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 are primarily sold to departments and agencies of the U.S. Government, including the Department of Defense ("DOD"), Department of Energy ("DOE"), Department of Transportation ("DOT"), Department of Veterans Affairs ("VA"), Environmental Protection Agency ("EPA") 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 86%, 88% and 88% of revenues in fiscal years 1995, 1994 and 1993, respectively. The balance of the Company's revenues are attributable to the sales of Technical Services and Products to foreign, state and local governments, commercial customers and others. The percentage of revenues attributable to Technical Services and Products has remained relatively constant at approximately 91% and 9%, respectively, for fiscal year 1995 and approximately 92% and 8%, respectively, for fiscal years 1994 and 1993. The Company provides Technical Services primarily in the areas of "National Security," "Environment," "Energy" and "Other Technical Services," the last of which includes the Company's health, space, transportation and commercial information technology business areas. For certain financial information regarding the Company's business segments, see Note C of Notes to Consolidated Financial Statements of the Company set forth on page of this Form 10-K.
The principal office and corporate headquarters of the Company is 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.
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:
- 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 and architectural definition, systems and software engineering, systems installation, training and site support.
- Information system engineering and support services, including requirements analysis and acquisition support, computer system design, information and user environment modeling and data communication systems support.
- 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.
- Development of core technology for advanced distributed simulation and applications for the DOD and other government and commercial customers.
- 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.
- Logistics engineering services and turnkey logistics information management systems to a wide variety of government customers.
- Design, integration, implementation and operation of battle field simulation training ranges on land, air and sea.
- Systems engineering and technical assistance for cruise missiles, 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.
- Support to the DOD in imagery collection, processing, exploitation and dissemination systems for digital processing, technology intelligence communications and information management.
- Engineering support for a wide variety of naval avionics systems, including scientific and engineering studies, hardware design, development and fabrication, computer engineering and support, and reliability, maintainability and logistics engineering.
- Maintenance engineering and training, including field technical services and repair, electronic system design and hands-on operational support, primarily to the U.S. Navy.
- Independent verification and validation and software quality assurance support services for shipboard anti-submarine warfare 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.
- Engineering, environmental, quality assurance, integration and program support to the U.S. Army's chemical demilitarization and remediation activity.
ENVIRONMENT
In the environment area, the Company performs site assessments, remedial investigation and feasibility studies, remedial actions, technology evaluations, sampling, monitoring and regulatory compliance support and training. Examples of the Company's Technical Services in the environment area include the following:
- 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 and information systems and training.
- Development, demonstration and evaluation of new technologies for hazardous waste treatment, including bioremediation and high-energy plasma treatment systems.
- 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.
- Analysis of a broad range of environmental issues associated with the marine sciences such as ocean dumping, mineral exploration, global change and global ocean circulation and temperature trends.
- 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.
- Development and implementation of information systems.
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:
- 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.
- Support to DOE in planning, facility transitions, safety analysis, transportation, waste management, quality assurance, emergency preparedness and public outreach.
- Design, fabrication and application of alternative energy sources such as solar generators and fuel cells.
- 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.
- 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.
- 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.
- Management, operation and technical services for fossil energy research laboratories.
OTHER TECHNICAL SERVICES
The Company provides Technical Services to government and commercial customers in such other areas as health, space, transportation and commercial information technology. The health related Technical Services of the Company include medical information systems, technology development and adolescent counseling. The Company also provides a wide variety of Technical Services in the space, transportation, commercial information technology and other areas. Examples of the Technical Services provided by the Company in these areas are described below:
- 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.
- 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, explosive and contraband detection, and state motor vehicle registration.
- 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.
- Development and integration of fuel cell technology for alternative fuel vehicles and support to the FAA in flight testing helicopter instrumented approaches using the satellite based global positioning system (GPS).
- Information technology and automatic data processing outsourcing services for commercial clients.
- 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, battlefield hazards and the U.S. Army's breast cancer research program and biomedical service and management of government facilities.
- 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.
- Security services for the U.S. Government and commercial customers, including material control and accountability, computer security, technical surveillance countermeasures, intrusion detection, access control and physical plant threat assessments and vulnerability analysis.
PRODUCTS
The Company designs, develops and manufactures high-technology products for government and commercial customers. Examples of the Company's Products are described below:
- Automatic equipment identification technology for rail, truck, air and sea transportation modes.
- Ruggedized/militarized computers for various military and industrial applications.
- A portable ultrasonic imaging system primarily used for nondestructive inspection of aircraft and nuclear power plant piping.
- Hardware products for multi-lateration based range instrumentation systems, including transponders, airborne instrumentation pods and ground reference interrogator/relay stations.
- A variety of flat panel displays for military applications based on plasma and electroluminescent technology and liquid crystal display technology.
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 products and services 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. To date, the Company has not experienced any significant difficulty in obtaining or retaining the services of such employees. 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."
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 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 high-technology 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, 1995, 1994 and 1993, approximately 88%, 89% and 89%, respectively, of the Company's contract revenues from the Technical Services segment and 68%, 72% and 82%, 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 1995, 1994 and 1993, the U.S. Air Force accounted for 11%, 12%, and 12%, respectively, of consolidated revenues, the U.S. Army accounted for 19%, 17% and 15%, respectively, of consolidated revenues, the U.S. Navy accounted for 10%, 10% and 12%, respectively, of consolidated revenues and the DOE accounted for 11%, 10% and 5%, respectively, of consolidated revenues. No single contract in the Technical Services segment accounted for 10% or more of consolidated revenues in fiscal years 1995, 1994 and 1993.
