2002, 2001, and 2000 (All amounts in thousands unless stated otherwise and except for share and per share amounts).
QuickLinks-- Click here to rapidly navigate through this documentSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549----------------FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934(Mark One) (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from toCommission file number 1-7516
KEANE, INC
---------- (Exact
(Exact Name of Registrant as Specified in Its Charter)Massachusetts 04-2437166 - ------------- ---------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) Ten City Square, Boston, Massachusetts 02129 - -------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code)
Massachusetts
(State or Other Jurisdiction
of Incorporation or Organization)04-2437166
(I.R.S. Employer
Identification Number)
100 City Square, Boston, Massachusetts
(Address of Principal Executive Offices)
02129
(Zip Code)Registrant's telephone number, including area code:(617) 241-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Title of Each Class
Common Stock, $.10 par valueName of Each Exchange on Which Registered - ------------------- ----------------------------------------- Common Stock, $.10 par value American StockExchange on Which Registered
American Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:
NONENoneIndicate 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
Xý No___oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
(_)Yes o No ýIndicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. Yes ý No o
The aggregate market value of the
Common Stockcommon stock held bynonaffiliatesnon-affiliates of the registrant, based on the last sale price of theCommon Stockcommon stock on the AMEX onMarch 10, 2000,June 28, 2002, was$1,508,163,647.$749,037,388. As of March10, 2000, 69,862,4467, 2003, 68,331,059 shares ofCommon Stock,common stock, $.10 par value per share, and284,987284,599 shares ofClassclass BCommon Stock,common stock, $.10 par value per share, were issued and outstanding.Documents Incorporated by Reference. The Registrant intends to file a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the Registrant's Annual Meeting of Stockholders to be held on May
31, 2000.28, 2003. The information required in response to Items10-1310–13 of Part III of this Form 10-K is hereby incorporated by reference to such proxy statement.This Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For example, statements containing the words "believes," "anticipates," "plans," "expects," and similar expressions may be forward-looking statements. However, Keane cautions investors not to place undue reliance on any forward-looking statements in this Report because these statements speak only as of the date when made. Keane undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. There are a number of factors that could cause our actual results to differ materially from those indicated by these forward-looking statements, including without limitation, the factors set forth under the caption "Certain Factors That May Affect Future Results."
ITEM 1. BUSINESS
GENERALOVERVIEW
Keane, Inc.
(together(collectively with its subsidiaries, "Keane" or "the Company," unless the context requires otherwise) is a leading provider ofe-business,Information Technology (IT),and business consulting services. In business since 1965, Keane's mission is to help clients optimize the performance of their IT organizations. The Company helps clientsplan, build, and manage business systems and implement business processes, organizational change, and change management programs to realize value from their IT and e-business initiatives. In business since 1965, Keane has steadily focused on helping clients leverage technology toimprove businessperformance. Today, this focus is the thread tying together all of the Company's service offerings. Keane's clients are increasingly looking to harness the power of the Internet and newer technologies, and integrate these technologies with existing systems to transition to a business-to-business (B2B) e-commerce environment. At the same time, effectivelyperformance by planning, building, managing, andimproving existing systems has become more critical than ever, given the importance of these systems to e-commerce initiatives. As a result, Keane seesrationalizing application software through itse-businessBusiness Consulting, Application Development andapplications developmentIntegration (AD&I), andmanagement services as key drivers of growth. To meet this market need, the Company expanded its e-Solutions capability in 1999 to offer clients a full life-cycle solution from strategy development through design, implementation, integration, and management of e-business solutions. Keane also continues to invest in its ApplicationsApplication Development and Management Outsourcingsolution, which it considers among(Applications Outsourcing) services.Keane delivers its services through an integrated network of local branch offices in North America and the
bestUnited Kingdom, and through Advanced Development Centers (ADCs) in theindustry.United States, Canada, and India. Thisconclusion is based on consultationsglobal delivery model enables Keane to provide its services to customers on-site, at its near-shore facilities in Canada, and through its offshore development centers in India. Branch offices work in conjunction withindustry analyst firms, audits of Keane's projects bytheCenter for Systems Management (against the Capability Maturity Model--the CMM)Company's business consulting arm, Keane Consulting Group (KCG), andbenchmarking Keane's productivity against the Quantitative Software Management's (QSM) metrics repository of 20,000 completed IT projects within the industry.are supported by centralized Strategic Practices and Quality Assurance Groups.Keane's clients consist primarily of
Fortune 1000 organizationsGlobal 2000 companies across every major industry, healthcare organizations, and government agencies.The Company servicesKeane strives to build long-term relationships with customers by providing a broad range of service offerings that enable clients to optimize their portfolio of software applications throughout their useful life. Keane also achieves recurring revenue as a result of its multi-year outsourcing contracts and its focus on process, management disciplines, and metrics as alocal level through branch offices in major markets of the United States, Canada, and the United Kingdom. These offices are supported by centralized practices representing Keane's core services and key competencies.means to consistently generate high business value for its customers.Keane is a Massachusetts corporation headquartered in Boston. Its common stock is traded on the American Stock Exchange under the symbol KEA.
InformationKeane maintains a website with the address www.keane.com. Keane is not including the information contained in its website as part of, or incorporating it by reference into, this annual report on Form 10-K. Keanecan be accessed on the Company's web site at www.keane.com ormakes available, free of charge, through itsInvestor Relations line at 1-800-75-KEANE. SERVICESwebsite its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practical after Keaneoffers an integrated mix of end-to-end businesselectronically files these materials with, or otherwise furnishes them to, the Securities andIT solutions. The Company divides its business into three main lines: BusinessExchange Commission.Keane's registered trademarks include EZ-Access®. Keane's trademarks include: Keane, Enterprise Application Integration, Keane InSight and
IT Consulting, e-Solutions (including itsVistaKeane. Keane's registered service marks include: Applications RationalizationSM Service and Application Lifecycle OptimizationSM Services. Keane's service marks include: Application Development and Integrationservices)services and Application2
Development and Management Outsourcing Services. All other trademarks, service marks, or tradenames referenced in this Form 10-K are the property of their respective owners.
SERVICES
Keane helps clients plan, build, manage, and rationalize their application software. Specifically, Keane focuses on three synergistic service offerings: Business Consulting, Application Development and Integration (AD&I), and Applications
DevelopmentOutsourcing, which is Keane's flagship service offering. As part of its Build services, the Company also provides a full-line of healthcare information systems andManagement Outsourcing. For each business line, Keane offers a full life cycle solution.related IT consulting and IT integration services for healthcare organizations. Keane believes itscomprehensivebroad range ofservice positions the Companyservices position it as a strategic partner to clients,because these services enable Keaneenabling it to identify and implementcompletecomprehensive solutions that meet clients' specific business requirements.The paragraphs below outlineBusiness Consulting (Plan services)
Keane's
corebusinesslines and some of the key competencies it draws on to deliver its solutions. Business and IT Consulting (plan services) Keane'sconsulting servicesrepresent a critical componentplay an important role in the Company's ability to help clientsachievealign their businesses for today's economy. Business Consulting revenue is reported within the Company's Plan sector. The Company provides its businessvalue from IT investments. Theseconsulting services through Keane Consulting Group (KCG), the Company's business and management consulting arm. KCG helps companies maximize productivity, reduce costs, and create capacity for future growth by identifying high-value business opportunities and implementing its operations improvement recommendations. In addition, KCG enables customers to lower costs and improve the flexibility and scalability of their IT assets through Keane's Applications Rationalization Service. As part of this service, the Company analyzes a client's applications portfolio and helps the company to identify and eliminate software with redundant functionality, end-of-life systems, and software that uses non-core technology.KCG delivers its services by taking a broad view of business processes, organizational design, and technology architecture. KCG provides operations improvement services in four core competency areas: insurance and financial services, manufacturing and distribution, technology, and public sector services. Typical KCG client engagements include: streamlining customer processes and operations, optimizing supply chains, and aligning IT and business strategies. KCG helps Keane develop strong relationships with senior business executives because their assignments often involve work for these decision makers who may, in the future, request that the Company perform critical services. In addition, KCG consulting engagements can lead to follow-on IT projects as clients rely on Keane to support an idea or concept from its genesis through implementation and eventual management.
Application Development and Integration (AD&I) (Build services)
As application software becomes more complex, it requires sophisticated integration between front-end and back-end systems to enhance access to critical corporate data, enable process improvements, and improve customer service. Many of Keane's AD&I projects focus on
assisting companies in transforming their strategy, processes, organization,solutions for Enterprise Application Integration (EAI), supply chain, andIT infrastructure for competitive advantage. Findingscustomer service problems. AD&I revenue is reported within the Company's Build sector.As a result of its significant expertise and
recommendations oftentimesexperience, Keane has becomethe foundation for successful transitions to e-business as well as key IT decisions, such as implementationa top-tier provider ofnew technologies, overhauls of existing systems, and integration of customer-facing business systems with back-office platforms and applications. The Keane Consulting 2Group offers the following services: e-Strategy (e-business strategy development), Operations Improvement, e-Transformation (services that focus on updating a client's business model and processes in alignment with e-business requirements), and Customer Relationship Management Strategy services. Clients undergoing organizational change associated with transforming their business to leverage the Internet, integrating mergers and acquisitions, or adapting to governmental deregulation may benefit from these services. e-Solutions (e-Architecture, Online Branding, Applications Development and Integration) (build services) Keane's e-business services (marketed under the e-Solutions name) help clients exploit new technology to meet their business objectives. Offerings and capabilities range from e-architecture planning and implementation, to creative web design and development, applicationlarge, complex software development and integrationarchitecture planning, data warehousing, implementation of customer relationship management (CRM) technologies,projects for Global 2000 companies. The Company also provides AD&I services to the public sector, which includes agencies within the United States Federal Government, various states, andenterprise application integration. This range of services respondsother local government entities.Given the recent economic downturn, many clients have deferred investments in new information systems. As a result, Keane has concentrated its short-term marketing efforts on helping clients to
clients, which are increasingly concentratingbetter integrate and enhance existing applications, and onways they can leverage Internet technologies in their organizations. Many of Keane's clients are focused on supply chain optimization, e-markets, exchanges,projects that rapidly improve efficiency ande-procurement initiatives due to their tremendous return on investment.immediately lower costs.3
Keane believes that it is well positioned to
manage suchcapture large-scale AD&I projectsbecause offrom both thestrength ofcommercial and public sector markets due to itsprogramcore competencies in project management, integration, and global delivery. The Company anticipates that these competencies,delivery methodologies,together with its long-term relationships with Global 2000 companies, particularly those clients for which Keane provides Applications Outsourcing services, will enable it to benefit from an economic recovery andquality assurance processes. This business line also includes Keane's Healthcare Solutions practice, which offers a suite of Healthcare Information Systems (HIS) and related consulting and IT services. Keane's HIS products provide the architecture to streamline and link financial, patient care, and clinical operations across hospitals, group practices, long-term care facilities, and HMOs. The systems are compatible with the operating systems used by healthcare institutions nationwide, includinganopen UNIX platform as well as IBM's AS/400 and RS/6000 environments. In addition, Keane's broad range of services can help healthcare clients address ongoing HIPAA requirements, a legislative act which is expected to have far-reaching implicationsincrease in spending onthe industry's IT infrastructure and business operations. Applicationsinformation technology.Application Development and Management
(ADM)Outsourcing(manage(Applications Outsourcing) (Manage services)Keane's
ADMApplications Outsourcingservices helpservice helps clientseffectivelymanageand enhanceexisting business systemsto improvemore efficiently and more reliably, improving the performance of these applications whilebetter controllingfrequently reducing costs. Application Outsourcing revenue is reported within the Company's Manage sector. Under this service offering, Keanemanages clients'assumes responsibility for managing a client's business applications withcommitmentsthe goal of instituting operational efficiencies that enhance flexibility, freeing up client personnel resources, and achieving higher user satisfaction.Keane seeks to
improving software quality, processes,obtain competitive advantages in the application outsourcing market by targeting its Global 2000 client base andcosts.generating measurable client business benefit. The Company achieves this client benefit through the use of its world-class methodologies, continuous process improvement, and its global delivery model. On March 15, 2002, Keane acquired SignalTree Solutions, a United States-based corporation with offshore development capabilities in India. The addition of SignalTree Solutions' delivery capability, now called Keane India Ltd., expanded Keane's delivery model to include two Advanced Development Centers (ADCs) in India. Keane's global delivery model now offers customers the flexibility and economic advantage of allocating work between a variety of delivery options, including on-site at a client's facility, near-shore in Halifax, Nova Scotia, and offshore in India. Keane believes the addition of offshore ADCs strengthens its Applications Outsourcing offering.Forty-three of the Company's Applications Outsourcing engagements
may also encompass developmenthave been independently assessed at Level 3 or 4 on the Software Engineering Institute's (SEI) Capability Maturity Model (CMM). In addition, Keane's ADCs in India, located in Hyderabad and Delhi, are independently evaluated at Level 5 on the SEI CMM and comply with ISO 9001: 2000 standards. Keane's ADC in Halifax, Nova Scotia, has been independently evaluated at Level 3 on the SEI CMM, and is transitioning its processes in alignment with SEI CMM Level 5. The SEI CMM has five levels ofnew applications, as directed by clients.process maturity, and many IT organizations typically operate at Level 1, the lowest level of maturity. Since 1997, Keane has used theSoftware Engineering Institute's Capability Maturity Model (CMM)SEI CMM as a standard for objectively measuring its success in improving itsclient'sclients' applicationmanagement. This movemanagement environments. The SEI CMM hasgivenbecome the industry's standard method for evaluating the effectiveness of an IT environment and the process maturity of outsourcing vendors.Applications Outsourcing provides Keane with larger, longer-term contracts. These client engagements usually span three-to-five years. Outsourcing projects typically supply Keane with contractually-obligated recurring revenue, and with an incumbent position from which to cross-sell other solutions. The Company has observed historically that consistently providing measurable business value within an existing client account strongly positions it to win additional outsourcing engagements and development and integration projects.
Healthcare Solutions (Build services)
Keane's Healthcare Solutions Division (HSD) develops and markets a
strategic advantagecomplete line of open-architecture financial management, patient care, clinical operations, enterprise information, long-term care, and practice management systems for healthcare organizations. In addition, HSD provides healthcare-related IT consulting, outsourcing, and IT integration services. Because the healthcare market is less cyclical in nature than most of the commercial IT market, Keane's HSD4
business compliments the Company's commercial AD&I revenue and typically acts as a stabilizing influence on Build revenue during periods of slower economic growth. HSD revenue is reported within Keane's AD&I (Build) sector.
HSD's products help healthcare organizations overcome the challenge of providing higher quality patient care while administering more efficient operations through the use of information technology. HSD's core healthcare solutions include EZ-Access, Keane InSight, and VistaKEANE. EZ-Access is a browser-based family of healthcare information systems designed to improve access to patient data, reduce the occurrence of medical errors, and protect client investment in information technology. EZ-Access includes Keane's highly rated and widely installed Patcom Plus, a patient management system. Keane InSight is a comprehensive healthcare information system that provides immediate access to patient information using secure, browser-based technology. VistaKEANE is a fully integrated financial and clinical solution for long-term and post-acute care providers. HSD's customers include integrated delivery networks, hospitals, long-term care facilities, and physician group practices. HSD currently provides proprietary software and services to more than 300 hospital-based clients and 4,300 long-term care facilities throughout the United States.
In addition, Keane's broad range of services help healthcare clients address ongoing Health Insurance Portability and Accountability Act (HIPAA) requirements. HIPAA is Federal legislation designed to improve efficiency in the
application outsourcing area,national healthcare system and protect the privacy of health information. It is expected to have far-reaching implications on the healthcare industry's IT infrastructure and business operations. The Company's HIPAA related services include Enterprise Assessment and Planning, Compliance Implementation, and Ongoing Compliance Management.STRATEGY
Keane's vision is to be recognized as
Keane isone of theonly leading ADM outsourcing providersworld's great IT services firms by its clients, employees, and shareholders. The Company believes it can achieve this vision by leveraging its position as a provider of Application Lifecycle Optimization Services toactively gaugebuild strong long-term relationships with clients. To support itsdelivery against this industry standard. To date,customers in better managing their application portfolios over a long period of time, Keane's Application Lifecycle Optimization framework has three phases: Application Development, Application Management, and Applications Rationalization. Through its rigorous adherence to process management disciplines, and performance metrics, Keane believes it can deliver measurable business benefit to its clients, and ultimately grow per share value by consistently generating cash from operations.The Company has
earned CMM Level 3 or greater distinction on 27 engagements. In addition,four major strategic priorities for 2003. Keaneis expanding its metrics strategy to incorporate QSM Productivity Index. SERVICE DELIVERY MODEL Throughout the 1990s as Keane refined its end-to-end solutions,believes these strategic priorities will enable the Companytransformed its service delivery modeltoaccommodate profitable growth and optimal customer service. The transition combines service delivery via local branch offices with expertise provided by centralized practice groups. These practices represent core service offerings (e.g., Consulting, e-Solutions, and ADM Outsourcing) and critical competencies, such as vertical specialization and Keane's application development center. Keane considers this client-centric delivery model an important means for achievinggain competitive strength during thefollowing: 1. increasing sales and revenue growth, 2. providing higher value services and thereby enhancing margins, 3. strengthening client relationships and recurring revenues, 4. cross-selling the full breadth of its services, 5. lowering the costs of doing business, and 36. maintaining employee satisfaction and thus retention. This delivery model presents advantages to clientscurrent economic downturn, as wellamong them responsive and proactive service, cost efficiencies, and a greater level of staffing continuity. Keane client's benefit from the convenience and attentiveness of being served locally by its branch offices while also benefiting from Keane's company-wide knowledge and experience through its centralized practice groups. Each of these factors contributesas toclient satisfaction levels. Keane's intent is to maximize synergies between its strong field organization and its enterprise practices to fuel sales and support world-class delivery across the organization. STRATEGIC DIFFERENTIATORS AND STRENGTHS Keane considers the following competitive strengths vis-a-vis new entrants and existing competitors. 1. End-to-end solutions. Keane's integrated line of services equip it with the capabilities to partner with clients in their mission to leverage Information Technology to improve business performance. Specifically, Keane can design, develop, integrate, and manage business-critical software applications and advise clients on process and organizational improvementsstrongly position itself to take advantage ofthese applications. This rangefuture increases in IT spending.Grow long-term per share value. The Company is focused on continuing to increase operating cash flow, which it believes is the ultimate driver of
competenciesvaluation. The Company plans to use excess cash to repurchase shares and to complete attractive acquisitions. In order to maximize cash flow, the Company is focused on increasing revenue, improving operating margins, and continuing to aggressively manage its balance sheet. The Company believes that long-term revenue growth will be achieved by Keane's Applications Outsourcing business as well as the Company's strong position in less cyclical vertical industries such as healthcare and the public sector. The Company expects to increase its operating margins over the short-term by aggressively controlling its Selling, General, and Administrative (SG&A) spending and by improving billing rates and utilization as the economy recovers. Finally, Keane's ability to effectively manage its balance sheet, most notably Days Sales Outstanding (DSO) and capital spending, is expected to enable the Company to generate strong operating cash flow in the current economic climate.5
Expand offshore global delivery. Global sourcing has become an important component of our clients' overall sourcing strategies. Use of offshore delivery enables
Keaneclients tohelp clients overcomegain access to a large pool of cost-effective technical personnel, while enhancing productivity via a 24 hours a day, 7 days a week development approach. As a result, thechallenge of "enterprise integration" whichCompany believes offshore delivery isessential tocritical for success insuch areas as business to business ("B2B"), e-commerce, and customer relationship management. Enterprise integration encompasses the integrationtoday's IT services market. During 2002, Keane added an offshore sourcing component through its acquisition ofnew technologies across multiple platforms, with existing systems, and with core business processes. The Company's comprehensive offerings and enterprise integration expertise, together with its high customer intimacy, is a significant combination distinguishingSignalTree Solutions, now called Keanefrom existing competitors and establishing barriers to entry for new competitors. 2. Strong customer relationships.India Ltd. Keane India hasmore than 1,400 client relationships, which provides a strong channel for developing a deep understandingover 20 years ofclient business and IT requirements, marketing the full scope of its integrated service offerings, and enabling a high percentage of recurring revenues. Keane seeks to build long-term relationships with its clients 3. Strong distribution. The demand for e-business application development and management services,experience servicing customers inparticular, are mass market opportunities. Keane's extensive branch office distribution (acrossNorth America andthe United Kingdom) allows it to captureEurope anddeliver business in each of the geographic markets where it operates. This allows Keane to cost-effectively deliver solutions with a minimum of sales, general, and administrative (SG&A) expense. It also enables the development of high-level customer intimacy and satisfaction. 4. Expertise integrating new and old technology. Keane's technical competencies cut across newer Internet technologies and older legacy platforms, and in integrating the two. This range of expertise enables Keane to develop customer-facing e-business applications that are integrated with the back office and data warehouses--a fundamental technological challenge that virtually all companies face as they try to implement e-business initiatives. Keane has extensive experience with enterprise application integration gained fromis known for itsefforts in extending the value of clients' existing business systems. 5. Project management competencies. Unlike newer entrants to the market, Keane has extensive competencies inproject managementalong with a comprehensive set of mature delivery methodologies.expertise and quality initiatives. During 2003, Keanealso has a strong quality assuranceplans to target both existing clients andprogram management system. Thenew customers for development and outsourcing engagements that involve an offshore component. In addition, the Companycontinuesplans to invest inthese disciplinesandassetsexpand its two ADCs in India, as well as its ADC in Halifax, Nova Scotia, to support new opportunities. In addition to offshore solutions, components of Keane's next generation global delivery model include on-site and near-shore solutions.Strengthen position as leading provider of Applications Outsourcing services. Industry analysts and clients recognize Keane as one of the leading application outsourcing vendors in North America. Given changes in customer buying behavior, Keane's ability to provide high-quality service to its clients has been significantly enhanced by the addition of an offshore delivery capability in India. As a result, Keane is intensifying its efforts during 2003 to position itself as a full lifecycle, global provider of outsourcing, and a means for clients to gain the economic advantage of offshore delivery while reducing their associated risks. The Company also seeks opportunities to proactively target its existing customer base of Global 2000 customers to cross-sell its Applications Outsourcing service.
Improve Organizational Effectiveness and operational leverage. Keane endeavors to continuously build its sales and management team by hiring, developing, and retaining high-potential employees. During 2003, Keane plans to add
valuehigh-potential personnel resources toits individual service offerings and tofurther strengthen itscapabilitiessales and management team. In addition, Keane plans to enhance its sales and management processes as well as its information systems to boost the effectiveness of these critical functions. Keane is currently implementing a PeopleSoft suite of enterprise software applications, which when completed and installed, will provide real-time data on sales pursuits and significant sales trends. In addition, during 2003, Keane plans to better align its internal focus, measurement processes, and compensation systems to promote a high performance culture, encouraging intra-company cooperation, and create a more positive and supportive work environment for its employees. The Company anticipates that the results of these efforts will be the elimination of bureaucracy, a more efficient response system to client needs, and an increased focus on client satisfaction.COMPETITION
The IT services market is highly competitive and driven by continual changes in
assuming a "prime contractor" role onclient business requirements and advances in technology. The Company's competition varies by the type of service provided and by geographic markets.The Company competes with traditional players in the IT services industry, including large
e-business initiatives involving a seriesintegrators (such as Accenture (ACN), Electronic Data Systems (EDS), Computer Sciences Corporation (CSC), IBM Global Services (IBM), and Perot Systems (PER)); IT solutions providers (such as Sapient Corporation (SAPE), American Management Systems (AMSY), BearingPoint (BP), and Ciber (CBR)); and management consulting firms (such as McKinsey and Booz Allen). Some ofcomplexthese competitors are larger andconcurrent projects.have greater financial resources than the Company.The Company believes that the basis for competition in the IT services industry includes the ability to create an integrated solution that best meets the needs of an individual customer, provide competitive cost pricing models, develop strong client relationships, generate recurring revenue, and offer flexible client-service delivery options. The Company believes that it competes favorably with respect to these factors. There can be no assurance that the Company will continue to compete
6
successfully with its existing competitors or will be able to compete successfully with any new competitors.
