND AMENDMENT ...........................................7 8.1 Termination and Amendments .............................................7 ARTICLE IX PLAN ADMINISTRATION ......................................................7 9.1 Committee ..............................................................7 9.2 Committee Powers .......................................................8 9.3 Plan Expenses ..........................................................9 9.4 Reliance Upon Documents and Opinions ...................................9 9.5 Requirement of Proof ..................................................10 9.6 Limitation on Liability ...............................................10 9.7 Indemnification .......................................................10 ARTICLE X MISCELLANEOUS PROVISIONS ................................................11 10.1 Restrictions on Plan Interest .........................................11 10.2 No Enlargement of Employee Rights .....................................11 10.3 Rights of Repurchase and First Refusal for the Company..........................................12 10.4 Mailing of Payments ...................................................12 10.5 Inability to Locate Participant or Beneficiary ........................12 10.6 Governing Law .........................................................12 10.7 Records ...............................................................12 10.8 Illegality of Particular Provision ....................................12 10.9 Receipt or Release ....................................................12 10.10 Arbitration ...........................................................13
ii 4 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION MANAGEMENT STOCK COMPENSATION PLAN PURPOSE This Plan is an unfunded compensation arrangement established effective on April 3, 1996, by Science Applications International Corporation ("SAIC") to make deferred awards of company stock to selected management and highly compensated employees. ARTICLE I DEFINITIONS Whenever the following terms are used in the Plan they shall have the meaning specified below, unless the context indicates clearly to the contrary. 1.1 Account. The bookkeeping account established for an Employee pursuant to Article IV to record the number of Share Units awarded to the Employee and the vesting thereof. 1.2 Award. The award of Share Units in the Trust to an Employee pursuant to the Plan. 1.3 Awarding Authority. The individual or group of individuals appointed by the Board to make Awards pursuant to the Plan. 1.4 Beneficiary. The person or persons properly designated by the Participant, in accordance with Section 6.3, to receive the benefits provided herein upon death of the Participant. 1.5 Board. The Board of Directors of Science Applications International Corporation. 1.6 Committee. The committee appointed by the Board to administer the Plan. Members of the Committee shall be eligible to receive Awards under the Plan at the discretion of the Awarding Authority. 1.7 Company. Science Applications International Corporation, a Delaware corporation, and any subsidiary thereof, the participation in this Plan of the Employees of which is approved by the Awarding Authority. 1.8 Company Stock. The Class A Common Stock of Science Applications International Corporation. 1.9 Distribution. Payment of the vested balance in a Participant's Account from the Trust to the Participant or the Participant's Beneficiary. - 1 - 5 1.10 Employee. A management or highly compensated employee of the Company, as determined by the Committee. 1.11 Participant. An Employee designated by the Committee to receive an Award under the Plan. 1.12 Plan. The Science Applications International Corporation Stock Compensation Plan for Management Employees as set forth herein and as amended from time to time by the Board. 1.13 Share Unit. The interest of a Participant in a share of Company Stock held in the Participant's Account in the Trust. 1.14 Trust. The Science Applications International Corporation Stock Compensation Plan Trust established by the Company to hold all assets awarded to Participants under the Plan. 1.15 Trustee. State Street Bank or such successor trustee as shall be appointed pursuant to the Trust. ARTICLE II PARTICIPATION AND AWARDS 2.1 Designation by Awarding Authority. The Awarding Authority in its sole discretion shall designate those Employees who are to receive Awards under the Plan. The Awarding Authority's designation of an Employee for a particular Award shall not require the Awarding Authority to make any further Awards to such Employee. 2.2 Awarding Authority to Make Awards. The Awarding Authority shall make Awards under the Plan by determining a number of Share Units to be credited to those Employees whom the Awarding Authority has selected for participation in the Plan corresponding to a specified number of shares of Company Stock allocated in the Trust to such Employees, and by establishing an Account in favor of such Employees in accordance with Article IV to hold such Share Units. A separate Account shall be established for each Award. Each Account shall be subject to a vesting schedule specified by the Awarding Authority. The amount, timing and vesting of each Award shall be decided in the Awarding Authority's sole discretion, and the Awarding Authority may apply different terms to Awards made to different Employees as well as to different Awards made to the same Employee. 2.3 Awards to be Held in Trust. Within a reasonable period of time following the date of an Award, SAIC shall contribute to the Trust Company Stock or an amount of money sufficient to purchase shares of Company Stock corresponding to the Share Units made in such Award. The Trustee shall apply such contribution toward the purchase of Company Stock in accordance with the directions of the Committee and the terms of the Trust. To the extent any such Award is made - 2 - 6 to an Employee of an affiliate of SAIC, SAIC may charge the cost of the corresponding Trust contribution to such affiliate as agreed between SAIC and the affiliate. 2.4 Vesting and Forfeiture. Each Account shall be subject to a vesting schedule, not to exceed seven (7) years, established by the Awarding Authority. Vesting shall cease upon termination of the Participant's employment with the Company for any reason other than the death of the Participant. For purposes of the Plan, an Employee's leave of absence exceeding thirty (30) days other than (i) a leave of absence caused by the Employee's disability, as defined under the terms of any of the Company's short-term or long-term disability plans, (ii) a qualified military leave as determined by the Committee, or (iii) a family or medical leave covered by federal or state family/medical leave acts, shall be considered a termination of employment effective on the thirtieth day of such leave of absence. An Employee's change in status to that of consulting employee shall also be considered a termination of employment for purposes of the Plan. Further, an Employee's change in status to a part-time Employee, which status exists for an aggregate period or periods (whether or not consecutive) of six months, shall be considered a termination of employment as of the end of such six-month period. For this purpose "part-time Employee" shall mean an Employee whose scheduled work week is less than 30 hours. In the event of the death of a Participant, all of the Participant's Accounts shall become immediately vested. The unvested portion of a Participant's Accounts upon termination of employment shall be immediately forfeited by the Participant, and the shares of Company Stock represented by such unvested portion shall be returned to the Company or reallocated in accordance with the Committee's directions and the terms of the Trust. ARTICLE III TRUST FUND 3.1 Trust Fund Established. The Company has established the Trust pursuant to a trust agreement under which the Trustee will hold and administer in trust all assets deposited with the Trustee in accordance with the terms of this Plan. The Board shall have the authority to select and remove the Trustee to act under the Trust agreement, and to enter into new or amended trust agreements as it deems advisable. 3.2 Company, Committee and Trustee Not Responsible for Adequacy of Trust Fund. Neither the Company, Committee nor Trustee shall be liable or responsible for the adequacy of the Trust Fund to meet and discharge any or all payments and liabilities hereunder. All Plan benefits will be paid only from the Trust assets, and neither the Company, the Committee nor the Trustee shall have any duty or liability to furnish the Trust with any funds, securities or other assets except as expressly provided in Section 2.3 hereof. - 3 - 7 ARTICLE IV ACCOUNTING PROCEDURES 4.1 Committee to Maintain Accounts. The Committee shall open and maintain a separate Account with respect to each Award made under the Plan for purposes of keeping a record of the assets held in Trust for each Participant and for recording the vesting status of each Award. 4.2 Accounting Procedures. The Committee shall establish and may amend from time to time accounting procedures for the purpose of making allocations, Distributions, valuations and adjustments to Accounts provided for in this Article IV. A Participant or Beneficiary shall have no contractual or other right to have a particular accounting procedure or convention apply, or continue to apply, and the Committee shall be free to alter any such procedure or convention without obligation to any Participant or Beneficiary. 4.3 Invasion of Trust by Creditors. If assets of the Trust should be reduced due to action of the Company's Creditors, as provided in the Trust document, the Committee shall reduce each Account on a pro rata basis to reflect such reduction in Trust assets, and the Company shall have no obligation to replace such lost assets. 4.4 Trust Expenses. Expenses of the Trust which are not paid by the Company shall be applied to reduce each Account on a pro rata basis. ARTICLE V RIGHTS IN ACQUIRED STOCK 5.1 Power to Vote Stock Rests With Trustee. The power to vote any stock held by the Trustee shall rest solely with the Trustee, who shall vote such stock in the same proportion that the other shareholders vote their shares of Company Stock. For purposes of this Section 5.1, Company Stock shall include both Class A and Class B Common Stock. 5.2 Tender Offers. In the case of a tender offer for the Company Stock, the Trustee shall tender the shares of Company Stock held by the Trust only if more than fifty percent (50%) of the shares of Company Stock held outside the Trust are tendered by the shareholders. 5.3 Dividends. All dividends on Company Stock held in Trust shall be held by the Trustee and reinvested as directed by the Committee. The Committee shall allocate such dividends among the Accounts pro rata to the shares allocated to each Account. - 4 - 8 ARTICLE VI DISTRIBUTION OF ACCOUNTS 6.1 Time of Distribution. Subject to the acceleration provisions of Article VII, a Participant's Account shall be Distributed as follows: (a) The vested portion of the Participant's Account shall be distributed within a reasonable period of time following the date (i) it becomes vested, or (ii) the Participant's employment with the Company terminates (including upon a leave of absence or change in status as specified in Section 2.4), as elected by the Participant in a manner prescribed by the Committee within ninety (90) days following the date of the Award contained in the Account. Such election shall be irrevocable. (b) If the Participant fails to make the election described in subsection (a), the Participant's Account shall be distributed in full within a reasonable period of time following the seventh anniversary of the date of the Award contained in such Account. 6.2 Form of Distribution. Distributions shall be made in the form of Company Stock or cash, or part Company Stock and part cash, as the Committee shall determine in its sole discretion. 6.3 Beneficiary Designation. (a) Upon forms provided by the Committee, each Participant shall designate in writing the Beneficiary or Beneficiaries whom such Participant desires to receive the benefits of this Plan, if any, payable in the event of such Participant's death. A Participant may from time to time change his or her designated Beneficiary or Beneficiaries without the consent of such Beneficiary or Beneficiaries by filing a new designation in writing with the Committee; provided, however, that if a married Participant wishes to designate an individual other than his or her spouse as Beneficiary, such designation shall not be effective unless consented to in writing by the spouse. Notwithstanding the foregoing, spousal consent shall not be necessary if it is established to the satisfaction of the Committee that there is no spouse of the Participant or that the required consent cannot be obtained because the spouse cannot be located or is legally incompetent. The Company may rely upon the designation of Beneficiary or Beneficiaries last filed by the Participant in accordance with the terms of this Plan. (b) If the designated Beneficiary does not survive the Participant, or if there is no valid Beneficiary designation, amounts payable under the Plan shall be paid to the Participant's spouse, or if there is no surviving spouse, then to the duly appointed and currently acting personal representative of the Participant's estate. If there is no personal representative of the Participant's estate duly appointed and acting in that capacity within sixty (60) days after the Participant's death, then all payments due under the Plan shall be payable to the person or persons who can verify by affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive - 5 - 9 the benefits specified hereunder pursuant to the laws of intestate succession or other statutory provision in effect at the Participant's death in the state in which the Participant resided. 6.4 Distribution to Guardian. If the Committee shall find that any person to whom any payment is payable under this Plan is unable to care for his or her affairs because of illness or accident, or is a minor, a payment due (unless a prior claim therefor shall have been made by a duly appointed guardian or other legal representative) may be paid to the spouse, a child, a parent, or a brother or sister, or to any custodian, conservator or other fiduciary responsible for the management and control of such person's financial affairs in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of the Trust under this Plan. 6.5 Withholding of Taxes. To the extent any Distribution from the Trust is subject to withholding taxes, the Committee may require, as a condition to the payment of such Distribution, that the Participant or Beneficiary who is eligible for the Distribution: (a) make payment to the Company in the form of a check for such withholding taxes; or (b) consent to the withholding of shares of Company Stock by the Trustee sufficient in value to satisfy such withholding taxes, in which case such shares shall be delivered to the Company which shall make the appropriate tax withholding. The Committee may offer either or both of these options to the Participant or Beneficiary in the Committee's sole discretion. ARTICLE VII ACCELERATION OF DISTRIBUTION AND VESTING 7.1 Termination of Employment or Death. Unless sooner distributed in accordance with Section 6.1, and notwithstanding any provision to the contrary in Section 6.1, the vested portion of a Participant's Accounts shall be distributed from the Trust as soon as practicable following termination of the Participant's employment with the Company for any reason, including death. Termination of employment shall include certain leaves of absence and changes in status as specified in Section 2.4. The Participant and Beneficiary shall forfeit any unvested portion of the Accounts at the time of such termination or death. 7.2 Change in Control. Every Account shall become fully vested and shall be immediately distributed to the Participants to whom such Accounts belong, upon the occurrence of a Change in Control (as hereinafter defined) of the Company. A Change in Control shall be deemed to occur upon any "person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934), other than the Company, a subsidiary or any employee benefit plan or trust maintained by the Company or a subsidiary becoming the beneficial owner (as defined in Rule 13d-3 under - 6 - 10 the Securities Exchange Act of 1934), directly or indirectly, of more than 25% of the Company Stock outstanding at such time, without the prior approval of the Board. For purposes of the foregoing, a subsidiary is any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations, other than the last corporation in such chain, owns at least fifty percent (50%) of the total voting power in one of the other corporations in such chain. 7.3 Hardship. Notwithstanding the provisions of Section 6.1 hereof, a Participant shall be entitled to request a hardship Distribution of all or any portion of the vested portion of his or her Account(s). A Participant must make a written request for a hardship Distribution, stating the reasons such withdrawal is necessary because of a financial hardship. The Committee, in its sole discretion, shall determine whether or not to grant the hardship Distribution of such Participant's Account(s) and, in so doing, may rely on the Participant's statements, and a hardship Distribution and vesting acceleration may be approved without further investigation unless the Committee has reason to believe such statements are false. ARTICLE VIII PLAN TERMINATION AND AMENDMENT 8.1 Termination and Amendments. The Plan shall continue until all amounts have been distributed in accordance with the terms of the Plan. Notwithstanding the foregoing sentence, the Board retains the right to amend or terminate the Plan for any reason, including but not limited to adverse changes in accounting rules or tax laws or the bankruptcy, receivership or dissolution of the Company. In the event of a Plan amendment or termination, benefits will either be paid out when due under the terms of the Plan or as soon as possible as determined by the Committee in its sole discretion. To the extent feasible, the Committee shall use its best efforts to avoid adversely affecting the rights of any existing Participants in the Plan, but the Committee shall be under no specific duty or obligation in this regard. ARTICLE IX PLAN ADMINISTRATION 9.1 Committee. The Plan shall be administered by the Committee. Subject to the provisions of the Plan and the authority granted hereunder to the Awarding Authority, the Committee shall have exclusive power to determine the manner and time of Awards and payment of benefits to the extent herein provided and to exercise any other discretionary powers granted to the Committee pursuant to the Plan. The decisions or determinations by the Committee shall be final and binding upon all parties, including shareholders, Participants and other Employees. Without limiting the generality of the foregoing, the Committee shall have the authority to determine whether a termination of employment has occurred for purposes of the Plan's vesting and forfeiture provisions, and such determinations need not be uniformly applied as among Employees. The Committee shall have the authority to interpret the Plan, to make factual findings - 7 - 11 and determinations, to adopt and revise rules and regulations relating to the Plan and to make any other determinations which it believes necessary or advisable for the administration of the Plan. The Committee's discretion in these matters shall be as broad and unfettered as permitted by law. 9.2 Committee Powers. The Committee shall have all powers necessary to supervise the administration of the Plan and control its operations. In addition to any powers and authority conferred on the Committee elsewhere in the Plan or by law, the Committee shall have, by way of illustration and not by way of limitation, the following powers and authority: (a) To designate agents to carry out responsibilities relating to the Plan; (b) To employ such legal, actuarial, medical, accounting, clerical and other assistance as it may deem appropriate in carrying out the provisions of this Plan; (c) To administer, interpret, construe and apply this Plan and to decide all questions which may arise or which may be raised under this Plan by any Employee, Participant, Beneficiary or other person whomsoever, including but not limited to all questions relating to eligibility to participate in the Plan, determination of Awards and the amount of benefits to which any Participant may be entitled; (d) To establish rules and procedures from time to time for the conduct of its business and for the administration and effectuation of its responsibilities under the Plan; (e) To establish claims procedures, and to make forms available for filing of such claims, and to provide the name of the person or persons with whom such claims should be filed. The Committee shall establish procedures for action upon claims initially made and the communication of a decision to the claimant promptly and, in any event, not later than sixty (60) days after the date of the claim; the claim may be deemed by the claimant to have been denied for purposes of further review described below in the event a written decision is not furnished to the claimant within such sixty (60) day period. Every claim for benefits which is denied shall be denied by written notice setting forth in a manner calculated to be understood by the claimant (1) the specific reason or reasons for the denial, (2) specific reference to any provisions of this Plan on which denial is based, (3) description of any additional material or information necessary for the claimant to perfect his claim with an explanation of why such material or information is necessary, and (4) an explanation of the procedure for further reviewing the denial of the claim under the Plan. The Committee shall establish a procedure for review of claim denials, such review to be undertaken by the Committee. The review given after denial of any claim shall be a full and fair review with the claimant or his duly authorized representative having one hundred eighty (180) days after receipt of denial of his claim to request such review, having the right to review all pertinent documents and the right to submit issues and comments in writing. The Committee shall establish a procedure for issuance of a decision by the Committee not later than sixty (60) days after receipt of a request for review from a claimant unless special circumstances, such as the need to hold a hearing, require a longer period of time, in which case a decision shall be rendered as soon as possible but not later than one hundred twenty (120) days after receipt of the claimant's request for review. The decision on review shall be in writing and shall include - 8 - 12 specific reasons for the decision written in a manner calculated to be understood by the claimant with specific reference to any provisions of this Plan on which the decision is based; and (f) To perform or cause to be performed such further acts as it may deem to be necessary, appropriate, or convenient in the efficient administration of the Plan. Any action taken in good faith by the Committee in the exercise of authority conferred upon it by this Plan shall be conclusive and binding upon the Participants and their beneficiaries. All discretionary powers conferred upon the Committee shall be absolute. 9.3 Plan Expenses. Members of the Committee shall serve as such without compensation from the Plan, but may receive compensation from the Company for so serving. All Plan administration expenses shall be borne by the Company or the Trust as determined by the Committee in its sole discretion. 9.4 Reliance Upon Documents and Opinions. (a) The members of the Committee, the Board, and the Company shall be entitled to rely upon any: (i) Tables, valuations, computations, estimates, certificates, opinions and reports furnished by any consultant, or firm or corporation which employs one or more consultants or advisors; and (ii) Computations, estimates and reports furnished by any consultants or consulting firms. (b) The members of the Committee, the Board, and the Company shall be fully protected and shall not be liable in any manner whatsoever for anything done or action taken or suffered in reliance upon any such consultant, firm, or corporation which employs one or more consultants or counsel. (c) Any and all such things done or such actions taken or suffered by the Committee, the Board, and the Company in so relying shall be conclusive and binding on all Employees, Participants, Beneficiaries and any other persons whomsoever, except as otherwise provided by law. (d) The Committee may, but is not required to, rely upon all records of the Company with respect to any matter or thing whatsoever, and may likewise treat such records as conclusive with respect to all Employees, Participants, Beneficiaries and any other persons whomsoever, except as otherwise provided by law. - 9 - 13 9.5 Requirement of Proof. The Committee, the Board, or the Company may require satisfactory proof of any matter under this Plan from or with respect to any Employee, Participant or Beneficiary, and no such person shall acquire any rights or be entitled to receive any benefits under this Plan until such proof shall be furnished as so required. 9.6 Limitation on Liability. No employee or director of the Company and no other person shall be subject to any liability by reason of or arising from his or her participation in the establishment or administration or operation of the Plan unless he or she acts fraudulently or in bad faith. 9.7 Indemnification. (a) To the extent permitted by law, the Company shall indemnify each member of the Awarding Authority, of the Committee, and any other employee or director of the Company who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding, whether civil, criminal, administrative, or investigative, by reason of his or her conduct in the performance in connection with the establishment or administration of the Plan or any amendment or termination of the Plan. (b) This indemnification shall apply against expenses including, without limitation, attorneys fees and any expenses of establishing a right to indemnification hereunder, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, except in relation to matters as to which he or she has acted fraudulently or in bad faith in the performance of such duties. (c) The termination of any proceeding by judgment, order, settlement, conviction, upon a plea of nolo contendere or its equivalent shall not, in and of itself, create a presumption that the person acted fraudulently or in bad faith in the performance of his or her duties. (d) Expenses incurred in defending any such proceeding may be advanced by the Company prior to the final disposition of such proceeding, upon receipt of an undertaking by or on behalf of the recipient to repay such amount, unless it shall be determined ultimately that the recipient is entitled to be indemnified as authorized in this Section 9.7. (e) The right of indemnification set forth in this Section 9.7 shall be in addition to any other right to which any Awarding Authority member, Committee member or other person may be entitled as a matter of law, by corporate bylaws or otherwise. - 10 - 14 ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Restrictions on Plan Interest. (a) A Participant's interest in this Plan shall be limited to his or her Account in the Trust and he or she shall have no other interest in any assets of the Company nor any right as against the Company, Awarding Authority or Committee for payment of benefits under this Plan. (b) None of the benefits, payments, proceeds, claims or rights hereunder of any Participant or Beneficiary shall be subject to any claim of any creditor of such Participant or Beneficiary and in particular the same shall not be subject to attachment, garnishment, or other legal process by any creditor of such Participant or Beneficiary. (c) A Participant or Beneficiary shall not have any right to alienate, anticipate, commute, pledge, encumber, or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently or otherwise, under the Plan. (d) A Participant's and Beneficiary's interest in this Plan and his or her Account in the Trust are subject to the claims of the Company's creditors as provided in the Trust. Each Participant and Beneficiary shall, however, be considered a general creditor of the Company with respect to the assets held in his or her Account in the Trust, so that if the Company should become insolvent, the Participant or Beneficiary will have a claim against the Trust assets equal to that of the Company's other general creditors (regardless of whether such assets are removed from the trust by a trustee in bankruptcy). 10.2 No Enlargement of Employee Rights. (a) This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for, or an inducement to, or a condition of, the employment of any Employee. (b) An Employee's employment with the Company is not for any specified term and may be terminated by such Employee or by the Company at any time for any reason, with or without cause. Nothing in this Plan or in any agreement pursuant to this Plan shall confer upon any Employee or Participant any right to continue in the employ of or affiliation with the Company nor constitute any promise or commitment by the Company regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. (c) No person shall have any right to any benefits under this Plan, except to the extent expressly provided herein. - 11 - 15 (d) The Plan is not intended to nor shall it be deemed to be a Plan providing retirement income or resulting in the deferral of income by employees for periods extending to the termination of covered employment or beyond. 10.3 Rights of Repurchase and First Refusal for the Company. Any Company Stock distributed from the Plan shall be subject to a right of repurchase and right of first refusal by the Company. The terms and conditions of the right of repurchase and right of first refusal shall be those applied to Company Stock by the Certificate of Incorporation of Science Applications International Corporation, as in effect from time to time. 10.4 Mailing of Payments. All payments under the Plan shall be delivered in person or mailed to the last address of the Participant (or, in the case of the death of the Participant to that of any other person entitled to such payments under the terms of the Plan). Each Participant shall be responsible for furnishing the Committee with his or her correct current address and the correct current name and address of his or her Beneficiary. 10.5 Inability to Locate Participant or Beneficiary. In the event that the Committee is unable to locate a Participant or Beneficiary to whom benefits are payable hereunder after mailing a notice to the Participant's or Beneficiary's last known address, and such inability lasts for a period of three (3) years, then any remaining benefits payable hereunder shall be forfeited to the Company and no Participant or Beneficiary shall have any right to further benefits from the Plan, even if subsequently located. 10.6 Governing Law. All legal questions pertaining to the Plan shall be determined in accordance with the laws of the State of California. 10.7 Records. The records of the Company with respect to the Plan shall be conclusive on all Participants, Beneficiaries, and all other persons whomsoever. 10.8 Illegality of Particular Provision. If any particular provision of this Plan shall be found to be illegal or unenforceable, such provision shall not affect the other provisions thereof, but the Plan shall be construed in all respect as if such invalid provision were omitted. 10.9 Receipt or Release. Any payment to any Participant or Beneficiary in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Awarding Authority, the Committee and the Company, and the Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. - 12 - 16 10.10 Arbitration. The Committee's written decision on review of a denial of benefits, as provided in Section 9.2(e), shall be final, conclusive and binding on all Participants, Beneficiaries and Employees of the Company. Notwithstanding the foregoing, any person disputing such a written decision shall submit such dispute to binding Arbitration pursuant to the rules of the American Arbitration Association, to be held in San Diego County. The losing party in such arbitration proceedings shall bear the costs of arbitration, and each party shall bear its own attorneys' fees. - 13 - EX-10.F 6 EXHIBIT 10.F 1 EXHIBIT 10(f) SCIENCE APPLICATIONS INTERNATIONAL CORPORATION 1995 STOCK OPTION PLAN 1. PURPOSE Science Applications International Corporation (the "Company") hereby establishes the Science Applications International Corporation 1995 Stock Option Plan (the "Plan"). The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means by which the Company and its Subsidiaries can attract and retain qualified key employees, directors and consultants and provide such personnel with an opportunity to participate in the increased value of the Company which their effort, initiative and skill have helped produce. 2. DEFINITIONS (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Class A Common Stock of the Company, par value $.01. (d) "Committee" shall mean the Company's Stock Option Committee responsible for administering the Plan. (e) "Employee/Optionee" shall mean an Optionee who is an employee of the Company or any Subsidiary. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Exercise Price" shall mean the price per share at which an Option may be exercised, as determined by the Committee and as specified in the Optionee's option agreement. (h) "Formula Price" shall mean the price per share of Common Stock as established by the Board from time to time. (i) "Option" shall mean an option to purchase Common Stock granted pursuant to the Plan. (j) "Optionee" shall mean any person who holds an Option pursuant to the Plan. (k) "Plan" shall mean this Science Applications International Corporation 1995 Stock Option Plan, as it may be amended from time to time. 1 amended 10/2/96 2 (l) "Purchase Price" shall mean at any particular time the Exercise Price times the number of shares for which an Option is being exercised. (m) "Subsidiary" as used in the Plan means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations, other than the last corporation in such chain, owns at least fifty percent (50%) of the total voting power in one of the other corporations in such chain. 3. ADMINISTRATION (a) The Committee. The Plan shall be administered by the Committee which shall consist of not less than two directors appointed by the Board, each of whom shall satisfy the requirements of Rule 16b-3, as amended, of the Exchange Act. No member of the Committee shall be liable for any action or determination in respect thereto, if made in good faith. The Committee may appoint a separate committee with respect to Optionees who are not subject to Section 16 of the Exchange Act. (b) Powers of the Committee. Subject to the provisions of the Plan, the Committee shall have the authority, in its discretion and on behalf of the Company: (i) to grant Options; (ii) to determine whether the Options granted are intended to be incentive stock options or non-qualified stock options; (iii) to determine the Exercise Price per share of Options to be granted; (iv) to determine the individuals to whom, and the time or times at which, Options shall be granted and the number of shares for which an Option will be exercisable; (v) to interpret the Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted and, with the consent of the Optionee, to modify or amend each Option; (viii) to accelerate or defer, with the consent of the Optionee, the exercise date of any Option; (ix) with the consent of the Optionee, to reprice, cancel and regrant, or otherwise adjust the Exercise Price of an Option previously granted by the Committee; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. 2 3 (c) Committee Discretion. In exercising its authority, the Committee shall have the broadest possible discretion and the Committee's determinations under the Plan made in good faith shall be binding and conclusive on Optionees and other persons claiming entitlements under the Plan. In no event shall a Committee determination with respect to a particular Optionee or provision of the Plan be binding with respect to any other Optionee (even if similarly situated) nor with respect to any future determinations regarding the same or other provisions of the Plan. 4. ELIGIBILITY (a) General. The individuals who shall be eligible to participate in the Plan and to receive Options hereunder shall be such key employees, directors and consultants of the Company and its Subsidiaries as the Committee shall from time to time determine. The Committee may designate one or more directors who are not eligible for participation in the Plan for a specified period of time. No Option shall be granted to any person who, at the time the Option is granted, owns (including stock owned by application of the constructive ownership rules of Section 425(d) of the Code) stock possessing more than 10% of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. (b) Incentive Stock Options. No Option which is designated as an incentive stock option shall be granted to any person who, at the time the Option is granted, is not an employee of the Company or a Subsidiary. The aggregate fair market value (determined as of the time the Option is granted) of the Common Stock with respect to which Options designated as incentive stock options are exercisable for the first time by an employee shall not exceed $100,000 during any calendar year (under all plans of the Company or any Subsidiary which provide for the granting of an incentive stock option). 5. STOCK SUBJECT TO THE PLAN Options may be granted permitting the purchase of the aggregate of not more than 12,000,000 shares of the Company's Common Stock, subject to adjustment pursuant to Section 10 hereof. These shares may consist either in whole or in part of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury. If an Option granted under this Plan is surrendered, expires or for any other reason ceases to be exercisable in whole or in part, the shares which were subject to any such Option but as to which the Option ceases to be exercisable shall be available for Options to be granted under the Plan. 6. STOCK OPTIONS (a) Options. The Options granted pursuant to the Plan may be "incentive stock options" within the meaning of Section 422 of the Code or non-qualified stock options. Options designated to be incentive stock options shall be designated as such in the option agreements evidencing such Options. 3 4 (b) Option Agreements. Options shall be evidenced by written option agreements between the Optionee and the Company in such form as the Committee shall from time to time determine. No Option or purported Option shall be a valid and binding obligation of the Company unless previously granted by the Committee and evidenced in writing by such an option agreement. If an option agreement is not executed by the Optionee and returned to the Company within the time prescribed in the option agreement, the Option evidenced thereby will be forfeited and the option agreement will be null and void. Appropriate officers of the Company are hereby authorized to execute and deliver option agreements in the name of the Company, as directed from time to time by the Committee. (c) Exercise Price. The Exercise Price at which Options may be granted under the Plan shall be not less than one hundred percent (100%) of the fair market value of the Common Stock on the day the Option is granted, but may be less than the Exercise Price or Prices of previously granted Options, whether in effect, canceled or expired. As long as the Company's Common Stock is not listed on any national securities exchange or traded on a regular basis (as determined by the Company's Board or a Committee of the Board to which the Board has delegated the authority to make such determination) on the over-the-counter market, fair market value may be taken as the Formula Price as in effect at the date of grant. (d) Date of Grant. The Committee shall, after it approves the granting of an Option to a participant, cause the participant to be notified of such action. The date on which the Committee approves the granting of an Option shall be considered the date on which such Option is granted. (e) Terms of Exercise. The right to purchase shares covered by any Option or Options under the Plan shall be exercisable only in accordance with the terms and conditions of the grant to such Optionee. The Committee may, in its discretion, provide that such Option or Options may be exercised in whole or in part, in installments, cumulative or otherwise, for any period or periods of time specified by the Committee of not more than ten years from the date of the grant of the Option. Subject to the provisions of Paragraph 9, that portion of an Option which is exercisable on an installment basis may not be exercised prior to the expiration of the applicable installment period. (f) Non-Transferability. An Option granted under the Plan may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the Optionee to whom granted, may be exercised only by such Optionee or his conservator or other legal representative. (g) Limit on Option Grants. In no event may any single Optionee receive Option grants for more than 500,000 shares of Common Stock in the aggregate. 7. EXPIRATION AND TERMINATION (a) Expiration of Option. Each Option and all rights and obligations thereunder shall, subject to the provisions of Paragraph 9, expire on a date to be determined by the Committee, such date, however, in no event to be later than ten (10) years from the date an Option is granted. 4 5 (b) Termination of Employment or Affiliation. Subject to the provisions of Paragraph 9, that portion of an Option which is exercisable on an installment basis may not be exercised unless the Optionee shall continue in the employ or affiliation of the Company or any of its Subsidiaries during the entire period to which such installment relates. Except as set forth below in Paragraphs 7(c) through (e) or otherwise set forth in an option agreement, all Options granted to an Optionee under this Plan shall terminate and no longer be exercisable as of the date such Optionee ceases to be employed or affiliated with the Company or any Subsidiary; provided, however, the Committee in its discretion may extend the period of time that such Optionee may exercise such Optionee's Options, but in no event may the Committee extend such period of time beyond the expiration date of the Options or beyond ten (10) years from the date of grant of such Options. (c) Termination Due to Retirement or Permanent Total Disability. In the event an Employee/Optionee's employment with the Company or any Subsidiary shall terminate as the result of normal retirement, permanent total disability or early retirement under the terms of a retirement or pension plan maintained by the Company and in which such Employee/Optionee is a participant, such Employee/Optionee may, at any time within ninety (90) days after such termination of employment, exercise such Employee/Optionee's Options to the extent that the Employee/Optionee was entitled to exercise them on the date of such termination of employment, unless such Options would expire pursuant to their terms at an earlier date, in which case such Options shall remain exercisable only until the earlier expiration date. (d) Death. If an Optionee dies while in the employ or affiliation of the Company or of a Subsidiary without having fully exercised such Optionee's Options, such Options may, within one (1) year of the Optionee's death (or within such shorter period as may be specified in the Option by the Committee), be exercised by the beneficiary designated pursuant to Paragraph 8(c), or if there is no such surviving beneficiary, by the person or persons to whom the Optionee's rights under the Option shall pass by will or by the applicable laws of descent and distribution to the extent that such deceased Optionee was entitled to exercise the Options on the date of death, unless such Options would expire pursuant to their terms at an earlier date, in which case such Options shall remain exercisable only until the earlier expiration date. (e) Leaves of Absence. An Employee/Optionee who is on a leave of absence pursuant to the terms of the Company's Administrative Policy No. B-11 "Unpaid Personal Leave of Absence" or any amended or replacement policy thereof, shall not, during the period of any such absence be deemed, by virtue of such absence alone, to have terminated such Employee/Optionee's employment with the Company or any Subsidiary except as the Committee may otherwise expressly provide. Except as otherwise determined by the Committee, or unless otherwise required by applicable law, unless such Employee/Optionee is on a Medical Leave (as hereinafter defined), all rights which such Employee/Optionee would have had to exercise Options granted hereunder will be suspended during the period of such leave of absence. Upon such Employee/Optionee's return to the Company or any Subsidiary, all rights to exercise Options shall be restored to the extent such Options are exercisable at that time. The Committee in its discretion may permit the exercise, while on a leave of absence, of Options which would otherwise expire or may defer the expiration date of such Options, but not beyond ten (10) years from their date of grant. An Employee/Optionee who is on a Medical Leave shall have all rights to exercise such Employee/Optionee's Options that such Employee/Optionee 5 6 would have had if such Employee/Optionee were not on a Medical Leave. For purposes of this Paragraph 7(e), "Medical Leave" shall be defined as a leave of absence for medical reasons which shall begin after ninety-one (91) consecutive calendar days of total disability leave and shall remain in effect until the earlier of a release by the attending physician for the Employee/Optionee to return to work or until the termination of employment. In the case of incentive stock options which would otherwise cease to be incentive stock options during a leave of absence by virtue of the operation of Treasury Regulations Section 1.421(7)(h)(2), the Committee, in its sole discretion, may permit exercise of the incentive stock option while on such a leave of absence or may permit conversion of such incentive stock option to a non-qualified stock option with otherwise identical terms. 