No single customer or contract in the Products segment accounted for 10% or more of consolidated revenues in fiscal years 1995, 1994 and 1993.
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 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.
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, systems 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 losses.
During the fiscal years ended January 31, 1995, 1994 and 1993, approximately 64%, 65% and 62%, respectively, of the Technical Services revenues were derived from cost-reimbursement type contracts and 13%, 12% 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, exclusive of related fees, at January 31, 1995 were $13,393,000. Unbilled receivables in this category which were included in the Products revenues, exclusive of related fees, at January 31, 1995 were $383,000. Although no assurance can be given that the contracts or contract amendments will be received or that the related costs will be recovered, the Company expects to recover substantially all such costs.
Contract costs for services or products supplied to the U.S. Government, including allocated indirect costs, are subject to audit and adjustment by negotiations between the Company and U.S. Government representatives. The majority of the Company's indirect contract costs have been agreed upon through the fiscal year ended January 31, 1991 and substantially all of the Company's indirect contract costs have been agreed upon through the fiscal year ended January 31, 1990. 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.
PATENTS AND PROPRIETARY INFORMATION
Although the Company owns or has made application for patents on certain products and processes, 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 trademarks, tradenames, 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 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, 1995 and 1994 amounted to approximately $858,000,000 and $695,000,000, respectively, and the backlog for the Products segment at those dates amounted to approximately $119,000,000 and $109,000,000, respectively. The Company expects that a substantial portion of its backlog at January 31, 1995 will be recognized as revenues prior to January 31, 1996. Some contracts associated with the backlog are incrementally funded and may continue for more than one year.
EMPLOYEES AND CONSULTANTS
As of March 10, 1995, the Company employed approximately 17,000 persons on a full-time basis and approximately 1,250 persons on a part-time basis. 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. The Company has not experienced any significant difficulty in recruiting or retaining such personnel. Management believes the Company's orientation towards employee ownership is a major factor in the Company's ability to attract and retain qualified personnel. As of March 10, 1995, approximately 9,950 employees, consultants and their family members were stockholders of record.
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.
ITEM 2.

ITEM 2. PROPERTIES.
As of March 10, 1995, the Company conducted its operations in more than 310 offices and manufacturing and laboratory facilities located in 41 states, the District of Columbia and various
foreign countries, and occupied a total of approximately 4,800,000 square feet of space. The Company has principal locations in the San Diego, California and the Washington, D.C. metropolitan areas and occupies over 1,000,000 square feet of space in each of these locations.
The Company owns and occupies six buildings totalling approximately 550,000 square feet of space situated on 22.2 acres of land owned by the Company in the Golden Triangle area of San Diego, California and leases a 128,500 square foot office building located on that land. The Company also leases approximately 140,000 square feet of space in the Sorrento-Mesa area of San Diego, California. The Company has options to purchase all of these leased facilities.
At the principal location of the Company in the Washington, D.C. metropolitan area (McLean, Virginia), the Company owns a building consisting of approximately 287,000 square feet of space situated on 10 acres of land. In McLean, Virginia, the Company also occupies two buildings containing a total of approximately 425,000 square feet of space. The Company has certain rights to purchase these leased buildings. In addition, the Company owns and occupies a 62,000 square foot building on 2.6 acres of land in Reston, Virginia.
The Company owns and occupies a 62,500 square foot building on approximately 13 acres of land in Virginia Beach, Virginia and owns and occupies an 83,000 square foot building on approximately 8.4 acres of land in Oak Ridge, Tennessee. The Company also owns and occupies a 95,500 square foot building situated on approximately 7.3 acres of land in Columbia, Maryland. In addition, the Company leases approximately 3.1 acres of land in Richland, Washington and owns a 23,700 square foot building on such land. This building was occupied in February 1995.
The Company also leases an office building containing approximately 100,000 square feet of space in Huntsville, Alabama and an office building in Orlando, Florida containing approximately 30,000 square feet of space. The Company has options to purchase these buildings in the future.
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 K of Notes to Consolidated Financial Statements of the Company on page of this Form 10-K for information regarding commitments under leases.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
On February 15, 1994, the Company was served with search warrants and a subpoena for documents and records associated with the performance by the SAIT operating unit of the Company under three contracts with the DOD. The search warrants and subpoena state that the U.S. Government is seeking evidence regarding the making of false statements and false claims to the DOD, as well as conspiracy to commit such offenses. The search warrants and subpoena appear to be based upon allegations contained in a civil complaint that had been filed under seal on March 13, 1993 by an employee of the Company's SAIT operating unit. The complaint was filed in the U.S. District Court for the Southern District of California and sought damages on behalf of the U.S. Government under the Federal False Claims Act. On August 1, 1994, the Department of Justice on behalf of the U.S. Government announced its intention to intervene in the case. Based on the Company's motion, on November 8, 1994, the District Court dismissed the employee who had originally filed the complaint from the lawsuit, leaving only the U.S. Government and the Company as parties. The employee has appealed the District Court's order to the U.S. Court of Appeals for the Ninth Circuit. The Company has engaged in a series of presentations and submissions with the Department of Justice in which the Company responded to issues raised by the Department of Justice. At this stage of the proceedings, the Company is unable to assess the impact, if any, of this investigation and lawsuit on its consolidated financial position, results of operations or ability to conduct business.
The Company is involved in various other 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 or its ability to conduct business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of fiscal year 1995.
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 1995 Annual Meeting of Stockholders (the "1995 Proxy Statement").
The following is a list of the names and ages (as of April 14, 1995) 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.
