SECURITIES 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][x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE -                                                                            
ACT
OF 1934
For the fiscal year ended December 31, 1998
                          -----------------2001

                                       OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________

                          Commission file number 1-7516
                                                ------

                                   KEANE, INC
                                   ----------
             (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)

Registrant's telephone number, including area code: (617) 241-9200
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                    Name of Each Exchange on Which Registered
- ---------------------------------------                    -----------------------------------------
Common Stock, $.10 par value           American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

- -----

Indicate 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. [_]

The aggregate market value of the Common Stock held by nonaffiliates of the
registrant, based on the last sale price of the Common Stock on the AMEX on
March 12, 1999,8, 2002, was $1,621,812,462.$1,019,651,000. As of March 12, 1999, 60,200,9088, 2002, 75,475,071 shares of
Common Stock, $.10 par value per share, and 285,213284,891 shares of Class B 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 26, 1999.29, 2002. The information
required in response to Items 10-13 of Part III of this Form 10-K is hereby
incorporated by reference to such proxy statement.


                                       1



PART I
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ITEM 1.              BUSINESS

OVERVIEW

Keane, Inc., (collectively with its subsidiaries, "Keane" or "the Company,"
unless the context requires otherwise) is a leading provider of information
technology (IT) and business consulting services. In business since 1965, the
Company helps clients optimize business performance through the innovative use
and management of information technology. Keane's clients consist primarily of
Global 2000 companies across every major industry, healthcare organizations, and
government agencies. Keane provides its services through an extensive network of
local branch offices in North America and in the United Kingdom, and through
Advanced Development Centers in the United States, Canada, and India. This
integrated client service model enables Keane to deliver services to customers
on-site, off-site, at its near-shore facilities in Canada and through its
offshore development centers in India. Branch offices work in conjunction with
the Company's business consulting arm, Keane Consulting Group, and are supported
by centralized Strategic Practices and Quality Assurance Groups. The Company
develops a high percentage of recurring revenue as a result of its multi-year
outsourcing contracts, broad range of service offerings, and track record of
delivering quality IT solutions consistently and reliably.

Keane seeks to improve its cash position by marketing services that encourage
long-term relationships with customers. The Company rigorously manages its
internal investments and looks to gain economies of scale by enhancing critical
mass to increase revenues in order to decrease Selling, General, &
Administrative ("SG&A") expenses as a percentage of revenue. The Company also
attempts to continuously improve and accelerate the collection of its
receivables. The Company had $129.2 million in cash and investments at the end
of 2001 after the payment of approximately $73.1 million of cash related to
Keane's acquisition of Metro Information Services, Inc. on November 30, 2001.

Keane is a Massachusetts corporation (togetherheadquartered in Boston. Its common stock
is traded on the American Stock Exchange under the symbol KEA. Information on
Keane can be accessed on the Company's web site at www.keane.com or through its
Investor Relations line at 1-800-75-KEANE.

SERVICES

Keane offers a full range of services that span the full Plan, Build and Manage
life cycle. Specifically, Keane focuses on three highly synergistic service
offerings: Business Consulting, Application Development & Integration (ADI), and
Application Development and Management (ADM) Outsourcing, which is Keane's
flagship service offering. Business Consulting revenue is reported within the
Company's Plan sector. ADI revenue is reported in the Build sector. As part of
its Build services, the Company also provides a full-line of healthcare
information systems and related IT consulting and IT integration services for
healthcare organizations. ADM Outsourcing revenue is reported in the Company's
Manage sector. Keane believes its broad range of services position it as a
strategic partner to clients, enabling it to identify and implement
comprehensive solutions that meet clients' specific business requirements.

Business Consulting (Plan services)

Keane's management consulting services represent a critical component in the
Company's ability to help clients optimize their businesses for today's economy.
The Company provides its business consulting services through Keane Consulting
Group (KCG), the Company's business and management consulting arm. A recent
study by International Data Corporation (IDC), an independent research firm,
forecasts that the worldwide market for business consulting services is expected
to grow at a compounded annual growth rate of 11% through 2005. KCG helps
companies to maximize productivity, increase revenue, reduce costs, and create
capacity for future growth by identifying high-value business opportunities and
providing clients with both strategy and implementation services. KCG delivers
its subsidiaries, unlessservices by taking a holistic view of business processes, organizational
design and technology architecture. Its operations improvement services can be
divided into three core competency areas: insurance and financial services,
manufacturing and distribution, and technology services. Typical client
engagements include: assisting with the context otherwise requires, "Keane" orintegration of mergers and acquisitions,
streamlining customer operations, optimizing supply chains, enhancing
customer-facing processes, and aligning IT and business strategies. KCG helps
Keane develop strong relationships with senior executives and other
decision-makers. In addition, consulting engagements often lead to follow-on IT
projects as clients rely on Keane to support an idea from its genesis through
implementation and eventual management.


                                       2



Application Development & Integration (Build services)

In an increasingly global, networked and information-based economy, application
software is becoming more complex, requiring tighter and more sophisticated
integration between front-end and back-end systems to enhance access to critical
corporate data, enable high-value process improvements, and enhance customer
service. As a result, Keane focuses its project-based Application Development
and Integration (ADI) business on the "Company")rapidly growing Enterprise Application
Integration (EAI), provides managementsupply chain, and information technology (IT) consulting, applicationcustomer service areas. A recent study by
IDC forecasts that the worldwide market for systems integration services is
expected to grow at a compounded annual growth rate of 15% through 2005. As a
firm with broad-based expertise across the full spectrum of technical
requirements, Keane has become a top-tier provider of large, complex software
development and integration projects for Global 2000 companies. The Company also
provides ADI services for the public sector, which includes agencies within the
U.S. Federal government, various states and other local government entities.
Revenue from public sector business represented approximately 16.5% of Keane's
total revenue in the year 2001. Typical client engagements include the
development of software to create an integrated supply or value chain, the
implementation of an enterprise Customer Relationship Management (CRM) solution
and its integration with an Enterprise Resource Planning (ERP) system, and the
design and implementation of an integrated online state vehicle registration and
motor carrier services system.

Keane believes that it is well positioned to capture large-scale, ADI projects
from both the commercial and public sector markets due to its core competencies
in project and program management, IT architecture, advanced application
development, and legacy system integration. The Company anticipates that these
competencies, together with its long-term relationships with Global 2000
companies, will enable it to benefit from an economic recovery and an increase
in spending on information technology.

Application Development and Management (ADM) Outsourcing (Manage services)

The need to manage critical business applications continues to expand rapidly as
companies add systems to their application portfolios. Given the need to focus
on core competencies and a growing dependence on information technology,
maximizing return on investment from existing application portfolios has become
a critical objective of many organizations. As a result, Global 2000 companies
are turning to best-of-breed outsourcing as an effective solution for building
and supporting their IT systems better, faster, and more cost-effectively.
According to IDC, the market for application outsourcing is expected to grow at
a compounded annual growth rate of 29% through 2005.

Keane's ADM Outsourcing service helps clients manage existing business systems
more efficiently and more reliably, improving the performance of these
applications while better controlling costs. Under this service offering, Keane
assumes responsibility for the management of a client's business applications
with goals of: instituting operational efficiencies that provide cost savings
over current operations; implementing improvements that reduce time-to-market
and enhance flexibility in responding to changing business needs; freeing
personnel resources and management attention for other strategic priorities; and
achieving higher user satisfaction. Some outsourcing engagements include the
hiring of a client's IT personnel as part of the agreement. In these instances,
Keane trains client staff in its proprietary methodologies and processes to work
on the client outsourcing engagement.

Keane seeks to obtain competitive advantages in the ADM Outsourcing market by
generating measurable client benefit, using world class methodologies,
referencing its Global 2000 client base, and emphasizing its continuous process
improvement and seamless client service delivery model. On March 15, 2002, Keane
acquired SignalTree Solutions, a U.S.-based corporation with two development
facilities in India. The addition of SignalTree's delivery capability expanded
Keane's flexible delivery model to include two offshore software development
centers in India. Since the benefit that Keane seeks to provide its customers is
based on management and call center management services to
corporations, government agencies, and healthcare facilities.  Keane's services
enable clients to operationalize their business strategy, cost-effectively
develop new software applications to enable their strategy, and manage mission-
critical software applications to better support business requirements.  The
Company serves its clients through a series of corporate practices that support
Keane's network of branch offices in the major markets of the U.S., Canada, and
the U.K.  Keane's practices accumulate, develop, and disseminateprocess improvements, the Company's organizational experience along core serviceADM Outsourcing
business spans multiple vertical industries and industry lines.  This delivery
structure allows Keane to provide clients with the world-class capabilities of
the entire company on a responsive and cost-effective local level.  Keane
provides services primarily to Fortune 1,000 companies, including AT&T
Corporation, Eastman Kodak Company, General Electric Company, International
Business Machines Corporation, McDonald's Corporation and Procter & Gamble
Company.

KEANE'S SERVICES MODEL: Underlying Keane's strategic focus and efforts is a
three-tiered service model. This model structures the Company's services into
three core disciplines--planning, building and managing IT. Across these
disciplines is a consistent focus on helping clients achieve quantifiable
business benefit.  Keane achieves this objective through the application of
rigorous processes and management disciplines and a culture of accountability
for successful results.

Keane's "plan, build and manage" capabilities encompassincludes a broad range of
services designed to help clients align IT with business strategy and build and
managetechnologies.

The effectiveness of Keane's ADM Outsourcing capability is demonstrated by the
optimal infrastructure of people, process, and technology to enablefact that strategy. This full spectrum of capabilities not only responds to clients'
most critical IT and business needs, but enables them to take advantage of the
synergies associated with linking their IT planning, implementation and
outsourcing investments.

Planning Services: Keane's planning services are delivered primarily through
Bricker & Associates, Inc. ("Bricker"), the Company's operations improvement
consulting subsidiary. Keane also provides project management training and
consulting based on the Company's project management, risk management, and
related processes.  Bricker helps companies plan and implement operations
improvements aligned with their business strategy to achieve targeted increases
in revenue, profits, and shareholder value.  Bricker does this by taking an
integrated approach to organizational design, workflow improvements, and
technology strategy.

Bricker's planning services frequently identify opportunities for IT initiatives
to enable clients' business strategies. These recommendations are complemented
by Keane's extensive range of IT solutions. Keane's investment in this
consulting practice positions the Company at the front end of many37 of its clients' application development and outsourcing initiatives.

Build Services: Keane's Application Development services, the Company's "build"
services, assist clients in implementing new technology to achieve strategic
objectives.  The services include Customer Relationship Management ("CRM") and
Customer Application Development solutions that may leverage industry-leading
packaged software, data warehousing, and web-based technology. Many of the
industries Keane serves are initiating CRM programs to target key customers,
improve sales effectiveness, and increase customer loyalty.  Keane's Application
Development projects can encompass IT planning and assessment; design,
development, and integration of software applications; and program management
services.

Keane considers its qualifications in the following areas as important strengths
in the Application Development arena: (i) its operations improvement and change
management competencies; (ii) its software package, application, and system
architecture expertise; (iii) its enterprise application integration

                                       2

 
experience; and (iv) its industry-renowned project management processes. By
combining these capabilities, Keane seeks to deliver complete Application
Development solutions that fully leverage advanced technology while extending
the life and payback of existing IT assets.