8. EXERCISE OF OPTIONS (a) The Purchase Price shall be paid in full when the Option is exercised. The Purchase Price may be paid in whole or in part in (i) cash or (ii) whole shares of Common Stock of the Company evidenced by negotiable certificates, valued at the Formula Price in effect on the date of exercise; provided, however, that unless an exception is granted by the Secretary of this Corporation, shares of Common Stock of the Company acquired through the exercise of a stock option must have been owned by the Optionee for at least six months before such shares of Common Stock may be used to pay the Purchase Price. The Company or any Subsidiary shall be entitled to deduct from other compensation payable to each Optionee any sums required by federal, state or local tax law to be withheld with respect to the exercise of an Option but, in the alternative, may require the Optionee or other person exercising the Option to pay, or the Optionee or such other persons may pay, such sums to the employer corporation at the time of such exercise. The Committee shall have the authority in its discretion to allow withholding on exercise of an Option to be satisfied by withholding from the shares to be issued upon the exercise of the Option a number of shares, valued at the Formula Price in effect on the date of exercise of the Option, equal in value to the withholding requirement. (b) An Optionee shall have no rights as a shareholder of the Company with respect to any shares for which his or her Option is exercisable until the date of exercise of such Option and the issuance of a stock certificate for such shares. No adjustment shall be made for dividends, ordinary or extraordinary or whether in currency, securities or other property, distributions, or other rights for which the record date is prior to the date such stock certificate is issued. (c) Each Optionee may name a beneficiary or beneficiaries (who may be named contingently or successively) to whom the right to exercise Options following the Optionee's death (as provided in Paragraph 7(d)) shall pass. Each designation will revoke any prior designations by the same Optionee, shall be on a form prescribed by the Committee, and shall be effective only when filed by the Optionee in writing with the Committee during the lifetime of the Optionee. In the absence of any such designation, the right to exercise any unexercised Options following the death of the Optionee shall pass to the person or persons to whom the Optionee's rights under the Option pass by will or by the applicable laws of descent and distribution. 9. CHANGE IN CONTROL 6 7 Notwithstanding any provision of Paragraph 7 above to the contrary but subject to the provisions of Paragraph 4(b) above, any Option granted pursuant to the Plan shall, in the case of a Change In Control (as hereinafter defined) of the Company, become fully exercisable as to all shares of Common Stock to which it relates from and after the date of such Change In Control. For purposes of this Paragraph 9, the term "Change in Control" shall be deemed to occur upon any "person" (as defined in Section 13(d) of the Exchange Act), other than the Company or any Subsidiary or employee benefit plan or trust maintained by the Company or any Subsidiary, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of the Common Stock of the Company outstanding at such time, without the prior approval of the Board. If the provisions of this Paragraph 9 are limited by the $100,000 limit of Paragraph 4(b) above, the acceleration of exercisability provided under this Paragraph 9 shall be first applied to those incentive stock options having the lowest Exercise Price. Any remaining Options which would have become exercisable but for the $100,000 limit shall become exercisable on the first date on which they may become exercisable without exceeding the $100,000 limit. 10. LOANS The Company may, but shall not be obligated to, provide to any Optionee a loan or guarantee on behalf of any Optionee a loan to facilitate the exercise of Options on such terms and conditions as agreed to by the Committee. 11. CAPITAL ADJUSTMENTS The aggregate number of shares of the Company's Common Stock subject to this Plan, the maximum number of shares as to which Options may be granted to any one Optionee hereunder, and the number of shares and the Exercise Price shall be appropriately adjusted, as determined by the Committee in its discretion, for any increase or decrease in the number of shares of Common Stock which the Company has issued resulting from any stock split, stock dividend, combination of shares or any other change, or any exchange for other securities or any reclassification, reorganization, redesignation, recapitalization, or otherwise. 12. NO EMPLOYMENT OBLIGATION An Employee/Optionee's employment with the Company or a Subsidiary is not for any specified term and may be terminated by such Employee/Optionee or by the Company or a Subsidiary at any time, for any reason, with or without cause. Nothing in this Plan or in any option agreement pursuant to this Plan shall confer upon any Optionee any right to continue in the employ of, or affiliation with, the Company or a Subsidiary nor constitute any promise or commitment by the Company or a Subsidiary regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. 13. GOVERNMENT AND STOCK EXCHANGE REGULATIONS 7 8 The Company shall not be required to issue any shares upon the exercise of any Option unless and until the Company has fully complied with any then applicable requirements by the Securities and Exchange Commission, the California Corporations Commissioner, or other regulatory agencies having jurisdiction, and of any exchanges upon which Common Stock of the Company may be listed. Upon the exercise of an Option at a time when there is not in effect a registration statement under the Securities Act of 1933 or a similar statute (the "Act") relating to the stock issuable upon exercise thereof and available for delivery a prospectus meeting the requirements of Section 10(a)(3) of said Act, or if the rules or interpretations of the Securities and Exchange Commission so require, the stock may be issued only if the holder represents and warrants in writing to the Company that the shares purchased are being acquired for investment and not with a view to distribution thereof. 14. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN The Board or the Operating Committee of the Board may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board or the Operating Committee may deem advisable in order that Options granted thereunder shall conform to any change in the law, or in any other respect which the Board or the Operating Committee may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without the approval of a majority of the voting power of the capital stock of the Company present or represented and entitled to vote at a duly constituted meeting of the stockholders, (i) increase the maximum number of shares for which Options may be granted under the Plan, except as specified in Paragraph 11, (ii) change the provisions of Paragraph 6(c) relating to the establishment of the Exercise Price other than to change the manner of determination the fair market value of the Company's Common Stock to conform with any then applicable provisions of the Code or regulations issued thereunder, or (iii) permit the granting of Options to members of the Committee. No Option may be granted during any suspension, or after termination of the Plan. 15. NO IMPLIED RIGHTS OR OBLIGATIONS The Company, in establishing and maintaining this Plan as a voluntary and unilateral undertaking, expressly disavows the creation of any rights in Optionees or others claiming entitlements under the Plan or any obligations on the part of the Company, any Subsidiary or the Committee, except as expressly provided herein. 16. EMPLOYEES BASED OUTSIDE OF THE UNITED STATES Notwithstanding any provision of the Plan to the contrary, in order to foster and promote achievement of the purposes of the Plan or to comply with provisions of laws or regulations in other countries in which the Company and its subsidiaries operate or have employees, the Committee, in its sole discretion, shall have the power and authority to (i) determine which employees employed outside the United States are eligible to participate in the Plan, (ii) modify the terms and conditions of any Options granted to employees who are employed outside the United States and (iii) establish 8 9 subplans, modified option exercise procedures and other terms and procedures to the extent such actions may be necessary or advisable. 17. EFFECTIVE DATE The effective date of the Plan shall be July 14, 1995. 18. TERMINATION DATE Unless the Plan shall have been previously terminated by the Board or the Operating Committee of the Board, the Plan shall terminate on July 31, 1998, except as to Options theretofore granted and outstanding under the Plan at that date, and no Option shall be granted after that date. 19. GOVERNING LAW The Plan and all option agreements shall be construed in accordance with and governed by the laws of the State of Delaware. 9 EX-10.G 7 EXHIBIT 10.G 1 EXHIBIT 10.G KEYSTAFF DEFERRAL PLAN SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (Effective January 1, 1997) 2 KEYSTAFF DEFERRAL PLAN OF SCIENCE APPLICATIONS INTERNATIONAL CORPORATION 1. Purpose 1.1 The purpose of this Plan is to provide a means to enhance the Company's capacity to attract and retain outstanding directors and executives in key positions by assisting them in meeting their future financial security objectives. 2. Definitions 2.1 Whenever the following terms are used in this document and the attached Plan Agreement, they shall have the meaning specified below. 2.2 "Deferral Account" shall mean a bookkeeping account established by the Company for each Participant, in which shall be recorded the amounts deferred in accordance with this Plan and the attached Agreement. The Company shall credit to each Participant's Deferral Account an amount equal to the compensation which otherwise would have been paid had the Participant not elected to defer compensation. Such credits shall be made at the time compensation would have been paid to the Participant. The Deferral Account shall also receive quarterly earnings credits in accordance with provisions of Section 5. Separate Deferral Accounts shall be established to record amounts deferred (and earnings credits thereon) with respect to Plan Years beginning before and after December 31, 1990, to be referred to herein as Pre-1991 Deferral Accounts and Post-1990 Deferral Accounts, respectively. Except as otherwise stated herein, references to Deferral Account(s) shall include both the Pre-1991 and Post-1990 Deferral Account(s). 2.3 "Anniversary Date" shall be the last day of a Plan Year. 2.4 "Beneficiary" shall mean the person or persons, or the estate of a Participant, entitled to receive any benefits under this Plan upon the death of a Participant. 2.5 "Ceiling Excess Earnings" shall mean, for each Pre-1991 Deferral Account, the difference between the Participant's Pre-1991 Deferral Account if interest had been credited at a rate of Moody's plus 5% in each Plan Year and the Participant's actual current Pre-1991 Deferral Account. 1 3 A separate calculation of Ceiling Excess Earnings shall be made with respect to post-1990 Deferral Account(s) using a rate of Moody's plus 3%. 2.6 "Commitment Period" shall mean that period of time beginning with the subsequent Plan Year and extending for a number of Plan Years as determined from time to time by the Committee. 2.7 "Covered Compensation" shall mean a Director's compensation, as a Director of the Company, excluding expenses reimbursed, or an Executive's merit bonus in each Plan Year. The Committee, in its sole discretion, shall determine what constitutes a merit bonus. 2.8 "Committee" shall mean the administrative Committee appointed to manage and administer the Plan in accordance with the provisions of this Plan. 2.9 "Company" shall mean SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, its subsidiaries, or any successor. 2.10 "Director" shall mean any person not in regular full-time employment of the Company serving on the Board of Directors of SCIENCE APPLICATIONS INTERNATIONAL CORPORATION. 2.11 "Early Retirement Date" shall mean the date that the Participant attains his or her fifty-fifth (55th) birthday. 2.12 "Effective Date" shall be January 1, 1986. 2.13 "Employer" shall mean the Company and any subsidiary having one or more employees who are eligible to participate in the Plan and have been selected by the Committee to participate. Where the context dictates, the term "Employer" as used herein refers to the particular Employer which has entered into a Plan Agreement with a specific Participant. 2.14 "Executive" shall mean any person in the employment of the Company who is determined by the Committee to be serving in an executive capacity, excluding those persons meeting the definition set forth in Section 2.10. 2.15 "Master Plan Document" is this legal instrument containing the provisions of the Plan. 2.16 "Moody's Seasoned Corporate Bond Rate," sometimes referred to as "Moody's," is an economic indicator; an arithmetic average of yields of representative bonds: industrials, public utilities, AAA, AA, A and BAA. For 2 4 Plan purposes, Moody's Rate shall be determined by the Committee based on financial services or publications selected by the Committee. 2.17 "Normal Retirement Date" shall mean the date that the Participant attains his or her sixty-fifth (65th) birthday. 2.18 "Participant" shall mean any Executive or Director who elects to participate in the Keystaff Deferral Plan, signs a Plan Agreement, and is accepted into the Plan. 2.19 "Plan" shall mean the Keystaff Deferral Plan of the Employer which shall be evidenced by this instrument and by each Plan Agreement. 2.20 "Plan Agreement" shall mean the written agreement(s) entered into from time to time by and between an Employer and a Participant. A separate Plan Agreement shall be entered into with respect to the Pre-1991 Deferral Account and Post-1990 Deferral Account of a Participant. 2.21 "Plan Year" shall begin on January 1 of each year. 2.22 "Retirement" and "Retire" shall mean severance from employment with the Employer at or after the attainment of (i) age fifty-five (55) and ten (10) years of Plan participation or (ii) age sixty-five (65). The Committee shall have the sole discretion to determine whether Retirement has occurred in the case of an Executive who becomes a consulting employee or who continues to be affiliated with the Company as a consultant or under some other status. 2.23 "Termination of Employment" shall mean cessation of regular employment, voluntarily or involuntarily, but excluding Retirement or death, as determined by the Committee in its sole discretion. In the case of a Director, "Termination of Employment" shall mean the Director's ceasing to be a Director of the Company. The Committee shall have the sole discretion to determine (i) whether a change in status (e.g., from employee to consultant, from employee to consulting employee, or from director to employee, consulting employee or consultant) shall be considered a Termination of Employment, (ii) whether a leave of absence shall be considered a Termination of Employment, and (iii) when a consultant or consulting employee will be considered to have a Termination of Employment. 3. Eligibility 3.1 The Committee will determine which Executives and Directors of the Company are eligible to participate in the Plan. 3 5 4. Deferral Commitments 4.1 Deferral Elections Each Executive and Director who wishes to participate in the Plan must elect, prior to the first Plan Year of the Participant's eligibility, to defer during each year of the Commitment Period a fixed percentage of the Participant's Covered Compensation. This election will be irrevocable and binding upon the Participant, except as provided in Section 4.2, "Changes to Deferral Elections." Participants may elect to defer up to 100% but not less than 10% of Covered Compensation, in whole percentages, but not less than $1,000 (before reductions, if any, under Section 4.2.1). With respect to the Post-1990 Deferral Account elections, the Committee shall specify annual election periods during which irrevocable deferral elections by Participants shall be made. 4.2 Changes to Deferral Elections 4.2.1 The maximum allowable total deferral of Covered Compensation for all Participants under this Plan for any Plan Year will be determined by the Committee. In the event that Participant deferral elections are estimated to result in this maximum being exceeded, the following method will be used to reduce Participant deferral percentages so that the total estimated deferral is less than the maximum allowable. a) All Executives who have elected to defer more than 50% of Covered Compensation will be reduced, on an equal percentage basis, but not below 50% of Covered Compensation or $5,000, whichever is greater. b) If after implementation of subsection (a) above, the total deferral is still greater than the maximum allowable total deferral, all Executives' percentage deferrals will be reduced on an equal percentage basis until the maximum allowable total deferral is achieved. 4.2.2 In the event that a Participant rescinds, in whole or in part, his or her election to defer a percentage of Covered Compensation in any Plan Year, the Participant may not defer any Covered Compensation for the balance of the Plan Year, nor in the following Plan Year. 4.2.3 The Committee, in its sole discretion, may elect to terminate the Plan at any time pursuant to Section 9; in such event, deferrals will cease effective as of the termination date. 4 6 4.3 Rollover of Balances from Current Deferred Compensation Plan 4.3.1 Participants who hold a balance in the Company's current Deferred Compensation Plan may elect to transfer that balance on a bookkeeping basis into this Plan at the beginning of the first Plan Year. 5. Earnings on Participants' Accounts 5.1 Base Earnings on Deferral 5.1.1 Covered Compensation deferred by a Participant shall be credited to the Participant's Deferral Account as of the date of deferral. Interest in each Plan Year will be credited quarterly on the average Deferral Account balance for that quarter. The rate of interest applied to the Pre-1991 Deferral Account shall be at a base rate equivalent to an annual rate equal to Moody's Rate, and the rate applicable to the Post-1990 Deferral Account shall be at a base rate equivalent to an annual rate equal to the Moody's Rate less 1%. In each case, the Moody's Rate in effect on each Anniversary Date shall be used to determine the applicable rate of interest applied during the subsequent Plan Year. 5.2 Earnings on Rollover Balances 5.2.1 The portion of a Participant's Pre-1991 Deferral Account resulting from the transfer of a balance from the Company's current Deferred Compensation Plan will be credited quarterly with a rate of interest equivalent to 60% of the interest rate announced by Bank of America as its "prime rate" on the previous Anniversary Date for the first four (4) Plan Years. After the fourth Plan Anniversary Date, this portion of the Pre-1991 Deferral Account will be credited with interest quarterly at an effective annual rate equal to Moody's Rate plus 9% until the cumulative interest equals that amount of interest which would have been credited assuming that Moody's Rate had been used since Plan inception. At that time, the distinction between portions of the Pre-1991 Deferral Account from deferrals and from transfers will cease to exist. 5.3 Additional Earnings 5.3.1 The Committee may, in its sole discretion, determine whether and in what amount additional earnings shall be allocated to Participants' Deferral Accounts. It is anticipated, but not guaranteed, that for Pre-1991 Deferral Accounts, additional earnings will be allocated beginning with the 10th Anniversary Date of the Plan and that for Post-1990 Deferral Accounts, additional earnings will be allocated beginning on January 1, 2001. Whether additional earnings will be credited and their amount will depend upon several factors, including the Company's future tax rate and its after-tax return on 5 7 investments. Additional earnings in any Plan Year, if any, as determined by the Committee, will be allocated to each Participant's Deferral Account (except as otherwise provided in Section 6.1.3 and except for Deferral Accounts of Participants who have had a Termination of Employment prior to ten years of participation in the Plan) by the ratio of the Participant's Ceiling Excess Earnings to the sum of all Participants' Ceiling Excess Earnings as of the end of the Plan Year, with such additional earnings and Ceiling Excess Earnings calculated separately for Pre-1991 and Post-1990 Deferral Accounts. 6. Payout of Participants' Accounts 6.1 Early Withdrawal Option 6.1.1 Participants may elect a one-time early withdrawal of up to 75% of their Pre-1991 and/or Post-1990 Deferral Account(s) to be paid within 90 days following any Anniversary Date starting with the seventh Anniversary Date of Plan participation. 6.1.2 Participants shall make an annual election prior to each Anniversary Date starting with the 6th Anniversary Date whether to continue their deferral for one or more years or to receive the early withdrawal payment following the subsequent Anniversary Date. 6.1.3 Participants who elect the one-time early withdrawal of up to 75% of their Pre-1991 and/or Post-1990 Deferral Account(s) pursuant to this Section 6.1 shall not be entitled to receive additional earnings, if any, otherwise allocable under Section 5.3.1 to the remaining portion of their applicable Deferral Account(s) from which the withdrawal is made. 6.2 Termination Payouts 6.2.1 A Participant who has a Termination of Employment prior to one year of Plan Participation shall receive an amount equal to his or her Deferral Account, less any credited earnings. Payment shall be make in a lump sum within twelve months following Termination of Employment. 6.2.2 A Participant who has a Termination of Employment after one year of Plan Participation but prior to 10 years of Plan participation shall receive payment in a lump sum within twelve months following Termination of Employment equal to his or her Deferral Account(s) as of the most recent quarterly valuation. 6 8 6.2.3 A Participant who has a Termination of Employment after 10 years of Plan participation shall be subject and entitled to the Normal Payout provisions set forth in Section 6.4. 6.3 Survivor Payouts 6.3.1 If a Participant dies before Normal Payout commences and the Plan Agreement is in effect at the time of death, the Employer shall make a Survivor Payout, as defined in Section 6.3.2, to the designated Beneficiary. 6.3.2 The Survivor Payout shall consist of the Participant's Deferral Account(s) at the time of death. 6.3.3 The Survivor Payout shall be paid in a lump sum to the Beneficiary within twelve months following verification of the Participant's death. 6.3.4 Notwithstanding subsection 6.3.3 above, a Participant may elect on the Beneficiary form provided by the Committee that the Survivor Payout be made over a 20-, 40-, or 60-quarter period rather than as a lump sum. 6.4 Normal Payouts 6.4.1 Normal Payouts shall commence at age sixty-five (65), Retirement or ten (10) years of Plan participation, whichever is the latest to occur. 6.4.2 A Participant who Retires may request that Normal Payout commence upon such Retirement. The Committee in its sole discretion may grant such request in the event that the Participant demonstrates financial need and the cash flow of the Company permits such early commencement. 6.4.3 The Participant shall elect to receive the Normal Payout over a 20-, 40- or 60- quarter period. The first payment will commence within 90 days of the quarter end following Retirement. 6.4.4 If a Participant does not elect a payout option, the payments shall be over a 20-quarter period. 6.4.5 Normal Payout shall consist of the Participant's Deferral Account(s) spread equally over the elected payout period. Earnings, and additional earnings, if applicable, as provided in Subsection 5.3.1, shall continue to be credited to the remaining Deferral Account(s) during the payout period and shall be estimated so that approximately equal payments can be made. 7 9 6.4.6 If a Participant dies during the Normal Payout period, Normal Payout shall continue as scheduled to the Participant's Beneficiary. 6.4.7 The election provided in Section 6.4.3 shall be made during the initial Commitment Period of Plan participation and shall become irrevocable at the end of such period. 6.5 Payment for Notification of Death 6.5.1 If a Participant dies following either Retirement or Termination of Employment, the Company will pay a $5,000 notification payment of a lump sum to the Participant's Beneficiary within 90 days of the quarter end following verification of the Participant's death. 7. Beneficiary Designation 7.1 Upon forms provided by the Committee, each Participant shall designate in writing the Beneficiary or Beneficiaries whom such Participant desires to receive the benefits of this Plan, payable under Sections 6.3, 6.4 and/or 6.5, in the event of such Participant's death. 7.2 A Participant may from time to time change his or her designated Beneficiary or Beneficiaries without the consent of such Beneficiary or Beneficiaries by filing a new designation in writing with the Committee. 7.3 If a married Participant wishes to designate an individual other than his or her spouse as Beneficiary, such designation shall not be effective (i.e., the surviving spouse shall be treated as the sole Beneficiary) unless consented to in writing by the spouse, which consent shall acknowledge the effect of the designation and be witnessed by a member of the Committee (or an individual designated by the Committee) or acknowledged before a notary public. Notwithstanding the foregoing, spousal consent shall not be necessary if it is established to the satisfaction of the Committee that there is no spouse of the Participant or that the required consent cannot be obtained because the spouse cannot be located. The Company may rely upon the designation of Beneficiary or Beneficiaries last filed by the Participant in accordance with the terms of this Plan. 7.4 If the designated Beneficiary does not survive the Participant, or if there is no valid Beneficiary designation, amounts payable under the Plan shall be paid to the Participant's spouse, or if there is no surviving spouse, then to the duly appointed and currently acting personal representative of the Participant's estate. If there is no personal representative of the Participant's estate duly appointed and acting in that capacity within 60 days after the Participant's 8 10 death, then all payments due under the Plan shall be payable to the person or persons who can verify affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive the benefits specified hereunder pursuant to the laws of interstate succession or other statutory provision in effect at the Participant's death in the state in which the Participant resided. 7.5 In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead shall be paid to that person's then living parent(s) to act as custodian, or, if no parent of that person is living, to a custodian selected by the Committee to hold the funds for the minor under the Uniform Transfers to Minors Act, or similar law, in effect in the jurisdiction in which the minor resides. 8. Acceleration Provisions 8.1 Notwithstanding the provisions of Section 6 hereof, a Participant shall be entitled to request a hardship withdrawal of all or any portion of their Deferral Account or acceleration of payments of their Deferral Account if payments have already commenced under the payout option selected by the Participant. A Participant must make a written request to the Committee for a hardship withdrawal or request for accelerated payment, stating the reasons such withdrawal or acceleration is necessary because of a financial hardship. The Committee, in its sole discretion, shall determine whether or not to grant the Participant's request and, in so doing, may rely on the Participant's statements, and a hardship withdrawal or accelerated payment may be approved without further investigation unless the Committee has reason to believe such statements are false. The Participant shall specify from which of their Deferral Account(s) (i.e., Pre-1991 or Post-1990, or both) the hardship withdrawal shall be taken. 8.2 The Committee, acting in its sole discretion, may determine to accelerate, in whole or in part, payments of some or all Deferral Account(s) (including Deferral Account(s) as to which payments have not yet commenced) in the event of a threatened or actual change in control of the Company, or in the event that a change in the legal, accounting, or tax treatment of amounts deferred under the Plan are altered in a manner which would potentially subject the Company, the Participants, or both, to adverse tax or administrative burdens. 9 11 9. Amendment and Termination of Plan 9.1 The Company may, at its absolute and sole discretion, amend or terminate the Plan at any time. 9.2 In the event of Company-initiated Plan termination, Participants' entire Deferral Account(s), including credited interest, will be paid to Participants within twelve months of the quarter end following Plan termination. 10. Nature of Accounts 10.1 All amounts credited to the Deferral Account(s) shall remain the sole property of the Company and shall be usable by it as part of its general funds for any legal purpose whatsoever. The Deferral Account(s) shall exist only as bookkeeping entries for the purpose of facilitating the computation of earnings credits hereunder and such Deferral Account(s) shall not constitute trust funds, escrow accounts, or any other form of asset segregation in favor of anyone other than the Company. No participant shall have any interest in any specific asset of the Company by virtue of this Plan and each Participant's rights under this Plan shall at all times be limited to those of a general unsecured creditor of the Company. Although sometimes referred to in this Plan as "interest," amounts credited to Deferral Account(s) pursuant to Section 5.1, 5.2 and 5.3 may be treated as compensation for tax and payroll withholding purposes, pursuant to applicable Internal Revenue Code and Treasury regulation requirements. 11. Limitation on Rights of Participants 11.1 If a Participant is an employee of the Company, such employment is not for any specific term and may be terminated by the Participant or Company at any time, for any reason, with or without cause. Neither this Plan nor any election to defer compensation hereunder shall be held or construed to confer on any person any legal right to be continued as an employee, consultant or Director of the Company; nor to constitute any promise or commitment by the Company regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. 12. Non-Transferability 12.1 No right to payment under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same shall be void. No 10 12 right to payment shall in any manner be liable for, or subject to, the debts, contracts, liabilities or torts of the person entitled thereto. 13. Restriction Against Assignment 13.1 The Participant or Beneficiary shall not have the power to transfer, assign, anticipate, modify, or otherwise encumber in any manner whatsoever any of the payments that will become due pursuant to this Plan, nor shall said payments be subject to attachment, garnishment or execution, or be transferable by operation of law in event of bankruptcy or insolvency. 14. Binding Effect 14.1 The Plan Agreement or Agreements attached hereto, when executed, is/are solely between the Company and the Participant. The Participant and any Beneficiary shall have recourse only against the Company for its enforcement, and any Plan Agreement shall be binding upon the Beneficiary, heirs, and personal representative of the Participant and upon the successors and assigns of the Company. 15. Settlement of Disputes 15.1 If any disputes arise with regard to the interpretation of any of the provisions of this Plan or with regard to the amount of any payments due under this Plan and the Agreement, the Committee shall make any resolution of such disputes which it deems, in its sole discretion, to be in the best interest of the Company and the Participants. Any such determinations made by the Committee shall be final and binding on all Participants in the Plan. 15.2 The Committee shall adopt procedures, consistent with Section 503 of the Employee Retirement Income Security Act of 1974, with respect to notice to Participants of claims denied under the Plan and review of denied claims. 16. Administration 16.1 The Plan shall be administered by the Committee, as appointed by the President of the Company. 11 13 17. Forfeiture Any payment due to a Participant hereunder which is not claimed by the Participant, his or her Beneficiary, his or her estate or other person legally entitled thereto within four years after becoming payable shall be forfeited and canceled and shall remain with the Company and no other person shall have any right thereto or interest therein. The Company shall have no duty under this Agreement to give notice to any person other than the Participant or his or her designated Beneficiary that amounts are payable hereunder. 12 EX-10.K 8 EXHIBIT 10.K 1 EXHIBIT 10(k) January 18, 1996 Admiral William A. Owens, USN Vice Chairman of the Joint Chiefs of Staff Quarters 8 Fort Myer, VA 22211 Dear Bill: Based upon our discussions, I am pleased to offer you a position in the senior management of Science Applications International Corporation (SAIC) commencing March 4, 1996. You will be reporting to me in our San Diego office at a weekly starting salary of $6,730.77 which is equivalent to a rate of $350,000 per year. At our January 12, 1996, Board of Directors meeting, you were elected as a Class III Director and Vice Chairman of the Board effective March 4, 1996. As a Class III Director, your term of office will continue through July 12, 1996, when we have our annual stockholders meeting. Your name will be placed in nomination at that time for a three-year term of office. Initially, I would like you to work with me and other senior managers to determine the future strategic business direction of the Company, and to develop and execute tactical plans to build the Company's business in key areas. Specifically, I look forward to your playing a major role in expanding our overseas business and in coordinating internally our joint military activities. In the latter undertaking, our Military Policy and Operations Research Group will be available to assist you. You will also assist me in organizing the Company's structure to best service our customers, and to provide career recognition to our key managers and employees. As a senior Manager and Board member, you will also participate in our Executive Bonus Compensation Plan. The program provides bonus compensation to our Executive Managers based on performance. Your minimum annual bonus for the first three years of your employment will be $350,000, with the first payment made in April 1996. With respect to the first bonus payment, $300,000 of the bonus payment will be deferred pursuant to the terms of the SAIC Executive Deferred Stock Compensation Plan. Your base salary of $350,000 per year and your minimum annual bonuses of $350,000 are guaranteed for the first three years of your employment ending February 28, 1999. These payments totaling $2,100,000 are guaranteed unless you decide to terminate your employment with the Company, or are terminated for cause. In the event you are terminated at the end of your first three years of employment with the Company, your SAIC stock will be repurchased. For purposes of this cash repurchase, the Company will treat all unvested options and stock that you hold as fully vested on the date of your termination; with the exception of unvested shares 2 William A. Owens Page 2 January 18, 1996 granted under the Management Stock Compensation Plan. For purposes of this agreement, termination for cause is defined as an action by you which involves willful misfeasance or gross negligence in connection with the performance of your assigned duties, or conviction of a criminal offense. I assume your discussions with Steve Rabb have familiarized you with the Company's fringe benefit programs. In addition, you will receive the following executive benefits from the Company. Twenty vacation days per year Automobile allowance of $825 per month plus reasonable operating expenses Reimbursement for reasonable travel and entertainment expenses Reimbursement for membership in two social clubs approved by me Reimbursement for reasonable relocation expenses incurred in your move to San Diego As we have discussed, I will review and approve on a case by case basis, certain outside activities which will benefit SAIC, such as speaking engagements and directorships, and you will be allowed to retain payments for these services assuming SAIC is not charged for your time and reimbursed for all expenses incurred related to these activities. In addition, your employment is contingent upon the following documents being completed, signed, and returned on your first day of work: Invention, Copyright and Confidentiality Agreement Education Summary and Pre-Employment Statement Mutual Agreement to Arbitrate Claims Standards of Business Ethics and Conduct Certification Employment Eligibility Certification (I-9) (w/required documents) SAIC has a strong policy against employee use of illegal drugs and substance abuse. As discussed, your employment offer is contingent upon your successfully passing a medical laboratory screen for illegal drugs. Although the use of illegal drugs or substances can be cause for termination should you become employed by SAIC, it is understood that you or the Company may terminate this employment relationship at any time with or without cause or notice. 3 William A. Owens Page 3 January 18, 1996 This employment offer is effective through February 10, 1996, and contingent upon your having provided me with a copy of a letter from the Department of Defense's Designated Agency Ethics Official which states that the terms of this offer are consistent with and permitted by all applicable statutes and regulations. I request that you indicate your acceptance by signing the enclosed duplicate employment offer letter, and returning it and the letter from the Department of Defense's Designated Agency Ethics Official to my attention. If you have any questions, feel free to call me at (619) 546-6658 or Dan Baldwin at (619) 546-6338. The terms of this offer letter are to be considered strictly confidential and are not to be discussed with anyone other than Department of Defense officials without the express permission of Science Applications International Corporation. We look forward to your early acceptance of this offer and to a mutually rewarding association. Sincerely, SCIENCE APPLICATIONS INTERNATIONAL CORPORATION S/ J.R. BEYSTER - ---------------------------- J.R. Beyster Chairman and CEO I accept the terms and conditions of this employment offer. S/ WILLIAM A. OWENS January 20, 1996 - ------------------- ---------------- (Name) (Date) 4 EXHIBIT 10(l) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT is entered into on March 30, 1998, by and between Science Applications International Corporation ("SAIC") and William A. Owens ("Owens"). WHEREAS, SAIC and Owens have heretofore entered into an employment agreement dated January 18, 1996, (the "Employment Agreement") which provided for a three-year term of employment ending February 28, 1999; and WHEREAS, the Employment Agreement also provided certain remedies for Owens in the event he was terminated without cause on or before the end of the three-year term of employment; and WHEREAS, SAIC and Owens have agreed that, with the decision of SAIC's founder to remain active for an additional two years and in the absence of specific assurances of Owens becoming SAIC's Chief Executive Officer in the near term, it is not in either party's interests to extend the term of Owens' employment beyond February 28, 1999; and WHEREAS, the parties believe it is in their best interests to effect an orderly transition upon the termination of the term of the Employment Agreement and set forth herein any remaining obligations, other than those related to the protection of SAIC's trade secrets and other proprietary materials, relating to Owens' employment by SAIC; NOW THEREFORE, in consideration of the foregoing, and the mutual promises and covenants set forth below, SAIC and Owens agree to amend the Employment Agreement by adding the following terms: 1. On or about March 30, 1998, SAIC and Owens will issue a joint press release to the effect that, based upon the plans by SAIC's Chief Executive Officer to continue his term of office for an additional two-year period, Owens has elected to seek employment elsewhere, as he had joined SAIC with the expectation that its Chief Executive Officer would have elected to retire by this time. 2. Owens will submit his resignation as Vice Chairman and a member of the SAIC Board of Directors effective as of April 9, 1998, and as President & Chief Operating Officer effective as of June 1, 1998, but will continue as a regular full-time employee under the terms set forth below. 3. During the period of March 24, 1998, through August 1, 1998, Owens will work with SAIC's management to transition his responsibilities, but he will also be free to seek alternative employment if it does not unreasonably interfere with the orderly transition of his responsibilities. 4. Beginning on August 1, 1998, and continuing through August 1, 1999, Owens will be free to expend his full time and energies in search of alternative employment. During said period, and the preceding four-month period, the Company will provide office space and the support of an administrative assistant to the extent that Owens needs such services in connection with his employment search. In connection with Owens' employment search, SAIC's executive officers agree to provide positive employment references, or to refer any such inquiries to the Chairman of SAIC's Board of Directors, who will provide positive employment references, and 1 5 further agree not to otherwise disparage Owens to any third party. 5. Regardless of whether Owens has accepted or has begun employment elsewhere, until August 1, 1999, Owens will continue to be paid his salary of $33,333 per month (payable in biweekly installments, less taxes and other applicable withholdings) and continue to receive comprehensive leave accruals, medical and dental benefits, and retirement plan contributions in accordance with the tems and conditions of such plans and programs. Owens will also be eligible to receive a pro rata bonus for his efforts during the period of February 1, 1998, through August 1, 1998, in an amount not to exceed 50% of his salary for said period. In the event that Owens has secured another position prior to August 1, 1999, he may elect to receive the continuing salary described above as a lump sum payment, less applicable taxes and other withholdings. If Owens makes such an election, SAIC will no longer be responsible for providing comprehensive leave, medical and dental benefits, and retirement plan contributions described above. 