PART II
ITEM 5.

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 subsidiary, Bull, Inc., which was organized in 1973 for the purpose of maintaining the Limited Market.
The Limited Market generally permits existing stockholders to sell shares of Class A Common Stock on four predetermined days each year (each a "Trade Date"). 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 fair market value of the Class A Common Stock determined pursuant to the formula and valuation process described below (the "Formula Price") to employees, consultants and directors of the Company who have been approved by the Board of Directors or the Operating Committee as being entitled to purchase up to a specified number of shares of Class A Common Stock. In addition, the trustees of the Company's Employee Stock Ownership Plan, Cash or Deferred Arrangement ("CODA"), 1993 Employee Stock Purchase Plan, 1995 Employee Stock Purchase Plan (if approved by the Company's stockholders at the 1995 Annual Meeting of Stockholders), Stock Compensation Plan, Management Stock Compensation Plan and certain retirement plans of the Company's subsidiaries 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 and its retirement plans) 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 is greater than the aggregate number of shares sought to be purchased by authorized buyers and the Company, offers to sell 500 or less shares of Class A Common Stock, or up to the first 500 shares if more than 500 shares of Class A Common Stock are offered by any seller, 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. To the extent that the aggregate number of shares sought to be purchased exceeds the aggregate number of shares offered for sale, the Company may, but is not obligated to, sell authorized but unissued shares of Class A Common Stock in the Limited Market.
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 year 1995, the Company purchased 279,658 shares in the Limited Market. The Company did not purchase shares in the Limited Market in fiscal year 1994. The Company's purchases in fiscal year 1995 accounted for 16% of the total shares purchased by all buyers in the Limited Market during that year.
During the 1995 and 1994 fiscal years, the trustees of the Company's Profit Sharing Retirement Plan II (consolidated as of January 1, 1995 with the Company's Profit Sharing Retirement Plan), Employee Stock Ownership Plan, CODA and 1993 Employee Stock Purchase Plan purchased an aggregate of 1,065,741 shares and 1,824,077 shares, respectively, in the Limited Market. These purchases accounted for approximately 61% and 81% of the total shares purchased by all buyers in the
Limited Market during fiscal years 1995 and 1994, 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 Company's employee 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. 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.
The Company received a no-action letter from the Securities and Exchange Commission (the "SEC Letter") that authorizes the Company and the Employee Stock Ownership Plan to commence on an annual basis, at the Company's discretion, a joint tender offer (a "Tender Offer") to purchase all shares of the Company's Class A Common Stock held by persons who are not directors, employees or consultants of the Company (or family members of, or trustees for, such employees, directors or consultants of the Company) as of the date the Tender Offer is commenced (the "Outside Stockholders"). Under current federal income tax laws, the Tender Offer, as structured, would allow Outside Stockholders who tender certain shares purchased by the Employee Stock Ownership Plan to defer the payment of federal income tax under Section 1042 of the Internal Revenue Code of 1986, as amended, on any capital gain derived from the sale, provided certain conditions are met.
The Company and the Employee Stock Ownership Plan have completed one Tender Offer pursuant to which the Employee Stock Ownership Plan purchased on November 20, 1992 an aggregate of 700,444 shares of Class A Common Stock from 186 Outside Stockholders. The Company has not yet determined whether it will commence a Tender Offer during calendar year 1995. There can be no assurance that a Tender Offer will be commenced in the future or, if commenced, that it will be completed. If a Tender Offer is undertaken in the future, the Company will be required to take certain actions to ensure that such Tender Offer does not negatively affect the liquidity of the Limited Market on the Trade Date upon which such Tender Offer is completed.
PRICE RANGE OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The fair market value of the Class A Common Stock is established pursuant to the valuation process described below, which uses the formula set forth below to determine the Formula Price at which the Class A Common Stock trades in the Limited Market. The Formula Price 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 Certificate of Incorporation, the price applicable to shares of Class B Common Stock is equal to five times the Formula Price.
The following formula ("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 revision 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 ("W(1)") and (ii) a fraction, the numerator of which is 5.66 multiplied by the market factor ("M" or "Market Factor"), multiplied by the earnings of the Company for the four fiscal quarters immediately preceding the price revision ("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 primary 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. The Market Factor is a numerical factor which yields a fair market value for the Class A Common Stock and the Class B Common Stock by reflecting existing securities market conditions relevant to the valuation of such stock. In establishing the Market Factor, the Board of Directors considers the performance of the general securities markets and relevant industry groups, the financial performance of the Company versus comparable public companies, general economic conditions, input from
an independent appraisal firm and other relevant factors. The Market Factor is generally reviewed quarterly by the Board of Directors in conjunction with an appraisal which is prepared by an independent appraisal firm for the committee administering the Company's qualified retirement plans (the "Committee") and which is relied upon by the Committee and the Board of Directors. The Market Factor, as determined by the Board of Directors, remains in effect until subsequently changed by the Board of Directors. The Formula Price of the Class A Common Stock, expressed as an equation, is as follows:
E 5.66MP FORMULA PRICE = --- + ------ W(1) W
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 Comon Stock at the end of the quarter immediately preceding the date on which a price revision is to occur (the "book value floor"). The 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. With the exception of this modification, the Formula has not been modified by the Board of Directors since March 23, 1984.
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 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.
The Board of Directors believes that the valuation process and Formula result in a fair market value for the Class A Common Stock within a broad range of financial criteria. 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 or Class B 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.
HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
As of March 10, 1995, there were 11,228 holders of record of Class A Common Stock and 139 holders of record of Class B Common Stock. As of such date, approximately 92% of the Class A Common Stock and approximately 44% of the Class B Common Stock were beneficially owned by employees and consultants of the Company and their respective family members.
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.

ITEM 6. SELECTED FINANCIAL DATA.
The following data has been derived from consolidated audited financial statements. The consolidated balance sheet at January 31, 1995 and 1994 and the related consolidated statements of income and of cash flows for the three years ended January 31, 1995 and notes thereto appear elsewhere in this Form 10-K Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Revenues increased 15%, 11% and 17% in 1995, 1994 and 1993, respectively, over the prior year. Revenues in 1995 from the Company's principal customer, the U.S. Government, continued to shift toward lower cost service type contracts as also occurred in 1994 from 1993. This trend reflects the increasingly competitive business environment in the Company's traditional business areas, as well as the Company's increased success in the engineering and field services market, which typically involve lower cost contracts.
The sale of Technical Services and Products to the U.S. Government as a prime contractor or subcontractor accounted for 86% of revenues in 1995, and 88% in 1994 and 1993. This decrease is attributable to growth in non-U.S. Government revenues as a result of the Company's efforts to
increase revenues from state and local governments and commercial clients in certain focused business areas. The revenue mix between the Technical Services segment and the Products segment shifted slightly to 91% and 9%, respectively, of consolidated revenues in 1995 from 92% and 8%, respectively, of consolidated revenues in 1994 and 1993.
Within the Technical Services segment, revenues are further classified between "National Security," "Environment," "Energy" and "Other Technical Services." Other Technical Services includes the health, space, transportation and commercial information technology business areas. Revenues in each of the business area classifications within the Technical Services segment increased in 1995 over 1994.
National Security revenues decreased to 46% of total revenues in 1995 from 50% in 1994 and 51% in 1993. Although National Security revenues declined as a percentage of total revenues, these revenues increased 7% in 1995, 9% in 1994 and 13% in 1993 over the prior year, in spite of declines in the overall defense market during these periods. The U.S. Government maintained funding in areas in which the Company has strong capabilities, such as research and development, training, simulation and test and evaluation. Revenues in the Environment business area decreased slightly as a percentage of total revenues to 14% in 1995 from 15% in 1994 and 1993. Energy revenues remained constant at 9% of total revenues for 1995 and 1994, down slightly from 10% in 1993. Other Technical Services revenues have increased to 22% of total revenues in 1995 from 17% in 1994 and 16% in 1993. The continued growth in Other Technical Services reflects the Company's expansion into the health, transportation and commercial information technology markets and mirrors the country's shift of priorities and resources from defense programs to civilian programs in areas such as health care and transportation. The Company expects this trend 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 or its revenues from the environment, energy, health, space, transportation and commercial information technology business areas.
Product revenues increased 22%, 21% and 28% in 1995, 1994 and 1993, respectively, over the prior year. The increases in Product revenues have primarily occurred on existing mature product lines.
Revenues are generated from the efforts of the Company's technical staff as well as the pass through of costs for materials and subcontract efforts, which primarily occur on large, multi-year contracts. At the end of 1995, the Company had 16,700 full-time employees compared to 15,400 and 14,200 at the end of 1994 and 1993, respectively. Material and subcontract ("M&S") revenues were $560 million in 1995, $458 million in 1994 and $402 million in 1993. As a percentage of total revenues, M&S revenues were 29% in 1995 and 27% in 1994 and 1993 and have increased due to the growth in the pass through of M&S costs on certain large, multi-year systems integration contracts and the growth of Product revenues. Product revenues generally have a very high percentage of M&S cost content.
The Company's business is directly related to the receipt of contract awards and contract performance. There were 333 contracts with annual revenues greater than $1 million in 1995, compared with 294 such contracts in 1994. These larger contracts represented 77% of the Company's revenues in each of these years. Of these contracts, 20 contracts had individual revenues greater than $10 million in 1995 and 1994. 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 larger contracts, the Company believes it 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.
The following table summarizes revenues by contract type for the last three years:
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 cost of revenues as a percentage of revenues (excluding interest income) was 88.2% in 1995, 88.5% in 1994 and 88.3% in 1993. This relatively constant cost of revenues percentage represents a number of offsetting effects. Trends which increased the cost of revenues percentage are faster revenue growth in M&S revenues, which have nearly all their associated costs in the cost of revenues category; faster revenue growth in lower cost service type contracts, which typically have more of their associated costs in cost of revenues and less costs in selling, general and administrative ("SG&A") expenses; and overruns during the performance of certain firm fixed-price contracts in 1995, 1994 and 1993, which resulted in losses or lower profits for such contracts. The primary trend which decreased the cost of revenues percentage is the growth in commercial revenues, which have more of their associated costs in SG&A as opposed to cost of revenues.
