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 March 31, 1996 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 Identification
incorporation or organization) 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 March 31, 1996, the number of issued and outstanding shares of Common
Stock (excluding 304,881 shares held in treasury) and Class B Common Stock are
15,957,093 and 288,258 shares, respectively.
Page 1 of 12
Keane, Inc. and Subsidiaries
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Statements of Income for the three months ended March 31, 1996
and 1995 (unaudited)........................................................ 3
Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995
(unaudited)................................................................. 4
Consolidated Statements of Cash Flows for the three months ended March 31,
1996 and 1995 (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................................................. 11
Signature Page.............................................................. 12
Page 2 of 12
Keane, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
(In thousands except per share amounts)
Three months ended March 31,
1996 1995
Total revenues $105,761 $90,452
Salaries, wages and other direct costs 70,479 58,963
Selling, general and administrative expenses 23,158 19,668
Amortization of goodwill and other intangible 3,138 2,949
assets ----- -----
Operating income 8,986 8,872
Investment income 531 366
Interest expense 96 164
Other expenses, net 145 37
--- --
Income before income taxes 9,276 9,037
Provision for income taxes 3,896 3,886
----- -----
Net income $5,380 $5,151
====== ======
Net income per share $.33 $.32
==== ====
Weighted average shares outstanding 16,421 16,283
====== ======
The accompanying notes are an integral part of the consolidated financial statements.
Page 3 of 12
Keane, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
[CAPTION]
(In thousands)
March 31, 1996 December 31, 1995
Assets
Current:
Cash and cash equivalents $12,201 $ 21,913
Investments 13,552 11,331
Accounts receivable, net
Trade 89,305 81,022
Other 3,809 1,091
Prepaid expenses and other current assets 4,789 4,848
-------- --------
Total current assets 123,656 120,205
Property and equipment, net 11,942 12,425
Intangible assets, net 56,175 59,038
Other assets, net 3,108 2,730
-------- --------
$194,881 $194,398
======== ========
Liabilities
Current:
Accounts payable $ 4,291 $ 4,696
Accrued compensation 3,310 7,926
Accrued expenses and other liabilities 3,894 5,360
Notes payable 3,800 3,178
Income taxes payable 3,151 -----
Capital lease obligations 429 434
-------- --------
Total current liabilities 18,875 21,594
Notes payable 2,522 5,427
Deferred income taxes 163 49
Long-term portion of capital lease obligations 11 107
Stockholders' Equity
Common Stock 1,626 1,621
Class B Common Stock 29 29
Additional paid-in capital 94,242 93,543
Cumulative translation adjustment (38) (43)
Retained earnings 79,863 74,483
Less treasury stock (2,412) (2,412)
-------- --------
Total stockholders' equity 173,310 167,221
-------- --------
$194,881 $194,398
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 12
[CAPTION]
Keane, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) (In thousands)
Three Months ended March 31,
Cash flows from operating activities: 1996 1995
Net Income $5,380 $5,151
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,736 4,234
Deferred income taxes 140 (652)
Provision for doubtful accounts 789 (200)
Loss on the sale of property and equipment 5 42
Accrued interest on long-term debt 95 164
Changes in assets and liabilities, net of
acquisitions:
(Increase) in accounts receivable (11,787) (2,034)
(Increase) decrease in prepaid expenses (346) (916)
and other assets
Increase (decrease) in accounts payable and (6,484) (2,571)
accrued expenses and other liabilities
Increase in income taxes payable 3,151 ---
----- ---
Net cash (used for) provided
by operating activities (4,321) 3,218
------- -----
Cash flows from Investing Activities:
Purchase of investments (4,275) ---
Sale of investments 2,054 ---
Purchase of property and equipment (1,147) (729)
Proceeds from the sale of property
and equipment 27 48
Payments for acquisitions (274) (320)
----- -----
Net cash used for investing activities (3,615) (1,001)
------- -------
Cash flows from Financing Activities:
Payments under long-term debt (2,374) ---
Principal payments under capital lease (106) (92)
obligations
Proceeds from issuance of common stock 704 666
--- ---
Net cash (used for) provided by financing
activities (1,776) 574
------ ---
Net increase (decrease) in cash (9,712) 2,791
Cash and cash equivalents at beginning of
period 1,913 26,288
------ ------
Cash and cash equivalents at end of period $12,201 $29,079
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 12
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
1995 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.