CLIENTS
AND MARKETPLACE DRIVERSKeane's clients consist primarily of
the Fortune 1,000Global 2000 organizations,but also includegovernment agencies, and healthcareorganizations, and "dot com" or Internet start-ups.organizations. These organizations generally have significant IT budgetsand/orand frequently depend on service providersto help them fulfill their business optimization and software design, development, implementation, and management needs. 4for Application Lifecycle Optimization services. In
1999,2002, the Company derived its revenue from the following industry groups:Industry Percentage of Revenue -------- --------------------- Manufacturing 21.3% Financial Services 17.5% Government 16.6% Energy/Utilities 7.1% Healthcare 11.7% High Technology/Software 10.7% Telecommunications 5.7% Retail/Consumer Goods 5.6% Other 3.8%
Industry Percentage of Revenue Financial services 20.2 % Manufacturing 19.8 % Government 18.5 % Healthcare 17.8 % High Technology/Software 8.1 % Energy/Utilities 6.5 % Retail/Consumer goods 4.7 % Other 2.7 % Telecommunications 1.7 % 7
The following table is a representative list of clients for which Keane provided services in
1999. 3M Corporation GMAC Aldus Corp. GTE Data Service Incorporated American Express Co., Inc. Guardian Life Insurance Ameritech Hoffmann-La Roche, Inc AT&T Corporation International Business Machines Corporation Bose Corporation J.D. Edwards BankBoston Corporation J.P. Morgan Baxter Healthcare Corporation Jewel Food Stores, Inc. Baylor Health Care System Johns Hopkins Hospital Bell Atlantic Liberty Mutual Insurance Co. BMW Life Care Centers of America British Airways McDonald's Corporation b-there.com McKesson Corporation Cargill Microsoft Corporation Carrier Miller Brewing CIGNA Corporation National Assn. of Security Dealers Cincinnati Bell Telephone Northern Mutual Life Insurance Department of Justice Northern Telecom, Inc. Discover Card The Pillsbury Company Eastman Kodak Company Princess Cruise Lines Elf Atochem North America Procter & Gamble Company EMC Corporation The Putnam Companies, Inc. Energizer Battery Co. Reader's Digest Association, Inc. Exxon Corporation Robert Wood Johnson Hospital Fidelity SD Warren Farmers Insurance Group Sony First Bank Transquest Ford U.S. Customs General Electric Company Whirlpool Corporation The markets Keane services are experiencing major changes in business climate. Increased competition, globalization, and deregulation are forcing companies to devise new ways to differentiate their products and services and more effectively acquire and retain customers. For most companies, this will require a major transformation of the organizational structure and business processes, and significant investments in information technology. In this environment, Internet technologies are becoming a channel for continuous and real-time business transactions, including interaction with customers, distribution of product and materials, and exchange of information with suppliers, trading partners, and employees. In addition, companies must optimize and integrate their back-office and legacy systems with newer technologies to realize the potential of new technology implementations. 52002:
3M Corporation Massachusetts General Hospital Allmerica MemorialCare American Honda Motors Miller Brewing Aon State of Missouri AT&T Corporation Moody's Investor Services AXA MPO Baylor Health Care System NOAA Biogen New York State Division of Budget Blue Cross & Blue Shield of South Carolina State of North Carolina Britannic PacifiCare Carrier PBGC City of Chicago Pfizer Countrywide Home Loans Procter & Gamble Company Crawford & Company Prudential CSX Technologies PSE&G Defense Commissary Agency Putnam Investments Defense Logistics Agency Royal & Sun Alliance DEA Square D District of Columbia State Street Bank & Trust Exxon Corporation SUPERVALU Fidelity State of Tennessee First National Bank Toyota State of Florida Tufts Health Plan Gateway Unipart GEICO United States Air Force General Electric Company United States Customs Service GMAC United States Marine Corps Great American Insurance United States State Department HBOS Unisys HealthSouth Wachovia State of Indiana Warner Bros. International Business Machines Corporation Wawa Invacare Whirlpool Corporation Legal & General The Williams Companies, Inc. State of Maine Zurich Financial Services Group State of Maryland Keane's
executive management, recognizing the implications of these forces, expects the Company's primary revenue drivers will be its business consulting, e-Solutions, and applications outsourcing services through 2002. E-business includes B2B initiative as well as business-to-customer (B2C) projects. Industry research firm Gartner Group forecasts the B2B market worldwide to grow from $145 billion in 1999 to $7.29 trillion in 2004. Moreover, by 2004, B2B e-commerce will represent 7% of the forecasted $105 trillion total global sales transactions, according to Gartner. The Company has historically derived, and may in the future derive, a significant percentage of its total revenue from a relatively small number of clients. Keane's fiveten largest clients accounted for approximately19%29% and 32% of the Company's totalrevenuesrevenue during each of the years ended December 31,19982002 and1999.2001, respectively. The Company's two largest clients during19982002 and19992001 were variousorganizationsagencies within the Federal Government and IBM. Federal Government contracts accounted for approximately5%7.6% and6%6.9% of the Company's totalrevenuesrevenue in19982002 and1999,2001, respectively. IBM accounted for approximately6%4.4% and 6.5% of the Company's totalrevenuesrevenue for19982002 and1999.2001, respectively. A significant decline inrevenuesrevenue from IBM or the Federal Governmentcouldwould have a material adverse effect upon the Company's totalrevenues.revenue. With the exception of IBM and the Federal Government, no single client accounted for more than 5% of the Company'srevenuestotal revenue during any of the three years ended on or before December 31,1999.2002.In accordance with industry
practices, nearly allpractice, many of the Company's orders are terminable by either the client or the Company on short notice. Moreover, any and all orders relating to the Federal Government may be subject to renegotiation of profits or termination of contract or subcontractors at8
the election of the Federal Government. The Company had orders at December 31, 2002 of approximately $1.46 billion, in comparison to orders of approximately $843 million at December 31, 2001. Because Keane's clients can cancel or reduce the scope of their engagements on short notice, the Company does not believe that backlog is
material to thea reliable indication of future business.The Company had orders at December 31, 1999 of approximately $786 million, in comparison to orders of approximately $900 million at December 31, 1998. GROWTH STRATEGY Keane's growth strategy unites a series of complementary initiatives all focused on increasing revenue, enhancing margins, cross-selling services to existing accounts, and developing new customers. The core elements of this strategy, as described below, build on Keane's strengths and strategic programs that have been under way throughout much of the 1990s: o Build an operating model capable of generating 25% CAGR. Keane has made significant strides over the past three years in developing and enhancing a complete line of services (its end-to-end solutions) to help clients derive business value from IT. These efforts have enabled Keane to evolve its revenue mix into higher margin solutions business. Through its operating model, the Company is focused on positioning itself as a premier provider of end-to-end solutions. Senior management attention is focused on the following areas: o seamlessly integrating its strategic practices and branch operations to augment sale and delivery of the Company's full range of services, o leveraging its vast geographic presence in the U.S., as well as its presence in Canada and the U.K., o leveraging its relationships and reputation with its large customer base, o developing repeatable solutions to accelerate growth, and o building scalable systems and processes to accommodate growth. o Leverage strategic practices to accelerate revenue and margin growth. Keane's strategic practices are an important means for targeting mass-market opportunities (e.g., e-business and application outsourcing) and expanding capabilities at the local level. These practices gather, refine, and disseminate Keane's best practices, including repeatable solutions that can be used across multiple client engagements throughout Keane's branches. Keane will continue to expand the value of these practices with vertical and domain expertise. The Company has a senior management team in place to direct integration of these practices with branch operations to enable Keane to sell and deliver its full "Plan-Build-Manage" capabilities across local markets. o Leverage branch structure to drive sales growth. Keane has made significant strides in developing "critical mass" in its branch organization and expanding its geographic reach. Today, the Company has branch offices in major markets across the United States, and in Canada and the United Kingdom. Through these branches, the Company has cultivated relationships with more than 1,400 clients. Keane incentivizes its local sales and management teams to proactively manage their client relationships, by maintaining a deep understanding of clients' business and operational needs and marketing the full range of Keane's services to respond to their requirements. The Company believes its end-to-end solutions are synergistic in that delivery from one service line (for instance, e-Strategy, a "plan" service) positions Keane to deliver services in another business line (for instance, development of web-based applications, a "build" service). 6o Build a world-class organization. Keane recognizes that a world-class organization embodying top people, processes, and IT infrastructure assets is necessary for the Company's continued success. To enhance its organization, Keane is focusing on the following: o attracting, developing, and retaining top business, technical and managerial talent, o continuously upgrading corporate support functions, including finance, marketing, IT, HR and knowledge management, toward a customer (internal and external) orientation, o investing in its strategic practices to continually improve its services, and o institutionalizing key operational and delivery processes and best practices. o Build awareness and strength of the Keane brand. Keane has established world-class capabilities and key strengths in business, operational, and IT consulting, e-business, applications development and integration, and applications management. The Company plans to devote resources to branding to make its capabilities and its value proposition better known in the marketplace. Initiatives in 2000 are focused on: o communicating a unified brand that supports Keane's "plan-build-manage" services, o increasing awareness of Keane's presence and competitive advantages in the e-business space, and o building on its current brand which embodies reliable, results-oriented delivery of IT services.SALES, MARKETING AND ACCOUNT MANAGEMENT
Keane markets its services and software products through its direct sales force, which is based in its branch offices and regional areas, as well as through its
centralized practices.Applications Outsourcing Corporate Practice. Keane's account executives(AEs)are assigned to a limited number of accounts so they can develop an in-depth understanding of each client's individual needs and form strong client relationships.These AEsUnder the direction of Regional Sales Vice Presidents, these account executives identify IT services needs within clients and are responsible forensuringcreating a solution that meets these requirements better than any other alternative. In addition, account executives ensure that clients receive responsive service that achieves their objectives. Account executives receive in-depth training in Keane's sales processes andthat Keane's software solutions achieve client objectives. AEsservice offerings and are supported by enterprise knowledge management systems in order to efficiently share organizational learning. Account executives collaborate with Keane's Applications Outsourcing Practice,Groups andother branch offices, and Global Services Group as needed to address specialized customer requirements.Keane's Applications Outsourcing Practice employs specialized senior sales professionals to respond to client
requirements.requirements and to pursue and close large, strategic outsourcing engagements. Applications Outsourcing engagements provide a strong base of recurring revenue and afford the opportunity to cross-sell Keane's other strategic services.Keane focuses its marketing efforts on organizations with significant IT budgets and recurring software development and outsourcing needs.
In 1998, theThe Companylaunchedmaintains a corporate branding campaign focused on communicating Keane's value proposition of reliably delivering application solutions with quantifiable business results. These branding efforts are actively executed through multiple channels.In 2000, the Company plans to develop and extend its branding program to reflect Keane's strategic intent.EMPLOYEES
On December 31,
1999,2002, Keane had8,9817,331 employees, including6,9026,175 business and technicalprofessionals' staffprofessionals whose services are billable to clients. The Company sometimes supplements its technical staff by utilizingsub contractors.subcontractors.Management believes Keane's growth and success are
attributable todependent on the caliber of its people and will continue to dedicate significant resources to hiring, training and development, and career advancement programs. Keane's efforts in these areas are grounded in the Company's core values, namely respect for the individual, commitment to client success, achievement through teamwork, integrity, continuous improvement, andthe drive for continuous improvement.commitment to shareholder value. Keane strives to hire, promote, and recognize individuals and teams who embody these values.Keane recognizes that there is significant competition for employees with the skills and competencies required for its continued success. The Company believes it has been successful in efforts to hire and retain the managerial, technical, sales, and support personnel required to deliver its services and manage its growth. One significant factor advancing Keane's ability to attract and retain professionals is its branch office network, which allows its staff to minimize travel time on client projects. At the same time, this network of branch offices provides employees with broader career growth options through transfers across the organization or into its corporate practice groups. Keane also recognizes that it's growing share of multimillion-dollar outsourcing engagements and its mergers and acquisitions (M&A) strategy are two significant factors in its growth. As a result, Keane's corporate human resources organization is directly involved in major outsourcing engagements and M&A activities in addition to recruiting and career development functions.The Company generally does not have employment contracts with its key employees. None of the Company's employees
isare subject to a collective bargaining agreement. The Company believes that its relations with its employees are good.7COMPETITION The IT services market is highly competitive and driven by continual change in clients' business requirements and advances in technology. The Company's competition varies by the type of service provided and by geographic markets. Competitors typically include traditional players in the IT services industry, including large integrators (e.g., Andersen Consulting, EDS, CSC, and IBM Global Services); IT solutions providers (e.g., Sapient, Cambridge Technology Partners, AMS, and Whittman-Hart); pure-play Internet solutions providers (e.g., Razorfish, Scient, and Viant); niche players (e.g., companies focused on specific domain or vertical expertise); and management consulting firms (e.g., McKinsey and Booz Allen). Some of these competitors are larger and have greater financial resources than the Company. In addition, clients may seek to increase their internal IT resources to satisfy their customer software development. The Company believes that the bases for competition in the IT services industry include the ability to compete cost-effectively, develop strong client relationships, generate recurring revenue, use comprehensive delivery methodologies, and achieve organizational learning by implementing standardized operational processes. The Company believes that it competes favorably with respect to those factors. 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.9
The principal executive office of the Company
isas of December 31, 2002, was located at Ten City Square, Boston, Massachusetts 02129, in an approximately 34,000 square foot office building which isowned byleased from City Square Limited Partnership.The limited partnership is comprised of an officerSome of theCompany, someCompany's officers and directorsand shareholders. Seeare limited partners in this partnership. (See Item 13--"Certain Relationships and RelatedTransactions.Transactions)." At December 31,1999,2002, the Company leased and maintained sales and support offices in more than50seventy locations in North America, the UnitedStatesKingdom, andfive locations in the United Kingdom.India. The aggregate annual rental expense for the Company's sales and support offices was approximately$19.4$27.7 million in1999.2002. The aggregate annual rental expense for all of the Company's facilities was approximately$21.8$30.8 million in1999.2002. For additional information regarding the Company's lease obligations, see Note J of Notes to Consolidated Financial Statements.In October 2001, the Company entered into a lease with Gateway Developers LLC ("Gateway LLC") for a term of twelve years, pursuant to which the Company agreed to lease approximately 95,000 square feet of office and development space in a building located at 100 City Square in Boston, Massachusetts (the "New Facility"). The Company leases approximately 57% of the New Facility and the remaining 43% is or will be occupied by other tenants. John Keane Family LLC is a member of Gateway LLC. The members of John Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of the Board of the Company, and his immediate family members.
On October 31, 2001, Gateway LLC entered into a $39.4 million construction loan with Citizens Bank of Massachusetts (the "Gateway Loan") in connection with the New Facility and an adjacent building located at 20 City Square, Boston, Massachusetts. John Keane Family LLC and John F. Keane are each liable for certain obligations under the Gateway Loan if and to the extent Gateway LLC requires funds to comply with its obligations under the Gateway Loan. Stephen D. Steinour, a director of the Company, is Chief Executive Officer of Citizens Bank of Pennsylvania. Citizens Bank of Massachusetts and Citizens Bank of Pennsylvania are subsidiaries of Citizens Financial Group, Inc. Mr. Steinour was not involved in the process of approving the loan.
The Company began occupying the New Facility and vacating its offices at Ten City Square in March 2003. Based upon its knowledge of rental payments for comparable facilities in the Boston area, the Company believes that the rental payments under the lease for the New Facility, which will be approximately $3.2 million per year ($33.00 per square foot for the first 75,000 square feet and $35.00 per square foot for the remainder of the premises) for the first six years of the lease term and approximately $3.5 million per year ($36.00 per square foot for the first 75,000 square feet and $40.00 per square foot for the remainder of the premises) for the remainder of the lease term, plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time the Company entered into the lease, as favorable to the Company as those which could have been obtained from an independent third party.
ITEM 3. LEGAL PROCEEDINGS
In April 1998, United Services Planning Association, Inc. and Independent Research Agency for Life Insurance, Inc. filed a complaint in the District Court for Tarrant County, Texas (Civil Action No. 96-173235-98) against the Company and two of its employees alleging that the Company misrepresented its ability to complete a project contracted for by the plaintiffs and concealed from the plaintiffs material facts related to the status of the project. The parties are currently engaged in discovery. It is not likely that the case will go to trial before the fall of 2003. The plaintiffs seek monetary relief. The Company believes that
its facilities are adequateit has a meritorious defense to the plaintiff's complaint and intends to contest the claims vigorously. However, the Company is presently unable to assess the likely outcome of the matter.On September 25, 2000, the United States Equal Employment Opportunity Commission ("EEOC") commenced a civil action against the Company in the United States District Court for
its current needsthe10
District of Massachusetts alleging that the Company discriminated against former employee Michael Randolph and
that suitable additional space will be available as needed. ITEM 3. LEGAL PROCEEDINGSother unspecified "similarly-situated individuals" by acts of racial harassment, retaliation and constructive discharge. This matter was settled and dismissed, and a consent decree entered by the Court, in May 2002. This settlement was not material to the Company's financial position or results of operations.The Company is involved in other litigation and various legal matters, which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of
any existing matterthese matters will have a material adverse effect on its financial condition, results of operations, or cash flows. The Company believes these litigation matters are without merit and intends to defend these matters vigorously.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of StockholdersNo matters were submitted to a vote of the
Company was held onCompany's security holders during the fourth quarter of the year ended December2, 1999. The Stockholders approved an amendment to the Company's 1998 Stock Incentive Plan increasing the number of shares of Common Stock which the Company is authorized to issue under the 1998 Stock Incentive Plan from 2,000,000 to 7,000,000. Set forth below is the number of votes cast for, against or abstained. For Against Abstained 40,658,329 9,670,367 2,421,151 831, 2002. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY: The executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- --------John F. Keane 68 Chairman President, and Chief Executive Officer Brian T. Keane 39 Executive Vice President, Office of the President, and Director* John F. Keane Jr. 40 Executive Vice President, Office of the President, and Director* John J. Leahy 42 Senior Vice President - Finance and Administration and Chief Financial Officer Raymond W. Paris 62 Senior Vice President - Healthcare Solutions Practice Renee Southard 45 Senior Vice President - Human Resources Philip J. Harkins(1) 52 Director Winston R. Hindle, Jr.(1)(2) 69 Director John F. Rockart(1)(2) 68 Director Robert A. Shafto(1)(2) 64 Director*
Name Committee Age Position John F. Keane (3)(4) 71 Chairman of the Board and Director Brian T. Keane 42 President, Chief Executive Officer and Director John J. Leahy 45 Senior Vice President of Finance and Chief Financial Officer Donald E. Hillier 55 Senior Vice President of Human Resources Robert B. Atwell 54 Senior Vice President Russell A. Cappellino 61 Senior Vice President Raymond W. Paris 65 Senior Vice President Laurence D. Shaw 41 Senior Vice President Linda B. Toops 48 Senior Vice President Maria A. Cirino (1)(2) 39 Director John H. Fain (3)(4) 54 Director Philip J. Harkins (2)(3)(4)(5) 55 Director Winston R. Hindle, Jr. (1)(3)(4)(5) 72 Director John F. Keane, Jr. (3)(4) 43 Director John F. Rockart (1)(2)(5) 71 Director Stephen D. Steinour (1)(2) 44 Director
- (1)
- Audit Committee
- (2)
- Compensation Committee
- (3)
- Former Governance and Nominating Committee (The Company had, until February 2003, a Governance and Nominating Committee. The
Company has previously announced its plan to appoint Mr. Brian T. Keane as the Company's Chief Executive OfficerGovernance andMr. John F. Keane, Jr., as the Company's President. The Company's Board of Directors intends to effect these appointments immediately following the Company's 2000 Annual Meeting of Stockholders, subject to approval ofNominating Committee was reconstituted in February 2003 into two separate committees, aproposed amendmentNominating Committee andrestatement of the Company's by-laws at that meeting. - ---------- (1) Member of Audita Governance Committee.(2) Member of Compensation Committee.)- (4)
- Governance Committee
- (5)
- Nominating Committee
All Directors hold office until the next
annual meetingAnnual Meeting ofthe stockholdersStockholders and until their successors have been elected and qualified.The Company has no standing nominating committee.Officers of the Company serve at the discretion of the Board of Directors.11
Mr. John Keane, the founder of the Company, has been
Chief Executive Officer, President and a directorChairman of theCompanyBoard of Directors since the Company's incorporation in March 1967. Mr. Keane served as Chief Executive Officer and President of the Company from 1967 to November 1999. Prior to joining the Company, Mr. Keane worked for IBM's Data Processing Division and was employed as a consultant by Arthur D. Little, Inc., a Cambridge, Massachusetts management consulting firm. Mr. Keane is also a directororof Firstwave Technologies, Inc. andEG&G,APC, Inc.Mr. Brian Keane joined the Company in 1986 and
was appointedhas served as the Company's President and Chief Executive Officer since November 1999. From September 1997 to November 1999, Mr. Keane served as Executive Vice President and a member of the Office of the Presidentin September 1997.of the Company. From December 1996 to September 1997,Mr. Keane had beenhe served as Senior Vice President. From December 1994 to December 1996, he was an Area Vice President. From July 1992 to December 1994, Mr. Keane served as a Business Area Manager, and from January 1990 to July 1992, he served as a Branch Manager. Mr. Keane has been a director of the Company since May 1998. Mr. Keane has served as a trustee of Mount Holyoke College since May 2000. Brian Keane is a son of John Keane, the founder, and Chairman of the Company, andathe brother of John Keane, Jr., a director.Mr. Leahy joined the Company in August 1999 as Senior Vice President—Finance and Administration and Chief Financial Officer. From 1982 to August 1999, Mr. Leahy was employed by PepsiCo, during which time he held a number of positions, serving most recently as Vice President of Business Planning and Development for Pepsi-Cola International.
Mr. Hillier joined the Company in July 2002 as Senior Vice President, Human Resources. From June 1999 to February 2002, Mr. Hillier was Senior Vice President of Human Resources for CGU/One Beacon, an insurance company. From June 1990 to May 1999, Mr. Hillier served as Senior Vice President of Human Resources and Operations for Zurich Financial Services Group.
Mr. Atwell joined the Company in 1974 and served as a Branch Manager from 1974 to 1985 and as head of Seminars Projects & Services (SPS), formerly Productivity Management Services Group (PMSG), from 1985 to 1986. Mr. Atwell left the Company from 1986 to 1991. During that time, he served as Regional Sales Vice President for Palladian Software, Vice President of Sales for Applied Expert Systems, Vice President of Sales and Marketing for Access Development Corporation, and Vice President of Broadway and Seymour. In 1991, Keane acquired Broadway and Seymour and appointed Mr. Atwell Managing Director of the Company's Raleigh/Durham Branch. Since that time, Mr. Atwell has served as Area Manager from 1993 to 1994, Area Vice President from 1995 to 1999, and Senior Vice President of North American Branch Operations from 1999 to present.
Mr. Cappellino joined the Company as Senior Vice President, Offshore Solutions in March of 2002. From 1995 to March 2002, Mr. Cappellino served as Chairman and CEO of SignalTree Solutions, Inc. From 1993 to 1995, Mr. Cappellino was President of Network Solutions and Vice President/General Manager of Worldwide Telecommunications Marketing at Tandem Computers.
Mr. Paris joined the Company in November 1976. Mr. Paris has served as Senior Vice President—Healthcare Solutions since January 2000 and as Vice President and General Manager of the Healthcare Solutions Practice from August 1986 to January 2000. Mr. Paris also served as Area Manager of the Healthcare Solutions Practice from 1981 to 1986.
Mr. Shaw joined the Company in September 2002 as Senior Vice President and Managing Director of Keane Ltd. From 1996 to September 2002, Mr. Shaw was employed by Headstrong, a global restructuring corporation, during which time he held a number of positions, serving most recently as Chief Operating Officer of European Operations.
Ms. Toops joined the Company in August of 1992. Ms. Toops has served as President of Keane Consulting Group (KCG) and Senior Vice President of Keane, Inc. since June 2000. From 1992 to June 2000, Ms. Toops served as Executive Vice President of KCG. From 1977 through 1992, Ms. Toops held a variety of sales and management positions within the IBM Corporation.
12
Ms. Cirino has been a director of the Company since July 2001. Since 2000, Ms. Cirino has held the position of CEO and Chairman of Guardent, Inc., a managed security services corporation. Prior to 2000, Ms. Cirino served as Vice President of Sales and Marketing for Razorfish, an internet company. From 1997 to 1999, Ms. Cirino held the same position of Vice President of Sales and Marketing for I-cube, an internet company, which was acquired by Razorfish in October of 1999. Prior to 1997, Ms. Cirino held the position of Vice President of Sales for Shiva Corporation, a developer of remote access products for enterprise networks.
Mr. Fain has been a director of the Company since November 2001 and served as Senior Vice President of the Company from November 2001 through March 2002. Prior to joining the Company, Mr. Fain was the founder, Chief Executive Officer and Chairman of the Board of Directors of Metro Information Services, which was acquired by the Company in November 2001. Mr. Fain's role at Metro Information Services also included serving as President until January 2001 and Chairman of the Compensation Committee until February 1999.
Mr. Harkins has been a director of the Company since February 1997. Mr. Harkins is currently the President and Chief Executive Officer of Linkage, Inc., an organizational development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins was Vice President of Human Resources of the Company.
Mr. Hindle has been a director of the Company since February 1995. Mr. Hindle is currently retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President and, subsequently, Senior Vice President of Digital Equipment Corporation. Mr. Hindle is also a director of Mestek, Inc. and CareCentric, Inc.
Mr. John Keane, Jr.
joinedhas been a director of the Companyin 1987since May 1998. Mr. Keane is the founder of ArcStream Solutions, Inc., a consulting and systems integration firm focusing on cable and wireless solutions, and has been its President and Chief Executive Officer since July 2000. From September 1997 to July 2000, he wasappointedExecutive Vice President and a member of the Office of the Presidentin September 1997.of the Company. From December 1996 to September 1997,Mr. Keane had beenhe served as Senior Vice President. From December 1994 to December 1996, he was an Area Vice President. From January 1994 to December 1994, Mr. Keane served as a Business Area Manager. From July 1992 to January 1994, he acted as manager of Software Reengineering, and from January 1991 to July 1992, he served as Director of Corporate Development.Mr. Keane has been a director of the Company since May 1998.John Keane, Jr. is a son of John Keane, the founder and Chairman of the Company, and a brother of Brian Keane.9Mr. Leahy joined the Company in August 1999 and was appointed to the position of Senior Vice President and Chief Financial Officer. Prior to these roles, Mr. Leahy was Vice President of Business Planning and Development for Pepsi-Cola International. Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of the Healthcare Solutions Practice in 1981 and has served as Vice President and General Manager of the Healthcare Solutions Practice since August 1986. Ms. Southard joined the Company in July 1983 and has been Vice President - Human Resources since December 1995. Ms. Southard served as Director of HR Operations from August 1994 to December 1995, Manager of Human Resources and Administration from September 1993 to August 1994, and Staffing and Employment Manager from August 1988 to September 1993. Mr. Harkins has been a director since February 1997. Mr. Harkins is currently the President and Chief Executive Officer of Linkage, Inc., an organizational development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins was Vice President of Human Resources of the Company. Mr. Hindle has been a director since February 1995. Mr. Hindle is currently retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President and, subsequently, Senior Vice President of Digital Equipment Corporation. Mr. HindleKeane is also a director ofCP Clare Corporation, Mestek,Ezenia! Inc.and Simione Central Holdings, Inc., a collaboration software company.Dr. Rockart has been a director of the Company since the Company's incorporation in March 1967. Dr. Rockart has been a Senior Lecturer Emeritus at the Alfred J. Sloan School of Management of the Massachusetts Institute of Technology (MIT) since July 2002. Dr. Rockart served as a Senior Lecturer at the Alfred J. Sloan School of Management of MIT from 1974 to July 2002 and
has beenwas the Director of the Center for Information Systems Researchsince 1976.from 1976 to 2000. Dr. Rockart is also a director ofComShareComshare, Inc. and Selective Insurance Group.Mr.
