-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V4xA7EgrdzcDA0zhqpM1btOGWz4MITxjTivKC1eP2W6MsBpvZAp0dAqXhDFHOrV/ SeGbGVAYISpOOle1CmeHjA== 0000927016-98-004047.txt : 19981118 0000927016-98-004047.hdr.sgml : 19981118 ACCESSION NUMBER: 0000927016-98-004047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEANE INC CENTRAL INDEX KEY: 0000054883 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 042437166 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07516 FILM NUMBER: 98750577 BUSINESS ADDRESS: STREET 1: TEN CITY SQ CITY: BOSTON STATE: MA ZIP: 02129 BUSINESS PHONE: 6172419200 MAIL ADDRESS: STREET 1: TEN CITY SQ CITY: BOSTON STATE: MA ZIP: 02109 FORMER COMPANY: FORMER CONFORMED NAME: KEANE ASSOCIATES INC DATE OF NAME CHANGE: 19800826 10-Q 1 FORM 10-Q 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, 1998 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 filing requirements for the past 90 days. Yes [ X ] No [ ] As of September 30, 1998, the number of issued and outstanding shares of Common Stock (excluding 305,615 shares held in treasury) and Class B Common Stock were 70,116,474 and 286,296 shares, respectively. 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, 1998 and 1997........................... 3 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997....................................................... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997............................................. 5 Notes to Unaudited Financial Statements................................. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 10 Part II - Other Information............................................. 19 Signature Page.......................................................... 20 Exhibit Index........................................................... 21
2 KEANE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 Total revenues $280,540 $180,354 $772,056 $492,895 Salaries, wages and other direct costs 180,638 120,826 500,964 326,380 Selling, general and administrative expenses 50,225 34,785 137,614 97,597 Amortization of goodwill and other intangible 2,069 3,509 5,634 10,527 assets Merger costs 1,910 0 6,042 0 Operating income 45,698 121,802 127,844 58,391 Investment income 1,046 1,206 3,697 3,091 Interest expense 159 51 161 151 Other expenses, net 243 82 487 732 Income before income taxes 46,342 22,307 124,851 60,599 Provision for income taxes 21,065 9,545 56,283 25,962 Net income $ 25,277 $ 12,762 $ 68,568 $ 34,637 Net income per share (basic) $.36 $.18 $.98 $.50 Net income per share (diluted) $.35 $.18 $.96 $.49 Weighted average common shares outstanding (basic) 70,338 69,296 70,046 69,133 Weighted average common shares and common share 71,477 70,864 71,383 70,620 equivalents outstanding (diluted)
The accompanying notes are an integral part of the consolidated financial statements. 3 KEANE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1998 1997 (UNAUDITED) Assets Current: Cash and cash equivalents $ 42,156 $ 39,723 Short term investments 3,245 6,607 Accounts receivable, net Trade 244,630 156,036 Other 1,367 2,038 Prepaid expenses and other current assets 15,945 10,708 -------- -------- Total current assets 307,343 215,112 Long term investments 38,937 44,139 Property and equipment, net 27,908 23,613 Intangible assets, net 37,824 35,825 Other assets, net 9,307 8,916 -------- -------- $421,319 $327,605 ======== ======== Liabilities Current: Accounts payable 21,292 22,711 Accrued compensation 26,441 23,691 Accrued expenses and other liabilities 27,982 13,091 Notes payable 857 6,827 Accrued income taxes 10,973 3,945 Current capital lease obligations 901 822 -------- -------- Total current liabilities 88,446 71,087 Long-term portion of capital lease obligations 1,564 1,379 Notes payable 58 365 Stockholders' Equity Common Stock 7,043 6,935 Class B Common Stock 29 29 Additional paid-in capital 105,457 97,933 Foreign currency translation (516) (372) Retained earnings 221,651 152,662 Less treasury stock (2,413) (2,413) -------- -------- Total stockholders' equity 331,251 254,774 -------- -------- $421,319 $327,605 ======== ========
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) NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 68,568 $ 34,637 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 16,689 16,744 Accrued interest on long term debt ----- 148 Deferred income taxes (6,418) (192) Provision for doubtful accounts 3,913 1,544 (Gain) loss on disposal of fixed assets (80) (32) Changes in assets and liabilities, net of acquisitions: Increase in accounts receivable (89,316) (53,570) (Increase) decrease in prepaid expenses and other assets 1,299 (4,713) Increase in income taxes payable 7,028 293 Increase in accounts payable, accrued expenses, and other current liabilities 14,847 11,438 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 16,530 6,297 