National Center for Critical Information Processing and Storage Contract
The U.S. Department of Justice filed a complaint against us in
June 2009 relating to the solicitation and award of a task order to provide information technology support services to the National Center for Critical Information Processing and Storage (NCCIPS) run by the Naval Oceanographic Command Major Shared
Resource Center (MSRC) located at the Stennis Space Center in Mississippi. We were awarded the task order in April 2004. The complaint alleges that prior to the release of the task order solicitation, our employees inappropriately met with
government employees and obtained non-public information not provided to other potential bidders for this work, or received such information in advance of other bidders, giving us an unfair advantage in the bidding process for the task order. The
complaint alleges that the former MSRC director and deputy director took actions purposefully designed to favor us in the bidding process. In its complaint, the government seeks approximately $116 million in damages representing the aggregate amount
of all payments received by us under this task order, plus the trebling of such damages and penalties under the False Claims Act.
We have cooperated with the
government’s investigation of this matter since the government first contacted us in September 2006. We also conducted our own internal review of the allegations made by the government. Based on our internal review and discussions with the
government, we believe that the government’s claims lack merit and intend to vigorously defend ourselves against the allegations raised in the complaint. Due to the early stage of this case, the outcome is uncertain. We have recorded a
liability for an insignificant amount related to this matter as of July 31, 2009. However, there is a reasonable possibility of additional exposure to loss estimated to be up to approximately $230 million, representing the amount of the trebling of
the claim for damages minus the value received by the customer, plus penalties. As the case progresses, many factors will affect the ultimate amount of the potential loss, if we are not successful in our defense of this complaint, including the
results of discovery, the outcome of pre-trial motions, and the court’s rulings on certain legal issues, such as the applicable measure of damages. An adverse outcome could have a material adverse effect on our consolidated financial position,
results of operations and cash flows.
Firm-Fixed-Price Contract with the Greek Government
In June 2009, we initiated arbitration before the International Chamber of Commerce against the Hellenic Republic of Greece (the Customer) seeking redress for breaches of contract
by the Customer relating to a firm-fixed-price contract (the Greek contract) to provide a Command, Control, Communications, Coordination and Integration System (the System) to support the 2004 Athens Summer Olympic Games. Following System acceptance
in November 2008 pursuant to the requirements of the modified Greek contract, the Customer failed to make payment and reduce advance payment and performance bonds as required by the contract. The Customer also refused to initiate the contractually
required process for the resolution of alleged omissions and deviations. Under the terms of the Greek contract, disputes are subject to ultimate resolution by binding arbitration before a panel of three Greek arbitrators in Greece. The arbitration
complaint seeks (1) aggregate damages in excess of $99 million for payment of amounts owed and other claims and damages, (2) release of advance payment and performance bonds totaling $26 million and (3) costs and expenses associated
with the arbitration. Due to the complex nature of the legal and factual issues involved, the outcome of the arbitration is uncertain. For a description of the Greek contract, the disputes and the impact of the Greek contract on our results of
operations and financial condition see “Firm-Fixed-Price Contract with the Greek Government” under Note 10 of the notes to the unaudited condensed consolidated financial statements for the three and six months ended July 31, 2009.
Telkom South Africa
As previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed on March 30, 2009 and in our Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2009 filed on June 4, 2009, after finding that Telkom
South Africa repudiated the contract, the arbitrator is in the process of determining the damages to be recovered by Telcordia Technologies, Inc. (Telcordia), a former subsidiary of ours. Due to the scope and technical complexity of the case, the
arbitrator appointed a third-party expert to provide an independent opinion on disputed technical issues, including whether certain work performed by Telcordia was in-scope and whether the software delivered by Telcordia in December 2000 contained
certain technical features. At a hearing in April 2008, the arbitrator determined the technical issues that the independent technical expert would be tasked to analyze.