Manage Services: The growing attention on new technology implementations has not
diminished the tremendous need to more effectively manage the existing IT assets
known as legacy systems. Keane's flagship Application Outsourcing solution,
together with its Migration and Call Center services, help clients address this
need.

Application Outsourcing services, encompassing management and enhancements of
mission-critical software applications, are designed to enable clients to
realize ongoing business value from their IT assets. On these engagements Keane
focuses on advancing clients' application environments tohave been independently assessed at
Level 3 or 4 on the Software Engineering Institute's (SEI) Capability Maturity
Model ("CMM")(CMM). In addition, SignalTree's technology centers in Hyderabad and Delhi
are independently evaluated at Level 5 on the SEI CMM and comply with ISO 9001
standards. The SEI CMM is
recognized withinhas five levels of process maturity, and many IT
organizations typically operate at Level 1, the IT industrylowest level of maturity. Since
1997, Keane has used the SEI CMM as thea standard for objectively measuring its
success in improving its client's application management environment. The SEI
CMM has become the industry's standard method for evaluating the effectiveness
orof an IT environment and the process maturity of IToutsourcing vendors.


                                       3



ADM outsourcing provides Keane with large client engagements that usually span
three-to-five years in duration. In addition, 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

Keane's Healthcare Solutions Division (HSD) develops and markets a complete line
of patient management, processes.  By
advancing to CMM Level 3, clients are able to eliminate defects in software,
reduce lengthy cycle times, lower support costs,financial management, clinical, long-term care and
improve service to their
user community.

To date, 17practice management systems for healthcare organizations, as well as related IT
consulting and IT integration services. Keane helps healthcare organizations
overcome the challenge of Keane's outsourcing engagements were independently certified at
CMM Level 3, including those at BankBoston, Bell Atlantic, Blue Cross Blue
Shieldproviding higher quality patient care while
administering more efficient operations through the use of Maryland, Public Service Electric & Gas, and Toyota Motor Sales.information
technology. In addition, as proven in its engagements, Keane can achieve this certification
within 12 months, as comparedKeane's broad range of services help healthcare clients
address ongoing Health Insurance Portability and Accountability Act (HIPAA)
requirements. HIPAA is Federal legislation designed to the industry standard of 3 1/2 years according
to the Center for Systems Management. Keane believes its ability to deliver such
a strategic advantage in its outsourcing programs is a critical competitive
differentiatorimprove efficiency in the
Application Outsourcing marketplace.

STRATEGIC DIFFERENTIATORS: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. HSD revenues are currently reported
under Keane's ADI (Build) business line.

STRATEGY/DISTINCTIVE CAPABILITIES

Keane's mission is to help companies optimize business performance through the
innovative use and management of information technology (IT). In addition, Keane
considersaligns its internal focus, measurement processes, and compensation systems to
promote the following characteristicsconsistent generation of long-term shareholder value. The Company's
vision is to be recognized as one of the Company criticalworld's great IT services firms by its
customers, employees, and shareholders. Keane seeks to its positioning in the marketplace:

     A delivery structure of world-class corporate practices supporting local
     branches, enabling it to deliver its organizational strengths responsively
     and cost-effectively at the local level.
     Industry expertise developed from serving clients in banking, insurance,
     utilities, telecommunications, manufacturing, healthcare, and government.
     Operations improvement expertise, enabling it to help clients realize the
     benefits of integrating operations improvements with technology
     initiatives.
     Capabilities across the application development and management lifecycle,
     enabling it to help clients leverage advanced technologies while extending
     the return on investment of existing technology.
     Focus on rigorous process and management disciplines, through its
     proprietary methodologies and best practices, enabling it to provide
     clients with consistent,accomplish this objective
by providing high quality and measurable results.
     Long-termeffective IT solutions for its customers. The
Company endeavors to create a positive and supportive work environment for its
employees to foster creativity, teamwork, and individual excellence.

Distinctive capabilities that enable Keane to deliver value to its customers,
and to reach its financial milestones, include a relentless focus on processes
improvement, mature competencies in project and program management, consistent
use of methodologies, a strong quality assurance function, and a seamless client relationships, which create greater opportunities for
     recurring revenues through ongoing
service delivery based on exposuremodel. This model currently includes providing services to
clients' business, technicalcustomers on-site at a client's facility, off-site at a separate location,
near-shore at Keane's Advanced Development Center in Canada, and organizational requirements.

MARKETPLACE DRIVERS:offshore at one
of the Company's two Software Development Centers in India. The Company believes
that there arethe benefits of its seamless delivery model include: the use of common
processes, management, and metrics to improve predictability; a single point of
contact to enhance accountability; the flexibility to move and balance workload
based on business need; and the ability to optimize economic benefit. The
Company continues to invest in its delivery model and competencies in order to
add value to its strategic service offerings and to further strengthen its
capabilities.

Keane's goal is to leverage its core competencies and financial capabilities to
gain market share and competitive strength as well as to increase shareholder
value during the current economic downturn, and to strongly position itself to
take advantage of future increases in IT spending. As a result, the Company has
intensified its internal focus to strengthen the differentiation and market
position of its ADM Outsourcing services. In addition, the Company has
concentrated its Business Consulting and Application Development and Integration
(ADI) services within market segments where it believes demand for such services
will increase in the event of an economic recovery. To enhance its efforts, the
Company is seeking to acquire other IT services firms, at what it considers
favorable purchase prices, in order to increase its critical mass and obtain
additional customers to which it can cross-sell its services.

Business Model

Keane remains focused on its core strengths and follows a business model that is
intended to help the Company achieve sustainable growth. This business model
includes five major elements: recurring revenue, critical mass, operational
excellence, synergy across business units and repeatable solutions. The
combination of these elements helps Keane to mitigate short-term fluctuations in
the IT services market and generate significant opportunitieslong-term per share value.

1.    Recurring Revenue - Keane believes the most important ingredient for
      growthlong-term success in the IT services industry particularly in the
application management, application development and consulting markets.
Dataquest Incorporated, a market research firm, estimated the U.S. and European
markets for service offerings such as Keane's at $116 billion and $80 billion,
respectively, for 1999.  Moreover, according to Dataquest Incorporated,
expenditures on externally provided IT services in the areas of consulting,
application development and integration, and IT/application management (Keane's
core "plan, build, manage" service offerings) are among the industry's highest
growth areas.is recurring revenue. The
      Company believes thatseeks to build recurring revenue through a combination of services
      provided over multi-year contracts and close customer relationships. The
      Company attempts to increase contractually obligated recurring revenue
      with its ADM Outsourcing service, through which Keane


                                       4



      typically manages and enhances applications under three-to-five year
      contracts. These contracts provide Keane with significant opportunities
      for expansion and add-on business, while the following factors will continueCompany's broad range of
      Plan, Build, and Manage services enables cross-selling opportunities.
      Keane's local branch presence allows the Company to drivegain a high degree of
      customer intimacy and an understanding of customers' evolving needs,
      providing a ready market growth infor new services. Keane earns customer loyalty by
      providing concrete and measurable business value through the IT services business served by Keane:

1.   Increased Dependence on Information Technology: Globalization,
     deregulation, consolidation,consistent,
      high quality delivery of its services.

2.    Critical Mass - Critical mass is essential for gaining market and
      the rapid pacefinancial leverage. Increasing critical mass drives down SG&A cost as a
      percentage of change have increased
     reliance on information technology. Companies are applying technologyrevenue, allows depth and breadth of capabilities, and
      builds market presence and mind share to bring products to market first or faster, integrate key business processes
     to improve

                                       3

 
     qualitysupport sales and reduce costs, and improve customer service. Enterprises are
     using outsourcing strategies to enable them to achieve business-driven IT
     initiatives.

2.   IT Changing the Basis of Industry Competition: Advances in new technology,
     especially the Internet, are enabling companies to fundamentally change the
     basis of competition within industries. Products and services can be
     delivered to customers in innovative ways, and the costs associated with
     delivering these products and services can be significantly different.
     Companies must have a proactive ITrecruiting
      efforts. Keane's strategy to achieve a competitive
     advantage in this environment.

3.   Organizational Focus on Core Competencies: The intense competition and
     rapid change characteristics of many industries have led senior managementcritical mass is to concentrate on
      their core competencies in order to compete more
     effectively. Businessesbusiness lines and geographic markets where the Company has or can
      establish leadership. These business lines are consequently outsourcing more frequently,
     especially IT services.

4.   The Growing Challenges of Managing Corporate IT Organizations: The IT
     environment has grown increasingly complex, costlyBusiness Consulting,
      Application Development & Integration, and burdensome as a
     result of the challenges of deploying new technology, maintaining older
     systems (including meeting Year 2000 compliance requirements) and finding
     skilled staff in a limited pool of qualified IT professionals. Advisory
     services and outsourcing solutions enable companies to implement operations
     improvements, achieve faster time to market of new technology, gain control
     over existing software assets and strategic development initiatives.

5.   The Growing Trend toward Reengineering IT Organizations: With the growing
     acceptance of IT as a critical business asset and the internal pressures
     experienced within IT organizations, executive managers are increasingly
     seeking ways to make IT more effective. Similar to the reengineering
     efforts undertaken in other parts of the business in recent years,
     executives are now focusing on improving processes and performance in IT.
     Outsourcing to a firm with proven methodologies and performance metrics
     enables these organizations to implement world-class processes and
     systematically target improvement objectives.

BUSINESS STRATEGY:ADM Outsourcing. Keane believes that the IT pressures companies are
experiencing, together with requirements to reduce costs, decrease cycle times,
and adapt quickly to changing market dynamics, is causing companiesplans to
      focus on achieving significant improvements in their IT organizations.  Those service
providers best able to deliver reliablegeographic markets within North America and quantifiable business benefitWestern Europe and
      results -- i.e., on-time, within budget and according to technical
specifications, business requirements and targeted performance metrics -- will
appeal to organizations focused on using outsourcing as a strategic business
tool.  Moreover, service providers with the critical mass and infrastructure to
operate and grow efficiently have a competitive advantage in servicing client
needs.  In an effortstrives to achieve profitablesignificant market share in those markets through
      organic growth, supplemented by acquisitions.

3.    Operational Excellence - Already a recognized leader in this environment,providing cost
      effective and predictable delivery of services to clients, Keane is
      increasing market share with both newcommitted to operational excellence and existing clients while deriving an
increasing portioncontinuous process improvement in
      all of its business from large-scale, multiyear projects with
large organizations. The key elements of the Company's growth strategy are
described below.

1.   Increase Concentration of Core Solutions Business: The Company is focusing
     on large, Keane-managed business within its core "plan, build and manage"
     service offerings. These opportunities include consulting, application
     development, application management, migration services (including Year
     2000 compliance services), call center management and enterprise healthcare
     information solutions. Keane believes its full range of services parallel
     the overall spending patterns in the IT services market, in which clients
     are turning to service providers for assistance in planning, building and
     managing business-driven IT initiatives. In addition, it believes that
     providing one type of service positions it for follow-on business in its
     other core services. Growth of Keane's core services continued to increase
     during the year, representing 76% of total revenue for 1998, up from 66% in
     1997.