SG&A expenses as a percentage of revenues (excluding interest income) were 7.6%, 7.2% and 7.5% in 1995, 1994 and 1993, respectively. SG&A is comprised of general and administrative ("G&A"), bid and proposal ("B&P") and independent research and development ("IR&D") expenses. B&P costs have remained constant in relation to revenues over the past three years. The level of B&P activity and costs has historically fluctuated depending on the availability of bidding opportunities and resources. During 1995, IR&D costs increased as a percentage of revenues due to a focused effort by the Company to build core capabilities in areas which it believes are key to its future growth: distributed interactive simulation, imagery, medical, environmental and software development. G&A expenses increased 21% over 1994 and increased as a percentage of total revenues to 5.2% in 1995 from 5.0% in 1994. This relative increase was driven by the growth in revenues from commercial contracts, which have more of their associated costs in G&A, and an increase in goodwill amortization costs due to an increase in the number of business acquisitions in 1995 and 1994. 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 increased to 4.3% in 1995 from 3.8% in 1994 and 4.1% in 1993. The National Security operating profit margin was 2.8% in 1995, compared to 3.3% in 1994 and 4.3% in 1993. The lower operating profit margins in 1995 and 1994 as compared to 1993 were a result of overruns on certain firm fixed-price contracts in the National Security area. Environment operating profit margins were 4.9%, 4.5% and 4.2%, respectively, for 1995, 1994 and 1993. Energy operating profit margins increased to 5.8% in 1995 from 5.1% in 1994 and 4.2% in 1993, primarily due to higher profit margins on
contracts with commercial utilities. The operating profit margin in Other Technical Services increased to 6.3% in 1995 from 4.1% in 1994 and 3.2% in 1993. The increase in operating profit margins in Other Technical Services in 1995 and 1994 over 1993 was a result of an improvement in the performance of certain firm fixed-price contracts. The operating profit margin in the Products segment decreased to 3.9% in 1995 from 9.3% in 1994 and 4.9% in 1993. The 1995 decrease is attributable to overruns on certain firm fixed-price contracts, while the 1994 increase in profit margin was attributable to higher margins on existing product lines. In general, overall operating profit margins for the Company in 1995, 1994 and 1993 are lower than historical margins due to increased competition and overruns on certain firm fixed-price contracts.
Interest expense in 1995, 1994 and 1993 primarily relates to interest on a building mortgage, deferred compensation and borrowings outstanding under the Company's credit/term loan agreements. Although interest expense on borrowings under the Company's credit/term loan agreements decreased in 1995 from 1994 and 1993, overall interest expense increased primarily due to interest accrued on the deferred compensation plans.
The provision for income taxes as a percentage of income before income taxes was 38.5% in 1995, 40.6% in 1994 and 36.7% in 1993. The decrease in the effective rate for 1995 from 1994 was primarily related to a final settlement of certain issues related to the Company's 1986 and 1987 federal and state income tax returns. The increase in the effective rate for 1994 was primarily attributable to the increase in the federal statutory rate as a result of the Omnibus Budget Reconciliation Act of 1993, as well as a lower level of downward revisions of prior year tax estimates as a result of ongoing resolutions of certain issues relating to prior year federal and state income tax returns.
As described in the Notes to Consolidated Financial Statements, effective February 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," and Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Adoption of SFAS No. 112, which required the Company to recognize an obligation to provide postemployment benefits in accordance with previously issued standards, did not have a material effect on the Company's financial position or results of operations in 1995. Adoption of SFAS No. 115, SFAS No. 119 and SOP 93-6, which required certain disclosures in the Notes to Consolidated Financial Statements, did not have an effect on the Company's financial position or results of operations in 1995.
On February 15, 1994, the Company was served with search warrants and a subpoena for documents and records associated with the performance by the SAIT operating unit of the Company under three contracts with the Department of Defense (DOD). The search warrants and subpoena state that the U.S. Government is seeking evidence regarding the making of false statements and false claims to the DOD, as well as conspiracy to commit such offenses. The search warrants and subpoena appear to be based upon allegations contained in a civil complaint that had been filed under seal on March 13, 1993 by an employee of the Company's SAIT operating unit. The complaint was filed in the U.S. District Court for the Southern District of California and sought damages on behalf of the U.S. Government under the Federal False Claims Act. On August 1, 1994, the Department of Justice on behalf of the U.S. Government announced its intention to intervene in the case. Based on the Company's motion, on November 8, 1994, the District Court dismissed the employee who had originally filed the complaint from the lawsuit, leaving only the U.S. Government and the Company as parties. The employee has appealed the District Court's order to the U.S. Court of Appeals for the Ninth Circuit. The Company has engaged in a series of presentations and submissions with the Department of Justice in which the Company responded to issues raised by the Department of Justice. At this stage of the proceedings, the Company is unable to assess the impact, if any, of this investigation and lawsuit on its consolidated financial position, results of operations or its ability to conduct business.
The Company is involved in various other 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 or its ability to conduct business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity continue to be funds provided by operations and revolving credit/term loan agreements. At January 31, 1995 and 1994, there were no borrowings outstanding under such agreements and cash and cash equivalents and long-term investments totaled $48 million and $60 million, respectively. Cash flows generated from operating activities increased to $117 million in 1995 from $86 million and $76 million in 1994 and 1993, respectively. The Company continues to actively monitor receivables with emphasis placed on collection activities and the negotiation of more favorable payment terms. As a result, average receivable days outstanding decreased to 63 in 1995 from 64 in 1994.
Cash flows spent on investing activities increased to $120 million in 1995 compared to $47 million and $37 million in 1994 and 1993, respectively. Expenditures for the acquisition of businesses were $71 million in 1995 compared to $14 million in 1994 and $18 million in 1993. Acquisitions of businesses in 1995 were primarily made to complement the Company's capabilities in the areas of transportation, environment, health and energy. Additional acquisitions were also made in the National Security business area to improve the Company's capabilities in areas in which the Company expects continued DOD funding. The Company expects to continue to acquire businesses for these and other purposes in the future. Capital expenditures, excluding land and buildings, were $20 million in 1995 and $18 million in 1994 and 1993 and are expected to be approximately $28 million for 1996. Expenditures for land and buildings were $15 million, $9 million and $2 million in 1995, 1994 and 1993, respectively, and are expected to be approximately $7 million for 1996.
