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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, 1997 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 filing
requirements for the past 90 days.
Yes X No
----- -----
As of September 30, 1997, the number of issued and outstanding shares of Common
Stock (excluding 305,615 shares held in treasury) and Class B Common Stock were
65,857,978 and 286,882 shares, respectively. The Company declared a 2 for 1
stock split on July 24, 1997, payable in the form of a stock dividend to holders
of record as of August 14, 1997, which was distributed on August 29, 1997, and
has been reflected in the number of Common Shares outstanding.
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Keane, Inc. and Subsidiaries
TABLE OF CONTENTS
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Part I - Financial Information
<S> <C>
Consolidated Statements of Income for the three months and nine months
ended September 30, 1997 and 1996 (unaudited).......................................... 3
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 (unaudited).......................................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (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............................................................ 13
Signature Page......................................................................... 14
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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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Total revenues $169,930 $120,900 $463,006 $339,736
Salaries, wages and other direct costs 114,379 81,935 307,473 227,446
Selling, general and administrative expenses 32,042 24,570 89,457 71,848
Amortization of goodwill and other intangible
assets 3,509 3,120 10,527 9,378
Operating income 20,000 11,275 55.549 31,064
Investment and dividend income 1,181 411 2,997 1,509
Interest expense 51 127 151 340
Other expenses, net 34 155 549 444
Income before income taxes 21,096 11,404 57,846 31,789
Provision for income taxes 9,073 4,904 24,875 13,466
Net income $ 12,023 $ 6,500 $ 32,971 $ 18,323
*Net income per share $.18 $.10 $.49 $.28
*Weighted average shares outstanding 67,693 66,676 67,449 66,299
*Adjusted to reflect the Company's 2 for 1 stock split in the form of a dividend that was distributed on
August 29, 1997 to shareholders of record as of August 14, 1997.
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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<TABLE>
<CAPTION>
KEANE, INC. AND SUBSIDIARIES (IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31,
1997 1996
Assets (UNAUDITED)
<S> <C> <C>
Current:
Cash and cash equivalents $ 14,639 $ 38,837
Investments 48,188 30,242
Accounts receivable, net
Trade 144,924 94,773
Other 1,018 2,447
Prepaid expenses and other current assets 7,700 5,536
-------- --------
Total current assets 216,469 171,835
Property and equipment, net 17,223 10,658
Intangible assets, net 36,288 46,815
Other assets 8,590 5,906
-------- --------
$278,570 $235,214
======== ========
Liabilities
Current:
Accounts payable 11,959 9,825
Accrued compensation 12,925 11,036
Accrued expenses and other liabilities 11,407 5,454
Notes payable 3,046 3,191
Income taxes payable 6,514 5,677
Current capital lease obligations 203 236
-------- --------
Total current liabilities 46,054 35,419
Notes payable ----- 2,807
Long-term portion of capital lease obligations ----- 358
Stockholders' Equity
Common Stock 6,616 6,572
Class B Common Stock 29 29
Additional paid-in capital 95,558 92,647
Cumulative translation adjustment (86) (46)
Retained earnings 132,812 99,841
Less treasury stock (2,413) (2,413)
-------- --------
Total stockholders' equity 232,516 196,630
-------- --------
$278,570 $235,214
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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<CAPTION>
KEANE, INC. AND SUBSIDIARIES NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SEPTEMBER 30,
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
<S> <C> <C>
Net income $ 32,971 $ 18,323
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 15,568 14,386
Accrued interest on long term debt 148 318
Deferred income taxes (192) 150
Provision for doubtful accounts 1,544 1,600
Loss on disposal of fixed assets 67 24
Changes in assets and liabilities, net of acquisitions:
Increase in accounts receivable (49,438) (22,573)
Increase in prepaid expenses and other assets (4,657) (1,104)
Increase in income taxes payable 837 1,782
Increase (decrease) in accounts payable,
accrued expenses, and other current liabilities 8,760 (484)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,608 12,422
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (40,773) (13,023)
Sale of investments 22,828 8,141
Purchase of property and equipment (11,734) (3,189)
Proceeds from sale of assets 8 45
Payment for acquisitions ---- (289)
Proceeds from sale of business unit 400 ----
-------- --------
Net cash used for investing activities (29,271) (8,315)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under long-term debt (3,491) (2,695)
Proceeds from issuance of common stock 2,956 2,974
-------- --------
Net cash (used for) provided by financing activities (535) 279
-------- --------
Net increase (decrease) in cash and cash equivalents (24,198) 4,386
Cash and cash equivalents, beginning of period 38,837 21,913
-------- --------
Cash and cash equivalents, end of period $ 14,639 $ 26,299
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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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 1996 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 presentations.