2.   Build Long-Term Strategic Partnerships with Clients: The Company also seeks
     to build long-term strategic partnerships with its clients. The Company
     believes that its branch office structure, which consists of local branches
     located near clients, assists Keane in developing an intimate understanding
     of its clients' business, IT and organization requirements. Thisfunctions. Being efficient enables Keane to offer knowledgeable,

                                       4

 
     highly responsive solutionsits customers
      high value services at competitive rates without compromising the
      Company's performance margins. Keane achieves operational excellence
      through critical mass, lower travel costs due to clients,its local branch
      presence, process improvements, high utilization of staff, and its
      flexible and integrated client service delivery model. Keane's dedication
      to do so more cost-effectively
     than many of its competitors. Keane enjoys a strong recurring revenue rate,
     demonstrating its ability to respond to client needs on an ongoing basis
     with client satisfaction. One way Keanecontinuous process improvement is extending its client
     relationships is by growing business with its large base of Year 2000
     clients. Keane has been leveraging its market share by helping these
     clients with other IT services. Asdemonstrated through investments in
      measurement programs and the creation of the endKeane Center for Excellence
      focused on quality and efficiency enhancements. Operational efficiency
      enables Keane to maintain profitability regardless of 1998,macro-economic
      conditions.

4.    Synergy Across Business Units - As a services company dedicated to turning
      customer technology challenges into business opportunities, it is
      imperative that Keane sold over $700
     million in other servicesshare resources and organizational experience. No
      single business unit can have all of the necessary talent and knowledge to
      meet every possible challenge. Keane strives to be a boundaryless
      organization serving its Year 2000 project clients, up from over
     $262 million at the end of 1997. Keane's strategy is to leverage its
     increased client base by introducing and delivering its other strategic
     services to new Year 2000 clients where possible.

3.   Achieve Critical Mass and Strengthen Its Services Portfolio: Growing market
     share and achieving critical mass in each market it serves are fundamentalcustomers through a local relationship while
      providing access to the Company's strategy. Keane accomplishes this by growingbest solutions and resources across the organization and expanding its service offerings to meet the demands of its
     clients.

     Critical Mass Strategy: Keane defines its critical mass objectives on three
     -----------------------                                                    
     levels: at the account, at the branch, and at the enterprise. By reaching
     critical mass objectives in each of these three areas,Company.
      Keane seeks to strengthen client partnershipsaccomplish this goal through a strong local presence, achieve
     economies of scale by spreading costs across a broad revenue base, and
     implement continuous improvements by investing in its methodologies and
     infrastructure.

     Critical mass at the account level is measured by revenues generated by
     individual clients. Keane targets clients with potential to generate more
     than $1 million in revenues annually primarily through delivery of large
     project and multiyear outsourcing engagements. This strategy enables Keane
     to sell and deliver services more cost-effectively and provides Keane with
     a more predictable revenue stream. In 1998, the number of clients from
     which the Company generated $1 million or more each increased 75% from
     1997.

     Critical mass at the branch level equates with being one of the two largest
     IT services firms in that market and having the depth and breadth of
     managerial, sales and technical capability to deliver complex solutions
     locally. Reaching branch-level critical mass objectives produces the local
     presence Keane relies on to strengthen client partnerships. Keane measures
     critical mass progress at the branch level according to growth in revenues
     per branch. In 1998, the average revenues generated by each of Keane's
     branches increased 25% from 1997. Finally, critical mass at the enterprise
     level can be measured by the Company's annual revenue growth rate, which
     has been 44% compounded over the last five years.

     Overseas Expansion: In addition, in 1998, Keane expanded into the European
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     marketplace, establishing Keane Ltd operations in the United Kingdom
     through the acquisition of Icom Systems Ltd. Overseas operations are a
     significant step in Keane's critical mass objectives, affording Keane a
     foothold in the U.K. market while strengthening its ability to support the
     needs of its global customers.

     Acquisition Strategy: Keane's acquisition strategy, to a large extent, has
     ---------------------                                                     
     been the strategy used to quickly increase the company's critical mass,
     strengthen its presence in existing markets and establish a strong presence
     in new regions. Recently, acquisitions have also been used to strengthen
     Keane's ability to provide clients with a full-service solution across the
     "plan, build, and manage" application life-cycle. For example, Keane's
     acquisition of Bricker & Associates, Inc. in June 1998 provided the company
     with strong management consulting capabilities. Likewise, the acquisition
     of Fourth Tier, Inc. in October 1998 provides Keane with credentials in the
     Customer Relationship Management market. Keane believes marketing services
     throughout the "plan, build, and manage" application life-cycle is
     synergistic.

     The Company has demonstrated a capacity to complete acquisitions and to
     successfully integrate the acquired companies into its operations. Keane
     believes this ability is a competitive advantage in a consolidating market,
     and will continue to evaluate appropriate acquisition opportunities. In
     1998, the Company completed five acquisitions. Since July 1986, Keane has
     completed 22 acquisitions of companies with annual revenues at the time of
     acquisition ranging from approximately $1 million to

                                       5

 
     approximately $170 million. In identifying potential acquisition
     candidates, the Company seeks firms with client profiles, geographic
     markets, technical capabilities and corporate cultures similar or
     complementary to its own. Because the IT services industry is highly
     fragmented, the Company expects that there will continue to be suitable
     acquisition opportunities, although competition for these acquisitions has
     been intense and will likely intensify further.

     The Company's ability to expand successfully by acquisitions depends on
     many factors, including the successful identification and acquisition of
     businesses and management's ability to integrate and operate the new
     businesses effectively. The Company competes for acquisition candidates
     with other entities, some of whom have greater financial resources than the
     Company. Increased competition for acquisition candidates may result in
     fewer acquisition opportunities being made available to the Company as well
     as less advantageous acquisition terms, including increased purchase
     prices. The anticipated benefits from any acquisition may not be achieved
     unless the operations of the acquired business are successfully combined
     with those of the Company in a timely manner. These integration activities
     require substantial attention from management. The diversion of the
     attention of management, and any difficulties encountered in the transition
     process, could have an adverse impact on Keane's revenues and operating
     results. In addition, the process of integrating the various businesses
     could cause the interruption of, or a loss of momentum in, the activities
     of some or all of these businesses, which could have an adverse effect on
     the Company's operations and financial results. To support these needs,
     Keane has a Director of Mergers and Acquisitions overseeing due-diligence
     and other acquisition-related requirements, and it uses its Knowledge
     Management resources to facilitate the smooth integration of newly acquired
     organizations.

4.   Continuously Strengthen Keane's Infrastructure: A strong infrastructure is
     required to successfully sell and execute large and complex projects.
     Keane's infrastructure encompasses a series of corporate practices, the
     Company's delivery methodologies, and such internal processes as sales,
     recruiting and management operations. This infrastructure--the processes,
     expertise and competencies that make up the Company and its value
     proposition--are all supported by investment in organizational training and knowledge management processes
      and technologies. Keane believes that the
     investment made in allsystems, methodologies, comprehensive training programs, and strategic
      practices. The responsibilities of these areas, combined with its emphasis on
     accumulatingstrategic practices include collecting,
      refining, and disseminating Keane's intellectual capital through the
      identification of best practices and the development of world-class
      methodologies. These practices enable Keane's branch offices to better
      sell and deliver the Company's business solutions.

5.    Repeatable Solutions - Well-defined, repeatable solutions enable Keane to
      leverage its extensive distribution channel and address widespread market
      needs. Based on extensive organizational experience, enhances the
     ability of the Company to accommodate aggressive growth, attractKeane's solutions are
      process intensive and retain
     superior technical and managerial talent, and consistently deliver high-
     quality solutions to its clients. Below is a summary of key activities in
     strengthening Keane's infrastructure.

     Corporate Practices and Industry Focus: To help clients derive greater 
     ---------------------------------------
     value from IT, Keane continues to formalize corporate practices in its core
     services and along its industry lines. Keane's core practices include
     operations improvement consulting, custom application development, customer
     relationship management, data warehousing/business intelligence, e-
     solutions (application solutions that leverage web-based technologies),
     application management outsourcing and call center outsourcing. Through its
     Corporate Practices, Keane is also leveraging the expertise and best
     practices it has developed serving banking, insurance, manufacturing,
     utilities, high technology, healthcare, telecommunications, and government
     clients. These clients are each facing unique business challenges stemming
     from such forces as deregulation, consolidation, changing currencies, and
     new competitors. The strategic use of IT, together with innovation in
     processes and organization, enables clients to gain competitive strength in
     this environment.

     Keane's earliest industry focus is in the healthcare industry, where it
     offers clients an enterprisewide solution that spans both its full range of
     services and its industry-leading suite of healthcare information systems.
     Keane expects its Healthcare Solutions Practice will continue to grow in
     importance as healthcare organizations address ongoing mergers and shifts
     in regulations, and demand grows for an integrated healthcare delivery
     system. While many of Keane's competitors in this arena are just beginning
     to focus on IT services, Keane has a well-established presence in the IT
     services market asbacked by well as a comprehensive product offering through its
     Healthcare Solutions Practice. To leverage this competitive strength, Keane
     intends to continue integrating its products and services, drawing on its
     experience serving the industry since 1975, its operational improvement
     capabilities, and its demonstrated ability to move clients to CMM Level 3.

                                       6

 
     Methodologies:  All of Keane's services are based on the application of
     --------------                                                         
     rigorous processesdefined methodologies and management
      disciplines. When combined with a strong project management capability,
      these characteristics ensure solutions that are repeatable, measurable,
      and trainable. These factors, in turn, enhance quality, customer
      satisfaction, and profitability.

CLIENTS

Keane's clients consist primarily of Global 2000 organizations, government
agencies, and healthcare organizations. These organizations generally have
significant IT budgets and depend on service providers to help them fulfill
their business optimization and software design, development, implementation,
and management needs.


