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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 September 30, 1995 Commission File Number 1-7516
KEANE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
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
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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
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As of September 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
15,866,977 and 288,288 shares, respectively.
1
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Keane, Inc. and Subsidiaries
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Statements of Income for the three months
and nine months ended September 30, 1995 and 1994 (unaudited) .............. 3
Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 (unaudited)........................ 4
Consolidated Statements of Cash Flows for the
nine months ended September 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
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Keane, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
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<CAPTION>
(In thousands except per share amounts)
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Total revenues $96,516 $86,641 $281,615 $258,366
Salaries, wages and other direct costs 65,458 55,935 186,211 167,701
Selling, general and administrative expenses 20,000 19,280 60,241 58,041
Amortization of goodwill and other intangible assets 3,036 2,870 8,987 8,606
Operating income 8,022 8,556 26,176 24,018
Investment and dividend income 363 --- 1,084 34
Interest expense 179 1,040 507 2,222
Other expenses, net 35 110 116 377
Income before income taxes 8,171 7,406 26,637 21,453
Provision for income taxes 3,228 3,355 11,168 9,396
Net income $4,943 $4,051 $15,469 $12,057
Net income per share $.30 $.29 $.95 $.87
Weighted average shares outstanding 16,382 13,909 16,327 13,864
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The accompany notes are an integral part of the consolidated financial
statements.
3
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Keane, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
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<CAPTION>
(In thousands)
September 30, 1995 December 31, 1994
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Assets
Current:
Cash and cash equivalents $ 22,066 $ 26,288
Accounts receivable, net
Trade 83,983 69,046
Other 1,063 994
Prepaid expenses and other current assets 6,046 3,975
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Total current assets 113,158 100,303
Property and equipment, net 12,130 11,600
Intangible assets, net (Note 3) 58,202 65,600
Other assets, net 2,785 1,499
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$186,275 $179,002
Liabilities
Current:
Accounts payable $ 3,425 $ 3,490
Accrued compensation 3,203 6,852
Accrued expenses and other liabilities 4,071 9,250
Notes payable 4,556 4,400
Current capital lease obligations 446 435
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Total current liabilities 15,701 24,427
Notes payable 7,298 6,941
Deferred federal and state income taxes 734 2,705
Long-term portion of capital lease obligations 198 542
Stockholders' Equity:
Preferred Stock -- --
Common stock 1,617 1,599
Class B common stock 29 29
Additional paid-in capital 92,419 90,019
Cumulative Translation Adjustment (5) (74)
Retained earnings 70,696 55,226
Less treasury stock (2,412) (2,412)
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Total stockholders' equity 162,344 144,387
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$186,275 $179,002
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The accompanying notes are an integral part of the consolidated financial
statements.
4
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Keane, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
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(In thousands)
Nine Months ended September 30,
1995 1994
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Cash flows from operating activities:
Net income $15,469 $12,057
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 12,977 11,994
Accrued interest on long term debt 507 454
Deferred income taxes (1,837) 618
Provision for doubtful accounts 224 --
Loss on disposal of fixed assets 89 53
Changes in assets and liabilities, net of effect from
purchase of acquisitions:
Decrease in refundable income taxes -- (965)
(Increase) in accounts receivable (14,600) (15,091)
(Increase) in prepaid expenses and other assets (2,943) (306)
Decrease in income taxes payable -- (2,780)
Decrease in accounts payable, (8,569) (11,724)
accrued expenses, and other current liabilities
Net cash (used for) provided by operating activities 1,317 (5,690)
Cash flows from investing activities:
Sale of short-term investments, net -- 4,878
Purchase of property and equipment (4,408) (3,230)
Proceeds from sale of assets 152 147
Payments for acquisitions (3,375) (46,711)
Net cash used for investing activities (7,631) (44,916)
Cash flows from financing activities:
Borrowings under long-term debt -- 120,379
Payments under long-term debt (326) (86,268)
Proceeds from issuance of common stock 2,418 1,481
Net cash provided by financing activities 2,092 35,592
Net (decrease) in cash and cash equivalents (4,222) (15,014)
Cash and cash equivalents at beginning of period 26,288 19,244
Cash and cash equivalents at end of period $22,066 $4,230
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The accompanying notes are an integral part of the consolidated financial
statements.
5
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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
Company's 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.
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 September 30,
1995 and 1994.
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<CAPTION>
1995 1994
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Primary
Average shares outstanding
Common 15,843 13,258
Class B Common 288 290
Net effect of dilutive options-based on the treasury
stock method using average market price
Common Stock 251 361
Total 16,382 13,909
Net income $4,943 $4,051
Per share amount $.30 $.29
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Keane, Inc. and Subsidiaries
Notes to Unaudited Financial Statements
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<CAPTION>
1995 1994
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Fully Diluted
Average Shares outstanding
Common 15,843 13,258
Class B Common 288 290
Net effect of dilutive stock options-based on the
treasury stock method using higher of
average market price or period ending price
Common stock 281 361
Total 16,412 13,909
Net income $4,943 $4,051
Per share amount $.30 $.29
Note 3. Intangible assets consist of the following: 9/30/95 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
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85,520 84,214
Less accumulated amortization 27,318 18,614
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$58,202 $65,600
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Note 4. During the first nine 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
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Keane, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
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The Company's revenues for the Third Quarter were $96.5 million, a 11.4%
increase over the same period last year. Revenues for the first nine months of
1995 were $281.6 million, a 9.0% increase over the same period last year. The
increase in revenue is primarily due to an improved economy of AGS Computers,
Inc. on January 4, 1994 and increased sales for the Company's Application
Outsourcing and Help Desk services.