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 24, 1997, the Company declared a 2 for 1 stock spilt in the
form of a dividend that was distributed on August 29, 1997 to
shareholders of record as of August 14, 1997. All Common shares and
per share amounts included in these financial statements are given
retroactive effect to the extent required for this stock split.
Note 2. Computation of Earnings Per Share for Quarters Ending September 30,
1997 and 1996.
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<CAPTION>
1997 1996
<S> <C> <C>
Primary
Average shares outstanding
Common 65,837 65,336
Class B Common 288 288
Net effect of dilutive options-based on the treasury
stock method using average market price
Common Stock 1,568 1,052
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Total 67,693 66,676
Net income $12,023 $ 6,500
Per share amount $.18 $.10
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KEANE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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<CAPTION>
1997 1996
<S> <C> <C>
Fully Diluted
Average Shares outstanding
Common 65,837 65,336
Class B Common 288 288
Net effect of dilutive stock options-based on the
treasury stock method using higher of average market
price or period ending price
Common Stock 1,582 1,202
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Total 67,707 66,826
Net income $ 12,023 $ 6,500
Per share amount $.18 $.10
Note 3. Intangible assets consist of the following: 9/30/97 12/31/96
Goodwill $ 20,360 $ 20,360
Noncompetition agreements 22,203 22,203
Customer-based intangibles 37,915 37,915
Software 8,089 8,089
Other 1,208 1,208
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89,775 89,775
Less accumulated amortization 53,487 42,960
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$ 36,288 $ 46,815
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</TABLE>
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KEANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This 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 Third Quarter of 1997 were $169.9 million, a
40.6% increase over the same period last year. Revenues for the first nine
months of 1997 were $463.0 million, a 36.3% increase over the same period last
year. The increase in revenues is primarily attributable to increased sales of
the Company's Application Outsourcing, Development and Resolve 2000/TM/
Compliance projects.
Salaries, wages and other direct costs for the Third Quarter of 1997 were $114.4
million, or 67.3% of revenues, compared to $81.9 million, or 67.8% of revenues,
during the same period last year. Salaries, wages and other direct costs for
the first nine months of 1997 were $307.5 million, or 66.4% of revenues,
compared to $227.4 million, or 66.9% of revenues, during the same period last
year. With the increase in the Company's strategic services in the areas of
Application Outsourcing, Development and Resolve 2000/TM/ Compliance, the
Company has increased its average billing rate by more than the increases in
related technical salary cost. For the first nine months of 1997, the Company's
average billing rate increased 8% over the comparable period last year compared
to an increase of 4% in technical salaries over the same period.
Selling, general and administrative expenses (SG&A) for the Third Quarter of
1997 were $32.0 million, or 18.9% of revenues, compared to $24.6 million, or
20.3% of revenues, for the same period last year. Year-to-date SG&A expenses
were $89.5 million, or 19.3% of revenues, compared to $71.9 million, or 21.1% 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 to an
increase in revenues that did not require a proportionate increase in costs.
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KEANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Amortization of goodwill and capitalized acquisition costs for the Third Quarter
of 1997 were $3.5 million, or 2.1% of revenues, compared to $3.1 million, or
2.6% of revenues, for the same period last year. Amortization of goodwill and
capitalized acquisition costs for the first nine months of 1997 were $10.5
million, or 2.3% of revenues, compared to $9.4 million, or 2.8% of revenues, for
the same period last year.