A hearing before the arbitrator was held in October 2008 in South Africa to address Telkom South Africa’s motion to amend its statement of defense and its motion to dismiss a portion of Telcordia’s damage claims for failure to
provide adequate financial documentation. The arbitrator allowed Telkom South Africa to amend its statement of defense to assert that Telcordia failed to meet its integration obligations. Telkom South Africa’s motion to dismiss was postponed
pending an on-site review of additional Telcordia documentation by Telkom South Africa’s financial expert. In November 2008, Telcordia filed an amendment to its statement of claim to address Telkom South Africa’s new integration defense.
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SAIC, INC.
A hearing before the third-party expert was held in November 2008 in South Africa. In November 2008, the third-party expert issued a report containing his findings regarding the December 2000 software release and the fair and
reasonable value of out-of-scope software features and services. A hearing before the arbitrator was held in April 2009 during which the parties were allowed to question the third-party expert regarding the findings in his November 2008 report. It
is anticipated that another hearing before the third-party expert regarding other technical issues will be held in October 2009 and that the final hearing before the arbitrator will be held in February 2010. Given the current schedule, the damage
phase of the arbitration is anticipated to be completed in the first quarter of fiscal 2011.
Pursuant to the definitive stock purchase agreement for the sale of
Telcordia, we are entitled to receive all of the proceeds, net of the tax liability incurred by Telcordia, from any judgment or settlement. Due to the complex nature of the legal and factual issues involved in the dispute, the damages that Telcordia
will ultimately be awarded in the second phase of arbitration, and therefore the amounts we will be entitled to receive, net of the tax liability incurred by Telcordia, are not presently determinable. We do not have any assets or liabilities
recorded related to this contract and the related legal proceedings as of July 31, 2009.
Nuclear Regulatory Commission
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed on March 30, 2009 and in our Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2009 filed on June 4, 2009, the U.S. Department of Justice filed a lawsuit against us in September 2004 in the U.S. District Court for the District of Columbia alleging civil
False Claims Act violations and breach of contract by us on two contracts that we had with the Nuclear Regulatory Commission (NRC). The complaint alleges that our performance of several subcontracts on separate U.S. Department of Energy (DOE)
programs, the participation of an employee of ours in an industry trade association and certain other alleged relationships created organizational conflicts of interest under the two NRC contracts. We dispute that the work performed on the DOE
programs and the alleged relationships raised by the government created organizational conflicts of interest. In July 2008, the jury found in favor of the government on the breach of contract and two False Claims Act counts. The jury awarded a
nominal amount of $78 in damages for breach of contract and $2 million in damages for the False Claims Act claims. The judge entered the judgment in October 2008, trebling the False Claims Act damages and awarding a total of $585,000 in civil
penalties. We filed post-trial motions in October 2008 challenging the judgment, and these motions are still pending. If the post-trial motions are denied, we intend to file an appeal. We have recorded a liability for the full judgment amount of $7
million for this matter as of July 31, 2009.
New York State Contract Dispute
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed on March 30, 2009 and in our Quarterly Report on Form 10-Q for
the quarterly period ended April 30, 2009 filed on June 4, 2009, as a result of a dispute over the proper interpretation of contract pricing terms, we have initiated a lawsuit in the New York State Court of Claims against a state
government customer seeking payment for certain technical services. Although the amount of the claim, based on three unpaid invoices, is only approximately $40,000, the resolution of the claim is expected to resolve the pricing interpretation
dispute and could have significant implications for the contract going forward. While we are confident that our interpretation of the pricing terms is correct, if the customer’s interpretation prevails, given estimated future tasking over the
five year term of the base contract and the two option years, we estimate that this could result in an aggregate loss on the contract of approximately $2 million to $21 million, with the lower end of the range more likely. The amount presently in
dispute based on the work performed to date is $1 million. Both parties filed motions for summary judgment, each seeking to establish that its interpretation of the contract pricing terms was correct. The judge denied both parties’ motions. The
discovery phase of the litigation is proceeding. We are unable to determine the outcome and accordingly, have not recorded a liability for this matter as of July 31, 2009.