Note 2. Computation of Earnings Per Share for quarters ending March 31, 1996
and 1995.
1996 1995
Primary
Average shares outstanding
Common 15,937 15,710
Class B Common 288 289
Net effect of dilutive options-based on the
treasury stock method using average
market price
Common Stock 196 284
Total 16,421 16,283
Net income $5,380 $5,151
Per share amount $.33 $.32
Page 6 of 12
Keane, Inc. and Subsidiaries
Notes to Unaudited Financial Statements
1996 1995
Fully Diluted
Average Shares outstanding
Common 15,937 15,710
Class B Common 288 289
Net effect of dilutive stock options-based on
the treasury stock method using higher of
average market price or period ending price
Common stock 240 299
Total 16,465 16,289
Net income $5,380 $5,151
Per share amount $.33 $.32
Note 3. Intangible assets consist of the following: 3/31/96 12/31/95
Goodwill $20,360 $ 20,214
Noncompetition agreements 22,203 22,135
Customer-based intangibles 37,916 37,855
Software 8,089 8,089
Other 1,213 1,213
----- -----
89,781 89,506
Less accumulated amortization 33,606 30,468
------ ------
56,175 59,038
====== ======
Note 4 Commitments and Contingencies
On April 3, 1996, the Company finalized an agreement with IBM for the transfer
of certain customer relationships and proprietary products. In conjunction with
this agreement, IBM will reimburse the Company for resources provided, primarily
personnel, to IBM which had assumed management of certain customer projects
pending the execution of a formal agreement. These reimbursements total
approximately $2.5 million and are included in Other receivables in the
accompanying March 31, 1996 balance sheet. The finalization of this agreement
did not have a material impact on the Company's results of operations for the
quarter ended March 31, 1996. There have been no material changes in the other
contingencies described in the 1995 Annual Report.
Page 7 of 12
Keane, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Quarterly Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
Results of Operations
- ---------------------
The Company's revenue for the First Quarter of 1996 was $105.8 million, a 16.9%
increase over the First Quarter last year. The increase in revenue was
primarily attributable to an improved economy in which the demand for
professional services is strong. In addition, the Company has had significant
increases from its specialized services offerings, particularly in the areas of
Application Development, Application Outsourcing and Help Desk.
Salaries, wages and other direct costs for the First Quarter were $70.5 million,
or 66.6% of revenue, compared to the First Quarter last year of $58.9 million,
or 65.2% of revenue, for a 1.4% increase as a percentage of revenue. This
increase as a percentage of revenue is primarily due to lower rates provided to
IBM pursuant to the IBM National Agreement Keane executed on July 29, 1995,
which the Company anticipates will provide for the opportunity to increase
business with IBM. In addition, the Company's direct cost increase was due to
the fact that large clients are negotiating for volume discounts and increased
levels of service from vendors, and the Company has been agreeing to lower rates
to win new business in a competitive market.
Selling, General & Administrative ("SG&A") expenses for the First Quarter were
$23.2 million, or 21.9% of revenue, compared to $19.7 millions, or 21.7% of
revenue, for the First Quarter last year. The increase in SG&A as a percentage
of revenue was primarily attributable to the Company's investment in its
Management Information Systems. In the First Quarter, the Company installed at
each of its local offices a PC-based Client Information System and an Applicant
Tracking System. The Client Information System is intended to allow each branch
to access immediately a variety of information on each of its client accounts,
while the Applicant Tracking System is designed to increase productivity in our
recruiting and selection efforts. It is anticipated that both of these systems
will be implemented and operational before the end of the Second Quarter, and
the associated costs of these systems will be completed.
Amortization of goodwill and other intangible assets for the First Quarter was
$3.1 million, or 3.0% of revenue, compared to $2.9 million, or 3.3% of revenue
in the first quarter of 1995.
Interest and other related investment income totaled $0.5 million for the First
Quarter of 1996, compared to $0.4 million the same period last year. Interest
and other related expenses for the first Quarters each of 1995 and 1996 totaled
$0.2 million.
Pre-tax income for the First Quarter was $9.3 million, or 8.8% of revenue, up
2.6% from pre-tax income last year of $9.0 million, or 10% of revenue.
The Company's effective tax rate for the First Quarter was 42%, compared to an
effective tax rate of 43% for the same period last year. The lower effective
tax rate is a result of reductions in the Company's state income tax rate.
