SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1995 COMMISSION FILE NUMBER 1-7516
KEANE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2437166
(State or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification Number)
Ten City Square, Boston, Massachusetts 02129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 241-9200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of June 30, 1995, the number of issued and outstanding shares of Common Stock
(excluding 303,414 shares held in treasury) and Class B Common Stock are
15,809,754 and 288,288 shares, respectively.
1
Keane, Inc. and Subsidiaries
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Statements of Income for the three months and six months ended June 30, 1995
and 1994 (unaudited)............................................................................... 3
Consolidated Balance Sheets as of June 30, 1995 and December 31, 1994 (unaudited).................. 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1994 (unaudited).. 5
Notes to Unaudited Financial Statements............................................................ 6
Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 8
Part II - Other Information........................................................................ 10
Signature Page..................................................................................... 12
2
KEANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
Total revenues $94,647 $85,560 $185,099 $171,725
Salaries, wages and other direct costs 61,790 55,882 120,753 111,766
Selling, general and administrative expenses 20,573 19,052 40,241 38,761
Amortization of goodwill and other intangible 3,002 2,956 5,951 5,736
assets
Operating income 9,282 7,670 18,154 15,462
Investment income 355 1 721 34
Interest expense 164 702 328 1,182
Other expenses, net 44 135 81 267
Income before income taxes 9,429 6,834 18,466 14,047
Provision for income taxes 4,054 2,795 7,940 6,041
Net income $ 5,375 $ 4,039 10,526 $ 8,006
Net income per share $.33 $.29 $.65 $.58
Weighted average shares outstanding 16,316 13,896 16,299 13,842
The accompanying notes are an integral part of the consolidated financial
statements.
3
KEANE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
JUNE 30, 1995 DECEMBER 31, 1994
Assets
Current:
Cash and cash equivalents $ 27,657 $ 26,288
Accounts receivable, net
Trade 72,657 69,046
Other 1,650 994
Prepaid expenses and other current assets 6,896 3,975
-------- --------
Total current assets 108,860 100,303
Property and equipment, net 10,953 11,600
Intangible assets, net (Note 3) 61,141 65,600
Other assets, net 2,061 1,499
-------- --------
183,015 179,002
======== ========
Liabilities
Current:
Accounts payable 2,826 3,490
Accrued compensation 6,368 6,852
Accrued expenses and other liabilities 3,464 9,250
Notes payable 4,507 4,400
Current capital lease obligations 442 435
-------- --------
Total current liabilities 17,607 24,427
Notes payable 7,169 6,941
Deferred federal and state income taxes 1,326 2,705
Long-term portion of capital lease
obligations 322 542
Stockholders' Equity:
Preferred Stock --- ---
Common Stock 1,611 1,599
Class B Common Stock 29 29
Additional paid-in capital 91,656 90,019
Foreign currency translation (45) (74)
Retained earnings 65,752 55,226
Less treasury stock (2,412) (2,412)
Total stockholders' equity 156,591 144,387
$183,015 $179,002
The accompanying notes are an integral part of the consolidated financial
statements.
4
KEANE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1995 1994
Net income $10,526 $8,006
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 8,521 8,064
Accrued interest on long term debt 328 100
Deferred income taxes (1,335) 206
Provision for doubtful accounts (256) (208)
Loss on disposal of fixed assets 58 50
Changes in assets and liabilities, net of effect from
purchase of acquisitions:
Decrease in refundable income taxes -- (810)
(Increase) in accounts receivable (3,391) (13,820)
(Increase) in prepaid expenses and other assets (2,900) (1,055)
Decrease in income taxes payable -- (2,780)
Decrease in accounts payable, (6,622) (8,033)
accrued expenses, and other current liabilities
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES 4,929 (10,280)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net -- 4,868
Purchase of property and equipment (1,686) (2,607)
Proceeds from sale of assets 58 136
Payment for acquisitions (3,375) (44,242)
NET CASH USED FOR INVESTING ACTIVITIES (5,003) (41,845)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long term debt -- 92,416
Payments under long term debt (206) (60,198)
Proceeds from issuance of common stock 1,649 943
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,443 33,161
Net increase (decrease) in cash and cash equivalents 1,369 (18,964)
Cash and cash equivalents, beginning of period 26,288 19,244
Cash and cash equivalents at end of period $27,657 $280
The accompanying notes are an integral part of the consolidated financial
statements.
