<PAGE>
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, 1996 Commission File Number 1-7516
KEANE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<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
</TABLE>
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, 1996, the number of issued and outstanding shares of Common Stock
(excluding 304,881 shares held in treasury) and Class B Common Stock are
16,099,365 and 288,258 shares, respectively.
1 of 13
<PAGE>
Keane, Inc. and Subsidiaries
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<S> <C>
Consolidated Statements of Income for the three months and six months ended
June 30, 1996 and 1995 (unaudited)...................................... 3
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995
(unaudited)............................................................. 4
Consolidated Statements of Cash Flows for the six months ended June 30,
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.............................................. 12
Signature Page........................................................... 13
</TABLE>
2
<PAGE>
Keane, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Three months ended Six months ended
June 30 June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Total revenues $113,075 $94,647 $218,836 $185,099
Salaries, wages and other direct costs 75,032 61,790 145,511 120,753
Selling, general and administrative
expenses 24,120 20,573 47,278 40,241
Amortization of goodwill and other
intangible assets 3,120 3,002 6,258 5,951
Operating income 10,803 9,282 19,789 18,154
Investment income 567 355 1,098 721
Interest expense 117 164 213 328
Other expenses, net 144 44 289 81
Income before income taxes 11,109 9,429 20,385 18,466
Provision for income taxes 4,666 4,054 8,562 7,940
Net income $ 6,443 $ 5,375 $ 11,823 10,526
Net income per share $.39 $.33 $.72 $.65
Weighted average shares outstanding 16,634 16,316 16,528 16,299
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
Keane, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
<TABLE>
<CAPTION>
(In thousands)
June 30, 1996 December 31, 1995
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 14,277 $ 21,913
Investments 17,231 11,331
Accounts receivable, net
Trade 96,707 81,022
Other 2,603 1,091
Prepaid expenses and other current 5,222 4,848
assets -------- --------
Total current assets 136,040 120,205
Property and equipment, net 11,401 12,425
Intangible assets, net 53,055 59,038
Other assets 3,961 2,730
-------- --------
$204,457 $194,398
======== ========
Liabilities
Current:
Accounts payable 4,202 4,696
Accrued compensation 8,643 7,926
Accrued expenses and other liabilities 3,062 5,360
Notes payable 3,822 3,178
Income taxes payable 363 -----
Capital lease obligations 294 434
-------- --------
Total current liabilities 20,386 21,594
Notes payable 2,617 5,427
Deferred income taxes ----- 49
Long-term portion of capital lease
obligations 6 107
Stockholders' Equity
Preferred Stock ----- -----
Common Stock 1,640 1,621
Class B Common Stock 29 29
Additional paid-in capital 95,928 93,543
Cumulative translation adjustment (43) (43)
Retained earning 86,306 74,483
Less treasury stock (2,412) (2,412)
-------- --------
Total stockholders' equity 181,448 167,221
-------- --------
$204,457 $194,398
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Keane, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (In thousands)
(unaudited)
Six Months ended June 30,
Cash flows from operating activities: 1996 1995
<S> <C> <C>
Net income $ 11,823 $10,526
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 9,550 8,521
Accrued interest on long term debt 212 328
Deferred income taxes (852) (1,335)
Provision for doubtful accounts 1,276 (256)
Loss on disposal of fixed assets 25 58
Changes in assets and liabilities,
net of acquisitions:
(Increase) in accounts receivable (18,473) (3,391)
(Increase) in prepaid expenses
and other assets (804) (2,900)
Increase in income taxes payable 363 --
(Decrease) in accounts payable,
accrued expenses, and other current
liabilities (2,074) (6,622)
Net cash provided by operating 1,046 4,929
activities
Cash flows from investing activities:
Purchase of investments (10,133) ---
Sale of investments 4,233 ---
Purchase of property and equipment (2,306) (1,686)
Proceeds from sale of assets 13 58
Payment for acquisitions (274) (3,375)
-------- -------
Net cash used for investing activities (8,467) (5,003)
Cash flows from financing activities:
Payments under long term-debt (2,619) (206)
Proceeds from issuance of common stock 2,404 1,649
Net cash (used for) provided by
financing activities (215) 1,443
Net increase (decrease) in cash and
cash equivalents (7,636) 1,369
Cash and cash equivalents, beginning of period 21,913 26,288
-------- -------
Cash and cash equivalents at end of period 14,277 $27,657
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
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
reclassified 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 June 30, 1996
and 1995.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Primary
Average shares outstanding
Common 16,100 15,773
Class B Common 288 289
Net effect of dilutive options-based on the
treasury stock method using average
market price
Common Stock 246 254
Total 16,634 16,316
Net income $ 6,443 $ 5,375
Per share amount $.39 $.33
</TABLE>
6
<PAGE>
Keane, Inc. and Subsidiaries
Notes to Unaudited Financial Statements
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Fully Diluted
Average Shares outstanding
Common 16,100 15,773
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 246 259
Total 16,634 16,321
Net income $ 6,443 $ 5,375
Per share amount $.39 $.33
Note 3. Intangible assets consist of 6/30/96 12/31/95
the following:
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 36,726 30,468
-------- ---------
$ 53,055 $ 59,038
======== =========
</TABLE>
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 June 30, 1996 balance sheet. The finalization of this agreement
did not have a material impact on the Company's results of operations. There
have been no material changes in the other contingencies described in the
Company's 1995 Annual Report.