Page 8 of 12
Net income and earnings per share for the First Quarter of 1996 were $5.4
million and $ .33, respectively, compared to $5.2 million and $ .32 for the
First Quarter last year.
Liquidity & Capital Resources
- -----------------------------
The Company ended the First Quarter with cash equivalents and short-term
investments totaling approximately $25.8 million. The Company's debt, including
accrued interest at the end of the First Quarter was $6.3 million, which
consists primarily of a non-interest bearing note discounted at 7%, payable to
Nynex in two equal installments in January 1997 and January 1998. The Company
maintains and has available a $20 million unsecured demand line of credit split
equally between two major Boston banks. The increase in accounts receivable is
primarily due to the revenue growth experienced in the first quarter and the
implementation of a new time reporting system which caused delays in the
processing of invoices. The Company has identified the problems and has taken
the appropriate action steps.
Based on the Company's current operating plan, it believes that its cash and
cash equivalents on hand, cash flows from operations, and its current available
line of credit will be sufficient to meet its current working capital
requirements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS: The following important
factors, among others, could cause actual results to differ materially from
those indicated by forward-looking statements made in this Quarterly Report on
Form 10-Q and presented elsewhere by management from time to time.
The Company has experienced and expects to continue to experience fluctuations
in its quarterly results. A variety of factors influence the level of the
Company's revenues in a particular quarter, including general economic
conditions which may influence its clients and potential clients to invest in
their information systems or to downsize their businesses, the number and
requirements of client engagements, employee utilization rates, changes in the
rates the Company is able to charge its clients for its services, acquisitions
by the Company and other factors, many of which are beyond the Company's
control. Since a significant portion of the expenses of the Company do not vary
relative to the Company's level of revenues, if revenues in a particular quarter
do not meet expectations, operating results will be adversely affected, which
may have an adverse impact on the market price of the Company's Common Stock.
In addition, many of the Company's engagements are terminable without client
penalty. An unanticipated termination of a major project could result in an
increase in underutilized employees and a decrease in revenues and profits.
Finally, gross margins vary based on a variety of factors including employee
utilization rates and the number and type of services performed by the Company
during a particular period.
In the past five years, the Company has grown significantly through
acquisitions, and the Company's future growth may be based in part on selected
acquisitions. The Company's ability to expand successfully by acquisitions
depends on many factors, including the successful identification and acquisition
of businesses and management's ability to integrate and operate the new
businesses effectively. The anticipated benefits from any acquisition may not be
achieved unless the operations of the acquired business are successfully
combined with those of the Company in a timely manner. The integration of the
Company's acquisitions requires substantial attention from management. The
diversion of the attention of management, and any difficulties encountered in
the transition process, could have an adverse impact on Keane's revenues and
operating results. In addition, the process of integrating the various
businesses could cause the interruption of, or a loss of momentum in, the
activities of some or all of these businesses, which could have an adverse
effect on the Company's operations and financial results.
Page 9 of 12
The custom software services market is highly competitive and characterized by
continual change and improvement in technology. The market is fragmented, and
no company holds a dominant position. Consequently, Keane's competition for
client assignments and experienced personnel varies significantly from city to
city and by the type of service provided. Some of Keane's competitors are large
and have greater technical, financial and marketing resources and greater name
recognition in the markets they serve than does the Company. In addition,
clients may elect to increase their internal information systems resources to
satisfy their custom software development needs. The Company believes that the
bases for competition in the software services industry include the ability to
compete cost-effectively, develop strong client relationships, generate
recurring revenues, utilize comprehensive delivery methodologies and achieve
organizational learning by implementing standard operational processes. In the
healthcare software systems market, Keane competes with some companies that are
large in the healthcare market and have greater financial resources than Keane.
The Company believes that significant competitive factors in the healthcare
software systems market include size and demonstrated ability to provide service
to targeted healthcare markets. There can be no assurance that the Company will
continue to compete successfully with its existing competitors or will be able
to compete successfully with any new competitors.
As a result of these and other factors, the Company's past financial performance
should not be relied on as an indication of future performance. Keane believes
that period-to-period comparisons of its financial results are not necessarily
meaningful and it expects that results of operations may fluctuate from period
to period in the future.
Page 10 of 12
Keane, Inc. and Subsidiaries
Part II - Other Information
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) Reports on Form 8-K - The registrant filed no reports on
Form 8-K during the quarter ended March 31, 1996.
- --------------------------------------------------------------------------------
Page 11 of 12
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
Page 12 of 12