Salaries, wages and other direct costs for the Third Quarter were $65.5 million,
or 67.8% of revenues, compared to $55.9 million, or 64.6% of revenues, during
the same period last year. Salaries, wages and other direct costs for the first
nine months of 1995 were $186.2 million, or 66.1% of revenues, compared to
$167.7 million, or 64.9% 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.
On August 10, 1995, the Company signed a two-year national contractor agreement
with International Business Machines (IBM) to provide support to IBM and its
customers. Under the agreement, which is effective as of July 29, 1995, the
Company will provide a full range of technical personnel with expertise in the
areas of programming, project management, systems analysis and design, database
management and design, program testing and debugging, technical writing,
computer operations, technical call center personnel, and engineering. All of
the Company's existing time-and-materials based business with IBM will be
covered under the terms of the agreement. The Company is one of eight who have
signed national support contracts with IBM, which previously utilized
approximately two hundred firms to provide services similar to those covered by
the agreement.
Under the terms of this new contract, rates that the Company will charge to IBM
will be lower than what was charged in the past. As a result, the Company's
margins will be lower, but anticipates in the long term that the agreement will
result in increased volume, which in turn would have a positive impact on
earnings. The Company's direct costs were also impacted by start-up and training
costs for the Microsoft Windows 95 help desk support contract.
Selling, general and administrative expenses (SG&A) for the Third Quarter were
$20.0 million, or 20.7% of revenues, compared to $19.3 million, or 22.3% of
revenues, for the same period last year. Year-to-date SG&A expenses were $60.2
million, or 21.4% of revenues, compared to $58.0 million, or 22.5% of revenues,
for the same period last year. The decrease in SG&A as a percentage of revenues
for the quarter and year to date is primarily attributable
8
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Keane, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
to an increase in revenues that did not require a proportionate increase in
costs and careful management of discretionary expenses.
Amortization of goodwill and capitalized acquisition costs for the Third Quarter
were $3.0 million, or 3.1% of revenues, compared to $2.9 million, or 3.3% of
revenues, for the same period last year. Amortization of goodwill and
capitalized acquisition costs for the first nine months of 1995 were $9.0
million, or 3.2% of revenues compared to $8.6 million, or 3.3% of revenues for
the same period last year.
Interest and other related expenses for the Third Quarter were $214,000 compared
to $1,150,000 for the same period last year. Interest and other related expenses
for the first nine months were $623,000 compared to $2,599,000 for the same
period last year. The Company recognized investment income of $363,000 in the
Third Quarter and $1,084,000 year to date. The Company currently has no
outstanding bank debt as a result of a secondary offering of common stock in the
third quarter last year.
The Company's pre-tax income for the Third Quarter was $8.2 million, or 8.5% of
revenues, compared to $7.4 million, or 8.5% of revenues, for the same period
last year. Pre-tax income year-to-date was $26.6 million, or 9.5% of revenues,
compared to $21.5 million, or 8.3% of revenues for the same period last year.
The Company's effective tax rate for the year is expected to be approximately
41.9% as compared to the 43.0% utilized through June 30, 1995. The significant
factors responsible for this decline include a reduction in state income tax and
increased tax exempt income. As a result of this decrease, the tax rate for the
third quarter was 39.5% bringing the year to date tax rate for the nine months
ending September 30, 1995 to approximately 41.9% compared to 43.8% for the same
period last year.
Net Income
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Net income and earnings per share for the Third Quarter were $4.9 million and
$.30 per share, respectively, compared to $4.1 million and $.29 per share,
respectively, for the same period last year. Net income and earnings per share
for the nine months ended September 30, 1995 were $15.5 million and $.95 per
share, respectively, compared to $12.1 million and $.87 per share, respectively,
for the same period last year.
9
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Keane, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
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The Company ended the third quarter with cash and equivalents totaling $22.1
million. The Company has two demand lines of credit equally divided with two
major Boston banks in the aggregate amount of $20 million. The Company
currently has no outstanding bank debt primarily as a result of the stock
offering completed in November, 1994. The Company believes that it will
generate sufficient cash flow from operations to meet any debt obligations and
working capital requirements.
10
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Keane, Inc. and Subsidiaries
Part II - Other Information
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Item 5. Other Information
Effective as of October 31, 1995, the Company purchased substantially
all of the assets of Source Data Systems (SDS), a privately held
developer and supplier of healthcare system applications based in Cedar
Rapids, Iowa with annual revenues of approximately $11 million. SDS,
which employees approximately 125 professional, has over 170 hospitals
clients throughout the United States.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K -- The Company filed
no reports on Form 8-K during the quarter
ended September 30, 1995.
11
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Signatures
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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 November 14, 1995 /s/ John F. Keane
--------------------------------- ----------------------------------
John F. Keane
President
Date November 14, 1995 /s/ Wallace A. Cataldo
--------------------------------- ---------------------------------
Wallace A. Cataldo
Vice President, Finance
12
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JUL-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 0 22,066
<SECURITIES> 0 0
<RECEIVABLES> 0 85,046
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 113,158
<PP&E> 0 26,772
<DEPRECIATION> 0 14,642
<TOTAL-ASSETS> 0 186,275
<CURRENT-LIABILITIES> 0 15,701
<BONDS> 0 0
<COMMON> 0 1,646
0 0
0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 186,275
<SALES> 0 0
<TOTAL-REVENUES> 96,516 281,615
<CGS> 0 0
<TOTAL-COSTS> 88,494 255,439
<OTHER-EXPENSES> 35 116
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 179 507
<INCOME-PRETAX> 8,171 26,637
<INCOME-TAX> 3,228 11,168
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<NET-INCOME> 4,943 15,469
<EPS-PRIMARY> .30 .95
<EPS-DILUTED> .30 .95
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