6. SAIC will pay Owens the sum of $140,000 to compensate Owens for the closing costs, commissions, tax payments, and any loss associated with the sale of his personal residence. This amount will be payable on August 1, 1998. 7. On February 1, 1999, with the exception of unvested shares granted under the Management Stock Compensation Plan, all of Owens' unvested SAIC Class A Common Stock and options to acquire such stock, will become fully vested. On or before February 28, 1999, at Owens election, he will be allowed to exercise any outstanding options he may have to acquire shares of SAIC Class A Common Stock (Owens currently has options to acquire 95,000 shares) and, provided that Owens does not disparage SAIC or its executive officers or recruit SAIC employees, SAIC will allow him to retain the stock realized as option proceeds as well as any other shares of SAIC Class A Common Stock that he may own at the time for up to five years under the terms of a contract attached hereto and identified as Exhibit I. 8. Owens will remain affiliated with SAIC, provided that Owens does not disparage SAIC or its executive officers or recruit SAIC employees, until he reaches the age of 59-1/2 in order to respond to any questions that SAIC management may have with respect to matters which may have been under his purview, provided that any such inquiries do not interfere with his then current employment or involve an unreasonable amount of time. The payments and benefits provided to Owens herein shall be the compensation for such services. As a result of his continuing affiliation with and services to SAIC, Owens will be able to remain a participant in SAIC's Key Executive Deferred Stock Compensation Plan until he reaches the age of 59-1/2, at which time he will begin receiving the ten-year distribution of the amounts he has deferred into the Key Executive Deferred Stock Compensation Plan in accordance with the terms of such plan. 9. All account balances that Owens may have in SAIC's Management Stock Compensation Plan, Stock Compensation Plan, Profit Sharing Retirement Plan, CODA, and Employee Stock Retirement Plan will be governed by the terms of said plans. 10.This Amendment is a complete statement of all agreements and understandings of the parties with respect to the rights and obligations which Owens and SAIC have to each other with respect to Owens' employment and the termination of that employment. Notwithstanding the preceding sentence, the continuing obligations that Owens may have to SAIC to protect its trade secrets and other proprietary materials under separate agreements with SAIC and SAIC's obligations of indemnity to Owens under its Certificate of Incorporation and Bylaws shall not be extinguished by this Amendment. Upon the performance by SAIC of its obligations to Owens under this Amendment, SAIC shall have no further obligation or liability to Owens. 2 6 IN WITNESS WEHREOF, the parties hereto have executed this agreement effective on the date first above written. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION WILLIAM A. OWENS By: S/ J.ROBERT BEYSTER S/ WILLIAM A. OWENS ------------------------------- ------------------- J. Robert Beyster Chairman & CEO 3 7 Exhibit I ALUMNI STOCK AGREEMENT This ALUMNI Stock Agreement ("Agreement") dated March 30, 1998 is made by and between William A. Owens ("ALUMNI") and Science Applications International Corporation, a Delaware corporation ("SAIC"). RECITALS WHEREAS, ALUMNI was employed by SAIC until February 28, 1999 (the "Termination Date"); and WHEREAS, pursuant to Article IV of SAIC's Certificate of Incorporation, SAIC has the right to repurchase all shares of SAIC Class A Common Stock owned by ALUMNI or affiliated with ALUMNI's account which were issued after October 1, 1981 and all shares of SAIC Class A Common Stock which ALUMNI has the right to obtain pursuant to SAIC's benefit plans, option agreements or other contractual agreements at the time ALUMNI terminated ALUMNI's employment with SAIC (the "ALUMNI Shares") at the Formula Price in effect on the Termination Date; and WHEREAS, pursuant to Article IV of SAIC's Certificate of Incorporation, in order to exercise its right to repurchase the ALUMNI Shares, SAIC must provide written notice to ALUMNI at ALUMNI's address of record within sixty (60) days after the Termination Date; and WHEREAS, the parties hereto desire to extend the time of SAIC's right to repurchase the ALUMNI Shares until sixty (60) days after the five year anniversary of the Termination Date; NOW, THEREFORE, the parties agree as follows: 1. SAIC's right to repurchase the ALUMNI Shares shall be extended to sixty (60) days after the five year anniversary of the Termination Date; provided however that, if ALUMNI disparages SAIC or its executive officers, or recruits SAIC employees, SAIC's rights of repurchase may be exercised at any time upon sixty (60) days notice of the Formula Price in effect on the date of the notice. 2. In the event SAIC elects to exercise its right to repurchase the ALUMNI Shares, SAIC shall provide written notice to ALUMNI at ALUMNI's address of record within sixty (60) days after the five year anniversary of the Termination Date. 3. Such right of repurchase shall be at the Formula Price in effect on the five year anniversary of the Termination Date. 1 8 4. Payment for the repurchase of the ALUMNI Shares will be made by corporate check. ALUMNI agrees to provide SAIC with the share certificates representing the ALUMNI Shares, or with a Lost Certificate Affidavit for the ALUMNI Shares. 5. This Agreement constitutes the final, complete and exclusive agreement and understanding of the parties hereto in respect of the subject matter contained herein, and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by an officer, employee or representative of any party hereto. 6. This Agreement shall be deemed to have been entered into in the State of California, and all questions of the validity, interpretation, or performance of any of its terms or of any rights or obligations of the parties to this Agreement shall be governed by California law. 7. Subject to applicable law, this Agreement may be amended, modified and supplemented only by written agreement between the parties hereto which states that it is intended to be a modification of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. "SAIC" SCIENCE APPLICATIONS INTERNATIONAL CORPORATION By: /s/ J. D. HEIPT ----------------------------- J. D. Heipt Senior Vice President for Administration "ALUMNI" /s/ WILLIAM A. OWENS ------------------------------------ Signature William A. Owens ------------------------------------ Printed Name 2 EX-10.L 9 EXHIBIT 10.L 1 EXHIBIT 10(l)-1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of December 18, 1997, by and among Bell Communications Research, Inc., a Delaware Corporation ("Bellcore"), Science Applications International Corporation, a Delaware corporation ("SAIC"), and Richard C. Smith, Jr. ("Officer"). RECITALS WHEREAS, Bellcore is a wholly-owned subsidiary of SAIC; and WHEREAS, Bellcore desires to employ Officer as its Chief Executive Officer, and Officer desires to accept employment as Bellcore's Chief Executive Officer; and WHEREAS, each party wishes to set forth the provisions and conditions upon which Officer will be employed by Bellcore; AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. BASIC AGREEMENT. Bellcore shall employ Officer, and Officer shall accept employment with Bellcore, subject to the provisions and conditions set forth in this Agreement. 2. TERM OF EMPLOYMENT. Officer's employment with Bellcore pursuant to this Agreement shall commence on the later of (a) January 2, 1998 and (b) the date which is thirty (30) days after execution of this Agreement (hereinafter, the "Effective Date") and shall continue until a date designated as the date of termination of Officer's employment with Bellcore in a written notice of termination delivered by either Officer or Bellcore to the other party at least thirty (30) days prior to the date so designated. 3. EMPLOYMENT DUTIES; EMPLOYMENT AT-WILL. 3.1 Employment and Duties. Officer shall serve as Bellcore's Chief Executive Officer. Officer's authority shall be superior to that of all other officers of Bellcore, excluding only the Chairman and Vice-Chairman of Bellcore's Board of Directors. Officer at all times shall be subject to the policies and direction of Bellcore's Board of Directors and shall report to the Chairman of Bellcore's Board of Directors. During Officer's employment with Bellcore, Officer shall render exclusive and full-time services to SAIC and Bellcore and shall perform such duties as reasonably may be expected of the incumbent of his position. Officer further agrees to perform his duties faithfully, diligently and to the best of his ability and to act solely in the best interests of Bellcore and SAIC in connection with his employment with Bellcore. Officer shall not accept or undertake any position as consultant, director or advisor to any other company, 1 2 person or business entity or association without the prior written approval of SAIC's Vice President for Administration. 3.2 Employment-At-Will. Officer understands and agrees that he is an employee-at-will, and that his employment may be terminated by Bellcore at any time, with or without Cause (as hereinafter defined), subject only to Bellcore's obligation (if any) to provide those benefits set forth under paragraph 4.6 hereof. 4. COMPENSATION. 4.1 Inducement Stock Award. (a) Grant of SAIC Common Stock. As consideration (i) for Officer's agreement to accept employment with Bellcore and for Officer's performance of the Officer Covenants (as defined in Section 6), and (ii) to compensate Officer for the loss of vesting stock and options granted or awarded to Officer by his previous employer, SAIC shall cause to be irrevocably deposited in trust for the benefit of Officer and his beneficiaries, under the terms set forth in paragraph 4.1(b) below, vesting shares of SAIC's Class A Common Stock ("Common Stock") having a value of $1,500,000.00, determined by reference to the formula price for each share of Common Stock (as determined by SAIC's Board of Directors) (the "Formula Price") in effect as of the Effective Date (hereinafter, the "Inducement Stock Award"). (Such trust shall be referred to hereinafter as the "Rabbi Trust.") The Inducement Stock Award shall be deposited in the Rabbi Trust within [thirty (30) days] following the Effective Date. (b) Terms of Rabbi Trust: Distribution. The instrument governing the Rabbi Trust (hereinafter, the "Trust Instrument"), to the extent reasonably necessary to assure that SAIC's obligations with respect to the Inducement Stock Award will continue to be treated as "unfunded" for purposes of the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code"), shall provide that upon insolvency of SAIC the assets of the Rabbi Trust will be subject to the claims of SAIC's general creditors. The Trust Instrument shall provide that in other respects the assets of the Rabbi Trust will be maintained for the exclusive benefit of Officer and his beneficiaries, and will otherwise be subject to all fiduciary and other requirements of applicable state trust law. The Trust Instrument shall provide for the distribution of the Inducement Stock Award in accordance with its terms and conditions. 4.2 Base Salary. Commencing upon the Effective Date, and continuing until approximately April, 1999 (following completion of SAIC's fiscal year ending approximately January 31, 1999), as consideration for performance of Officer's duties as set forth in Section 3 of this Agreement, Bellcore shall pay to Officer a base salary at the rate of $500,000.00 per annum, which shall be payable in installments in accordance with Bellcore's standard practices and procedures. Following completion of SAIC's fiscal year ending approximately January 31, 1999 (in approximately April, 1999), Officer's base salary shall be re-evaluated and determined by Bellcore's Board of Directors. 2 3 4.3 Bonus Compensation. (a) Annual Incentive Bonus. Bellcore shall pay to Officer, with respect to each SAIC fiscal year beginning with the fiscal year ending approximately January 31, 1999, an annual incentive bonus in such amount as shall be determined by Bellcore's Board of Directors, in its sole discretion, subject to Officer's continued employment on the date such bonus is paid. Officer's target incentive bonus with respect to each such fiscal year shall be $500,000.00 per annum ("Target Amount") based upon the attainment of performance criteria established by SAIC as described in Section 5 of this Agreement. (b) Form of Payment. Officer's annual incentive bonus shall be paid in (i) cash, (ii) fully vested shares ("Vested Shares"), of Common Stock, and(or) (iii) vesting shares ("Vesting Shares") of Common Stock, in such portions as Bellcore's Board of Directors deems appropriate; provided, however, that (1) not more than fifty percent (50%) of Officer's incentive bonus shall be paid in cash and (2) not more than fifty percent (50%) of Officer's annual incentive bonus will be paid in Vesting Shares unless Officer elects in advance to receive a greater portion of his annual incentive bonus in Vesting Shares. (c) Time of Payment. Officer's annual incentive bonus shall be paid at such time as SAIC or Bellcore pays annual incentive bonuses to other similarly situated employees, which customarily occurs within sixty (60) days following completion of the fiscal year with respect to which such bonuses relate. (d) Vesting Schedule. Vesting Shares shall be granted in accordance with the provisions and conditions of the Bellcore Stock Incentive Plan and shall be subject to Bellcore's standard Bonus Compensation Stock Restriction Agreement as it may be in effect from time to time ("Restriction Agreement"), which shall be substantially in the form of Exhibit 4.3(d) attached hereto, and shall vest according to the following schedule: (i) twenty percent (20%) of such Vesting Shares shall vest upon the first, second and third anniversaries of the award of such Vesting Shares; and (ii) forty percent (40%) of such Vesting Shares shall vest upon the fourth anniversary of the award of such Vesting Shares. 4.4 Stock Options. (a) Initial Inducement Option Award. As consideration for Officer's performance of the Officer Covenants, and in order to induce Officer to accept employment with Bellcore, as soon as practicable following the Effective Date, SAIC shall grant (or cause Bellcore to grant) to Officer vesting options to purchase 40,000 shares of Common Stock ("Vesting Options"). (b) Annual Option Award. Concurrently with payment of Officer's annual bonus for SAIC fiscal year 1999 and for each SAIC fiscal year thereafter, SAIC shall grant (or cause Bellcore to grant) to Officer additional Vesting Options in such amounts as SAIC or Bellcore deems appropriate. Officer's target annual Vesting Option award shall be 30,000 Vesting Options based upon the attainment of performance criteria established by SAIC and Bellcore pursuant to Section 6 of this Agreement. 3 4 (c) Option Terms. All Vesting Options shall be awarded in accordance with SAIC's standard practices and procedures and pursuant to the provisions of SAIC's 1995 Stock Option Plan, as amended, and shall be subject to SAIC's standard Non-Qualified Stock Option Agreement and Confirmation, as it may be in effect from time to time ("Standard Option Agreement"), which currently is in the form of Exhibit 4.4(c) attached hereto. Vesting Options shall vest in accordance with the provisions of such Standard Option Agreement, which currently provides that (i) twenty percent (20%) of such Vesting Options shall vest at the end of each of the first, second and third anniversaries of the award with respect thereto, and (ii) forty percent (40%) of such Vesting Options shall vest on the fourth anniversary of such award. 4.5 Additional Employee Benefits. (a) Relocation Expenses. Officer shall be entitled to reimbursement of expenses incurred in connection with relocation of his family and principal residence to New Jersey in accordance with SAIC's standard relocation policy. (b) Company Automobile. Bellcore shall provide Officer with a company vehicle or an automobile allowance in accordance with Bellcore's officer automobile policy as it may be amended from time to time, but only for such time as Bellcore continues to maintain such policy. (c) Deferral Programs. Officer shall be entitled to participate in such salary and (or) bonus deferral plans or programs as may be maintained by Bellcore during the term of Officer's employment with Bellcore. (d) Health and Welfare Benefits. Except as set forth in this paragraph 4.5, Officer shall be eligible, during and subsequent to his employment, only for (i) the standard health and welfare benefits, including medical, dental, disability and group life and disability insurance, which generally are made available to all Bellcore employees, and (ii) for such other employee benefit plans, including Bellcore's non-qualified benefit plans, as are set forth on Exhibit 4.5(d) or as otherwise may be approved by SAIC in writing. Officer acknowledges and agrees that only the base salary payable pursuant to paragraph 4.2 and the cash portion of the annual incentive bonus payable pursuant to paragraph 4.3 shall be credited for purposes of determining the benefits payable to Officer under any of Bellcore's pension plans which are set forth on Exhibit 4.5(d). 4 5 4.6 Termination of Employment; Severance Payment. (a) No Termination Allowance Plan Benefits. Officer shall not be eligible for a payment under Bellcore's Termination Allowance Plan or any other severance plan or program maintained by Bellcore. In lieu thereof, Officer will be eligible only for the severance benefits determined under this paragraph 4.6. Upon termination of Officer's employment with Bellcore for any reason, all rights and entitlements of Officer under this Agreement (other than the right to receive the severance benefits determined under this paragraph 4.6) immediately shall terminate. (b) Severance Payments. If, at any time, Officer is involuntarily terminated without Cause (as defined in paragraph 4.8) or is subject to Constructive Termination (as defined below), Officer shall be entitled: (i) to receive a severance payment equal to Two Million Dollars ($2,000,000.00), which shall be payable in twenty-four (24) equal monthly installments of $83,333.33, and which shall be subject to deductions and tax withholding pursuant to paragraph 4.7; (ii) to receive an additional severance payment, with respect to any Vesting Options which have not yet vested as of the date of termination of Officer's employment with Bellcore ("Unvested Options"), equal to the product of (A) the amount by which the Formula Price of the Common Stock in effect as of the date of termination of Officer's employment with Bellcore exceeds the exercise price of such Unvested Options and (B) the number of shares of Common Stock covered by such Unvested Options. (c) Rights Upon Termination. Upon any termination of Officer's employment with Bellcore, for whatever reason, Officer shall be entitled to: (i) base salary through the date of such termination; (ii) the balance of any incentive and compensation awards earned and payable (but not yet paid), in accordance with (1) the terms of the plan or program under which such incentive or compensation awards are made or (2) Bellcore's custom and practice; (iii) the right to exercise any outstanding stock options which have vested in accordance with their terms; (iv) rights under any outstanding stock awards which have vested in accordance with their terms; (v) a lump-sum payment in respect of accrued but unused vacation days (determined in accordance with Bellcore's standard practices and procedures) at his base salary rate on the date of such termination; 5 6 (vi) other benefits (if any), except as provided herein, in accordance with applicable plans, programs and arrangements of Bellcore, including COBRA; and (vii) a payment with respect to any Vesting Shares (but only those Vesting Shares) which Officer has elected to receive or to have deposited into the Rabbi Trust in lieu of cash or fully vested shares of Common Stock, specifically including but not limited to Vesting Shares deposited into the Rabbi Trust with respect to the Inducement Stock Award and Annual Bonus which Officer has deferred (hereinafter, the "Elective Vesting Stock"), equal to the product of (A) the Formula Price of Common Stock (in effect as of the date of termination of Officer's employment with Bellcore) and (B) the number of shares of Elective Vesting Stock which have not yet vested as of the date of termination of Officer's employment with Bellcore. (d) Certain Additional Payments by Bellcore. (i) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or distribution by or on behalf of Bellcore and SAIC (collectively, the "Company") to or for the benefit of Officer as a result of a Change In Control (as defined below), whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this paragraph 4.6(d) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by Officer with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Officer shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Officer of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment, Officer retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (ii) Subject to the provisions of paragraph 4.6(d)(iii) and (iv) below, all determinations required to be made under this paragraph 4.6(d), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm selected by the Company (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Within 30 days after receipt of notice from Officer that there has been a Payment, or such earlier time as is requested by the Company, the Accounting Firm shall make all determinations required under this paragraph 4.6(d), shall provide to the Company and Officer a written report setting forth such determinations, together with detailed supporting calculations, and, if the Accounting Firm determines that no Excise Tax is payable, shall deliver the Accounting Opinion to Officer. Any Gross-Up Payment, as determined pursuant to this paragraph 4.6(d), shall be paid by the Company to Officer within 30 days after receipt of the Accounting Firm's determination. Subject to the remainder of this paragraph 4.6(d), any determination by the Accounting Firm shall be binding upon the Company and Officer; provided, however, that Officer shall only be 6 7 bound to the extent that the determinations of the Accounting Firm hereunder are reasonable and reasonably supported by applicable law. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. If it ultimately is determined in accordance with the procedures set forth in paragraph 4.6(d)(iii) that Officer is required to make a payment of any Excise Tax, the Accounting Firm shall reasonably determine the amount of the Underpayment (if any) that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Officer. In determining the reasonableness of Accounting Firm's determinations hereunder, and the effect thereof, Officer shall be provided a reasonable opportunity to review such determinations with Accounting Firm and Officer's tax counsel. (iii) Officer shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would result in the imposition of any Excise Tax. Such notification shall be given as soon as practicable but no later than 30 calendar days after Officer actually receives notice in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid; provided, however, that the failure of Officer to Notify the Company of such claim (or to provide any required information with respect thereto) shall not affect any rights granted to Officer under this paragraph 4.6(d) except to the extent that the Company is materially prejudiced in the defense of such claim as a direct result of such failure. Officer shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Officer in writing prior to the expiration of such period that it desires to contest such claim, Officer shall: A. give the company any information reasonably requested by the Company relating to such claim; B. take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to Officer C. cooperate with the Company in good faith in order effectively to contest such claim; and D. if the Company elects not to assume and control the defense of such claim, permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Officer harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation 7 8 and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph 4.6(d), the Company shall have the right, at its sole option, to assume the defense of and control all proceedings in connection with such contest, in which case it may pursue of forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may either direct Officer to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Officer agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Officer to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Officer, to the extent not previously advanced pursuant to this paragraph 4.6(d), on an interest-free basis and shall indemnify and hold Officer harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further that any extension of the statute of limitations relating to payment of taxes for the taxable year of Officer with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's right to assume the defense of and control the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and Officer shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Officer of an amount advanced by the Company pursuant to paragraph 4.6(d) Officer becomes entitled to receive any refund with respect to such claim, Officer promptly shall pay to the Company the amount of such refund (together with any interest paid of credited thereon after taxes applicable thereto). In addition, in the case of any refund of an advanced amount that Officer is required to repay to the Company pursuant to the preceding sentence, Officer shall also repay to the Company the amount of any additional payment received by Officer from the Company in respect of taxes on such advanced amount, to the extent Officer is entitled to a refund of (or has yet paid) such taxes. If, after the receipt by Officer of an amount advanced by the Company pursuant to paragraph 4.6(d)(iii), a determination is made that Officer is not entitled to a refund with respect to such claim and the Company does not notify Officer in writing of its intent to contest such denial or refund prior to the expiration of 60 days after such determination, then such advance shall, to the extent of such denial, be forgiven and shall not be required to be repaid and the amount of forgiven advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) For purposes of this paragraph 4.6(d), Change in Control will be deemed to have occurred for purposes hereof, if (i) a change of stock ownership of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any successor Item of a similar nature has occurred; or (ii) the acquisition of beneficial ownership, directly or indirectly, by any person, other than in the capacity of an underwriter, (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities occurs; or (iii) during any period of two consecutive years, a majority of the Board of Directors ceases, for any reason, to consist of Continuing Directors; provided that a Change In Control will not be deemed to have occurred for purposes hereof with respect to any 8 9 person meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended. As used herein, "continuing Director" shall mean a member of the Board of Directors (i) as of the beginning of the relevant two year period or (ii) who was nominated or appointed (before initial election as a director) to serve as a director by a majority of the then Continuing Directors. Notwithstanding anything contained herein to the contrary, a Change In Control will not be deemed to have occurred for purposes hereof when within any 12 month period a majority of the Board of Directors resigns and the replacement directors (the "New Directors") are nominated or appointed by the remaining members of the Board of Directors. (e) No Offset. Upon any termination of his employment with Bellcore, Officer shall be under no obligation to seek employment elsewhere, and there shall be no offset against amounts due to Officer under this Agreement on account of any remuneration or other benefit attributable to any subsequent employment that he may obtain. (f) No Penalty. The parties agree that the amounts payable to Officer pursuant to this Section 4.6 are in the nature of severance payments considered to be reasonable by SAIC and Bellcore and are not in the nature of a penalty. (g) Time For Payment. The payments provided in Section 4.6(b) and 4.6(c) shall be payable to Officer within thirty (30) days following termination of his employment with Bellcore. (h) Exclusive Remedy. Officer shall be entitled to receive the severance benefits described in paragraph 4.6(b) only under the circumstances described in paragraph 4.6(b). Officer's right to receive the severance payments described in paragraph 4.6(b) and the rights described in paragraph 4.6(c) shall constitute Officer's sole and exclusive rights and remedies for and with respect to such termination without Cause or Constructive Termination. 4.7 Deductions and Tax Withholding. All payments and benefits made or provided to Officer pursuant to this Agreement shall be subject to all customary deductions and withholding, including, without limitation, withholding for Social Security and other federal, state and local taxes, as Bellcore and SAIC reasonably shall determine. 4.8 For Cause Termination. For purposes of this Agreement, an event or occurrence constituting "Cause" for termination shall include the following: (a) Failure of Officer either (1) substantially to perform the employment duties and responsibilities assigned to him by Bellcore's Board of Directors or (2) to comply with reasonable requests made by SAIC or Bellcore which are materially related to Officer's performance of his employment duties and responsibilities, in either case after being given written notice of and a reasonable opportunity to cure such failure, if curable; or (b) Officer engages in conduct that (i) is illegal or that contributes willful gross neglect or willful gross misconduct (including without limitation sexual harassment, race, 9 10 sex or age discrimination or intentional fraud) and (ii) that results in material harm to Bellcore or SAIC; or (c) Drunkenness or use of drugs or any controlled substance which (1) interferes with Employee's ability to perform any of his duties and responsibilities to SAIC or Bellcore, or (2) violates SAIC's Administrative Policy A-18 "Drug and Substance Abuse," a copy of which is attached hereto as Exhibit 4.8(c); or (d) Officer's conviction of a felony or of any crime involving fraud or misrepresentation. 4.9 Constructive Termination. For purposes of this Agreement, the term "Constructive Termination" shall mean a termination of Officer's employment with Bellcore at his initiative following the occurrence, without his prior written consent, of (1) a reduction of Officer's then current base salary (other than as part of an across-the-board reduction applicable to Bellcore's senior management officers), or (2) the material diminution of Officer's responsibilities, as they exist on the date of execution of this Agreement; provided, however, that: (a) Officer specifically acknowledges and agrees that removal of Officer as Chief Executive Officer of Bellcore shall not constitute Constructive Termination of Officer if SAIC assigns Officer duties and responsibilities of equal importance and stature within SAIC or any of its other subsidiaries; and (b) Constructive Termination shall be deemed to have occurred pursuant to clause (2) of this paragraph 4.9 above only if (i) Officer, immediately following those events which, in Officer's opinion, constitute a material diminution of his responsibilities, shall have delivered to SAIC and to Bellcore's Board of Directors written notice specifying in reasonable detail the facts and circumstances which he believes constitute such material diminution of his responsibilities, and (ii) the parties, for a period of not less than ninety (90) days, in good faith shall have attempted to agree upon responsibilities which are commensurate with Officer's capabilities. 4.10 Indemnification. Officer shall be indemnified with respect to any claim arising out of performance of his duties hereunder to the fullest extent permitted or authorized by Bellcore's certificate of incorporation, bylaws, Board resolutions, or the laws of the state of Delaware, against any and all costs, expenses, liabilities and losses (including, without limitation, attorney's fees, judgments, interest expenses of investigation, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) incurred or suffered by Officer in connection therewith, and such indemnification shall continue as to Officer even if he has ceased to be a director, member, employee, agent, manager, consultant or representative of any such person, and shall inure to the benefit of Officer's successors and assigns. 10 11 5. PERFORMANCE CRITERIA AND CAREER DEVELOPMENT. 5.1 Bellcore Performance Criteria. Officer's annual performance review shall occur as promptly as possible after completion of each SAIC fiscal year beginning in approximately April, 1998. Bellcore's Board of Directors shall establish performance objectives, including revenue, profit, cash flow, marketing, sales and human resource goals. Bellcore and SAIC shall establish quantitative goals and objectives for Officer's performance on an annual basis, which shall include increases in Bellcore's revenues, profits, sales and cash flow over each prior year's performance. 5.2 SAIC Performance Criteria. Officer's performance also shall be evaluated based upon his cooperation and participation as a member of SAIC's executive team, led by Dr. J. R. Beyster, in accomplishing SAIC's major strategic goals and objectives for Bellcore, including without limitation (1) recruiting senior telecommunications executives to Bellcore or SAIC, (2) organizing Bellcore and SAIC in a flexible manner enabling them to meet market demands and utilize company resources most efficiently, and (3) assisting with integration of Bellcore and SAIC administrative functions. 6. OFFICER COVENANTS. 6.1 Non-Competition. (a) Covenants Not to Compete. During the period of Officer's employment with Bellcore and for an additional period commencing upon the date of voluntary or involuntary termination (whether for Cause or otherwise) of Officer's employment with Bellcore and continuing until the date which is one (1) year following voluntary or involuntary termination (whether for Cause or otherwise) of Officer's employment with Bellcore (the "Restricted Period"), Officer shall not, without Bellcore's and SAIC's prior written consent, anywhere in the United States, (i) engage in Bellcore's or SAIC's business for his own account, or (ii) enter the employ of, or render any services to a Conflicting Organization (as defined below) as an individual partner, shareholder, officer, director, principal, agent, employee, trustee or consultant, or in any other relationship or capacity. Notwithstanding the foregoing, Officer may own, directly or indirectly, solely as a passive investment, securities of any person or entity which are publicly traded on any national securities exchange or in the over-the-counter market if Officer (A) is not a controlling person of, or a member of a group which controls, such Conflicting Organization and (B) does not own, directly or indirectly, one percent (1%) or more of any class of securities of such Conflicting Organization. (b) Conflicting Organization. For purposes of paragraph 6.1(a), the term "Conflicting Organization" shall mean (i) any of Ameritech Services, Inc., Bell Atlantic NSI Holdings, Inc., BellSouth Telecommunications, Inc., Pacific Bell, Southwestern Bell Telephone Company, Telesector Resources Group, Inc., U. S. West Communications, Inc., or any of their respective parent companies, subsidiaries or affiliates, or (ii) any person or organization which (A) is engaged in or about to become engaged in conducting research, development of products or services or offering or marketing products or services which compete or are intended to compete with the research, products or services of Bellcore or SAIC, or (B) if Officer rendered 11 12 services to such person or organization potentially would involve the use or disclosure of confidential information as described in paragraph 6.2. (c) Excluded Activities. Notwithstanding the foregoing, this paragraph 6.1 shall not apply to activities (i) engaged in by a non-profit research foundation or a similar non-profit organization, or (ii) engaged in by a government agency. 6.2 Confidential Information. Prior to, during and after the Restricted Period, Officer shall keep secret and retain in strictest confidence, and shall not use for the benefit of himself or others except in connection with the business and affairs of Bellcore or SAIC, all confidential matters of Bellcore, SAIC and their affiliates or subsidiaries, including, but not limited to, trade "know-how," trade secrets, customer and supplier lists, pricing policies, operational methods, marketing plans or strategies, product development techniques or plans, business acquisition plans, new personnel acquisition plans, and other confidential information regarding the business affairs of Bellcore, SAIC and either of their affiliates or subsidiaries learned by Officer at any time, and shall not disclose them to anyone outside Bellcore, SAIC and their affiliates or subsidiaries, either during or after employment by Bellcore, except (a) as required in the course of performing duties hereunder, (b) with Bellcore's or SAIC's express written consent, or (c) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of Bellcore or SAIC or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information; provided, however, that Officer shall have given to Bellcore and SAIC notice of, and an opportunity to contest, any such requirement. For this purpose, information known or available generally to the public or within the trade or industry of Bellcore or SAIC shall not be deemed to be confidential matters unless such information is or becomes known to the public or the trade or industry as a result of a breach by Officer of the provisions of this paragraph 6.2. 6.3 Property of Bellcore. All memoranda, notes, lists, records, and other documents (and all copies thereof), in Officer's possession or custody, including but not limited to such items stored in computer memories, on microfilm or by any other means, made or compiled by or on behalf of Officer or made available to Officer concerning the (as applicable) business of SAIC, Bellcore or any of their (as applicable) affiliates or subsidiaries (other than personal rolodexes, personal tax, financial and correspondence files, and similar personal files), are and shall be SAIC's or Bellcore's property and shall be delivered to SAIC or Bellcore promptly upon the termination of Officer's employment with Bellcore, or at any other time on request. 12 13 6.4 Employees of Bellcore or SAIC. (a) Non-Solicitation. During the Restricted Period, Officer shall not directly or indirectly hire or attempt to hire, any person who he knows or reasonably should know is an employee of SAIC, Bellcore or their affiliates or subsidiaries. During the Restricted Period, Officer shall not hire any person who is known to Officer or reasonably should be known to Officer to have been employed by SAIC, Bellcore or any of their affiliates or subsidiaries within one year of such hire. (b) Excluded Hires. Notwithstanding the foregoing, it shall not be a violation of this paragraph 6.4 if one of Officer's subordinates hires or attempts to hire a person described in this paragraph 6.4 if Officer has no knowledge of such action before it takes place. 6.5 Intellectual Property. (a) Assignment of Inventions. Officer hereby assigns and agrees to assign to Bellcore, its successors and assigns, all his right, title and interest in and to all inventions, discoveries, improvements, ideas, computer or other apparatus programs and related documentation, and other works of authorship (hereinafter, "innovations"), whether or not patentable, copyrightable or susceptible to other forms of protection which, during the period of his employment with Bellcore or by its successors in business, he has made, conceived, created or developed, either solely or jointly with others, in the course of such employment or with the use of Bellcore's time, material or facilities, or relating to any subject matter with which Bellcore is then actively involved. (b) Disclosure. Officer further agrees, without charge to Bellcore, but at its expense: (i) promptly to disclose any such innovations, (ii) promptly, upon request, to execute a specific assignment to Bellcore of all rights, title and interest to such innovations, including priority rights arising from patent applications, and (iii) to do anything else legally and ethically required to secure patents, copyrights or other forms of protection for such innovations in the United States, and in other countries, both during and after his employment with Bellcore. 6.6 Rights and Remedies Upon Breach. If Officer breaches, or threatens to commit a breach of, any of the provisions of Section 6 of this Agreement ("Officer Covenants"), Bellcore shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to SAIC or Bellcore under law or in equity: (a) The right and remedy to have the Officer Covenants specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to SAIC and Bellcore and that money damages will not provide adequate remedy to SAIC or Bellcore; and (b) The right and remedy to require Officer to account for and pay over to SAIC or Bellcore all compensation, profits, monies, accruals, increments or other benefits 13 14 derived or received by Officer as the result of any transactions constituting a breach of any of the Officer Covenants. 6.7 Severability of Covenants; Blue-Penciling. The parties acknowledge and agree that the Officer Covenants are reasonable and necessary, in light of (i) Officer's unique position, responsibility and knowledge of the operations of Bellcore, (ii) the global nature of Bellcore's and SAIC's businesses, and (iii) the unfair advantage that Officer's knowledge and expertise concerning Bellcore and its business would afford to a Conflicting Organization. In addition, the parties acknowledge and agree that the Officer Covenants will not impair Officer's ability to earn a livelihood, particularly in view of the substantial payments to be made hereunder. Nevertheless, if any court determines that any of the Officer Covenants, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision then shall be enforceable and shall be enforced. Furthermore, if any court determines that any of the Officer Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Officer Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. 7. SAIC Guarantee. SAIC unconditionally guarantees prompt performance of Bellcore's obligations under this Agreement. 8. Non-Disclosure Agreement. The terms of this Agreement, including but not limited to the nature and amounts of any compensation or benefits in the event of a termination of Officer's employment, shall be kept confidential and not disclosed to anyone or any entity except each party may disclose same to their respective attorneys, financial advisors and governmental entities which have a need to know such information. Bellcore may also disclose such information to its Board of Directors. 9. Entire Agreement. This Agreement shall contain the final, complete and exclusive agreement and understanding of the parties with respect to the subject matter hereof. It may not be modified orally, but only by a written agreement signed by all parties hereto. If and to the extent any provision of this Agreement is in conflict or inconsistent with any of the employee benefit plans identified in Exhibit 4.5(d), this Agreement shall govern and control. 10. Controlling Law. All questions concerning the validity and operation of this Agreement and the performance of the obligations imposed upon the parties. hereunder shall be governed by the laws of the State of New Jersey. 11. Assignments. Bellcore and SAIC each shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder, to any affiliate, successor or subsidiary of Bellcore or SAIC. except for SAIC's guarantee pursuant to Section 7 hereof, which shall continue in the event of any such assignment. Officer agrees that this Agreement is personal to him and his rights and interest hereunder may not be assigned, nor may his obligations and duties hereunder be delegated. 14 15 12. Cumulative Remedies; No Waiver. Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver or, or an election to exercise, any other such right or remedy. No waiver of any term or condition of this Agreement shall be construed as a waiver of any other term or condition; nor shall any waiver of any default hereunder be construed as a waiver of any other default hereunder. 13. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand, telecopy or mailed, certified or registered mail with postage prepaid to the address for each party set forth on the signature page of this Agreement, or to such other address as such party may specify in writing. 14. Representation By Counsel; Interpretation. Each party to this Agreement has been represented by counsel or has been afforded the opportunity to be represented by counsel in connection with this Agreement and the relationships contemplated by this Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The captions and headings to the paragraphs and sections of this Agreement are for reference purposes only and shall not be considered in interpreting this Agreement. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties. 15. Costs And Expenses. Each party to this Agreement shall pay all costs and expenses incurred by such party in the negotiation and preparation of this Agreement. 16. Arbitration. Officer and Bellcore each shall enter into an arbitration agreement which shall contain substantially the same provisions and conditions as are included in SAIC's standard Mutual Agreement to Arbitrate Claims, which is attached hereto as Exhibit 16. IN WITNESS WHEREOF, the parties have executed this Agreement on this 18 day of December, 1997. OFFICER: S/ RICHARD C. SMITH, JR. - ----------------------------------- Richard C. Smith, Jr. Address: 1023 Westover Road Kansas City, MO 64113 [Signatures continued on next page] 15 16 BELLCORE: Bell Communications Research, Inc. By: S/ JOHN GLANCY --------------------------------------------------- John Glancy,Vice Chairman of the Board of Directors Address: 445 South Street Morristown, NJ 07960-6438 SAIC: Science Applications International Corporation By: S/ WILLIAM A. ROPER, JR. --------------------------------------------------- William A. Roper, Jr., Chief Financial Officer Address: 1241 Cave Street La Jolla, CA 92037 16 17 EXHIBIT 10(l)-2 BONUS COMPENSATION STOCK RESTRICTION AGREEMENT THIS BONUS COMPENSATION STOCK RESTRICTION AGREEMENT ("Agreement") is entered into by and between SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, a Delaware corporation ("SAIC" or "Company"), and the undersigned ("Stockholder"), who is affiliated with Company or a subsidiary of Company ("Subsidiary") as an employee or director. WHEREAS, subject to the stockholder executing and returning this agreement to the Company's Stock Programs Department within 120 days from the Commencement Date, the Company has agreed to provide the above stated number of shares SAIC Class A Common Stock ("Bonus Stock") to the Stockholder pursuant to the Company's 1984 Bonus Compensation Plan and Stockholder has agreed that the ownership interest in such stock shall be subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing, the parties have agreed to the following: 1. VESTING SCHEDULE. In the event Stockholder's affiliation with Company or any of its subsidiaries as an employee or director is terminated, for any reason, including death, any unvested shares of Bonus Stock shall automatically revert to Company without compensation as of the date of such termination of affiliation in accordance with the following vesting schedule: (a) Prior to the first-year anniversary of the Commencement Date of this Agreement, all of the Bonus Stock shall be subject to reversion. (b) After the first-year anniversary of the Commencement Date, 20% of the Bonus Stock shall be vested and the balance shall be subject to reversion. (c) After the second-year anniversary of the Commencement Date, an additional 20% of the Bonus Stock shall be vested and the balance shall be subject to reversion (d) After the third-year anniversary of the Commencement Date, an additional 20% of the Bonus Stock shall be vested and the balance shall be subject to reversion (e) After the fourth-year anniversary of the Commencement Date, the final 40% of said Stock shall be vested. The Company does not issue fractional shares and if the application of the foregoing vesting schedule results in a fraction of a share being vested, such fractional share shall be deemed to be subject to reversion. Stockholder shall not sell, transfer, assign, hypothecate, pledge, grant a security interest in, or in any other way alienate any of the Bonus Stock, or any interest or right therein, which is subject to reversion to Company. If shares of Bonus Stock revert in accordance with the foregoing vesting schedule, such shares shall automatically be deemed to have been transferred to Company, shall no longer be outstanding and all rights of Stockholder shall immediately terminate with respect to such shares. In the event of such reversion, Stockholder agrees to promptly return the stock certificates(s) that includes the reverted shares to Company. Upon return of such stock certificate(s), Company will issue a new stock certificate to Stockholder for the vested shares, if any, and to the extent that they are not repurchased by Company pursuant to its right to repurchase as set forth in Article Fourth of the Company's Restated Certificate of Incorporation. Notwithstanding the foregoing, if Stockholder has not returned such stock certificate(s) within sixty(60) days following the date the Bonus Stock reverted to Company, in whole or in part, Stockholder hereby appoints Company or its agents to take all such action needed to effect the cancellation of such stock certificate(s). 2. FORFEITURE OF STOCK. In the event Stockholder fails to execute and return this agreement within 120 days from the Commencement Date, the shares granted pursuant to this agreement shall be forfeited. 3. RIGHTS, RESTRICTIONS AND LIMITATIONS. All shares of Bonus Stock issued to Stockholder pursuant to this Agreement are subject to the rights, restrictions and limitations set forth in Article Fourth of the Company's Restated Certificate of Incorporation. 4. RESTRICTIONS UNDER SECURITIES LAW. All shares of Bonus Stock covered by this Agreement are subject to any restrictions which may be imposed under applicable state and federal securities laws and are subject to obtaining all necessary consents which may be required by, or any condition which may be imposed in accordance with, applicable state and federal securities laws or regulations. 5. INVESTMENT. Stockholder agrees that any and all shares of Bonus Stock acquired hereunder shall be acquired for investment and not for distribution. 6. EMPLOYMENT AT WILL. Stockholder's employment with Company is not for any specified term and may be terminated by Stockholder or Company at any time for any reason. Stockholder further acknowledges that this Agreement, despite the fact Stockholder is required to hold the Bonus Stock not yet vested for up to four years, does not constitute a promise or commitment by Company regarding any future employment, work assignments, compensation, or any other term or condition of employment. 7. CAPITAL ADJUSTMENTS. The formula price and number of shares shall be appropriately adjusted for any increase or decrease in the number of shares of stock which Company has issued and outstanding resulting from any stock split, stock dividend, combination of shares or any other change, or any exchange for other securities or any reclassification, reorganization, redesignation, recapitalization or otherwise. 18 8. INCORPORATION OF BONUS COMPENSATION PLAN. The Bonus Stock granted hereby, is granted pursuant to the Company's 1984 Bonus Compensation Plan (the "Plan"), and all terms and conditions of which are hereby made a part hereof and are incorporated herein by reference. In the event of any inconsistency between the terms and conditions contained herein and those set forth in the Plan, the terms and conditionals of the Plan shall prevail. 9. MISCELLANEOUS. This Agreement contains the entire agreement of the parties with respect to its subject matter. This Agreement shall be binding upon and shall inure to the benefit of the respective parties, the successors and assigns of Company, and to the heirs, legatees and personal representatives of Stockholder. 10. GOVERNING LAW. This agreement shall be governed by, construed and enforced in accordance with the laws of the State of Delaware without reference to such state's principles of conflict of laws. 11. NOTICE OF RESTRICTION. The parties agree that any stock certificate(s) issued representing the Bonus Stock granted hereunder shall contain a legend indicating that such stock is subject to the restrictions of this Agreement. 12. ALTERATIONS. Stockholder acknowledges that signing this Agreement constitutes an unequivocal acceptance of this Agreement and any attempted modification or deletion will have no force and effect upon the Company's right to enforce the terms and conditions heretofore stated. IN WITNESS WHEREOF, Stockholder has executed this Agreement effective as of the year and day above written. - ----------------------------- --------------------------- Signature Date Please sign and return. A copy for your files will be returned with your stock certificate. THIS AGREEMENT MUST BE SIGNED AND RETURNED WITHIN 120 DAYS OR THE AWARD WILL BE FORFEITED SAIC: 3-95. 19 EXHIBIT 10(l)-3 NON-QUALIFIED STOCK OPTION AGREEMENT AND CONFIRMATION 1995 STOCK OPTION PLAN THIS AGREEMENT is entered into as of the above stated Grant Date by and between SCIENCE APPLICATIONS INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), and the undersigned, who is affiliated with the Company or a subsidiary of the Company ("Subsidiary") as an employee, director or consultant ("Optionee"). RECITALS WHEREAS the Company's Board of Directors has approved the granting to Optionee of an option to purchase shares of the Company's Class A Common Stock, $.01 par value per share ("Stock"), in the belief that the interests of the Company and Optionee will be advanced by encouraging and enabling Optionee to acquire a proprietary interest in the Company. NOW, THEREFORE, in consideration of the mutual promises herein set forth, it is agreed: 1. GRANT OF OPTION; NUMBER OF SHARES; OPTION PRICE. Subject to Optionee executing and returning this Agreement to the Company's Stock Programs Department within 120 days from the Grant Date (unless such delay is approved by the Stock Option Committee, in its sole unreviewable discretion, upon a finding of good cause), the Company hereby grants to Optionee an option to purchase, on the terms and conditions herein set forth, all or any part of the number of shares of Stock ("Option Shares"), at the purchase price per share ("Option Price") both set forth above. In the event Optionee fails to execute and return this Agreement as provided above, the option will be forfeited and this Agreement will be null and void. 2. TERM OF OPTION. This option shall expire five (5) years from the Grant Date of this Agreement, except as and to the extent that the term of the option may sooner terminate as provided in Section 4 hereof. Notice of termination or expiration shall not be the responsibility of the Company. 1 20 3. EXERCISE OF OPTION. The right to exercise the option shall be in accordance with the following schedule: (a) The option may not be exercised in whole or in part at any time prior to the first-year anniversary of the Grant Date. (b) The option may be exercised as to 20% of the Option Shares after the first-year anniversary of the Grant Date. (c) The option may be exercised as to an additional 20% of the Option Shares after the second-year anniversary of the Grant Date. (d) The option may be exercised as to an additional 20% of the Option Shares after the third-year anniversary of the Grant Date. (e) The option may be exercised as to an additional 40% of the Option Shares after the fourth-year anniversary of the Grant Date. The rights to exercise the option, as specified in the preceding schedule, shall be cumulative. Optionee may buy all, or from time to time, any part of the maximum number of Option Shares which are then exercisable, but in no case may Optionee exercise the option in regard to any fraction of a share. Except as set forth in Section 4(c) below, this option shall be exercisable only by Optionee. 4. TERMINATION OF OPTION. If Optionee shall cease to be affiliated with the Company or a Subsidiary as an employee, director or consultant, this option shall terminate in accordance with the following: (a) If Optionee ceases to be affiliated with the Company or a Subsidiary and such affiliation ceases for any reason other than death, retirement or permanent total disability, Optionee may exercise this option within the thirty (30) day period following such cessation of affiliation, but only to the extent that this option was exercisable at the date of such cessation of affiliation. (b) If Optionee is an employee and ceases to be affiliated with the Company or a Subsidiary and such affiliation ceases as a result of Optionee's normal retirement, permanent total disability or early retirement under the terms of a retirement or pension plan maintained by the Company or a Subsidiary and in which Optionee is a participant, Optionee may exercise this option within the ninety (90) day period following such cessation of affiliation, but only to the extent that this option 2 21 was exercisable at the date of such cessation of affiliation. (c) If Optionee ceases to be affiliated with the Company or a Subsidiary and such affiliation ceases as a result of Optionee's death, this option may be exercised within the one (1) year period following such death, and then only by the beneficiary designated by Optionee or by the person or persons to whom Optionee's rights under this option shall pass by Optionee's will or by the laws of descent and distribution, but only to the extent that this option was exercisable at the date of Optionee's death. (d) If Optionee is an employee of the Company or a Subsidiary and is on a leave of absence pursuant to the terms of The Company's Administrative Policy No. B-11 "Unpaid Personal Leave of Absence", Optionee shall not during the period of such absence be deemed, by virtue of such absence alone, to have terminated Optionee's employment with the Company or a Subsidiary. Unless Optionee is on a Medical Leave (as hereinafter defined), all rights which Optionee would have had to exercise the option will be suspended during the period of such leave of absence. Upon Optionee's return to the Company or a Subsidiary, all rights to exercise the option shall be restored to the extent the option is exercisable at that time. If Optionee is on a Medical Leave, Optionee shall have all rights to exercise the option that Optionee would have had if Optionee were not on a Medical Leave. For purposes of this Section 4(d), "Medical Leave" shall be defined as a leave of absence for medical reasons which shall begin after ninety-one (91) consecutive calendar days of total disability leave and shall remain in effect until the earlier of a release by the attending physician for Optionee to return to work or until the termination of employment. (e) If any portion of the option granted hereunder is not exercised by the end of the applicable period specified in (a), (b) or (c) of this Section 4, any such unexercised portion and all of Optionee's rights with respect thereto shall terminate at the end of such period. In no event shall this option or any portion thereof be exercisable beyond the five (5) year term stated in Section 2. 5. RIGHTS, RESTRICTIONS AND LIMITATIONS. All shares of stock issued upon the exercise of this option are subject to the rights, restrictions and limitations set forth in Article Fourth of the Company's Restated Certificate of Incorporation, as amended. 3 22 6. RESTRICTIONS UNDER SECURITIES LAW. All shares of Stock covered by this Agreement are subject to any restrictions which may be imposed under applicable state and federal securities laws and are subject to obtaining all necessary consents which may be required by, or any condition which may be imposed in accordance with, applicable state and federal securities laws or regulations. 7. INVESTMENT. Optionee agrees that any and all shares of Stock purchased upon the exercise of this option shall be acquired for investment and not for distribution. 8. CAPITAL ADJUSTMENT. The Option Price and the number of Option Shares shall be appropriately adjusted for any increase or decrease in the number of shares of Stock which the Company has issued and outstanding resulting from any stock split, stock dividend, combination of shares or any other change, or any exchange for other securities or any reclassification, reorganization, redesignation, recapitalization or otherwise. 9. INCORPORATION OF STOCK OPTION PLAN. The option granted hereby is granted pursuant to the Company's 1995 Stock Option Plan ("Plan"), all the terms and conditions of which are hereby made a part hereof and are incorporated herein by reference. In the event of any inconsistency between the terms and conditions contained herein and those set forth in the Plan, the terms and conditions of the Plan shall prevail. 10. EMPLOYMENT AT WILL. If Optionee is an employee of the Company or a Subsidiary, such employment is not for any specified term and may be terminated by employee or by the Company or a Subsidiary at any time, for any reason, with or without cause. Nothing in this Agreement or the Plan shall confer upon Optionee any right to continue in the employ of, or affiliation with, the Company or a Subsidiary nor constitute any promise or commitment by the Company or a Subsidiary regarding future positions, future work assignments, future compensation or any other term or condition of employment or affiliation. 11. MISCELLANEOUS. This Agreement contains the entire agreement between the parties with respect to its subject matter. This Agreement shall be binding upon and shall inure to the benefit of the respective parties, the successors and assigns of the Company, and the heirs, legatees and personal representatives of Optionee. Optionee acknowledges that signing this Agreement constitutes an unequivocal acceptance of this Agreement and any attempted modifications or deletions will have no force or effect upon the Company's right to enforce the terms and conditions stated herein. 12. GOVERNING LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Delaware without reference to such state's principles of conflict of laws. 4 23 IN WITNESS WHEREOF, THE UNDERSIGNED OPTIONEE HEREBY AGREES TO ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT, ACKNOWLEDGES RECEIPT OF THE 1995 STOCK OPTION PLAN AND HEREBY ACKNOWLEDGES THAT THIS AGREEMENT SHALL NOT BE BINDING ON THE COMPANY UNTIL AN UNALTERED COPY OF THIS AGREEMENT HAS BEEN SIGNED BY THE OPTIONEE, RETURNED TO, RECEIVED AND APPROVED BY THE COMPANY. - ---------------------------------------- -------------------- Signature of Optionee Date 5 24 Exhibit 10 (l)-4 Officer shall be entitled to participate in the following employee benefit plans, or successors plans, but only for as long as and to the extent that Bellcore maintains such plans for the benefit of similarly situated Bellcore employees: 1. Officer Non-Qualified Pension Plan 2. Mid-Career Pension Plan 3. Officer Supplemental Savings Plan 4. Officer Supplementary Death Benefit Plan 5. Officer Long Term Disability and Survivor Protection Plan 6. Senior Management Financial Counseling Program 7. Officer Company-Provided Automobile Program 25 EXHIBIT 10(l)-5 A-18 DRUG & SUBSTANCE ABUSE 5 5/15/95 APPROVAL J.D. HEIPT, SENIOR VICE PRESIDENT-ADMINISTRATION PAGE 1 OF 5 1.0 PURPOSE: To achieve a work force and a work environment free of illicit drugs and substance abuse by establishing a strong policy against such practices. The risk to national security, employee safety, and corporate integrity associated with illicit drugs and substance abuse is especially high because of the nature of the Company's business and its employee ownership base. These risks can be lowered and the interests of employee shareholders better protected by implementing a responsible program for the prevention of illicit use of drugs and substance abuse. 2.0 SCOPE: This policy applies to all employees of Science Applications International Corporation (SAIC) and its subsidiaries. 3.0 POLICY: SAIC expects employees to refrain from the illicit use of drugs and substance abuse. Such practices are contrary to the protection of national security, the maintenance of health and safety of the work force, and the performance of superior work expected of all SAIC employees. SAIC encourages employees engaged in the illicit use of drugs or substance abuse to obtain treatment or seek employment elsewhere. Employees found to be involved with illicit drugs or substance abuse will be subject to disciplinary action up to and including termination of employment. The use of alcohol in conjunction with company functions in a manner that encourages abuse or endangers persons or property is prohibited. 4.0 DEFINITIONS: 4.1 ILLICIT DRUGS refers to substances controlled under the Federal Controlled Substances Act as amended. 4.2 INVOLVEMENT WITH ILLICIT DRUGS refers to the possession, purchase, sale, or exchange of illicit drugs; to the illegal or non-prescription use of illicit drugs; or to the presence of illicit drugs in any screening performed under this policy. 4.3 SUBSTANCE ABUSE refers to the excessive use or misuse of any drug, including prescription drugs, or alcohol in a manner that has an adverse impact on job performance. 26 A-18 DRUG & SUBSTANCE ABUSE 5 5/15/95 J.D. HEIPT, SENIOR VICE PRESIDENT-ADMINISTRATION PAGE 2 OF 5 4.4 SCREENING refers to the process by which an individual demonstrates the absence (or presence) of illicit drugs in his or her body by submitting, through procedures prescribed by SAIC, a urine sample for illicit drug testing by an independent laboratory designated by SAIC. Any specimen designated as positive must have been evaluated by at least two analytically distinct methodologies. 4.5 FITNESS FOR DUTY EXAMINATION refers to an examination conducted by an SAIC approved medical doctor who has the discretion as to which test(s) to administer to determine what drug or substance, if any, the employee is using. These tests include, but are not limited to, physical examination, blood alcohol test, urinalysis, and/or breathalyzer. 5.0 EMPLOYEE ASSISTANCE PROGRAM: It is SAIC's desire to assist those who may be involved with illicit drug use or substance abuse to refrain from such activity. In this connection, SAIC has established and maintains an Employee Assistance Program (EAP) as an adjunct to the SAIC Medical Benefits Plan for the purpose of providing confidential professional assistance to employees and members of their families concerning personal or emotional problems. These include drug and substance abuse. Voluntary submission for counseling or treatment through the EAP will be a private matter between the employee and the treatment provider unless the employee specifically authorizes the release of this confidential information to his or her supervisor. However, participation in a treatment or recovery program will not relieve an employee from the requirement of satisfactory job performance. The Company will provide management training in the procedures for identifying and referring to the EAP employees who might be suffering from personal problems that could signal possible substance abuse. 6.0 PRE-EMPLOYMENT SCREENING: 6.1 All offers of SAIC employment will be contingent on the applicant's complying with SAIC's screening requirements. 6.2 Prospective employees who fail the pre-employment screening are not eligible to become affiliated with SAIC as consultants, temporaries, payrollees, or other employee leasing agencies. 27 A-18 DRUG & SUBSTANCE ABUSE 5 5/15/95 J.D. HEIPT, SENIOR VICE PRESIDENT-ADMINISTRATION PAGE 3 OF 5 6.3 Pre-employment screening will not be applicable in the case of individuals who become employed by SAIC as a result of a merger or acquisition of a business or enterprise. 6.4 Pre-employment screening may be applicable in the case of individuals who are employed by SAIC in a foreign country where such testing is contractually required and not otherwise prohibited by applicable law. 7.0 EMPLOYEE SCREENING: 7.1 SAIC employees and affiliated personnel such as consultants, payrollees, temporaries, or other employee leasing agencies will be subject to screening when required by SAIC Company Policy, federal law, regulations, executive orders, or by the terms of contracts entered into by SAIC. Detailed procedures implementing such requirements will be provided to affected operations as appropriate. 7.2 Any employee who refuses to comply with a properly authorized screening requirement under 7.1 will be ineligible to work in positions subject to such requirements. If no suitable alternative work assignment is available, the employee will be subject to layoff. Any employee who fails to pass a screening requirement under 7.1 will be ineligible to remain in any position subject to such screening requirement and will be subject to disciplinary action up to and including termination of employment. 7.3 Any employee who is suspected of being involved with drug or substance abuse under 8.1 may be instructed to submit to a fitness for duty examination. The examining physician will be informed of the reasons for the referral of the employee by the referring SAIC manager. Based upon the examination and/or test results, the medical doctor will render an opinion whether the employee is fit for duty. Any employee who fails to pass a screening and/or fitness for duty examination requirement under 8.1 may be ineligible to remain in his or her position and will be subject to disciplinary action up to and including termination of employment. Should an employee, who is suspected of being involved with drug or substance abuse under 8.1, refuse to submit to a fitness for duty examination, management will be forced to determine what disciplinary action, if any, is appropriate based on information then available, including any documentation of employee's refusal to submit to an examination. 28 A-18 DRUG & SUBSTANCE ABUSE 5 5/15/95 J.D. HEIPT, SENIOR VICE PRESIDENT-ADMINISTRATION PAGE 4 OF 5 8.0 REASONABLE SUSPICION SCREENING: 8.1 Screening, which may include a fitness for duty examination, will be required of an existing employee when, at the determination of SAIC management in coordination with the Regional/Sector/Group Human Resource office, Corporate Human Resources, and the Legal Department, reasonable suspicion exists that an employee may be involved with illicit drugs or may be under the influence of illicit drugs or substance abuse while at work. Such suspicion is determined on a case-by-case basis in regard to the specific facts and circumstances involved. Reasonable suspicion may be inferred from, among other things: 8.1.1 Involvement by the employee in a work place accident or an incident or other circumstances which resulted in, or could have resulted in, personal injury or damage to property, and in which a supervisory employee reasonably suspects that the employee was impaired by illicit drugs or substance abuse at the time the acts or omissions contributed to the occurrence of the accident, incident, circumstances; or 8.1.2 Evidence of illicit drug involvement or behavior of an employee which causes a supervisory employee to have reasonable belief, based upon observation of the employee's speech, hearing, motor coordination, judgment, appearance, odors, or other observable factors, that the employee is impaired by illicit drugs or substance abuse. In all instances where this belief is based primarily on second party observation, the supervisor shall make every reasonable effort to confirm these observations directly. 9.0 FOLLOW-UP SCREENING: Screening may be requested by an employee or may be required of an employee by SAIC management as part of an abatement or a rehabilitation/counseling treatment program for substance abuse. Such follow-up screening may be on an unannounced schedule for a period of time specified as part of the abatement or rehabilitation/counseling treatment program. 10.0 RESCREENING: Any individual whose drug test screens positive for illicit drug content may request, through Corporate Human Resources, a written copy of the test results. The individual may also request that the same urine specimen be retested by another laboratory approved by SAIC. 29 A-18 DRUG & SUBSTANCE ABUSE 5 5/15/95 J.D. HEIPT, SENIOR VICE PRESIDENT-ADMINISTRATION PAGE 5 OF 5 11.0 SPECIMEN ADULTERATION: Any individual whose urine specimen test result indicates that it has been adulterated or diluted will be deemed to have failed to comply with the screening requirement and to have failed to pass the required screening. 12.0 CONFIDENTIALITY: All information and records concerning individual screening results shall be kept confidential and maintained separate from employee personnel files. Only the designated senior personnel managers and other members of management with a need to know shall have access to individual screening results. 13.0 RIGHT OF SEARCH ON COMPANY PROPERTY: SAIC reserves the right to enter, search, and inspect all personal hand-carried articles as well as Company property, including but not limited to lockers, desks, Company vehicles, and any materials transmitted in Company mail or shipment channels, whether sealed or locked, at any time, without the employee's specific consent. 30 EXHIBIT 10(l)-6 SAIC EMPLOYMENT ARBITRATION RULES AND PROCEDURES 1. DEMAND FOR ARBITRATION Any party to an Arbitration Agreement may initiate arbitration by serving upon the other party, either personally or by mail, a completed Mediation/Arbitration Request Form (Attachment A to the SAIC Employee Dispute Resolution Guide). (See Rule 7[K] hereof). A copy of the Mediation/Arbitration Request Form must be promptly sent by SAIC to the appropriate AAA office. If on the date, the Mediation/ Arbitration Request Form is received by SAIC, any claim, if asserted in a civil action, would have been barred by the applicable Statute of Limitations, then the claim shall be deemed barred for purposes of arbitration. An arbitration also is initiated by the receipt by AAA of an order from a court compelling arbitration. For purposes of the Statute of Limitations, the arbitration is deemed initiated as of the date of issuance of the court order, not any other date (such as the date of the commencement of the judicial proceedings that led to the order). 2. SELECTING THE ARBITRATOR Promptly upon receipt of the completed Mediation/Arbitration Request Form, AAA will provide each party with an identical list of seven (7) prospective arbitrators from its panel of labor and employment arbitrators. (For purposes of arbitrator selection, all defendants, whether or not separately represented, shall be deemed to be one party). Within fifteen (15) working days from receipt of the AAA list, the parties or their representatives will meet or participate in a teleconference to select an arbitrator in the following manner. Each party shall alternately strike the name of any arbitrator on the list to which it objects. The party initiating the claim will strike first. If a party does not timely participate in such meeting or teleconference, all persons on the list will be deemed acceptable to the non-responding party. If after striking, no mutually acceptable arbitrator exists, a new list of seven (7) prospective arbitrators shall be issued by AAA. Each party shall alternately strike one of the arbitrators from the list until only one arbitrator remains. The party asserting the claim will strike first. If the arbitrator named declines or is or becomes unable to serve, or if for any reason the appointment cannot be made from the submitted lists, the selection process shall be repeated from the beginning. 3. HEARING DATE The arbitrator will promptly set a hearing date and time and will mail written notice to each of the parties at least sixty (60) days in advance of the hearing unless the parties otherwise agree or mutually waive notice. 4. ADMINISTRATIVE CONFERENCE (AS NECESSARY) Once an arbitrator is selected, the parties may request or the arbitrator may require one or more administrative conference(s). Such conference is for the purpose of setting procedure, managing discovery, exchanging witness and expert lists, narrowing the issues in dispute, or such other matters as may be deemed necessary or expedient by the arbitrator for the efficient administration and hearing of the dispute. In complex cases, the arbitrator will assist the parties in defining the issues and obtaining stipulations where possible. 1 31 MEDIATION/ARBITRATION REQUEST FORM VIOLATION OF LAW: Indicate below any federal, state or local law, statute, regulation or ordinance you claim the Company has violated. OTHER: Indicate below the basis of any other claims that involve a legally protected right. Please note that your claim(s) must involve legally protected rights to be eligible for arbitration or mediation. See pages 8 and 12 of the Employee Dispute Resolution Guide (the "Guide"). 3. Indicate other stages (if any) in the Dispute Resolution process used to hear your claims: Management Review Appeals Committee Mediation 4. Indicate the amount of your claims (i.e., the amount of damages you seek to recover) and/or describe any other relief you seek: Amount of Claims: Description of Other Relief Sought: 5. Indicate the amount of the filing or processing fee enclosed: Please note that a check payable to "SAIC" in the amount of the applicable filing or processing fee is required before mediation or arbitration can be initiated. For mediation, the processing fee is $50.00. For arbitration, the filing fee is 50% of the applicable, then current AAA employment arbitration filing fee. The schedule showing the AAA employment arbitration filing fees in effect on January 31, 1994 is attached to the SAIC Employment Arbitration Rules and Procedures (Attachment C to the Guide). Employee represents that he or she has a dispute that is eligible for mediation under the Guide or arbitration pursuant to the Mutual Agreement to Arbitrate Claims (Attachment B to the Guide), and is submitting the dispute for resolution. Date_________ Employee's Signature_________________________ MediationlArbitration Request Form received on this date._____________ Received by Corporate Regional HR Director____________________________ Arb-Req.Frm 2 32 Exhibit 10(l)-7 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT That certain Employment Agreement dated December 18, 1997 ("Employment Agreement"), by and among Science Applications International Corporation, a Delaware corporation ("SAIC"), Bell Communications Research, Inc., a Delaware corporation ("Bellcore"), and Richard C. Smith ("Officer"), is hereby amended by this First Amendment to Employment Agreement dated February 2, 1998 ("First Amendment") in the following particulars only: 1. Effective Date. The Effective Date of the Employment Agreement was January 5, 1998. 2. Inducement Stock Award. Paragraph 4.1 of the Employment Agreement is hereby amended and restated in its entirety as follows: 4.1 Inducement Stock Award. (a) Grant of SAIC Common Stock. As consideration (i) for Officer's agreement to accept employment with Bellcore and for Officer's performance of the Officer Covenants (as defined in Section 6), and (ii) to compensate Officer for the loss of vesting stock and options granted or awarded to Officer by his previous employer, SAIC shall cause to be irrevocably deposited in trust for the benefit of Officer and his beneficiaries, under the terms set forth in paragraph 4.1(b) below, vesting shares of SAIC's Class A Common Stock ("Common Stock") having a value of $1,500,000.00, determined by reference to the formula price for each share of Common Stock (as determined by SAIC's Board of Directors) (the "Formula Price") in effect as of the Effective Date (hereinafter, the "Inducement Stock Award"). (Such trust shall be referred to hereinafter as the "Rabbi Trust.") The Inducement Stock Award shall be deposited in the Rabbi Trust within ninety (90) days following the Effective Date. (b) Terms of Rabbi Trust: Distribution. The instrument governing the Rabbi Trust (hereinafter, the "Trust Instrument"), to the extent reasonably necessary to assure that SAIC's obligations with respect to the Inducement Stock Award will continue to be treated as "unfunded" for purposes of the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code"), shall provide that upon insolvency of SAIC the assets of the Rabbi Trust will be subject to the claims of SAIC's general creditors. The Trust Instrument shall provide that in other respects the assets of the Rabbi Trust attributable to the Inducement Stock Award will be maintained for the exclusive benefit of Officer and his beneficiaries, and will otherwise be subject to all fiduciary and other 1 33 requirements of applicable state trust law. The Trust Instrument shall provide for the distribution of the Inducement Stock Award in accordance with its terms and conditions. 3. Inducement Stock Options. Paragraph 4.4(a) of the Employment Agreement is hereby amended by adding the following sentence to the end of Paragraph 4.4(a): Such Vesting Options will provide for an exercise price at the Formula Price in effect on the date they are issued. 4. Counterparts. This First Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Signature by telecopy shall be sufficient to evidence a party's intention to be bound hereby, provided that such party forwards his or her original signature to the other parties by first class mail or overnight delivery service. 5. Legal Effect. Except as amended by this First Amendment, the Employment Agreement shall remain in full force and effect. 6. Governing Law. This First Amendment and the legal relations among the parties hereto shall be governed by and construed in accordance with the laws of New Jersey. 7. Headings. The headings of the Sections and Articles of this First Amendment are inserted for convenience only and shall not constitute a part hereof or affect in any way the meaning or interpretation of this First Amendment. 8. Representation by Counsel; Interpretation. Each party to this First Amendment has been represented by counsel or has had the opportunity to review this First Amendment and to discuss the transactions contemplated hereby with counsel of its choice. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this First Amendment against the party that drafted it has no application and any such right is expressly waived. The provisions of this First Amendment shall be interpreted in a reasonable manner to effect the intent of the parties hereto. "SAIC" SCIENCE APPLICATIONS INTERNATIONAL CORPORATION By: S/ WILLIAM A. ROPER ----------------------------------------- William A. Roper, Chief Financial Officer [SIGNATURES CONTINUED ON FOLLOWING PAGE] 2 34 "Bellcore" BELL COMMUNICATIONS RESEARCH, INC. By: S/ JOHN E. GLANCY ------------------------------------------ John E. Glancy, Vice Chairman of the Board of Directors "Officer" S/ RICHARD C. SMITH ---------------------------------------------- Richard C. Smith 3 EX-21 10 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
State of Incorporation ---------------------- AMSEC Corporation Delaware Andrew Palmer & Associates Limited (wholly-owned by SAIC Limited) England AW Software und Technologie GmbH Austria Bell Communications Research, Inc. Delaware Bull, Inc. California Campus Point Realty Corporation California Environmental Restoration Systems, Inc. Delaware General Sciences Corporation Delaware Hicks & Associates, Inc. Delaware JHK & Associates, Inc. dba TransCore Delaware JMD Development Corporation dba JDA California Network Solutions, Inc. Delaware Pathology Associates International Corporation Delaware PT Science Applications International Corporation Indonesia Indonesia R.E. Wright Environmental, Inc. Delaware Sachse Engineering Associates, Inc. California SAIC (Bermuda) Ltd. Bermuda SAIC Colombia, Limitada Colombia SAIC Commercial Enterprises, Inc. California SAIC de Mexico, S.A. de C.V. Mexico SAIC Engineering, Inc. California SAIC Engineering of North Carolina, Inc. North Carolina SAIC Engineering of Ohio, Inc. Ohio SAIC Europe Limited England SAIC Global Technology Corporation Delaware
2
State of Incorporation ---------------------- SAIC in Novosibirsk Russia SAIC Limited (subsidiary of SAIC Europe Limited) England SAIC - MIR Russia SAIC Services Delaware SAIC Ukraine Corporation Delaware Science Applications (Greece) Ltd. Greece Science Applications International (Barbados) Corporation Barbados Science Applications International Corporation (SAIC Canada) Canada Science Applications International Corporation de Venezuela, S.A. Venezuela Science Applications International Corporation (Singapore) Pte. Ltd. Singapore Science Applications International Deutschland GmbH Germany Science Applications International, Europe S.A. France Science Applications International Pty. Ltd. Australia Science Applications International Technology California Syntonic Technology, Inc. dba TransCore Delaware Systems Control Technology, Inc. Delaware Tenth Mountain Systems, Inc. Delaware
EX-23 11 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 333-26025 and No. 333-37117) and Form S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No. 333-34335 and No. 333-40251) of Science Applications International Corporation of our report dated April 3, 1998 appearing on page F-2 of this Annual Report on Form 10-K. We also hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 333-26025 and No. 333-37117) and Form S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No. 333-34335 and No. 333-40251) of Science Applications International Corporation of our report dated February 27, 1998 relating to the Science Applications International Corporation Employee Stock Purchase Plan appearing on page F-2 of Exhibit 28 (a) of this Annual Report on Form 10-K. We also hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 333-26025 and No. 333-37117) and Form S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No. 333-34335 and No. 333-40251) of Science Applications International Corporation of our report dated April 3, 1998 relating to the Science Applications International Corporation Cash or Deferred Arrangement appearing on page F-2 of Exhibit 28 (b) of this Annual Report on Form 10-K. We also hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 333-26025 and No. 333-37117) and Form S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No. 333-34335 and No. 333-40251) of Science Applications International Corporation of our report dated April 3, 1998 relating to the TransCore Retirement Savings Plan appearing on page F-2 of Exhibit 28 (c) of this Annual Report on Form 10-K. We also hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 333-26025 and No. 333-37117) and Form S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No. 333-34335 and No. 333-40251) of Science Applications International Corporation of our report dated April 3, 1998 relating to the Bell Communications Research Savings and Security Plan appearing on page F-2 of Exhibit 28 (d) of this Annual Report on Form 10-K. We also hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (No. 333-26025 and No. 333-37117) and Form S-4 (No. 333-51523) and in the Registration Statements on Form S-8 (No. 333-34335 and No. 333-40251) of Science Applications International Corporation of our report dated April 3, 1998 relating to the Bell Communications Research Savings Plan For Salaried Employees appearing on page F-2 of Exhibit 28 (e) of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Diego, California April 29, 1998 EX-27.1 12 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1998 FEB-01-1997 JAN-31-1998 214,731 40,200 810,385 36,184 12,471 1,175,800 639,217 155,401 2,415,234 1,081,212 145,958 0 0 535 754,243 2,415,234 0 3,089,351 0 2,623,339 0 0 11,682 158,493 73,699 0 0 0 0 84,794 1.65 1.55 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
EX-27.2 13 EX-27.2
5 THE COMPANY'S FINANCIAL DATA SCHEDULE HAS BEEN RESTATED FOR THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE." THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE INTERIM PERIODS ENDED APRIL 30, 1997, JULY 31, 1997 AND OCTOBER 31, 1997. 1,000 3-MOS 6-MOS 9-MOS JAN-31-1998 JAN-31-1998 JAN-31-1998 FEB-01-1997 FEB-01-1997 FEB-01-1997 APR-30-1997 JUL-31-1997 OCT-31-1997 173,093 212,916 327,482 0 0 0 507,021 542,434 554,710 19,427 15,815 15,155 15,571 16,378 13,327 750,032 837,288 973,007 341,173 347,889 354,826 140,120 145,670 137,042 1,064,704 1,147,940 1,288,870 453,546 510,508 548,730 50,786 51,526 71,911 0 0 0 0 512 0 508 582,699 514 558,776 0 663,297 1,064,704 1,147,940 1,288,870 0 0 0 624,527 1,325,488 2,039,896 0 0 0 545,786 1,161,585 1,783,205 0 0 0 0 2,853 0 1,545 63,998 4,541 30,685 28,799 99,076 13,809 0 44,584 0 0 0 0 0 0 0 0 0 0 0 0 16,876 35,199 54,492 0.33 0.69 1.07 0.32 0.65 1.01 For Purposes of This Exhibit, Primary means Basic.