                                       5



In 2001, the Company derived its revenue from the following industry groups:

Industry                                  Percentage of Revenue
- --------                                  ---------------------
Manufacturing                                      21.7%
Financial Services                                 21.6%
Government                                         16.5%
Healthcare                                         12.3%
Energy/Utilities                                    9.5%
High Technology/Software                            8.9%
Retail/Consumer Goods                               5.2%
Other                                               2.8%
Telecommunications                                  1.5%

The following table is a representative list of clients for which Keane provided
services in 2001:

- --------------------------------------------------------------------------------
3M Corporation                               McDonald's Corporation
- --------------------------------------------------------------------------------
Allmerica                                    MemorialCare
- --------------------------------------------------------------------------------
Aon                                          Miller Brewing
- --------------------------------------------------------------------------------
AT&T Corporation                             State of Missouri
- --------------------------------------------------------------------------------
Bose Corporation                             National Assn. of Security Dealers
- --------------------------------------------------------------------------------
Baxter Healthcare Corporation                State of New York
- --------------------------------------------------------------------------------
Baylor Health Care System                    State of North Carolina
- --------------------------------------------------------------------------------
Cargill                                      Northern Telecom, Inc.
- --------------------------------------------------------------------------------
Carrier                                      State of Ohio
- --------------------------------------------------------------------------------
Centrica                                     Optimum Logistics
- --------------------------------------------------------------------------------
CGU                                          Pfizer
- --------------------------------------------------------------------------------
City of Chicago                              Pharmacia & Upjohn
- --------------------------------------------------------------------------------
Crawford & Company                           Princess Cruise Lines
- --------------------------------------------------------------------------------
U.S. Department of Justice                   Procter & Gamble Company
- --------------------------------------------------------------------------------
Eastman Kodak Company                        Putnam Investments
- --------------------------------------------------------------------------------
Ecolab                                       Reader's Digest Association, Inc.
- --------------------------------------------------------------------------------
Executive Office for U.S. Attorneys          Robert Wood Johnson Hospital
- --------------------------------------------------------------------------------
Fidelity                                     Security Benefit Group
- --------------------------------------------------------------------------------
Farmers Insurance Group                      State Street Bank & Trust
- --------------------------------------------------------------------------------
First Bank                                   Sony
- --------------------------------------------------------------------------------
Ford                                         Square D
- --------------------------------------------------------------------------------
General Electric Company                     Supervalu
- --------------------------------------------------------------------------------
Great American Insurance                     TracFone
- --------------------------------------------------------------------------------
GMAC                                         Transcontinental Gas Pipeline
- --------------------------------------------------------------------------------
Guardian Life Insurance                      Tufts Health Plan
- --------------------------------------------------------------------------------
Honeywell                                    Unipart
- --------------------------------------------------------------------------------
International Business Machines Corporation  U.S. Air Force
- --------------------------------------------------------------------------------
Invacare                                     U.S. Customs
- --------------------------------------------------------------------------------
J.P. Morgan                                  West Publishing
- --------------------------------------------------------------------------------
Johns Hopkins Hospital                       Whirlpool Corporation
- --------------------------------------------------------------------------------
Liberty Mutual Insurance Co.                 Zurich Financial Services
- --------------------------------------------------------------------------------
State of Maine
- --------------------------------------------------------------------------------

Keane's ten largest clients accounted for approximately 32% and 30% of the
Company's total revenue during each of the years ended December 31, 2001 and
2000, respectively. The Company's two largest clients during 2001 and 2000 were
various agencies within the Federal Government and IBM. Federal Government
contracts accounted for approximately 6.9% and 7.5% of the Company's total
revenue in 2001 and 2000, respectively. IBM accounted for approximately 6.5% and
6% of the Company's total revenue for 2001 and 2000, respectively. A significant
decline in revenue from IBM or the Federal Government would have a material
adverse effect upon the Company's total revenue.


                                       6



With the exception of IBM and the Federal Government, no single client accounted
for more than 5% of the Company's total revenue during any of the three years
ended December 31, 2001.

In accordance with industry practice, many of the Company's orders are
terminable by either the client or the Company on short notice. The Company captures these
     processes, as well as its organizational experience, in its methodologies.
     The underlying management principles within these methodologies are
     embodied in Productivity Management, Keane's approach to managing projects
     which has evolved over the last 33 years from actual delivery experience.
     Methodologies enable the Company to improve productivity and predictability
     in its services. As a result, Keane invests in improving its existing
     methodologies and introducing new methodologies as needed. In 1998, Keane
     introduced its Customer Relationship Management methodology (its CRM
     Framework), which addresses how Keane delivers enterprise-wide solutionsdoes
not believe that help clients plan, build and manage application solutions to support
     and integrate such processes as sales, marketing and customer service.

     Training and Knowledge Management: Keane also invests in training at all
     ----------------------------------                                      
     levels of the organization. To Keane, training offers an effective means of
     sharing the company's organizational knowledge, building critical job
     skills, and fostering the development of company culture. In addition,
     Keane supports a Knowledge Management program. This programbacklog is an
     integrated system of people, processes, and technology focused on capturing
     and sharing organizational knowledge and best practices, while filling
     critical knowledge voids. Keane's Knowledge Management program is tied
     closelymaterial to its organizational learning teams, training organization, and
     quality assurance practice. This unique integration provides a powerful
     learning continuum, which allows Keanebusiness. The Company had orders at
December 31, 2001 of approximately $843 million, in comparison to leverage the valueorders of
its
     companywide experience and deliver solutions faster, better, and more
     efficiently.approximately $740 million at December 31, 2000.

SALES, MARKETING SALES AND CLIENTS:ACCOUNT MANAGEMENT

Keane markets its services and software products through its direct sales force,
which is based in its branch offices.offices and regional areas, as well as through its
centralized Strategic Practices Group. Keane's sales representativesaccount executives 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
representativesaccount executives are responsible for ensuring that clients receive responsive
service and that Keane's software solutions achieve client objectives. Account
executives receive in-depth training in Keane's sales processes and service
offerings and are supported by enterprise knowledge management systems in order
to efficiently share organizational learning. Account executives are empowered
to collaborate with Keane's Strategic Practice Group, other branch offices, and
Advanced Development Centers as needed to address specialized customer
requirements.

Keane focuses its marketing efforts on organizations with significant IT budgets
and recurring software development and outsourcing needs. While Keane performs
work for companies in most major industries and for state and federal
governments, most of the Company's revenue is derived from organizations within
the following industry groups: manufacturing, financial services (including
banking and insurance services businesses), government, software, energy,
healthcare, telecommunications, public utilities, and retail/consumer
organizations. Organizations in each of these industries are highly information-
dependent and use mission-critical information systems as a competitive
advantage.  Projects and services for these industry groups address both front
office (e.g. sales, marketing and customer service) and back office (e.g., human
resources, billing and logistics) processes, organization, and technology.  For
instance, projects for manufacturing clients may involve factory floor
operations, materials management, order processing, accounting and computer
operating systems development and support.  Typical development projects for
financial services firms include applications for mutual fund analysis, fund
tracking, stock transfer, customer information, commercial and consumer loans,
cash distribution, accounting and human resource systems.  Insurance company
projects include such applications as claims processing, agency management,
coordination of benefits and subrogation, pension, premium and loss reporting,
accounting, compensation and benefits systems.  Projects for healthcare clients
include applications for accounting, patient registration and scheduling, and
other patient care and clinical functions.

The following table sets forth a list of selected clients for which the Company
provided services in 1998:

   
     3M Corporation                      Baylor Health Care System    
     Aldus Corp.                         Bell Atlantic                
     American Express Co., Inc.          British Airways              
     Ameritech                           Cargill                      
     AT&T Corporation                    Carrier                      
     Bose Corporation                    CIGNA Corporation            
     BankBoston Corporation              Cincinnati Bell Telephone    
     Baxter Healthcare Corporation       Department of Justice         

                                       7

 
     Discover Card                       McDonald's Corporation            
     Eastman Kodak Company               McKesson Corporation                 
     Elf Atochem North America           Microsoft Corporation                
     EMC Corporation                     Miller Brewing                       
     Exxon Corporation                   National Assn. of Security Dealers   
     Fidelity                            Northern Mutual Life Insurance       
     Farmers Insurance Group             Northern Telecom, Inc.               
     First Bank                          The Pillsbury Company                
     General Electric Company            Princess Cruise Lines                
     GTE Data Service Incorporated       Procter & Gamble Company             
     Guardian Life Insurance             The Putnam Companies, Inc.           
     Hoffmann-La Roche, Inc              Reader's Digest Association, Inc.    
     International Business              Robert Wood Johnson Hospital      
       Machines Corporation              SD Warren                         
     J.D. Edwards                        Transquest                           
     Jewel Food Stores, Inc.             U.S. Customs                         
     Johns Hopkins Hospital              Whirlpool Corporation                 
     Liberty Mutual Insurance Co.                

The Company has historically derived, and may in the future derive,maintains
a significant percentagecorporate branding campaign focused on communicating Keane's value proposition
of its total revenue from a relatively small number of
clients.  Keane's five largest clients accounted for approximately 25% and 19%
of the Company's total revenues during the years ended December 31, 1997 and
1998, respectively.  The Company's two largest clients during 1997 and 1998 were
IBM and various organizations within the Federal Government. IBM accounted for
approximately 10% and 6% of the Company's total revenues for 1997 and 1998,
respectively, and various organizations within the Federal Government accounted
for approximately 5% of the Company's total revenues in each of 1997 and 1998. A
significant decline in revenues from IBM or the Federal Government could have a
material adverse effect upon the Company's total revenues.  With the exception
of IBM and the Federal Government, no single client accounted for more than 5%
of the Company's revenues during the three years ended December 31, 1998.

In accordancereliably delivering application solutions with industry practice, nearly all of the Company's ordersquantifiable business results.
These branding efforts are terminable by either the client or the Company on short notice.  The Company
does not believe that backlog is material to the business.  The Company had
orders at December 31, 1998 of approximately $900 million, in comparison to
orders of approximately $636 million at December 31, 1997.

YEAR 2000: Among the services that the Company provides are assessment,
planning, migration/remediation, testing services and independent verification
and validation for Year 2000 compliance. In 1998, Keane was recognized by
Gartner Group as one of the top three service providers in this market.  The
Company has devoted significant resources to services that address the Year 2000
problem and believes the demand for these services will continueactively executed through 1999
and, to a lesser degree, into 2000 and beyond.  Although the Company believes
that the demand for its services relating to the Year 2000 problem will continue
to exist after the Year 2000, this demand will diminish significantly over time
and will eventually disappear. Keane's strategy is to leverage and build on its
leadership position in Year 2000 compliance services. The Company's leadership
in this market has enabled it to significantly increase market share, gain
visibility with client executives, and expand its reputation for delivering
large, mission-critical projects. These are all important advantages in
positioning Keane to meet clients' current needs for application management and
development. As reflected in its sales performance, Keane has been effective in
leveraging this success by introducing Year 2000 clients to its other strategic
services. As of the end of 1998, Keane cross-sold more than $700 million of non-
Year 2000 services to its Year 2000 customers, up from more than $262 million as
of the end of 1997.

The Company's services addressing the Year 2000 problem involve key aspects of
its clients' computer systems.  A failure in a client's system could result in a
claim for substantial damages against the Company, regardless of the

                                       8

 
Company's responsibility for such failure.  Litigation, regardless of its
outcome, could result in substantial cost to the Company.  Accordingly, any
contract liability claim or litigation against the Company could have an adverse
effect on the Company's business, operations and financial results.

BRANCH OFFICES:  Keane provides services through its network of branch offices
located in major metropolitan areas in the United States, Canada and the United
Kingdom.  Branch offices are responsible for providing marketing, software
planning, analysis, design, implementation and maintenance services for clients
within assigned geographic territories.  Each of these offices has the necessary
technical resources and management depth to service its targeted area.  Each
office is led by a resident managing director and has one or more client sales
representatives, service delivery managers, staffing and employee development
managers and personnel recruiters. In 1998, the average revenues generated by
each of Keane's branches was $20 million, which is up 25% from 1997. Keane
believes a strong local presence and capability enable it to provide clients
with highly responsive, cost-effective service and dependable results, and
provide employees with an attractive work environment with minimal travel
demands.

Keane's branch offices are afforded the benefits of being part of a large
organization with many resources.  Keane's knowledge sharing resources and
corporate practices, for instance, enable the Company to learn from its
experience at one branch and refine and leverage that experience at other
locations.  Keane's infrastructure is designed to capture and then continuously
improve software planning, development and management processes. Frequently,
branches transfer personnel from other branches with expertise within a specific
technology, application or industry.