ShaftoSteinour has beenadirector of the Company since July1994.2001. Since July 2001, Mr.Shafto is currently retired. From January 1998 to April 1998, Mr. Shafto was Chairman of New England Financial. Through December 31, 1997, he was Chairman,Steinour has served as the Chief Executive Officerand PresidentofNew England Life Insurance Company, an insurance and investment firm, which he joined in 1972Citizens Bank of Pennsylvania. From January 1997 to July 2001, Mr. Steinour served asSecondVicePresident for Computer Systems Development and Information Systems.Chairman of Citizens Financial Group, a commercial bank holding company. From October 1992 to December 1996, Mr.Shafto was namedSteinour served as the Executive Vice President and ChiefOperatingCredit Officer ofNew England Life Insurance Company in 1989 and assumed the positionCitizens Wholesale Banking Group ofChief Executive Officer in January 1992. He was elected to the office of Chairman of New England Life Insurance Company effective July 1, 1993.Citizens Financial Group.Compensation of the Company's non-employee directors currently consists of an annual
director'sdirectors' fee of $4,000 plus $1,000 andexpensesexpense reimbursement for each meeting of the Board of Directors13
attended. Effective for the annual directors term beginning with the Company's 2003 Annual Meeting of Stockholders, the compensation of the members of the Board of Directors will be as follows:
Compensation Amount Annual retainer $20,000 Additional compensation: Fee per Board Meeting 2,000 Annual fee for Chairperson of Nominating Committee �� 5,000 Annual fee for Chairperson of Governance Committee 5,000 Annual fee for Chairperson of Compensation Committee 15,000 Annual fee for Chairperson of Audit Committee 25,000 Committee meetings and telephonic meetings of the Board No additional fee (part of annual retainer) Initial stock option grant for a new Director 10,000 shares of common stock to be granted on the date of election. Such options shall vest in 3 equal annual installments and the exercise price shall be the closing price of the Company's common stock on the American Stock Exchange on the date of grant. Annual stock option grant 5,000 shares of common stock to be granted on the date of the Annual Meeting. Such options shall vest in 3 equal annual installments and the exercise price shall be the closing price of the Company's common stock on the American Stock Exchange on the date of grant. The compensation of the Company's non-employee directors is determined on an approximate fifty-two week period (the "Annual Directors Term") that runs from annual meeting date to annual meeting date rather than on a calendar year. A director may elect to receive his or her annual fee or meeting attendance fees for an Annual Directors Term in the form of shares of common stock in lieu of cash payments. If a director elects to receive shares of common stock in lieu of cash as payment for the annual fee or meeting attendance fees, the number of shares to be received by the director will be determined by dividing the dollar value of the annual fee or the meeting attendance fees owed by the closing price of Keane's common stock as reported on the American Stock Exchange on the last day of the Annual Directors Term.
Directors generally make their elections as to the form of compensation for his or her annual fee or meeting attendance fees in July of each year and such election is valid for the Annual Directors Term beginning in the calendar year in which the election is made.
Non-employee directors are also eligible to receive stock options under the Company's stock incentive plans. During 2002, the Company did not grant stock options to non-employee directors. Directors who are officers or employees of the Company do not receive any additional compensation for their services as directors.
1014
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's authorized capital stock consists of 200,000,000 shares of
Common Stock,common stock, $.10 par value per share; 503,797 shares ofClassclass BCommon Stock,common stock, $.10 par value per share; and 2,000,000 shares of Preferred Stock, $.01 par value per share. As of March10, 2000,7, 2003, there were69,862,44668,331,059 shares ofCommon Stockcommon stock outstanding and held of record by approximately60,0002,843 registered stockholders;284,987284,599 shares ofClassclass BCommon Stockcommon stock outstanding and held of record by approximately120108 registered stockholders; and no shares ofPreferred Stockpreferred stock outstanding.COMMON STOCK AND CLASS B COMMON
STOCK:STOCKVoting. Each share of
Common Stockcommon stock is entitled to one vote on all matters submitted to stockholders and each share ofClassclass BCommon Stockcommon stock is entitled to ten votes on allsuch matters.matters submitted to stockholders. The holders ofCommon Stockcommon stock andClassclass BCommon Stockcommon stock vote as a single class on all actions submitted to a vote of the Company's stockholders, except that separate class votes of the holders ofCommon Stockcommon stock andClassclass BCommon Stockcommon stock are required with respect toauthorize further issuanceamendments to the articles ofClass B Common Stockorganization that alter or change the powers, preferences, or special rights of their respective classes or as to affect them adversely, andcertain charter amendments.with respect to such other matters as may require class votes under Massachusetts law. Voting for directors is non-cumulative.As of March
10, 1999,7, 2003, theClassclass BCommon Stockcommon stock represented less than1%1.0% of the Company's outstanding equity, but had approximately4%4.0% of the combined voting power of the Company's outstandingCommon Stockcommon stock andClassclass BCommon Stock.common stock. Thesubstantialvoting rights of theClassclass BCommon Stockcommon stock may makethe CompanyKeane less attractive as the potential target of a hostile tender offer or other proposal to acquire the stock or business ofthe CompanyKeane and render merger proposals more difficult, even if such actions would be in the best interests of the holders of theCommon Stock.common stock.Dividends and Other Distributions. The holders of
Common Stockcommon stock andClassclass BCommon Stockcommon stock are entitled to receive ratably such dividends, if any, as may be declared bytheKeane's Board of Directors, out of funds legally available therefore, except that the Board of Directors may not declare and pay a regular quarterly cash dividend on the shares ofClassclass BCommon Stockcommon stock unless anoncumulativenon-cumulative per share dividend which is $.05 per share greater than the per shares dividend paid on the class B common stock is paid at the same time on the shares ofCommon Stock.common stock. In the event of a liquidation, dissolution, or winding up ofthe Company,Keane, holders ofCommon Stockcommon stock andClassclass BCommon Stockcommon stock have the right to ratable portions oftheKeane's net assetsof the Company availableafter the payment of all debts and other liabilities.Trading Markets.
The Company's Common Stock is traded on the American Stock Exchange. The Common Stock is also registered pursuant to the Securities Exchange Act of 1934, as amended. The Company furnishes to the holders of its Common Stock and Class B Common Stock the same information and reports concerning the Company.Shares ofClassclass BCommon Stockcommon stock are not transferable by a stockholder except fortransfers (i) bytransfers:
- •
- By gift,
(ii) in- •
- In the event of the death of a stockholder, or
(iii) by- •
- By a trust to a person who is the grantor or a principal beneficiary of
such trust (individualsthat trust.Individuals or entities receiving
Classshares of class BCommon Stockcommon stock pursuant tosuchthese transfersbeingare referred to as"Permitted Transferees")."permitted transferees." TheClassclass BCommon Stockcommon stock is not listed or traded on any exchange or in any market, and no trading market exists for shares of theClassclass BCommon Stock.common stock. TheClassclass BCommon Stockcommon stock is, however, convertible at all times, and without cost to the stockholder, into shares ofCommon Stockcommon stock on a share-for-share basis. Shares ofClassclass BCommon Stockcommon stock are automatically converted into an equal number ofsuchshares ofCommon Stockcommon stock in connection with any transfer ofsuchthose shares other than to aPermitted Transferee.permitted transferee. In addition, all of the outstanding shares ofClassclass BCommon Stock15
common stock are convertible into shares of
Common Stockcommon stock upon a majority vote of the Board of Directors.Future Issuance of Class B Common Stock; Retirement of Class B Common Stock Upon Conversion into Common Stock. The Company may not issue any additional shares of
Classclass BCommon Stockcommon stock withoutthe approval of a majority of the votes of the outstanding shares of Common Stock and Class B Common Stock voting as separate classes. The Board of Directors may issue shares of authorized but unissued Common Stock and Preferred Stock without furtherstockholderaction.approval. All shares ofClassclass BCommon Stockcommon stock converted intoCommon Stockcommon stock are retired and may not be reissued.Other Matters. The holders of
Common Stockcommon stock andClassclass BCommon Stockcommon stock have no preemptive rights or,(exceptexcept as describedabove)above, rights to convert their stock into any other securities and are not subject to future calls or assessments by the Company. The common stock is listed on the American Stock Exchange under the symbol "KEA." All outstanding shares of common stock and class B common stock are fully paid and non-assessable. The rights, preferences, and privileges of holders ofCommon Stockcommon stock and class B common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series ofPreferred Stockpreferred stock which the Company may designate and issue in the future.See "Preferred Stock" below. 11PREFERRED
STOCK:STOCKThe Company's Articles of Organization authorize the issuance of up to 2,000,000 shares of Preferred
Stock, $.01 par value per share.Stock. Shares of Preferred Stock may be issued from time to time in one or more series, and the Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions, including the dividend rights, conversion rights, voting rights, terms of redemption, redemption price or prices, and liquidation preferences, of anysuchseries of Preferred Stock, and to fix the number of shares of any such series of Preferred Stock without any further vote or action by the stockholders. The voting and other rights of the holders ofCommon Stockcommon stock andClassclass BCommon Stockcommon stock will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stock that may be issued in the future.IssuancesThe issuance of shares of Preferred Stock, while providing desirable flexibility in connection with acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock.PRICE RANGE OF COMMON STOCK AND DIVIDEND
POLICY:POLICYThe Company's
Common Stockcommon stock is traded on the American Stock Exchange under the symbol "KEA." The following table sets forth, for the periods indicated, the high and lowclosing pricessales price per share as reported by the American Stock Exchange.Stock Price High Low ---- --- 1999 First Quarter $42.50 $21.31 Second Quarter 31.69 18.00 Third Quarter 28.75 20.50 Fourth Quarter 32.75 20.06 1998 First Quarter $56.50 $35.25 Second Quarter 59.00 42.75 Third Quarter 60.94 36.00 Fourth Quarter 39.94 28.12
Stock Price Period High Low 2002 First Quarter $ 19.18 $ 14.30 Second Quarter 16.82 12.30 Third Quarter 12.70 5.99 Fourth Quarter 10.10 5.29
2001
First Quarter $ 18.75 $ 9.28 Second Quarter 22.00 11.40 Third Quarter 21.01 12.45 Fourth Quarter 20.05 13.25 16
The closing price of the
Common Stockcommon stock on the American Stock Exchange on March10, 20007, 2003 was$25.625.$7.67.The Company has not paid any cash dividend since June 1986. The Company currently intends to retain all of its earnings to finance future growth and therefore does not anticipate paying any cash dividend in the foreseeable future. The Company's new $50.0 million credit facility with two banks contains restrictions that may limit its ability to pay cash dividends in the future.
The Company's Articles of Organization restrict the ability of the Board of Directors to declare regular quarterly dividends on the
Classclass BCommon Stock. 12common stock. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 1999Total revenues $285,004 $280,465 $255,601 $220,022 Income (Loss) before income taxes 51,147 44,761 32,649 (5,744) Net income (Loss) 30,178 26,633 19,426 (3,163) Net income per share (basic) .42 .37 .27 (.04) Net income per share (diluted) .42 .37 .27 (.04) Year Ended December 31, 1998 Total revenues $230,056 $266,904 $285,465 $293,773 Income before income taxes 38,300 42,402 48,314 45,140 Net income 22,784 22,700 27,249 23,616 Net income per share (basic) .32 .32 .38 .33 Net income per share (diluted) .32 .31 .38 .3313
First quarter Second quarter Third quarter Fourth quarter For the year ended December 31, 2002
Total revenues
$
221,259
$
226,062
$
213,383
$
212,499
Gross profit 63,426 64,157 58,669 56,904 Income (loss) before income taxes 9,254 9,200 6,517 (11,335 ) Net income (loss) 5,553 5,521 3,910 (6,803 ) Net income (loss) per share (basic) 0.07 0.07 0.05 (0.10 ) Net income (loss) per share (diluted) 0.07 0.07 0.05 (0.10 )
For the year ended December 31, 2001
Total revenues
$
208,346
$
196,995
$
186,637
$
187,181
Gross profit 63,197 59,208 57,223 51,648 Income (loss) before income taxes 14,211 11,256 8,908 (5,154 ) Net income (loss) 8,454 6,698 5,302 (3,067 ) Net income (loss) per share (basic) 0.12 0.10 0.08 (0.04 ) Net income (loss) per share (diluted) 0.12 0.10 0.08 (0.04 ) 17
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1995 1996 1997 1998 1999 - --------------------------------------------------------------------------------------------------------Income Statement Data: Total revenues $394,619 $505,982 $706,801 $1,076,198 $1,041,092 Operating income 33,659 47,403 85,163 170,187 116,466 Net income 20,148 28,173 51,371 96,349 73,074 Net income per share (basic) .30 .40 .73 1.36 1.02 Net income per share (diluted) .30 .40 .72 1.33 1.01 *Weighted average common 67,036 69,780 70,096 71,053 71,571 shares outstanding (basic) *Weighted average common 67,728 70,540 71,603 72,284 72,395 shares and common share equivalents outstanding (diluted) - -------------------------------------------------------------------------------------------------------- Balance Sheet Data: Total assets $198,191 $251,771 $329,176 $458,959 $514,825 Total debt 9,146 16,502 9,493 3,930 11,403 Stockholders' equity 169,526 201,768 257,037 363,784 422,799 Book value per share 2.53 2.89 3.65 5.10 5.95 *Number of shares 67,114 69,792 70,342 71,336 71,051 outstanding - -------------------------------------------------------------------------------------------------------- Financial Performance: Total revenue growth(decline) 12.3% 28.2% 39.7% 52.3% (3.3)% Net margin 5.1% 5.6% 7.3% 9.0% 7.0% Return on average equity 12.8% 15.2% 22.4% 31.0% 18.6%*Adjusted to reflect the 2-for-1 stock split that was distributed on August 29, 1997 to shareholders of record as of August 14, 1997.
For the years ended December 31, 2002 2001 2000 1999 1998 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Income Statement Data: Total revenues $ 873,203 $ 779,159 $ 871,956 $ 1,041,092 $ 1,076,198 Operating income 10,357 19,753 27,921 116,466 170,187 Net income 8,181 17,387 20,354 73,074 96,349 Net income per share (basic) 0.11 0.25 0.29 1.02 1.36 Net income per share (diluted) 0.11 0.25 0.29 1.01 1.33 Weighted average common shares outstanding (basic) 74,018 68,474 69,646 71,571 71,053 Weighted average common share equivalents outstanding (diluted) 74,406 69,396 69,993 72,395 72,284
Balance Sheet Data:
Total cash and marketable securities $ 68,255 $ 129,243 $ 115,212 $ 142,763 $ 129,229 Total assets 685,674 679,903 463,594 519,307 458,959 Total debt 45,647 15,357 8,616 11,403 3,930 Stockholders' equity 490,584 529,173 370,677 422,799 363,784 Book value per share 7.06 7.00 5.48 5.95 5.10 Number of shares outstanding 69,521 75,509 67,675 71,051 71,336
Financial Performance:
Total revenue growth (decline) 12.1 % (10.6 )% (16.2 )% (3.3 )% 52.3 % Net margin 0.9 % 2.2 % 2.3 % 7.0 % 9.0 % All amounts prior to 1999 have been restated to reflect the acquisitions of Bricker & Associates, Inc., Icom Systems Limited, and Fourth Tier, Inc., which were accounted for as poolings-of-interests.
14ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects""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."RESULTSOVERVIEW
Keane plans, builds, manages, and rationalizes application software through its Business Consulting, Application Development and Integration (AD&I), and Application Development and Management Outsourcing (Applications Outsourcing) services. Keane develops long-term relationships with customers by providing a broad range of service offerings delivered on a local basis through an integrated network of branch offices in North America and in the United Kingdom. Branch offices work in conjunction with the Company's business consulting arm, Keane Consulting Group (KCG), and are supported by centralized Strategic Practices. The practices focus on developing repeatable approaches to common customer needs and challenges and help to gather and institutionalize the Company's best practices. Branch offices are also supported by Advanced Development Centers
18
(ADCs) in the United States, Canada, and India, which enable the Company to further improve the efficiency and economic advantage of the services it provides customers.
Given the recent economic downturn, many customers have deferred their investments in new information systems. As a result, Keane has concentrated its short-term efforts on helping customers to more efficiently manage their existing applications. This mix of services includes Applications Outsourcing and Applications Rationalization, a service that helps customers to identify and eliminate higher cost, non-core, and end-of-life applications. Applications Outsourcing is the Company's flagship service offering, because it represents a large, growing market, and provides Keane with long-term contracts and a high percentage of recurring revenue. Keane has also increased its focus on providing services to vertical markets, such as healthcare and the public sector, that have been less impacted by reductions in technology spending. In addition, the Company seeks to provide cost-effective services and to enhance its operating margins through the use of its near-shore Advanced Development Center in Halifax, Nova Scotia, and its offshore Advanced Development Centers in Hyderabad and Delhi, India. The Company acquired its offshore facilities as a result of its acquisition of SignalTree Solutions Holding, Inc. (SignalTree). The Company anticipates that use of its near-shore and offshore facilities will increase as a result of its focus on global delivery and the need of customers to continue to decrease costs associated with investments in technology. Finally, Keane has maintained tight control of its costs while executing a strategy that has created a business model with high operating leverage.
In order for Keane to remain successful in the near term, Keane must continue to maintain and grow its client base, provide high quality service and satisfaction to its existing clients, and continue to take advantage of cross selling opportunities. In the current economic environment, Keane must also provide clients with service offerings that are appropriately priced, satisfy clients' IT needs, and provide clients with measurable business benefit.
Keane believes that maximizing the generation of cash from operations is fundamental to building long-term per share value. To accomplish this, Keane believes that its ability to sell and deliver Applications Outsourcing and to cross-sell other services is critical to its long-term success. Attracting, retaining, and developing talented sales, management, and technical professionals is another essential component. In addition, the Company's ability to leverage Selling, General & Administrative (SG&A) expense over a broader base of revenue is crucial to increasing net income and cash provided from operations. Keane's management measures Keane's performance on a quarter by quarter and year-over-year basis by comparing plan, build, and manage revenues, Applications Outsourcing revenues, the number of billable personnel, gross margins, and SG&A as a percentage of revenues for such periods. Another key metric used by Keane's management is bookings, or new sales to customers.
APPLICATION OF
OPERATIONS, 1999 VS. 1998:CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe discussion and analysis of Keane's financial condition and results of operations are based on consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Keane to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of Keane's financial condition and results of operations. The Company believes that the accounting policies described below meet these characteristics. Keane's significant accounting policies are more fully described in the notes to the consolidated financial statements.
19
Revenue Recognition
Keane recognizes revenue as services are performed or products are delivered in accordance with contractual agreements and generally accepted accounting principles. For general consulting engagements, revenue is recognized on a time and materials basis as services are delivered. For the majority of our outsourcing engagements, the Company provides a specific level of service each month for which it bills a standard monthly fee. Revenue for these engagements is recognized in monthly installments over the billable portion of the contract. These installments may be adjusted to reflect changes in staffing requirements and service levels consistent with terms of the contract.
For fixed price engagements, revenue is recognized on a percentage of completion basis over the life of the contract. The Company uses estimated labor-to-complete to measure the percentage of completion. Percentage of completion recognition relies on accurate estimates of the cost, scope, and duration of each engagement. If the Company does not accurately estimate the resources required or the scope of the work to be performed, then future revenues may be negatively affected or losses on existing contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.
Revenue associated with application software products is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on installed products are recognized on a pro-rated basis over the term of the agreement.
For the majority of outsourcing engagements, the Company provides a specific level of service each month for which it bills a standard monthly amount. Revenue for these engagements can be recognized in monthly installments over the billable portion of the contract or on a time and materials basis. Installment amounts may be adjusted to reflect changes in staffing requirements or service level agreements. Costs of transitioning the employees and ensuring the Company meets required service level agreements may be capitalized over defined periods of time.
In all consulting engagements, outsourcing engagements, and software application sales, the risk of issues associated with satisfactory service delivery exists. Although management believes these risks are adequately addressed by the Company's adherence to proven project management methodologies, proprietary frameworks, and internal project audits, the potential exists for future revenue charges relating to service delivery issues.
Allowance for Bad Debts
Each accounting period, Keane evaluates accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue in the period the risk is identified. Considerable judgment is used in assessing the ultimate realization of these receivables including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. If the Company's evaluation of service delivery issues or a client's ability to pay is incorrect, the Company may incur future adjustments to revenue.
Property and Equipment
The Company periodically reviews its property and equipment for impairment in accordance with Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." In determining whether an asset is impaired, the Company must make assumptions regarding recoverability of costs, estimated future cash flows from the asset, intended use of the asset, and other related factors. If these estimates or their related assumptions change, the Company may be required to record impairment charges for these assets.
20
Goodwill and Intangible Assets
In assessing the recoverability of the Company's goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets," and was, therefore, required to perform an impairment test on its goodwill and other intangibles with indefinite lives during the first six months of 2002, and then on a periodic basis thereafter. The Company's initial goodwill impairment analysis was completed during the second quarter of 2002, and was based on January 1, 2002 balances. Through this analysis it was determined that there was no impairment as of that date. Subsequently, during the fourth quarter of 2002, the company completed its annual impairment review based on September 30, 2002 balances and determined that there was no impairment as of that date. Future changes in estimates may result in a non-cash goodwill impairment that could have a material adverse impact on our financial condition and results of operations.
The Company periodically reviews its identifiable intangible assets for impairment in accordance with Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment of Disposal of Long-lived Assets." In determining whether an intangible asset is impaired, the Company must make assumptions regarding estimated future cash flows from the asset, intended use of the asset and other related factors. If the estimates or the related assumptions used to determine the value of the intangible assets change, the Company may be required to record impairment charges for these assets.
Income Taxes
Keane accounts for income taxes in accordance with FAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Based on prior taxable income and estimates of future taxable income, the Company has determined that it is more likely than not that its net deferred tax assets will be fully realized in the future. If actual taxable income varies from these estimates, the Company may be required to record a valuation allowance against its deferred tax assets resulting in additional income tax expense which will be recorded in the Company's consolidated statement of operations.
Stock-based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the closing price of the shares at the date of grant. The Company adopted the disclosure provisions of FAS 123, (FAS 123) "Accounting for Stock-Based Compensation," and applies APB Opinion 25, "Accounting for Stock Issued to Employees," to its grants of stock options and accordingly, recognizes no compensation expense for stock-based employee compensation provided options are issued at the current market value. The Company also grants restricted stock for a fixed number of shares to employees for nominal consideration. Compensation expense related to restricted stock awards is recorded ratably over the restriction period.
21
Keane has recorded restructuring charges and reserves associated with restructuring plans approved by management over the last four years. These reserves include estimates pertaining to employee separation costs and real estate lease obligations. The reserve associated with lease obligations could be materially affected by factors such as the ability to obtain subleases, the creditworthiness of sub-lessees, market value of properties, and the ability to negotiate early termination agreements with lessors. While the Company believes that its current estimates regarding lease obligations are adequate, future events could necessitate significant adjustments to these estimates. Future changes in estimates may result in adjustments to the Company's consolidated financial statements.
Results of Operations, 2002 vs. 2001
The Company's total revenue for
19992002 was$1.04 billion,$873.2 million, a3.3%12% increase from revenue of $779.2 million for 2001. This increase in total revenue was primarily the result of new clients and new client billings due to the acquisition of Metro Information Services, Inc. (Metro), which was completed on November 30, 2001, and the acquisition of SignalTree Solutions Holding, Inc., which was completed on March 15, 2002.Revenue from the Company's Plan services was $66.9 million in 2002, a decrease of 11% from
$1.08 billion$75.3 million in1998.2001. Plan revenue is comprised primarily of business consulting services delivered by KCG, the Company's business consulting arm, and IT consulting services, which are sold and implemented out of Keane's network of branch offices. Plan services include Keane's Applications Rationalization Service. The decrease in Plan revenue was primarilyathe result of therapiddeferral of consulting projects andanticipateda decrease in billing rates caused by general economic conditions.Revenue from the Company's Build services was $216.2 million in 2002, a decrease of 19% from $265.9 million in 2001. Keane's Build revenue, which consists primarily of Application Development and Integration (AD&I) business, was also adversely affected during 2002 by the deferral of software development projects in both North America and the United Kingdom, as well as by reduced billing rates due to the current reduction in capital spending related to technology. However, the decline in
Year 2000 compliance revenue. Year 2000 compliancethe Company's Build services revenuedecreased 44.2% to $206.1was offset in part by revenue generated from the less cyclical public sector and healthcare related vertical markets, which contributed growing and more stable revenue streams within the Build services sector.Revenue from the Company's Manage services, which consist primarily of Keane's Applications Outsourcing service, as well as Staff Augmentation services and other Maintenance and Migration services, were $590.1 million
for 1999during 2002, an increase of 35% from$369.5$437.9 million in1998. However,2001. This improvement was theCompany's 1999result of increasing revenue from Keane's Applications Outsourcing service, and the acquisitions of Metro Information Services, Inc. and SignalTree Solutions Holding, Inc. Although not immune from economic fluctuations, Applications Outsourcing revenues are more stable than those associated with Plan or Build due to the long-term and recurring nature of outsourcing contracts and the cost-saving benefits related to outsourcing. Generally, under an Applications Outsourcing agreement, the Company receives a fixed monthly fee in return for meeting or exceeding a contractually agreed upon service level. Applications Outsourcing agreements generally do not require any capital outlay from the Company, which recognizes outsourcing revenue and expense on a monthly basis consistent with the service provided to itscore Plan, Buildcustomers. The Company does not employ percentage-of-completion accounting on its outsourcing agreements.Applications Outsourcing revenue was $408.5 million during 2002, and
Manage services, excluding Year 2000 compliance, was $835.0 million,represented 47% of total revenue, up18.2%4% from$706.7$393.9 million in1998. Plan, Build, and Manage revenue refer to the Company's three core business lines, Business and IT Consulting, e-Solutions,2001. The increase in ApplicationsDevelopment and Management Outsourcing. The growth in non-Y2K revenueOutsourcing was a result of clients' ongoing needs to efficiently manage existing software portfolios.22
The Company observed no clear trend of an increase in discretionary IT spending during 2002 or the first two months of 2003. As a result, the Company anticipates continuing softness in its AD&I business, which represents a majority of its Build sector, and its Plan sector, until economic conditions improve and customers once again begin funding technology projects. However, the Company continues to see ongoing opportunities in its Applications Outsourcing business, which represents a majority of its Manage sector as well as opportunities within the healthcare sector. The Company believes that outsourcing provides greater stability of revenue due to long-term contracts and recurring revenue.
