10-Q/A 1 0001.txt AMENDMENT #1 TO FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2000 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, 2000, the number of issued and outstanding shares of Common Stock (excluding 3,790,851 shares held in treasury) and Class B Common Stock were 68,655,250 and 284,891 shares, respectively. Part I, Item 2 of the Quarterly Report on Form 10-Q of Keane, Inc., a Massachusetts corporation (the "Company"), originally filed on November 14, 2000, is being amended and restated in its entirety by this Amendment No. 1 on Form 10-Q/A. This amendment changes information in the paragraph relating to the quarter over quarter and year over year comparison of plan revenues to accurately reflect the correct revenue numbers. No other changes are being made by this amendment. 2 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. 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 2000 was $219.7 million, a 14% decrease from $255.6 million in the third quarter of 1999, due to the anticipated and rapid decline of Y2K compliance revenue. Y2K-related revenue declined 100% to $0 million for the third quarter 2000, as compared to $40.9 million for the third quarter of 1999. The Company anticipates no such revenue in subsequent quarters. Keane's core Plan, Build, Manage revenue, excluding Y2K compliance, was down 1% sequentially from the second quarter of 2000 due to seasonal factors such as increased holidays and employee vacations. However, core Plan, Build, and Manage revenues were up 2% from the third quarter of last year, and for the first nine months of 2000. Keane's internet-related business increased to an annualized run rate of $169 million, an increase of 64% from the third quarter of 1999 and up 7% sequentially from the second quarter of this year. Internet-related business for the first nine months of 2000 was up 75% from the same period a year ago. The Company anticipates that its Internet- related revenues will continue to grow rapidly as clients seek to leverage Internet technology to reduce costs associated with business processes such as supply chain and logistics, and or to invest in B2B software applications in order to support e-markets or e-trading systems. Third quarter 2000 revenue from the Company's Plan Services was $24.8 million, down from $27.8 million in the third quarter last year. For the first nine months of the year, Plan revenues were $83.7 million, up from $82.9 million during the same period in 1999. Plan revenue is primarily comprised of business innovation consulting and IT consulting services, which assist companies in developing new strategies, plans to operationalize their strategies, as well as new business processes, organizational structures and IT infrastructures, leveraging the Internet and positioning themselves within the new digital economy. Third quarter 2000 revenue from the Company's Build Services was $82.7 million representing a 3.5% decrease from $85.6 million during third quarter of last year. Build revenues for the first nine months of 2000 were $244.0 million, down 4.3 % from $254.4 million during the first nine months of 1999. Build revenue primarily consists of implementing e-solutions, e-Customer Relationship Management systems, e-architecture and data-warehousing services, custom application development projects and licensing and implementing the Company's proprietary suite of hospital and long-term care application software products. Third quarter 2000 revenue from the Company's Manage services was $112.1 million, up 19.5% from $93.8 million during the third quarter 1999. Manage revenues for the first nine months of 2000 were $324.6 million, up 15.2% from $281.7 million during the same period last year. Manage revenue primarily consists of Application Development and Management (ADM) Outsourcing services, Call Center Outsourcing, and other activities related to managing and enhancing business applications. 3 Approximately $2.9 million of foreign exchange negatively impacted the year-to- date revenues from the Company's UK operations. Salaries, wages and other direct costs for the third quarter of 2000 were $154.0 million, or 70.1% of revenue, compared to $171.4 million, or 67.1% of revenue for the third quarter of 1999. Salaries, wages and other direct costs for the first nine months of 2000 were $463.8 million, or 70.5%, of revenue, compared to $536.1 million, or 65.3% of revenue, during the same period last year. This increase as a percentage of revenue is primarily a result of the fixed nature of these costs and the decline of revenues. Selling, General & Administrative ("SG&A") expenses for the third quarter of 2000 were $50.0 million, or 22.8% of revenue, compared to $50.5 million, or 19.8% of revenue, for the third quarter last year. However, SG&A expense was down sequentially from $52.2 million, or 23.5% of revenue for the second quarter of 2000. SG&A expenses for the first nine months of 2000 were $153.4 million, or 23.3% of revenue, versus $154.0, or 18.8% of revenue for 1999. The increase as a percentage of revenue was primarily attributable to the decrease in revenues, and continued investments by the Company in the development and marketing of its core service offerings. The decrease as a percentage of revenue on a sequential basis reflects the Company's efforts to bring SG&A costs in alignment with revenues. Amortization of goodwill and other intangible assets for the third quarter of 2000 was $3.3 million, or 1.5% of revenue, compared to $2.4 million, or 0.9% of revenue, in the third quarter of 1999. Amortization of goodwill and capitalized acquisition costs for the first nine months of 2000 were $8.9 million, or 1.4% of revenue, compared to $6.7 million, or 0.8% of revenue, for the same period last year. The increase in amortization was attributable to additional intangible assets as a result of the Company's acquisitions of Denver Management Group in July of 2000, and Care Computer Systems in September of 2000. Interest and dividend income totaled $1.8 million for the third quarter of 2000 and 1999. Interest and other expenses for the second quarter of 2000 was $0.4 million, compared to $0.5 million for the same period last year. The Company's effective tax rate for the third quarter of 2000 and 1999 was 40.5%. Net income and earnings per share for the third quarter of 2000 were $8.3 million and $0.12 per share diluted, as compared to $19.4 million and $0.27 per share diluted for the third quarter last year. However, net income was up 3.6%, sequentially from the second quarter of 2000. Net income for the first nine months of 2000 was $21.7 million or $0.31 cents per share diluted, versus $76.2 million or $1.05 earnings per share diluted during the same period of 1999. In the fourth quarter of 1999, the Company recorded a restructuring charge of $13.7 million. Of this charge, $3.8 million related to a workforce reduction of approximately 600 employees, primarily consultants. In addition, the Company performed a review of its business strategy and concluded that consolidating some of its branch offices was key to its success. As a result of this review, the Company wrote off $4.8 million of impaired assets, which included the carrying value of specific assets associated with these branch offices, and incurred charges of $3.8 million for branch closings and $1.3 million for payments to certain employees. 