EMPLOYEES:multiple channels.

EMPLOYEES

On December 31, 1998,2001, Keane had 10,5377,871 employees, including 9,4936,566 business and
technical staffprofessionals whose services are billable to clients. The Company
sometimes supplements its technical staff by utilizing subcontractors.

Management believes thatKeane's growth and success are dependent on the caliber of
its future successpeople and will depend in part on its
continued abilitycontinue to attract and retain highly skilled managerial, technical,
sales and support personnel.  Accordingly, Keane devotesdedicate significant resources to its Human Resources Department, including a staff of over 125 recruiters.
The Company's current employeeshiring,
training and development, and career advancement programs. Keane's efforts in
these areas are also a valuable recruiting tool.  During
1998, approximately 28% ofgrounded in the Company's new billable employees were referred to
the Company by existing personnel.  There can be no assurance that the Company
will be able to continue to attract and retain personnel necessarycore values, namely respect for the
development of its business.individual, commitment to client success, achievement through teamwork,
integrity, and continuous improvement. Keane strives to hire, promote, and
recognize individuals and teams who embody these values.

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.

COMPETITION:COMPETITION

The IT services market is highly competitive and characterizeddriven by continual changechanges in
client business requirements and improvementadvances in technology. The market is fragmented, and
no company holds a dominant position.  Consequently, the Company's
competition
for client assignments and experienced personnel varies significantly from city
to city.  The Company believes it is among the 10 largest custom software
services firms serving the commercial market in the United States.

The Company's competition also varies by the type of service provided.  For
large application developmentprovided and outsourcing projects, the Company competes
with consulting divisions of large public accounting firms, such as Andersen
Consulting, as well as companies such as Electronic Data Systems Corporation and
IBM Global Services.  For systems implementation and maintenance, the Company
often competes with small, local firms, as well as large international firms,
including Analysts International Corp., Cap Gemini America, Computer Horizons
Corporation, Computer Sciences Corporation, and Computer Task Group, Inc.  For
management consulting engagements, the Company competes with large public
accounting firms, McKinsey and Booz-Allen & Hamilton. In the healthcare software
systems market, Keane competes with such companies as Shared Medical Systems,
HBOC/McKesson, and MEDITECH, Inc.  The Company believes its well-established
presenceby geographic markets.

Competitors typically include traditional players in the IT services marketindustry,
including large integrators (such as well as its comprehensive product offering
is a significant competitive differentiator in serving the healthcare market.Accenture, Electronic Data Systems (EDS),
Computer Sciences Corporation (CSC), and IBM Global Services); IT solutions
providers (including Sapient Corporation, American Management Systems, Logica,
and KPMG); and management consulting firms (e.g., KPMG Consulting, 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 custom software development needs.

                                       9
and management
requirements.

The Company believes that the basesbasis for competition in the IT services industry
includeincludes the ability to create an integrated solution that best meets the needs
of an individual customer, compete cost-effectively,cost effectively, develop strong client
relationships, generate recurring revenues,revenue, offer flexible client service
delivery options and use comprehensive delivery
methodologies and achieve organizational learning by implementing standardized
operational processes.of disciplined methodologies. The Company believes that
it competes favorably with respect to thesethose factors. There can be no


                                       7



assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with any new
competitors.

ITEM 2. PROPERTIES

The principal executive office of the Company is located at Ten City Square,
Boston, Massachusetts 02129, in an approximately 34,000 square foot office
building which is owned byleased from City Square Limited Partnership. SeveralSome of the
Company's officers, directors, and shareholders are limited partners ofin this
partnership. See Item 13 -- "Certain Relationships and Related Transactions." At
December 31, 1998,2001, the Company leased and maintained sales and support offices
in more than 50fifty locations in the United States and three locations in the
United Kingdom. The aggregate annual rental expense for the Company's sales and
servicesupport offices was approximately $13,433,000$16.6 million in 1998.2001. The aggregate annual
rental expense for all of the Company's facilities was approximately $16,111,000$19.4
million in 1998.2001. For additional information regarding the Company's lease
obligations, see Note KI of "NotesNotes 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 under construction at One Chelsea Street in Boston, Massachusetts (the
"New Facility"). The Company will lease approximately 57% of the New Facility
and the remaining 43% 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
(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.

The Company currently expects to occupy the new facility in January 2003. The
Company will consolidate several existing facilities it has in the Boston area
as part of this move. Based upon its knowledge of rental payments for comparable
facilities in the Boston area, the Company believes that its facilities are adequatethe rental payments
under the lease for its current needs and
that suitable additional spacethe New Facility, which will be availableapproximately $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 $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 needed.favorable to the Company as those which could
have been obtained from an independent third party.

ITEM 3. LEGAL PROCEEDINGS

On September 25, 2000, the U.S. Equal Employment Opportunity Commission ("EEOC")
commenced a civil action against Keane in the United States District Court for
the District of Massachusetts alleging that the Company discriminated against
former employee Michael Randolph and other unspecified "similarly-situated
individuals" by acts of racial harassment, retaliation and constructive
discharge. The EEOC has not specified the amount of damages it is seeking. The
parties are presently engaged in discovery. Because the lawsuit is in pre-trial
stages, management is unable to estimate the effect, if any, it may have on its
consolidated financial position or consolidated 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.


                                       8



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the year ended December 31, 1998.

                                       10
2001.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY: The executive officers and
directors of the Company are as follows:

NAME                           AGE   POSITION
- ----                           ---   --------
                                 
John F. Keane(1)               67    Chief Executive Officer,
NAME AGE POSITION ---- --- -------- John F. Keane (3) 70 Chairman of the Board and Director Brian T. Keane 41 President, Chief Executive Officer and Director John J. Leahy 44 Senior Vice President and Chief Financial Officer Robert B. Atwell 53 Senior Vice President - North American Branch Operations Irene Brown 47 Senior Vice President Raymond W. Paris 64 Senior Vice President - Healthcare Solutions Renee Southard 47 Senior Vice President - Human Resources Linda B. Toops 47 Senior Vice President John H. Fain 53 Senior Vice President and Director Maria A. Cirino (1)(2) 38 Director Philip J. Harkins(2)(3) 54 Director Winston R. Hindle, Jr. (1)(3) 71 Director John F. Keane, Jr. (3) 42 Director John F. Rockart (1)(2) 70 Director Stephen D. Steinour (1)(2) 43 Director John F. Keane, Jr. 39 Office of the President, Executive Vice President, Director Brian T. Keane 38 Office of the President, Executive Vice President, Director Edward H. Longo 55 Senior Vice President Raymond W. Paris 61 Vice President Healthcare Solutions Practice Wallace A. Cataldo 49 Vice President, Finance and Administration Renee Southard 44 Vice President Human Resources Philip J. Harkins(1)(2) 51 Director Winston R. Hindle, Jr.(1)(2) 68 Director John F. Rockart(1)(2) 67 Director Robert A. Shafto(1)(2) 63 Director __________________________________
(1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of Governance and Nominating Committee All Directors hold office until the next annual meeting of the stockholders 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. Mr. John Keane, the founder of the Company, has been Chief Executive Officer, President and a directorChairman of the CompanyBoard 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 director orof Firstwave Technologies, Inc. and EG&G,Perkin Elmer, Inc. Mr. JohnBrian Keane Jr. joined the Company in 19871986 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 President in September 1997. Prior to this role, Mr. Keane had been Senior Vice President since December 1996.of the Company. From December 19941996 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,September 1997, 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, President, Chief Executive Officer and a director of the Company, and a brother of Brian Keane. Mr. Brian Keane joined the Company in 1986 and was appointed Executive Vice President and a member of the Office of the President in September 1997. Prior to this role, Mr. Keane had been Senior Vice President since December 1996.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, President, Chief Executive Officer and a directorChairman of the Company, and a brother of John Keane, Jr., a director. Mr. LongoJohn Keane, Jr. has been a director of the Company since May 1998. Mr. Keane is the founder of ArcStream Solutions, Inc. and has been its President and Chief Executive Officer since July 2000. From September 1997 to July 2000, he was Executive Vice President and a member of the Office of the President of the Company. From December 1996 to September 1997, he 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 9 served as Director of Corporate Development. John Keane, Jr. is a son of John Keane, the founder and Chairman of the Company, and a brother of Brian Keane. Mr. Leahy joined the Company in March 1980August 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. Atwell joined the Company in 1974, served as Branch Manager from 1974 to 1985 and as head of 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 as Senior Vice President of North American Branch Operations from 1999 to present. Ms. Irene Brown joined the Company in August 1998 and has beenserved as a Senior Vice President since December 1994.January 2001. From January 19932000 to December 1994, he was Vice President, Eastern Region. From May 1987 to January 1993, he was2000, Ms. Brown served as a Vice President of the New England area.Company. From June 1986August 1998 to May 1987, heDecember 1999 she served as Managing Director -Keane Limited and from August 1975 to July 1998 Ms. Brown was an Area Manager. 11 employed by Icom Solutions, most recently as Managing Director. Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of thehas served as Senior Vice President - Healthcare Solutions Practice in 1981since January 2000 and has served as Vice President and General Manager of the Healthcare Solutions Practice sincefrom August 1986.1986 to January 2000. Mr. Cataldo joined the Company in June 1975 and has been Vice President - Finance and Administration since October 1985. Mr. CataldoParis also served as Chief Financial OfficerArea Manager of the Healthcare Solutions Practice from November 19831981 to October 1985 and as Controller from November 1978 to November 1983.1986. Ms. Southard joined the Company in July 1983 and1983. Ms. Southard has beenserved as Senior Vice President - Human Resources since December 1995.1999. Prior to this, Ms. Southard was Vice President - Human Resources from December 1995 to December 1999. 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. Ms. Linda 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. Mr. Fain has been a director and Senior Vice President of the Company since November 2001. 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. Ms. Cirino has been a director since July 2001. Since 2000, Ms. Cirino has held the position of CEO and Chairman of Guardent. Prior to 2000, Ms. Cirino served as Vice President of Sales and Marketing for Razorfish. From 1997 to 1999, Ms. Cirino held the same position of Vice President of Sales and Marketing for I-cube, 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. Ms. Cirino is also a director of Corex Technologies, Inc. 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. Hindle is also a director of CP Clare Corporation, and Mestek, Inc. and CareCentric, Inc. 10 Dr. Rockart has been a director since the Company's incorporation in March 1967. Dr. Rockart has been a Senior Lecturer at the Alfred J. Sloan School of Management of the Massachusetts Institute of Technology since 1974, and has beenwas the Director of Thethe Center for Information Systems Research since 1976.from 1976 to 2000. Dr. Rockart is also a director of ComShareComshare, Inc. Mr. ShaftoSteinour has been a director since July 1994.2001. He currently serves as the Chief Executive of Citizens Bank of Pennsylvania. Prior to his appointment as Chief Executive, Mr. Shafto is currently retired. From January, 1998 to April, 1998, Mr. Shafto wasSteinour served as Vice Chairman of New England Financial. Through December 31, 1997,the Wholesale and Regional Banking Division at Citizens Bank. Before joining Citizens Bank, he was Chairman, Chiefserved as the Division Executive Officerat Recoll Management in Boston and as Executive Vice President at Bank of New England Life Insurance Company, an insurance and investment firm which he joined in 1972 as Second Vice President for Computer Systems Development and Information Systems. Mr. Shafto was named President and Chief Operating Officer of New England Life Insurance Company in 1989 and assumed the position of Chief Executive Officer in January 1992. He was elected to the office of Chairman of New England Life Insurance Company effective July 1, 1993.England's Controlled Loan Department. Compensation of the nonemployeenon-employee directors currently consists of an annual director's fee of $4,000 plus $1,000 and expenses for each meeting of the Board of Directors attended. Directors are also eligible to receive periodic stock option grants under the Company's stock incentive plans. In July 2001, Ms. Cirino and Mr. Steinour, who joined the Board of Directors in July 2001, each received options to purchase 10,000 shares of the Company's Common Stock. In December 2000, all other outside directors received options to purchase 10,000 shares of the Company's Common Stock. Directors who are officers or employees of the Company do not receive any additional compensation for their services as directors. 1211 PART II - ------- 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, $.10 par value per share; 503,797 shares of Class B Common Stock, $.10 par value per share; and 2,000,000 shares of Preferred Stock, $.01 par value per share. As of March 12, 1999,8, 2002, there were 71,363,75575,475,071 shares of Common Stock outstanding and held of record by approximately 3,1972,482 registered stockholders; 285,213284,891 shares of Class B Common Stock outstanding and held of record by approximately 127110 registered stockholders; and no shares of Preferred Stock outstanding. On October 9, 1998, the Company privately issued 915,571 shares of Keane, Inc. Common Stock in exchange for all of the outstanding capital stock of Fourth Tier, Inc., a privately-held provider of enterprise relationship management services. Such issuance was made pursuant to the exemption provided for private offerings in Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. COMMON STOCK AND CLASS B COMMON STOCK: Voting. Each share of Common Stock is entitled to one vote on all matters submitted to stockholders and each share of Class B Common Stock is entitled to ten votes on all such matters.matters submitted to stockholders. The holders of Common Stock and Class B Common 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 of Common Stock and Class B Common Stock are required with respect to authorize further issuancesamendments to the articles of Class B Common Stockorganization that alter or change the powers, preferences or special rights of their respective classes or as to affect them adversely, and certain charter amendments.with respect to such other matters as may require class votes under Massachusetts law. Voting for directors is noncumulative.non-cumulative. As of March 12, 1999,8, 2002, the Class B Common Stock represented less than 1% of the Company's outstanding equity, but had approximately 4% of the combined voting power of the Company's outstanding Common Stock and Class B Common Stock. The substantial voting rights of the Class B Common Stock may make the CompanyKeane less attractive as the potential target of a hostile tender offer or other proposal to acquire the stock or business of the CompanyKeane and render merger proposals more difficult, even if such actions would be in the best interests of the holders of the Common Stock. Dividends and Other Distributions. The holders of Common Stock and Class B Common Stock are entitled to receive ratably such dividends, if any, as may be declared by theKeane's Board of Directors, out of funds legally available therefor, except that the Board of Directors may not declare and pay a regular quarterly cash dividend on the shares of Class B Common Stock unless a noncumulative 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 of Common Stock. In the event of a liquidation, dissolution or winding up of the Company,Keane, holders of Common Stock and Class B Common Stock have the right to ratable portions of theKeane's net assets of the Company available after 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 of Class B Commoncommon Stock are not transferable by a stockholder except for transfers (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 shares of Class B Common Stock pursuant to suchthese transfers beingare referred to as "Permitted Transferees")."permitted transferees." The Class B Common Stock is not listed or traded on any exchange or in any market, and no trading market exists for shares of the Class B Common Stock. The Class B Common Stock is, however, convertible at all times, and without cost to the stockholder, into shares of Common Stock on a share-for- shareshare-for-share basis. Shares of Class B Common Stock are automatically converted into an equal number of such shares of Common Stock in connection with any transfer of suchthose shares other than to a Permitted Transferee.permitted transferee. In addition, all of the outstanding shares of Class B Common Stock are convertible into shares of Common Stock upon a majority vote of the Board of Directors. Future IssuancesIssuance 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 Class B Common Stock without the approval of a majority of the votes of the outstanding shares of Common Stock and Class B Common Stock voting as separate 13 classes. The Board of Directors may issue shares of authorized but unissued Common Stock and Preferred Stock without further stockholder action.approval. All shares of Class B Common Stock converted into Common Stock are retired and may not be reissued. Other Matters. The holders of Common Stock and Class B Common Stock have no preemptive rights or, (exceptexcept as described above)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 12 outstanding shares of Common Stock and Class B Common Stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Common 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 of Preferred Stockpreferred stock which the Company may designate and issue in the future. See "Preferred Stock" below. PREFERRED STOCK: The 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 any such series 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 of Common Stock and Class B Common 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. IssuanceThe 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: The Company's Common Stock is traded on the American Stock Exchange under the symbol "KEA." The following table sets forth, for the periods indicated, the high and low closing pricesprice per share as reported by the American Stock Exchange. Stock Price High Low ---- --- 1998------- ------- 2001 First Quarter $56.50 $35.25$ 18.63 $ 9.76 Second Quarter 59.00 42.7522.00 11.80 Third Quarter 60.94 36.0019.90 12.95 Fourth Quarter 39.94 28.12 199719.70 13.41 2000 First Quarter $18.56 $14.88$ 30.94 $ 22.19 Second Quarter 29.35 15.0629.38 20.38 Third Quarter 34.47 27.0625.00 15.84 Fourth Quarter 40.69 26.8815.95 9.75 The closing price of the Common Stock on the American Stock Exchange on March 12, 19998, 2002 was $26.94.$16.85. 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 Articles of Organization restrict the ability of the Board of Directors to declare regular quarterly dividends on the Class B Common Stock. 1413 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Year Ended December 31, 19982001 Total revenues $230,056 $266,904 $285,465 $293,773$ 208,346 $ 196,995 $ 186,637 $ 187,181 Income (Loss) before income taxes 38,300 42,402 48,314 45,14014,211 11,256 8,908 (5,154) Net income 22,784 22,700 27,249 23,616 *Net(Loss) 8,454 6,698 5,302 (3,067) Net income (Loss) per share (basic) .32 .32 .38 .33 *Net.12 .10 .08 (.04) Net income (Loss) per share (diluted) .32 .31 .38 .33.12 .10 .08 (.04) Year Ended December 31, 19972000 Total revenues $151,776 $163,301 $182,140 $209,584$ 216,208 $ 221,799 $ 219,671 $ 214,278 Income (Loss) before income taxes 18,580 21,092 23,106 25,3059,265 13,400 13,884 (2,363) Net income 10,884 12,371 13,561 14,555 *Net(Loss) 5,511 7,975 8,260 (1,392) Net income (Loss) per share (basic) .16 .18 .19 .21 *Net.08 .11 .12 (.02) Net income (Loss) per share (diluted) .15 .17 .19 .20.08 .11 .12 (.02)
*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. All amounts have been restated to reflect the acquisitions in 1998 of Bricker & Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were accounted for as poolings-of-interests. 15 ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1994 1995 19962001 2000 1999 1998 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Income Statement Data: Total revenues $351,346 $394,619 $505,982$ 779,159 $ 871,956 $ 1,041,092 $1,076,198 $706,801 $1,076,198 Operating income 32,643 33,659 47,40319,753 27,921 116,466 170,187 85,163 170,187 Net income 17,308 20,148 28,17317,387 20,354 73,074 96,349 51,371 96,349 Net income per share (basic) .30 .30 .40.25 .29 1.02 1.36 .73 1.36 Net income per share (diluted) .25 .29 .30 .401.01 1.33 .72 1.33 *WeightedWeighted average common 57,964 67,036 69,78068,474 69,646 71,571 71,053 70,096 71,053 shares outstanding (basic) *WeightedWeighted average common 58,984 67,728 70,54069,396 69,993 72,395 72,284 71,603 72,284 shares and common share equivalents outstanding (diluted) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Total cash and investments $ 129,243 $ 115,212 $ 142,763 $ 129,229 $ 91,022 Total assets $181,259 $198,191 $251,771 $329,176 $ 457,560679,903 463,594 519,307 458,959 329,176 Total debt 12,317 9,146 16,50215,357 8,616 11,403 3,930 9,493 3,930 Stockholders' equity 145,915 169,526 201,768529,173 370,677 422,799 363,784 257,037 363,784 Book value per share 2.20 2.53 2.897.00 5.48 5.95 5.10 3.65 5.10 *NumberNumber of shares 66,244 67,114 69,79275,509 67,675 71,051 71,336 70,342 71,336 outstanding - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Financial Performance: Total revenue growth 95.2% 12.3% 28.2%(decline) (10.6)% (16.2)% (3.3)% 52.3% 39.7% 52.3% Net margin 4.9% 5.1% 5.6%2.2% 2.3% 7.0% 9.0% 7.3% 9.0% Return on average equity 15.1% 12.8% 15.2%3.9% 5.1% 18.6% 31.0% 22.4% 31.0%