Total billable employees for all operations were 6,175 billable employees as of December 31, 2002, down from 6,566 total billable as of December 31, 2001. This year-over-year decrease resulted from a need to bring personnel resources, which account for the vast majority of Keane's direct costs, in alignment with anticipated revenue. The Company's
strategic repositioning executedbase of billable employees within its India operation was 413 billable employees as of December 31, 2002. The Company did not have billable employees in India during 2001.On March 15, 2002, Keane acquired SignalTree Solutions Holding, Inc., a privately-held, United States-based corporation with two software development facilities in India and additional operations in the United States, by the merger of a wholly-owned subsidiary of Keane into SignalTree Solutions. Under the terms of the merger agreement, Keane paid $68.2 million in cash for SignalTree Solutions. Keane expects the addition of SignalTree Solutions to enhance its value proposition to customers by providing access to world-class software development processes as well as the economic advantage of a large pool of cost-effective technical professionals.
As of December 31, 2002, in connection with a third quarter acquisition, the Company had a recorded contingent liability of $895,000 related to certain earn-out considerations. The $895,000 is expected to be paid out during the
year. This repositioning has yielded growth in important areas such as e-Solutions, which totaled $108first quarter of 2003. Future earn-outs are based on specific net revenue targets. Payments for achieving these goals will range from $1.0 to $2.0 million in future periods. The Company also recorded $3.0 million as deferred revenueduring 1999. Growth in Keane's core Plan, Build,related to contingent service credits andManage revenue was negatively impacted during the second half of 1999 due toissued across-industry Y2K-related freeze among many of Keane's clients, which deferred the start of new development projects to lower their Y2K-related risk. Despite the Y2K freeze, Keane's 1999 Plan, Build, and Manage revenue was up 34.0%, 21.0%, and 11.1% to $110.9$3.0 million$331.1 million, and $370.9 million, respectively, from 1998.non-interest bearing note payable as partial consideration. The note has a one-year term with a possible one-year extension based on additional acquisition service credits.Salaries, wages, and other direct costs for
19992002 were$702.8$630.0 million, or67.5%72.2% of total revenue, compared to$696.8$547.9 million, or64.7%70.3% of total revenue, for1998, an2001. The increaseof 2.8%. This increasein direct costs was primarily attributable to the Metro and SignalTree Solutions acquisitions. The Company's gross margins for 2002 were 27.8%, asa percentage of revenue is due primarilycompared to 29.7% for 2001. The decrease in gross margins reflects continuing softness in the demand for IT services resulting in lower billing rates and utilization ofCompanybillableheadcount, caused by the rapid decline of Y2K revenue and the Y2K-related deferral of new projects. Due to the extraordinary nature of expenses related to Keane's transition from Y2K and to bring costs in closer alignment with revenues, in the Fourth Quarter of 1999, the Company incurred a onetime restructuring charge of $13.7 million or 1.3% of revenue. These charges are related to employee severance costs, costs associated with asset impairments, payments to certain employees and consolidation of less profitable business units and the closing of certain facilities. It is expected that approximately $4.1 million, associated with severance costs and payments to certain employees, will be paid in 2000. The remaining $2.9 million will be paid out as branch office closures occur.personnel.Selling, General & Administrative ("SG&A") expenses for
19992002 were$199.0$198.8 million, or19.1%22.8% of total revenue, as compared to$193.4$186.7 million, or18.0%24.0% of total revenue, for 2001. The decrease in1998, an increase of 1.1%. This increaseSG&A as a percentage of revenue was the result of cost synergies obtained from the acquisition of Metro Information Services, Inc. as well as the Company's continuing focus on tightly controlling discretionary expenses. The increase in SG&A expenses was attributable to personnel costs incurred in connection with the Metro and SignalTree Solutions acquisitions, as more fully described below.During the first quarter of 2002, the Company completed the integration of Metro's corporate functions with its own, and during the second quarter of 2002, the Company completed the consolidation and relocation of overlapping branch offices. During the second quarter of 2002, the Company also integrated United States-based operations acquired from SignalTree Solutions with its own. During the third quarter of 2002, the Company integrated all corporate functions of SignalTree Solutions into its corporate headquarters in Boston, Massachusetts.
During the fourth quarter of 2002, due to changes in assumptions and pursuant to plans and acquisitions, Keane recorded a restructuring charge of $17.6 million, including $12.8 million associated
23
with real estate, $1.9 million associated with fixed assets, and $2.9 million associated with workforce reductions. The real estate charges represent consolidation of both corporate and field properties, as well as changes in estimates for previously recorded restructuring charges. During the fourth quarter of 2001, Keane recorded a restructuring charge of $10.4 million relating to the costs of workforce reductions, consolidation of branch offices, impaired assets, and certain other expenditures.
Amortization of intangible assets for 2002 was $16.4 million, or 1.9% of total revenue, compared to $14.5 million, or 1.9% of total revenue, for 2001. The increase in amortization of intangible assets was primarily attributable to additional intangible assets resulting from the Company's acquisitions of Metro Information Services, Inc, and SignalTree Solutions offset by the impact of the adoption of FAS 142, under which goodwill is no longer amortized.
Interest and dividend income totaled $2.5 million for 2002, compared to $7.0 million for 2001. The decrease in interest and dividend income was attributable to fewer cash reserves earning interest and dividends due to the use of cash to retire debt associated with the acquisition of Metro Information Services, Inc., the acquisition of SignalTree Solutions, and the repurchase of shares of the Company's common stock, as well as interest rate declines. Other income was $1.0 million for 2002, as compared to other income of $2.7 million in 2001. Other income during 2001 related to (i) a gain of $4.0 million from the sale of the Company's Help Desk business partially offset by the Company's decision to write-off certain equity investments totaling $2.0 million, and (ii) gains from the sale of investments.
The Company's effective tax rate was 40.0% for 2002, down from 40.5% in 2001. This decrease was a direct result of the adoption of FAS 142, offset by an adjustment of prior year's estimated tax liability.
Net cash provided from operations was $56.7 million during 2002, as compared to $83.2 million during 2001. Cash provided from operations in 2002 includes the effects of payments related to restructuring in the amount of $16.5 million. The decrease in net cash from operations was primarily attributable to a decrease in net income. The Company continues to focus on using cash flow to fund potential acquisitions, stock repurchases, and to build long-term per share value.
Results of Operations, 2001 vs. 2000
The Company's revenue for 2001 was $779.2 million compared to $876.9 million in 2000. Revenue from Keane's divested Help Desk business totaled $5.2 million and $43.3 million for 2001 and 2000, respectively. Keane's revenue during 2001 was negatively impacted by the economic slowdown and the related reduction in technology spending. However, this was partially offset by a $16.8 million increase in revenue from the Company's public sector business and a $31.0 million increase in revenue from its Applications Outsourcing service. Applications Outsourcing revenue represented 51% of total revenue during 2001 or $393.9 million, an increase of 8.5% from $363.0 million during 2000.
Revenue from the Company's Plan services was $75.3 million, a decrease of 30% from $107.1 million in 2000. Plan revenue for 2001 was negatively impacted by a general deferral of capital expenditures and consulting projects.
Revenue from the Company's Build services was $265.9 million in 2001, a decrease of 17% from $322.2 million in 2000. During the fourth quarter of 2000, Keane incurred a charge of $13.5 million, of which $8.6 million was related to the consolidation and/or closing of certain non-profitable branch offices, employee severance costs, facility leases, and for other miscellaneous purposes with the balance related to increased reserves against accounts receivable. During the fourth quarter of 2001, Keane booked $10.4 million in restructuring charges relating to the costs of workforce reductions, consolidation of branch offices, impaired assets, and certain other expenditures.
As anticipated, Keane's Build revenue was also adversely affected in 2001 by the challenging economic environment and the related deferral of new software development projects in both North
24
America and the United Kingdom. This decline was offset in part by ongoing Build project revenue from existing Global 2000 customers and revenue of $128.4 million attributable to public sector business from federal and state governments. Engagements within the public sector represented approximately 16.5% of Keane's total revenue in 2001.
Revenue from the Company's Manage services was $437.9 million in 2001 and $437.6 million in 2000. Keane's 2001 revenue from Manage services included approximately $16.0 million as a result of its acquisition of Metro Information Services, on November 30, 2001. Revenue from the Company's divested Help Desk business was approximately $5.2 million during 2001 and $43.3 million during 2000. On February 12, 2001, the Company sold its Help Desk operation to Convergys Corporation in return for $15.7 million in cash.
The increase in Keane's Manage revenue during 2001 was driven by continuing sales growth in the Company's
revenueApplications Outsourcing business, as Global 2000 customers sought to improve productivity andinvestmentsefficiencies associated with the management and enhancement of their application portfolios. This business has not been as negatively impacted by the economy as Keane's Build business.In response to this challenging business climate, the Company
continuedexpanded its customer base and critical mass with its acquisition of Metro Information Services. Metro provided Keane with hundreds of new customers tomake inwhom thedevelopment and marketingCompany can cross-sell its services. Of Metro's 300 largest customers that accounted for 90% of itscore service offerings.revenue for the twelve months ended June 30, 2001, 236 were new customers for Keane. In addition, the Company improved operational leverage by combining corporate functions and consolidating overlapping branch offices. Of Metro's 33 branch offices, 26 were within geographic markets currently served by Keane.Salaries, wages, and other direct costs for 2001 were $547.9 million, or 70.3% of total revenue, compared to $621.2 million, or 71.2% of total revenue, for 2000. The decline in costs resulted from the sale of the Company's
objective islower margin Help Desk operations and its ongoing efforts toaggressively managebring costs in alignment with revenue. As a result, Keane's gross margins for 2001 increased to 29.7%, up from 28.8% during 2000.Selling, General & Administrative ("SG&A") expenses for 2001 were $186.7 million, or 24.0% of total revenue, compared to $201.9 million, or 23.1% of total revenue, for 2000. The decline in SG&A
asexpenditures during 2001 was apercentageresult ofrevenue, by realizingtheeconomiessale ofscale associatedthe Company's Help Desk operations and aggressive control of discretionary spending to bring cost in alignment withincreasing revenue without proportionately increasing SG&A.revenue. The Company intends to continue to control aggressively its discretionary expenditures until economic conditions improve and spending on IT projects increases.Amortization of goodwill and other intangible assets for
19992001 was$9.2$14.5 million, or0.9%1.9% of total revenue, compared to $12.4 million, or 1.4% of total revenue, in 2000. The increase in amortization for 2001 was attributable to additional intangible assets as a result of the Company's acquisition of Metro Information Services in November of 2001 and the acquisitions of Denver Management Group and Care Computer Systems in July and September of 2000.Interest and dividend income totaled $7.0 million for 2001, compared to $7.7 million
or 0.7% of revenue,for 2000. The slight decrease in1998. The increase is primarily attributable to the acquisitions executed during the current and prior year. Interest and other expenses for 1999 totaled $1.5 million, compared to $1.2 million in 1998. Interestinterest and dividend income was attributable to having less cash earning interest and dividend income as a result of using cash for1999 totaled $7.8acquisitions and the repurchase of Keane stock, and as a result of interest rate declines. Other income was $2.7 million for 2001 as compared to$5.2other expense of $0.9 million in1998. The2000. This increase ininterestother income was related to a gain of $4.0 million from the sale of Keane's Help Desk operation, partially offset by the Company's decision to write-off certain equity investments totaling $2.0 million during the first quarter of 2001, andother related income can be attributed togains from theincrease in investments, which grew to $89.7 million at year-end 1999 from $77.5 million at year-end 1998. Pretax income for 1999 was $122.8 million, or 11.8%sale ofrevenue, down 29.5% from pretax income of $174.2 million, or 16.2% of revenue in 1998.investments.The Company's effective tax rate
for 1999was 40.5%compared to 44.7%in1998. The decrease is primarily attributable to2001 and 2000.25
Net cash provided from operations was $83.2 million during 2001, before proceeds from the
high tax rate incurred in 1998 which was impacted by non-deductible merger costssale of$8.1the Help Desk business of $15.7 million and$1.7the investment of $4.0 million for the repurchase of Keane shares, and $96.1 million during 2000. The Company is focused on continuing to optimize cash flow in order to fund potential mergers and acquisitions, stock repurchases, and to build long-term shareholder value.RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (FAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under FAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. The Company is required to adopt FAS 145 in the first quarter of 2003 and does not expect the adoption of this statement to have a material impact on its financial condition or results of operations.
In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to exit or disposal plan. Costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, branch closing, or other exit disposal activity. This statement is effective for exit or disposal activities initiated after December 31, 2002. FAS 146 may affect the timing of the Company's recognition of future exit or disposal costs, if any.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The statement requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees issued prior to December 31, 2002 should not be revised or restated as a result of this interpretation.
On December 31, 2002, the
conversionFinancial Accounting Standards Board issued Statement ofFourth Tier, Inc from cashFinancial Accounting Standards No. 148 (FAS 148) "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment toaccrual basisFAS 123, "Accounting fortax reporting. NetStock-Based Compensation." The statement provides three transition methods for entities electing to adopt the fair value recognition provisions of Statement 123 for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements. The statement is effective for1999 were $73.1 million and $1.01 per share diluted, respectively, down 24.2%fiscal years ending after December 15, 2002. Currently, the Company does not elect to transition from$96.3 million and $1.33 per share diluted, respectively, in 1998. 15RESULTS OF OPERATIONS, 1998 VS. 1997: The Company's revenuethe intrinsic value method of accounting for1998 was $1.08 billion, a 52.3% increase from $706.8 million in 1997. The increase in revenue was a resultstock-based compensation to the fair value method. Adoption ofstrong growth generated bydisclosure provisions of this statement will not impact the Company'sservice offerings,financial condition or results of operations.In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which requires the consolidation of a variable interest entity, as defined by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a
26
variable interest shall treat variable interests in that same entity held by its related parties as its own interests.
The Company is presently evaluating whether or not City Square and
by five strategic acquisitions madeGateway LLC are variable interest entities and, if so, whether or not the Company is the primary beneficiary of these entities.If the Company determines that City Square or Gateway LLC, or both, are variable interest entities of which they are the primary beneficiary, the Company will be required to consolidate the financial position and results of operation of the entities for which it determines it is the primary beneficiary. Such consolidation will be required beginning July 1, 2003.
If the Company concludes it is not required to consolidate either of these entities, the Company will continue to account for its lease with City Square consistent with its past practice. As for its lease with Gateway LLC, if the Company concludes it is not required to consolidate this entity, the Company will amortize the asset and liability recorded during the
year. The Company experienced the largest revenue growth in Year 2000 Compliance Services and Application Outsourcing. Year 2000 Compliance revenue increased 146.4% to $369.4 million, Application Outsourcing revenue increased 48.8% to $155.3 million and Application Development increased 32.8% to $130.1 million. IT Consulting increased 48.4% to $54.0 million, primarily as a resultconstruction of theacquisitionfacility, and believes the net effect ofBricker & Associates, Inc. Help Desk revenue increased 25.5%such amortization included in its operating results will approximate the rent expense resulting from payments it is required to$49.2 million, Health Care Services and Sales increased 22.4% to $37.1 million, Supplemental Staffing revenue increased 13.5% to $263.9 million, and all other services increased 6.8% to $17.2 million. Salaries, wages, and other direct costs for 1998 were $696.8 million, or 64.7% of revenue, compared to $469.4 million, or 66.4% of revenue for 1997, a decrease of 1.7%. This decrease as a percentage of revenue was due tomake under theCompany's ability to increase average billing rates by more than the increase in related technical salary costs, as a result of the increase in strategic services work being performed by the Company. Selling, General, & Administrative ("SG&A") expenses for 1998 were $193.4 million or 18.0% of revenue, compared to $138.2 million or 19.5% of revenue in 1997, a decrease of 1.5% as a percentage of revenue. The Company's objective is to continue to reduce SG&A, as a percentage of revenue, by realizing the economies of scale associated with increasing revenue without proportionately increasing SG&A, investing in MIS to increase productivity, and continuing to implement cost saving programs such as national purchasing for volume purchase discounts in such areas as travel, office supplies, and computer equipment. Amortization of goodwill and other intangible assets for 1998 was $7.7 million, or 0.7% of revenue, compared to $14.0 million, or 2.0% of revenue, in 1997. The decrease is primarily attributable to certain assets becoming fully amortized at the end of 1997. Merger costs for 1998 were $8.1 million as compared to $0 for 1997. This increase was the result of investment banking, legal, accounting and other professional fees associated with the acquisitions of Bricker & Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were all accounted for as poolings-of-interests. Interest and other expenses for 1998 totaled $1.2 million, compared to $1.3 million in 1997. Interest and dividend income for 1998 totaled $5.2 million, compared to $4.2 million in 1997. The increase in interest and other related income was attributed to the increase in investments, which grew to $77.5 million at year-end 1998 from $50.7 million at year-end 1997. Pretax income for 1998 was $174.2 million, or 16.2% of revenue, up 97.7% from pretax income of $88.1 million, or 12.5% of revenue in 1997. The Company's effective tax rate for 1998 was 44.7% compared to 41.7% in 1997. This increase is due to $8.1 million of merger costs that are not deductible for state and federal taxes and a one-time tax expense of $1.7 million as the result of the requirement to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting. Net income and earnings per share for 1998 were $96.3 million and $1.33 per share diluted, respectively, up 87.6% and 84.7%, respectively from $51.4 million and $.72 per share diluted, respectively, in 1997.lease.LIQUIDITY AND CAPITAL
RESOURCES:RESOURCESThe Company's cash and investments at December 31,
1999 increased2002 decreased to$142.8$68.3 million from $129.2 million at December 31,1998.2001. Thisincreasedecrease was primarily attributable tonet income,the cost of the SignalTree Solutions acquisition of $68.2 million, which occurred in March of 2002, along with the cost associated with the Company's stock repurchase program, which totaled $54.1 million for the year. The Company experienced strong operating cash flow of $56.7 million, of which, $50.0 million was related to its continuing effort to decrease its Days Sales Outstanding (DSO), which helped fund its stock repurchase programs. The decrease in accounts receivable was offset additionally by purchases ofapproximately $37.6property and equipment of $7.8 million.On September 21, 2001, the Company announced that its Board of Directors had authorized the Company to repurchase up to 1,542,800 shares of its common stock over the next 12 months. A total of 175,000 shares of common stock were repurchased under this authorization during the second quarter of 2002, at an average price of $12.88 for a cost to $2.2 million. The remaining authorized amount of 1,367,800 shares, which would have expired on September 18, 2002, was added to the July 25, 2002 share authorization amount of 3,632,200 shares, for a total of 5 million
offset by decreasesshares authorized. The Company completed the purchase of the total authorized amount during the fourth quarter of 2002. The Company's total investment inaccounts payable and accrued expensesthis authorized share repurchase was $39.1 million at an average price per share ofapproximately $37.6 million and payments for acquisitions of $61.0 million.$7.83.On
May 26, 1999,October 25, 2002, theCompany'sBoard of Directors authorized the Company to repurchaseof up to 1,000,000an additional 5 million shares ofCommon Stock lasting until May 25, 2000. This repurchase program was completed duringits common stock over the next 12 months. The repurchases may be made on the open market or in negotiated transactions, and the timing and amount of shares repurchased will be determined by the Company's management based on its evaluation of market and economic conditions and other factors. During the fourth quarter of 2002 the Company purchased 1,323,600 shares of its common stock under this authorization for a total investment of $12.7 million at an average price per share of $9.59. The remaining authorized amount is 3,676,400 shares.Between May 1999
totaling approximately $23.9and December 31, 2002, the Company has invested $163.0 million to repurchase 11,955,800 shares of its common stock under seven separate authorizations.During 2002, the Company paid $16.5 million associated with restructuring charges from previous years. Refer to Note N to the audited condensed consolidated financial statements for a summary of the restructuring activity.
27
On September 25, 2002, the Company completed an acquisition of a business complementary to the Company's business strategy. The Company purchased all of the stock of the acquired business at a total cost of $6.2 million, consisting of $2.9 million in cash along with a note payable for $3.0 million and the remaining balance related to transaction costs. The note payable has an initial term of one year and may be settled, at the option of the holder, through cash payments or through services rendered by the Company to the holder. Based upon certain earn-out targets and other criteria, future consideration related to the acquisition could amount to $6.9 million.
On February 10,
2000,2003, the Companyannouncedreceived a $7.3 million award in connection with anadditional repurchase programarbitration proceeding initiated by the Company in 2000 against Signal Corporation for a breach ofup to 2,000,000 shares of Common Stock lasting untilan agreement between Signal Corporation and the Company's Federal Systems subsidiary.On February
9, 2001.The buyback program is expected to cost approximately $53 million.28, 2003, the Company entered into a new $50.0 million revolving credit agreement with two banks. TheCompany maintains and has available a $20credit facility replaces the previous $10 millionunsecureddemand line of credit,withwhich expired in July 2002. The terms of the credit facility require the Company to maintain amajor Boston bank for operationsmaximum total funded debt andacquisition opportunities. 16other financial ratios. Based on itsthe Company's current operating plan, the Company believes that its cash, cash equivalents, andinvestments on hand,marketable securities, cash flows from operations, andcurrent available linesits new line of credit will be sufficient to meet itsworkingcurrent capital requirements for at least the next twelve months.In 2002, the Company financed its operations exclusively through its ability to generate cash from operations. If the Company were to experience a decrease in revenue as a result of a decrease in demand for its services or a decrease in its ability to collect receivables, the Company would be required to curtail discretionary spending related to SG&A expenses and adjust its workforce in an effort to maintain profitability. The Company has no significant debt but does have commitments for cash as follows:
Payments due by period (in millions) Contractual obligations Less than
1 year1-3 years 4-5 years After 5 years Total Capital lease obligations $ 0.9 0.9 $ 1.8 Operating leases 25.7 35.6 15.2 28.4 104.9 Total contractual cash obligations $ 26.6 36.5 15.2 28.4 $ 106.7 The Company's material commitments are primarily related to office rentals and capital expenditures. Contractual obligations related to operating leases reflect existing rental leases and the proposed new corporate facility as noted in Footnote J "Related Parties, Commitments and Contingencies."
OFF-BALANCE SHEET ARRANGEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Currently the Company does not consider any off balance sheet arrangements with respect to any variable interest entities. However, the Company is presently evaluating whether or not City Square or Gateway LLC, or both, are variable interest entities and, if so, whether or not the Company is the primary beneficiary of these entities.
If the Company determines that City Square or Gateway LLC, or both, are variable interest entities, the Company will be required to consolidate the financial position and results of operations of the entities. Such consolidation will be required beginning July 1, 2003.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
28
Guarantees of Indebtedness of Others." The statement requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Under FIN 45, the guarantor's previous accounting for guarantees issued prior to December 31, 2002 will not be revised or restated.
The Company is a guarantor with respect to a line of credit for Innovate EC, an entity in which the Company acquired a minor equity position as a result of a previous acquisition. The total line of credit is for $600,000. The Company guarantees $300,000 of this obligation. The line is subject to review by the lending institution. The Company would be required to meet its guarantor obligation in the event the lending institution refuses to extend the credit facility and Innovate EC is unable to satisfy its obligation.
IMPACT OF INFLATION AND CHANGING
PRICES:PRICESInflationary increases in costs have not been material in recent years and, to the extent permitted by competitive pressures, are passed on to
theclients 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 in 1999. This is due primarily to our increase in client strategic services in which competition is less and the quality of services commands higher rates. YEAR 2000 ISSUES 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 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. Although the transition from 1999 to 2000 has passed and Keane is not aware of any unresolved Year 2000 problems relating to the services provided by Keane, its internal systems, the products developed by Keane's Healthcare Solutions Practice or third party products used by Keane in its Healthcare Solutions Practice, it is possible that Year 2000 problems could be discerned in the future. Keane generally delivers services and not products to its customers. The Company believes that the services provided by its professionals to its customers are provided in a Year 2000 compliant manner. Keane's Healthcare Solutions Practice develops, markets, and sells software products. In 1999, Keane notified its customers that it did not intend to offer Year 2000 compliant versions or patches for certain of its products that were known to be Year 2000 non-compliant. Instead, Keane encouraged its clients to migrate to new products offered by Keane. Keane believes that it may have had an immaterial loss of customers in the Healthcare Solution Practice due to clients who failed to migrate to its newer products. In addition to its own products, Keane markets certain third party software products through its Healthcare Solutions Practice. During 1999, the Company received assurances from substantially all of the vendors of these products that they are Year 2000 compliant. Customer claims regarding Year 2000 issues related to these products were immaterial. In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company incurred approximately $1,635,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addresses promptly. Among the services that Keane provided in 1999 was the assessment, planning, migration/remediation, and testing for Year 2000 compliance. Keane has devoted significant resources to, and earned significant revenue from, providing services to address the Year 2000 problem. The market for these services declined significantly during 1999 and is expected to further diminish and disappear after the first quarter of 2000. Further, Keane's services addressing the Year 2000 problem involve key aspects of its client's 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. The total cost of Keane's Year 2000 compliance activities was not material to its business, results of operations and financial condition. While Keane believes that it has completed its Year 2000 readiness process, Keane cannot assure you that it has identified and remedied all significant Year 2000 problems, that Keane will not incur significant additional time and expense or that such problems will not harm Keane's business. 17CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS:RESULTSThe 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.
FluctuationsKeane's quarterly operating results have varied, and are likely to continue to vary significantly. This may result in
Operating Results.volatility in the market price of Keane's shares. 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:o
- •
- general economic conditions which may influence investment decisions or cause downsizing;
o- •
- the number and requirements of client engagements;
o- •
- employee utilization rates;
o- •
- changes in the rates Keane can charge clients for services;
o- •
- acquisitions; and
o- •
- other factors, many of which are beyond Keane's control.