5
KEANE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the accounting policies described in the
1994 Annual Report on Form 10-K and should be read in conjunction with
the disclosures therein. All financial figures are in thousands of
dollars, except per share amounts. Prior period amounts have been
restated to conform to current year presentation.
In the opinion of management, these interim financial statements
reflect all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. Interim results
are not necessarily indicative of results for the full year.
On July 28, 1994, the Company declared a 3 for 2 stock split in the
form of a dividend that was distributed on September 7, 1994 to
shareholders of record as of August 12, 1994. All Common shares and
per share amounts included in these financial statements are given
retroactive effect to the extent required for this stock split. The
1995 share figures also reflect the sale of 2.3 million additional
shares as part of a secondary stock offering completed in November
1994.
Note 2. Computation of Earnings Per Share for quarters ending June 30, 1995
and 1994.
1995 1994
Primary
Average shares outstanding
Common 15,773 13,203
Class B Common 289 291
Net effect of dilutive options-based on the
treasury
stock method using average market price
Common Stock 254 402
Total 16,316 13,896
Net income $5,375 $4,039
Per share amount $.33 $.29
6
KEANE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1995 1994
Fully Diluted
Average Shares outstanding
Common 15,773 13,203
Class B Common 289 291
Net effect of dilutive stock
options-based on the
treasury stock method using
higher of average market
price or period ending price
Common stock 259 402
Total 16,321 13,896
Net income $5,375 $4,039
Per share amount $.33 $.29
Note 3. Intangible assets consist of the following: 6/30/95 12/31/94
Goodwill $19,302 $19,302
Noncompetition agreements 22,735 21,985
Customer-based intangibles 37,640 37,464
Software 5,549 5,169
Other 294 294
-------- -------
85,520 84,214
Less accumulated amortization 24,379 18,614
-------- -------
$61,141 $65,600
Note 4. During the first six months of 1995, there have been no material
changes in the contingencies described in Footnote L, Commitments and
Contingencies, of the Company's 1994 Annual Report.
7
KEANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
---------------------
The Company's revenues for the Second Quarter were $94.6 million, a 10.6%
increase over the same period last year. Revenues for the first six months of
1995 were $185.1 million, a 7.8% increase over the same period last year. The
increase in revenue is primarily due to an improved economy over last year,
combined with the stabilization of branch offices acquired from the acquisition
of AGS. In the Company's experience, there is a 12-18 month period of
restructuring and then stabilizing the business and employees following an
acquisition.
Salaries, wages and other direct costs for the Second Quarter were $61.8
million, or 65.3% of revenue compared to $55.9 million, or 65.3% of revenues,
during the same period last year. Salaries, wages and other direct costs for the
first six months of 1995 were $120.8 million, or 65.3% of revenues, compared to
$111.8 million, or 65.1% of revenues, during the same period last year. The
Company has continued to experience increases in its direct costs as a result of
customer demands to increase services and reduce costs. The Company has
responded in many situations by reducing customer costs in exchange for
increased volumes of business. The Company has been managing its selling,
general & administrative expenses through cost reductions and increases in
revenue volume to usually offset the increases in its direct cost percentage.
Selling, general and administrative expenses (SG&A) for the Second Quarter were
$20.6 million, or 21.7% of revenues, compared to $19.1 million, or 22.3% of
revenues, for the same period last year. Year-to-date SG&A expenses are $40.2
million, or 21.7% of revenue, compared to $38.8 million, or 22.6% of revenues
for the same period last year. The decrease in SG&A for the quarter and year to
date is primarily attributable to an increase in revenues that did not require a
proportionate increase in cost through careful management of discretionary
expenses.