EX-27.3 14 EX-27.3
5 THE COMPANY'S FINANCIAL DATA SCHEDULE HAS BEEN RESTATED FOR THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE." THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 1996. 1,000 YEAR JAN-31-1996 FEB-01-1995 JAN-31-1996 25,794 7,654 500,201 1,878 40,097 594,227 278,523 121,238 859,290 367,042 33,151 0 0 486 458,611 859,290 0 2,155,657 0 1,875,072 0 0 4,529 102,314 45,018 0 0 0 0 57,296 1.19 1.14 For Purposes of This Exhibit, Primary means Basic.
EX-27.4 15 EX-27.4
5 THE COMPANY'S FINANCIAL DATA SCHEDULE HAS BEEN RESTATED FOR THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE." THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE INTERIM PERIODS ENDED APRIL 30, 1996, JULY 31, 1996, OCTOBER 31, 1996 AND YEAR ENDED JANUARY 31, 1997. 1,000 3-MOS 6-MOS 9-MOS 12-MOS JAN-31-1997 JAN-31-1997 JAN-31-1997 JAN-31-1997 FEB-01-1996 FEB-01-1996 FEB-01-1996 FEB-01-1996 APR-30-1996 JUL-31-1996 OCT-31-1996 JAN-31-1997 46,226 45,484 56,739 59,735 0 0 0 0 466,206 498,696 549,441 567,534 0 0 0 18,048 35,194 39,658 38,835 33,983 576,388 614,550 677,643 711,215 285,700 309,781 323,362 329,727 123,787 130,011 137,816 143,932 834,307 902,170 971,969 1,012,462 322,438 389,900 422,389 440,662 35,135 30,098 42,345 44,341 0 0 0 0 0 0 0 0 493 489 495 496 476,241 481,683 506,740 526,963 834,307 902,170 971,969 1,012,462 0 0 0 0 516,921 1,117,517 1,754,327 2,402,224 0 0 0 0 451,853 974,641 1,531,597 0 1,064 0 0 2,092,254 0 0 0 4,925 0 2,432 3,705 0 23,387 50,094 82,432 113,209 10,290 21,916 36,064 49,529 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13,097 28,178 46,368 63,680 .27 .58 .95 1.30 .26 .55 .90 1.23 For Purposes of This Exhibit, Primary means Basic.
EX-28.A 16 EXHIBIT 28.A 1 EXHIBIT 28 (a) (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number __________ SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN ---------------------------- (Full title of the plan) Science Applications International Corporation 10260 Campus Point Drive, San Diego, California 92121 ----------------------------------------------------- (Name of issuer of the securities held pursuant to the plan and the address of its principal executive office) 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Science Applications International Corporation Stock Purchase Plan Committee has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN Date: February 27, 1998 BY: /s/ ANNE M. JENINGS -------------------------------------- Anne M. Jenings Science Applications International Corporation Employee Stock Purchase Plan Committee 3 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN Index To Financial Statements Page ---- Report of Independent Accountants F-2 Financial Statements: Statement of Net Assets Available for Benefits as of January 31, 1998 and 1997 F-3 Statement of Changes in Net Assets Available for Benefits for the years ended January 31, 1998, 1997, and 1996 F-4 Notes to Financial Statements F-5 Schedules: None All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. F - 1 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Employee Stock Purchase Plan Committee and Participants of the Science Applications International Corporation Employee Stock Purchase Plan: In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the net assets available for benefits of the Science Applications International Corporation Employee Stock Purchase Plan at January 31, 1998 and 1997, and the changes in net assets available for benefits for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Diego, California February 27, 1998 F - 2 5 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN Statement of Net Assets Available for Benefits
=========== =========== 01/31/98 1/31/97 =========== =========== ASSETS: Investments at fair value: SAIC Class A Common Stock $10,059,000 $ 6,093,000 (Cost $8,933,000 and $5,367,000 respectively) Receivables: Participant contributions withheld 978,000 32,000 Employer contributions receivable 109,000 2,000 ----------- ----------- Net Assets Available for Benefits $11,146,000 $ 6,127,000 =========== ===========
See accompanying notes to financial statements. F - 3 6 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN Statement of Changes in Net Assets Available for Benefits
Year Ended ============ ============ ============ 01/31/98 1/31/97 1/31/96 ============ ============ ============ Unrealized appreciation of investments in SAIC Common Stock $ 1,126,000 $ 726,000 $ 164,000 Realized appreciation of shares distributed 155,000 71,000 116,000 Participant contributions 11,090,000 6,980,000 5,263,000 Employer contributions 1,236,000 370,000 279,000 Benefits paid (8,588,000) (5,949,000) (5,855,000) ============ ============ ============ Decrease/Increase in net assets 5,019,000 2,198,000 (33,000) Net assets at beginning of year 6,127,000 3,929,000 3,962,000 ============ ============ ============ Net Assets at End of Year $ 11,146,000 $ 6,127,000 $ 3,929,000 ============ ============ ============
See accompanying notes to financial statements. F - 4 7 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EMPLOYEE STOCK PURCHASE PLAN Notes to Financial Statements NOTE A - PLAN DESCRIPTION The Science Applications International Corporation Employee Stock Purchase Plan (the "Plan") is a three year plan the purpose of which is to secure for Science Applications International Corporation (the "Company") and its stockholders the benefits inherent in the ownership of capital stock of the Company by employees of the Company and its subsidiaries. The Plan is intended to provide to all eligible employees of the Company and designated subsidiaries an opportunity to purchase shares of Class A Common Stock through payroll deductions. It is intended that the Plan shall qualify under Section 423(b) of the Internal Revenue Code. The 1995 Employee Stock Purchase Plan became effective on July 14, 1995. The Plan is a successor plan to the 1993 Employee Stock Purchase Plan which terminated on July 31, 1995. All shares purchased under the 1993 Plan were distributed to participants or repurchased by the Company. The plans are substantially similar except for the number of shares reserved for issuance. The financial statements reflect the net assets available for benefits and changes in net assets available for benefits of the 1995 Plan as well as the 1993 Plan. Each participant is furnished with a copy of the complete Plan before electing to participate in the Plan. Science Applications International Corporation is the Trustee under the Plan. No trustee fees have ever been paid by the Plan. No bonds of any nature are furnished to the Plan by the Trustee, its officers or employees. The Plan is administered by the Employee Stock Purchase Plan Committee (the "Committee") whose members are appointed by the Company's Board of Directors to serve at the discretion of the Board. The members of the Committee do not act in the capacity of trustees. The members of the Committee receive no compensation from the Plan for services rendered in connection therewith. The members of the committee as of January 31, 1998 are A. Jenings, W. Reed, and W.A. Roper. The Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended. At predetermined purchase dates during the year, the Trustee purchases for the account of each participant the whole number of shares of the Company's Class A Common Stock (the "Common Stock") which may be acquired from funds available in the participant's Stock Purchase Account, together with the Company's contribution as described below. The authority to control and manage the operation and administration of the Plan is vested in the Committee. Generally, all employees of the Company and its affiliates who have adopted the Plan are eligible to participate in the Plan. Employees may contribute to the Plan by authorizing payroll deductions in amounts equal to 3% or more, up to a maximum of 10%, of their base compensation. These contributions are allocated to the Stock Purchase Accounts of the respective participants. No interest is paid on amounts in the participants' Stock Purchase Accounts. F - 5 8 There is no general public market for the Common Stock. However, the Company has established and maintains a limited secondary market for the Common Stock through its wholly-owned subsidiary, Bull, Inc. This limited market permits stockholders to sell stock to employees, consultants, and directors of the Company who have been approved by the Board of Directors or the Operating Committee of the Board of Directors as being entitled to purchase an equity interest in the Company. All purchases of SAIC's Common Stock are made either in the limited secondary market or from the Company. The purchase price to be paid for shares of Common Stock is the prevailing fair market value (Note B). In 1996, the Company paid or accrued 5% of the purchase price and the remaining 95% was paid out of participant contributions. In April 1997 the Board of Directors authorized an increase in company contributions to 10% of the purchase price. The remaining 90% is paid out of the participant contributions. A participant is not entitled to purchase an amount of Common Stock having a fair market value, as measured on its purchase date, in excess of 10% or $25,000 in any calendar year pursuant to the Plan and any other employee stock purchase plans which may be adopted by the Company. A participant's interest in his account is 100% vested at all times. Shares of Common Stock acquired under the Plan will be distributed to the participant prior to any record date established by the Company for any vote of its stockholders. Until distribution occurs, the shares are held by the Company, acting as Trustee, on behalf of the participants. Each participant is furnished with a statement of accounting at the time of any distribution. All shares of Common Stock purchased pursuant to the Plan are subject to the Company's right of repurchase upon the participant's termination of employment or affiliation with the Company. The repurchase price is the prevailing Formula Price at that time. Such shares are also subject to the Company's right of first refusal in the event that the participant desires to sell such shares other than in the limited market. Participants may withdraw the money held in their Stock Purchase Accounts at any time prior to the acquisition of shares of Common Stock therewith, although upon doing so the participant will no longer be eligible to re-enroll until the beginning of the next applicable plan year. The 1995 Employee Stock Purchase Plan will terminate on July 31, 1998. From Plan inception through January 31, 1998, 872,847 shares of Common Stock were purchased by the 1995 Employee Stock Purchase Plan. F - 6 9 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The accompanying financial statements are prepared on the accrual basis of accounting. Investment valuation and income, gains, and losses The fair value of Common Stock is determined using the fair market value pursuant to a stock price formula and valuation process which includes an appraisal prepared by an independent appraisal firm. Periodic determinations of fair market value of the Common Stock are made by the Board of Directors, with the assistance of the independent appraisal firm. The Board of Directors reserves the right to alter the formula. Realized gains and losses on Common Stock are the difference between the fair market value when distributed and the original cost of the shares of Common Stock purchased during the year or the fair market value of shares held at the beginning of the year. Unrealized appreciation or depreciation is computed as the fair market value of the Common Stock held at the end of the year less the fair market value of the Common Stock held at the beginning of the year or acquisition cost of Common Stock acquired during the year. As of January 31, 1998 and 1997, the fair market value per share was $39.13 and $25.96, respectively, for Class A Common Stock. The number of shares held by the Plan was 257,053 and 234,693 on January 31, 1998 and 1997, respectively. Benefits distributable Investments in Common Stock are distributed from the Plan prior to any record date established by the Company for any vote of its stockholders. Benefits distributable at January 31, 1998 and 1997 were $10,059,000 and $6,093,000, respectively. Administrative expenses of the Plan All expenses incurred in the administration of the Plan are paid out of the Plan assets unless the Company elects to pay such costs. During Plan years ended January 31, 1998, 1997, and 1996, the Company paid all administrative expenses of the Plan. Use of estimates 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Contributions Participant contributions are accrued when the participant earns the compensation from which the contribution is made. Employer contributions are accrued when the corresponding participant's contributions are accrued. F - 7 10 NOTE C - TAX STATUS AND FEDERAL INCOME TAX CONSEQUENCES TO PARTICIPANTS The Plan is not subject to federal income taxes and is intended to qualify under Section 423(b) of the Internal Revenue Code. No taxable income will be recognized by a participant in the Plan until the taxable year of sale or certain other dispositions of the shares of Common Stock acquired under the Plan. F - 8 EX-28.B 17 EXHIBIT 28.B 1 EXHIBIT 28.B Securities and Exchange Commission Washington, D.C., 20549 Form 11-K [X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the calendar year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT (Full Title of Plan) Science Applications International Corporation 10260 Campus Point Drive, San Diego, California 92121 (Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office) 2 SIGNATURE The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the Science Applications International Corporation Retirement Plans Committee duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT DATE 4-15-98 /s/ DANIEL W. BALDWIN ------------------ ---------------------------------------- Daniel W. Baldwin Senior Vice President and Treasurer Retirement Plans Committee 3 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT INDEX TO FINANCIAL STATEMENTS
PAGE Report of Independent Accountants F-2 Financial Statements: Statement of Net Assets Available for Benefits F-3 Statement of Changes in Net Assets Available for Benefits F-4 Notes to Financial Statements F-5 - F-13 Additional Information:* Schedule I - Schedule of Assets Held for Investment Purposes F-14 Schedule II - Schedule of Loans or Fixed Income Obligations F-15 Schedule III- Schedule of Reportable Transactions F-16
* Other schedules required by Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure under ERISA have been omitted because they are not applicable. F-1 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Retirement Plans Committee and Participants of the Science Applications International Corporation Cash or Deferred Arrangement In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the net assets available for benefits of the Science Applications International Corporation Cash or Deferred Arrangement (the Plan) at December 31, 1997 and 1996, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in Schedules I through III is presented for purposes of additional analysis and is not a required part of the basic financial statements but is additional information required by ERISA. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. PRICE WATERHOUSE LLP San Diego, California April 3, 1998 F-2 5 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS - --------------------------------------------------------------------------------
December 31, 1997 1996 ------------ ------------ Assets Investments, at fair market value: Mutual funds $412,896,000 $310,573,000 SAIC Common Stock 264,309,000 159,670,000 Short-term investments 296,000 348,000 Participant loans 21,569,000 17,000,000 ------------ ------------ 699,070,000 487,591,000 ------------ ------------ Receivables: Participant contributions 2,599,000 2,161,000 Company contributions 1,362,000 650,000 Interest income 4,000 ------------ ------------ 3,961,000 2,815,000 ------------ ------------ Total assets 703,031,000 490,406,000 ------------ ------------ Liabilities Accrued Plan expenses 88,000 52,000 ------------ ------------ Net assets available for benefits $702,943,000 $490,354,000 ============ ============
See accompanying notes to financial statements. F-3 6 Science Applicatons International Corporation Cash or Deferred Arrangement Statement of Changes in Net Assets Available for Benefits - --------------------------------------------------------------------------------
Year ended December 31, 1997 1996 ------------ ------------ Additions to net assets Investment income: Mutual funds: Dividends and interest $ 34,349,000 $ 19,708,000 Realized gain 8,726,000 4,722,000 Unrealized appreciation 19,930,000 18,677,000 SAIC Common Stock: Realized gain -- -- Unrealized appreciation 87,106,000 30,082,000 Interest 1,405,000 1,218,000 Participant contributions 77,427,000 66,555,000 Company contributions 15,168,000 9,625,000 ------------ ------------ Total additions 244,111,000 150,587,000 ------------ ------------ Deductions from net assets Distributions to participants 31,371,000 25,164,000 Plan expenses 151,000 163,000 ------------ ------------ Total deductions 31,522,000 25,327,000 ------------ ------------ Net increase 212,589,000 125,260,000 Net assets at beginning of year 490,354,000 365,094,000 ------------ ------------ Net assets at end of year $702,943,000 $490,354,000 ============ ============
See accompanying notes to financial statements. F-4 7 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - PLAN DESCRIPTION GENERAL The Science Applications International Corporation Cash or Deferred Arrangement (the "Plan" or "CODA") was established on September 18, 1982 and became effective January 1, 1983. The authority to administer the Plan is vested in the Retirement Plans Committee (the "Committee") whose members are the Named Fiduciaries for purposes of Section 402(a) of the Employee Retirement Income Security Act of 1974, as amended. Generally, employees of Science Applications International Corporation (the "Company" or "SAIC") and its subsidiaries are eligible to participate in the Plan upon commencing employment, except for employees in groups or units designated as ineligible. The following description of the Plan provides only general information. Participants should refer to the Plan document for a more complete description of the Plan's provisions. The Plan consists of a Deferred Fund which is the fund in which assets acquired by the Plan in its function as a qualified Cash or Deferred Arrangement are held and accounted for. The Plan permits participants to elect to defer up to 18% of their eligible compensation, as defined, for the Plan year and to have such deferred amount contributed directly by the Company to the Deferred Fund for the benefit of the participants. Such contributions are limited under Section 402(g) of the Internal Revenue Code (the "Code") to $9,500 for the years ended December 31, 1997 and 1996. Amounts deferred by participants, including rollovers from qualified plans, totaled $77,427,000 and $66,555,000 for the years ended December 31, 1997 and 1996, respectively. In addition to amounts deferred by participants, the Company, at its discretion, may make a matching contribution equal to a specified percentage of the aggregate amounts deferred by participants. The match is only provided on eligible participant deferrals of up to 10% of compensation. In 1997 and 1996, the Company contributed 50% and 30%, respectively, of the first $2,000 of a participant's annual deferred compensation and 15% of such deferred compensation above $2,000 for an annual total of $15,168,000 and $9,625,000, respectively. During 1997 and 1996, the Company matching contribution was allocated to the SAIC Stock Fund. Also, the Company, at its discretion, may make an additional contribution to the Deferred Fund for the benefit of non-highly compensated participants in order to comply with Section 401(k)(3) of the Code. The Company made no additional contributions for the benefit non-highly compensated participants during 1997 and 1996. The Company's contribution to the Deferred Fund is to be paid in cash unless the Company's Board of Directors determines to make the contribution in shares of Class A Common Stock or another form. Contributions to the Deferred Fund shall not exceed the maximum amount deductible by the Company for Federal income tax purposes. Employees hired prior to January 1, 1995 are immediately eligible for the Company matching contributions. Employees hired on or after January 1, 1995, who have elected to participate, are eligible for Company matching contributions if they have attained age 21 and have both twelve calendar months of employment and 850 hours of service, as defined. Participants may elect to borrow up to 50% of their vested plan balance, up to a maximum of $50,000, excluding amounts included in the SAIC Stock Fund. Upon this election, the loan balance is transferred from the applicable investment fund(s) to a separate loan fund (participant loans) until repayment. Participants are permitted to transfer to the Plan their account balances from a previous employer's qualified retirement plan. F-5 8 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The participant's interest in the Deferred Fund account will be paid in a single distribution to the participant or their designated beneficiary upon termination of employment with the Company, retirement, permanent disability or death. A participant may not make withdrawals from the Deferred Fund accounts while employed with the Company prior to attaining age 59 1/2 unless the Committee determines the participant is incurring financial hardship. After attaining age 59 1/2, a participant may make withdrawals even if still employed with the Company. Distributions from the Deferred Fund are paid in cash. VESTING A participant's interest in the employee deferral portion of the Deferred Fund account is 100% vested at all times. A participant's interest in the Company matching contribution is 100% vested if the participant was hired prior to January 1, 1995. If the participant was hired on or after January 1, 1995, the participant's interest in the Company matching contribution vests at the rate of 25% per year in years three through six, becoming fully vested after six years of service, as defined. Participants are deemed fully vested upon reaching age 59 1/2, permanent disability or death. Forfeitures, arising from participants withdrawing from the Plan prior to achieving 100% vesting, are applied to the Company's matching contribution. There were no Plan forfeitures applied against Company matching contributions in 1997 or 1996. INVESTMENT PROGRAMS The investment programs offered to participants in the Deferred Fund allow participants to choose among thirteen investment funds offered by the Vanguard Group of Investment Companies. Participants are also allowed to direct a portion of their investment into Class A Common Stock of the Company. Such investment into the SAIC Stock Fund can be exchanged into one of the Vanguard Funds subject to certain restrictions. THE VANGUARD FUNDS OFFERED WERE AS FOLLOWS: 1) Vanguard Fixed Income Securities Fund - GNMA Portfolio, which invests in fixed income securities guaranteed by the U.S. Government; 2) Vanguard Index Trust - 500 Portfolio, which invests in common stocks; 3) Vanguard Money Market Reserves - Prime Portfolio, which invests in money market instruments; 4) Vanguard Fixed Income Securities Fund - Short Term Federal Portfolio, which invests in U.S. government obligations; 5) Vanguard/ Wellesley Income Fund, which invests in fixed income securities and common stocks; 6) Vanguard/Windsor Fund, which invests in common stocks; 7) Vanguard International Growth Portfolio, which invests in common stocks of companies based outside the United States; 8) Vanguard U.S. Growth Portfolio, which invests in common stocks; 9) Vanguard Fixed Income Securities Fund - Intermediate - Term Corporate Portfolio, which invests primarily in investment grade corporate bonds; 10) Vanguard LIFEStrategy Income Portfolio, which invests in common stocks, bonds and short term reserves; 11) Vanguard LIFEStrategy Conservative Growth Portfolio, which invests in common stocks, bonds and short term reserves; 12) Vanguard LIFEStrategy Moderate Growth Portfolio, which invests in common stocks and bonds; and 13) Vanguard LIFEStrategy Growth Portfolio, which invests in common stocks and bonds. Separate Deferred Fund accounts are established for each investment program selected by a participant. Participants may elect to transfer their existing account balances at any time among the Vanguard investment funds and/or alter the allocations of future contributions among any of the investment alternatives under rules prescribed by the Committee. PLAN TERMINATION Although the Company has not expressed any intent to terminate the Plan, it reserves the right to suspend or discontinue contributions to the Plan or to terminate the Company's participation in the Plan at any time. In the event of termination, a distribution of the participants' Deferred Fund account balances will be made in accordance with the Plan provisions. F-6 9 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The accompanying financial statements are prepared on the accrual basis of accounting. INVESTMENT VALUATION AND INCOME, GAINS AND LOSSES Vanguard Funds Deposits to the Vanguard Funds are used to buy shares from the respective investment fund. Vanguard Fund shares are valued at the net asset value per share as of each valuation date. Investment transactions are accounted for on the date the shares in the fund are purchased or sold. Realized and unrealized gains and losses are computed based on the market value at the beginning of the year or purchase price if purchased during the year. SAIC Common Stock A general public market for the Company's Common Stock does not exist; therefore, the fair market value of the Common Stock is determined pursuant to a stock price formula and valuation process which includes an appraisal prepared by an independent appraisal firm. Periodic determinations of fair market value of the Common Stock are made by the Board of Directors, with the assistance of the independent appraisal firm. The Board of Directors reserves the right to alter the formula. The gains or losses realized on distributions of investments and the increases or decreases in unrealized appreciation are calculated as the difference between the current fair market value and the fair market value of the investments at the beginning of the year or purchase price if purchased during the year. As of December 31, 1997 and 1996, the fair market value of the Company's Class A Common Stock was $34.78 per share and $22.83 per share and the Plan held approximately 7,599,000 shares and 6,994,000 shares, respectively. It is the policy of the Committee to keep the SAIC Stock Fund invested primarily in Common Stock, except for estimated reserves for use in distributions and investment exchanges by participants. Such reserves are invested in the Vanguard Money Market Reserves - Prime Portfolio mutual fund. If reserves in the SAIC Stock Fund are less than the amount required at any given time to make requested distributions and investment changes, investment exchanges out of the SAIC Stock Fund by participants may have to be deferred. Short-term investments Short-term investments consist primarily of State Street Bank and Trust Short-Term Investment Fund, which invests in short-term money market instruments. State Street Bank and Trust Company is the Plan's Trustee. CONTRIBUTIONS Participant contributions and Company matching contributions are accrued based upon the amounts deferred by participants at year end which are received by the Trustee subsequent to year end. Additional Company contributions are accrued based upon the amounts determined by the Company's Board of Directors (Note 1). F-7 10 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- DISTRIBUTIONS TO PARTICIPANTS Distributions to participants are recorded when paid. Generally, upon termination or retirement, participants will receive their vested account balance in a single lump sum payment following their termination or retirement date. Benefits to be paid at a future date as elected by terminated or retired participants are as follows:
DECEMBER 31, 1997 1996 ------------ ------------ INVESTMENT FUND Vanguard GNMA $ 4,465,000 $ 2,816,000 Vanguard Index 12,396,000 6,816,000 Vanguard Prime 7,514,000 4,598,000 Vanguard STFED 3,453,000 1,926,000 Vanguard Wellesley 5,011,000 2,727,000 Vanguard Windsor 21,776,000 12,725,000 Vanguard Intl. Growth 5,179,000 2,687,000 Vanguard U.S. Growth 4,276,000 2,171,000 Vanguard Int. Corporate Bond 265,000 124,000 Vanguard LS Income 94,000 91,000 Vanguard LS Cons. Growth 166,000 31,000 Vanguard LS Mod. Growth 367,000 173,000 Vanguard LS Growth 891,000 381,000 SAIC CODA Stock 36,053,000 19,290,000 Participant Loans 2,771,000 871,000 ------------ ------------ Total $104,677,000 57,427,000 ============ ============
These amounts are reflected as liabilities in the Plan's Form 5500. ADMINISTRATIVE EXPENSES OF THE PLAN All expenses incurred in the administration of the Plan are paid out of Plan assets unless the Company elects to pay such costs. Fees totaling $88,000 and $52,000 were paid or accrued to the Trustee by the Plan during 1997 and 1996, respectively. Other Plan expenses totaling $63,000 and $111,000 were paid or accrued by the Plan during 1997 and 1996, respectively. USE OF ESTIMATES 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 11 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - TAX STATUS The Plan is intended to qualify under Section 401(a) of the Code. In addition, the Deferred Fund of the Plan is intended to be a "Qualified Cash or Deferred Arrangement" under Section 401(k) of the Code. Accordingly, the Plan is not subject to Federal income taxes. The Plan received a favorable determination letter from the Internal Revenue Service during January 1997 indicating that the Plan and related trust, as amended, are designed in accordance with applicable sections of the Code. NOTE 4 - PARTY-IN-INTEREST TRANSACTIONS Transactions involving cash, securities or assets of the Company, the Trustee or other affiliated persons are considered to be party-in-interest transactions under Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure. Reportable party-in-interest transactions for the years ended December 31, 1997 and 1996, are summarized below:
YEAR ENDED DECEMBER 31, 1997 --------------------------------------------------- NUMBER NUMBER INVESTMENT SALES OF UNITS OF SALES COST PROCEEDS State Street Bank & Trust Short-Term Investment Fund 627,000 64 $ 62,659,000 $62,659,000 INVESTMENT PURCHASES State Street Bank & Trust Short-Term Investment Fund 626,000 66 $62,618,000 SAIC Class A Common Stock 612,000 4 $17,713,000
YEAR ENDED DECEMBER 31, 1996 --------------------------------------------------- NUMBER NUMBER INVESTMENT SALES OF UNITS OF SALES COST PROCEEDS State Street Bank & Trust Short-Term Investment Fund 812,000 69 $81,180,000 $81,180,000 INVESTMENT PURCHASES State Street Bank & Trust Short-Term Investment Fund 805,000 72 $80,542,000 SAIC Class A Common Stock 621,000 4 $13,156,000
NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND Financial information by investment fund as of December 31, 1997 and 1996, and for the years then ended are shown on the following pages. F-9 12 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1997 VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD GNMA INDEX 500 PRIME WELLESLEY WINDSOR INT'L GROWTH ------------ ------------ ------------ ------------ ------------- ------------ ASSETS Investments: Mutual funds $ 22,141,000 $ 90,256,000 $ 37,244,000 $ 33,775,000 $ 134,811,000 $ 28,870,000 SAIC Common Stock Short-term investments Participant loans ------------ ------------ ------------ ------------ ------------- ------------ 22,141,000 90,256,000 37,244,000 33,775,000 134,811,000 28,870,000 ------------ ------------ ------------ ------------ ------------- ------------ Receivables: Participant contributions 81,000 446,000 730,000 165,000 521,000 182,000 Company contributions 1,305,000 Interest income ------------ ------------ ------------ ------------ ------------- ------------ 81,000 446,000 2,035,000 165,000 521,000 182,000 ------------ ------------ ------------ ------------ ------------- ------------ Total assets 22,222,000 90,702,000 39,279,000 33,940,000 135,332,000 29,052,000 ------------ ------------ ------------ ------------ ------------- ------------ LIABILITIES Accrued Plan expenses ------------ ------------ ------------ ------------ ------------- ------------ Net assets available for benefits $ 22,222,000 $ 90,702,000 $ 39,279,000 $ 33,940,000 $ 135,332,000 $ 29,052,000 ============ ============ ============ ============ ============= ============ VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD LS CONS. LS MOD. U.S. GROWTH INT. CORP. STFED LS INCOME GROWTH GROWTH ------------ ----------- ------------ ---------- ------------ ------------ ASSETS Investments: Mutual funds $ 30,388,000 $ 2,471,000 $ 15,450,000 $ 676,000 $ 2,615,000 $ 5,675,000 SAIC Common Stock Short-term investments Participant loans ------------ ----------- ------------ ---------- ------------ ------------ 30,388,000 2,471,000 15,450,000 676,000 2,615,000 5,675,000 ------------ ----------- ------------ ---------- ------------ ------------ Receivables: Participant contributions 217,000 14,000 62,000 21,000 60,000 Company contributions Interest income ------------ ----------- ------------ ---------- ------------ ------------ 217,000 14,000 62,000 21,000 60,000 ------------ ----------- ------------ ---------- ------------ ------------ Total assets 30,605,000 2,485,000 15,512,000 676,000 2,636,000 5,735,000 ============ =========== ============ ========== ============ ============ LIABILITIES Accrued Plan expenses ------------ ----------- ------------ ---------- ------------ ------------ Net assets available for benefits $ 30,605,000 $ 2,485,000 $ 15,512,000 $ 676,000 $ 2,636,000 $ 5,735,000 ------------ ----------- ------------ ---------- ------------ ------------ VANGUARD SAIC COMMON PARTICIPANT STATE STREET LS GROWTH STOCK LOANS STIF TOTAL ------------ -------------- ------------- ------------ ------------- ASSETS Investments: Mutual funds $ 8,347,000 $ 177,000 $ 412,896,000 SAIC Common Stock 264,309,000 264,309,000 Short-term investments $ 296,000 296,000 Participant loans $ 21,569,000 21,569,000 ------------ -------------- ------------- ------------ ------------- 8,347,000 264,486,000 21,569,000 296,000 699,070,000 ------------ -------------- ------------- ------------ ------------- Receivables: Participant contributions 100,000 2,599,000 Company contributions 57,000 1,362,000 Interest income ------------ -------------- ------------- ------------ ------------- 100,000 57,000 3,961,000 ------------ -------------- ------------- ------------ ------------- Total assets 8,447,000 264,486,000 21,569,000 353,000 703,031,000 ------------ -------------- ------------- ------------ ------------- LIABILITIES Accrued Plan expenses 88,000 88,000 ------------ -------------- ------------- ------------ ------------- Net assets available for benefits $ 8,447,000 $ 264,486,000 $ 21,569,000 $ 265,000 $ 702,943,000 ============ ============== ============= ============ =============
F-10 13 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AT DECEMBER 31, 1996 VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD GNMA INDEX 500 PRIME WELLESLEY WINDSOR INT'L GROWTH ------------- ------------ ------------ ------------ ------------- ------------- ASSETS Investments: Mutual funds $ 19,620,000 $ 58,841,000 $ 31,364,000 $ 26,138,000 $ 102,219,000 $ 25,170,000 SAIC Common Stock Short-term investments Participant loans ------------- ------------ ------------ ------------ ------------- ------------- 19,620,000 58,841,000 31,364,000 26,138,000 102,219,000 25,170,000 ------------- ------------ ------------ ------------ ------------- ------------- Receivables: Participant contributions Company contributions Interest income ------------- ------------ ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------ ------------- ------------- Total assets 19,620,000 58,841,000 31,364,000 26,138,000 102,219,000 25,170,000 ------------- ------------ ------------ ------------ ------------- ------------- LIABILITIES Accrued Plan expenses ------------- ------------ ------------ ------------ ------------- ------------- Net assets available for benefits $ 19,620,000 $ 58,841,000 $ 31,364,000 $ 26,138,000 $ 102,219,000 $ 25,170,000 ============= ============ ============ ============ ============= ============= VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD LS CONS. LS MOD. U.S. GROWTH INT. CORP. STFED LS INCOME GROWTH GROWTH ------------- ----------- ------------ ------------ ------------ ----------- ASSETS Investments: Mutual funds $ 19,558,000 $ 1,538,000 $ 14,494,000 $ 455,000 $ 1,197,000 $ 2,384,000 SAIC Common Stock Short-term investments Participant loans ------------- ----------- ------------ ------------ ------------ ----------- 19,558,000 1,538,000 14,494,000 455,000 1,197,000 2,384,000 ------------- ----------- ------------ ------------ ------------ ----------- Receivables: Participant contributions Company contributions Interest income ------------- ----------- ------------ ------------ ------------ ----------- ------------- ----------- ------------ ------------ ------------ ----------- Total assets 19,558,000 1,538,000 14,494,000 455,000 1,197,000 2,384,000 ------------- ----------- ------------ ------------ ------------ ----------- LIABILITIES Accrued Plan expenses ------------- ----------- ------------ ------------ ------------ ----------- Net assets available for benefits $ 19,558,000 $ 1,538,000 $ 14,494,000 $ 455,000 $ 1,197,000 $ 2,384,000 ============= =========== ============ ============ ============ =========== VANGUARD SAIC COMMON PARTICIPANT STATE STREET LS GROWTH STOCK LOANS STIF TOTAL ------------ ---------------- ------------ ------------- ------------- ASSETS Investments: Mutual funds $ 3,946,000 $ 3,649,000 $ 310,573,000 SAIC Common Stock 159,670,000 159,670,000 Short-term investments $ 348,000 348,000 Participant loans $ 17,000,000 17,000,000 ------------ ---------------- ------------ ------------- ------------- 3,946,000 163,319,000 17,000,000 348,000 487,591,000 ------------ ---------------- ------------ ------------- ------------- Receivables: Participant contributions 2,161,000 2,161,000 Company contributions 650,000 650,000 Interest income 4,000 4,000 ------------ ---------------- ------------ ------------- ------------- 650,000 2,165,000 2,815,000 ------------ ---------------- ------------ ------------- ------------- Total assets 3,946,000 163,969,000 17,000,000 2,513,000 490,406,000 ------------ ---------------- ------------ ------------- ------------- LIABILITIES Accrued Plan expenses 52,000 52,000 ------------ ---------------- ------------ ------------- ------------- Net assets available for benefits $ 3,946,000 $ 163,969,000 $ 17,000,000 $ 2,461,000 $ 490,354,000 ============ ================ ============ ============= =============