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (43,545) (40,773) Sale of investments 52,109 22,828 Purchase of property and equipment (14,118) (13,216) Proceeds from sale of assets 307 133 Payment for acquisitions (9,150) ----- Proceeds from sale of business unit ----- 400 -------- -------- NET CASH USED FOR INVESTING ACTIVITIES (14,397) (30,628) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes payable and long-term debt 150 ----- Payments under long-term debt (7,482) (3,963) Proceeds from issuance of common stock 7,632 2,956 -------- -------- NET CASH PROVIDED BY(USED FOR) FINANCING ACTIVITIES 300 (1,007) -------- -------- Net increase (decrease) in cash and cash equivalents 2,433 (25,338) Cash and cash equivalents, beginning of period 39,723 43,287 -------- -------- Cash and cash equivalents, end of period $ 42,156 $ 17,949 ======== ========
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 Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "Annual Report") 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 the three months and nine months ending September 30, 1998 and 1997. In the period ending September 30, 1998 there were 426,250 of anti-dilutive options.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 Net income $25,277 $12,762 $68,568 $34,637 Weighted average number of common 70,338 69,296 70,046 69,133 shares outstanding used in calculation of basic earnings per share Incremental shares from the assumed 1,139 1,568 1,337 1,487 exercise of dilutive stock options Weighted average number of common 71,477 70,864 71,383 70,620 shares outstanding used in calculation of diluted earnings per share Earnings per share Basic $ .36 $ .18 $ .98 $ .50 ======= ======= ======= ======= Diluted $ .35 $ .18 $ .96 $ .49 ======= ======= ======= =======
6 KEANE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 3. Intangible assets consist of the following: 9/30/98 12/31/97 Goodwill $ 23,283 $ 23,283 Noncompetition agreements 2,268 22,203 Customer-based intangibles 44,501 37,915 Software 5,618 8,089 Other 273 1,208 -------- --------- 75,943 92,698 Less accumulated amortization 38,119 56,873 -------- --------- $ 37,824 $ 35,825 ======== =========
Note 4. On August 4, 1998, the Company acquired the issued and outstanding capital stock of Icom Systems Limited ("Icom"), parent company of Icom Solutions Limited, a privately-held provider of information technology business solutions in Birmingham, England, and issued or reserved for issuance approximately 894,500 shares of Keane common stock in connection with the acquisition, 835,545 of which were issued in exchange for shares of Icom capital stock which Keane acquired at the closing of the transaction, and up to approximately 58,955 of which will be issuable upon the exercise of options to acquire shares of Keane common stock that Keane issued in exchange for certain options to acquire shares of Icom capital stock held by the Icom optionholders. The Icom transaction has been accounted for as a pooling-of-interests. Accordingly, all financial data contained herein include the accounts of Icom for all periods presented. During the quarter ended September 30, 1998, the Company incurred a $1.9 million charge to operations to reflect investment banking, legal, accounting and other professional fees associated with the Icom transaction. Revenue and net income of the combined entities for the six-month period prior to the merger and the corresponding period in the prior year are presented in the following table. Prior to the acquisition, there were no intercompany transactions between the two companies. 7 KEANE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997 Revenue Keane, Inc. $465,655 $299,795 Icom Systems Ltd. 25,861 12,746 -------- -------- Combined revenue $491,516 $312,541 ======== ======== Net income Keane, Inc. $ 41,594 $ 21,450 Icom Systems Ltd. 1,697 425 -------- -------- Combined net income $ 43,291 $ 21,875 ======== ========
On June 1, 1998, the Company completed its acquisition of Bricker & Associates, Inc. ("Bricker"), an operations improvement consulting firm, under an Agreement and Plan of Merger by and among the Company, Beta Acquisition Corp. and Bricker, whereby the Company agreed to acquire all of the outstanding capital stock and options of Bricker in exchange for approximately 2.3 million shares of Keane, Inc. common stock (the "merger"). The merger has been accounted for as a pooling- of-interests. Accordingly, all financial data contained herein include the accounts of Bricker for all periods presented. During the quarter ended June 30, 1998, the Company incurred a $4.1 million charge to operations to reflect investment banking, legal, accounting and other professional fees associated with the Bricker transaction. Revenue and net income of the combined entities for the three-month period prior to the merger and the corresponding period in the prior year are presented in the following table. Prior to the merger, there were no intercompany transactions between the two companies. 8 KEANE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 MARCH 31, 1997 Revenue Keane, Inc. $209,162 $141,110 Bricker & Associates, Inc. 5,800 3,191 -------- -------- Combined revenue $214,962 $144,301 ======== ======== Net income Keane, Inc. $ 19,080 $ 9,848 Bricker & Associates, Inc. 1,846 168 -------- -------- Combined net income $ 20,926 $ 10,016 ======== ========