Amortization of goodwill and capitalized acquisition costs for the Second
Quarters of 1995 and 1994 totaled $3.0 million, respectively. Amortization of
goodwill and capitalized acquisition costs for the first six months of 1995 were
$6.0 million compared to $5.7 million for the same period last year.
Interest and other related expenses for the Second Quarter were $208,000
compared to $837,000 for the same period last year. Interest and other related
expenses for the first six months were $409,000 compared to $1,449,000 for the
same period last year. The Company recognized investment income of $355,000 in
the Second Quarter and $721,000 year to date. As a result of the successful
stock offering completed in the Fourth Quarter of last year, the Company repaid
all
8
outstanding bank debt. The shift from interest expense used to finance the AGS
acquisition to interest income earned with excess funds available from the
offering are reflected in the Second Quarter results of operations.
The Company's pre-tax income for the Second Quarter was $9.4 million, or 10.0%
of revenues (up 38%), compared to $6.8 million, or 8.0% of revenues for the same
period last year. Pre-tax income year-to-date was $18.5 million, or 10.0% of
revenues (up 31%), compared to $14.0 million, or 8.2% of revenue, for the same
period last year.
The Company's effective tax rate for both the Second Quarter of 1995 and 1994
was 43.0%.
Net Income
----------
Net income and earnings per share for the Second Quarter were $5.4 million and
$.33 per share, respectively, compared to $4.0 million and $ .29 per share,
respectively, for the same period last year. Net income and earnings per share
for the six months ended June 30, 1995 were $10.5 million and $ .65 per share,
respectively, compared to $8.0 million and $ .58 per share, respectively, for
the same period last year.
Liquidity and Capital Resources
-------------------------------
The Company has increased its cash balance by $1.4 million as of June 30, 1995
and ended the quarter with cash and equivalents totaling $27.7 million. The
Company has completed two new demand lines of credit divided with two major
Boston banks in the aggregate amount of $20 million, replacing the larger credit
agreement in place at the beginning of the year. The Company currently has no
outstanding bank debt. The Company believes that it will generate sufficient
cash flow from operations to meet its debt obligations and working capital
requirements.
9
KEANE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 31,
1995. The Stockholders approved the election of the four nominees named
below, and ratified the selection of Coopers & Lybrand, L.L.P. as the
Company's independent accountants for 1995. Set forth below is the
number of votes cast for, against or withheld, as well as the number of
abstentions and Broker non-votes as to each such matter, including a
separate tabulation with respect to each nominee for director:
Proposal #1 - To fix the number of directors at four and to elect the
following persons to serve as directors:
BROKERS
FOR AGAINST ABSTAIN NON-VOTES
John F. Keane 15,495,364 18,632
John F. Rockhart 15,495,797 18,199
Robert Shafto 15,485,456 28,540
Winston Hindle 15,485,437 28,559
Propose #2 - To ratify the selection of Coopers & Lybrand, L.L.P. as the
Company's independent accountants for 1995:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
15,482,394 14,162 17,440
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of the
Quarterly Report on Form 10-Q.
10.19 Documents relating to the Demand Lines of Credit with
Shawmut Bank, N.A. and the First National Bank of Boston
(the "Banks").
10
(a) Demand Money Market Promissory Note dated as of May
1, 1995, in the amount of $10,000,000, among the
Registrant and Shawmut Bank.
(b) Loan Agreement dated July 20, 1995, in the amount
of $10,000,000, among the Registrant and Bank of
Boston.
(b) Reports on Form 8-K - The Registrant filed no reports on
Form 8-K during the quarter ended June 30, 1995.
11
SIGNATURES
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEANE, INC.
(Registrant)
Date __________________________ ___________________________________
John F. Keane
President
Date __________________________ ___________________________________
Wallace A. Cataldo
Vice President, Finance
12