| KEANE INC ITEM 1A RISK FACTORS The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time-to-time |
| Our "e One Keane "e transformation initiative may not be successfully implemented, which could materially affect our results of operations |
| We have recently undertaken the early stages of a multi-faceted internal reorganization, which we call the "e One Keane Transformation "e |
| Our goals in implementing the One Keane Transformation include: the replacement of our current regional operations structure with an overlapping structure including regional client relationship organizations, delivery organizations based on business lines (such as applications services and business transformation services) and vertical industry expertise (including financial and health care) and global shared services for sales and human resources, aimed at lowering cost |
| We expect that the One Keane Transformation will be an ongoing process over the next 12-24 months and will touch all areas of Keane, requiring significant internal resources, including significant attention from our management |
| If we are unable to successfully implement the One Keane Transformation, or a successful implementation that does not achieve our stated objectives, it could result in loss of employee morale, an inability to lower our delivery costs and compete in the global market, and could materially affect our results of operations |
| Our quarterly operating results have varied, and are likely to continue to vary significantly |
| This may result in volatility in the market price of our common stock |
| We have experienced and expect to continue to experience fluctuations in our quarterly results |
| Our gross margins vary based on a variety of factors including employee utilization rates and the number and type of services performed during a particular period |
| A variety of factors influence our 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 we can charge clients for services; • acquisitions; and • other factors, many of which are beyond our control |
| A significant portion of our expenses does not vary relative to revenue |
| As a result, if revenue in a particular quarter does not meet expectations, our operating results could be materially adversely affected, which in turn may have a material adverse impact on the market price of our common stock |
| In addition, many of our 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 |
| We continue to position ourselves to achieve increasing percentages of revenues and growth through outsourcing |
| If we are successful in obtaining new outsourcing contracts, we may experience increased pressure on our overall margins during the early stages of these contracts |
| This could result in higher concentrations of revenues and contributions to income from a smaller number of larger clients on customized outsourcing solutions |
| If we were to receive a higher concentration of our revenues from a smaller number of clients, our revenues could decrease significantly if one or more of these clients decreased their spending with us |
| Outsourcing contracts are generally long-term contracts that require additional staffing in the initial phases of the contract period, which often results in lower gross margins at the beginning of these contracts |
| If our clients are not satisfied with our services, we may have exposure to liabilities, which could adversely affect our profitability and financial condition as well as our ability to compete for future work |
| If we fail to meet our contractual obligations, we could be subject to legal liability, which could 11 _________________________________________________________________ adversely affect our business, operating results and financial condition |
| The provisions we typically include in our contracts that are designed to limit our exposure to legal claims relating to our services and the applications we develop may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions |
| In addition, although we maintain professional liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities |
| Moreover, as a consulting firm, we depend to a large extent on our relationships with our clients and our reputation for high-quality services to retain and attract clients and employees |
| As a result, claims made against our work may damage our reputation, which in turn, could impact our ability to compete for new work and negatively impact our revenue and profitability |
| The termination of a contract by a significant client could reduce our revenue and profitability or adversely affect our financial condition |
| Our five largest clients, excluding the Federal Government, accounted for approximately 19dtta6prca of our revenue for the year ended December 31, 2005, although no individual client accounted for more than 5dtta4prca of our total |
| The various agencies of the Federal Government represent our largest client, accounting for approximately 9dtta8prca of the total revenue for the year ended December 31, 2005 |
| We strive to develop long-term relationships with our clients |
| Most individual client assignments are from three to twelve months; however, many of our client relationships have continued for many years |
| Although they may be subject to penalty provisions, clients may generally cancel a contract at any time |
| Under many contracts, clients may reduce their use of our services under such contract without penalty |
| In addition, contracts with the Federal Government contain provisions and are subject to laws and regulations that provide the Federal Government with rights and remedies not typically found in commercial contracts |
| Among other things, the Federal Government, as well as other public sector clients, may terminate contracts with short notice, for convenience and may cancel multi-year contracts if funds become unavailable |
| When contracts are terminated, our revenue may decline and if we are unable to eliminate associated costs in a timely manner, our profitability may decline |
| For the year ended December 31, 2005, approximately 18dtta7prca of our revenue was from public sector clients, including US Federal, state, and local governments and agencies |
| Often government spending programs are dependent upon the budgetary capability to support such programs |
| Most states must operate under a balanced budget |
| As a result of such budget and deficit considerations, our existing and future revenues and profitability could be adversely affected by reduced government IT spending |
| Our engagement with Melbourne, Victoria Transport Ticketing Authority, or Victoria TTA contract, exposes us to a number of different risks inherent in such long-term, large-scale, fixed-fee projects |
| We have been awarded a contract to perform services in relation to the development, operation and maintenance of a public transport ticketing system for the state of Victoria, Australia |
| This engagement will require significant management attention and financial resources, and could adversely affect our results of operations in a number of ways |