Government Investigations and Reviews
We are routinely subject to investigations and reviews relating to
compliance with various laws and regulations, including those associated with organizational conflicts of interest, with respect to our role as a contractor to agencies and departments of the U.S. Government and in connection with performing
services in countries outside of the United States. Adverse findings in these investigations or reviews can lead to criminal, civil or administrative proceedings and we could face penalties, fines, repayments or compensatory damages. Adverse
findings could also have a material adverse effect on our business, consolidated financial position, results of operations and cash flows due to our reliance on government contracts.
Other
We are also involved in various claims and lawsuits arising in the normal conduct of our business, none of
which, in the opinion of our management, based upon current information, will likely have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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Item 1A.
Risk Factors.
Except for the updated risk factors described below, there were no
material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed on March 30, 2009.
Our business is subject to reviews, audits and cost adjustments by the U.S. Government, which, if resolved unfavorably to us, could adversely affect our profitability, cash position or growth prospects.
U.S. Government agencies, including the Defense Contract Audit Agency (DCAA) and others, routinely audit and review a contractor’s performance on
government contracts, indirect rates and pricing practices and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for
its accounting and management internal control systems, including: control environment and overall accounting system, general information technology system, budget and planning system, purchasing system, material management and accounting system,
compensation system, labor system, indirect and other direct costs system, billing system and estimating system used for pricing on government contracts. Significant audits currently underway include our control environment and overall accounting,
billing and indirect cost and other direct systems, as well as reviews of our compliance with certain Cost Accounting Standards.
Both contractors and the U.S.
Government agencies conducting these audits and reviews have recently come under increased scrutiny. For example, it was determined that the audit procedures the DCAA used in reviewing some of our systems were not in compliance with the requirements
of Generally Accepted Government Auditing Standards. As a result, in April and July 2009, the DCAA rescinded its most recent audit reports on our accounting, billing, and indirect cost systems issued in 2005 and 2006 and is currently auditing these
systems again. The current audits and reviews have become more rigorous and the standards to which we are held are being more strictly interpreted, increasing the likelihood of an audit or review resulting in an adverse outcome. During the course of
its current audits, the DCAA is closely examining and questioning several of our long established and disclosed practices that it had previously audited and accepted, increasing the uncertainty as to the ultimate conclusion that will be reached.
Government audits and reviews may conclude that our practices are not consistent with applicable laws and regulations and result in adjustments to contract costs and mandatory customer refunds. Such adjustments can be applied retroactively, which
could result in significant customer refunds.
In addition, a failure to obtain an “adequate” determination of our accounting and management systems from
the responsible U.S. Government agency could significantly and adversely affect our business, including our ability to bid on new contracts and our competitive position in the bidding process. Failure to comply with applicable contracting and
procurement laws, regulations and standards could also result in the U.S. Government imposing penalties and sanctions against us, including suspension of payments and increased government scrutiny that could delay or adversely affect our ability to
invoice and receive timely payment on contracts, perform contracts or compete for contracts with the U.S. Government.
Our indirect cost audits by the DCAA have not
been completed for fiscal 2005 and subsequent fiscal years. Although we have recorded contract revenues subsequent to fiscal 2004 based upon costs that we believe will be approved upon final audit or review, we do not know the outcome of any ongoing
or future audits or reviews and adjustments and, if future adjustments exceed our estimates, our profitability would be adversely affected.
Our business with the U.S. Government is subject to review and investigation which could adversely affect our profitability, cash position or growth prospects
.
If a review or investigation identifies improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of
contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and suspension or debarment from doing business with U.S. Government agencies. We could also suffer harm to our reputation if allegations of
impropriety are made against us, which would impair our ability to win new contract awards or receive contract renewals.
We are from time to time subject to
investigations by the U.S. Department of Defense and other U.S. Government agencies. Penalties and sanctions are not uncommon in the industry. If we incur a material penalty or administrative sanction or otherwise suffer harm to our reputation, our
profitability, cash position and future prospects could be adversely affected. More generally, increases in congressional scrutiny and investigations into business practices and into major programs supported by contractors may lead to increased
legal costs and may harm our reputation and profitability if we are among the targeted companies.