The Company used $22 million for financing activities in 1995 compared to $1 million and $24 million in 1994 and 1993, respectively. In 1995, funds were utilized primarily for common stock repurchases and retirement of outstanding debt associated with businesses acquired in 1995. The 1995 increase in utilization of funds from 1994 was primarily due to a reduction in sales of the Company's common stock. The 1994 decrease in utilization of funds from 1993 was primarily due to increased sales of the Company's common stock and decreased borrowing activity.
Subsequent to January 31, 1995, the Company increased its borrowing capacity by replacing its credit/term loan agreements with new unsecured credit agreements with three banks totaling $105 million, which allow borrowings on a revolving basis until March 31, 2000. The Company's cash flows from operations plus borrowing capacity are expected to provide sufficient funds for the Company's operations, business acquisitions, common stock repurchases, capital expenditures and future long-term debt requirements.
EFFECTS OF INFLATION
The majority 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 fixed-price and T&M type contracts typically include labor and other cost escalations in 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.
ITEM 8.

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 of this Form 10-K.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the fiscal years ended January 31, 1995 and 1994, the Company did not have a change in accountants or a disagreement with accountants required to be reported hereunder.
PART III
ITEM 10.

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 1995 Proxy Statement, which information is incorporated by reference into this Form 10-K.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
For information with respect to executive compensation, see the information set forth under the caption "Executive Compensation" in the 1995 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.
ITEM 12.

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 1995 Proxy Statement, which information is incorporated by reference into this Form 10-K.
ITEM 13.

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 captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the 1995 Proxy Statement, which information is incorporated by reference into this Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 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 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
A Report on Form 8-K was filed on November 14, 1994. Disclosure was made under Item 5 -- Other Events.
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.
(Registrant) SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
By /s/ J.R. BEYSTER
----------------------------------- J.R. Beyster CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Date: April 14, 1995
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.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1995, 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.
PRICE WATERHOUSE LLP San Diego, California March 31, 1995
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF INCOME
See accompanying notes to consolidated financial statements.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEET ASSETS
See accompanying notes to consolidated financial statements.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes to consolidated financial statements.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of Science Applications International Corporation and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Investments in affiliates and corporate joint ventures owned twenty to fifty percent are accounted for under the equity method. Other investments are generally carried at cost.
CONTRACT REVENUES
The major portion of the Company's revenues results from contract services performed for the United States Government or from subcontracts with other contractors engaged in work for the United States 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 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. 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, including indirect costs, are subject to audit and adjustment by negotiations between the Company and government representatives. The majority of the Company's indirect contract costs have been agreed upon through 1991 and substantially all of the Company's indirect contract costs have been agreed upon through 1990. Contract revenues 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 $28,203,000 total cash and cash equivalents at January 31, 1995, $24,382,000 was invested in commercial paper. The carrying amounts approximate fair value due to the short maturity of these instruments.
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 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.
DEBT SECURITIES
Effective February 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" prospectively. Adoption of SFAS No. 115 did not have an effect on the Company's financial position or results of operations in 1995. Long-term debt securities are included in other assets and consist of long-term
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) municipal bonds which have been recorded at amortized cost and classified as "held-to-maturity." As of January 31, 1995, debt securities of $20,100,000 had a fair value of $19,488,000 maturing between 1996 and 1998. Gross unrealized losses amounted to $612,000.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Goodwill represents the excess of the purchase cost over the fair value of net assets acquired in an acquisition and is amortized by a straight line method generally over five to ten years. Amortization of intangible assets amounted to $6,257,000, $3,007,000 and $1,859,000 in 1995, 1994 and 1993, respectively. Accumulated amortization was $15,987,000 and $9,730,000 at January 31, 1995 and 1994, respectively.
INCOME TAXES
Income taxes are provided utilizing the liability method under SFAS No. 109. 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.
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.
Computations of earnings per share are based on the weighted average number of shares of common stock outstanding, increased by the effect of dilutive options using the modified treasury stock method. Fully diluted earnings per share was substantially the same as primary earnings per share in 1995, 1994 and 1993.
A general public market for the Company's common stock does not exist. Periodic determinations of the fair market value of the common stock are made by the Board of Directors pursuant to a stock price formula and valuation process which includes an appraisal prepared by an independent appraisal firm. The Board of Directors reserves the right to alter the formula and valuation process.
OTHER FINANCIAL INSTRUMENTS
In October 1994, SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," was issued. The Company has adopted the disclosure requirements of SFAS No. 119 for the year ended January 31, 1995.
It is the Company's policy not to enter into derivative financial instruments for speculative purposes. During 1995, the Company entered into foreign currency forward exchange contracts to protect against currency exchange risks associated with certain firm and identifiable foreign currency commitments entered into in the ordinary course of business. At January 31, 1995, the Company had approximately $5,066,000 of foreign currency forward exchange contracts in Australian dollars and Spanish pesetas outstanding with net unrealized losses of $98,000. These contracts were executed with creditworthy banks for terms of less than eight months.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and long-term investments. 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.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentrations of credit risk with respect to receivables are limited because the Company's primary customers are various agencies of the United States Government as well as commercial customers engaged in work for the United States Government. As of January 31, 1995, there were no significant concentrations of receivables with these commercial customers.
RECLASSIFICATIONS
Certain amounts from previous years have been reclassified in the consolidated financial statements to conform to the 1995 presentation.