A significant portion of Keane's expenses
doesdo 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 RelatingKeane has pursued, and intends to
Acquisitions.continue to pursue, strategic acquisitions. Failure to successfully integrate acquired businesses or assets may adversely affect Keane's financial performance. In the past five years, Keane has grown significantly through acquisitions.SinceFrom January 1, 1999 through December 31, 2002, Keane has completedtheeleven acquisitions. The aggregate29
merger and consideration costs of these 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.totaled approximately $359.8 million. Keane's future growth may be based in part on selected acquisitions. At any given time, Keane may be in various stages of consideringsuchacquisition 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,In addition, even if Keane reaches a definitive agreementis reached,with a target, there is no assurance that Keane will complete any futureacquisition will be completed.acquisition.Keane typically anticipates that each acquisition will bring
certainbenefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine ifsuch benefitsKeane canactually be realized.realize these benefits. 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, expenses, andexpenses.liabilities. 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,In addition, 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
acquisitionacquisitions could result in Keane having to incur additional debt and/or contingent liabilities.AllAny of these possibilitiesmightcould have a material adverse effect on Keane's business, financial condition, and result of operations.DependenceKeane may not realize the expected benefits or synergies of its acquisitions of Metro and SignalTree Solutions. Although the integration of the operations and personnel of Metro, which Keane acquired in November 2001, and SignalTree Solutions, Inc., which Keane acquired in March 2002, are complete, Keane may not achieve the anticipated benefits or synergies of each acquisition. Achieving the benefits of these acquisitions will depend in part on
Personnel.Keane's ability to retain clients acquired through the mergers and cross-sell services to these new clients and the ability of Keane's sales organization to satisfactorily meet the needs of these new clients. If Keane is unable to retain Metro and SignalTree Solutions clients or effectively cross-sell to such clients, the combined company could suffer a loss of momentum in the activities of its business, which could have a material adverse effect on Keane's business, financial condition, and results of operations.Keane faces significant competition for its services, and its failure to remain competitive could limit its ability to maintain existing clients or attract new clients. 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 and integration needs.
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.
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.
30
Keane conducts business in the United Kingdom, Canada, and India, which exposes it to a number of difficulties inherent in international activities. As a result of its acquisition of SignalTree Solutions in March 2002, Keane has two software development facilities in India and has added approximately 400 technical professionals to its professional services organization. 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, Keane's ability to meet development objectives important to its new strategy would be hindered, and its business could be harmed.
If Keane fails to manage its geographically dispersed organization, it may fail to meet or exceed its financial objectives and its revenues may decline. Keane performs development activities in the United States, Canada, and in India, and has offices throughout the United States, the United Kingdom, Canada, and India. This geographic dispersion requires substantial management resources that locally-based competitors do not need to devote to their operations.
Keane's operations in the United Kingdom, Canada, and India are subject to 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.
Keane may be unable to redeploy its professionals effectively if engagements are terminated unexpectedly, which would adversely affect its results of operations. Keane's clients can cancel or reduce the scope of their engagements with Keane on short notice. If they do so, Keane may be unable to reassign its professionals to new engagements without delay. The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of Keane's professionals, which would have a negative impact on Keane's business, 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.
Keane's growth could be limited if it is unable to attract personnel in the Information Technology and business consulting industries. 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 18competition 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: o compete cost-effectively; o develop strong client relationships; o generate recurring revenues; o utilize comprehensive delivery methodologies; and o 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. 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. Risks Associated with Provision of Year 2000 Services. The Company's business may suffer as a result of defects to Year 2000 compliance issues that have not yet been detected. We have not had any independent verification of our year 2000 compliance efforts. We have not procured any Year 2000 specific insurance or made any contingency plans to address any undetected year 2000 risks. Among the services that Keane provided in 1999 was the assessment, planning, migration/remediation, and testing for Year 2000 compliance. Keane has devoted significant resources to, and earned significant revenue from, providing services to address the Year 2000 problem. The market for these services declined significantly during 1999 and is expected to further diminish and disappear after the first quarter of 2000. Further, Keane's services addressing the Year 2000 problem involve key aspects of its client's 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 Systems Ltd, now known as Keane Limited. Keane's 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 of its financial results are not necessarily meaningful and it expects that results of operations may fluctuate from period to period in the future.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in trading
market riskmarket-risk, sensitive instruments or purchasing hedging instruments or "other than trading" instruments that are likely to expose the Company to market risk, whether interest rate, foreign currency exchange, and commodity price or equity price risk. The Company has not purchased options or entered into swaps or forward or futures contracts. The Company's primary market risk exposure is that of interest rate risk on its investments, which would affect the carrying value of those investments.19Since January 1, 2001, the United States Federal Reserve Board has significantly decreased certain benchmark interest rates, which has led to a general decline in market interest rates. The decline in market interest rates has resulted in a significant decline in the Company's interest income. Additionally, the Company transacts business in the United Kingdom, Canada, and India and as such has exposure associated with movement in foreign currency exchange rates. 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSPage(s) Reports of Independent Auditors............................................21-22 Consolidated Balance Sheets as of December 31, 1998 and 1999..................23 Consolidated Statements of Income For the Years Ended December 31, 1997, 1998 and 1999..........................24 Consolidated Statements of Stockholders' Equity for the For the Years Ended December 31, 1997, 1998 and 1999..........................25 Consolidated Statements of Cash Flows for the Years For the Years ended December 31, 1997, 1998 and 1999..........................26 Notes to Consolidated Financial Statements.................................27-38 20
Report of independent auditors 33
Consolidated balance sheets as of December 31, 2002 and 2001
34
Consolidated statements of income for the years ended December 31, 2002, 2001, and 2000
35
Consolidated statements of stockholders' equity for the years ended December 31, 2002, 2001, and 2000
36
Consolidated statement of cash flows for the years ended December 31, 2002, 2001, and 2000
37
Notes to consolidated financial statements
38-6732
REPORT OF INDEPENDENT AUDITORS
TO
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:We have audited the accompanying consolidated balance
sheetsheets of Keane, Inc. as of December 31,19992002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for each of theyear then ended.three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on ouraudit.audits.We conducted our
auditaudits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that ouraudit providesaudits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keane, Inc. at December 31,
1999,2002 and 2001, and the consolidated results of its operations and its cash flows for each of theyear thenthree years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States./s/As discussed in Note E to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets in accordance with the adoption of Statement of Financial Accounting Standards No. 142.
/s/ Ernst and Young LLP
Boston, Massachusetts
March 13, 2000 21REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
February 10, 2003, except for Note P,
as to which the date is February 28, 200333
KEANE, INC.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Keane, Inc. and its subsidiaries at December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 26, 1999 22KEANE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1999 - -------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT SHARE AMOUNTS)Assets Current: Cash and cash equivalents $ 51,696 $ 53,018 Short term investments 6,165 8,582 Accounts receivable, net: Trade 230,856 213,767 Other 1,573 2,248 Prepaid expenses and other current assets 23,376 19,845 --------- --------- Total current assets 313,666 297,460 Long term investments 71,368 81,163 Property and equipment, net 29,973 27,330 Goodwill, net 15,446 81,110 Other intangible assets, net 20,268 12,775 Other assets, net 8,238 14,987 --------- --------- $ 458,959 $ 514,825 ========= ========= Liabilities Current: Accounts payable 20,222 18,500 Accrued expenses and other liabilities 30,647 35,466 Accrued compensation 25,429 18,288 Notes payable 1,000 7,564 Accrued income taxes 13,548 -- Unearned income 1,399 8,369 Current capital lease obligations 954 1,080 --------- --------- Total current liabilities 93,199 89,267 Long-term portion of capital lease obligations 1,976 2,610 Notes payable 149 Commitments and contingencies (Note J) Stockholders' Equity Preferred stock, par value $.01, authorized 2,000,000 shares, issued none Common stock, par value $.10, authorized 200,000,000 shares, issued and outstanding 71,363,272 in 1998 and 72,085,356 in 1999 7,136 7,208 Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 285,303 in 1998 and 285,112 in 1999 29 29 Additional paid-in capital 109,606 120,810 Accumulated other comprehensive income (764) (2,027) Retained earnings 250,546 323,620 Less treasury stock at cost, 313,064 shares of Common Stock in 1998 and 1,319,396 shares of Common Stock in 1999 (2,769) (26,841) --------- --------- Total stockholders' equity 363,784 422,799 --------- --------- $ 458,959 $ 514,825 ========= =========
As of December 31, 2002 2001 (In thousands except share amounts) Assets Current: Cash and cash equivalents $ 46,383 $ 65,556 Marketable securities 21,872 63,687 Accounts receivable, net: Trade 129,432 160,172 Other 1,004 3,109 Prepaid expenses and deferred taxes 37,430 20,026 Total current assets 236,121 312,550 Property and equipment, net 24,729 20,701 Construction in progress 40,888 13,000 Goodwill, net 277,435 224,891 Customer lists, net 69,193 53,659 Other intangible assets, net 17,613 26,292 Deferred taxes and other assets, net 19,695 28,810 $ 685,674 $ 679,903 Liabilities Current: Accounts payable 11,986 13,723 Accrued expenses and other liabilities 61,152 51,980 Accrued compensation 36,346 34,161 Note payable 3,100 — Accrued income taxes 81 4,675 Unearned income 11,535 5,178 Current capital lease obligations 887 1,154 Total current liabilities 125,087 110,871 Accrued long-term construction-in-progress costs 40,888 13,000 Deferred income taxes 28,343 25,656 Long-term portion of capital lease obligations 772 1,203
Stockholders' equity
Preferred stock, par value $.01, authorized 2,000,000 shares, issued none — — Common stock, par value $.10, authorized 200,000,000 shares, issued and outstanding 75,545,386 at December 31, 2002 and 75,223,971 at December 31, 2001 7,555 7,522 Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 284,604 at December 31, 2002 and 284,891 at December 31, 2001 28 28 Additional paid-in capital 166,598 162,269 Accumulated other comprehensive income (1,411 ) (2,007 ) Retained earnings 369,542 361,361 Less treasury stock at cost, 6,309,416 shares at December 31, 2002 (51,728 ) — Total Stockholders' equity 490,584 529,173 $ 685,674 $ 679,903 The accompanying notes are an integral part of the consolidated financial statements.
2334
KEANE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997 1998 1999 - ------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)Total revenues $ 706,801 $1,076,198 $1,041,092 Salaries, wages and other direct costs 469,433 696,752 702,795 Selling, general and administrative expenses 138,168 193,438 199,009 Amortization of goodwill and other intangible assets 14,037 7,701 9,169 Restructuring charge -- -- 13,653 Merger costs -- 8,120 -- ---------- ---------- ---------- Operating income 85,163 170,187 116,466 Interest and dividend income 4,212 5,189 7,827 Interest expense 244 163 -- Other expenses, net 1,048 1,057 1,480 ---------- ---------- ---------- Income before income taxes 88,083 174,156 122,813 Provision for income taxes 36,712 77,807 49,739 ---------- ---------- ---------- Net income $ 51,371 $ 96,349 $ 73,074 ========== ========== ========== Net income per share (basic) $ 0.73 $ 1.36 $ 1.02 ========== ========== ========== Net income per share (diluted) $ 0.72 1.33 $ 1.01 ========== ========== ========== Weighted average common shares outstanding (basic) 70,096 71,053 71,571 ========== ========== ========== Weighted average common shares and common share equivalents outstanding (diluted) 71,603 72,284 72,395 ========== ========== ==========
For the years ended December 31, 2002 2001 2000 (In thousands except per share amounts) Total revenues $ 873,203 $ 779,159 $ 871,956 Salaries, wages and other direct costs 630,047 547,883 621,208 Selling, general, and administrative expenses 198,813 186,708 201,852 Amortization of goodwill and other intangible assets 16,382 14,457 12,351 Restructuring charges 17,604 10,358 8,624 Operating income 10,357 19,753 27,921 Interest and dividend income 2,526 7,043 7,725 Interest expense 255 295 588 Other (income) expenses, net (1,008 ) (2,720 ) 872 Income before income taxes 13,636 29,221 34,186 Provision for income taxes 5,455 11,834 13,832 Net income $ 8,181 $ 17,387 $ 20,354 Net income per share (basic) $ 0.11 $ 0.25 $ 0.29 Net income per share (diluted) $ 0.11 $ 0.25 $ 0.29 Weighted average common shares outstanding (basic) 74,018 68,474 69,646 Weighted average common shares and common share equivalents outstanding (diluted) 74,406 69,396 69,993 The accompanying notes are an integral part of the consolidated financial statements.
2435
KEANE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFor the Years Ended December 31, 1997, 1998 and 1999 (IN THOUSANDS EXCEPT SHARE AMOUNTS)
Class B Common Stock Common Stock ------------ ------------ Shares Amount Shares Amount - -------------------------------------------------------------------------Balance January 1, 1997 69,810,652 $6,981 287,613 $29 Common Stock issued under 549,704 55 stock option and employee purchase plans Conversions of Class B Common 998 (998) Stock into Common Stock Income tax benefit from stock option plans Dividends paid to shareholders Foreign translation adjustment Net income Comprehensive income ---------------------------------------- Balance December 31, 1997 70,361,354 7,036 286,615 29 Pooling of interests with Omega (Note L) Common Stock issued under 769,795 77 stock option and employee purchase plans Issuance of common stock for 230,811 23 business acquisitions Merger expenses paid by Shareholders Conversions of Class B Common Stock into Common Stock 1,312 (1,312) Income tax benefit from stock option plans Dividends paid to shareholders Foreign translation adjustment Net income Comprehensive income ---------------------------------------- Balance December 31, 1998 71,363,272 7,136 285,303 29 ======================================== Common Stock issued under 721,893 72 stock option and employee purchase plans Conversions of Class B Common 191 (191) Stock into Common Stock Income tax benefit from stock option plans Repurchase of Common Stock Unrealized loss on securities Net income Comprehensive income ---------------------------------------- Balance December 31, 1999 72,085,356 $7,208 285,112 $29 ======================================== ========================================
Accum. Other Treasury Stock Total Additional Compre- at Cost Stock- Paid-in hensive Retained ------- holders' Capital Income Earnings Shares Amount Equity - ----------------------------------------------------------------------------------------------------Balance January 1, 1997 $92,646 ($45) $104,570 (305,615) ($2,413) $201,768 Common Stock issued under 4,006 4,061 stock option and employee purchase plans Conversions of Class B Common -- Stock into Common Stock Income tax benefit from stock 1,028 1,028 option plans Dividends paid to shareholders (864) (864) Foreign translation adjustment (327) (327) Net income 51,371 51,371 ------ Comprehensive income 51,044 --------------------------------------------------------------------- Balance December 31, 1997 97,680 (372) 155,077 (305,615) (2,413) 257,037 Pooling of interests with Omega 589 589 (Note N) Common Stock issued under 6,191 (7,449) (356) 5,912 stock option and employee purchase plans Issuance of common stock for (23) -- business acquisitions Merger expenses paid by 1,571 1,571 Shareholders Conversions of Class B Common -- Stock into Common Stock Income tax benefit from stock 4,187 4,187 option plans Dividends paid to shareholders (1,469) (1,469) Foreign translation adjustment (392) (392) Net income 96,349 96,349 ------ Comprehensive income 95,957 --------------------------------------------------------------------- Balance December 31, 1998 109,606 (764) 250,546 (313,064) (2,769) 363,784 ===================================================================== Common Stock issued under 10,689 (6,332) (162) 10,599 stock option and employee purchase plans Conversions of Class B Common -- Stock into Common Stock Income tax benefit from stock 515 515 option plans Repurchase of Common Stock (1,000,000) (23,910) (23,910) Unrealized loss on securities (1,263) (1,263) Net income 73,074 73,074 ------ Comprehensive income 71,811 --------------------------------------------------------------------- Balance December 31, 1999 $120,810 ($2,027) $323,620 (1,319,396) ($26,841) $422,799 ===================================================================== =====================================================================
Class B
Common stockTreasury stock
at costFor the years ended
December 31,
2000, 2001 and 2002Common stock Other
Compre-
hensive
incomeAdditional
paid-in
capitalRetained
earningsTotal
stockholders'
equityShares Amount Shares Amount Shares Amount (In thousands except share amounts) Balance January 1, 2000 72,085,356 $ 7,208 285,112 $ 29 $ 120,810 $ (2,027 ) $ 323,620 (1,319,396 ) $ (26,841 ) $ 422,799 Common stock issued under stock option and employee purchase plans 360,524 36 320 394,794 10,389 10,745 Conversions of class B common stock into common stock 221 1 (221 ) (1 ) — Income tax benefit from stock option plans 314 314 Repurchase of common stock (4,131,000 ) (80,925 ) (80,925 ) Investments valuation adjustment 538 538 Foreign currency translation (3,148 ) (3,148 ) Net income 20,354 20,354 Comprehensive income 17,744 Balance December 31, 2000 72,446,101 7,245 284,891 28 121,444 (4,637 ) 343,974 (5,055,602 ) (97,377 ) 370,677 Common stock issued under stock option and employee purchase plans 18,000 1 (8,894 ) 737,348 15,186 6,293 Common stock issued in connection with acquisition of Metro Information Services, Inc. 2,759,870 276 49,460 4,644,454 86,236 135,972 Income tax benefit from stock option plans 259 259 Repurchase of common stock (326,200 ) (4,045 ) (4,045 ) Investments valuation adjustment 1,181 1,181 Foreign currency translation adjustment 1,449 1,449 Net income 17,387 17,387 Comprehensive income 20,017 Balance December 31, 2001 75,223,971 7,522 284,891 28 162,269 (2,007 ) 361,361 — — 529,173 Common stock issued under stock option and employee purchase plans 321,128 33 4,045 189,184 2,364 6,442 Conversions of common stock into common stock 287 — (287 ) — — Income tax benefit from stock option plans 284 284 Repurchase of common stock (6,498,600 ) (54,092 ) (54,092 ) Minimum pension liability (1,159 ) (1,159 ) Investments valuation adjustment (273 ) (273 ) Foreign currency translation 2,028 2,028 Net income 8,181 8,181 Comprehensive income 8,777 Balance December 31, 2002 75,545,386 $ 7,555 284,604 $ 28 $ 166,598 $ (1,411 ) $ 369,542 (6,309,416 ) $ (51,728 ) $ 490,584 The accompanying notes are an integral part of the consolidated financial statements.
2536
KEANE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 1998 1999 - ------------------------------------------------------------------------------------------- (IN THOUSANDS)Cash Flows From Operating Activities: Net income $ 51,371 $ 96,349 $ 73,074 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,659 21,018 31,519 Deferred income taxes (6,896) (10,553) 4,996 Provision for doubtful accounts 3,391 5,332 (625) Loss on sale of property and equipment 14 25 14 Non-cash interest on long-term debt 197 -- -- Non-cash restructuring charge -- -- 5,572 Tax benefit from stock options 1,028 4,187 -- Changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable (59,993) (75,253) 37,580 Increase in prepaid expenses and other assets (451) (1,995) (6,395) Increase (decrease) in accounts payable, accrued expenses, unearned income and other liabilities 29,098 16,627 (24,064) Increase (decrease) in income taxes payable (3,990) 10,493 (13,548) ---------- ---------- ---------- Net cash provided by operating activities 36,428 66,230 108,123 ---------- ---------- ---------- Cash Flows From Investing Activities: Purchase of investments (60,080) (97,592) (110,915) Sale of investments 39,577 70,805 96,542 Purchase of property and equipment (17,502) (16,740) (16,418) Proceeds from the sale of property and equipment 519 385 77 Payments for acquisitions -- (9,150) (60,996) ---------- ---------- ---------- Net cash used for investing activities (37,486) (52,292) (91,710) ---------- ---------- ---------- Cash Flows From Financing Activities: Payments under long-term debt, net (4,161) (7,292) (563) Principal payments under capital lease obligations (921) (1,240) (1,217) Proceeds from issuance of common stock 4,061 7,483 10,761 Repurchase of common stock -- -- (24,072) Dividends paid (864) (1,469) -- ---------- ---------- ---------- Net cash used for financing activities (1,885) (2,518) (15,091) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (2,943) 11,420 1,322 Cash and cash equivalents at beginning of year 43,219 40,276 51,696 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 40,276 $ 51,696 $ 53,018 ========== ========== ========== Supplemental information: Income taxes paid $ 45,922 $ 68,540 $ 62,140
For the years ended December 31, 2002 2001 2000 (In thousands) Cash flows from operating activities: Net income $ 8,181 $ 17,387 $ 20,354 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,452 26,113 28,991 Deferred income taxes (3,796 ) 1,808 (5,444 ) Provision for doubtful accounts (5,514 ) 2,024 3,086 Loss on sale of property and equipment (46 ) (167 ) — Gain on sale of investments (387 ) (1,233 ) — Non-cash restructuring charges 1,847 825 3,403 Impairment of long-term investments — 2,000 — Gain on sale of business unit — (4,302 ) — Income tax benefit from stock options 284 259 314 Changes in operating assets and liabilities, net of acquisitions: Decrease in accounts receivable 49,888 41,691 48,432 (Decrease) increase in prepaid expenses and other assets (10,754 ) (1,065 ) 6,748 (Decrease) increase in accounts payable, accrued expenses, unearned income and other liabilities (5,789 ) 758 (18,415 ) (Decrease) increase in income taxes payable (4,695 ) (2,916 ) 8,609 Net cash provided by operating activities 56,671 83,182 96,078 Cash flows from investing activities: Purchase of investments (27,859 ) (104,591 ) (30,875 ) Sale and maturities of investments 69,788 102,340 60,191 Purchase of property and equipment (7,802 ) (7,609 ) (11,386 ) Proceeds from the sale of property and equipment 410 419 182 Proceeds from sale of business unit — 16,087 — Payments for current year acquisitions (63,236 ) (7,148 ) (32,516 ) Payments for prior years acquisitions (184 ) (1,266 ) (3,756 ) Net cash used for investing activities (28,883 ) (1,768 ) (18,160 ) Cash flows from financing activities: Payments on acquired debt — (65,938 ) — Payments under long-term debt, net — (5,006 ) (3,523 ) Principal payments under capital lease obligations (1,227 ) (1,303 ) (1,376 ) Proceeds from issuance of common stock 6,330 6,293 10,745 Repurchase of common stock (54,092 ) (4,045 ) (80,925 ) Net cash used for financing activities (48,989 ) (69,999 ) (75,079 ) Effect of exchange rate changes on cash 2,028 358 (2,074 ) Net (decrease) increase in cash and cash equivalents (19,173 ) 11,773 765 Cash and cash equivalents at beginning of year 65,556 53,783 53,018 Cash and cash equivalents at end of year $ 46,383 $ 65,556 $ 53,783 Supplemental information: Income taxes paid $ 16,511 $ 14,922 $ 10,469 The accompanying notes are an integral part of the consolidated financial statements.
2637
KEANE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears
For the years ended December 31,1999, 19982002, 2001, and1997 (All2000
(All amounts in thousands unless stated otherwise and except for share and per share amounts).A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:The consolidated financial statements include the accounts of Keane, Inc. (the "Company") and all of its wholly owned subsidiaries.
AllUpon consolidation, all significant intercompany accounts and transactionshave beenare eliminated.As described in Note L, during 1998 the Company completed five acquisitions. Four of the acquisitions were accounted for as poolings-of-interests and one was accounted for as a purchase.Theaccompanying financial statements and notes have been restated for all periods presented for the three material pooling-of-interests acquisitions. Certain priorCompany's fiscal yearamounts have been reclassified to conform to the current year presentation.ends on December 31st.NATURE OF OPERATIONS: Keane
is a leading provider of e-business,provides Information Technology (IT),and business consulting services. The Company divides its business into three main lines: Business Consulting, Application Development andIT Consulting, e-Solutions (including its e-architecture, applications development and integration services)Integration (AD&I), andApplicationsApplication Development and ManagementOutsourcing.Outsourcing (Applications Outsourcing).Keane's clients consist primarily of
Fortune 1000Global 2000 organizations,across every major industry,government agencies, and healthcareorganizations, and government agencies.organizations. The Company services clients through branch office operations in major markets ofthe United States, Canada,North America and the United Kingdom. These offices are supported by Keane Consulting Group (KCG), a centralizedpracticesStrategic Practices Group representing Keane's core services and keycompetencies.competencies, and seven Advanced Development Centers ("ADC") in the United States, Canada, and India. This delivery structure allows the Company to provide clients with world-class capabilities representing the organizational experience and best practices of the entire Company on a responsive and cost-effective local level.REVENUE RECOGNITION: The Company provides
system design, implementationthree synergistic service offerings: Business Consulting, AD&I, andsupport services under fixed price andApplications Outsourcing. The Company recognizes revenue primarily through either time and materialscontracts.or fixed price basis for each type of offering.Revenue on time and materials contracts is recorded at contractually agreed upon rates. For these types of contracts, revenue is recognized as the services are performed. In some cases, the Company invoices customers prior to performing the service, resulting in deferred revenues, which is reported as a current liability in the consolidated financial statements.
For fixed price contracts, revenue is
recorded onrecognized using thebasis of the estimatedpercentage of completion method. The Company uses estimated labor-to-complete to measure percentage complete. Percentage ofservices rendered.completion recognition relies on accurate estimates of cost, scope, and duration of each engagement. If the Company does not accurately estimate the cost or scope or does not manage its projects properly within the expected period of the project, future revenues may be negatively impacted. Adjustments to revenue are recorded in the period of which the over/under estimate is detected. Management regularly reviews profitability and underlying estimates for fixed price contracts. Losses, if any, on fixed price contracts arerecognized whenrecorded in the period in which the loss isdetermined.identified.Revenue associated with application software products is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on installed products are recognized on a pro-rated basis over the term of the agreement.