F-11 14 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1997 VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD GNMA INDEX 500 PRIME WELLESLEY WINDSOR INT'L GROWTH ------------ ------------ ------------- ------------ ------------- ------------- ADDITIONS TO NET ASSETS Investment income: Mutual funds: Dividends and interest $ 1,436,000 $ 1,830,000 $ 1,683,000 $ 3,671,000 $ 21,478,000 $ 1,234,000 Realized gain (loss) 55,000 3,310,000 102,000 468,000 2,702,000 866,000 Unrealized (depreciation) appreciation 374,000 15,705,000 18,000 1,321,000 (1,003,000) (1,212,000) SAIC Common Stock: Realized gain Unrealized appreciation Interest Participant contributions 2,089,000 10,260,000 16,445,000 4,081,000 12,698,000 4,702,000 Company contributions 15,139,000 ------------ ------------ ------------- ------------ ------------- ------------- Total additions 3,954,000 31,105,000 33,387,000 9,541,000 35,875,000 5,590,000 ------------ ------------ ------------- ------------ ------------- ------------- DEDUCTIONS FROM NET ASSETS Distributions to participants 1,073,000 3,660,000 3,143,000 1,485,000 5,793,000 1,730,000 Plan expenses ------------ ------------ ------------- ------------ ------------- ------------- Total deductions 1,073,000 3,660,000 3,143,000 1,485,000 5,793,000 1,730,000 ------------ ------------ ------------- ------------ ------------- ------------- Net increase prior to exchanges 2,881,000 27,445,000 30,244,000 8,056,000 30,082,000 3,860,000 Exchanges (279,000) 4,416,000 (22,329,000) (254,000) 3,031,000 22,000 ------------ ------------ ------------- ------------ ------------- ------------- Net increase (decrease) 2,602,000 31,861,000 7,915,000 7,802,000 33,113,000 3,882,000 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 19,620,000 58,841,000 31,364,000 26,138,000 102,219,000 25,170,000 ------------ ------------ ------------- ------------ ------------- ------------- End of year $ 22,222,000 $ 90,702,000 $ 39,279,000 $ 33,940,000 $ 135,332,000 $ 29,052,000 ============ ============ ============= ============ ============= ============= VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD LS CONS. LS MOD. U.S. GROWTH INT. CORP. STFED LS INCOME GROWTH GROWTH ------------ ----------- ------------ ---------- ----------- ----------- ADDITIONS TO NET ASSETS Investment income: Mutual funds: Dividends and interest $ 1,173,000 $ 119,000 $ 903,000 $ 43,000 $ 128,000 $ 252,000 Realized gain (loss) 980,000 3,000 (14,000) 26,000 34,000 66,000 Unrealized (depreciation) appreciation 3,364,000 35,000 45,000 29,000 136,000 415,000 SAIC Common Stock: Realized gain Unrealized appreciation Interest Participant contributions 5,037,000 326,000 1,629,000 141,000 427,000 1,225,000 Company contributions ------------ ----------- ------------ ---------- ----------- ----------- Total additions 10,554,000 483,000 2,563,000 239,000 725,000 1,958,000 ------------ ----------- ------------ ---------- ----------- ----------- DEDUCTIONS FROM NET ASSETS Distributions to participants 1,291,000 106,000 798,000 164,000 217,000 434,000 Plan expenses ------------ ----------- ------------ ---------- ----------- ----------- Total deductions 1,291,000 106,000 798,000 164,000 217,000 434,000 ------------ ----------- ------------ ---------- ----------- ----------- Net increase prior to exchanges 9,263,000 377,000 1,765,000 75,000 508,000 1,524,000 Exchanges 1,784,000 570,000 (747,000) 146,000 931,000 1,827,000 ------------ ----------- ------------ ---------- ----------- ----------- Net increase (decrease) 11,047,000 947,000 1,018,000 221,000 1,439,000 3,351,000 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 19,558,000 1,538,000 14,494,000 455,000 1,197,000 2,384,000 ------------ ----------- ------------ ---------- ----------- ----------- End of year $ 30,605,000 $ 2,485,000 $ 15,512,000 $ 676,000 $ 2,636,000 $ 5,735,000 ============ =========== ============ ========== =========== =========== VANGUARD SAIC COMMON PARTICIPANT STATE STREET LS GROWTH STOCK LOANS STIF TOTAL ----------- ------------- ------------ ------------- ------------- ADDITIONS TO NET ASSETS Investment income: Mutual funds: Dividends and interest $ 328,000 $ 71,000 $ 34,349,000 Realized gain (loss) 128,000 8,726,000 Unrealized (depreciation) appreciation 703,000 19,930,000 SAIC Common Stock: Realized gain - Unrealized appreciation 87,106,000 87,106,000 Interest $ 1,347,000 $ 58,000 1,405,000 Participant contributions 2,135,000 497,000 183,000 15,552,000 77,427,000 Company contributions 29,000 15,168,000 ----------- ------------- ------------ ------------- ------------- Total additions 3,294,000 87,674,000 1,530,000 15,639,000 244,111,000 ----------- ------------- ------------ ------------- ------------- DEDUCTIONS FROM NET ASSETS Distributions to participants 339,000 10,419,000 719,000 31,371,000 Plan expenses 151,000 151,000 ----------- ------------- ------------ ------------- ------------- Total deductions 339,000 10,419,000 719,000 151,000 31,522,000 ----------- ------------- ------------ ------------- ------------- Net increase prior to exchanges 2,955,000 77,255,000 811,000 15,488,000 212,589,000 Exchanges 1,546,000 23,262,000 3,758,000 (17,684,000) - ----------- ------------- ------------ ------------- ------------- Net increase (decrease) 4,501,000 100,517,000 4,569,000 (2,196,000) 212,589,000 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 3,946,000 163,969,000 17,000,000 2,461,000 490,354,000 ----------- ------------- ------------ ------------- ------------- End of year $ 8,447,000 $ 264,486,000 $ 21,569,000 $ 265,000 $ 702,943,000 =========== ============= ============ ============= =============
F-12 15 SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 - FINANCIAL INFORMATION BY INVESTMENT FUND - CONTINUED
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1996 VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD GNMA INDEX 500 PRIME WELLESLEY WINDSOR INT'L GROWTH ------------ ------------ ------------ ------------ ------------- ------------ ADDITIONS TO NET ASSETS Investment income: Mutual funds: Dividends and interest $ 1,346,000 $ 1,222,000 $ 1,518,000 $ 2,101,000 $ 9,744,000 $ 1,073,000 Realized gain (loss) 47,000 1,805,000 329,000 1,489,000 586,000 Unrealized (depreciation) appreciation (430,000) 7,089,000 (204,000) 9,608,000 1,304,000 SAIC Common Stock: Realized gain Unrealized appreciation Interest Participant contributions 2,432,000 8,039,000 3,254,000 4,432,000 11,661,000 4,362,000 Company contributions ------------ ------------ ------------ ------------ ------------- ------------ Total additions 3,395,000 18,155,000 4,772,000 6,658,000 32,502,000 7,325,000 ------------ ------------ ------------ ------------ ------------- ------------ DEDUCTIONS FROM NET ASSETS Distributions to participants 1,074,000 2,880,000 2,825,000 1,666,000 5,086,000 1,322,000 Plan expenses ------------ ------------ ------------ ------------ ------------- ------------ Total deductions 1,074,000 2,880,000 2,825,000 1,666,000 5,086,000 1,322,000 ------------ ------------ ------------ ------------ ------------- ------------ Net increase prior to exchanges 2,321,000 15,275,000 1,947,000 4,992,000 27,416,000 6,003,000 Exchanges (2,011,000) 4,078,000 (265,000) (1,877,000) (2,193,000) 1,082,000 ------------ ------------ ------------ ------------ ------------- ------------ Net increase (decrease) 310,000 19,353,000 1,682,000 3,115,000 25,223,000 7,085,000 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 19,310,000 39,488,000 29,682,000 23,023,000 76,996,000 18,085,000 ------------ ------------ ------------ ------------ ------------- ------------ End of year $ 19,620,000 $ 58,841,000 $ 31,364,000 $ 26,138,000 $ 102,219,000 $ 25,170,000 ============ ============ ============ ============ ============= ============ VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD VANGUARD LS CONS. LS MOD. U.S. GROWTH INT. CORP. STFED LS INCOME GROWTH GROWTH ------------ ----------- ------------ --------- ----------- ----------- ADDITIONS TO NET ASSETS Investment income: Mutual funds: Dividends and interest $ 1,423,000 $ 87,000 $ 874,000 $ 16,000 $ 53,000 $ 105,000 Realized gain (loss) 459,000 (1,000) (20,000) 1,000 2,000 6,000 Unrealized (depreciation) appreciation 1,245,000 (46,000) (185,000) (4,000) 20,000 79,000 SAIC Common Stock: Realized gain Unrealized appreciation Interest Participant contributions 3,268,000 256,000 1,914,000 30,000 162,000 473,000 Company contributions ------------ ----------- ------------ --------- ----------- ----------- Total additions 6,395,000 296,000 2,583,000 43,000 237,000 663,000 ------------ ----------- ------------ --------- ----------- ----------- DEDUCTIONS FROM NET ASSETS Distributions to participants 666,000 30,000 1,155,000 21,000 2,000 23,000 Plan expenses ------------ ----------- ------------ --------- ----------- ----------- Total deductions 666,000 30,000 1,155,000 21,000 2,000 23,000 ------------ ----------- ------------ --------- ----------- ----------- Net increase prior to exchanges 5,729,000 266,000 1,428,000 22,000 235,000 640,000 Exchanges 5,744,000 187,000 (1,680,000) 433,000 962,000 1,744,000 ------------ ----------- ------------ --------- ----------- ----------- Net increase (decrease) 11,473,000 453,000 (252,000) 455,000 1,197,000 2,384,000 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 8,085,000 1,085,000 14,746,000 - - - ------------ ----------- ------------ --------- ----------- ----------- End of year $ 19,558,000 $ 1,538,000 $ 14,494,000 $ 455,000 $ 1,197,000 $ 2,384,000 ============ =========== ============ ========= =========== =========== VANGUARD SAIC COMMON PARTICIPANT STATE STREET LS GROWTH STOCK LOANS STIF TOTAL ----------- ------------- ------------ ------------ ------------- ADDITIONS TO NET ASSETS Investment income: Mutual funds: Dividends and interest $ 146,000 $ 19,708,000 Realized gain (loss) 19,000 4,722,000 Unrealized (depreciation) appreciation 201,000 18,677,000 SAIC Common Stock: Realized gain - Unrealized appreciation $ 30,082,000 30,082,000 Interest 131,000 $ 1,038,000 $ 49,000 1,218,000 Participant contributions 776,000 11,446,000 14,050,000 66,555,000 Company contributions 9,575,000 50,000 9,625,000 ----------- ------------- ------------ ------------ ------------- Total additions 1,142,000 51,234,000 1,038,000 14,149,000 150,587,000 ----------- ------------- ------------ ------------ ------------- DEDUCTIONS FROM NET ASSETS Distributions to participants 15,000 7,916,000 483,000 25,164,000 Plan expenses 163,000 163,000 ----------- ------------- ------------ ------------ ------------- Total deductions 15,000 7,916,000 483,000 163,000 25,327,000 ----------- ------------- ------------ ------------ ------------- Net increase prior to exchanges 1,127,000 43,318,000 555,000 13,986,000 125,260,000 Exchanges 2,819,000 316,000 4,815,000 (14,154,000) - ----------- ------------- ------------ ------------ ------------- Net increase (decrease) 3,946,000 43,634,000 5,370,000 (168,000) 125,260,000 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year - 120,335,000 11,630,000 2,629,000 365,094,000 ----------- ------------- ------------ ------------ ------------- End of year $ 3,946,000 $ 163,969,000 $ 17,000,000 $ 2,461,000 $ 490,354,000 =========== ============= ============ ============ =============
F-13 16 ADDITIONAL INFORMATION SCHEDULE I SCIENCE APPLICATION INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT ITEM 27a FORM 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AT DECEMBER 31, 1997 - --------------------------------------------------------------------------------
DESCRIPTION OF COST OF CURRENT IDENTITY OF ISSUE INVESTMENT SHARES OR UNITS ASSET VALUE Mutual funds: The Vanguard Group of Investment Companies Vanguard Fixed Income Securities Fund - GNMA Portfolio 2,123,000 $ 21,471,000 $ 22,141,000 Vanguard Index Trust - 500 Portfolio 1,002,000 57,415,000 90,256,000 Vanguard Money Market Reserves- Prime Portfolio 37,421,000 37,421,000 37,421,000 Vanguard/Wellesley Income Fund 1,545,000 30,773,000 33,775,000 Vanguard/Windsor Fund 7,939,000 122,383,000 134,811,000 Vanguard Int'l Growth Portfolio 1,761,000 26,713,000 28,870,000 Vanguard U.S. Growth Portfolio 1,059,000 24,945,000 30,388,000 Vanguard Int. Term Corporate Bond Portfolio 249,000 2,442,000 2,471,000 Vanguard Fixed Income Securities Fund - Short-Term Federal Portfolio 1,525,000 15,457,000 15,450,000 Vanguard LIFEStrategy Income Portfolio 54,000 651,000 676,000 Vanguard LIFEStrategy Conservative Growth Portfolio 195,000 2,460,000 2,615,000 Vanguard LIFEStrategy Moderate Growth Portfolio 383,000 5,181,000 5,675,000 Vanguard LIFEStrategy Growth Portfolio 520,000 7,443,000 8,347,000 -------------- -------------- 354,755,000 412,896,000 Common Stock: SAIC* Class A 7,599,000 109,484,000 264,309,000 Short-Term Investment: State Street Bank & Trust Short-Term Investment Fund 296,000 296,000 296,000 Company* Participant loans Due Jan. 1998 to Dec. 2022; 6% - 12% 4,000 21,569,000 21,569,000 -------------- -------------- $ 486,104,000 $ 699,070,000 ============== ==============
* Represents a party-in-interest. F-14 17 ADDITIONAL INFORMATION SCHEDULE II SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT ITEM 27b FORM 5500 - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS AT DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------- AMOUNT RECEIVED ORIGINAL DURING REPORTING YEAR UNPAID AMOUNT ----------------------------- BALANCE AT IDENTITY AND ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR Joyce Tremain $ 6,000 - - $ 6,000 8689 Long Hill Rd. Rome, NY 13440 Kathryn E. Dayan $ 11,000 - - $ 11,000 12015-4 World Trade Drive San Diego, CA 92128 Kathryn E. Dayan $ 13,000 - - $ 13,000 12015-4 World Trade Drive San Diego, CA 92128
DETAILED DESCRIPTION OF LOSS INCLUDING DATES OF MAKING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE AMOUNT OVERDUE* OF COLLATERAL, ANY REGURGITATION OF THE LOAN AND THE --------------------------- IDENTITY AND ADDRESS OF OBLIGOR TERMS OF THE RENEGOTIATION AND OTHER MATERIAL ITEMS PRINCIPAL INTEREST Joyce Tremain Loan date: 4/5/96; Maturity date: 3/23/01; $ 6,000 - 8689 Long Hill Rd. Interest rate: 7%; Collateral: Vested Balance Rome, NY 13440 Kathryn E. Dayan Loan date: 4/19/96; Maturity date: 4/6/01; $ 11,000 - 12015-4 World Trade Drive Interest rate: 7%; Collateral: Vested Balance San Diego, CA 92128 Kathryn E. Dayan Loan date: 5/26/95; Maturity date: 4/24/20; $ 13,000 - 12015-4 World Trade Drive Interest rate: 9%; Collateral: Vested Balance San Diego, CA 92128
* During 1998, the Company instructed the Plan's recordkeeper to issue Forms 1099 to the obligors listed above in the amount of the principal balance outstanding at December 31, 1997. F-15 18 ADDITIONAL INFORMATION SCHEDULE III SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CASH OR DEFERRED ARRANGEMENT ITEM 27d FORM 5500 - SCHEDULE OF REPORTABLE TRANSACTIONS* YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PURCHASE SELLING LEASE PARTY INVOLVED DESCRIPTION OF ASSET TRANSACTIONS PRICE PRICE RENTAL State Street Bank Short-Term Investment & Trust Fund 66 $ 62,618,000 State Street Bank Short-Term Investment & Trust Fund 64 $ 62,659,000
CURRENT VALUE ON EXPENSE COST OF TRANSACTION NET GAIN PARTY INVOLVED INCURRED ASSET DATE OR LOSS State Street Bank & Trust $ 62,618,000 State Street Bank & Trust $ 62,659,000 $ 62,659,000 $ -
* Transactions or series of transactions in excess of 5 percent of the current value of the Plan's assets as of December 31, 1996 as defined in Section 2520.103-6 of the Department of Labor Rules and Regulations for Reporting and Disclosure under ERISA. F-16 EX-28.C 18 EXHIBIT 28.C 1 EXHIBIT 28 (c) Securities and Exchange Commission Washington, D.C. 20549 Form 11-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the calendar year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ TRANSCORE RETIREMENT SAVINGS PLAN --------------------------------- (Full title of the plan) 7611 Derry Street Harrisburg, PA 17111 Plan's telephone number, including area code (717) 561-2400 Science Applications International Corporation 10260 Campus Point Drive, San Diego, California 92121 (Name of issuer of the securities held pursuant to the plan and the address of its principal executive office) Registrant's telephone number, including area code (619) 546-6000 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustee (or other persons who administer the Plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. TRANSCORE RETIREMENT SAVINGS PLAN Date: April 23, 1998 BY:/s/ JOHN M. WORTHINGTON -------------------------------------- John M. Worthington Senior Vice President and Chief Operating Officer 3 TRANSCORE RETIREMENT SAVINGS PLAN INDEX TO FINANCIAL STATEMENTS
PAGE Report of Independent Accountants F-2 Financial Statements: Statements of Net Assets Available for Plan Benefits, with Fund Information as of December 31, 1997 and 1996 F-3-F-4 Statements of Changes in Net Assets Available for Plan Benefits, with Fund Information for the Years Ended December 31, 1997 and 1996 F-5-F-6 Notes to Financial Statements F-7-F-10 Additional Information*: Schedule I: Schedule of Assets Held for Investment Purposes at December 31, 1997 F-11 Schedule II: Schedule of Loans or Fixed Income Obligations at December 31, 1997 F-12 Schedule III: Schedule of Reportable Transactions for the Year Ended December 31, 1997 F-13
* Other supplemental schedules required by Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure under ERISA have been omitted because they are not applicable. F-1 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Plan Administrator and Participants of the TransCore Retirement Savings Plan In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the net assets available for benefits of the TransCore Retirement Savings Plan (the Plan) at December 31, 1997, and the changes in net assets available for benefits for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The financial statements of the TransCore Retirement Savings Plan for the year ended December 31, 1996 were audited by other independent accountants whose report dated June 23, 1997 expressed an unqualified opinion on those statements. Our audit was performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in Schedules I through III is presented for purposes of additional analysis and is not a required part of the basic financial statements but is additional information required by ERISA. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. PRICE WATERHOUSE LLP San Diego, California April 3, 1998 F-2 5 TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION DECEMBER 31, 1997 - -------------------------------------------------------------------------------------------------------------------------- FUND INFORMATION ---------------------------------------------------------------------------------- MONEY SHORT-TERM LONG-TERM MARKET WELLESLEY FEDERAL GNMA CORPORATE PRIME INCOME WELLINGTON PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND FUND ----------- ----------- ----------- ----------- ----------- ----------- Investments, at fair value Science Applications International Corporation Common Stock (cost $1,392,907) Vanguard Mutual Funds (aggregate cost $7,684,316) $ 153,289 $ 230,780 $ 968,620 $ 737,374 $ 495,658 $ 2,634,417 Short-term investments and cash (cost $77,650) Loans to participants - principal balance ----------- ----------- ----------- ----------- ----------- ----------- Net assets available for plan benefits $ 153,289 $ 230,780 $ 968,620 $ 737,374 $ 495,658 $ 2,634,417 =========== =========== =========== =========== =========== =========== Unit or share values (Note 2) $ 10.13 $ 10.43 $ 9.26 $ 1.00 $ 21.86 $ 29.45 =========== =========== =========== =========== =========== ===========
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- INDEX INTERNATIONAL SAIC 500 WINDSOR II GROWTH LOAN COMMON PORTFOLIO FUND PORTFOLIO FUND STOCK TOTAL ----------- ----------- ----------- ----------- ----------- ----------- Investments, at fair value Science Applications International Corporation Common Stock $ 2,563,314 $ 2,563,314 (cost $1,392,907) Vanguard Mutual Funds (aggregate cost $7,684,316) $ 1,368,292 $ 1,750,943 $ 699,077 9,038,450 Short-term investments and cash 77,983 77,983 (cost $77,650) Loans to participants - principal balance $ 87,480 87,480 ----------- ----------- ----------- ----------- ----------- ----------- Net assets available for plan benefits $ 1,368,292 $ 1,750,943 $ 699,077 $ 87,480 $ 2,641,297 $11,767,227 =========== =========== =========== =========== =========== =========== Unit or share values (Note 2) $ 90.07 $ 28.62 $ 16.39 $ 34.78 =========== =========== =========== ===========
See accompanying notes to the financial statements F-3 6 TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION DECEMBER 31, 1996 - -------------------------------------------------------------------------------------------------------------------------------- FUND INFORMATION --------------------------------------------------------------------------------------- MONEY SHORT-TERM LONG-TERM MARKET WELLESLEY INDEX FEDERAL GNMA CORPORATE PRIME INCOME WELLINGTON 500 PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND FUND PORTFOLIO ---------- ---------- ---------- ---------- ---------- ---------- ---------- Investments, at fair value Science Applications International Corporation Common Stock (cost $1,292,490) Vanguard Mutual Funds (aggregate cost $5,556,829) $ 114,064 $ 142,664 $ 895,224 $ 662,276 $ 394,655 $2,038,251 $ 637,352 Short-term investments and cash Loans to participants - principal balance ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net assets available for plan benefits $ 114,064 $ 142,664 $ 895,224 $ 662,276 $ 394,655 $2,038,251 $ 637,352 ========== ========== ========== ========== ========== ========== ========== Unit or share values (Note 2) $ 10.13 $ 10.22 $ 9.26 $ 1.00 $ 20.51 $ 26.15 $ 69.16 ========== ========== ========== ========== ========== ========== ==========
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION DECEMBER 31, 1996 - -------------------------------------------------------------------------------------------------------------------------------- FUND INFORMATION --------------------------------------------------------------------------------------- INTERNATIONAL SAIC WINDSOR II GROWTH LOAN COMMON FUND PORTFOLIO FUND STOCK TOTAL ---------- ---------- ---------- ---------- ---------- Investments, at fair value Science Applications International Corporation Common Stock $1,681,467 $1,681,467 (cost $1,292,490) Vanguard Mutual Funds (aggregate cost $5,556,829) $ 930,975 $ 510,143 6,325,604 Short-term investments and cash Loans to participants - principal balance $ 78,618 78,618 ---------- ---------- ---------- ---------- ---------- Net assets available for plan benefits $ 930,975 $ 510,143 $ 78,618 $1,681,467 $8,085,689 ========== ========== ========== ========== ========== Unit or share values (Note 2) $ 23.83 $ 16.46 $ 22.83 ========== ========== ==========
See accompanying notes to the financial statements F-4 7 TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------ FUND INFORMATION --------------------------------------------------------------------------------- MONEY SHORT-TERM LONG-TERM MARKET WELLESLEY FEDERAL GNMA CORPORATE PRIME INCOME PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND ------------ ------------ ------------ ------------ ------------ Investment income: Interest Dividends $ 8,330 $ 12,709 $ 70,346 $ 36,331 $ 54,610 Net appreciation (depreciation) in fair value of investments 412 4,077 47,723 30,294 ------------ ------------ ------------ ------------ ------------ Total investment income 8,742 16,786 118,069 36,331 84,904 Contributions: TransCore Company Contributions 8,810 11,813 20,538 24,109 23,042 Participant Contributions 31,430 41,242 68,823 80,321 87,831 Rollover Contributions 4,818 21,468 29,821 3,926 ------------ ------------ ------------ ------------ ------------ Total additions 53,800 91,309 207,430 170,582 199,703 ------------ ------------ ------------ ------------ ------------ Withdrawals (8,415) (9,272) (83,688) (26,684) (3,675) Net transfers among funds (6,160) 6,079 (50,346) (68,800) (95,025) ------------ ------------ ------------ ------------ ------------ Net increase 39,225 88,116 73,396 75,098 101,003 Net assets available for plan benefits: Beginning of year 114,064 142,664 895,224 662,276 394,655 ------------ ------------ ------------ ------------ ------------ End of year $ 153,289 $ 230,780 $ 968,620 $ 737,374 $ 495,658 ============ ============ ============ ============ ============
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- FUND INFORMATION ------------------------------------------------------------------------------------------- INDEX INTERNATIONAL SAIC WELLINGTON 500 WINDSOR II GROWTH LOAN COMMON FUND PORTFOLIO FUND PORTFOLIO FUND STOCK ------------ ------------ ------------ ------------ ------------ ------------ Investment income: Interest $ 6,051 Dividends $ 221,363 $ 26,075 $ 154,631 $ 29,254 Net appreciation (depreciation) in fair value of investments 257,960 245,064 211,482 (17,145) $ 892,863 ------------ ------------ ------------ ------------ ------------ ------------ Total investment income 479,323 271,139 366,113 12,109 6,051 892,863 Contributions: TransCore Company Contributions 60,293 81,923 93,641 35,341 64,327 Participant Contributions 232,456 350,700 388,771 146,388 243,369 Rollover Contributions 16,287 58,868 56,110 15,415 39,015 ------------ ------------ ------------ ------------ ------------ ------------ Total additions 788,359 762,630 904,635 209,253 6,051 1,239,574 ------------ ------------ ------------ ------------ ------------ ------------ Withdrawals (192,213) (145,176) (176,640) (7,450) (13,207) (285,368) Net transfers among funds 20 113,486 91,973 (12,869) 16,018 5,624 ------------ ------------ ------------ ------------ ------------ ------------ Net increase 596,166 730,940 819,968 188,934 8,862 959,830 Net assets available for plan benefits: Beginning of year 2,038,251 637,352 930,975 510,143 78,618 1,681,467 ------------ ------------ ------------ ------------ ------------ ------------ End of year $ 2,634,417 $ 1,368,292 $ 1,750,943 $ 699,077 $ 87,480 $ 2,641,297 ============ ============ ============ ============ ============ ============
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------------------------------------------------- TOTAL ------------ Investment income: Interest $ 6,051 Dividends 613,649 Net appreciation (depreciation) in fair value of investments 1,672,730 ------------ Total investment income 2,292,430 Contributions: TransCore Company Contributions 423,837 Participant Contributions 1,671,331 Rollover Contributions 245,728 ------------ Total additions 4,633,326 ------------ Withdrawals ) (951,788) Net transfers among funds ------------ Net increase 3,681,538 Net assets available for plan benefits: Beginning of year 8,085,689 ------------ End of year $ 11,767,227 ============
See accompanying notes to the financial statements F-5 8 TRANSCORE RETIREMENT SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------------- FUND INFORMATION ----------------------------------------------------------------------------------------------- MONEY SHORT-TERM LONG-TERM MARKET WELLESLEY FEDERAL GNMA CORPORATE PRIME INCOME WELLINGTON PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND FUND ------------- ------------- ------------- ------------- ------------- ---------------- Investment income: Interest Dividends $ 6,672 $ 9,130 $ 83,583 $ 34,155 $ 34,908 $ 156,599 Net appreciation (depreciation) in fair value of investments (1,413) (2,399) (77,531) (1,409) 123,401 --------- --------- --------- --------- --------- ----------- Total investment income 5,259 6,731 6,052 34,155 33,499 280,000 Contributions: TransCore Company Contributions 5,668 6,918 22,552 26,482 14,671 42,646 Participant Contributions 21,535 23,944 75,819 91,449 56,321 159,421 Rollover Contributions 972 33,735 55,671 --------- --------- --------- --------- --------- ----------- Total additions 33,434 37,593 104,423 185,821 104,491 537,738 --------- --------- --------- --------- --------- ----------- Withdrawals (3,392) (4,002) (21,655) (19,622) (19,111) (79,968) Net transfers among funds (27,349) (15,727) (219,651) (161,144) (166,565) (192,045) --------- --------- --------- --------- --------- ----------- Net increase (decrease) 2,693 17,864 (136,883) 5,055 (81,185) 265,725 Net assets available for plan benefits: Beginning of year 111,371 124,800 1,032,107 657,221 475,840 1,772,526 --------- --------- --------- --------- --------- ----------- End of year $ 114,064 $ 142,664 $ 895,224 $ 662,276 $ 394,655 $ 2,038,251 ========= ========= ========= ========= ========= ===========
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------------- FUND INFORMATION ------------------------------------------------------------------------------------------ INDEX INTERNATIONAL SAIC 500 WINDSOR II GROWTH LOAN COMMON PORTFOLIO FUND PORTFOLIO FUND STOCK TOTAL ------------ ------------- ------------- --------- -------------- --------------- Investment income: Interest $ 5,793 $ 5,793 Dividends $ 12,207 $ 58,631 $ 21,305 417,190 Net appreciation (depreciation) in fair value of investments 84,223 83,202 32,339 $ 229,729 470,142 --------- --------- --------- -------- ----------- ----------- Total investment income 96,430 141,833 53,644 5,793 229,729 893,125 Contributions: TransCore Company Contributions 26,549 37,095 17,080 6,289 205,950 Participant Contributions 109,947 149,284 68,519 22,776 779,015 Rollover Contributions 53,784 75,895 31,910 49,919 301,886 --------- --------- --------- -------- ----------- ----------- Total additions 286,710 404,107 171,153 5,793 308,713 2,179,976 --------- --------- --------- -------- ----------- ----------- Withdrawals (9,735) (15,405) (8,924) (9,083) (36,104) (227,001) Net transfers among funds 47,479 114,818 27,145 22,576 570,463 --------- --------- --------- -------- ----------- ----------- Net increase (decrease) 324,454 503,520 189,374 19,286 843,072 1,952,975 Net assets available for plan benefits: Beginning of year 312,898 427,455 320,769 59,332 838,395 6,132,714 --------- --------- --------- -------- ----------- ----------- End of year $ 637,352 $ 930,975 $ 510,143 $ 78,618 $ 1,681,467 $ 8,085,689 ========= ========= ========= ======== =========== ===========
See accompanying notes to the financial statements F-6 9 TRANSCORE RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF RETIREMENT SAVINGS PLAN THE PLAN The following description of the TransCore Retirement Savings Plan (the "Plan") provides only general information. Participants should refer to the Plan agreement for a more comprehensive description of the Plan's provisions. The Plan is a defined contribution plan which became effective January 1, 1986. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. The purpose of the Plan is to encourage and assist employees in following a systematic savings program suited to their individual objectives, and to provide an opportunity for employees to become stockholders of Science Applications International Corporation (SAIC). TransCore (the "Company") is a wholly-owned subsidiary of SAIC. Any employee of the Company who was hired before April 1, 1986 or any employee who has completed at least one year of continuous service, as determined in accordance with the Company's service rules, or who has been compensated for 1,000 or more hours in a period of 12 consecutive months is eligible for participation in the Plan. Eligible employees may participate in the Plan by authorizing the Company to make biweekly salary deferrals. The Plan permits participants to elect to defer up to 15% of compensation. The Company will match 50% of the Participant's salary deferrals on the first 4% of eligible compensation. At the discretion of the Board of Directors, the Company may make additional profit-sharing contributions. All of the above savings and elections are subject to regulatory and Plan limitations. Company matching and profit sharing contributions vest as follows:
VESTED YEARS OF SERVICE PERCENTAGE ---------------- ---------- Less than one year 0 After one year, but less than two years 20 After two years, but less than three years 40 After three years, but less than four years 60 After four years, but less than five years 80 After five years 100
A participant with less than five years of service who withdraws any matched savings will forfeit a portion of related company contributions in accordance with specific plan provisions. The nonvested portion of the participant's profit-sharing contribution account is forfeited at the end of the Plan year in which termination occurs and is reallocated as additional profit-sharing contributions to the remaining eligible participants. The nonvested portion of the participant's matching contribution account is forfeited at the participant's date of termination and is used to reduce future employer matching contributions to the Plan. Participants who retire may withdraw their vested balances in a lump sum payment at any time prior to attaining the age of 70 1/2. Participants may borrow up to one-half of their vested account balances subject to certain minimum and maximum loan limitations. All approved loans require the participant to pledge the vested portion of his/her account balance as plan collateral. The loan must be repaid in regular installments through payroll deductions over a period not to exceed five years. F-7 10 TRANSCORE RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS INVESTMENT FUNDS Participants may allocate contributions among fund options at their discretion. Participants may transfer balances between all funds with the exception of the SAIC Common Stock Fund, which can receive amounts only through contributions. The investment options offered by the Plan are described below: Vanguard Group Funds Each of the following mutual funds has its own investment objectives and varying degrees of risk. Short-Term Federal Portfolio - Seeks a high level of interest income and modest fluctuations in share price by investing primarily in short-term securities issued by the U.S. government and its agencies. GNMA Portfolio - Seeks a high-level of interest income by investing in a broad range of mortgage-backed securities issued by the Government National Mortgage Association. Long-Term Corporate Portfolio - Seeks a high and stable level of interest income by investing in a widely diversified group of long-term bonds. Money Market Prime Portfolio - Seeks interest income and a stable share price by investing in short-term, high quality money market instruments issued by financial institutions, non-financial corporations and the U.S. government and its agencies. Wellesley Income Fund - Seeks a high level of income and long-term growth of income by investing in high-quality long-term and intermediate-term bonds and dividend-paying stocks. Wellington Fund - Seeks long-term growth of capital and income by investing in stocks and bonds. Index 500 Portfolio - Seeks long-term growth of capital by investing in the shares of companies included in the Standard & Poor's 500 index. Windsor II Fund - Seeks long-term growth of capital by investing in a diversified group of out-of-favor stocks of large capitalization companies. International Growth Portfolio - Seeks long-term growth of capital by investing in stocks of high quality, seasoned companies outside of the United States. Loan Fund This fund represents the principal balance of amounts loaned to participants. SAIC Common Stock Fund This fund purchases shares of SAIC Class A Common stock. F-8 11 TRANSCORE RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS ADMINISTRATION The designated Trustee of the Plan is State Street Bank. The administration of the Plan is vested in the Company which may designate one or more persons to operate and administer the Plan. Expenses of administering the Plan are paid by the Company. Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. NOTE 2 - SUMMARY ACCOUNTING POLICIES INVESTMENT VALUATION AND INCOME RECOGNITION The accompanying financial statements are prepared on the accrual basis of accounting. Investments in the Vanguard mutual funds are valued at quoted market prices which represent the net asset value of shares held by the Plan at year end. Loans to participants, short-term investments and cash are valued at cost which approximates fair value. SAIC Common Stock is carried at fair value. A general public market does not exist for SAIC's Common Stock; therefore, the fair market value of SAIC's Common Stock is determined pursuant to a stock price formula and valuation process which includes an appraisal prepared by an independent firm. Periodic determinations of the fair market value of SAIC's Common Stock are made by the Board of Directors, with the assistance of the independent appraisal firm. The Board of Directors of SAIC reserves the right to alter the formula. Investment income is recorded when earned. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Plan Administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3 - REALIZED AND UNREALIZED GAINS AND LOSSES Realized and unrealized gains and losses are calculated based upon the historical cost of assets. Such gains and losses are computed on a current value basis for the Form 5500. This difference may result in classification differences between realized and unrealized gains. NOTE 4 - INCOME TAX STATUS The TransCore Retirement Savings Plan is a qualified plan pursuant to Section 401(a) of the Internal Revenue Code ("the Code") and the related Trusts are exempt from federal taxation under Section 401(a) of the Code. A favorable tax determination letter dated March 24, 1994 has been received by the Plan. The Plan has been amended since receiving this determination letter. However, the Plan Administrator and the Plan's tax counsel believe that the Plan is designed and currently being operated in compliance with the applicable provisions of the Code. Accordingly, no provision has been made for federal income taxes in the accompanying financial statements. F-9 12 TRANSCORE RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS NOTE 5 - SUBSEQUENT EVENTS Effective with the Plan year beginning January 1, 1998, the Vanguard Group will replace State Street Bank as the Trustee of the Plan. F-10 13 ADDITIONAL INFORMATION SCHEDULE I TRANSCORE RETIREMENT SAVINGS PLAN
FORM 5500 ITEM 27(a) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------- IDENTITY OF SHARES CURRENT ISSUE DESCRIPTION OR UNITS COST VALUE Mutual Funds: The Vanguard Group Vanguard Short-Term Federal 15,132 $ 150,544 $ 153,289 of Investment Portfolio Companies Vanguard GNMA Portfolio 22,126 222,739 230,780 Vanguard Long-Term Corporate Portfolio 104,602 879,164 968,620 Vanguard Money Market Prime Portfolio 737,374 737,374 737,374 Vanguard Wellesley Income Fund 22,674 444,083 495,658 Vanguard Wellington Fund 89,453 2,062,957 2,634,417 Vanguard Index 500 Portfolio 15,191 1,056,471 1,368,292 Vanguard Windsor II Fund 61,179 1,457,772 1,750,943 Vanguard International Growth Portfolio 42,653 673,212 699,077 Participant Loans Due July 1998 to Oct. 2002; 87,480 87,480 7.4% - 12% Common Stock: Science Applications International Corporation * Class A Common Stock 73,700 1,392,907 2,563,314 Short-Term Investments 77,983 77,650 77,983 and Cash ----------- ------------ Total Investment Portfolio $ 9,242,353 $ 11,767,227 =========== ============