NOTE B -- ACQUISITIONS:
Acquisitions of certain business assets and companies have been accounted for by the purchase method of accounting. The operations of the companies and businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The excess of the purchase price over fair value of the net assets acquired has been included in intangible assets as goodwill. The aggregate effect of the purchased acquisitions was not material, therefore, pro forma financial information is not required.
NOTE C -- BUSINESS SEGMENT INFORMATION:
The Company's principal business involves the application of scientific expertise, together with computer and systems technology, to solve complex technical problems for government agencies and industrial customers. 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 been classified into two broad segments: Technical Services and Products. The Technical Services segment is further classified between the National Security, Environment, Energy and Other business areas. Other business areas include health, space, transportation and commercial information technology.
Technical services consist of applied and basic research; analysis and development of new and existing policies, concepts, systems and programs; design and development of computer software; systems engineering; systems integration; test and evaluation of new products or systems; technical operational and management support; environmental engineering; and engineering support to existing facilities, laboratories and systems.
Products include custom designed and standard hardware and software products such as data display devices, "ruggedized" personal computers, sensors and nondestructive imaging instruments. These products typically incorporate Company-developed hardware and software as well as hardware and software manufactured by others.
Segment information from previous years has been reclassified to conform to the 1995 presentation. The reclassifications had no effect on the consolidated financial position or results of operations for the years ended January 31, 1994 and 1993.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Industry segment information is as follows:
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. Identifiable assets of the respective industry segments consist of receivables, inventories and goodwill. All other assets 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 industry segments for similar reasons.
During 1995, 1994 and 1993, approximately 86%, 88% and 88%, respectively, of the Company's contract revenues were attributable to prime contracts with the United States Government or to subcontracts with other contractors engaged in work for the United States Government. Foreign operations and revenues directly attributable to foreign customers are not material.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- RECEIVABLES:
Receivables consist of the following:
Unbilled receivables at January 31, 1995 and 1994 include $13,776,000 and $16,228,000 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 a present contract, but for which formal contracts or contract modifications have not been executed. 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. The majority of the retention balance is expected to be collected beyond one year.
NOTE F -- NOTES PAYABLE:
The Company has substantially equivalent unsecured revolving credit/term loan agreements with three banks totaling $67,500,000 which allow borrowings on a revolving basis until July 1, 1996. At that time, the Company has the option to borrow under three-year term notes, payable in twelve quarterly installments. The agreements enable borrowings at various interest rates, at the Company's option, based on prime, money market, London interbank borrowing, certificate of deposit, bankers' acceptance, or other negotiated rates. Annual facility fees are 1/4 of 1% of the total commitment during the initial revolving credit term.
There were no balances outstanding under the credit/term loan agreements at January 31, 1995, 1994 and 1993. As of January 31, 1995, the entire $67,500,000 was available under the most restrictive debt covenants of the credit/term loan agreements. The maximum amounts outstanding were $12,800,000, $19,200,000 and $31,000,000 in 1995, 1994 and 1993, respectively. The average amount outstanding was $197,000, $541,000 and $6,724,000 during 1995, 1994 and 1993, respectively. The weighted average interest rate in 1995, 1994 and 1993 was 4.9%, 3.5% and 4.5%, respectively, based upon average daily balances.
NOTE G -- EMPLOYEE BENEFIT PLANS:
Effective February 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," and Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Adoption of SFAS No. 112, which required the Company to recognize an obligation to provide postemployment benefits in accordance with previously issued standards, had an immaterial effect on net income in 1995. While adoption of SOP 93-6 required certain disclosures in the Notes to Consolidated Financial Statements, it did not have an effect on the Company's financial position or results of operations in 1995.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1995, the Company merged two of its former profit sharing retirement plans into one principal Profit Sharing Retirement Plan 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 plans were $27,420,000, $20,471,000 and $19,114,000 for 1995, 1994 and 1993, respectively.
The Company has an Employee Stock Ownership Plan (the "Plan") in which eligible employees participate. Cash contributions to the Plan 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 Plan are the same as for the Profit Sharing Retirement Plan. Shares of Company common stock distributed from the Plan bear a limited put option that, if exercised, would require the Company to repurchase the shares at their current fair value. At January 31, 1995, the Plan held 15,974,000 shares of Class A common stock and 37,100 shares of Class B common stock with a combined fair value of $254,031,000. Contributions charged to income under the Plan were $10,516,000, $15,096,000, and $13,904,000 for 1995, 1994 and 1993, 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 $10,977,000, $7,673,000, and $6,608,000 were charged to income in 1995, 1994 and 1993, respectively. Effective January 1, 1995, the Company's matching contributions to employees hired after such date will be subject to the same vesting requirements as for the Profit Sharing Retirement Plan, while the Company's matching contributions for existing employees remain fully vested.
The Company has a Bonus Compensation Plan which provides for bonuses to reward outstanding employee performance. Bonuses are paid in the form of cash, fully vested shares of Class A common stock or vesting shares of Class A common stock. Awards of vesting shares of Class A common stock made prior to July 10, 1992, vest at the rate of 10%, 20%, 30% and 40% after one, two, three and four years, respectively, from the date of award. Awards of vesting shares of Class A common stock made after July 10, 1992, vest at the rate of 20%, 20%, 20% and 40% after one, two, three and four years, respectively. The amounts charged to income under this plan were $23,831,000, $20,111,000, and $19,234,000 for 1995, 1994 and 1993, respectively.
During 1995, the Company adopted the Stock Compensation Plan and the 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 amount charged to income under these plans was $160,000 for 1995.