On April 30, 1998, the Company purchased substantially all of the assets of Salt Lake City-based GSE Erudite Software, Inc., a subsidiary of GSE Systems, Inc. for approximately $9.8 million. The pro forma results of the combined company through March 31, 1998 are not included because the dollar amounts are immaterial. Note 5. On October 9, 1998 the Company acquired all of the outstanding capital stock of Fourth Tier, Inc., a privately-held provider of enterprise relationship management consulting services based in Los Angeles, California, in exchange for approximately 915,571 shares of Keane, Inc. common stock. The acquisition will be accounted for as a pooling of interests. 9 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 revenue for the third quarter of 1998 was $280.5 million, a 55.5% increase from $180.4 million in the third quarter of 1997. Revenue for the first nine months of 1998 were $772.1 million, a 56.6% increase from $492.9 million in the first nine months of 1997. The increase in revenue resulted primarily from strong growth in the Company's year 2000 compliance and supplemental staffing services. Year 2000 revenue for the third quarter of 1998 was $102.4 million, a 134.3% increase from $43.7 million in the third quarter of 1997. Year 2000 revenue for the first nine months of 1998 was $268.9 million, a 200.8% increase from $89.4 million for the first nine months of 1997. Application outsourcing revenue increased 38.8% to $38.6 million in the third quarter of 1998, as compared to $27.8 million in the third quarter of 1997. Application outsourcing revenue increased 58.5% to $111.4 million for the first nine months of 1998, as compared to $70.3 million for the first nine months of 1997. Helpdesk revenue increased 8.7% to $11.2 million in the third quarter of 1998, compared to $10.3 million in the same period last year. Helpdesk revenue increased 28.2% to $35.9 million in the first nine months of 1998, as compared to $28.0 million for the first nine months of 1997. Application development revenue for the third quarter of 1998 was $23.6 million, a 13.5% increase from $20.8 million in the third quarter of 1997. Application development revenue for the first nine months of 1998 was $63.6 million, a 2.2% increase from $62.2 million during the same period last year. IT consulting services revenue for the third quarter of 1998 was $14.1 million, a 62.1% increase from $8.7 million for the same period last year. IT consulting services revenue for the first nine months of 1998 was $39.6 million, a 67.1% increase from $23.7 million for the same period last year. Revenue from supplemental staffing increased 39.5% to $78.8 million for the third quarter of 1998, as compared to $56.5 million for the third quarter of 1997. Revenue from supplemental staffing increased 15.9% to $216.2 million for the first nine months of 1998, as compared to $186.5 million for the first nine months of 1997. Revenue from the Company's Healthcare Services Division increased by 24.3% to $9.2 million in the third quarter of 1998, as compared to $7.4 million for the third quarter of 1997. Revenue from the Company's Healthcare Services Division increased by 30.7% to $28.5 million in the first nine months of 1998, as compared to $21.8 million in the first nine months of 1997. All other services revenue for the 10 third quarter of 1998 totaled $2.6 million, down $2.5 million from the same period last year. All other services revenue for the first nine months of 1998 totaled $8.0 million, down $2.9 million from the same period last year. Salaries, wages and other direct costs for the third quarter of 1998 were $180.6 million, or 64.4% of revenue, compared to $120.8 million, or 67.0% of revenue, during the same period last year. Salaries, wages and other direct costs for the first nine months of 1998 were $501.0 million, or 64.9% of revenue, compared to $326.4 million, or 66.2% of revenue, during the same period last year. This decrease as a percentage of revenue was primarily attributable to an increase in higher margin strategic services business. This business comprised approximately $178.7 million, or 63.7% of the Company's revenue in the third quarter of 1998 compared to approximately $101.0 million, or 56.0% for the same period last year and approximately $469.7 million, or 60.8% of the Company's revenue for the first nine months