For the majority of outsourcing engagements, the Company provides a specific level of service each month for which it bills a standard monthly amount. Revenue for these engagements can be recognized in monthly installments over the billable portion of the contract or on a time and materials
contracts,basis. Installment amounts may be adjusted to reflect changes in staffing requirements or service level agreements. Costs of transitioning the employees and ensuring the Company meets required service level agreements may be capitalized over defined periods of time.38
ALLOWANCE FOR BAD DEBTS: Each accounting period, Keane evaluates accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue
is recorded at contractually agreed upon rates as the costs are incurred. Revenues for software application sales are recognized on the basis of customer acceptance overin the period the risk is identified. Considerable judgment is used in assessing the ultimate realization ofsoftware implementation.these receivables including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. If the Company's evaluation of service delivery issues or a client's ability to pay is incorrect, the Company may incur future charges to revenue.FOREIGN CURRENCY TRANSLATION: For the Company's subsidiaries in Canada, the United Kingdom, and
England,India, the Canadian dollar,andBritish pound, and Indian rupee, respectively, are the functional currencies. All assets and liabilities of the Company's Canadian, English, andEnglishIndian subsidiaries are translated at exchange rates in effect at the end of the period. Income and expenses are translated at rates that approximate those in effect on transaction dates. The translation differences are charged or credited directly to the translation adjustment account included as part of stockholders' equity. Realized foreign exchange gains and losses are included in other income (expense).CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Cash equivalents are currently designated as available-for-sale. Cash equivalents at December 31,
19992002 included investments in commercial paper ($24.9 million), municipal bonds ($.924.5 million) and money market funds ($4.812.8 million). Cash equivalents at December 31,19982001 included investments in commercial paper ($41.2 million), municipal bonds ($1.015.0 million) and money market funds ($1.133.8 million).FINANCIAL INSTRUMENTS: The amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value due to their short maturities. Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of the
company'sCompany's debt obligations approximates their carrying value. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of investments and trade receivables. The Company's cash, cash equivalents, and investments are held with a local financialinstitutions with high credit standings.institution. The27Company's customer base consists of geographically dispersedispersed customers inseveralmany differentindustries, thereforeindustries. Therefore, concentration of credit risk with respect to trade receivables is not considered significant.INVESTMENTS: Investments with maturities between three and twelve months at time of purchase are considered short-term investments. InvestmentsMARKETABLE SECURITIES: Marketable securities are stated at fair value as reported by the investment custodian. The Company determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designations as of each balance sheet date.
InvestmentsMarketable securities are currently designated as available-for-sale, and as such, unrealized gains and losses are reported in Other Comprehensive Income. The Company invests primarily in tax-exempt municipal bonds with at least aseparate componentsingle A rating by Moody's grading service. In addition, the Company invests in United States government obligations and corporate bonds. All investments must have a maturity date ofstockholders' equity.not more than five years. In the case of a puttable security, the put date will be within five years. The Company views its marketable securities portfolio as available for use in its current operations, and accordingly, these marketable securities are classified as current assets in the39
accompanying balance sheet. As of December 31,
1999,2002, the Company'sinvestments experienced declinemarketable securities reflect an increase in market value of$2.2$0.3 million, which has been reflected in the statement ofstockholder'sstockholders' equity. At December 31,1998,2001, the Company's marketable securities reflected an increase in market value ofthe investments approximated cost.$0.8 million. Realized gains and losses, as well as interest, dividends, and capital gain/loss distributions on all securities, are included inearnings.income.PROPERTY AND EQUIPMENT: Property and equipment is
statedcarried atcost. Repaircost less accumulated depreciation andmaintenance costsamortization. Property and equipment arecharged to expense.reviewed periodically for indicators of impairment and assets are written down as appropriate. Depreciation is computed on a straight-line basis over estimated useful lives of 25 to 40 years for buildings and improvements, and2two to5seven years for office equipment, computer equipment, and software. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvement or the term of thelease.lease not to exceed seven years. Repair and maintenance costs are charged to expense. Upon disposition, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is included in income.GOODWILL AND INTANGIBLE ASSETS: Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets," clarified criteria to recognize intangible assets
consist principally offrom goodwill andacquired customer-basedestablished requirements to cease amortizing goodwill and indefinite lived intangiblesnoncompetition agreements,andsoftware initially recorded at fair value.to begin an annual review for impairment. On January 1, 2002, the Company adopted FAS 142 and was, therefore, required to perform an impairment test on its goodwill and other intangibles with indefinite lives during the first six months of 2002, and then on a periodic basis thereafter. The Company's initial goodwill impairment analysis was completed during the second quarter of 2002, and was based on January 1, 2002 balances. Through this analysis it was determined that there was no impairment as of that date. Subsequently, during the fourth quarter of 2002, the Company completed its annual impairment review based on September 30, 2002 balances and determined that there was no impairment as of that date. Future changes in estimates may result in a non-cash goodwill impairment that could have a material adverse impact on the Company's financial condition and results of operations. As of December 31, 2002 and 2001, respectively, the Company reported total intangibles of customer lists and other intangibles of $86.8 million and $79.9 million. Intangibles are amortized on a straight-line basis over14 or 15 years for goodwill and 3three to 15yearsyears.The Company periodically reviews its identifiable intangible assets for
other intangibles. At each reporting date, management assesses whether there has been a permanentimpairment in accordance with Statement FAS 144. In determining whether an intangible asset is impaired, the Company must make assumptions regarding estimated future cash flows from the asset, intended use of the asset, and other related factors. If the estimates or the related assumptions used to determine the value ofits long-termthe intangible assets change, the Company may be required to record impairment charges for these assets.INCOME TAXES: Keane accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the
amounteffect ofsuch impairmenttemporary differences between the book and tax basis of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced bycomparing anticipated undiscounted future operating income from acquired business units with the carrying valuea valuation allowance if it is more likely than not that some portion or all of therelated goodwill. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effects of demand, competition and other economic factors. Accumulated amortization at December 31, 1998 and 1999 was $40.6 million and $44.7 million, respectively. INCOME TAXES:deferred tax asset will not be realized. The Company accounts for income taxes under the asset and40
liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
COMPREHENSIVE INCOME: Statement of Financial Accounting Standards No. 130
" Reporting(FAS 130), "Reporting ComprehensiveIncome",Income," establishes rules for the reporting and display of comprehensive income and its components. Components of comprehensive income include net income and certain transactions that have generally been reported in the consolidated statement of stockholders' equity. Other comprehensive income is comprised ofnet income,currency translation adjustments,andavailable-for-sale securities valuationadjustments.adjustments, and adjustments related to a foreign defined benefit plan. At December 31,1998, the only component of accumulated other comprehensive income was foreign currency translation adjustment of $.8 million. At December 31, 1999,2002, accumulated other comprehensive income was comprised of foreign currency translation adjustment of$.8$0.4 million, securities valuation adjustment of ($0.2) million, net of tax, and defined benefit plan adjustment of $1.2 million, net of tax. At December 31, 2001, accumulated other comprehensive income was comprised of foreign currency translation adjustment of $2.5 million and securities valuation adjustment of$1.3$(0.5) million, net of tax.STOCK-BASED COMPENSATION: The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the closing price of the shares at the date of grant. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards 123 (FAS 123), "Accounting for Stock-Based Compensation," and applies APB Opinion 25, "Accounting for Stock Issued to Employees," to its grants of stock options. Accordingly, the Company recognizes no compensation expense for stock-based employee compensation, provided options are issued at the current market value. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with FAS 123, the Company's net income and earnings per share for the years ended December 31, 2002, 2001 and 2000 would have been reduced to the pro forma amounts indicated below:
For the years ended December 31, 2002 2001 2000 Gross income—as reported $ 8,181 $ 17,387 $ 20,354 Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax effects 9,882 9,342 17,758 Net income—pro forma (1,701 ) 8,045 2,596 Net income per share—as reported (diluted) 0.11 0.25 0.29 Net (loss) income per share—pro forma (diluted) (0.02 ) 0.12 0.04 The Company also grants restricted stock for a fixed number of shares to employees for nominal consideration. Compensation expense related to restricted stock awards is recorded ratably over the restriction period.
41
LEGAL COSTS: The Company accrues costs of settlement, damages, and under certain conditions, costs of defense when such costs are probable and estimable. Otherwise, such costs are expensed as incurred.
USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INDUSTRY SEGMENT INFORMATION:
The Company adoptedBased on qualitative and quantitative criteria established by Statement of Financial Accounting Standards No. 131"Disclosure(FAS 131), "Disclosures about Segments of an Enterprise and RelatedInformation". TheInformation," the Company operates within one reportable segment:Professional Services. In this segment, the Company offers an integrated mix of end-to-end business solutions, such as Businessand IT consultingConsulting (Plan),e-Solutions including e-architecture, online branding, developmentApplication Development andintegrationIntegration (Build), and Application Development and Management Outsourcing (Manage).Approximately 96%RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (FAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under FAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. The Company is required to adopt FAS 145 in the first quarter of 2003 and does not expect the adoption of this statement to have a material impact on its financial condition or results of operations.
In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to exit or disposal plan. Costs covered by FAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, branch closing, or other exit disposal activity. This statement is effective for exit or disposal activities initiated after December 31, 2002. FAS 146 may affect the timing of the Company's
revenue was derived from these offerings,recognition of future exit or disposal costs, if any.In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees issued prior to December 31, 2002 should not be revised or restated due to the adoption of this interpretation.
42
On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (FAS 148), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to FAS 123, "Accounting for Stock-Based Compensation." The statement provides three transition methods for entities electing to adopt the fair value recognition provisions of Statement 123 for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements. The statement is effective for fiscal years ending after December 15, 2002. Currently, the
balanceCompany does not elect to transition from thehealthcare industry. Effectively,intrinsic value method of accounting for stock-based compensation to theCompany operates in one reportable segment. 28B. INVESTMENTS At December 31, 1999,fair value method. Adoption of disclosure provisions of this statement will not impact the Company'sinvestments included obligationsfinancial condition or results of operations.In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the
U.S. Government ($32.9 million), municipal bonds ($7.3 million), corporate pass through ($16.9 million), corporate bonds ($29.2 million) and commercial paper ($3.5 million). At December 31, 1998, the Company's investments included obligationsrisk of loss or entitled to receive a majority of theU.S. government ($33.6 million), municipal bonds ($10.9), corporate pass through ($12.8 million)entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests. The Company is currently evaluating the existence of variable interest entities, if any, andcorporate bonds ($20.2 million). There wasthe impact of adopting the interpretation on the consolidated financial statements. Refer to Note J to the audited condensed consolidated financial statements for additional disclosures regarding related parties, commitments, and contingencies.43
B. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities:
Gross unrealized Estimated
fair valueCost Gains Losses As of December 31, 2002 United States Government obligations $ 2,827 $ 103 $ 1 $ 2,929 Corporate bonds 2,251 39 17 2,273 Municipal bonds 16,489 181 — 16,670 Total 21,567 323 18 21,872 Due in one year or less 3,960 — — 3,946 Due after one year through three years 6,054 — — 6,170 Due after three years 11,553 — — 11,756 21,567 — — 21,872 As of December 31, 2001 United States Government obligations 30,017 338 11 30,344 Corporate bonds 27,906 651 285 28,272 Corporate passthroughs 4,997 75 1 5,071 Total 62,920 1,064 297 63,687 Due in one year or less 8,517 — — 8,705 Due after one year through three years 22,927 — — 23,133 Due after three years 31,476 — — 31,849 $ 62,920 $ — $ — $ 63,687 Proceeds from the sale and maturity of available for sale securities were approximately $69.7 million, with $0.4 million realized as net gains, $102.3 million with $1.2 million realized as net gains, and $60.2 million with no
gainrealized gains orloss,losses based on a specific identificationbasis, realized on the sale of availablemethod forsale securities duringthe years endedDecember 31, 1997, 19982002, 2001, and1999.2000, respectively.C. TRADE ACCOUNTS RECEIVABLE
AccountsTrade accounts receivable consists of the following:
As of December 31, 2002 2001 Billed $ 103,820 $ 144,896 Unbilled 33,491 28,290 Allowance for doubtful accounts (7,879 ) (13,014 ) Total $ 129,432 $ 160,172 44
Trade accounts receivable is presented net of
andoubtful accounts. The activity in the allowancefor doubtful accounts of $8.1 million and $7.9 million at December 31, 1998 and 1999, respectively. The provisions charged to the statement of operations were $3.3 million, $5.3 million and $7.8 million in 1997, 1998, and 1999, respectively, and write-offs against the allowances were $2.1 million, $2.1 million and $8.0 million in 1997, 1998, and 1999, respectively.account is as follows:
For the years ended December 31, 2002 2001 2000 Beginning of year balance $ 13,014 $ 10,990 $ 7,904 Provision charged, net 1,893 10,258 6,778 Write-offs (7,028 ) (8,234 ) (3,692 ) End of year balance $ 7,879 $ 13,014 $ 10,990 D. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 1998 1999 --------- ---------Buildings and improvements $ 772 $ 772 Office equipment 50,191 64,448 Computer equipment and software 8,946 13,678 Leasehold improvements 7,387 8,691 --------- --------- 67,296 87,589 Less accumulated depreciation and amortization 37,323 60,259 --------- --------- $ 29,973 $ 27,330 ========= =========
As of December 31, 2002 2001 Buildings and improvements $ 6,768 $ 2,599 Office equipment 63,955 52,537 Computer equipment and software 14,064 12,019 Leasehold improvements 10,504 10,752 Construction in progress 40,888 13,000 136,179 90,907 Less accumulated depreciation and amortization 70,562 57,206 Total $ 65,617 $ 33,701 Depreciation expense totaled
$8,622, $13,317$11.0 million, $11.7 million, and$22,350$16.2 million in1997, 19982002, 2001, and1999,2000, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of$1,510$3.1 million, $5.2 million, and$5,672,$6.6 million with accumulated amortization totaling$1,030$1.8 million, $3.1 million, and$2,496, at$3.3 million in 2002, 2001, and 2000, respectively. Please see Footnote J Related Parties, Commitments, and Contingencies for additional information.Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-lived Assets." FAS No. 144 supersedes Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of," and provides a single accounting model for long-lived assets to be disposed of. Adoption of this statement did not have a material effect on the Company's results of operations for the year ended December 31,
19982002.E. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and
1999, respectively. E.Other Intangible Assets." Under FAS 142, goodwill and indefinite45
lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired on or after June 30, 2001. With respect to goodwill and intangible assets acquired prior to June 30, 2001, companies are required to adopt FAS 142 in their first fiscal year beginning after December 15, 2001. Because of the different transition dates for goodwill and intangible assets acquired on or before June 30, 2001 and those acquired after that date, pre-existing goodwill and intangibles will be amortized during this transition period until adoption whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 will not.
The following table discloses the reconciliation of reported net income to the adjusted net income.
GOODWILL AND OTHER INTANGIBLE ASSETS—ADOPTION OF FAS 142
For the years ended December 31, 2002 2001 2000 Reported net income $ 8,181 $ 17,387 $ 20,354 Goodwill amortization — 3,177 3,133 Closing costs amortization — 43 32 Employee value amortization — 1,165 944 Adjusted net income 8,181 21,772 24,463 Basic earnings per share: Reported net income 0.11 0.25 0.29 Goodwill amortization — 0.05 0.05 Closing costs amortization — — — Employee value amortization — 0.02 0.01 Adjusted net income per share 0.11 0.32 0.35 Diluted earnings per share: Reported net income 0.11 0.25 0.29 Goodwill amortization — 0.05 0.05 Closing costs amortization — — — Employee value amortization — 0.02 0.01 Adjusted net income per share $ 0.11 $ 0.32 $ 0.35 46
Amortized intangible assets: Gross carrying
amountAccumulated
amortizationNet As of December 31, 2002 Customer lists $ 81,532 $ (12,339 ) $ 69,193 Contracts 29,250 (19,158 ) 10,092 Non-compete agreements 7,524 (4,601 ) 2,923 Technology 7,775 (3,177 ) 4,598 Total $ 126,081 $ (39,275 ) $ 86,806 As of December 31, 2001 Customer lists $ 56,132 $ (2,473 ) $ 53,659 Contracts 29,250 (16,261 ) 12,989 Non-compete agreements 4,824 (2,320 ) 2,504 Technology 7,775 (2,066 ) 5,709 Total $ 97,981 $ (23,120 ) $ 74,861
For the years ended December 31, 2002 2001 Aggregate amortization expense $ 16,382 $ 14,457 Estimated amortization expense For the year ended December 31, 2003 $ 14,831 For the year ended December 31, 2004 14,470 For the year ended December 31, 2005 13,518 For the year ended December 31, 2006 13,286 For the year ended December 31, 2007 11,258 CHANGES IN CARRYING AMOUNTS OF GOODWILL
For the year ended
December 31, 2002Balance as of January 1, 2002 $ 224,891 Goodwill acquired during the year 47,454 Unamortizable intangible assets reclassified as goodwill 5,090 Balance as of December 31, 2002 $ 277,435 47
F. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
December 31, 1998 1999 --------- ---------Deferred savings and profit sharing plan $ 5,250 $ 620 Accrued employee benefits 3,412 1,776 Employee stock withholdings 4,265 3,803 Accrued payroll taxes 6,164 876 Accrued rent obligations 2,130 2,905 Y2K warranties -- 4,637 Accrued restructuring -- 7,081 Other 9,426 13,768 --------- --------- $ 30,647 $ 35,466 ========= =========29F. CAPITAL LEASE OBLIGATIONS The Company finances certain equipment through capital leases. At December 31, 1999, future minimum lease payments under non-cancelable capital leases, together
As of December 31, 2002 2001 Accrued employee benefits $ 12,830 $ 8,322 Accrued restructuring 26,235 21,723 Other 22,087 21,935 $ 61,152 $ 51,980 Please refer to Footnote O for additional information on restructuring.
G. NOTES PAYABLE
In connection with the
present valuepurchase ofminimum lease payments, are summarized below:
Years ended December 31:2000 $ 1,430 2001 1,257 2002 1,132 2003 556 ------- Total minimum payments 4,375 Less amount representing future interest 685 Present value of net minimum payments 3,690 Less current portion 1,080 Long-term portion of capital lease payments $ 2,610 =======G. NOTES PAYABLE In conjunction witha business complimentary to the Company'sacquisitionown operations during the third quarter ofGSE Erudite Software, Inc. on April 20, 1998,2002, the Company issued a$1.0$3.0 million non-interest bearing note payabledueas partial consideration. The note has a one-yearfromterm with a possible one-year extension based on additional acquisition service credits. Additionally, thepurchase date. ThisCompany acquired an existing $100,000 non-interest bearing noteis subject to reduction to the extent required by the purchase agreement and was paid during 1999. Inpayable in connection withthe Company's acquisition of Parallax Solutions Ltd.,employment credits. During 2001, the Companyissuedpaid the remaining balance of a$6.6$4.0 million notepayablerelated tothe former owners. This note is payable in May of 2001 and bears interest at 7.05 %. At December 31, 1997, Icom Systems Ltd,acompany acquired by Keane in 1998 and was accounted for as a pooling-of-interests, had $3.9 million of outstanding debt and was paid during 1998.previous acquisition.H. CAPITAL STOCK
In May 1998, the stockholders approved an amendment to the Company's Articles of Organization increasing the number of shares of Common Stock authorized for issuance to 200,000,000 shares.The Company has three classes of stock:
Preferred Stock, Common Stockpreferred stock, common stock, andClassclass BCommon Stock.common stock. Holders ofCommon Stockcommon stock are entitled to one vote for each share held. Holders ofClassclass BCommon Stockcommon stock generally vote together with holders of common stock as a single classwith holders of Common Stockbut are entitled to 10 votes for each share held. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions of any series of Preferred Stock, and to fix the number of shares of any such series. TheCommon Stockcommon stock andClassclass BCommon Stockcommon stock have equal liquidation and dividend rights except that any regular quarterly dividend declared shall be $.05 per share less for holders of class B common stock. Class BCommon Stock. Class B Common Stockcommon stock is nontransferable, except under certain conditions, but may be converted intoCommon Stockcommon stock on a share-for-share basis at any time. Conversions to common stock totaled998, 1,312287 and191221 shares in1997, 19982002 and1999,2000, respectively. There were no conversions during 2001. Shares of common stock reserved for conversions totaled285,112284,604 at December 31,1999. 302002. On September 21, 2001, the Company announced that its Board of Directors had authorized the Company to repurchase up to 1,542,800 shares of its common stock over the next 12 months. A total of 175,000 shares of common stock was repurchased under this authorization during the second quarter of 2002, at an average price of $12.88 for a cost to $2.2 million. The remaining authorized amount of 1,367,800 shares, which would have expired on September 18, 2002, was added to the July 25, 2002 share authorization amount of 3,632,200 shares, for a total of 5 million shares authorized. The Company completed the purchase of the total authorized amount during the fourth quarter of 2002. The Company's total investment in this authorized share repurchase was $39.1 million at an average price per share of $7.83.
48
H. CAPITAL STOCK (Continued)
On October 25, 2002, the Board of Directors authorized the Company to repurchase an additional 5 million shares of its common stock over the next 12 months. The repurchases may be made on the open market or in negotiated transactions, and the timing and amount of shares repurchased will be determined by the Company's management based on its evaluation of market and economic conditions and other factors. During the fourth quarter, the Company purchased 1,323,600 shares of its common stock under this authorization for a total investment of $12.7 million at an average price per share of $9.59. The remaining authorized amount at December 31, 2002 was 3,676,400 shares. Between May 1999 and December 31, 2002, the Company has invested $163.0 million to repurchase 11,955,800 shares of its common stock under seven separate authorizations.
I. BENEFIT PLANS
STOCK OPTION PLANS:
The Company hasOn December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (FAS 148), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation." FAS 148 provides three transition methods for entities electing to adopt the fair value recognition provisions of Statement 123 for stock-basedcompensation plans, which are described below. The Company adoptedemployee compensation. FAS 148 also amends the disclosure provisions ofSFASFAS 123"Accounting for Stock-Based Compensation," and has continuedtoapply APB Opinion 25 and related Interpretations inrequire prominent disclosure about the effects of an entity's accountingfor its plans. Had compensation cost for the Company'spolicy decisions with respect to stock-based compensationplans been determined basedonthe fair value at the grant dates as calculated in accordance with SFAS 123, the Company'sreported net income and earnings per share in annual and interim financial statements. The statement is effective for fiscal years ending after December 15, 2002. Currently, theyears ended December 31, 1997, 1998Company does not elect to transition from the intrinsic value method of accounting for stock-based compensation proscribed by Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to Employees," and1999 would have been reducedrelated Interpretations to this fair value method proscribed by FAS 148. In addition, thepro forma amounts indicated below:
Years Ended December 31, 1997 1998 1999 --------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)Net income - as reported $ 51,371 $ 96,349 $ 73,074 Net income - pro forma 49,386 91,020 61,811 Net income per share - as reported (diluted) .72 1.33 1.01 Net income per share - pro forma (diluted) .69 1.26 .85The effectsCompany will continue to apply the disclosure provisions ofapplying SFAS 123 in this pro formaFAS 123. Accordingly, the Company's adoption of disclosureareprovisions of FAS 148 will notlikely to be representativeimpact the Company's financial condition or results ofeffects on reported net income for future yearsoperations.The fair market value of each stock option is estimated using the Black Scholes option pricing method, assuming no expected dividends with the following weighted-average assumptions:
Years Ended December 31, 1997 1998 1999 ----------------------------------Expected life (years) 4.0 4.0 4.0 Expected stock price volatility 41% 47% 96% Risk-free interest rate 6.24% 4.83% 5.27%
For the years ended December 31, 2002 2001 2000 Expected life 4.9 4.8 4.4 Expected stock price volatility 65 % 65 % 93 % Risk-free interest rate 4.24 % 5.00 % 5.00 % The Company has four stock-based compensation plans, which are described below.
The 1992 Stock Option Plan provides for grants of stock options for up to 3,600,000 shares of the Company's
Commoncommon stock to employees, officers and directors of, and consultants and advisors to, the Company. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such time or times as the Board of Directors in each case determines. The Company may grant options that49
are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code ("incentive stock options") or nonstatutory options not intended to qualify as incentive stock options.
The 1998 Stock Incentive Plan, amended in December 1999, provides for grants of stock options for up to 7,000,000 shares of the Company's common stock to employees, officers and directors of, and consultants and advisors to, the Company. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such time or times as the Board of Directors in each case determines. The Company may grant options that are intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code ("incentive stock options")or nonstatutory options,not intended to qualify as incentiverestricted stockoptions. Theawards and other stock-based awards.In December 2000, the Company initiated a new "Time Accelerated Restricted Stock Award Plan" (TARSAP) under its 1998 Stock Incentive Plan,
amendedwhereby the vesting of certain stock options is directly impacted by the performance of the Company. The vesting of stock options granted under the TARSAP accelerates upon the meeting of certain profitability criteria. If these criteria are not met, such options will vest five years after the date of grant and expire at the end of 10 years.The Company believes that tying the vesting of larger blocks of certain stock options directly to financial performance more effectively utilizes options that would have been granted in
Decemberfuture years, while making employees true stakeholders. The Company also anticipates that more closely aligning the interest of management and key employees with shareholders will focus employees on the goals and objectives most important to shareholders, and that the granting of such options was an important factor in securing employee confidence, commitment, and trust at a critical junction in the implementation of its strategic plans. Finally, the Company believes that the cost to shareholders of these additional options can be kept reasonable as a result of its stock repurchase program. Since May of 1999, the Company has invested $163.0 million to repurchase 11,955,800 million shares of its common stock under seven separate authorizations.The 2001 Stock Incentive Plan provides for grants of stock options for up to 7,000,000 shares of the Company's
Common Stockcommon stock to employees, officers and directors of, and consultants and advisors to, the Company. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such time or times as the Board of Directors in each case determines. The Company may grant options that are intended to qualify as incentive stock optionsunder Section 422 of the Internal Revenue Code ("incentive stock options")or nonstatutory options, restricted stock awards and other stock-basedawards, including the grant of shares based upon certain conditions not intended to qualify as incentive stock options.awards.The weighted-average fair value of options granted under
both Plansthe option plans during the years ended December 31,1997, 19982002, 2001, and19992000 was$8.40, $14.73$13.43, $11.96, and$14.39,$11.53, respectively.31In November 2001, the Company completed its merger with Metro Information Services, Inc. In connection with the merger, the Company assumed all options, whether vested or unvested, to purchase Metro's common stock, issued under Metro's stock option plans. Each option to purchase shares of Metro's common stock outstanding as of November 30, 2001 became an option to acquire a number of shares of Keane common stock equal to the number of shares of Metro's common stock subject to such option, multiplied by a conversion ratio of 0.48. The option price has been proportionally adjusted. The
50
number of adjusted shares under the Metro plan is 571,058, of which, 13,394 were exercised during 2002.