* Represents a party-in-interest. F-11 14 ADDITIONAL INFORMATION SCHEDULE II TRANSCORE RETIREMENT SAVINGS PLAN
FORM 5500 ITEM 27(b) - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS DECEMBER 31, 1997 - -------------------------------------------------------------------- ORIGINAL AMOUNT RECEIVED UNPAID IDENTITY AND AMOUNT DURING REPORTING YEAR BALANCE AT ADDRESS OF OBLIGOR OF LOAN PRINCIPAL INTEREST END OF YEAR Russell B Einarson 42 Blueberry Ridge Westfield, MA 01085 $ 4,907 $ 803 $ 187 $ 2,333 Deborah Hoffman 314 Dimpsey Road Hallifax, VA 17032 $ 4,400 $ - $ - $ 4,001
FORM 5500 ITEM 27(B) - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------- DETAILED DESCRIPTION OF LOANS INCLUDING DATE OF MAKING AND MATURITY, INTEREST RATE, THE TYPE AND VALUE OF COLLATERAL, ANY IDENTITY AND RENEGOTIATION OF THE LOAN AND THE TERMS OF AMOUNT OVERDUE ADDRESS OF OBLIGOR THE RENEGOTIATION AND OTHER MATERIAL ITEMS PRINCIPAL INTEREST Russell B Einarson 42 Blueberry Ridge Loan date: 12/30/94; Maturity date: 1/6/00; Westfield, MA 01085 Interest rate: 8.3%; Collateral - Vested balance $ 2,333 $ - Deborah Hoffman 314 Dimpsey Road Loan date: 4/25/95; Maturity date: 7/6/00; Hallifax, VA 17032 Interest rate: 9%; Collateral - Vested balance $ 4,001 $ -
F-12 15 ADDITIONAL INFORMATION SCHEDULE II TRANSCORE RETIREMENT SAVINGS PLAN
FORM 5500 ITEM 27(d) - SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------ TRANSACTIONS OR SERIES OF TRANSACTIONS IN EXCESS OF 5% OF THE CURRENT VALUE OF PLAN ASSETS AS OF JANUARY 1, 1997 CONTRACT CURRENT VALUE/ VALUE ON PARTY DESCRIPTION NUMBER OF PURCHASE SELLING COST OF TRANSACTION GAIN ON INVOLVED OF ASSET TRANSACTIONS PRICE PRICE ASSET DATE TRANSACTION Vanguard Index 500 Portfolio 8 $ 433,859 $ 433,859 2 $ 459,202 $ 455,525 $ 3,677 Vanguard Windsor II Fund 9 $ 396,693 $ 396,693 1 $ 410,046 $ 407,083 $ 2,963 SAIC SAIC Common Stock Fund 7 $ 198,597 $ 198,597 3 $ 420,955 $ 420,955 $ -
F-13 EX-28.D 19 EXHIBIT 28.D 1 EXHIBIT 28.D Securities and Exchange Commission Washington, D.C., 20549 Form 11-K [X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the calendar year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN (Full Title of Plan) Bell Communications Research, Inc. 445 South Street, Morristown NJ 07960 (Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office) 2 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Departmental Benefits Committee of the Bell Communications Research Savings and Security Plan, duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN DATE 4-11-98 s/ Richard Schooley ----------------------------------------- Richard Schooley Chairman, Departmental Benefits Committee 3 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES ----------
Pages ----- REPORT OF INDEPENDENT ACCOUNTANTS F-2 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits, with Fund Information as of December 31, 1997 and 1996 F-3 - F-4 Statement of Changes in Net Assets Available for Benefits, with Fund Information for the years ended December 31, 1997 and 1996 F-5 - F-6 NOTES TO FINANCIAL STATEMENTS F-7 - F-11 SUPPLEMENTAL SCHEDULES: Schedule I: Item 27a - Schedule of Assets Held for Investment Purposes as of December 31, 1997 F-12 - F-14 Schedule II: Item 27d - Schedule of Reportable Transactions for the year ended December 31, 1997 F-15
Other schedules required by Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 have been omitted because they are not applicable. F-1 4 Report of Independent Accountants To the Participants and the Administrative Committee of the Bell Communications Research Savings and Security Plan In our opinion, the accompanying statement of net assets available for benefits and the related statement of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of the Bell Communications Research Savings and Security Plan (the Plan) at December 31, 1997 and the changes in net assets available for benefits for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The financial statements of the Plan as of and for the year ended December 31, 1996 were audited by other independent accountants whose report dated June 19, 1997 expressed an unqualified opinion on those statements. Their report also contained an explanatory paragraph on supplemental information required by the Employee Retirement Income Security Act of 1974 (ERISA). Our audit was performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in Schedules I and II is presented for purposes of additional analysis and is not a required part of the basic financial statements but is additional information required by ERISA. The fund information in the statement of net assets available for benefits and the statement of changes in net assets available for benefits is presented for purposes of additional analysis rather than to present the net assets available for benefits and the changes in net assets available for benefits of each fund. Schedules I and II and the fund information have been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. PRICE WATERHOUSE LLP New York, New York April 3, 1998 F-2 5 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION AS OF DECEMBER 31, 1997 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard SAIC SAIC Telephone Diversified Interest Index International Stock Exchangeable Equity Telephone Income Trust-500 Growth Purchase Stock Fund Portfolio Fund Portfolio Portfolio -------- ----- ---- --------- ---- --------- --------- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $ 2,707 Diversified Telephone Portfolio common shares $ 285 SAIC common shares $ 155 Shares in registered investment companies $ 1,318 $ 351 Temporary cash investments $ 14 17 40 4 $ 134 ------- ------- ------- ------- ------- ------- ------- 14 172 2,747 289 134 1,318 351 Investment contracts with insurance companies, at contract value: 3,098 ------- ------- ------- ------- ------- ------- ------- Total investments 14 172 2,747 289 3,232 1,318 351 Receivables: Company contributions 60 Loans to participants Securities 25 2 Interest 4 1 ------- ------- ------- ------- ------- ------- ------- Net assets available for benefits $ 74 $ 172 $ 2,776 $ 292 $ 3,232 $ 1,318 $ 351 ======= ======= ======= ======= ======= ======= ======= LIABILITIES: Securities payable 12 11 ------- ------- ------- ------- ------- ------- ------- Total liabilities 12 11 ------- ------- ------- ------- ------- ------- ------- Net assets available for benefits $ 74 $ 172 $ 2,764 $ 292 $ 3,221 $ 1,318 $ 351 ======= ======= ======= ======= ======= ======= =======
Vanguard Vanguard Vanguard Total Bond Vanguard Vanguard Explorer PRIMECAP Market Wellington Windsor II Loan Fund Fund Portfolio Fund Fund Fund Total ---- ---- --------- ---- ---- ---- ----- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $ 2,707 Diversified Telephone Portfolio common shares 285 SAIC common shares 155 Shares in registered investment companies $ 130 $ 503 $ 49 $ 1,081 $ 1,062 4,494 Temporary cash investments 209 ------- ------- ------- ------- ------- ------- ------- 130 503 49 1,081 1,062 7,850 Investment contracts with insurance companies, at contract value: 3,098 ------- ------- ------- ------- ------- ------- ------- Total investments 130 503 49 1,081 1,062 10,948 Receivables: Company contributions 60 Loans to participants $ 253 253 Securities 27 Interest 5 ------- ------- ------- ------- ------- ------- ------- Net assets available for benefits $ 130 $ 503 $ 49 $ 1,081 $ 1,062 $ 253 $11,293 ======= ======= ======= ======= ======= ======= ======= LIABILITIES: Securities payable 23 ------- ------- ------- ------- ------- ------- ------- Total liabilities 23 ------- ------- ------- ------- ------- ------- ------- Net assets available for benefits $ 130 $ 503 $ 49 $ 1,081 $ 1,062 $ 253 $11,270 ======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-3 6 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION AS OF DECEMBER 31, 1996 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard Telephone Diversified Interest Index International Vanguard Vanguard Equity Telephone Income Trust-500 Growth Explorer PRIMECAP Fund Portfolio Fund Portfolio Portfolio Fund Fund ---- --------- ---- --------- --------- ---- ---- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $2,749 Diversified Telephone Portfolio common shares $ 234 Shares in registered investment companies $ 827 $ 322 $ 68 $ 87 Temporary cash investments 78 4 $ 304 ------ ------ ------ ------ ------ ------ ------ 2,827 238 304 827 322 68 87 Investment contracts with insurance companies, at contract value: 3,607 ------ ------ ------ ------ ------ ------ ------ Total investments 2,827 238 3,911 827 322 68 87 Receivables: Company contributions 6 17 4 2 1 Loans to participants Securities 8 1 Dividends 8 1 ------ ------ ------ ------ ------ ------ ------ Net assets available for benefits $2,849 $ 240 $3,928 $ 831 $ 324 $ 68 $ 88 ====== ====== ====== ====== ====== ====== ====== LIABILITIES: Securities payable 3 ------ ------ ------ ------ ------ ------ ------ Total liabilities 3 Net assets available for plan benefits $2,846 $ 240 $3,928 $ 831 $ 324 $ 68 $ 88 ====== ====== ====== ====== ====== ====== ======
Vanguard Total Bond Vanguard Vanguard Market Wellington Windsor II Loan Portfolio Fund Fund Fund Total --------- ---- ---- ---- ----- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $2,749 Diversified Telephone Portfolio common shares 234 Shares in registered investment companies $ 31 $ 782 $ 568 2,685 Temporary cash investments 386 ------ ------ ------ ------ ------ 31 782 568 6,054 Investment contracts with insurance companies, at contract value: 3,607 ------ ------ ------ ------ ------ Total investments 31 782 568 9,661 Receivables: Company contributions 3 3 36 Loans to participants $ 272 272 Securities 9 Dividends 9 ------ ------ ------ ------ ------ Net assets available for benefits $ 31 $ 785 $ 571 $ 272 $9,987 ====== ====== ====== ====== ====== LIABILITIES: Securities payable 3 ------ ------ ------ ------ ------ Total liabilities 3 ------ ------ ------ ------ Net assets available for plan benefits $ 31 $ 785 $ 571 $ 272 $9,984 ====== ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-4 7 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard SAIC SAIC Telephone Diversified Interest Index International Stock Exchangeable Equity Telephone Income Trust-500 Growth Purchase Stock Fund Portfolio Fund Portfolio Portfolio -------- ----- ---- --------- ---- --------- --------- Additions (deductions) to net assets attributable to: Investment income Dividends $ 99 $ 6 $ 229 $ 26 $ 15 Interest 3 Net change in appreciation (depreciation) of investments 998 91 272 (3) ------- ------- ------- ------- ------- ------- ------- Total investment earnings 1,100 97 229 298 12 ------- ------- ------- ------- ------- ------- ------- Contributions Participant $ 1 139 174 120 67 Company 72 41 73 31 13 ------- ------- ------- ------- ------- ------- ------- 73 180 247 151 80 ------- ------- ------- ------- ------- ------- ------- Transfer of participants' balances, net 1 $ 172 (817) (42) (453) 285 5 ------- ------- ------- ------- ------- ------- ------- Total additions (deductions) 74 172 463 55 23 734 97 ------- ------- ------- ------- ------- ------- ------- Deductions from net assets attributable to: Distributions to participants 544 3 728 247 70 Administrative expenses 1 2 ------- ------- ------- ------- ------- ------- ------- Net increase (decrease) 74 172 (82) 52 (707) 487 27 Net assets available for benefits: Beginning of year 2,846 240 3,928 831 324 ------- ------- ------- ------- ------- ------- ------- End of year $ 74 $ 172 $ 2,764 $ 292 $ 3,221 $ 1,318 $ 351 ======= ======= ======= ======= ======= ======= =======
Vanguard Vanguard Vanguard Total Bond Vanguard Vanguard Explorer PRIMECAP Market Wellington Windsor II Loan Fund Fund Portfolio Fund Fund Fund Total ---- ---- --------- ---- ---- ---- ----- Additions (deductions) to net assets attributable to: Investment income Dividends $ 12 $ 13 $ 2 $ 91 $ 94 $ 587 Interest $ 20 23 Net change in appreciation (depreciation) of investments (4) 30 1 108 123 1,616 ------- ------- ------- ------- ------- ------- ------- Total investment earnings 8 43 3 199 217 20 2,226 ------- ------- ------- ------- ------- ------- ------- Contributions Participant 16 16 5 47 96 14 695 Company 4 6 2 21 20 283 ------- ------- ------- ------- ------- ------- ------- 20 22 7 68 116 14 978 ------- ------- ------- ------- ------- ------- ------- Transfer of participants' balances, net 49 386 8 228 340 (162) ------- ------- ------- ------- ------- ------- ------- Total additions (deductions) 77 451 18 495 673 (128) 3,204 ------- ------- ------- ------- ------- ------- ------- Deductions from net assets attributable to: Distributions to participants 15 36 199 182 (109) 1,915 Administrative expenses 3 ------- ------- ------- ------- ------- ------- ------- Net increase (decrease) 62 415 18 296 491 (19) 1,286 Net assets available for benefits: Beginning of year 68 88 31 785 571 272 9,984 ------- ------- ------- ------- ------- ------- ------- End of year $ 130 $ 503 $ 49 $ 1,081 $ 1,062 $ 253 $11,270 ======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-5 8 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard Telephone Diversified Interest Index International Vanguard Equity Telephone Income Trust-500 Growth Explorer Fund Portfolio Fund Portfolio Portfolio Fund ------- ------- ------- ------- ------- ------- Additions (deductions) to net assets attributable to: Investment Income Dividends $ 122 $ 8 $ 257 $ 17 $ 14 $ 4 Interest 2 Net change in appreciation (depreciation) of investments (119) (19) 112 24 3 ------- ------- ------- ------- ------- ------- Total investment earnings (losses) 5 (11) 257 129 38 7 ------- ------- ------- ------- ------- ------- Contributions Participant 139 225 64 33 9 Company 74 129 34 17 4 ------- ------- ------- ------- ------- ------- 213 354 98 50 13 ------- ------- ------- ------- ------- ------- Transfer of participants' balances, net (144) (18) (279) 241 30 50 ------- ------- ------- ------- ------- ------- Total additions (deductions) 74 (29) 332 468 118 70 ------- ------- ------- ------- ------- ------- Deductions from net assets attributable to: Distributions to participants 368 17 607 92 50 2 ------- ------- ------- ------- ------- ------- Net increase (decrease) (294) (46) (275) 376 68 68 Net assets available for plan benefits: Beginning of year 3,140 286 4,203 455 256 ------- ------- ------- ------- ------- ------- End of year $ 2,846 $ 240 $ 3,928 $ 831 $ 324 $ 68 ======= ======= ======= ======= ======= =======
Vanguard Vanguard Vanguard Short Term Total Bond Vanguard Vanguard PRIMECAP Federal Market Wellington Windsor II Loan Fund Portfolio Portfolio Fund Fund Fund Total ---- --------- --------- ---- ---- ---- ----- Additions (deductions) to net assets attributable to: Investment Income Dividends $ 3 $ 63 $ 38 $ 526 Interest $ 1 $ 19 22 Net change in appreciation (depreciation) of investments 7 (1) 42 62 111 ------- ------- ------- ------- ------- ------- ------- Total investment earnings (losses) 10 105 100 19 659 ------- ------- ------- ------- ------- ------- ------- Contributions Participant 9 $ 4 51 53 587 Company 4 1 25 24 312 ------- ------- ------- ------- ------- ------- ------- 13 5 76 77 899 ------- ------- ------- ------- ------- ------- ------- Transfer of participants' balances, net 68 (72) 26 126 142 116 286 ------- ------- ------- ------- ------- ------- ------- Total additions (deductions) 91 (72) 31 307 319 135 1,844 ------- ------- ------- ------- ------- ------- ------- Deductions from net assets attributable to: Distributions to participants 3 93 102 91 1,425 ------- ------- ------- ------- ------- ------- ------- Net increase (decrease) 88 (72) 31 214 217 44 419 Net assets available for plan benefits: Beginning of year 72 0 571 354 228 9,565 ------- ------- ------- ------- ------- ------- ------- End of year $ 88 $ 0 $ 31 $ 785 $ 571 $ 272 $ 9,984 ======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-6 9 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN NOTES TO FINANCIAL STATEMENTS ---------- A. Plan Description: The Bell Communications Research Savings and Security Plan (the Plan) was established by Bell Communications Research (the Company) to provide a convenient way for non-salaried employees to save on a regular and long term basis. On November 14, 1997, the Company was sold to Science Applications International Corporation (SAIC). Prior to the sale, the Company was owned by the Regional Bell Operating Companies (RBOC's). Changes to the Plan as a result of the sale are noted below. The following description of the Plan provides only general information. Participants should refer to the Plan Prospectus for a more complete description of the Plan's provisions. 1. General. The Plan is a defined contribution plan covering all non-salaried employees of the Company who have one month of service and are age twenty-one or older. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). 2. Contributions. Each year, participants may contribute up to 16 percent of pretax annual compensation, as defined in the Plan. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. After one year of service, the Company contributes 70 percent of the first 6 percent of compensation that a participant contributes to the Plan. In addition, after one year of service, the Company makes a contribution of a 1/2 percent of compensation on behalf of each participant. Effective with the sale of the Company, this automatic contribution is deposited into the SAIC Stock Purchase Fund until the following quarterly trade and then into SAIC stock. This fund and related investment option were also established upon the sale of the Company. Prior to the sale of the Company, the automatic contribution was deposited according to each participant's asset allocation at that time; for participants who did not make a voluntary contribution, the automatic contribution was deposited into the Interest Income Fund. The contribution is made during the first quarter for participant earnings of the previous calendar year. These automatic Company contributions are immediately vested. Additional amounts may be contributed at the option of the Company's Board of Directors. Effective with the sale of the Company, 50 percent of Company contributions are invested in SAIC stock and 50 percent are invested in accordance with each participant's directed allocation. Contributions are subject to certain IRS limitations. 3. Participant Accounts. Each participant's account is credited with the participant's contribution and allocations of the Company's contribution and Fund earnings, and each participant's account is charged with an allocation of administrative expenses. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. 4. Vesting. Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company's matching and discretionary contribution plus actual earnings thereon is based on years of continuous service. A participant is 100 percent vested after five years of credited service. 5. Investment Options. The Plan is comprised of the following investments: VANGUARD BOND INDEX FUND - Total Bond Market Portfolio: This participant directed fund invests in United States treasury obligations, federal agency mortgage backed obligations and investment grade corporate obligations. VANGUARD EXPLORER FUND: This participant directed fund invests in the common stock of a diversified group of small capitalization companies. VANGUARD INDEX TRUST - 500 Portfolio: This participant directed fund invests in all of the 500 stocks that make up the Standard & Poor's 500 Composite Stock Price Index. F-7 10 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN NOTES TO FINANCIAL STATEMENTS, continued ---------- VANGUARD INTERNATIONAL GROWTH PORTFOLIO: This participant directed fund invests in the common stocks of companies based outside of the United States. VANGUARD / PRIMECAP FUND: This participant directed fund invests in the common stock of medium capitalization companies. VANGUARD / WELLINGTON FUND: This participant directed fund invests approximately 65 percent of its assets in common stocks and the remaining 35 percent in bonds. VANGUARD / WINDSOR II: This participant directed fund invests in the common stock of large capitalization companies. SAIC EXCHANGEABLE STOCK FUND: As previously stated, this fund was created upon the sale of the Company. This fund invests primarily in SAIC class A common stock and is participant directed to the extent that participant contributions were used to purchase SAIC stock. Also effective with the sale of the Company, the SAIC Non-exchangeable Stock Fund, a non-participant directed fund, was created to exclusively invest 50 percent of the Company matching contribution in SAIC class A common stock. There will be no activity in this fund until the next quarterly SAIC stock trade date which will occur in 1998. The SAIC STOCK PURCHASE FUND is not a participant directed investment option; it is a temporary holding fund designed to hold respective participant and Company contributions until the following SAIC common stock quarterly trade date. Pending the quarterly trade, the respective contributions are invested in the Vanguard Money Market Reserves Portfolio. BELLCORE INTEREST INCOME FUND: This participant directed fund invests primarily in investment contracts issued by insurance companies and banks. BELLCORE - DIVERSIFIED TELEPHONE PORTFOLIO STOCK FUND: This fund invests primarily in common stock and has been frozen to new participant directed contributions since 1984. BELLCORE - TELEPHONE EQUITY FUND STOCK FUND: This fund invests in the common stock of the RBOC's. Upon the sale of the Company, the fund was frozen to new participant directed contributions. Additionally, in 1998, the Fund will be terminated and its assets will be reallocated as directed by the participants. Any remaining assets will be reallocated to the Interest Income Fund. 6. Participant Loans Receivable. Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum of the lesser of (a) $50,000 less the participant's highest outstanding loan balance during the preceding one year period; or (b) 50 percent of their vested account balance. Additionally, effective with the sale of the Company, loans may not exceed the vested value of the participant's Plan account less their vested amounts in the SAIC Stock Fund. Loan transactions are treated as a transfer to (from) the investment fund from (to) the Loan Fund. Loan terms range from 12 to 56 months. The loans are secured by the balance in the participant's account and bear interest at a rate commensurate with local prevailing rates as determined quarterly by the Plan administrator. Interest rates ranged from 7 to 10 percent during 1996 and 1997. Principal and interest is paid ratably through monthly payroll deductions. 7. Payment of Benefits. On termination of service due to death, disability or retirement, a participant may elect to receive either a lump-sum amount equal to the value of the participant's vested interest in his or her account, or annual installments not to exceed the life expectancy of the participant and spouse, if applicable. For termination of service due to other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution, or maintain the account in the Plan. F-8 11 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN NOTES TO FINANCIAL STATEMENTS, continued ---------- 8. Forfeited Accounts. Forfeited accounts are used to reduce future Company contributions. Company contributions were reduced by $1,000 and $1,300 during 1997 and 1996, respectively. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation - The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Use of Estimates - 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Valuation and Income Recognition- The Plan's investments are valued at fair value, except for its investment contracts which are valued at contract value (Note C). Shares of registered investment companies are valued at quoted market prices which represent the net asset value of shares held by the Plan at year end. Quoted market prices for the value of the common shares of each company in the Telephone Equity Fund and the Diversified Telephone Portfolio are obtained on the basis of the closing price on the New York Stock Exchange on the year end date or, if no sales were made on that date, at the closing price on the New York Stock Exchange on the next preceding day on which sales were made. Participant notes receivable are valued at outstanding principle balance which approximates fair value. A general public market for the Company's common stock does not exist; therefore, the fair value of the common stock is determined pursuant to a stock price formula and valuation process which includes an appraisal prepared by an independent appraisal firm. Periodic determinations of fair value of the common stock are made by the SAIC Board of Directors, with the assistance of the independent appraisal firm. The SAIC Board of Directors reserves the right to alter the formula. The gains or losses realized on distributions of investments and the increases or decreases in unrealized appreciation are calculated as the difference between the current fair value and the fair value of the investments at the beginning of the year, or purchase price if purchased during the year. As of December 31, 1997, the fair value of the Company's Class A Common Stock was $34.78 per share and the Plan held approximately 4,458 shares. It is the policy of the Bell Communications Research Savings and Security Plan Committee to keep the SAIC Common Stock Fund invested primarily in common stock, except for estimated reserves for use in distributions and investment exchanges by participants. Such reserves are invested in the Vanguard Money Market Reserves - Prime Portfolio mutual fund. If reserves in the SAIC Common Stock Fund are less than the amount required at any given time to make required distributions and investment changes, investment exchanges out of the SAIC Common Stock Fund by participants may have to be deferred. Purchases and sales of securities are reflected as of the trade date. Investments are valued on a daily basis. Dividend income is recorded on the ex-dividend date. Interest earned on investments is recorded on the accrual basis. Payment of Benefits- Benefits are recorded when paid. F-9 12 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN NOTES TO FINANCIAL STATEMENTS, continued ---------- C. INVESTMENT CONTRACTS WITH INSURANCE COMPANIES: The plan maintains investments in fully benefit-responsive investment contracts with a number of insurance companies and banks. (Benefit responsiveness is the extent to which contract terms permit and require withdrawals at contract value for benefit payments, loans, or transfers to other investment options offered to the participants by the Plan).The accounts are credited with earnings of the underlying investments (principally bank certificates of deposit, and other fixed income products) and charged for Plan withdrawals and administrative expenses. The contracts are included in the financial statements at contract value, which approximates fair value, as reported to the Plan by the respective provider. Contract value represents contributions made under the contract, plus earnings, less plan withdrawals and administrative expenses. See Item 27a of the supplemental schedules for a complete list of all contracts held in the fund. Approximately 27 percent and 39 percent of total net assets at December 31, 1997 and 1996, respectively, were invested in investment contracts. These contracts are subject to credit risk. If any of the companies fails to perform on the contracts held, the asset value of the Interest Income Fund, and therefore the Plan, could be substantially impaired. D. PARTIES-IN-INTEREST: Transactions involving cash, securities or assets of the Company, the Trustee or other affiliated persons are considered to be party-in-interest transactions under Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure. Reportable party-in-interest transactions for the year ended December 31, 1997 are summarized below:
NUMBER NUMBER OF OF SHARES TRANSACTIONS COST ------------------------------------ INVESTMENT PURCHASES SAIC Class A Common Stock 4,458 1 $155,060
Certain Plan investments are investment funds; and are shares of mutual funds managed by The Vanguard Group. Vanguard Fiduciary Trust Company is the trustee as defined by the Plan, and therefore these transactions qualify as party-in-interest. There were no known prohibited transactions with known parties in interest as defined in ERISA Section 3(14) and regulations thereunder, including those transactions set forth in ERISA Sections 406 and 407(a) and Internal Revenue Code Section 4975(c). There was no known relationship in which The Vanguard Fiduciary Trust Company had any direct or indirect financial interest which would affect its capacity to perform the necessary calculations. Fees paid by the Plan for administrative expenses and investment management services amounted to $3,000 for 1997. All other Plan expenses are paid by the Company. E. PLAN TERMINATION POLICY: The Company intends to continue the Plan indefinitely, but reserves the right to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100 percent vested in their accounts; Company contributions would not be subject to forfeiture. F. RECONCILIATION TO FORM 5500: There are no reconciling items from the Statement of Net Assets Available for Benefits per the financial statements to the Form 5500. F-10 13 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN NOTES TO FINANCIAL STATEMENTS, continued ---------- G. TAX STATUS: On April 11, 1986, the Internal Revenue Service had determined that the Plan is qualified under the requirements of Section 401(a) of the Internal Revenue Code and is exempt from Federal income taxes under Section 501(a) of the Code. The Plan obtained its latest determination letter on August 1, 1995, in which the Internal Revenue Service stated that the Plan, as amended through December 21, 1994, was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended since receiving such determination letter. However, the Plan administrator and the Plan's counsel believe that the Plan is currently designed and is being operated in compliance with the applicable requirements of the Internal Revenue Code. Accordingly, no provision for income taxes has been included in the Plan's financial statements. F-11 14 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN SCHEDULE I: ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES --------------- TELEPHONE EQUITY FUND (Dollars in Thousands)
DECEMBER 31, 1997 ------------------------------------------ NUMBER FAIR NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE --------- ------- ------- Common Shares: Ameritech Corporation 5,723 $ 196 $ 461 Bell Atlantic Corporation 7,254 354 660 BellSouth Corporation 6,576 178 370 SBC Communications, Inc. 11,652 367 854 US West Communications, Inc. 8,025 210 362 Total Common Shares 1,305 2,707 Temporary cash investments 40 40 ------- ------- Total Telephone Equity Fund $ 1,345 $ 2,747 ======= =======
DIVERSIFIED TELEPHONE PORTFOLIO (Dollars in Thousands)
DECEMBER 31, 1997 ------------------------------------------- NUMBER FAIR NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE --------- -------- -------- Common Shares: AT&T Corporation 1,006 $ 12 $ 62 Air Touch Communications, Inc. 224 1 9 Ameritech Corporation 412 5 33 Bell Atlantic Corporation 497 10 45 BellSouth Corporation 715 8 40 Lucent Technologies Corporation 326 5 26 NCR Corporation 63 1 2 SBC Communications, Inc. 653 7 48 US West Communications Group, Inc. 263 2 12 US West Media Group 264 2 8 Total Common Shares 53 285 Temporary cash investments 4 4 -------- -------- Total Diversified Telephone Portfolio $ 57 $ 289 ======== ========
F-12 15 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN SCHEDULE I: ITEM 27A SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES, Continued ---------- INTEREST INCOME FUND (Dollars in Thousands)
DECEMBER 31, 1997 --------------------------------------------------- PRINCIPAL CONTRACT NAME OF ISSUER AND TITLE OF ISSUE AMOUNT VALUE FAIR VALUE --------- --------- ---------- Contracts with Insurance Companies: AIG 6.95% due 5/15/01 $ 76 $ 76 $ 76 AIG FP 7.07% due 6/30/01 $ 76 $ 76 $ 76 Bankers Trust Company 6.39% due 12/31/01 $ 130 $ 130 $ 130 Canada Life Insurance Company 5.47% due 12/31/98 $ 137 $ 137 $ 137 Deutche Bank 6.13% no maturity date $ 99 $ 99 $ 99 6.49% due on 3/31/01 $ 77 $ 77 $ 77 6.49% due on 3/31/00 $ 77 $ 77 $ 77 John Hancock 6.93% due on 11/15/01 $ 72 $ 72 $ 72 6.35% due on 8/15/02 $ 52 $ 52 $ 52 Morgan Guaranty 6.50% due on 9/30/01 $ 44 $ 44 $ 44 New York Life Insurance Company 8.04% due 9/30/98 $ 211 $ 211 $ 211 7.20% due 7/31/99 $ 174 $ 174 $ 174 7.05% due 4/15/00 $ 136 $ 136 $ 136 Principal Mutual Life Insurance Company 7.71% due 10/31/99 $ 172 $ 172 $ 172 7.02% due 4/15/00 $ 156 $ 156 $ 156 Rabobank Nederland 6.56% no maturity date $ 76 $ 76 $ 76 5.90% due 12/31/00 $ 154 $ 154 $ 154 Sun Life Insurance Company of America 6.65% due 3/31/99 $ 306 $ 306 $ 306 7.19% due 6/30/99 $ 200 $ 200 $ 200 Union Bank of Switzerland 6.87% no maturity date $ 303 $ 303 $ 303 7.19% no maturity date $ 243 $ 243 $ 243 6.40% no maturity date $ 127 $ 127 $ 127 ------ ------ ------ Total Contracts with Insurance Companies $3,098 $3,098 $3,098 Temporary Cash Investments $ 134 $ 134 $ 134 ------ ------ ------ Total Interest Income Fund $3,232 $3,232 $3,232 ====== ====== ======
F-13 16 BELL COMMUNICATIONS RESEARCH SAVINGS AND SECURITY PLAN SCHEDULE I: ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES, Continued VANGUARD MUTUAL FUNDS (Dollars in Thousands)
DECEMBER 31, 1997 -------------------------------------------------- NUMBER OF FAIR NAME OF ISSUER AND TITLE OF ISSUE SHARES COST VALUE --------- ------ ------- * Vanguard Index Trust-500 Portfolio 14,634 $ 959 $1,318 * Vanguard Windsor II Fund 37,123 $ 902 $1,062 * Vanguard International Growth Fund 21,407 $ 339 $ 351 * Vanguard Wellington Fund 36,693 $ 914 $1,081 * Vanguard Explorer Fund 2,348 $ 134 $ 130 * Vanguard PRIMECAP Fund 12,713 $ 479 $ 503 * Vanguard Total Bond Market Portfolio 4,865 $ 48 $ 49
LOAN FUND (Dollars in Thousands)
Participant loans 7% to 10% $253 $253
SAIC FUNDS (Dollars in Thousands) * SAIC Exchangeable Stock Fund SAIC Class A Common Stock 4,458 $ 155 $ 155 Temporary Cash Investments $ 17 $ 17 ------ ------ Total SAIC Exchangeable Stock $ 172 $ 172 * SAIC Stock Purchase Fund Temporary Cash Investments $ 14 $ 14 ------ ------ Total SAIC Stock Purchase Fund $ 14 $ 14 * Represents a party-in-interest
F-14 17 Bell Communications Research Savings and Security Plan Schedule II: Item 27d - Schedule of Reportable Transactions * Series of Transactions For the year ended December 31, 1997
IDENTITY OF PARTY INVOLVED DESCRIPTION NUMBER OF PURCHASE SELLING OF ASSET TRANSACTIONS PRICE PRICE - ---------------------------------------------------------------------------------------------------------------- The Vanguard Group Index Trust-500 Portfolio 84 $ 610,655.42 The Vanguard Group Index Trust-500 Portfolio 72 $ 391,107.55 The Vanguard Group Vanguard/PRIMECAP Fund 70 454,127.11 The Vanguard Group Vanguard/PRIMECAP Fund 31 69,219.32 The Vanguard Group Vanguard/Wellington Fund 61 470,101.90 The Vanguard Group Vanguard/Wellington Fund 52 278,987.02 The Vanguard Group Vanguard/Windsor II 76 582,050.96 The Vanguard Group Vanguard/Windsor II 43 210,204.56 The Vanguard Group Interest Income Fund 107 768,212.33 The Vanguard Group Interest Income Fund 154 1,458,905.69 N/A Telephone Equity Fund 42 333,307.39 N/A Telephone Equity Fund 106 1,406,856.53
IDENTITY OF PARTY INVOLVED COST OF ASSET CURRENT VALUE ON NET TRANSACTION DATE GAIN /(LOSS) - ------------------------------------------------------------------------------------------ The Vanguard Group $ 610,655.42 The Vanguard Group $ 306,703.95 391,107.55 $ 84,403.60 The Vanguard Group 454,127.11 The Vanguard Group 56,082.53 69,219.32 13,136.79 The Vanguard Group 470,101.90 The Vanguard Group 244,736.05 278,987.02 34,250.97 The Vanguard Group 582,050.96 The Vanguard Group 168,920.34 210,204.56 41,284.22 The Vanguard Group 768,212.33 The Vanguard Group 1,458,905.69 1,458,905.69 N/A 333,307.39 N/A 961,261.49 1,406,856.53 445,595.04
* Transactions or series of transactions in excess of 5 percent of the current value of the Plan's assets as of December 31, 1997 as defined in Section 2520.103-106 of the Department of Labor Rules and Regulations for Reporting and Disclosure under ERISA. F-15 EX-28.E 20 EXHIBIT 28.E 1 EXHIBIT 28.E Securities and Exchange Commission Washington, D.C., 20549 Form 11-K [X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the calendar year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES (Full Title of Plan) Bell Communications Research, Inc. 445 South Street, Morristown NJ 07960 (Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office) 2 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Departmental Benefits Committee of the Bell Communications Research Savings Plan for Salaried Employees, duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES DATE 4-11-98 s/ Richard Schooley ----------------------------------------- Richard Schooley Chairman, Departmental Benefits Committee 3 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES ----------
Pages ----- REPORT OF INDEPENDENT ACCOUNTANTS F-2 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits, with Fund Information as of December 31, 1997 and 1996 F-3 - F-4 Statement of Changes in Net Assets Available for Benefits, with Fund Information for the years ended December 31, 1997 and 1996 F-5 - F-6 NOTES TO FINANCIAL STATEMENTS F-7 - F-11 SUPPLEMENTAL SCHEDULES: Schedule I: Item 27a - Schedule of Assets Held for Investment Purposes as of December 31, 1997 F-12 - F-14 Schedule II: Item 27b - Schedule of Loans or Fixed Income Obligations as of December 31, 1997 F-15 Schedule III: Item 27d - Schedule of Reportable Transactions for the year ended December 31, 1997 F-16