of 1998 compared to $236.1 million, or 47.9% for the same period last year. Selling, general and administrative expenses (SG&A) for the third quarter of 1998 were $50.2 million, or 17.9% of revenue, compared to $34.8 million, or 19.3% of revenue, for the same period last year. SG&A expenses for the first nine months of 1998 were $137.6 million, or 17.8% of revenue, compared to $97.6 million, or 19.8% of revenue, for the same period last year. The decrease in SG&A as a percentage of revenue was primarily attributable to the economies of scale associated with increased revenue that did not require a proportionate increase in SG&A and to a large extent to an increase in the number of large contracts in which the Company is engaged, which allows associated overhead services to be delivered more cost effectively. Amortization of goodwill and other intangible assets for the third quarter of 1998 totaled $2.1 million, or .7% of revenue, compared to $3.5 million, or 1.9% of revenue, for the same period last year. Amortization of goodwill and capitalized acquisition costs for the first nine months of 1998 were $5.6 million, or .7% of revenue, compared to $10.5 million, or 2.1% of revenue, for the same period last year. The decrease in amortization is primarily attributable to certain intangible assets being fully amortized at year end 1997. The Company incurred one time charges of $4.1 million in the second quarter of 1998 and $1.9 million in the third quarter of 1998 for professional fees associated with the acquisitions of Bricker & Associates, Inc. and Icom Systems Limited, respectively. Both acquisitions have been accounted for as pooling of interests. The Company recognized investment income of $1.0 million in the third quarter of 1998 and $3.7 million in the first nine months of 1998, compared to $1.2 million and $3.1 million, respectively, for the comparable periods last year. 11 The Company's pre-tax income for the third quarter of 1998 was $46.3 million, or 16.5% of revenue, compared to $22.3 million, or 12.4% of revenue, for the same period last year. Pre-tax income for the first nine months of 1998 was $124.9 million, or 16.2% of revenue, compared to $60.6 million, or 12.3% of revenue, for the same period last year. The Company's effective tax rate for the third quarter of 1998 was 45.5%, compared to 42.8% for the same period last year. The Company's effective tax rate for the first nine months of 1998 was 45.1%, compared to 42.8% for the same period last year. The increase in the tax rate was primarily due to the one time merger costs associated with the acquisitions of Bricker and Icom, which are not tax deductible. Net income and earnings per share basic and diluted for the third quarter of 1998 were $25.3 million, $.36 per share and $.35 per share, respectively, compared to $12.8 million, $.18 per share and $.18 per share, respectively, for the same period last year. Net income and earnings per share basic and diluted for the nine months ended September 30, 1998 were $68.6 million, $.98 per share and $.96 per share, respectively, compared to $34.6 million, $.50 per share and $.49 per share, respectively, for the same period last year. Liquidity and Capital Resources - ------------------------------- The Company ended the third quarter of 1998 with cash, cash equivalents and marketable securities totaling approximately $84.3 million, compared to the year end balance of $90.5 million. The decrease is attributable to the increase in accounts receivable due to the Company's revenue growth and the purchase of property and equipment, offset by increases in accrued expenses and other current liabilities. The Company's debt, including accrued interest, at the end of the third quarter was $3.4 million, which consists primarily of a $1.0 million, 6% interest bearing note related to the acquisition of GSE Erudite Software on April 30, 1998 and $2.1 million associated with capitalized equipment leases of Icom Systems Limited in the United Kingdom. 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 during at least the next twelve months. Year 2000 Issues - ---------------- Overview - -------- The "Year 2000" issue is the result of computer programs being written using two digits rather than four to define the applicable year. Keane's computer equipment and software and devices 12 with embedded technology that are time sensitive may recognize "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of Keane's operations, including, among other things, a temporary inability to perform mission critical functions like billing and time reporting. As a result, software and computer systems may need to be upgraded or replaced in order to ensure that they accept four digit date codes. State of Readiness - ------------------ Company Services and Products. Keane's Information Services Division ("ISD"), - ----------------------------- which