In September of 2002, the Company completed the purchase of a business complementary to the Company's business strategy. In connection with this acquisition, the Company assumed all options, whether vested or unvested, to purchase the stock of the acquired company, under the respective stock option plans. Each option to purchase shares of the acquired company as of September 25, 2002 became an option to acquire a number of shares of Keane common stock equal to the number of shares of the acquired company subject to such option, multiplied by conversion ratio of 0.1766. The option price has been proportionally adjusted. The number of adjusted shares under the acquired company's plan is 87,502. During the fourth quarter of 2002, there were 14,184 shares exercised from this plan.
On September 26, 2002, the Company filed a Tender Offer Statement in connection with its offer to exchange currently held stock options with new options. The downturn in the stock market and the corresponding impact on the Company's stock price created a potential motivation and retention issue with key employees and executives of the Company. Consistent with the Company's philosophy of using stock options to motivate and retain management and employees, on August 20, 2002, the Company's Board of Directors approved the opportunity for employees to request that the Company exchange outstanding options to purchase shares of the Company's common stock, which were granted on or after January 1, 2000 and have an exercise price of $12.00 or greater per share, for new options to purchase shares of common stock on substantially the following terms ("the Offer"). Pursuant to the terms of the Offer:
- i.
- all eligible and outstanding options issued under all of the Company's stock option plans could be exchanged for new options at an exchange rate of four for every five surrendered;
- ii.
- the grant date of the new options would be the first business day that is at least six months and one day after the date of the expiration of the Offer; and
- iii.
- the exercise price of each new option would be the closing price of the Company's common stock on the new grant date.
The Offer expired on October 7, 2002 ("expiration date"). Options for 1,888,394 shares of the Company's common stock with a weighted average exercise price of $20.45 were eligible for the Offer. Of this amount, 1,458,298 options were surrendered for exchange, with 324,902 options being retained, with the balance of the 105,194 being cancelled because of terminations. As a result, the Company anticipates that on April 8, 2003, the first business day that is at least six months and one day from the expiration date, the Company will grant new options for 1,166,638 shares of the Company's common stock.
51
Information with respect to activity under the Company's stock option plans is set forth below:
Weighted Common Average Stock Exercise PriceOutstanding at December 31, 1996 2,118,665 $ 4.84 Granted 575,432 19.91 Exercised (413,004) 3.73 Canceled/Expired (93,998) 6.83 --------- Outstanding at December 31, 1997 2,187,095 8.93 Granted 953,789 34.15 Exercised (782,577) 4.21 Canceled/Expired (120,247) 18.80 --------- Outstanding at December 31, 1998 2,238,060 20.80 Granted 1,582,300 20.60 Exercised (409,112) 6.69 Canceled/Expired (517,389) 25.91 --------- Outstanding at December 31, 1999 2,893,859 $ 21.76
Common stock Weighted average
exercise priceOutstanding at December 31, 1999 2,893,859 $ 21.76 Granted 3,580,618 16.58 Exercised (382,078 ) 8.75 Canceled/Expired (870,830 ) 25.36 Outstanding at December 31, 2000 5,221,569 18.55 Granted 1,723,024 20.14 Exercised (192,095 ) 8.98 Canceled/Expired (475,328 ) 20.13 Outstanding at December 31, 2001 6,277,170 19.20 Granted 689,342 13.43 Exercised (145,734 ) 13.08 Canceled/Expired (2,466,150 ) 21.16 Outstanding at December 31, 2002 4,354,628 $ 17.25 Shares available for future issuance under the Company's stock option plans at December 31,
1999 is 5,718,978.2002 are 11,178,189.The following table summarizes information about stock options that were outstanding at December 31,
1999:2002:
Weighted Average Weighted Average Weighted Average Remaining Exercise Price Exercise Price Range of Number Contractual Of Options Number Of Exercisable Exercise Prices Outstanding Life Outstanding Exercisable Options --------------- ----------- ----- ----------- ----------- -------$0.04 -- $5.19 147,876 0.5 years $4.61 147,876 $4.61 5.42 -- 7.25 245,988 1.1 years 6.02 100,672 6.04 7.35 -- 15.06 262,780 2.0 years 14.35 68,800 13.93 15.32 -- 28.19 1,439,400 4.3 years 20.07 37,523 28.13 28.56 -- 38.38 669,000 3.5 years 33.82 180,978 34.03 39.50 -- 53.00 128,815 3.6 years 42.81 23,000 44.14 -------- $0.04 -- $53.00 2,893,859 3.4 years $21.76 558,849 $18.75
Range of exercise prices Number
outstandingWeighted
average
remaining
contractual
lifeWeighted
average
exercise
price
of options
outstandingNumber
exercisableWeighted
average
exercise
price of
exercisable
options$ 0.04–$ 4.99 22,744 4.4 $ 2.89 22,744 $ 2.89 5.00– 9.99 1,881,331 7.4 9.56 846,351 9.66 10.00– 14.99 171,363 8.0 11.95 64,264 11.92 15.00– 19.99 1,224,152 4.6 17.64 617,404 17.89 20.00– 24.99 266,625 1.9 22.47 156,500 22.53 25.00– 29.99 175,255 1.3 27.59 135,005 27.69 30.00– 39.99 517,028 4.2 34.37 493,579 34.44 40.00– 49.99 54,100 1.3 44.25 52,372 44.16 50.00– 59.99 41,070 4.2 57.14 37,231 57.13 60.00– 74.99 960 — 74.48 960 74.48 $ 0.04–$74.99 4,354,628 2,426,410 52
STOCK PURCHASE PLANS:
The Company's 1983 Restricted Stock Purchase Plan provides for grants of 2,025,000 shares of Common Stock to be made to key employees at the discretion of the compensation committee of the Board of Directors. No grants were issued during 1996 through 1999. At December 31, 1999, 1,377,760 shares remained available for future grants. Restrictions on the sale or transfer of shares lapse three years after the date of grant. As grants are issued, deferred compensation equivalent to the market value at the date of grant, less the $.10 per share of the purchase price, is amortized to compensation expense over the three-year vesting period. The amount of amortization for 1997 was $47. There was no amortization in 1998 and 1999.The Company's 1992 Employee Stock Purchase Plan provides for the purchase of2,550,0004,550,000 shares ofCommon Stockcommon stock by qualifying employees at a purchase price of 85% of the market value of the stock on the purchase date. During1997, 19982002, 2001, and1999,2000 participants in this plan purchased136,700, 72,832378,333, 575,841, and310,051384,209 shares, respectively. Shares available for future purchases totaled923,9811,585,598 at December 31,1999. 322002. INCENTIVE COMPENSATION PLANS:
During 1988, theThe Company has established incentive compensation plans for certain officers and selected employees. Payments under the plans are based on actual performance compared to stated plan objectives. Compensation expense under the plans in1997, 19982002, 2001, and19992000 approximated$6,661, $9,505$16.8 million, $18.3 million, and$8,336,$11.2 million, respectively. In addition, management may award discretionary bonuses based upon an individual's performance and/or contribution to the Company.DEFERRED SAVINGS AND PROFIT SHARING PLAN: During 1984, the Company established a deferred savings and profit sharing plan under Section 401(k) of the Internal Revenue Code. The plan enables eligible employees to reduce their taxable income by contributing up to 15% of their salary to the plan. The Company makes discretionary contributions to the plan based on a percentage of contributions made by the eligible employees and profits of the Company. The Company's contributions vest after the employee has completed 42 months of service and for
1997, 19982002, 2001, and19992000 amounted to approximately$3,156, $4,818$8.4 million, $4.5 million, and$5,065,$5.0 million, respectively.DEFINED BENEFIT PLAN: The Company has a defined benefit pension plan that provides pension benefits to employees of the Company's subsidiary located in the United Kingdom. Such benefits are available to employees who were active on August 4, 1998 and not to employees who joined the Company after that date, and are based on the employees' compensation and service. The Company's policy is to fund amounts required by applicable government regulations. Total pension expense for 2002, 2001, and 2000 was approximately $1.3 million, $1.2 million and $1.4 million, respectively.
The following table sets forth the benefit obligation, fair value of plan assets, and the funded status of the Company's Plan; amounts recognized in the Company's financial statements; and the principal weighted average assumptions used:
For the years ended December 31, 2002 2001 Change in projected benefit obligation: Benefit obligation at January 1, $ 16,780 $ 15,140 Service cost 1,518 1,604 Interest cost 1,159 956 Employee contributions 301 348 Actuarial loss (gain) 1,942 (984 ) Benefits paid (423 ) (284 ) Benefit obligation at December 31, 21,277 16,780 53
Change in plan assets: Fair value of plan assets at January 1, 15,546 16,949 Actual return on plan assets (4,221 ) (2,606 ) Employer contributions 979 1,139 Employee contributions 301 348 Benefits paid (423 ) (284 ) Fair value of plan assets at end of year 12,182 15,546 Funded status (9,095 ) (1,234 ) Unrecognized net loss (gain) 8,725 1,234 Accrued pension cost (370 ) —
Amounts recognized in the statement of financial position consist of:
Deferred tax asset, long term 773 — Accrued benefit liability (2,302 ) — Other comprehensive income 1,159 — Net amount recognized $ (370 ) $ —
For the years ended December 31, 2002 2001 Weighted average assumptions Discount rate at end of the year 5.75 % 6.00 % Expected return on plan assets for the year 8.00 % 8.25 % Rate of compensation increase at end of the year 3.75 % 4.00 % Discretionary pension increased LPI pension increases 0.00 % 2.00 % LPI pension increases 2.25 % 2.25 % Statutory revaluation of benefits (GMP)* 3.50 % 3.50 %
- *
- (Guaranteed Minimum Pension)
54
For the years ended December 31, 2002 2001 Components of net periodic benefit cost Service cost—benefits earned during the period $ 1,518 $ 1,604 Interest cost on projected benefit obligations 1,159 957 Expected return on plan assets (1,420 ) (1,397 ) Net amortization and deferral —amortization of unrecognized net loss (gain) 92 (6 ) Total net periodic benefit cost $ 1,349 $ 1,158 J. RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES
The
Company's corporate offices are located in Boston, Massachusetts. The building is leased from a partnership in which an officer, some directors, and shareholdersprincipal executive office of the Companyare limited partners. The lease is for a termas oftwenty yearsDecember 31, 2002, was located atannual rentals considered to be at prevailing market ratesTen City Square in Boston, Massachusetts andlasting through 2006. The Company is also required to pay specified percentages of annual increases in real estate taxes and operating expenses.leased from the City Square Limited Partnership as described below. The Company leases additional office space and apartments in more than seventy locations in North America, the United Kingdom, and India under operating leases and capital leases, some of which may be renewed for periods up to five years, subject to increasedrentals.rental fees. Rental expense for all of the Company's facilities amounted to approximately$13.0$30.8 million in1997, $16.12002, $19.4 million in19982001, and$21.8$22.4 million in1999.2000. The Company is committed to minimum annual rental payments under all leases of approximately$18.9$26.7 million in2000, $18.12003, $20.8 million in2001, $15.52004, $15.6 million in2002, $11.12005, $9.6 million in20032006, $5.6 million in 2007, and an aggregate of$14.2$28.4 million for 2008 and thereafter.In February 1985, the Company entered into a lease, which subsequently was extended to a term of 20 years, with City Square Limited Partnership ("City Square"), pursuant to which the Company leased approximately 34,000 square feet of office and development space in a building located at Ten City Square, in Boston, Massachusetts. The Company now leases approximately 88% of this building and the remaining 12% is leased by other tenants. At December 31, 2002, the leased space was used as the Company's corporate offices. John F. Keane, Chairman of the Board of the Company, and Philip J. Harkins, a director of the Company, are limited partners of City Square. Based upon its knowledge of rental payments for comparable facilities in the Boston area, the Company believes that the rental payments under this lease, which will be approximately $0.8 million per year ($25.00 per square foot) for the remainder of the lease term (until February 2006), plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time the Company entered into the lease, as favorable to the Company as those which could have been obtained from
2004an independent third party. As a result of its occupancy of the New Facility (as described below), the Company is in the process of finding a third party to2006.sublease the space it occupies at Ten City Square.As a result of the planned vacancy at Ten City Square, the Company has reserved the remaining lease payments due to City Square during the remainder of the lease term, resulting in a charge of approximately $3.9 million in the accompanying 2002 financial statements.
In October 2001, the Company entered into a lease with Gateway Developers LLC ("Gateway LLC") for a term of twelve years, pursuant to which the Company agreed to lease approximately
55
95,000 square feet of office and development space in a building located at 100 City Square in Boston, Massachusetts (the "New Facility"). The Company leases approximately 57% of the New Facility and the remaining 43% is or will be occupied by other tenants. John Keane Family LLC is a member of Gateway LLC. The members of John Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of the Board of the Company, and his immediate family members.
On October 31, 2001, Gateway LLC entered into a $39.4 million construction loan with Citizens Bank of Massachusetts (the "Gateway Loan") in connection with the New Facility and an adjacent building to be located at 20 City Square, Boston, Massachusetts. John Keane Family LLC and John F. Keane are each liable for certain obligations under the Gateway Loan if and to the extent Gateway LLC requires funds to comply with its obligations under the Gateway Loan. Stephen D. Steinour, a director of the Company, is Chief Executive Officer of Citizens Bank of Pennsylvania. Citizens Bank of Massachusetts and Citizens Bank of Pennsylvania are subsidiaries of Citizens Financial Group, Inc. Mr. Steinour was not involved in the process of approving the loan.
The Company began occupying the New Facility and making lease payments in March 2003. Based upon its knowledge of lease payments for comparable facilities in the Boston area, the Company believes that the lease payments under the lease for the New Facility, which will be approximately $3.2 million per year ($33.00 per square foot for the first 75,000 square feet and $35.00 per square foot for the remainder of the premises) for the first six years of the lease term and approximately $3.5 million per year ($36.00 per square foot for the first 75,000 square feet and $40.00 per square foot for the remainder of the premises) for the remainder of the lease term, plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time the Company entered into the lease, as favorable to the Company as those which could have been obtained from an independent third party.
In view of the related party ownership of the New Facility, the Company concluded that during the construction phase of the New Facility, the estimated construction in progress costs for the project would be capitalized in accordance with EITF No. 97-10, "The Effect of Lessee Involvement in Asset Construction." A credit for the same amount is reflected in the accrued long-term construction-in-progress costs in the accompanying balance sheet. For purposes of the consolidated statement of cash flows, the Company characterizes this treatment as a non-cash financing activity.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests.
The Company is currently evaluating whether or not City Square and Gateway LLC are variable interest entities as defined by FIN 46 and, if so, whether or not the Company is the primary beneficiary of these entities.
56
If the Company determines that City Square or Gateway LLC, or both, are variable interest entities, and that it is the primary beneficiary, the Company will be required to consolidate the financial position and results of operation of the entities for which it determines it is the primary beneficiary. Such consolidation will be required beginning July 1, 2003.
If the Company concludes it is not required to consolidate either of these entities, the Company will continue to account for its leases with City Square and Gateway LLC in accordance with generally accepted accounting principles. With respect to the Gateway LLC lease, if the Company concludes it is not required to consolidate this entity, the Company will amortize the asset and liability recorded during the construction of the facility, and estimates that the net effect of such amortization included in its operating results will approximate the rent expense resulting from contractual payments it is required to make under the lease.
In December 2002, the Company's Audit Committee and Board of Directors each approved two related party transactions involving directors of the Company. The Company has subcontracted with Guardent, Inc. ("Guardent") for a customer project involving the State of California. Ms. Cirino, a director of the Company, is an executive officer and shareholder of Guardent. The payments from the Company to Guardent are not expected to exceed approximately $160,000. The Company repurchased 400,000 shares of common stock from Mr. Fain, a director of the Company. These shares were repurchased on December 6, 2002 in a negotiated transaction at a price of $9.50 per share for an aggregate purchase price of $3.8 million. The closing price for the Company's common stock on the American Stock Exchange on December 6, 2002 was $9.65.
As of December 31, 2002, in connection with a third quarter acquisition, the Company had a recorded contingent liability of $895,000 related to certain earn-out considerations. The $895,000 is expected to be paid out during the first quarter of 2003. Future earn-outs are based on specific net revenue targets. Payments for achieving these goals will range form $1.0 to $2.0 million in future periods. The Company also recorded $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note payable as partial consideration. The note has a one-year term with a possible one-year extension based on additional acquisition service credits.
The Company is a guarantor with respect to a line of credit for Innovate EC, an entity in which the Company acquired a minor equity position as a result of a previous acquisition. The total line of credit is for $600,000. The Company guarantees $300,000 of this obligation. The line is subject to review by the lending institution. The Company would be required to meet its guarantor obligation in the event the lending institution refuses to extend the credit facility and Innovate EC is unable to satisfy its obligation.
57
J. RELATED PARTIES, COMMITMENTS AND CONTINGENCIES (Continued)
In April 1998, United Services Planning Association, Inc. and Independent Research Agency for Life Insurance, Inc. filed a complaint in the District Court for Tarrant County, Texas (Civil Action No. 96-173235-98) against the Company and two of its employees alleging that the Company misrepresented its ability to complete a project contracted for by the plaintiffs and concealed from the plaintiffs material facts related to the status of the project. The parties are currently engaged in discovery. It is not likely that the case will go to trial before the fall of 2003. The plaintiffs seek monetary relief. The Company believes that it has meritorious defenses to the plaintiff's complaint and intends to contest the claims vigorously. However, the Company is presently unable to assess the likely outcome of the matter.
The Company is involved in litigation and various legal matters, which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of
any existing matterthese matters will have a material adverse effect on its financial condition, results of operations, or cash flows. The Company believes these litigation matters are without merit and intends to defend these matters vigorously. Refer to Note P to the audited condensed consolidated financial statements for additional disclosures with respect to legal matters.K. INCOME TAXES
The provision forFor financial reporting purposes, income before income taxes includes
federal, state and foreign income taxes currently payable and those deferred because of temporary differences betweenthefinancial statement and tax bases of assets and liabilities.following components:
For the year ended
December 31, 2002Income before income taxes: Domestic $ 13,085 Foreign 551 Total income before provision for income taxes $ 13,636 58
The provision for income taxes consists of the following:
Years Ended December 31, 1997 1998 1999 ---------- ---------- ----------Current: Federal $ 35,236 $ 67,740 $ 34,230 State 8,161 15,499 9,283 Foreign 211 5,121 1,230 ---------- ---------- ---------- Total 43,608 88,360 44,743 Deferred: Federal (7,073) (7,626) 3,570 State 251 (2,717) 626 Foreign (74) (210) 800 ---------- ---------- ---------- Total (6,896) (10,553) 4,996 ---------- ---------- ---------- $ 36,712 $ 77,807 $ 49,739 ========== ========== ==========33
For the years ended December 31, 2002 2001 2000 Current: Federal $ 5,996 $ 8,993 $ 16,748 State 2,573 147 1,958 Foreign 682 886 570 Total 9,251 10,026 19,276
Deferred:
Federal (2,960 ) 1,605 (4,283 ) State (836 ) 412 (898 ) Foreign — (209 ) (263 ) Total (3,796 ) 1,808 (5,444 ) Total income tax provision $ 5,455 $ 11,834 $ 13,832 A reconciliation of the statutory income tax provision with the effective income tax provision is as follows:
Years Ended December 31, 1997 1998 1999 ---------- ---------- ----------Federal income taxes at 35% $ 30,829 $ 60,955 $ 42,985 State income taxes, 5,164 8,307 6,530 net of federal tax benefit Merger related costs -- 2,916 -- Tax credits (35) -- -- Other, net 754 5,629 224 ---------- ---------- ---------- $ 36,712 $ 77,807 $ 49,739 ========== ========== ==========
For the years ended December 31, 2002 2001 2000 Federal income taxes at 35% $ 4,772 $ 10,228 $ 11,965 State income taxes, net 1,129 363 1,060 Disallowed meals expense 508 506 806 Foreign tax 489 (81 ) (594 ) Adjustment of prior year's estimated tax liability (1,532 ) — — Merger related costs — 1,048 856 Other, net 89 (230 ) (261 ) Total $ 5,455 $ 11,834 $ 13,832 59
The components of the net deferred tax assets and liabilities are as follows:
Years Ended December 31, 1998 1999 --------- ---------Current: Allowance for doubtful accounts and other reserves $ 14,206 $ 3,687 Employee medical benefits (367) (1,079) Accrued expenses 946 3,741 --------- --------- Total current assets $ 14,785 $ 6,349 ========= ========= Long-term: Customer based intangibles $ (4,980) $ (4,482) Amortization of intangible assets 11,913 12,438 Depreciation and other 117 3,449 --------- --------- Long-term assets (liabilities) $ 7,050 $ 11,405 ========= =========
As of December 31, 2002 2001 Deferred tax assets: Allowance for doubtful accounts and other reserves $ 2,022 $ 2,208 Accrued expenses 17,490 9,167 Amortization of intangible assets 975 12,453 Depreciation and other 9,108 11,496 Acquired United States net operating loss carry-forwards 3,214 2,298 Total deferred tax assets 32,809 37,622
Deferred tax liabilities:
Intangibles (28,343 ) (28,150 ) Total deferred tax liabilities (28,343 ) (28,150 ) Total net deferred tax asset $ 4,466 $ 9,472 At December 31, 2002, the Company had domestic net operating loss (NOL) carry forwards for tax purposes of $7.9 million expiring in 2017 through 2021. These NOL carry forward amounts relate to prior acquisitions and are subject to limitation pursuit to IRC Section 382.
Cumulative undistributed earnings of the Company's foreign subsidiaries amounted to approximately $16 million at December 31, 2002. No provision for United States income tax has been made for the repatriation of these earnings because the Company considers the earnings to be indefinitely reinvested. If such earnings were distributed, tax expense would increase by approximately $500,000. Additionally, the Company's India subsidiary, part of the SignalTree Solutions acquisition, has tax holidays in India, which reduce or eliminate the income tax in that country. The
current component is included in prepaid expensesholidays expire between 2006 andother current assets2009. Based on thebalance sheet.currently enacted regular corporate income tax rate in India, the benefit to the Company of the tax holidays was approximately $325,000, of which the per diluted share amount is immaterial, for the year ended December 31, 2002.L. BUSINESS ACQUISITIONS
On March 15, 2002, Keane acquired SignalTree Solutions Holding, Inc. (SignalTree), a privately held, United States-based corporation with two software development facilities in India and additional operations in the United States. Under the terms of the merger agreement, Keane paid $68.2 million in cash for SignalTree Solutions.
The
long-term component isCompany accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of SignalTree Solutions, including intangible assets, were recorded at their respective fair values. All identifiable intangible assets are being amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations and cash flows of SignalTree Solutions were included in the Company's financial statements effective as of the purchase date.60
The total cost of the merger was $78.9 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation procedures and techniques. Goodwill was recorded at $41.3 million and other identified intangible assets were valued at $21.5 million. At the date of acquisition, the Company entered a plan to exit certain activities and consolidate facilities. As a result, the Company recorded a restructuring liability of $1.6 million related to the lease obligation and certain other costs for those facilities. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain costs Incurred in a Restructuring)," these costs have been reflected in the purchase price.
The components of the purchase price allocation is as follows:
Consideration and merger costs: Consideration paid $ 66,927 Transaction costs 1,303 Restructuring 1,553 Deferred tax liability 9,120 Total $ 78,903
Allocation of purchase price: Net asset value acquired $ 16,133 Customer lists (seven-year life) 18,800 Non-compete agreements (three-year life) 2,700 Goodwill 41,270 Total $ 78,903 The following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of SignalTree Solutions at the acquisition date:
Condensed balance sheet: Cash $ 2,650 Accounts receivable 7,304 Other current assets 3,562 Property, plant, equipment, net 8,011 Total assets 21,527 Accounts payable 569 Accrued compensation 1,569 Other liabilities 3,256 Net assets $ 16,133 61
On November 30, 2001, the Company completed the merger of Metro Information Services, Inc. (Metro), a provider of information technology, or IT, consulting and custom software development services and solutions. The merger was completed by exchanging all of the common stock of Metro for 7.4 million shares of the Company's common stock. Each share of Metro was exchanged for 0.48 of one share of Keane common stock. In addition, outstanding Metro stock options were converted at the same ratio into options to purchase 571,058 shares of Keane common stock.
The Company accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of Metro, including identifiable intangible assets, were recorded at their respective fair values. All identifiable intangible assets will be amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations and cash flows of Metro were included in the Company's financial statements effective as of the merger date.
The total cost of the merger was $164.5 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation procedures and techniques. Initial goodwill was recorded at $154.3 million and other identified intangible assets were valued at $46.1 million. At the date of acquisition, the Company entered a plan to exit certain activities and consolidate facilities. As a result, the Company recorded a restructuring liability of $11.0 million in 2001 related to the lease obligation and certain other costs for those facilities. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," these costs, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. During 2002, the Company adjusted the purchase price allocation principally as a result of an adjustment in the valuation of the liability assumed for the restructured facilities and for other matters unresolved at the time of acquisition. As a result of these non-cash adjustments, the goodwill balance was increased by $3.1 million.