7
<PAGE>
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 revenues for the Second Quarter were $113.1 million, a 19.5%
increase over the same period last year. Revenues for the first six months of
1996 were $218.9 million, an 18.2% increase over the same period last year. The
increase in revenue was primarily due to a continued strong economy as it
relates to software services compared to last year. During the second quarter,
the Company increased sales primarily in its core supplemental staffing business
and to a larger extent in its Application Development and Help Desk business.
Salaries, wages and other direct costs for the Second Quarter were $75.0
million, or 66.4% of revenues, compared to $61.8 million, or 65.3% of revenues,
during the same period last year. Salaries, wages and other direct costs for the
first six months of 1996 were $145.5 million, or 66.5% of revenues, compared to
$120.8 million, or 65.2% 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. Demands to provide
services at reduced costs by Keane's largest customer (IBM) had the largest
impact for the Second Quarter and the first six months of 1996.
Selling, General and Administrative expenses (SG&A) for the Second Quarter were
$24.1 million, or 21.3% of revenues, compared to $20.6 million, or 21.7% of
revenues, for the same period last year. Year-to-date SG&A expenses were $47.3
million, or 21.6% of revenues, compared to $40.2 million, or 21.7% of revenues
was for the same period last year. The decrease in SG&A for the quarter and
year to date is primarily attributable to the increase in revenues that did not
require a proportionate increase in cost.
Amortization of goodwill and capitalized acquisitions costs for the Second
Quarter of 1996 totaled $3.1 million, or 2.8% of revenues, compared to $3.0
million, or 3.2% of revenues, for the same period last year. Amortization of
goodwill and capitalized acquisition costs for the
8
<PAGE>
first six months of 1996 were $6.3 million, or 2.9% of revenues, compared to
$6.0 million, or 3.2% of revenues, for the same period last year.
Interest and other related expenses for the Second Quarter were $261,000,
compared to $208,000 for the same period last year. Interest and other related
expenses for the first six months were $502,000, compared to $409,000 for the
same period last year. The Company recognized investment income of $567,000 in
the Second Quarter and $1,098,000 year to date, compared to $355,000 and
$721,000, respectively, for the same period last year. The increase in
investment income can be attributed to a larger investment balance compared to
last year.
The Company's pre-tax income for the Second Quarter was $11.1 million, or 9.8%
of revenues, compared to $9.4 million, or 10.0% of revenues, for the same period
last year. Pre-tax income year-to-date was $20.4 million, or 9.3% of revenues,
compared to $18.5 million, or 10.0% of revenues, for the same period last year.
The Company's effective tax rate for the Second Quarter and year-to-date for
1996 was 42%, as compared to 43% for the same period last year. The decrease in
the tax rate was due to an expected reduction in state income taxes.
Net Income
- ----------
Net income and earnings per share for the Second Quarter were $6.4 million and
$.39 per share, respectively, compared to $5.4 million and $.33 per share,
respectively, for the same period last year. Net income and earnings per share
for the six months ended June 30, 1996 were $11.8 million and $.72 per share,
respectively, compared to $10.5 million and $.65 per share, respectively, for
the same period last year.
Liquidity and Capital Resources
- -------------------------------
The Company ended the Second Quarter with cash, cash equivalents and marketable
securities totaling approximately $31.5 million. The Company's debt, including
accrued interest, at the end of the Second Quarter was $6.4 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.
Based on the Company's current operating plan, it believes that its cash, cash
equivalents, marketable securities, 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
9
<PAGE>
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
rate the Company is able to charge 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
depend on many factors, including the successful identification and acquisitions
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 such acquisitions
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.
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
10
<PAGE>
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 period to
period in the future.
11
<PAGE>
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 29,
1996. 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 1996. 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:
<TABLE>
<CAPTION>
BROKERS
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
John F. Keane 11,802,079 130,033
John F. Rockhart 11,801,050 131,062
Robert Shafto 11,782,919 149,193
Winston Hindle 11,801,208 130,904
</TABLE>
Proposal #2 - To approve amendments to the Company's 1992 Employee Stock
Purchase Plan increasing the number of shares available for purchase under
such plan to 637,500:
<TABLE>
<CAPTION>
BROKERS
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
11,507,090 93,074 150,050 181,898
</TABLE>
Proposal #3 - To ratify the selection of Coopers & Lybrand, L.L.P. as the
Company's independent accountants for 1996:
<TABLE>
<CAPTION>
BROKERS
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
11,777,752 16,589 137,771
</TABLE>
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 June 30, 1996.
12
<PAGE>
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 July 31, 1996 /s/ John F. Keane
-------------------------- ------------------------------------
John F. Keane
President
Date July 31, 1996 /s/ Wallace A. Cataldo
-------------------------- ------------------------------------
Wallace A. Cataldo
Vice President, Finance
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 0 14,277
<SECURITIES> 0 17,231
<RECEIVABLES> 0 99,310
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 136,040
<PP&E> 0 30,079
<DEPRECIATION> 0 18,678
<TOTAL-ASSETS> 0 204,457
<CURRENT-LIABILITIES> 0 20,386
<BONDS> 0 0
0 0
0 0
<COMMON> 0 1,669
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 204,457
<SALES> 113,075 218,836
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 102,272 199,047
<OTHER-EXPENSES> 144 289
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 117 213
<INCOME-PRETAX> 11,109 20,385
<INCOME-TAX> 4,666 8,562
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,443 11,823
<EPS-PRIMARY> .39 .72
<EPS-DILUTED> .39 .72
</TABLE>