represented approximately 95% of the Company's total revenue in 1997, generally delivers services and not products to its customers. The Company believes that the services provided by its ISD professionals to its customers are provided in a Year 2000 compliant manner. Keane's Healthcare Services Division ("HSD") develops, markets and sells software products. Certain of HSD's products are not fully Year 2000 operable. HSD has advised its customer base for these products that it does not intend to offer Year 2000 compliant versions of these products and has encouraged them to migrate to new products offered by HSD that are Year 2000 ready. The Company anticipates that some customers will choose not to migrate to these products and will therefore terminate their relationship with Keane's HSD. The exact amount of anticipated lost customers has not been determined. The Company believes that the revenue lost as a result of these events will be immaterial to its overall operations. In addition to its own products, HSD markets certain third party software products. The Company is seeking assurances from the vendors of these products that all licensed software is Year 2000 compliant. The Company expects to receive substantially all of these assurances by the end of 1998. Company Systems. Keane has established a Year 2000 task force that has - --------------- completed its assessment of the Company's Information Technology-related ("IT-related") systems for the Year 2000 issue. For IT-related systems, the Company believes that most of the critical systems, including its accounting software, AS400 applications and payroll systems, are now Year 2000 compliant. However, Keane's Federal Systems subsidiary uses a software product for its accounting system that is not Year 2000 compliant. The vendor for this product has advised the Company that it plans to release a Year 2000 compliant upgrade for its product in the first quarter of 1999. The Company is in the process of replacing the billing software used by ISD because the current software product is not Year 2000 compliant. The cost to replace this software is currently estimated to be approximately $500,000 and will be capitalized by the Company. Keane believes that the new software will be operational by the end of the first quarter of 1999. Keane's Year 2000 task force is also evaluating the Company's non-IT systems, including alarm systems, sprinkler systems, elevators, fax machines and other miscellaneous systems that may contain embedded technology, for the Year 2000 Issue. Keane expects to complete its identification and assessment of Year 2000 Issues in non-IT systems in 1999 and to establish a remediation plan to address any outstanding Year 2000 Issues concerning the Company's non-IT systems. Costs to Address Year 2000 Issues - --------------------------------- Keane anticipates that it will incur direct costs to modify or replace existing systems used by Keane in the operation of its business to ensure that all systems will be operable in the Year 2000, including the costs to replace the Information Services Division billing software described above. 13 The Company believes that the total amounts spent by it to date and that it expects to spend in 1999 addressing the Year 2000 issue are not material. Risks to the Company - -------------------- In the event of a failure of some or all of the Company's IT-related and non-IT systems on January 1, 2000, the Company's operations may be substantially curtailed until the Company or its third-party suppliers develop a solution to address such system's failure. In such event, the Company may be unable to: (a) perform billing functions, (b) keep track of time performed on projects for its clients, (c) access client records, (d) communicate between field offices and headquarters, (e) operate its Internet site, (f) receive and send email or (g) prepare its financial statements for the fourth quarter of 1999 or periods thereafter. Among the services that Keane provides are assessment, planning, migration/remediation and testing services for Year 2000 compliance. Keane has devoted significant resources to services that address the Year 2000 problem and believes the market for these services will grow as the year 2000 approaches. However, the market for Year 2000 services may not continue to develop, and if such market fails to grow, or grows more slowly than anticipated, it could have a material adverse effect on Keane's business, financial condition or results of operations. Although Keane believes that the demand for its services relating to the Year 2000 problem will continue to exist after the year 2000, this demand will diminish significantly over time and will eventually disappear. Keane's services addressing the Year 2000 problem involve key aspects of its clients' computer systems. A failure in a client's