*AdjustedAll amounts prior to reflect the 2-for-1 stock split that was distributed on August 29, 1997 to shareholders of record as of August 14, 1997. All amounts1999 have been restated to reflect the acquisitions in 1998 of Bricker & Associates, Inc., Icom Systems LtdLimited and Fourth Tier, Inc., which were accounted for as poolings-of-interests. CRITICAL ACCOUNTING POLICIES The 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. Revenue Recognition: Keane recognizes revenue as services are performed or products are delivered in accordance with contractual agreements and generally accepted accounting principals. 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 15 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. 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 consulting margins 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 delivered or installed on a milestone basis. Software maintenance fees on installed products are recognized on a pro-rated basis over the term of the service agreement. In all consulting engagements, outsourcing engagements and software application sales, the risk of issues associated with satisfactory service delivery exists. Although management feels 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 unresolved issues. Bad Debt: 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 delivered under maintenance agreements. 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 charges to revenue. Goodwill and Intangible Impairment: Keane evaluates goodwill and other intangible assets associated with acquisition activity on a periodic basis. This evaluation relies on assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or related assumptions change, the Company may be required to recognize impairment charges. Deferred Taxes: Keane accounts for income taxes in accordance with SFAS 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. SFAS 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. Restructuring: Keane has recorded restructuring charges and reserves associated with restructuring plans approved by management over the last three 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. 16 ITEM 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 to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors That May Affect Future Results." RESULTS OF OPERATIONS, 1998 VS. 1997:2001 vs. 2000: The Company's revenue for 19982001 was $1.08 billion,$774.0 million, a 52.3% increase7% decrease from $706.8revenue of $833.6 million in 1997. The2000, excluding revenue associated with Keane's divested help desk business, or $779.2 million in 2001 compared to $876.9 million in 2000, including $43.3 million of revenue from this divested business. 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 Application Development and Management (ADM) Outsourcing service. ADM Outsourcing revenue represented 51% of total revenue during 2001 or $393.9 million, an increase of 8.5% from $363.0 million during 2000. For 2001, revenue from the Company's Plan services was $75.3 million, down from $107.1 million in 2000. Plan revenue is primarily comprised of business innovation consulting delivered via Keane Consulting Group (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 revenue for 2001 was negatively impacted by a resultgeneral deferral of strong growth generatedcapital expenditures and consulting projects. For 2001, revenue from the Company's Build Services was $265.9 million, down from $327.1 million in 2000, prior to all one-time charges or $322.2 million in 2000 including all one-time charges. 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 one-time charges relating to the costs of terminations, office closures, and asset write-downs associated with gaining synergies from the acquisition of Metro Information Services. As anticipated, Keane's Build revenue, which consists primarily of application development and integration business, was also adversely affected in 2001 by the challenging economic environment and the related deferral of new software development projects in both North 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, which consist primarily of Keane's ADM Outsourcing service, offerings,as well as Application Maintenance and by five strategic acquisitions madeMigration services, grew to $432.7 million during 2001, an increase of 8% from $399.2 million in 2000, excluding revenue from divested businesses and one-time charges. Manage revenue was $437.9 million in 2001 and $437.6 million in 2000, including the year. The Company experienced the largestdivested help desk business and one time charges. Keane's 2001 revenue growth in Year 2000 Compliance Services and Application Outsourcing. Year 2000 Compliance revenue increased 146.4% to $369.4from Manage services included approximately $16.0 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 result of theits acquisition of Bricker & Associates, Inc.Metro Information Services, on November 30, 2001. Revenue from the Company's divested Help Desk business was approximately $43.3 million during 2000 and $5.2 million during 2001. 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 increased 25.5%during 2001 was driven by continuing sales growth in the Company's ADM Outsourcing business, as Global 2000 customers seek to $49.2improve productivity and efficiencies 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. Based on the increase in ADM Outsourcing bookings and growth of the sales pipeline during 2001, the Company anticipates that this 17 business will continue to increase in 2002. One significant example of such business is Keane's new, ten-year $500 million ADM Outsourcing contract with PacifiCare Health Care ServicesSystems signed in January of 2002. However, the Company has observed no indication of a healthier economic climate or growth in IT spending over the first two months of 2002. As a result, Keane anticipates continued softness in its Application Development and Sales increased 22.4%Integration business, which represents a majority of its Build sector, and within its Plan sector, until economic conditions improve and customers begin funding capital projects once again. In response to $37.1this challenging business climate, the Company expanded its customer base and critical mass with its acquisition of Metro Information Services. Metro provides Keane with hundreds of new customers to whom the Company can cross-sell its services. Of Metro's 300 largest customers that accounted for 90% of its revenue for the twelve months ended June 30, 2001, 236 were new customers for Keane. In addition, the Company expects to improve operational leverage by combining corporate functions and consolidating overlapping branch offices. Of Metro's 33 branch offices, 26 are within geographic markets currently served by Keane. The Company has identified a minimum of $15 million Supplemental Staffingin redundant SG&A expenses that can be eliminated and expects to realize at least $11 million of these savings during 2002. On March 15, 2002, Keane acquired SignalTree Solutions Holding, Inc., a privately-held, U.S.-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. Under the terms of the merger agreement, Keane paid $64.5 million in cash for SignalTree, which purchase price is subject to adjustment. The enterprise value of the transaction is approximately 1.2 times SignalTree's 2001 revenue, increased 13.5% to $263.9 million, and all other services increased 6.8% to $17.2which was approximately $50 million. The Company's largest revenue increase was from Year 2000 Compliance. Keane expects the addition of SignalTree to enhance its Year 2000 revenues will gradually decrease overvalue proposition to customers by providing access to world-class software development processes as well as the next two years, but anticipates that revenues from Strategic Service offerings may increase as companies that have completed their Year 2000 Compliance projects are now able to concentrate on other strategic IT development projects.economic advantage of a large pool of cost-effective technical professionals. Salaries, wages and other direct costs for 19982001 were $696.8$547.9 million, or 64.7%70.3% of total revenue, compared to $469.4$621.2 million, or 66.4%71.2% of total revenue, for 1997, a decrease of 1.7%. This decrease as a percentage of revenue2000. The decline in costs is due to the Company's ability to increase average billing rates by more than the increase in related technical salary costs, as a result of the increasesale of the Company's lower margin Help Desk operations and its ongoing efforts to bring costs in strategic services work being performed by the Company.alignment with revenue. As a result, Keane's gross margins for 2001 increased to 29.7%, up from 29.2% during 2000 prior to all one-time charges, or 28.7% during 2000 including all one-time charges. Selling, General & Administrative ("SG&A") expenses for 19982001 were $193.4$186.7 million, or 18.0%24.0% of total revenue, compared to $138.2$201.9 million, or 19.5%23.1% of total revenue, for 2000. The decline in 1997,SG&A expenditures during 2001 is a decreaseresult of 1.5% as a percentagethe sale of the Company's Help Desk operations and aggressive control of discretionary spending to bring cost in alignment with revenue. The Company's objective isCompany will seek 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,control aggressively its discretionary expenditures until economic conditions improve 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.spending on IT projects increases. Amortization of goodwill and other intangible assets for 19982001 was $7.7$14.5 million, or 0.7%1.9% of total revenue, compared to $14.0$12.4 million, or 2.0%1.4% of total revenue, in 1997.2000. The decrease is primarilyincrease in amortization for 2001 was attributable to additional intangible assets which were fully amortized at the end of 1997. Merger costs for 1998 were $8.1 million as compared to $0 for 1997. This increase is thea result of investment banking, legal, accountingthe Company's acquisition of Metro Information Services in November of 2001 and other professional fees associated with the acquisitions of Bricker & Associates, Inc., IcomDenver Management Group and Care Computer Systems Ltdin July 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.September of 2000. Interest and dividend income totaled $7.0 million for 1998 totaled $5.2 million,2001, compared to $4.2$7.7 million in 1997.for 2000. The increaseslight decrease in interest and dividend income was attributable to having less cash earning interest and dividend income as a result of using cash for acquisitions 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 other related income can be attributed to theexpense of $0.9 million in 2000. This increase in other 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 which grew to $77.5totaling $2.0 million at year-end 1998during the first quarter of 2001, and gains from $50.7 million at year-end 1997. Pretax income for 1998 was $174.2 million, or 16.2%the sale of revenue, up 97.7% from pretax income of $88.1 million, or 12.5% of revenue in 1997.investments. The Company's effective tax rate for 1998 was 44.7% compared to 41.7%40.5% in 1997. This increase is due to $8.12001 and 2000. 18 Net cash provided from operations was $83.2 million of merger costs that are not deductible for stateduring 2001, and federal taxes and a one-time tax expense of $1.7$96.1 million asduring 2000, before proceeds from the resultsale of the requirement to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting. 17 Net income and earnings per share for 1998 were $96.3Help Desk business of $15.7 million and $1.33 per share diluted, respectively, up 87.6%the investment of $4.0 million for the repurchase of Keane shares. The Company is focused on continuing to optimize cash flow in order to fund potential mergers and 84.7%, respectively from $51.4 millionacquisitions, stock repurchases, and $.72 per share diluted, respectively, in 1997.to build long-term shareholder value. RESULTS OF OPERATIONS, 19972000 VS. 1996: In 1997,1999: The Company's revenue increased 39.7% to $706.8for 2000 was $872.0 million, a 16% decrease from $506.0 million$1.04 billion in 1996. This increase1999. The decrease in revenue resulted from strong growth in each of the Company's service offerings, including Year 2000 application outsourcing, application development, helpdesk and IT consulting services. Year 2000 revenue increased 724% to $149.9 million, and application outsourcing revenue increased 114% to $104.4 million. Revenue from application development services increased 36% to $98.0 million. Helpdesk revenue increased 39% to $39.2 million. IT consulting services revenue increased 14% to $36.4 million. Other revenue increased 40% to $16.1 million. The Company believes that these revenue increases are attributable to a strong economy in which companies made substantial investments in their information systems. In addition, the Company generated new revenues in 1997 aswas primarily a result of the rapid decline in the Company's Year 2000 (Y2K) compliance issue, which is requiring many large corporationsrevenue. Y2K-related revenue for 2000 was $5.4 million, down 97.4% from $206.1 million in 1999. Excluding Y2K-related business, revenue for 2000 was $871.5 million, an increase of 4.4% as compared to contract with outside service providerssimilar core non-Y2K revenue in order to achieve systems compliance by the Year 2000. Revenue from supplemental staffing services decreased 14% to $232.5 million. This decrease resulted from1999. The Company believes this increase was indicative of the Company's decision to de- emphasize supplemental staffingstrong positioning in 1997 in favor of strategic services, which, historically, produce higher margins than supplemental staffing. Revenue from the Company's Healthcare Solutions Practice increased to $30.3 million.its three core business lines, Business Innovation Consulting (Plan), Application Development and Integration (Build), and Application Development and Management Outsourcing (Manage). Keane's Plan, Build, and Manage revenue for 2000, excluding Y2K-related revenue, was $107.1 million, $327.1 million, and $437.3 million, respectively. Salaries, wages, and other direct costs for 19972000 were $469.4$621.2 million, or 66.4%71.2% of revenue, compared to $341.4$702.8 million, or 67.5% of revenue for 1996, a decrease of 1.1%.1999. This decreaseincrease as a percentage of revenue was due primarily to lower utilization of the Company's billable headcount, caused by the decline of Y2K revenue. In order to bring costs in closer alignment with revenue, in the fourth quarter of 2000, the Company incurred a charge of $13.5 million, of which $8.6 million, or 1.0% of revenue, is duerelated to the Company's abilityconsolidation and/or closing of certain non-profitable branch offices, employee severance costs, facility leases, and for other miscellaneous purposes. During the second quarter of 2000, the Company identified ten under-performing branch offices, which had lost critical mass as a result of the Y2K transition and were no longer profitable. Throughout the year, Keane took action to increase its average billing rates by more thanaddress these under-performing business units through the increase in related technical salary costs, which, in turn, is attributable to an increase in strategic services work being performed byconsolidation of operations, internal growth, the Company.upgrading of management and sales personnel and office closures. Selling, General, & Administrative ("SG&A") expensesexpense for 19972000 were $138.2$201.9 million or 19.5%23.1% of revenue, compared to $104.5$199.0 million or 20.6%19.1% of revenue in 1996, a1999. This increase was primarily attributable to the decrease in the Company's