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SAIC, INC.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
Purchases of equity securities by the Company
In December 2006, our board of directors
authorized a stock repurchase program under which we could repurchase up to 40 million shares of our common stock as part of our overall strategy for capital allocation. We repurchased 18 million shares between December 2006 and March
2008. In March 2008, our board authorized the repurchase of additional shares, restoring the number of shares authorized to be repurchased under the program to 40 million shares. Stock repurchases under this program may be made on the open
market or in privately negotiated transactions with third parties. Whether repurchases are made and the timing and actual number of shares repurchased will depend on a variety of factors including price, corporate capital requirements, other market
conditions and regulatory requirements. Through July 31, 2009, we repurchased an aggregate of 48 million shares under the stock repurchase program. As of July 31, 2009, there were 10 million shares remaining authorized for
repurchase under this program.
The following table presents repurchases of our stock during the quarter ended July 31, 2009:
Period
(a)
Total Number of
Shares
(or Units)
Purchased
(1)
(b)
Average Price
Paid per Share
(or Unit)
(c)
Total Number of
Shares (or
Units) Purchased as
Part of Publicly
Announced Plans
or Programs
(2)
(d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans
or
Programs
May 1, 2009 – May 31, 2009
2,027,374
$
18.26
1,797,140
9,766,329
June 1, 2009 – June 30, 2009
385,214
18.25
—
9,766,329
July 1, 2009 – July 31, 2009
223,655
18.08
—
9,766,329
Total
2,636,243
18.24
1,797,140
(1)
Includes shares purchased as follows:
May
June
July
Under publicly announced plans or programs
1,797,140
—
—
Upon surrender by stockholders of previously owned shares in payment of the exercise price of non-qualified stock options
185,187
370,987
222,840
Upon surrender by stockholders of previously owned shares to satisfy statutory tax withholding obligations
related to vesting of stock awards
45,047
14,227
815
Total
2,027,374
385,214
223,655
(2)
Stock repurchase program under which we could repurchase up to 40 million shares of our common stock was publicly announced in December 2006. In March 2008,
our board authorized the repurchase of additional shares, restoring the number of shares authorized to be repurchased under the program to 40 million shares.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
For information required by Item 4 with respect to our annual meeting of stockholders, see the information set forth in Item 8.01 of our Current Report on Form 8-K filed with the SEC on June 29, 2009, which
information is incorporated by reference in this Quarterly Report on Form 10-Q.
Item 5.
Other Information.
The forms of stock award, stock option and performance share agreements under our 2006 Equity Incentive Plan have been revised to reflect the adoption of a
recoupment policy for certain incentive compensation, which was disclosed in our Current Report on Form 8-K filed with the SEC on June 24, 2009. The revised form agreements are filed as exhibits to this Quarterly Report on Form 10-Q.
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SAIC, INC.
Item 6.
Exhibits.
10.1
Form of Stock Award Agreement under Registrant’s 2006 Equity Incentive Plan.
10.2
Form of Nonstatutory Stock Option Agreement under Registrant’s 2006 Equity Incentive Plan.
10.3
Form of Performance Share Award Agreement under Registrant’s 2006 Equity Incentive Plan.
10.4
Employment Letter Agreement dated June 19, 2009 between Walter P. Havenstein and Science Applications International Corporation. Incorporated by reference to Exhibit 10.1 to Registrant’s Current
Report on Form 8-K as filed on June 23, 2009 with the SEC.
10.5
Stock Offer Letter dated June 19, 2009, to Walter P. Havenstein from Science Applications International Corporation. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on
Form 8-K as filed on June 23, 2009 with the SEC.
10.6
Agreement dated June 22, 2009, by and among BAE Systems, Inc., Walter P. Havenstein and SAIC, Inc. Incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K as filed on
June 23, 2009 with the SEC.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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