system could result in a claim for substantial damages against Keane, regardless of Keane's responsibility for the failure. Keane could incur substantial costs in connection with any resulting litigation, regardless of the outcome. Contingency Plans - ----------------- As described above, the Company has identified potential vulnerabilities associated with the change of the century. The Company is devoting resources to working with providers of systems to the Company to ensure that its business is not substantially interrupted as a result of the date change. The Company currently does not have a contingency plan in the event of a particular system not being Year 2000 compliant. Such a plan will be developed if it becomes clear that the company is not going to achieve its scheduled compliance objectives. 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. 14 Fluctuations in Operating Results. Keane has experienced and expects to continue to experience fluctuations in its quarterly results. Keane's gross margins vary based on a variety of factors including employee utilization rates and the number and type of services performed by Keane during a particular period. A variety of factors influence Keane's revenue in a particular quarter, including: . general economic conditions which may influence investment decisions or cause downsizing; . the number and requirements of client engagements; . employee utilization rates; . changes in the rates Keane can charge clients for services; . acquisitions; and . other factors, many of which are beyond Keane's control. A significant portion of Keane's expenses do not vary relative to revenue. As a result, if revenue in a particular quarter does not meet expectations, Keane's operating results could be materially adversely affected, which in turn may have a material adverse impact on the market price of Keane common stock. In addition, many of Keane'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 revenue and profits. Risks Relating to Acquisitions. In the past five years, Keane has grown significantly through acquisitions. Since January 1, 1998, Keane has completed the acquisitions of Quantum Associates, Inc. d/b/a Omega Systems in Pittsburgh, Pennsylvania, GSE Erudite Systems in Salt Lake City, Utah, Bricker & Associates, Inc. in Chicago, Illinois, Icom Systems Limited in Birmingham, England and Fourth Tier, Inc. in El Segundo, California. Keane's future growth may be based in part on selected acquisitions. At any given time, Keane may be in various stages of considering such opportunities. Keane can provide no assurances that it will be able to find and identify desirable acquisition targets or that it will be successful in entering into a definitive agreement with any one target. Also, even if a definitive agreement is reached, there is no assurance that any future acquisition will be completed. Keane typically anticipates that each acquisition will bring certain benefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine if such benefits can actually be realized. Accordingly, there is a risk that an acquired company may not achieve an increase in revenue or other benefits for Keane. In addition, an acquisition may result in 15 unexpected costs and expenses. Any of these events could have a material adverse effect on Keane's business, financial condition and results of operations. The process of integrating acquired companies into Keane's existing business may also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention which Keane might otherwise devote to its existing business. Also, the process may require significant financial resources that Keane might otherwise allocate to other activities, including the ongoing development or expansion of Keane's existing operations. Finally, future acquisition could result in Keane having to incur additional debt and/or contingent liabilities. All of these possibilities might have a material adverse effect on Keane's business, financial condition and result of operations. Dependence on Personnel. Keane 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. Keane may not succeed in attracting and retaining the personnel necessary to develop its business. If Keane does not, its business, financial condition and result of operations could be materially adversely affected. Highly Competitive Market. The market for Keane's services is highly competitive. The technology for custom software services can change rapidly. 