| These include: • initial costs could potentially result in lower operating margins for the project in the beginning stages; • difficulties and costs of staffing and managing complex projects and operations in a new geographic market place; • dependence on subcontractors and potential subcontractor non-performance; • at certain times, the TTA may terminate the Victoria TTA contract for convenience, subject to certain termination fees and for events of default, subject to Kamcoapstas right to cure; • complexities in interpreting and delivering the broad range of functional and technical requirements required under the project contract; 12 _________________________________________________________________ • difficulties in working with multiple parties in defining these functional and technical requirements and achieving acceptance of deliverables; • project delays caused by reasons beyond our control; • fluctuations in foreign currency exchange rates; • the additional liability we have undertaken both to guarantee performance of our subsidiary under the contract and the entrance into performance and security bonds under our credit facility |
| Unfavorable government audits could require us to refund payments we have received, to forego anticipated revenue, and could subject us to penalties and sanctions |
| The government agencies we contract with generally have the authority to audit and review our contracts with them |
| As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations, and standards |
| If the audit agency determines that we have improperly received reimbursement, we would be required to refund any such amount |
| If a government audit uncovers improper or illegal activities by us or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines, and suspension or disqualification from doing business with the government |
| Any such unfavorable determination could adversely impact our ability to bid for new work |
| We have pursued, and intend to continue to pursue, strategic acquisitions |
| Failure to successfully integrate acquired businesses or assets may adversely affect our financial performance |
| In recent years, we have grown significantly through acquisitions |
| From January 1, 1999 through December 31, 2005, we completed 17 acquisitions |
| The aggregate merger and consideration costs of these acquisitions totaled approximately dlra429dtta2 million |
| Our future growth may be based in part on selected acquisitions |
| At any given time, we may be in various stages of considering acquisition opportunities |
| We may not be able to find and identify desirable acquisition targets or be successful in entering into a definitive agreement with any one target |
| In addition, even if we reach a definitive agreement with a target, we may not be able to complete any future acquisition |
| We typically anticipate that each acquisition will bring benefits, such as an increase in revenue |
| Prior to completing an acquisition, however, it is difficult to determine if these benefits will be realized |
| Accordingly, there is a risk that an acquired company may not achieve an increase in revenue or other benefits for us |
| In addition, an acquisition may result in unexpected costs, expenses, and liabilities |
| Any of these events could have a material adverse effect on our business, financial condition, and results of operations |
| We have recorded a significant amount of goodwill and other intangible assets resulting from our acquisitions |
| We review our goodwill and identifiable assets for impairment in accordance with SFAS Nodtta 142 ( "e SFAS 142 "e ), "e Goodwill and Other Intangible Assets, "e and SFAS Nodtta 144 ( "e SFAS 144 "e ), "e Accounting for the Impairment or Disposal of Long-Lived Assets |
| If the estimated future cash flows of the reporting units related to the underlying assets are not sufficient to support the carrying value of the associated underlying assets, we may be required to record impairment charges related to goodwill and other intangible assets |
| Any material loss resulting from an impairment charge could have a material adverse effect on our results of operations |
| As of December 31, 2005, our goodwill totaled dlra314dtta5 million, customer lists totaled dlra41dtta1 million, and other intangibles assets totaled dlra6dtta2 million |
| The process of integrating acquired companies into our existing business might also result in unforeseen difficulties |
| Unforeseen operating difficulties may absorb significant management attention, which we may otherwise devote to our existing business |
| In addition, the process may require significant financial resources that we might otherwise allocate to other activities, including the ongoing development or expansion of our existing operations |
| 13 _________________________________________________________________ Finally, future acquisitions could result in our having to incur additional debt and/or contingent liabilities |
| We may also issue equity securities in connection with acquisitions, which could have a dilutive effect on our earnings per share |
| Any of these possibilities could have a material adverse effect on our business, financial condition, and result of operations |
| We face significant competition for our services, and our failure to remain competitive could limit our ability to maintain existing clients or attract new clients |
| The market for our 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, our competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided |
| Some of our competitors are larger and have greater technical, financial, and marketing resources and greater name recognition in the markets they serve than we do |
| In addition, clients may elect to increase their internal information systems resources to satisfy their custom software development and integration needs |
| In the healthcare software systems market, we compete with some companies that are larger in the healthcare market and have greater financial resources than we do |
| We believe that significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets |
| We may not be able to compete successfully against current or future competitors |
| In addition, competitive pressures may materially adversely affect our business, financial condition, and results of operations |
| We conduct business in the UK, Canada, India, and Australia, which exposes us to a number of difficulties inherent in international activities |
| As a result of our acquisition of a controlling interest in Keane Worldzen in October 2003 and the acquisition of SignalTree Solutions in March 2002, we now have four software development facilities in India |
| As of December 31, 2005, we had approximately 2cmam298 technical professionals in the region, including Keane Worldzen |
| India is currently experiencing conflicts with Pakistan over the disputed territory of Kashmir as well as clashes between different religious groups within the country |