The Company also has an Employee Stock Purchase Plan which allows eligible employees to purchase shares of the Company's Class A common stock, with the Company contributing 5% of the existing fair market value. There are no charges to income under this plan.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- INCOME TAXES:
The provision for income taxes includes the following:
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 temporary differences:
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate (35% for 1995 and 1994, and 34% for 1993) to income before income taxes follows:
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other assets include deferred income taxes of $10,906,000 and $3,606,000 at January 31, 1995 and 1994, respectively. Income taxes paid in 1995, 1994 and 1993 amounted to $35,600,000, $38,392,000, and $25,480,000, respectively. The effective rates for 1995, 1994 and 1993 have been reduced as a result of ongoing resolutions of certain issues relating to prior year federal and state income tax returns as well as a favorable settlement of 1986 and 1987 tax years.
NOTE I -- LONG-TERM LIABILITIES:
Long-term liabilities consist of the following:
In connection with the purchase of land and a building in 1991, the Company assumed a mortgage note of $12,800,000. Terms of the note include an 8.88% interest rate and monthly payments of principal and interest of $102,000 until July 1, 1997 when the remaining principal balance becomes due.
The Company maintains a Keystaff Deferral Plan 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 for interest earned on such deferred compensation. Interest is accrued based on the Moody's Seasoned Corporate Bond Rate (7.26% in 1995). Deferred balances will generally be paid upon the later of ten years of plan participation or retirement, unless participants elect an early pay-out.
The carrying amount of the Company's long-term liabilities approximates fair value. The fair value of the Company's long-term liabilities is estimated based on the current rates offered to the Company for similar debt of the same remaining maturities.
Maturities of long-term liabilities are as follows:
NOTE J -- COMMON STOCK AND OPTIONS:
The Company has options outstanding under two stock option plans, the 1992 Stock Option Plan (the 1992 Plan), which was adopted effective July 10, 1992, and the 1982 Stock Option Plan (the 1982 Plan). Under the 1992 and 1982 Plans, options are granted at prices not less than the fair market
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) value at the date of grant and for terms not greater than ten years. Options granted prior to July 10, 1992 generally become exercisable 10%, 20%, 30% and 40% after one, two, three and four years, respectively, from the date of grant. Options granted after July 10, 1992 generally become exercisable 20%, 20%, 20% and 40% after one, two, three and four years, respectively, from the date of grant. No options have been granted under the 1982 Plan after July 10, 1992, the date the 1982 Plan terminated. The Company makes no charge to income in connection with these Plans.
As of January 31, 1995, 17,633,000 shares of Class A common stock were reserved for issuance upon exercise of options which are outstanding or which may be granted. As of January 31, 1995, options for 4,014,000 shares of Class A common stock were exercisable and 5,980,000 shares of Class A common stock were available for future grants.
A summary of changes in outstanding options under the Plans during the three years ended January 31, 1995, is as follows:
The Company has agreed to make available for issuance, purchase or options approximately 1,114,000 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 to be the fair market value at the date such shares are made available or options are granted.
NOTE K -- COMMITMENTS AND CONTINGENCIES:
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 leases. Rental expenses for facilities and equipment totaled $58,538,000, $57,213,000 and $54,050,000 in 1995, 1994 and 1993, respectively.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Minimum rental commitments, primarily for facilities, under all noncancelable operating leases in effect at January 31, 1995, are payable as follows:
The Company leases a general purpose office building and has guaranteed a $12,250,000 loan on behalf of the building owner. Certain financial ratios and balances required by the guarantee have been maintained.
Other commitments at January 31, 1995 include outstanding letters of credit aggregating $11,676,000, principally related to guarantees on contracts with commercial and foreign customers, and outstanding surety bonds aggregating $86,324,000, principally related to performance and payment type bonds.
On February 15, 1994, the Company was served with search warrants and a subpoena for documents and records associated with the performance by the SAIT operating unit of the Company under three contracts with the DOD. The search warrants and subpoena state that the U.S. Government is seeking evidence regarding the making of false statements and false claims to the DOD, as well as conspiracy to commit such offenses. The search warrant and subpoena appear to be based upon allegations contained in a civil complaint that had been filed under seal on March 13, 1993 by an employee of the Company's SAIT operating unit. The complaint was filed in the U.S. District Court for the Southern District of California and sought damages on behalf of the U.S. Government under the Federal False Claims Act. On August 1, 1994, the Department of Justice on behalf of the U.S. Government announced its intention to intervene in the case. Based on the Company's motion, on November 8, 1994, the District Court dismissed the employee who had originally filed the complaint from the lawsuit, leaving only the U.S. Government and the Company as parties. The employee has appealed the District Court's order to the U.S. Court of Appeals for the Ninth Circuit. The Company has engaged in a series of presentations and submissions with the Department of Justice in which the Company responded to issues raised by the Department of Justice. At this stage of the proceedings, the Company is unable to assess the impact, if any, of this investigation and lawsuit on its consolidated financial position, results of operations or ability to conduct business.
The Company is involved in various other 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 or its ability to conduct business.
NOTE L -- SUPPLEMENTARY INCOME STATEMENT INFORMATION:
Charges to costs and expenses for depreciation and amortization of buildings, property and equipment were $21,481,000, $20,120,000 and $19,956,000 for 1995, 1994 and 1993, respectively.
The Company expensed $8,490,000, $5,689,000 and $8,238,000 of independent research and development costs during 1995, 1994 and 1993, respectively.
Total interest paid in 1995, 1994 and 1993 amounted to $1,514,000, $1,449,000 and $1,743,000 respectively.