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 larger and have greater technical, financial and marketing resources and greater name recognition in the markets they serve than does Keane. In addition, clients may elect to increase their internal information systems resources to satisfy their custom software development needs. Keane believes that in order to compete successfully in the software services industry it must be able 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 larger in the healthcare market and have greater financial resources than Keane. Keane believes that 16 significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets. Keane may not be able to compete successfully against current or future competitors. In addition, competitive pressures faced by Keane may materially adversely affect its business, financial condition and results of operations. Year 2000 Compliance; Risks Associated with Provision of Year 2000 Services. Keane has reviewed its internal computer systems and has identified certain internal systems that are not year 2000 compatible (i.e., such systems use only two digits to represent the year in date data fields and, consequently, may not accurately distinguish between the 20th and 21st centuries or may not function properly at the turn of the century). Keane is in the process of correcting these systems or replacing them with year 2000 compliant systems. Keane expects to implement successfully the systems and programming changes necessary to address year 2000 issues and does not believe that the cost of such actions will have a material effect on Keane's financial condition or results of operations. There may, however, be a delay in, or increased costs associated with, the implementation of these changes. Keane's inability to implement changes could have a material adverse effect on Keane's business, financial condition or results of operations. Among the services that Keane provides are assessment, planning, migration/remediation and testing services for year 2000 compliance. Keane has devoted significant resources to services that address the year 2000 problem and believes the market for these services will grow as the year 2000 approaches. However, the market for year 2000 services may not continue to develop, and if such market fails to grow, or grows more slowly than anticipated, it could have a material adverse effect on Keane's business, financial condition or results of operations. Although Keane believes that the demand for its services relating to the year 2000 problem will continue to exist after the year 2000, this demand will diminish significantly over time and will eventually disappear. Keane's services addressing the year 2000 problem involve key aspects of its clients' computer systems. A failure in a client's system could result in a claim for substantial damages against Keane, regardless of Keane's responsibility for the failure. Keane could incur substantial costs in connection with any resulting litigation, regardless of the outcome. International Operations. In August 1998, Keane commenced operations in the United Kingdom with its acquisition of Icom. Keane's planned international operations will be subject to political and economic uncertainties, currency exchange rate fluctuations, foreign exchange restrictions, changes in taxation and other difficulties in managing operations overseas. Keane may not be successful in its international 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 17 of its financial results are not necessarily meaningful and it expects that results of operations may fluctuate from period to period in the future. 18 KEANE, INC. AND SUBSIDIARIES Part II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 2. Changes in Securities and Use of Proceeds On August 4, 1998, pursuant to a Stock Purchase Agreement by and among the Company and the stockholders of Icom Systems Limited, the Company issued 835,545 shares of its common stock (the "Shares") to the stockholders of Icom (the "Icom Stockholders") in exchange for substantially all of the outstanding share capital of Icom. The Shares were issued and sold in reliance upon Rule 903 of Regulation S under the Securities Act of 1933, as amended ("Regulation S"), to the Icom Stockholders, each of whom was deemed not to be a "U.S. person" as defined in Regulation S. No underwriters were involved with such issuance and sale of the Shares. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See exhibit index on page 21 for a list of the exhibits filed as part of this Quarterly Report on Form 10-Q, which exhibit index is incorporated herein by reference. (b) Reports on Form 8-K The Company filed the following current Reports on Form 8-K during the three month period ended September 30, 1998: Current Report on Form 8-K, dated August 4, 1998, announcing the acquisition of Icom Systems Limited. Current Report on Form 8-K, dated August 10, 1998, announcing the issue of 835,545 shares of the Company's common stock to the stockholders of Icom Systems Limited in exchange for substantially all of the outstanding share capital of Icom. No financial statements were filed with such reports. 