Other schedules required by section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 have been omitted because they are not applicable. F-1 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Participants and the Administrative Committee of the Bell Communications Research Savings Plan for Salaried Employees In our opinion, the accompanying statement of net assets available for benefits and the related statement of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of the Bell Communications Research Savings Plan for Salaried Employees (the Plan) at December 31, 1997 and the changes in net assets available for benefits for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The financial statements of the Plan as of and for the year ended December 31, 1996 were audited by other independent accountants whose report dated June 19, 1997 expressed an unqualified opinion on those statements. Their report also contained an explanatory paragraph on supplemental information required by the Employee Retirement Income Security Act of 1974 (ERISA). Our audit was performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in Schedules I through III is presented for purposes of additional analysis and is not a required part of the basic financial statements but is additional information required by ERISA. The fund information in the statement of net assets available for benefits and the statement of changes in net assets available for benefits is presented for purposes of additional analysis rather than to present the net assets available for benefits and the changes in net assets available for benefits of each fund. Schedules I through III and the fund information have been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. PRICE WATERHOUSE LLP New York, New York April 3, 1998 F-2 5 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION AS OF DECEMBER 31, 1997 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard SAIC SAIC Telephone Diversified Interest International Index Stock Exchangeable Equity Telephone Income Growth Trust-500 Purchase Stock Fund Portfolio Fund Portfolio Portfolio ---------- ---------- ---------- ---------- ---------- ---------- ---------- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $ 153,496 Diversified Telephone Portfolio common shares $ 18,332 SAIC Common Shares $ 40,899 Shares in Registered Investment Companies $ 48,410 $ 266,802 Temporary cash investments $ 1,244 4,385 2,345 250 $ 9,973 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1,244 45,284 155,841 18,582 9,973 48,410 266,802 Investment contracts with insurance companies, at contract value 232,236 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total investments 1,244 45,284 155,841 18,582 242,209 48,410 266,802 Receivables: Company Contributions 1,603 Loans to participants Securities 13 1,430 167 Dividends Interest 3 9 209 39 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total assets 2,850 45,306 157,480 18,788 242,209 48,410 266,802 LIABILITIES: Securities payable 690 799 Trustee fees payable 21 2 14 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities 711 2 813 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net assets available for plan benefits $ 2,850 $ 45,306 $ 156,769 $ 18,786 $ 241,396 $ 48,410 $ 266,802 ========== ========== ========== ========== ========== ========== ==========
Vanguard Vanguard Vanguard Total Bond Vanguard Vanguard Explorer PRIMECAP Market Wellington Windsor II Loan Fund Fund Portfolio Fund Fund Fund Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $ 153,496 Diversified Telephone Portfolio common shares 18,332 SAIC Common Shares 40,899 Shares in Registered Investment Companies $ 15,252 $ 51,583 $ 11,854 $ 62,721 $ 104,619 561,241 Temporary cash investments 18,197 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 15,252 51,583 11,854 62,721 104,619 792,165 Investment contracts with insurance companies, at contract value 232,236 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total investments 15,252 51,583 11,854 62,721 104,619 1,024,401 Receivables: Company Contributions 1,603 Loans to participants $ 10,113 10,113 Securities 1,610 Dividends Interest 260 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total assets 15,252 51,583 11,854 62,721 104,619 10,113 1,037,987 LIABILITIES: Securities payable 1,489 Trustee fees payable 37 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities 1,526 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net assets available for plan benefits $ 15,252 $ 51,583 $ 11,854 $ 62,721 $ 104,619 $ 10,113 $1,036,461 ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these finncial statement F-3 6 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION AS OF DECEMBER 31, 1996 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard Telephone Diversified Interest International Index Vanguard Equity Telephone Income Growth Trust-500 Explorer Fund Portfolio Fund Portfolio Portfolio Fund -------- -------- -------- -------- -------- -------- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $155,211 Diversified Telephone Portfolio common shares $ 14,996 Shares in Registered Investment Companies $ 48,812 $195,885 $ 9,658 Temporary cash investments 4,395 254 $ 20,951 -------- -------- -------- -------- -------- -------- 159,606 15,250 20,951 48,812 195,885 9,658 Investment contracts with insurance companies, at contract value 240,001 -------- -------- -------- -------- -------- -------- Total investments 159,606 15,250 260,952 48,812 195,885 9,658 Receivables: Company Contributions 245 452 134 420 46 Loans to participants Securities 446 101 Dividends 458 49 Interest 14 1 -------- -------- -------- -------- -------- -------- Total assets 160,769 15,401 261,404 48,946 196,305 9,704 LIABILITIES: Securities payable 184 40 26 Trustee fees payable 20 2 14 -------- -------- -------- -------- -------- -------- Total liabilities 204 42 40 -------- -------- -------- -------- -------- -------- Net assets available for plan benefits $160,565 $ 15,359 $261,364 $ 48,946 $196,305 $ 9,704 ======== ======== ======== ======== ======== ========
Vanguard Vanguard Total Bond Vanguard Vanguard PRIMECAP Market Wellington Windsor II Loan Fund Portfolio Fund Fund Fund Total -------- -------- -------- -------- -------- -------- ASSETS: Investments, at fair value: Telephone Equity Fund common shares $155,211 Diversified Telephone Portfolio common shares 14,996 Shares in Registered Investment Companies $ 14,218 $ 7,504 $ 45,744 $ 71,133 392,954 Temporary cash investments 25,600 -------- -------- -------- -------- -------- -------- 14,218 7,504 45,744 71,133 588,761 Investment contracts with insurance companies, at contract value 240,001 -------- -------- -------- -------- -------- -------- Total investments 14,218 7,504 45,744 71,133 828,762 Receivables: Company Contributions 96 18 137 218 1,766 Loans to participants $ 10,517 10,517 Securities 547 Dividends 507 Interest 15 -------- -------- -------- -------- -------- -------- Total assets 14,314 7,522 45,881 71,351 10,517 842,114 LIABILITIES: Securities payable 250 Trustee fees payable 36 -------- -------- -------- -------- -------- -------- Total liabilities 286 -------- -------- -------- -------- -------- -------- Net assets available for plan benefits $ 14,314 $ 7,522 $ 45,881 $ 71,351 $ 10,517 $841,828 ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these finncial statement F-4 7 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard SAIC SAIC Telephone Diversified Interest International Index Stock Exchangeable Equity Telephone Income Growth Trust-500 Purchase Stock Fund Portfolio Fund Portfolio Portfolio ---------- ---------- ---------- ---------- ---------- ---------- --------- Additions (deductions) to net assets attributable to: Investment Income Dividends $ 5,759 $ 424 $ 16,638 $ 2,052 $ 5,523 Interest 179 18 Net appreciation in fair value of investments $ 4 $ 9 56,254 6,075 239 60,101 ---------- ---------- ---------- ---------- ---------- ---------- --------- Total investment earnings 4 9 62,192 6,517 16,638 2,291 65,624 ---------- ---------- ---------- ---------- ---------- ---------- --------- Contributions Participant 431 4,272 6,707 3,082 9,835 Company 2,574 1,582 2,331 1,009 3,185 ---------- ---------- ---------- ---------- ---------- ---------- --------- 3,005 5,854 9,038 4,091 13,020 ---------- ---------- ---------- ---------- ---------- ---------- --------- Transfer of participants' balances, net (159) 45,297 (60,839) (2,260) (24,318) (3,324) 6,350 ---------- ---------- ---------- ---------- ---------- ---------- --------- Total additions (deductions) 2,850 45,306 7,207 4,257 1,358 3,058 84,994 Deductions from net assets attributable to: Distributions to participants 10,931 822 21,154 3,592 14,494 Administrative expenses 72 8 172 2 3 ---------- ---------- ---------- ---------- ---------- ---------- --------- Net increase (decrease) 2,850 45,306 (3,796) 3,427 (19,968) (536) 70,497 Net assets available for plan benefits: Beginning of year 160,565 15,359 261,364 48,946 196,305 ---------- ---------- ---------- ---------- ---------- ---------- --------- End of year $ 2,850 $ 45,306 $ 156,769 $ 18,786 $ 241,396 $ 48,410 $ 266,802 ========== ========== ========== ========== ========== ========== =========
Vanguard Vanguard Vanguard Total Bond Vanguard Vanguard Explorer PRIMECAP Market Wellington Windsor II Loan Fund Fund Portfolio Fund Fund Fund Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- Additions (deductions) to net assets attributable to: Investment Income Dividends $ 1,483 $ 1,737 $ 574 $ 5,201 $ 9,352 $ 48,743 Interest $ 870 1,067 Net appreciation in fair value of investments 114 5,108 243 5,811 15,233 149,191 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total investment earnings 1,597 6,845 817 11,012 24,585 870 199,001 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Contributions Participant 1,314 3,791 578 3,221 5,272 92 38,595 Company 358 932 158 1,042 1,689 14,860 ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1,672 4,723 736 4,263 6,961 92 53,455 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Transfer of participants' balances, net 2,783 27,577 3,312 4,869 6,996 (6,284) 0 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total additions (deductions) 6,052 39,145 4,865 20,144 38,542 (5,322) 252,456 Deductions from net assets attributable to: Distributions to participants 503 1,876 533 3,300 5,273 (4,918) 57,560 Administrative expenses 1 4 1 263 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) 5,548 37,269 4,332 16,840 33,268 (404) 194,633 Net assets available for plan benefits: Beginning of year 9,704 14,314 7,522 45,881 71,351 10,517 841,828 ---------- ---------- ---------- ---------- ---------- ---------- ---------- End of year $ 15,252 $ 51,583 $ 11,854 $ 62,721 $ 104,619 $ 10,113 $1,036,461 ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these finncial statement F-5 8 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996 (Thousands of Dollars)
Bellcore Bellcore Bellcore Vanguard Vanguard Telephone Diversified Interest International Index Vanguard Vanguard Equity Telephone Income Growth Trust-500 Explorer PRIMECAP Fund Portfolio Fund Portfolio Portfolio Fund Fund --------- --------- --------- --------- --------- --------- --------- Additions (deductions) to net assets attributable to: Investment Income Dividends $ 7,109 $ 538 $ 15,896 $ 2,117 $ 4,163 $ 517 $ 388 Interest 126 10 1 Net appreciation/ (depreciation) in fair value of investments (7,924) (1,275) 3,852 31,064 86 1,313 --------- --------- --------- --------- --------- --------- --------- Total investment earnings (losses) (689) (727) 15,897 5,969 35,227 603 1,701 --------- --------- --------- --------- --------- --------- --------- Contributions Participant 6,068 7,454 3,110 8,552 1,007 1,942 Company 2,779 3,708 1,278 3,782 370 661 --------- --------- --------- --------- --------- --------- --------- 8,847 11,162 4,388 12,334 1,377 2,603 --------- --------- --------- --------- --------- --------- --------- Transfer of participants' balances, net (18,774) (1,877) 10,232 3,670 5,853 8,093 10,405 --------- --------- --------- --------- --------- --------- --------- Total additions (deductions) (10,616) (2,604) 37,291 14,027 53,414 10,073 14,709 Deductions from net assets attributable to: Distributions to participants 8,519 950 14,704 1,795 5,764 369 395 Administrative expenses 1 3 3 2 --------- --------- --------- --------- --------- --------- --------- Net increase (decrease) (19,136) (3,554) 22,584 12,229 47,648 9,704 14,314 Net assets available for plan benefits: Beginning of year 179,701 18,913 238,780 36,717 148,657 --------- --------- --------- --------- --------- --------- --------- End of year $ 160,565 $ 15,359 $ 261,364 $ 48,946 $ 196,305 $ 9,704 $ 14,314 ========= ========= ========= ========= ========= ========= =========
Vanguard Vanguard Short Term Total Bond Vanguard Vanguard Federal Market Wellington Windsor II Loan Portfolio Portfolio Fund Fund Fund Total --------- --------- --------- --------- --------- --------- Additions (deductions) to net assets attributable to: Investment Income Dividends $ 3,487 $ 4,875 $ 39,090 Interest $ 468 $ 382 $ 916 1,903 Net appreciation/ (depreciation) in fair value of investments (409) (113) 2,504 7,164 36,262 --------- --------- --------- --------- --------- --------- Total investment earnings (losses) 59 269 5,991 12,039 916 77,255 --------- --------- --------- --------- --------- --------- Contributions Participant 377 2,921 4,097 35,528 Company 151 1,265 1,758 15,752 --------- --------- --------- --------- --------- --------- 528 4,186 5,855 51,280 --------- --------- --------- --------- --------- --------- Transfer of participants' balances, net (36,313) 6,830 4,688 15,039 (715) 7,131 --------- --------- --------- --------- --------- --------- Total additions (deductions) (36,254) 7,627 14,865 32,933 201 135,666 Deductions from net assets attributable to: Distributions to participants 437 105 2,019 2,454 683 38,194 Administrative expenses 1 1 11 --------- --------- --------- --------- --------- --------- Net increase (decrease) (36,691) 7,522 12,845 30,478 (482) 97,461 Net assets available for plan benefits: Beginning of year 36,691 33,036 40,873 10,999 744,367 --------- --------- --------- --------- --------- --------- End of year $ 0 $ 7,522 $ 45,881 $ 71,351 $ 10,517 $ 841,828 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these finncial statement F-6 9 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS ---------- A. PLAN DESCRIPTION: The Bell Communications Research Savings Plan for Salaried Employees (the Plan) was established by Bell Communications Research (the Company) to provide a convenient way for employees to save on a regular and long term basis. On November 14, 1997, the Company was sold to Science Applications International Corporation (SAIC). Prior to the sale, the Company was owned by the Regional Bell Operating Companies (RBOC's). Changes to the Plan as a result of the sale are noted below. The following description of the Plan provides only general information. Participants should refer to the Plan Prospectus for a more complete description of the Plan's provisions. 1. General. The Plan is a defined contribution plan covering all salaried employees of the Company who have one month of service and are age twenty-one or older. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). 2. Contributions. Each year, participants may contribute up to 16 percent of pretax annual compensation, as defined in the Plan. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. After one year of service, the Company contributes 70 percent of the first 6 percent of compensation that a participant contributes to the Plan. In addition, after one year of service, the Company makes a contribution of a 1/2 percent of compensation on behalf of each participant. Upon the sale of the Company, this automatic contribution is deposited into the SAIC Stock Purchase Fund until the quarterly trade date and then into SAIC stock. This fund and related investment option were also established upon the sale of the Company. Prior to the sale of the Company, the automatic Company contribution was deposited according to a participant's asset allocation at that time; for participants who did not make a voluntary contribution, the automatic contribution was deposited in the Interest Income Fund. The contribution is made during the first quarter for employee earnings of the previous calendar year. These automatic Company contributions are immediately vested. Additional amounts may be contributed at the option of the Company's Board of Directors. Effective with the sale of the Company, 50 percent of Company contributions are invested in SAIC stock and 50 percent are invested in accordance with each participant's directed allocation. Contributions are subject to certain IRS limitations. 3. Participant Accounts. Each participant's account is credited with the participant's contribution and allocations of the Company's contribution and fund earnings, and each participant's account is charged with an allocation of administrative expenses. Allocations are based on participant earnings, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. 4. Vesting. Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company's matching and discretionary contribution and actual earnings thereon is based on years of continuous service. A participant is 100 percent vested after five years of credited service. 5. Investment Options. The Plan is comprised of the following investments: VANGUARD BOND INDEX FUND - Total Bond Market Portfolio: This participant directed fund invests in United States treasury obligations, federal agency mortgage backed obligations and investment grade corporate obligations. VANGUARD EXPLORER FUND: This participant directed fund invests in the common stock of a diversified group of small capitalization companies. VANGUARD INDEX TRUST - 500 PORTFOLIO: This participant directed fund invests in all of the 500 stocks that make up the Standard & Poor's 500 Composite Stock Price Index. VANGUARD INTERNATIONAL GROWTH PORTFOLIO: This participant directed fund invests in the common stocks of companies based outside of the United States. F-7 10 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS, continued ---------- VANGUARD / PRIMECAP FUND: This participant directed fund invests in the common stock of medium capitalization companies. VANGUARD / WELLINGTON FUND: This participant directed fund invests approximately 65 percent of its assets in common stocks and the remaining 35 percent in bonds. VANGUARD / WINDSOR II: This participant directed fund invests in the common stock of large capitalization companies. SAIC EXCHANGEABLE STOCK FUND: As previously stated, this fund was created upon the sale of the Company. This fund invests primarily in SAIC class A common stock and is participant directed to the extent that participant contributions were used to purchase SAIC stock. Also effective with the sale of the Company, the SAIC Non-exchangeable Stock Fund, a non-participant directed fund, was created to exclusively invest 50% of the Company matching contribution in SAIC class A common stock. There will be no activity in this fund until the next quarterly SAIC stock trade date which will occur in 1998. The SAIC STOCK PURCHASE FUND is not a participant directed investment option; it is a temporary holding fund designed to hold respective participant and Company contributions until the following SAIC common stock quarterly trade date. Pending the quarterly trade, the respective contributions are invested in the Vanguard Money Market Reserves Portfolio. BELLCORE INTEREST INCOME FUND: This participant directed fund invests primarily in investment contracts issued by insurance companies and banks. BELLCORE - DIVERSIFIED TELEPHONE PORTFOLIO STOCK FUND: This fund invests primarily in common stock and has been frozen to new participant directed contributions since 1984. BELLCORE - TELEPHONE EQUITY FUND STOCK FUND: This fund invests in the common stock of the RBOC's. Upon the sale of the Company, the fund was frozen to new participant directed contributions. 6. Participant Loans Receivable. Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum of the lesser of (a) $50,000 less the participant's highest outstanding loan balance during the preceding one year period; or (b) 50 percent of their vested account balance. Upon the sale of the Company, loans also may not exceed the vested value of the participant's Plan account less vested amounts in the SAIC Stock Fund within the Plan. Loan transactions are treated as a transfer to (from) the investment fund from (to) the Loan Fund. Loan terms range from 1 year to 56 months. The loans are secured by the balance in the participant's account and bear interest at a rate commensurate with local prevailing rates as determined monthly by the Plan administrator. Interest rates ranged from 7 to 10 percent during 1997 and 1996. Principal and interest is paid ratably through monthly payroll deductions. 7. Payment of Benefits. On termination of service due to death, disability or retirement, a participant may elect to receive either a lump-sum amount equal to the value of the participant's vested interest in his or her account, or an amount not to exceed the life expectancy of the participant and spouse, if applicable. For termination of service due to other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution, or maintain the account in the Plan. 8. Forfeited Accounts. Forfeited accounts are used to reduce future Company contributions. Company contributions were reduced by $345,000 and $248,000 in 1997 and 1996, respectively. F-8 11 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS, continued ---------- B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation - The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Use of Estimates - 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Valuation and Income Recognition- The Plan's investments are valued at fair value, except for its investment contracts which are valued at contract value (Note C). Shares of registered investment companies are valued at quoted market prices which represent the net asset value of shares held by the Plan at year end. Quoted market prices for the value of the common shares of each company in the Telephone Equity Fund and the Diversified Telephone Portfolio are obtained on the basis of the closing price on the New York Stock Exchange on the year end date or, if no sales were made on that date, at the closing price on the New York Stock Exchange on the next preceding day on which sales were made. Participant notes receivable are valued at outstanding principle balance which approximates fair value. A general public market for the SAIC class A common shares does not exist; therefore, the fair value of the shares is determined pursuant to a stock price formula and valuation process which includes an appraisal prepared by an independent appraisal firm. Periodic determinations of fair value of the common stock are made by the SAIC Board of Directors, with the assistance of the independent appraisal firm. The SAIC Board of Directors reserves the right to alter the formula. The gains and losses realized on distributions of investments and the increases or decreases in unrealized appreciation are calculated as the difference between the current fair value and the fair value of the investments at the beginning of the year, or purchase price if purchased during the year. As of December 31, 1997, the fair value of the SAIC Company's Class A Common Stock was $34.78 and the Plan held approximately 1,175,927 shares. It is the policy of the Company to keep the SAIC Common Stock Fund invested primarily in common stock, except for estimated reserves for use in distributions and investment exchanges by participants. Such reserves are invested in the Vanguard Money Market Reserves - Prime Portfolio Fund. If reserves in the SAIC Common Stock Fund are less than the amount required at any given time to make required distributions and investment changes, investment exchanges out of the SAIC Common Stock Fund by participants may have to be deferred. Purchases and sales of securities are reflected as of the trade date. Investments are valued on a daily basis. Dividend income is recorded on the ex-dividend date. Interest earned on investments is recorded on the accrual basis. Payment of Benefits- Benefits are recorded when paid. C. INVESTMENT CONTRACTS WITH INSURANCE COMPANIES: The Plan maintains investments in fully benefit-responsive investment contracts with a number of insurance companies and banks. (Benefit responsiveness is the extent to which contract terms permit and require withdrawals at contract value for benefit payments, loans, or transfers to other investment options offered to the participants by the Plan). The accounts are credited with earnings on the underlying investments (principally bank certificates of deposit and other fixed income products) and charged for Plan withdrawals and administrative expenses. The contracts are included in the financial statements at contract value, which approximates fair value, as reported to the Plan by the provider. Contract value represents contributions made under the contract, plus earnings, less Plan withdrawals and administrative expenses. See Item 27a of the supplemental schedules for a complete list of all contracts held in the Plan. F-9 12 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS, continued ---------- Approximately 22 percent and 29 percent of total net assets at December 31, 1997 and 1996, respectively, were invested in investment contracts. These contracts are subject to credit risk. If any of the companies fails to perform on the contracts held, the asset value of the Interest Income Fund, and therefore the Plan, could be substantially impaired. On July 16, 1991, Mutual Benefit Life Insurance Company (MBL) was placed in rehabilitation under the direction of the Insurance Commissioner and Attorney General of the State of New Jersey. A Plan of Rehabilitation was approved by the Superior Court of New Jersey on January 24, 1994. This Plan provides that the full amount of principal as of July 16, 1991 plus accrued interest is guaranteed by a combination of the Life Insurance Company Guarantee Corporation of New York (LICGCNY) and an insurance company consortium. Interest was credited at contract rates through December 31, 1991. Interest for 1992 and subsequent years will be credited at rates which are based upon the assets' investment performance but not less than approximately 1 percent on the total assets. At December 31, 1997, MBL paid 8.05 percent and 5.10 percent on the respective contracts that the Plan currently holds. Amounts which are guaranteed by LICGCNY funds will be completely distributed after December 31, 1999. Distributions from the insurance consortium will be made in five installments beginning after December 31, 1999. Payouts may be deferred after that date by the consortium, but all payments must be made by December 31, 2010. Mutual Benefit related assets represent approximately 3 percent of the total Interest Income Fund assets and less than 1 percent of total Plan assets. D. PARTIES-IN-INTEREST: Transactions involving cash, securities or assets of the Company, the Trustee or other affiliated persons are considered to be party-in-interest transactions under Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure. Reportable party-in-interest transactions for the year ended December 31, 1997 are summarized below:
NUMBER NUMBER OF OF SHARES TRANSACTIONS COST ------------------------------------------------- INVESTMENT PURCHASES SAIC Class A Common Stock 1,175,927 1 $40,898,764
Certain Plan investments are shares of mutual funds managed by The Vanguard Group. Vanguard Fiduciary Trust Company is the trustee as defined by the Plan, and therefore these transactions qualify as party-in-interest. There were no known prohibited transactions with known parties in interest as defined in ERISA Section 3(14) and regulations thereunder, including those transactions set forth in ERISA Sections 406 and 407(a) and Internal Revenue Code Section 4975(c). There was no known relationship in which The Vanguard Fiduciary Trust Company had any direct or indirect financial interest which would affect its capacity to perform the necessary calculations. Fees paid by the Plan for administrative expenses and investment management services amounted to $263,000 and $11,000 for 1997 and 1996, respectively. All other Plan expenses are paid by the Company. E. PLAN TERMINATION POLICY: The Company intends to continue the Plan indefinitely, but reserves the right to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. If the Plan were to be terminated, participants would be fully vested in their accounts; Company contributions would not be subject to forfeiture. F-10 13 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS, continued ---------- F. RECONCILIATION TO FORM 5500: The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500:
December 31, 1997 1996 ----------- ----------- Net assets available for benefits per the financial statements $ 1,036,461 $ 841,828 Amounts allocated to withdrawing participants (1,115) 0 ----------- ----------- Net assets available for benefits per the Form 5500 $ 1,035,346 $ 841,828 =========== ===========
The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
Year ended December 31, 1997 ----------------- Benefits paid to participants per the financial statements $57,560 Add: Amounts allocated to withdrawing participants at December 31, 1997 1,115 Less: Amounts allocated to withdrawing participants at December 31, 1996 0 ------- Benefits paid to participants per the Form 5500 $58,675 =======
Amounts allocated to withdrawing participants are recorded on Form 5500 for benefit claims that have been processed and approved for payment prior to December 31 but not yet paid as of that date. G. TAX STATUS: On April 11, 1986, the Internal Revenue Service had determined that the Plan is qualified under the requirements of Section 401(a) of the Internal Revenue Code and is exempt from Federal income taxes under Section 501(a) of the Code. The Plan obtained its latest determination letter on August 1, 1995, in which the Internal Revenue Service stated that the Plan, as amended through December 21, 1994, was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended since receiving such determination letter. However, the Plan administrator and the Plan's counsel believe that the Plan is currently designed and is being operated in compliance with the applicable requirements of the Internal Revenue Code. Accordingly, no provision for income taxes has been included in the Plan's financial statements. F-11 14 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES SCHEDULE I: ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES --------------- TELEPHONE EQUITY FUND (Dollars in Thousands)
DECEMBER 31, 1997 ------------------------------------------------ NUMBER FAIR NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE --------- -------- -------- Common Shares: Ameritech Corporation 324,524 $ 11,136 $ 26,124 Bell Atlantic Corporation 411,358 20,095 37,434 BellSouth Corporation 372,913 10,101 21,000 SBC Communications, Inc. 660,785 20,750 48,403 US West Communications, Inc. 455,082 11,918 20,535 Total Common Shares 74,000 153,496 Temporary cash investments 2,345 2,345 -------- -------- Total Telephone Equity Fund $ 76,345 $155,841 ======== ========
DIVERSIFIED TELEPHONE PORTFOLIO (Dollars in Thousands)
DECEMBER 31, 1997 ---------------------------------------------- NUMBER FAIR NAME OF ISSUER AND TITLE OF ISSUE OF SHARES COST VALUE --------- ------- ------- Common Shares: AT&T Corporation 64,762 $ 760 $ 3,967 Air Touch Communications, Inc. 14,400 84 599 Ameritech Corporation 26,561 311 2,138 Bell Atlantic Corporation 31,980 613 2,910 BellSouth Corporation 46,040 505 2,593 Lucent Technologies Corporation 20,967 310 1,675 NCR Corporation 4,089 38 114 SBC Communications, Inc. 42,070 438 3,082 US West Communications Group, Inc. 16,936 156 764 US West Media Group 17,016 108 490 Total Common Shares 3,323 18,332 Temporary cash investments 250 250 ------- ------- Total Diversified Telephone Portfolio $ 3,573 $18,582 ======= =======
F-12 15 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES SCHEDULE I: ITEM 27A SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES, Continued ---------- INTEREST INCOME FUND (Dollars in Thousands)
DECEMBER 31, 1997 ------------------------------------------------------------ PRINCIPAL CONTRACT NAME OF ISSUER AND TITLE OF ISSUE AMOUNT VALUE FAIR VALUE ------------ ------------ ------------ Contracts with Insurance Companies: AIG 6.95% due 5/15/01 $ 8,773 $ 8,773 $ 8,773 AIG FP 7.07% due 6/30/01 $ 8,807 $ 8,807 $ 8,807 Bankers Trust Company 6.39% due 12/31/01 $ 15,012 $ 15,012 $ 15,012 Canada Life Insurance Company 5.47% due 12/31/98 $ 6,863 $ 6,863 $ 6,863 Deutche Bank 6.13% no maturity date $ 11,445 $ 11,445 $ 11,445 6.49% due on 3/31/01 $ 8,860 $ 8,860 $ 8,860 6.49% due on 3/31/00 $ 8,839 $ 8,839 $ 8,839 John Hancock 6.93% due on 11/15/01 $ 8,263 $ 8,263 $ 8,263 6.35% due on 8/15/02 $ 6,036 $ 6,036 $ 6,036 Morgan Guaranty 6.50% due on 9/30/01 $ 5,128 $ 5,128 $ 5,128 Mutual Benefit Life Insurance Company 8.05% due 12/31/99 $ 5,670 $ 5,670 $ 5,670 8.05% due 12/31/99 $ 379 $ 379 $ 379 5.10% due 12/31/99 $ 1,257 $ 1,257 $ 1,257 5.10% due 12/31/99 $ 84 $ 84 $ 84 New York Life Insurance Company 8.04% due 9/30/98 $ 10,589 $ 10,589 $ 10,589 7.20% due 7/31/99 $ 8,699 $ 8,699 $ 8,699 7.05% due 4/15/00 $ 7,215 $ 7,215 $ 7,215 Principal Mutual Life Insurance Company 7.71% due 10/31/99 $ 8,684 $ 8,684 $ 8,684 7.02% due 4/15/00 $ 8,252 $ 8,252 $ 8,252 Rabobank Nederland 6.56% no maturity date $ 8,834 $ 8,834 $ 8,834 5.92% due 12/31/00 $ 17,823 $ 17,823 $ 17,823 Sun Life Insurance Company of America 6.65% due 3/31/99 $ 14,974 $ 14,974 $ 14,974 7.19% due 6/30/99 $ 10,003 $ 10,003 $ 10,003 Union Bank of Switzerland 6.87% no maturity date $ 14,837 $ 14,837 $ 14,837 7.19% no maturity date $ 12,210 $ 12,210 $ 12,210 6.40% no maturity date $ 14,700 $ 14,700 $ 14,700 ------------ ------------ ------------ Total Contracts with Insurance Companies $ 232,236 $ 232,236 $ 232,236 Temporary Cash Investments $ 9,973 $ 9,973 $ 9,973 ------------ ------------ ------------ Total Interest Income Fund $ 242,209 $ 242,209 $ 242,209 ============ ============ ============
F-13 16 BELL COMMUNICATIONS RESEARCH SAVINGS PLAN FOR SALARIED EMPLOYEES SCHEDULE I: ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES, Continued VANGUARD MUTUAL FUNDS (Dollars in Thousands)
DECEMBER 31, 1997 ---------------------------------------------------------------------- NUMBER OF FAIR NAME OF ISSUER AND TITLE OF ISSUE SHARES COST VALUE ------------------- ----------------- ------------------- * Vanguard Index Trust-500 Portfolio 2,962,165 $162,031 $266,802 * Vanguard Windsor II Fund 3,655,447 $82,496 $104,619 * Vanguard International Growth Fund 2,953,612 $44,443 $48,410 * Vanguard Wellington Fund 2,129,733 $53,408 $62,721 * Vanguard Explorer Fund 275,811 $15,484 $15,252 * Vanguard PRIMECAP Fund 1,303,597 $46,448 $51,583 * Vanguard Total Bond Market Portfolio 1,174,858 $11,693 $11,854
LOAN FUND (Dollars in Thousands)
Participant loans 7% to 10% $10,113 $10,113
SAIC FUNDS (Dollars in Thousands) * SAIC Exchangeable SAIC Class A Common Stock 1,175,927 $40,899 $40,899 Temporary Cash Investments $4,385 $4,385 ----------------- ------------------- Total SAIC Exchangeable Stock Fund $45,284 $45,284 * SAIC Stock Purchase Fund Temporary Cash Investments $1,244 $1,244 ----------------- ------------------- Total SAIC Stock Purchase Fund $1,244 $1,244
-13- * Represents party-in-interest F-14 17 Bell Communications Research Savings Plan for Salaried Employees Schedule II: Item 27b - Schedule of Loans or Fixed Income Obligations as of December 31, 1997
AMOUNT RECEIVED DURING REPORTING YEAR UNPAID ORIGINAL ----------------------------------- BALANCE AT NAME AND ADDRESS LOAN AMOUNT PRINCIPAL INTEREST END OF YEAR ------------------ ----------- ---------- ---------- ---------- DeGraffinreed, Cheryl $ 2,370.00 $ -- $ -- $ 1,432.86 9001 Sussex Ave East Orange, NJ 07018 $ 1,182.04 $ -- $ -- $ 506.05 Delle Donne, Frances $15,000.00 $ -- $ -- $15,000.00 237 Rankin Ave Cranford, NJ 07016 Brantle, Thomas $18,000.00 $ 2,791.21 $ 1,002.29 $11,796.00 260 Ocean Ave. - Apt. 18B Sea Bright, NJ 07760 $16,257.71 $ 2,361.02 $ 901.66 $11,004.58 Kaeten, Karl $ 7,000.00 $ 1,227.08 $ 146.68 $ 1,971.09 1 Larison Lane Ringoes, NJ 08551 Young, William $30,000.00 $ 4,438.88 $ 739.20 $10,923.25 31 Tilton Rd Middletown, NJ 07748 $16,800.00 $ 2,042.95 $ 921.37 $13,781.68
AMOUNT OVERDUE* NAME AND ADDRESS DETAILED DESCRIPTION OF LOSS PRINCIPAL INTEREST ---------------- ---------------------------- --------- -------- DeGraffinreed, Cheryl Loan date-06/12/95; Loan Maturity-06/11/97; $ 1,626.54 $ 248.46 9001 Sussex Ave. Interest rate-10%, Collateral - vested balance East Orange, NJ 07018 Loan date-01/26/96; Loan Maturity-01/22/97; $ 1,182.04 $ 61.76 Interest rate-9.5%, Collateral - vested balance Delle Donne, Frances Loan date-10/29/96; Loan Maturity-06/26/01; $ 2,694.92 $ 1,275.16 237 Rankin Ave. Interest rate-9.25%, Collateral - vested balance Cranford, NJ 07016 Brantle, Thomas Loan date-05/15/95; Loan Maturity-01/13/00; $ 976.92 $ 286.96 260 Ocean Ave. - Apt. 18B Interest rate-10%, Collateral - vested balance Sea Bright, NJ 07760 Loan date-12/11/95; Loan Maturity-08/10/00; $ 826.00 $ 261.56 Interest rate-9.75%, Collateral - vested balance Kaeten, Karl Loan date-07/29/94; Loan Maturity-07/26/98; $ 477.78 $ 37.38 1 Larison Lane Interest rate-8.25%, Collateral - vested balance Ringoes, NJ 08551 Young, William Loan date-06/23/94; Loan Maturity-02/22/99; $ 2,303.36 $ 276.88 31 Tilton Rd. Interest rate-8.25%, Collateral - vested balance Middletown, NJ 07748 Loan date-08/14/96; Loan Maturity-04/12/01; $ 1,061.33 $ 420.83 Interest rate-9.25%, collateral - vested balance
* During 1998, the Company instructed the Plan's recordkeeper to issue Form 1099 to the obligors listed above in the amount of the principal and interest balance outstanding at December 31, 1997. F-15 18 Bell Communications Research Savings Plan for Salaried Employees Schedule III: Item 27d - Schedule of Reportable Transactions * Series of Transactions For the Year Ended December 31, 1997
IDENTITY OF PARTY INVOLVED DESCRIPTION OF NUMBER OF PURCHASE SELLING ASSET TRANSACTIONS PRICE PRICE - -------------------------------------------------------------------------------------------------------------------------------- The Vanguard Group Index Trust-500 Portfolio 252 $95,527,730.22 The Vanguard Group Index Trust-500 Portfolio 251 $84,712,266.83 The Vanguard Group International Growth Portfolio 243 56,105,649.98 The Vanguard Group International Growth Portfolio 249 56,746,971.56 The Vanguard Group Vanguard/PRIMECAP Fund 248 63,724,803.79 The Vanguard Group Vanguard/PRIMECAP Fund 224 31,467,707.17 The Vanguard Group Vanguard/Windsor II 247 52,207,895.70 The Vanguard Group Vanguard/Windsor II 243 33,955,420.31 N/A SAIC Exch. Stock Fund 1 45,297,111.55
IDENTITY OF PARTY INVOLVED COST OF CURRENT VALUE ON NET ASSET TRANSACTION DATE GAIN / (LOSS) - -------------------------------------------------------------------------------------------- The Vanguard Group $95,527,730.22 The Vanguard Group $69,674,079.47 84,712,266.83 $15,038,187.36 The Vanguard Group 56,105,649.98 The Vanguard Group 53,839,913.51 56,746,971.56 2,907,058.05 The Vanguard Group 63,724,803.79 The Vanguard Group 30,302,816.91 31,467,707.17 1,164,890.26 The Vanguard Group 52,207,895.70 The Vanguard Group 29,606,090.65 33,955,420.31 4,349,329.66 N/A 45,297,111.55
* Transactions or series of transactions in excess of 5 percent of the current value of the Plan's assets as of December 31, 1997 as defined in Section 2520.103-106 of the Department of Labor Rules and Regulations for Reporting and Disclosure under ERISA. F-16 -----END PRIVACY-ENHANCED MESSAGE-----