Interest and other related expenses for the Third Quarter of 1997 were $85,000
compared to $282,000 for the same period last year. Interest and other related
expenses for the first nine months were $700,000 compared to $784,000 for the
same period last year. The Company recognized investment income of $1,181,000
in the Third Quarter and $2,997,000 year to date compared to $411,000 and
$1,509,000, respectively, for the same period last year. The increase in
investment income is attributed to a larger investment balance compared to
last year.
The Company's pre-tax income for the Third Quarter of 1997 was $21.1 million, or
12.4% of revenues, compared to $11.4 million, or 9.4% of revenues, for the same
period last year. Pre-tax income for the first nine months of 1997 was $57.8
million, or 12.5% of revenues, compared to $31.8 million, or 9.4% of revenues,
for the same period last year.
The Company's effective tax rate for the Third Quarter of 1997 and the first
nine months of 1997 was 43.0% as compared to 43% and 42.4% for the corresponding
periods of 1996.
Net income and earnings per share for the Third Quarter of 1997 were $12.0
million and $.18 per share, respectively, compared to $6.5 million and $.10 per
share, respectively, for the same period last year. Net income and earnings per
share for the nine months ended September 30, 1997 were 33.0 million and $.49
per share, respectively, compared to $18.3 million and $.28 per share,
respectively, for the same period last year.
Liquidity and Capital Resources
- -------------------------------
The Company ended the Third Quarter of 1997 with cash, cash equivalents and
marketable securities totaling approximately $62.8 million, down from the
balance at December 31, 1996 of $69.1 million. The decrease is primarily
attributable to the increase in accounts receivable and expenditures associated
with adding and expanding facilities to support the Company's growth. The
Company's debt, including accrued interest, at the end of the Third Quarter of
1997 was $3.2 million, which consisted primarily of a non-interest bearing note
discounted at 7%, payable to NYNEX in January 1998. The Company maintains and
has available a $20 million unsecured demand line of credit split equally
between two major Boston banks.
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KEANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In February, 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which will require adoption in fiscal year 1997. This
statement specifies the computation, presentation, and disclosure requirements
of earnings per share. The Company is in the process of determining the effect
of the adoption of this statement on its consolidated financial statements and
related disclosures.
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. 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. 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, requirements, and nature 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.
The Company believes that its future success will depend in large part on its
ability to continue to attract and retain highly-skilled technical and
management personnel. The competition for such personnel is intense. There can
be no assurance that the Company will be able to continue to attract and retain
qualified personnel necessary for the development of its business.
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KEANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 Company competes for acquisition candidates with
other entities, some of whom have greater financial resources than the Company.
Increased competition for acquisition candidates may result in fewer acquisition
opportunities being made available to the Company as well as less advantageous
acquisition terms, including increased purchase prices. 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
basis 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.
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KEANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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KEANE, INC. AND SUBSIDIARIES
Part II - Other Information
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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, 1997.
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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)
November 5, 1997 /s/ John F. Keane
Date __________________________ ___________________________________
John F. Keane
President
November 5, 1997 /s/ Wallace A. Cataldo
Date __________________________ ___________________________________
Wallace A. Cataldo
Vice President, Finance
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 14,639
<SECURITIES> 0 48,188
<RECEIVABLES> 0 145,942
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 216,469
<PP&E> 0 41,892
<DEPRECIATION> 0 24,669
<TOTAL-ASSETS> 0 278,570
<CURRENT-LIABILITIES> 0 46,054
<BONDS> 0 0
0 0
0 0
<COMMON> 0 6,645
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 278,570
<SALES> 169,930 463,006
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 149,930 407,457
<OTHER-EXPENSES> 34 549
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 51 151
<INCOME-PRETAX> 21,096 57,846
<INCOME-TAX> 9,073 24,875
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,023 32,971
<EPS-PRIMARY> .18 .49
<EPS-DILUTED> .18 .49
</TABLE>