4 The fiscal 2000 activity against the accrued restructuring charge has proceeded as planned by management. Refer to Note 5 to the Unaudited Interim Financial Statements for a summary of this activity. Liquidity and Capital Resources ------------------------------- The Company's cash and investments at the end of the third quarter of 2000 decreased to $107.2 million as compared to a balance of $132.1 million at the close of the second quarter. This decrease was primarily attributable to the repurchase of the Company's common stock in the amount of approximately $15.5 million, as well as the purchase of Denver Management Group and Care Computer Systems during the third quarter for approximately $12.5 million and $20.0 million, respectively. During the third quarter, Keane invested $15.5 million of its cash to buy shares of its stock at prices ranging from $16.81 to $19.75. Keane repurchased 873,000 shares of stock, at an average price of $17.75 per share during the quarter. On October 26, the Company's Board of Directors increased the Company's stock repurchase authorization by an additional one million shares of common stock. This increase, when combined with the remaining 1.1 million shares available for purchase under the share authorization approved by the Company's Board of Directors on July 24, 2000 brings the Company's current authorization to 2.1 million shares. The cost associated with the purchase of the remaining 2.1 million shares should be approximately $28.0 million. The Board of Directors has approved three stock repurchase programs in the last seventeen months. On May 27, 1999 the board authorized the repurchase of up to one million shares of its common stock; on February 10, 2000, the board authorized the repurchase of up to two million shares of its common stock; and on July 26, 2000 the board authorized the repurchase of up to two million shares of its common stock. Keane has repurchased and retired, as of September 30, approximately 3.9 million shares of common stock at a cost of approximately $89 million, including 873,000 shares of common stock repurchased during the third quarter of 2000. The Company maintains and has available a $20 million unsecured demand line of credit with a major Boston bank for operations and acquisitions opportunities. Based on the Company's current operating plan, the Company believes that its cash and cash equivalents on hand, cash flows from operations, and its current available line of credit will be sufficient to meet its current capital requirements for least the next twelve months. Impact of Inflation and Changing Prices --------------------------------------- Inflationary increases in costs have not been material in recent years and, to the extent permitted by competitive pressures, are passed on to clients through increased billing rates. Rates charged by the Company are based on the cost of labor and market conditions within the industry. The Company was able to increase its billing rates over its increases in direct labor costs in 1999. This is due primarily to the Company's increase in strategic services such as business innovation consulting and e-solutions, in which the high value of services commands higher rates. 5 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. 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 does 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, 1999, Keane has completed the acquisitions of Emergent Corporation in San Mateo, California; Amherst Consulting Group, Inc, in Boston, Massachusetts; Advanced Solutions Inc. in New York, New York; Anstec, Inc. of Maclean, Virginia; First Coast Systems, Inc. of Jacksonville, Florida; Jamison/Gold, LLC, of Marina Del Ray, California and Parallax Solutions Limited, of Birmingham, England, Denver Management Group, of Denver, Colorado, and Care Computer Systems, of Seattle, Washington. 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 6 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 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 significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets. 7 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. International Operations. In August 1998, Keane commenced operations in the ------------------------ United Kingdom with its acquisition of Icom Systems Ltd, now known as Keane Limited. These operations were expanded with Keane's acquisition of Parallax Solutions Ltd. in May 1999. Keane's international operations are subject to political and economic uncertainties, currency exchange rate fluctuations, foreign exchange restrictions, and 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 of its financial results are not necessarily meaningful and it expects that results of operations may fluctuate from period to period in the future. Quantitative and Qualitative Disclosures about Market Risks. Market risks were ------------------------------------------------------------ reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. There have been no material changes in these risks since the end of the year. 8 Signatures ------------------------------------------------------------------------------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the registrant's Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. KEANE, INC. (Registrant) Date November 28, 2000 /s/ Brian T. Keane --------------------------- ----------------------------------- Brian T. Keane President and Chief Executive Officer (Principal Executive Officer) 9