| These conflicts, in addition to other unpredictable developments in the political, economic, and social conditions in India, could eliminate or reduce the availability of these development and professional services |
| If access to these services were to be unexpectedly eliminated or significantly reduced, our ability to meet development objectives important to our strategy to add offshore delivery capabilities to the services we provide would be hindered, and our business could be harmed |
| If we fail to manage our geographically-dispersed organization, we may fail to meet or exceed our financial objectives and our revenues may decline |
| We perform development activities in the US, Canada, India, and Australia, and have offices throughout the US, UK, Canada, India, and Australia |
| This geographic dispersion requires us to devote substantial management resources that locally based competitors do not need to devote to their operations |
| Our operations in the UK, Canada, India, and Australia are subject to currency exchange rate fluctuations, foreign exchange restrictions, changes in taxation, and other difficulties in managing operations overseas |
| We may not be successful in managing our international operations |
| In addition, there has been political discussion and debate related to worldwide competitive sourcing, particularly from the United States to offshore locations |
| There is proposed federal and state legislation currently pending related to this issue |
| It is too early to determine whether or in what form this legislation will be adopted; however, future legislation, if enacted, could have an adverse effect on our business, results of operations and financial condition |
| We may be unable to re-deploy our professionals effectively if engagements are terminated unexpectedly, which would adversely affect our results of operations |
| Our clients can cancel or reduce the scope of their engagements with us on short notice |
| If they do so, we may be unable to reassign our 14 _________________________________________________________________ professionals to new engagements without delay |
| The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of our professionals, which would have a negative impact on our business, financial condition, and results of operations |
| As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance |
| We believe that period-to-period comparisons of our financial results are not necessarily meaningful and we expect that our results of operations may fluctuate from period-to-period in the future |
| Our growth could be limited if we are unable to attract and retain personnel in the information technology and business consulting industries |
| We believe that our future success will depend in large part on our ability to continue to attract and retain highly-skilled technical and management personnel |
| The competition for such personnel is intense, including attracting and retaining qualified personnel in India |
| We may not succeed in attracting and retaining the personnel necessary to develop our business |
| If we do not, our business, financial condition, and results of operations could be materially adversely affected |
| We may be prohibited from repurchasing, and may not have the financial resources to repurchase, our 2dtta0prca Convertible Subordinated Debentures due 2013 (our "e Debentures "e ) on the date for repurchase at the option of the holder or upon a designated event, as required by the indenture governing our Debentures, which could cause defaults under our senior revolving credit facility and any other indebtedness we may incur in the future |
| The Debenture holders have the right to require us to repurchase all or a portion of their Debentures on June 15, 2008 |
| The Debenture holders may also require us to repurchase all or a portion of their Debentures upon a designated event, as defined in the indenture governing the Debentures |
| If the Debenture holders elect to require us to repurchase their Debentures on any of the above dates or if a designated event were to occur, we may not have enough funds to pay the repurchase price for all tendered Debentures |
| We are currently prohibited under our senior revolving credit facility from repurchasing any Debentures if a designated event were to occur |
| We may also be prohibited under any indebtedness we may incur in the future from purchasing any Debentures prior to their stated maturity |
| In these circumstances, we will be required to repay all of the outstanding principal of, and pay any accrued and unpaid interest on, such indebtedness or to obtain the requisite consents from the holders of any such indebtedness to permit the repurchase of the Debentures |
| If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the Debentures, which would constitute an event of default under the indenture for the Debentures, which itself could constitute a default under our senior revolving credit facility or under the terms of any future indebtedness that we may incur |
| In addition, the events that constitute a designated event under the indenture for the Debentures are events of default under our senior revolving credit facility and may also be events of default under other indebtedness that we may incur in the future |
| We incurred indebtedness when we sold our Debentures |
| We may incur additional indebtedness in the future |
| The indebtedness created by the sale of our Debentures, and any future indebtedness, could adversely affect our business and our ability to make full payment on the Debentures |
| Our aggregate level of indebtedness increased in connection with the sale of our Debentures |
| As of December 31, 2005, we had approximately dlra189dtta6 million of outstanding indebtedness and had the ability to incur additional debt under our revolving credit facility |
| We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage |
| Any increase in our leverage could have significant negative consequences, including: • increasing our vulnerability to adverse economic and industry conditions; • limiting our ability to obtain additional financing; • limiting our ability to make acquisitions; 15 _________________________________________________________________ • requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures; • limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and • placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources |
| Our ability to satisfy our future obligations, including debt service on our Debentures, depends on our future operating performance and on economic, financial, competitive, and other factors beyond our control |
| Our business may not generate sufficient cash flow to meet these obligations or to successfully execute our business strategy |
| If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures, seek additional financing or equity capital, restructure or refinance our debt or sell assets |
| We may not be able to obtain additional financing or refinance existing debt or sell assets on terms acceptable to us or at all |