19 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 12, 1998 /s/ John F. Keane Date -------------------------- ----------------------------------- John F. Keane President November 12, 1998 /s/ Wallace A. Cataldo Date -------------------------- ----------------------------------- Wallace A. Cataldo Vice President, Finance 20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- Restated Financial Data Schedules 27 For the three months ended March 31, 1996 Ex 27 27.1 For the three months ended June 30, 1996 Ex 27-1 27.2 For the three months ended September 30, 1996 Ex 27-2 27.3 For the year ended December 31, 1996 Ex 27-3 27.4 For the three months ended March 31, 1997 Ex 27-4 27.5 For the three months ended June 30, 1997 Ex 27-5 27.6 For the three months ended September 30, 1997 Ex 27-6 27.7 For the year ended December 31, 1997 Ex 27-7 27.8 For the three months ended March 31, 1998 Ex 27-8 27.9 For the three months ended June 30, 1998 Ex 27-9 Financial Data Schedule 27.10 For the three months ended September 30, 1998 Ex 27-10
EX-27 2 FOR THE THREE MONTHS ENDED MARCH 31, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 15,393 14,162 98,648 0 0 133,073 37,692 23,379 209,744 27,841 0 0 0 6,849 170,184 209,744 0 114,945 0 105,023 145 0 137 10,233 3,710 0 0 0 0 6,523 .10 .09
EX-27.1 3 FOR THE THREE MONTHS ENDED JUNE 30, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 0 18,155 0 17,231 0 105,016 0 0 0 0 0 145,784 0 38,658 0 24,766 0 219,790 0 29,287 0 0 0 0 0 0 0 6,905 0 178,735 0 219,790 0 0 122,163 237,108 0 0 110,376 215,399 144 289 0 0 147 285 12,112 22,345 5,061 8,772 0 0 0 0 0 0 0 0 7,050 13,573 .10 .20 .10 .20
EX-27.2 4 FOR THE THREE MONTHS ENDED SEPT. 30, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 JUL-01-1996 JAN-01-1996 SEP-30-1996 SEP-30-1996 0 31,619 0 16,214 0 108,870 0 0 0 0 0 160,551 0 39,233 0 26,101 0 231,459 0 33,779 0 0 0 0 0 0 0 6,973 0 185,768 0 231,459 0 0 130,624 367,732 0 0 118,375 333,774 152 441 0 0 165 450 12,460 34,805 5,853 14,625 0 0 0 0 0 0 0 0 6,607 20,180 .10 .29 .09 .29
EX-27.3 5 FOR THE YEAR ENDED DECEMBER 31, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 12-MOS DEC-31-1996 DEC-31-1996 OCT-01-1996 JAN-01-1996 DEC-31-1996 DEC-31-1996 0 43,219 0 30,242 0 102,564 0 0 0 0 0 154,655 0 41,862 0 28,286 0 251,343 0 44,220 0 0 0 0 0 0 0 6,917 0 194,423 0 251,343 0 0 136,769 504,500 0 0 123,791 457,565 300 741 0 0 151 601 13,464 48,269 5,939 20,563 0 0 0 0 0 0 0 0 7,525 27,705 .11 .40 .11 .40
EX-27.4 6 FOR THE THREE MONTHS ENDED MARCH 31, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 22,598 40,162 125,075 0 0 190,981 42,707 29,325 257,729 42,751 0 0 0 6,929 205,215 257,729 0 150,674 0 133,424 224 0 50 17,925 7,696 0 0 0 0 10,229 .15 .15
EX-27.5 7 FOR THE THREE MONTHS ENDED JUNE 30, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1997 DEC-31-1997 APR-01-1997 JAN-01-1997 JUN-30-1997 JUN-30-1997 0 19,380 0 45,678 0 138,716 0 0 0 0 0 207,365 0 46,782 0 31,017 0 273,865 0 46,746 0 0 0 0 0 0 0 6,949 0 218,061 0 273,865 0 0 161,867 312,541 0 0 141,960 275,384 426 650 0 0 50 100 20,367 38,292 8,721 16,417 0 0 0 0 0 0 0 0 11,646 21,875 .17 .32 .16 .31
EX-27.6 8 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JUL-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 0 19,657 0 48,188 0 152,728 0 0 0 0 0 228,400 0 51,504 0 31,649 0 296,279 0 55,962 0 0 0 0 0 0 0 6,961 0 231,671 0 296,279 0 0 180,354 492,895 0 0 159,120 434,504 82 732 0 0 51 151 22,307 60,599 9,545 25,962 0 0 0 0 0 0 0 0 12,762 34,637 .18 .50 .18 .49
EX-27.7 9 FOR THE YEAR ENDED DECEMBER 31, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 12-MOS DEC-31-1997 DEC-31-1997 OCT-01-1997 JAN-01-1997 DEC-31-1997 DEC-31-1997 0 39,723 0 6,607 0 158,074 0 0 0 0 0 215,112 0 57,106 0 33,491 0 327,605 0 71,087 0 0 0 0 0 0 0 6,964 0 247,810 0 327,605 0 0 207,607 700,499 0 0 183,269 617,773 398 1,128 0 0 21 172 25,040 85,638 10,750 36,712 0 0 0 0 0 0 0 0 14,290 48,925 .21 .71 .20 .69
EX-27.8 10 FOR THE THREE MONTHS ENDED MARCH 31, 1998
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 23,077 5,965 203,544 0 0 243,851 60,424 36,343 361,163 79,297 0 0 0 7,035 272,898 361,163 0 227,462 0 191,110 187 0 49 37,328 15,516 0 0 0 0 21,812 .31 .31
EX-27.9 11 FOR THE THREE MONTHS ENDED JUNE 30, 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 0 30,005 0 5,781 0 229,635 0 0 0 0 0 274,837 0 66,576 0 39,176 0 390,615 0 86,242 0 0 0 0 0 0 0 7,055 0 295,679 0 390,615 0 0 264,054 491,516 0 0 224,302 415,412 57 244 0 0 (47) 2 41,181 78,509 19,702 35,218 0 0 0 0 0 0 0 0 21,479 43,291 .31 .62 .30 .61
EX-27.10 12 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET/INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 0 42,156 0 3,245 0 245,997 0 0 0 0 0 307,343 0 63,460 0 35,552 0 421,319 0 88,446 0 0 0 0 0 0 0 7,072 0 324,179 0 421,319 0 0 280,540 772,056 0 0 234,842 650,254 243 487 0 0 159 161 46,342 124,851 21,065 56,283 0 0 0 0 0 0 0 0 25,277 68,568 .36 .98 .35 .96
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