62
The components of the purchase price allocation as of date of merger with 2002 adjustments is as follows:
Consideration and merger costs: November 30, 2001 2002 adjustments Total Value of stock issued $ 130,796 $ — $ 130,796 Fair value of options exchanged 4,754 — 4,754 Transaction costs 7,786 258 8,044 Restructuring 10,972 3,052 14,024 Deferred tax liability 8,141 — 8,141 Deferred tax asset — (1,249 ) (1,249 ) Total $ 162,449 $ 2,061 $ 164,510
Allocation of purchase price: November 30, 2001 2002 adjustments Total Net liabilities assumed $ (37,984 ) $ (1,034 ) $ (39,018 ) Customer lists (seven-year life) 45,200 — 45,200 Non-compete agreements (three-year life) 900 — 900 Goodwill 154,333 3,095 157,428 Total $ 162,449 $ 2,061 $ 164,510 The following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of Metro as of the date of the acquisition and adjustments:
Condensed balance sheet: November 30, 2001 2002 adjustments Total Cash $ 622 $ — $ 622 Accounts receivable 40,820 141 40,961 Other current assets 1,004 — 1,004 Property, plant, equipment, net 2,780 (401 ) 2,379 Total assets 45,226 (260 ) 44,966 Accounts payable 3,583 13 3,596 Accrued compensation 9,800 65 9,865 Other liabilities 3,889 696 4,585 Note payable 65,938 — 65,938 Net liabilities $ (37,984 ) $ (1,034 ) $ (39,018 ) The unaudited pro forma combined condensed statements of income below present the historical statements of the Company and its acquisitions of Metro on November 30, 2001 and SignalTree Solutions on March 15, 2002 as if the
balance sheet. L. BUSINESS ACQUISITIONS Fiscal 1999purchases had occurred at January 1, 2001. Unaudited pro forma combined condensed financial information is presented for comparative purposes only and is not63
necessarily indicative of the results of operations that would have actually been reported had the purchase occurred at the beginning of the periods presented, nor is it necessarily indicative of future financial position or results of operations.
For the years ended December 31, 2002 2001 Total revenues $ 883,412 $ 1,070,451 Net income 8,910 16,013 Net income per share (basic) 0.12 0.23 Net income per share (diluted) 0.12 0.23 In addition to the SignalTree Solutions and Metro acquisitions, the Company completed several acquisitions of businesses complementary to the Company's business strategy during the third quarter of 2002 and during 2000. The Company did not complete any acquisitions other than Metro during 2001. The merger and consideration costs of these acquisitions, which were accounted for using the purchase method of accounting, totaled $13.4 million in 2002 and $35.3 million in 2000. In certain cases, the purchase price included contingent consideration based upon operating performance of the acquired business. During 2001, the Company paid an additional $1.2 million related to earn-outs and has recorded these amounts as additional purchase price. As of December 31, 2002, in connection with a third quarter acquisition, the Company had a recorded contingent liability of $895,000 related to certain earn-out considerations. The $895,000 is expected to be paid out during the first quarter of 2003. Future earn-outs are based on specific net revenue targets. Payments for achieving these goals will range from $1.0 to $2.0 million in future periods. The Company also recorded $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note payable as partial consideration. The note has a one-year term with a possible one-year extension based on additional acquisition service credits.
The results of operations of
thethese acquired companiesand businesses acquired during fiscal 1999have been included in theaccompanyingCompany's consolidatedfinancial statementsstatement of income fromtheir respective dates of acquisition. Amherst Consulting Group In May 1999, the Company purchased substantially all of the assets of Amherst Consulting Group, Inc. ("Amherst") for approximately $8 million, including $2 million payable to the former owner in equal installments at the second and third anniversary of the purchase. Amherst is a privately held management consulting firm specializing in change management. The acquisition was accounted for by the purchase method of accounting. Accordingly, the assets acquired have been recorded at their fair values atthe date of acquisition. The excess of the purchase price over the fair value of the net assetsacquiredhas been allocated to identifiableintangiblesintangible assets and goodwill andis being amortized on a straight-line basis over a 3 to 15-year period. Parallax Solutions Ltd. In May 1999,theCompany purchased the stock of Parallax Solutions Ltd. ("Parallax") for approximately $18.7 million. Parallax provides software services and is based in Conventry England. The acquisition of Parallax has been accounted for by the purchase method of accounting. Accordingly, the assets acquired have been recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired has 34been allocated to identifiableintangiblesand goodwill and is being amortized on a straight-line basis over a 3 to 20-year period. Anstec, Inc. In December 1999, the Company purchased the outstanding stock of Anstec, Inc. ("Anstec") for approximately $4.6 million, including approximately $2.8 million issuable at the end of the contingency period defined in the purchase agreement. Anstec is a privately held information technology company that provides solutions to both the Federal Government and commercial enterprises. The acquisition of Anstec has been accounted for by the purchase method of accounting. Accordingly, the assets acquired have been recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired has been allocated to identifiable intangibles and goodwill and is being amortized on a straight-line basis over a 3 to 15-year period. First Coast Systems, Inc. In December 1999, the Company purchased substantially all of the assets of First Coast Systems, Inc. ("First Coast") for approximately $29.5 million, including approximately $2.7 million held in escrow issuable at the end of the contingency period defined in the purchase agreement and $3 million that may be issued based upon future earnings. First Coast is a privately held information technology company that provides software solutions for the healthcare industry. The acquisition of First Coast has been accounted for by the purchase method of accounting. Accordingly, the assets acquired have been recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired has been allocated to identifiable intangibles and goodwill and is being amortized on a straight-line basis over a 3 to 15-year period. Other Acquisitions During 1999, the Company completed three other acquisitions for approximately $9.9 million, including approximately $2 million and approximately 102,000 shares of Keane common stock that may be issued based upon future earnings. The acquisitions were accounted for by the purchase method accounting. Accordingly, the assets acquired have been recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired have allocated to identifiable intangibles and goodwill and is being amortized on a straight-line basis over a 3 to 15-year period. Fiscal 1998 Omega Systems, Inc. In February 1998, the Company acquired all outstanding shares of Omega Systems, a privately held IT services company in exchange for approximately 190,000 shares of Keane common stock. The transaction was accounted for as a pooling-of-interests. Acquired net assets of approximately $800,000 have been recorded at historical amounts. Prior periods were not restated due to immateriality, and accordingly, results of operations have been included since the date of acquisition. GSE Erudite Software, Inc. On April 30, 1998, the Company purchased substantially all of the assets of GSE Erudite Software, Inc. The aggregate purchase price of this acquisition was approximately $9.8 million. The acquisition was accounted for by the purchase method of accounting. Accordingly, the assets acquired, including primarily customer-based intangibles and non-competition agreements have been recorded at their fair values at the date of acquisition. The customer-based intangibles and non-competition agreementsare being amortized on a straight-line basis over periods ranging from three tofive15 years.Bricker & Associates, Inc. On June 1, 1998,Pro forma results of operations for these acquisitions have not been provided, as they were not material to the Companycompleted its acquisition of Bricker & Associates, Inc. ("Bricker"),on either anoperations improvement consulting firm, underindividual or anAgreement 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 2,336,196 million shares of Keane, Inc. common stock (the "merger"). The merger has been accounted for as pooling-of-interests. 35During 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 inter-company transactions between the two companies.
Three months ended March 31, 1998 March 31, 1997Revenue 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 August 4, 1998, the Company acquired the issued and outstanding capital stock of Icom Systems Ltd ("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 option holders. The merger has been accounted for as a pooling-of-interest. 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 inter-company transactions between the two companies.
Six months ended June 30, 1998 June 30, 1997Revenue 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 October 9, 1998 the Company acquired all of the outstanding capital stock of Fourth Tier, Inc. ("Fourth Tier"), a privately-held provider of enterprise relationship management consulting services based in Los Angeles, California, in exchange for 915,571 shares of Keane, Inc. common stock. The merger has been accounted for as a pooling-of-interest. During the quarter ended December 30, 1998, the Company incurred a $2.1 million charge to operations to reflect investment banking, legal, accounting and other professional fees associated with the Fourth Tier transaction. In addition, an additional charge for $1.7 million was incurred as a result of the requirement to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting. 36Revenue and net income of the combined entities for the nine-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 inter-company transactions between the two companies.aggregate basis.
Nine Months Ended September 30, 1998 September 30, 1997Revenue Keane, Inc. $ 772,056 $ 492,895 Fourth Tier, Inc. 10,369 4,322 --------- --------- Combined revenue $ 782,425 $ 497,217 ========= ========= Net income Keane, Inc. $ 68,568 $ 34,637 Fourth Tier, Inc. 4,205 2,179 --------- --------- Combined net income $ 72,773 $ 36,816 ========= =========64
M.
BANK DEBT In July 1995, the Company secured a $20 million demand line of credit from a major Boston bank, and expires in May of 2000. Borrowings will bear interest at the bank's base rate (the prime rate). There were no borrowings under this line during 1998 or 1999. N.EARNINGS PER SHAREA summary of the Company's calculation of earnings per share is as follows:
Years Ended December 31, 1997 1998 1999 ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)Net income $ 51,371 $ 96,349 $ 73,074 Weighted average number of common shares Outstanding used in calculation of basic earnings per Share 70,096 71,053 71,571 Incremental shares from the assumed exercise of Dilutive stock options 1,507 1,231 824 ---------- ---------- ---------- Weighted average number of common shares Outstanding used in calculation of diluted earnings Per share 71,603 72,284 72,395 ========== ========== ========== Earnings per share Basic $ .73 $ 1.36 $ 1.02 ========== ========== ========== Diluted $ .72 $ 1.33 $ 1.01 ========== ========== ==========
Years Ended December 31, 2002 2001 2000 Net income $ 8,181 $ 17,387 $ 20,354 Weighted average number of common shares outstanding used in calculation of basic earnings per share 74,018 68,474 69,646 Incremental shares from the assumed exercise of dilutive stock options 388 922 347 Weighted average number of common shares outstanding used in calculation of diluted earnings per share 74,406 69,396 69,993 Earnings per share Basic $ 0.11 $ 0.25 $ 0.29 Diluted $ 0.11 $ 0.25 $ 0.29 For the period ending December 31,
1999,2002, 2001, and 2000, there were950,3152,373,570, 2,348,368, and 3,063,740 options for common stock, respectively, which were excluded because they were anti-dilutive.O.N. RESTRUCTURING
CHARGECHARGESIn the fourth quarter of
1999,2002, 2001, and 2000, the Company recordedarestructuringchargecharges of$13.7 million.$17.6 million, $10.4 million, and $8.6 million, respectively. Ofthis charge $3.8these charges, $3.2 million, $4.4 million, and $1.7 million related to a workforce reduction of approximately600229, 900, and 200 employeesprimarily consultants.for the years 2002, 2001, and 2000, respectively. Inaddition,2002, the Company also released excess accruals of $251,000 in connection with workforce reduction, which resulted in a net workforce restructuring charge of $2.9 million. Cash expenditures in 2002 of $10.2 million related to prior-year's income statement charges and acquisition expenditures were $3.9 million and $6.3 million, respectively.The Company also 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 charges included $12.1 million in 2002, $4.0 million in 2001, and $3.5 million in 2000 for branch office closings and certain other expenditures. In conjunction with the review during the fourth quarter, the Company also performed a review of accrual balances for properties restructured in prior years. As a result, the Company determined that the cost to consolidate and/or close certain non-profitable offices would be higher than the original estimate. The change in estimates resulted in a net charge to the Company's restructuring liability of $756,000 and $1.2 million in 2002 and 2001, respectively. The resulting net charge in 2002 and 2001 was $12.9 million and $5.1 million, respectively. Cash expenditures in 2002 of $6.3 million related to prior-year's income statement charges and acquisition expenditures were $3.8 million and $2.5 million, respectively.
65
The Company also wrote off
$4.8$1.9 million, $0.8 million, and $3.4 million in 2002, 2001, and 2000, respectively, ofimpairedassets, whichincluded the carrying valuebecame impaired as a result ofspecific assets associated withthesebranch offices, and incurred charges of $3.8 million for branch closings and $1.3 million for payments to certain employees. 37restructuring actions. A summary of restructuring activity during the
restructuring chargeyears 2002, 2001 and 2000, which is reported in the consolidated accrued expenses in the accompanying balance sheet, is as follows:
Branch Workforce Impaired Office Payments to Reduction Assets Closures Certain Employees TotalSpecial charge $ 3,800 $ 4,753 $ 3,800 $ 1,300 $ 13,653 Cash expenditures (1,000) -- -- -- (1,000) Non cash charges -- (4,753) (819) -- (5,572) -------- -------- -------- -------- -------- Balance 12/31/99 $ 2,800 $ -- $ 2,981 $ 1,300 $ 7,081 ======== ======== ======== ======== ========
Workforce
reductionBranch office
closures
& other
expendituresImpaired assets Total Beginning balance in fiscal 2000 $ 2,800 $ 4,281 $ — $ 7,081 Charges in fiscal 2000 1,743 3,478 3,403 8,624 Cash expenditures in fiscal 2000 (3,138 ) (2,832 ) — (5,970 ) Fixed asset impairment charges in fiscal 2000 — — (3,403 ) (3,403 ) Beginning balance in fiscal 2001 1,405 4,927 — 6,332 Charges in fiscal 2001 4,417 3,957 825 9,199 Change in prior year's estimate — 1,159 — 1,159 Cash expenditures in fiscal 2001 (2,620 ) (2,494 ) — (5,114 ) Acquisition related charge in fiscal 2001 7,226 3,746 — 10,972 Fixed asset impairment charges in fiscal 2001 — — (825 ) (825 ) Beginning balance in fiscal 2002 10,428 11,295 — 21,723 Charges in fiscal 2002 3,192 12,060 1,847 17,099 Change in prior year's estimate (251 ) 756 — 505 Cash expenditures in fiscal 2002 (10,177 ) (6,318 ) — (16,495 ) Acquisition related charge in fiscal 2002 93 1,760 187 2,040 Acquisition related charge in fiscal 2002: Acquisition related charges to increase prior year estimate — 3,397 — 3,397 Fixed asset impairment charges in fiscal 2002 — — (2,034 ) (2,034 ) Balance as of December 31, 2002 $ 3,285 $ 22,950 $ — $ 26,235 As of December 31, 2002, the balance in the branch office closures reserve consisted of amounts for properties identified in 2002, 2001, 2000, and 1999 in the amounts of $15.4, $6.1, $0.8, and $0.6 million, respectively.
O. SEGMENT REPORTING
Based on qualitative and quantitative criteria established by Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related Information," the Company operates within one reportable segment: Professional Services.
66
In accordance with the enterprise wide disclosure requirements of FAS 131, the Company's geographic information is as follows:
Geographic Location Balance per
consolidated
financial
statementsDomestic Domestic
deferred
tax assetsInternational International
deferred
tax assets2002 Revenues $ 843,918 $ 29,285 $ 873,203 Long-lived assets 409,513 $ 11,609 26,601 $ 1,830 449,553 2001 Revenues 730,714 48,445 779,159 Long-lived assets 322,307 22,684 21,304 1,058 367,353 2000 Revenues 808,783 63,173 871,956 Long-lived assets 126,295 18,761 22,996 913 168,965 The Company has no single customer that provides revenues that equal or exceed 10 percent of its consolidated revenues.
P. SUBSEQUENT
EVENT The Company announced onEVENTSOn February 10, 2003, the Company received a $7.3 million award in connection with an arbitration proceeding initiated by the Company in 2000
that it intends to repurchase up to two million sharesagainst Signal Corporation for a breach ofits Common Stock lasting until February 9, 2001.an agreement between Signal Corporation and the Company's Federal Systems subsidiary. The Company willuseaccount for this award in the first quarter of 2003.On February 13, 2003, the Company's Board of Directors approved a new United Kingdom Employee Stock Purchase Plan. The Company has allocated 500,000 shares of the total number of shares reserved under the Company's 1992 Employee Stock Purchase Plan for
its stock plansissuance under the United Kingdom Employee Stock Purchase Plan.On February 28, 2003, the Company entered into a new three-year, $50 million credit facility with two banks. This new credit facility replaces the Company's previous $10 million demand line credit, which expired in July 2002. The terms of the credit facility require the Company to maintain certain financial ratios and
other general corporate purposes. 38earnings before interest, taxes, depreciation, and amortization (EBITDA). Borrowings will bear interest at one of the bank's base rate or the Euro currency reserve rate. 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in part under the caption "Directors and Executive Officers of the Company" in Item 4 of Part I hereof and the remainder is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May
31, 200028, 2003 (the"2000"2003 Proxy Statement") under the caption "Election of Directors."ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is incorporated herein by reference to the Company's
20002003 Proxy Statement under the caption "Executive Compensation."ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is incorporated herein by reference to the Company's
20002003 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners andManagement.Management" and "Equity Compensation Plan Information."ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is incorporated herein by reference to the Company's
20002003 Proxy Statement under the caption "Certain Related Party Transactions."39PART IVITEM 14. CONTROLS AND PROCEDURES
- a)
- Evaluation of Disclosure Controls and Procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms and are operating in an effective manner.
- b)
- Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
68
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The following consolidated financial statements are included in Part II, Item 8: Page(s) Reports of Independent Auditors...........................................21-22 Consolidated Balance Sheets as of December 31, 1998 and 1999.................23 Consolidated Statements of Income For the Years Ended December 31, 1997, 1998 and 1999.........................24 Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1997, 1998 and 1999.........................25 Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1998 and 1999.........................26 Notes to Consolidated Financial Statements................................27-38
Report of independent auditors 33 Consolidated balance sheets as of December 31, 2002 and 2001 34 Consolidated statements of income for the years ended December 31, 2002, 2001, and 2000 35 Consolidated statements of stockholders' equity for the years ended December 31, 2002, 2001, and 2000 36 Consolidated statement of cash flows for the years ended December 31, 2002, 2001, and 2000 37 Notes to consolidated financial statements 38-67 (b) Exhibits
The Exhibits set forth in the attached Exhibit Index are filed as part of this Annual Report.
(c) Reports on Form 8-K
None 40The Company filed the following Current Reports on Form 8-K during the three-month period ended December 31, 2002.
- i.
- Current Report on Form 8-K filed with the SEC on October 30, 2002 announcing the Board of Directors authorization for the Company to purchase 5,000,000 shares of common stock.
69
Pursuant to the requirements of Section 13 or 15 (d) 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) s/s John F Keane ---------------- By: John F. Keane Chairman, President, and Chief Executive Officer Date: March 23, 2000
KEANE, INC.
(Registrant)
/s/ BRIAN T. KEANE
Brian T. Keane
President and Chief Executive OfficerDate: March 21, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ sJOHN F. KEANE
John F. KeaneMarch 23, 2000
Chairman/s/ sJOHN J. LEAHY
John J. LeahyMarch 23, 2000 - ---------------------------- ---------------------------------- John F. Keane John J. Leahy Chairman, President, and
Senior Vice President andChief Executive OfficerChief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)
/s/sBRIAN T. KEANE
Brian T. KeaneMarch 23, 2000
President, Chief Executive Officer and Director
/s/sJOHN F. KEANE, JR.
John F. Keane, Jr.March 23, 2000 - ---------------------------- ---------------------------------- Brian T. Keane John
Director
/s/ JOHN F.Keane, Jr. Executive Vice President, Executive Vice President, Office of the President, Office of the President, and Director and Director s/sROCKART
John F. RockartMarch 23, 2000
Director
/s/s RobertMARIA A.Shafto March 23, 2000 - ---------------------------- ---------------------------------- John F. Rockart RobertCIRINO
Maria A.ShaftoCirino
DirectorDirector
/s/sPHILIP J. HARKINS
Philip J. HarkinsMarch 23, 2000
Director
/s/sWINSTON R. HINDLE, JR.
Winston R. Hindle, Jr.March 23, 2000 - ---------------------------- ---------------------------------- Philip J. Harkins Winston R. Hindle, Jr.
Director
/s/ STEPHEN D. STEINOUR
Stephen D. Steinour
Director
/s/ JOHN H. FAIN
John H. Fain
Director41Exhibit Index 3.1 Articles of Organization of the Registrant, as amended, are incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-85206). 3.2 Articles of Amendment to Registrant's Articles of Organization, effective as of May 29, 1998. 3.3 By-Laws of the Registrant, as amended, are incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994. *10.1 Key Employees Deferred Compensation Plan is incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File No. 33-33557), as filed with the Securities and Exchange Commission (the "Commission") on February 21, 1990 and declared effective by the Commission on March 8, 1990 (as amended, the "Registration Statement"). *10.270
I, Brian T. Keane,
Inc. 401(k) Deferred Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit 10.2 to the Registration Statement. *10.3 1982 Incentive Stock Option Plan (the "Option Plan") is incorporated herein by reference to Exhibit 10(c) to the Registrant's Annual Reportcertify that:
- 1.
- I have reviewed this annual report on Form 10-K of Keane, Inc.;
- 2.
- Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
- 3.
- Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the
year ended December 31, 1988 (the "1988 Form 10-K"). On January 9, 1990,periods presented in this annual report;- 4.
- The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Board of Directorsregistrant and we have:
- a)
- designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
- b)
- evaluated the effectiveness of the
Registrant adopted an Amendmentregistrant's disclosure controls and procedures as of a date within 90 days prior toSection 4the filing date of this annual report (the "Evaluation Date"); and- c)
- presented in this annual report our conclusions about the effectiveness of the
Option Plan increasingdisclosure controls and procedures based on our evaluation as of thenumber of shares eligible for issuance thereunder to 900,000. *10.4 AmendmentsEvaluation Date;
- 5.
- The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
Option Plan effective asregistrant's auditors and the audit committee ofFebruary 15, 1990registrant's board of directors (or persons performing the equivalent functions):
- a)
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and
March 7, 1990 are incorporated herein by reference to Exhibit 10.4report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and- b)
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
- 6.
- The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the
Registrant's Annual Reportdate of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 21, 2003 /s/ BRIAN T. KEANE
Brian T. Keane
President and Chief Executive Officer71
I, John J. Leahy, certify that:
- 1.
- I have reviewed this annual report on Form 10-K of Keane, Inc.;
- 2.
- Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
- 3.
- Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the
year ended December 31, 1990 (the "1990 Form 10-K"). *10.5 1978 Employee Stock Purchase Plan (the "Stock Purchase Plan") is incorporated herein by referenceperiods presented in this annual report;- 4.
- The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
- a)
- designed such disclosure controls and procedures to
Exhibit 10(b)ensure that material information relating to the1988 Form 10-K. *10.6 Amendmentsregistrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;- b)
- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the
Stock Purchase Plan effectivefiling date of this annual report (the "Evaluation Date"); and- c)
- presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of
February 15, 1990 are incorporated herein by reference to Exhibit 10.6the Evaluation Date;
- 5.
- The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
Registrant's Annual Report on Form 10-Kregistrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
- a)
- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the
year ended December 31, 1992 (the "1992 Form 10-K"). *10.7 1983 Restricted Stock Plan (the "Restricted Stock Plan") is incorporated herein by reference to Exhibit 10.5registrant's auditors any material weaknesses in internal controls; and- b)
- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
- 6.
- The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the
Registration Statement. *10.8 Amendmentdate of our most recent evaluation, including any corrective actions with regard tothe Restricted Stock Plan effective as of February 15, 1990 is incorporated herein by reference to Exhibit 10-4 of the 1990 Form 10-K. *10.9 1998 Equity Incentive Plan is incorporated herein by reference to Exhibit 10 to the Company's Registration Statement on Form S-8 (File No. 333-56119), as filed withsignificant deficiencies anddeclared effective by the Commission on June 5, 1998. *10.10 Amendment to 1998 Equity Incentive Plan. *10.11 1992 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.10 to the 1992 Form 10-K. 10.12 Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration Statement.material weaknesses.
Dated: March 24, 2003 /s/ JOHN J. LEAHY
John J. Leahy
Senior Vice President of Finance and
Chief Financial Officer72
Exhibit Index 2.1 Agreement and Plan of Merger, dated as of August 20, 2001, by and among the Registrant, Veritas Acquisition Corp., and Metro Information Services, Inc. is incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 20, 2001, filed on August 21, 2001. 3.1 Articles of Organization of the Registrant, as amended, are incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-85206) (the "Registration Statement"). 3.2 Articles of Amendment to Registrant's Articles of Organization, filed on May 29, 1998, are incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on 8-K, filed on June 3, 1998. 3.3 Second Amended and Restated By-Laws of the Registrant are incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000. 3.4 Amendment to Second Amended and Restated Bylaws of the Registrant is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. *10.1 Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit to the Registration Statement. *10.2 1992 Stock Option Plan is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. *10.3 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10 to the Company's Registration Statement on Form S-8 (File No. 333-56119), as filed with and declared effective by the Commission on June 5, 1998. *10.4 Amendment to 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. *10.5 Amended and Restated 1992 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001. 10.6 Metro Information Services, Inc. Amended and Restated 1997 Stock Option Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. 10.7 Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration Statement. 10.8 First Amendment of Lease dated March 19, 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement. 10.9 Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement. *10.10 Keane, Inc. 2001 Stock Incentive Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. *10.11 Keane, Inc. United Kingdom Employee Stock Purchase Plan. 10.12 Revolving Credit Agreement dated February 28, 2003, by and between the Registrant, Fleet National Bank, as Agent, and several lenders party thereto. 73
10.13 Lease, dated October 25, 2001 between the Registrant and Gateway Developers LLC. 21.0 Schedule of Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 99.1 Certification by the Registrant's President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification by the Registrant's Senior Vice President of Finance and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- *
- Management contract or compensatory plan or arrangement required
to befiled as an exhibitto this formpursuant to Item 14(A) and (C) of this report.10.13 First Amendment of Lease dated March 19, 1985, betweenINDEX TO CONSOLIDATED FINANCIAL STATEMENTS
KEANE, INC. CONSOLIDATED BALANCE SHEETS
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME
KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For theRegistrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement. 4210.14 Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement. 10.15 Documents relating to the Demand Lines of Credit with Shawmut Bank, N.A. and the First National Bank of Boston (the "Banks") are incorporated herein by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995: (a) Demand Money Market Promissory Note dated as of May 1, 1995, in the amount of $10,000,000, between the Registrant and Shawmut Bank. (b) Loan Agreement dated July 20, 1995, in the amount of $10,000,000, between the Registrant and Bank of Boston. 21. Schedule of Subsidiaries of the Registrant.......................Ex 21-1 23.1 Consent of Ernst & Young LLP.....................................Ex 23-1 23.2 Consent of PriceWaterhouseCoopers LLP............................Ex 23-2 27.10 Financial Data Schedule for the yearyears ended December 31,1999.............................................................Ex 27-10 43