revenue and investments the Company continued to make in the development and marketing of 1.1% as a percentage of revenue. The Company's objective is to continue to attempt to reduce SG&A, as a percentage of revenue, by realizing the economies of scale associated with increasing revenue without proportionately increasing SG&A, and to continue to implement cost saving programs in such areas as travel and employee benefits.its core business lines. Amortization of goodwill and other intangible assets for 19972000 was $14.0$12.4 million, or 2.0%1.4% of revenue, compared to $12.7$9.2 million, or 2.5%0.9% of revenue, in 1996.1999. The increase was primarily attributable to acquisitions made during the current and prior year. Keane completed two small acquisitions during 2000 at a cost of $32.5 million, net of cash acquired. On July 19, Keane acquired Denver Management Group, a management consulting firm focused on supply chain management and integrated distribution. Denver Management has been incorporated into Keane Consulting Group. On September 7, Keane acquired Care Computer Systems, Inc., a provider of software for the long-term care industry, which expanded the healthcare solutions marketed by Keane's Healthcare Solutions Division. Interest and other expensesexpense for 1997each of 2000 and 1996 totaled $1.3 million, respectively.1999 were $1.5 million. Interest and other relateddividend income for 19972000 totaled $4.2$7.7 million, compared to $2.7$7.8 million in 1996. The increase in interest and other related income can be attributed to the increase in investments. Pretax income for 1997 was $88.1 million, or 12.5% of revenue, up 80.9% from pretax income of $48.7 million, or 9.6% of revenue, in 1996.1999. The Company's effective tax rate for 1997each of 2000 and 1999 was 41.7% compared to 42.2% in 1996. The effective tax rate reflects a combination of federal and state income taxes.40.5%. Net income and earnings per share for 19972000 were $51.4$20.4 million and $.72$.29 per diluted share diluted, respectively, up 82.3% from $28.2including all charges, and $28.4 million and $.40$.41 per diluted share excluding all charges. This compares to net income of $73.1 million and $1.01 per diluted respectively,share including all charges, and net income of $81.2 and $1.12 per diluted share excluding all charges for 1999. On February 5, 2001, Keane announced the sale of its help desk business in 1996.a cash transaction valued at $15.7 million. Revenue from its divested help desk business and from business units closed as part of its restructuring represented approximately $52 million in unprofitable revenue for the year 2000. 19 Net cash provided from operations was at $96 million during 2000, before the expenditure of $81 million for the repurchase of Keane shares and $32.5 million in acquisitions, net of cash acquired. RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards issued Statement of Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging Activities." which required adoption in periods beginning after June 15, 1999. FAS 133 was subsequently amended by Statement of Financial Accounting Standards No. 137, " Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133" and will now be effective for fiscal years beginning after June 15, 2000, with earlier adoption permitted. In June 2000, the FASB issued Statement No. 138. " Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment to FAS 133 and effective simultaneously with FAS 133. The Company adopted FAS 133 as amended by FAS 138 in the first quarter of 2001, and FAS133 has not had a significant impact on its financial position or results of operations. In July 2001, the FASB issued FAS No. 141, "Business Combinations", and FAS No. 142, "Goodwill and Other Intangible Assets." FAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 2001. FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination that is initiated after June 30, 2001. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indictors 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 Statement 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 Statement 142 in their 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 Company is currently in the process of evaluating the impact of FAS 142 will have on its financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 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. The Company is required to adopt SFAS No. 144 for the fiscal year beginning after December 15, 2001 and is currently in the process of evaluating the impact on its consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and investments at December 31, 19982001 increased to $129.2$ 129.2 million from $91.0$ 115.2 million at December 31, 1997.2000. This increase was primarily attributable to net income, increasedthe continuing efforts by the Company to decrease its Days Sales Outstanding ("DSO"). The decrease in accounts payable and accrued expenses of approximtely $15.2 million,receivable was offset by increased accounts receivablepayments for acquired debt related to the Metro acquisition of approximtely $73.9$65.9 million and expenditures associated with the addingpurchases of property, plant and expandingequipment of facilities to support the Company's growth of approximtely $16.7$7.6 million. In addition to these payments, the Company spent $ 4.0 million on the purchase of 326,200 shares of its stock at an average price of $12.40 per share. On March 15, 2002 the Company acquired SignalTree Solutions Holding, Inc., a privately -held, U.S. based corporation with two software development facilities in India and additional operations in the United States. The Company paid approximately $64.5 million in cash for the acquisition. As a result, this transaction will reduce the Company's cash position at the end of the first quarter of 2002. On September 19, 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. Since May of 1999, the Company has invested $108.9 million to repurchase 5,457,200 million shares of its common stock under three separate authorizations. The timing and amount of additional share repurchases will be determined by the Company's management based on its evaluation of market and economic conditions and other factors. A total of 326,200 shares of Common Stock were repurchased during the first quarter of 2001. There were no shares repurchased during the second, third or fourth quarter of 2001. The Company maintains and has 20 available a $20$10 million unsecured demand line of credit split equally between twowith a major Boston banksbank for operations and acquisition opportunities. Based on itsthe Company's current operating plan, the Company believes that its cash and cash equivalents and investments on hand, cash flows from operations, and its current available linesline of credit will be sufficient to meet its workingcurrent capital requirements for at least the next twelve months. 18 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 adjusts its workforce in an effort to maintain profitability. The Company has no significant debt but does have commitments for cash as follows:
- -------------------------------------------------------------------------------------------------------------------------- Contractual Obligations Payments Due by Period (in millions) - -------------------------------------------------------------------------------------------------------------------------- Total Less than 1 year 1-3 years 4-5 years After 5 years - -------------------------------------------------------------------------------------------------------------------------- Capital Lease Obligations 2.3 1.1 1.2 - -------------------------------------------------------------------------------------------------------------------------- Operating Leases 129.5 27.0 46.6 22.9 33.0 - -------------------------------------------------------------------------------------------------------------------------- Other Obligations 8.5 7.4 1.1 - -------------------------------------------------------------------------------------------------------------------------- Total Contractual Cash 140.3 35.5 48.9 22.9 33.0 Obligations - --------------------------------------------------------------------------------------------------------------------------
The Company's material commitments are primarily related to office rentals and capital expenditures. Contractual obligations related to operating leases reflects existing rental leases and the proposed new corporate facility as noted in Footnote I to the consolidated financial statements "Related Parties, Commitments and Contingencies." The Company is committed to an Enterprise Application Architecture (EAA) project which will encompass all areas of the company and further enhance its ability to sustain growth for the organization. The EAA contract obligations are included in the above chart under the caption "Other Obligations." IMPACT OF INFLATION AND CHANGING PRICES: Inflationary increases in costs have not been material in recent years and, to the extent permitted by competitive pressures, are passed on to the clients through increased billing rates. Rates charged by the Company are based on the cost of labor and market conditions within the industry. The Company was able to increase its billing rates over its increases in direct labor in 1998. 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 OVERVIEW The "Year 2000" issue is the result of computer programs being written using two digits rather than four to define the applicable year. Keane's computer equipment and software and devices with embedded technology that are time sensitive may recognize "00" as the year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of Keane's operations, including, among other things, a temporary inability to perform mission critical functions like billing and time reporting. As a result, software and computer systems may need to be upgraded or replaced in order to ensure that they accept four digit date codes. STATE OF READINESS Company Services and Products. Keane 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. Certain of these products are not fully Year 2000 operable. Keane has advised its customer base for these products that it does not intend to offer Year 2000 compliant versions of these products and has encouraged them to migrate to new products offered by Keane that are Year 2000 ready. The Company anticipates that some customers will choose not to migrate to these products and will therefore terminate their relationship with Keane's Healthcare Solutions Practice. The exact amount of anticipated lost customers has not been determined. The Company believes that the revenue lost as a result of these events will be immaterial to its overall operations. In addition to its own products, Keane markets certain third party software products through its Healthcare Solutions Practice. The Company is seeking assurances from the vendors of these products that all licensed software is Year 2000 compliant. The Company has received substantially all of these assurances in the first quarter of 1999. Company Systems. Keane has established a Year 2000 task force that has - --------------- completed its assessment of the Company's Information Technology-related ("IT- related") systems for the Year 2000 issue. For IT-related systems, the Company believes that most of the critical systems, including its accounting software, AS400 applications and payroll systems, are now Year 2000 compliant. However, Keane's Federal Systems subsidiary uses a software product for its accounting system that is not Year 2000 compliant. The vendor for this product has advised the Company that it plans to release a Year 2000 compliant upgrade for its product in the first quarter of 1999. The Company is in the process of replacing its billing software because the current software product is not Year 2000 compliant. The cost to replace this software is currently estimated to be approximately $500,000. Keane believes that the new software will be operational by the end of the first quarter of 1999. Keane's Year 2000 task force is also evaluating the Company's non-IT systems, including alarm systems, sprinkler systems, elevators, fax machines and other miscellaneous systems that may contain embedded technology, for the Year 2000 Issue. Keane expects to complete its identification and assessment of Year 2000 Issues in non-IT systems in 1999 and to establish a remediation plan to address any outstanding Year 2000 Issues concerning the Company's non-IT systems. Costs to Address Year 2000 Issues - --------------------------------- Keane anticipates that it will incur direct costs to modify or replace existing systems used by Keane in the operation of its business to ensure that all systems will be operable in the Year 2000, including the costs to replace its billing 19 software described above. The Company believes that the total amounts spent by it to date and that it expects to spend in 1999 addressing the Year 2000 issue are not material. Risks to the Company - -------------------- In the event of a failure of some or all of the Company's IT-related and non-IT systems on January 1, 2000, the Company's operations may be substantially curtailed until the Company or its third-party suppliers develop a solution to address such system's failure. In such event, the Company may be unable to: (a) perform billing functions, (b) keep track of time performed on projects for its clients, (c) access client records, (d) communicate between field offices and headquarters, (e) operate its Internet site, (f) receive and send email or (g) prepare its financial statements for the fourth quarter of 1999 or periods thereafter. Among the services that Keane provides are assessment, planning, migration/remediation and testing services for Year 2000 compliance. Keane has devoted significant resources to services that address the Year 2000 problem and believes the market for these services will decline as the Year 2000 approaches. Although Keane believes that the demand for its services relating to the Year 2000 problem will continue to exist after the Year 2000, this demand will diminish significantly over time and will eventually disappear. Keane's services addressing the Year 2000 problem involve key aspects of its clients' computer systems. A failure in a client's system could result in a claim for substantial damages against Keane, regardless of Keane's responsibility for the failure. Keane could incur substantial costs in connection with any resulting litigation, regardless of the outcome. Contingency Plans - ----------------- As described above, the Company has identified potential vulnerabilities associated with the change of the century. The Company is devoting resources to working with providers of systems to the Company to ensure that its business is not substantially interrupted as a result of the date change. The Company currently does not have a contingency plan in the event of a particular system not being Year 2000 compliant. Such a plan will be developed if it becomes clear that the company is not going to achieve its scheduled compliance objectives.2001. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS: The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this 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: . general economic conditions which may influence investment decisions or cause downsizing; . the number and requirements of client engagements; . employee utilization rates; . changes in the rates Keane can charge clients for services; . acquisitions; and . other factors, many of which are beyond Keane's control. 2021 A significant portion of Keane's expenses do not vary relative to revenue. As a result, if revenue in a particular quarter does not meet expectations, Keane's operating results could be materially adversely affected, which in turn may have a material adverse impact on the market price of Keane common stock. In addition, many of Keane's engagements are terminable without client penalty. An unanticipated termination of a major project could result in an increase in underutilized employees and a decrease in revenue and profits. Risks 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, 1998,1999 through December 31, 2001, Keane has completed thenine acquisitions. The aggregate cost of these acquisitions of Quantum Associates, Inc. d/b/a Omega Systems in Pittsburgh, Pennsylvania, GSE Erudite Systems in Salt Lake City, Utah, Bricker & Associates, Inc. in Chicago, Illinois, Icom Systems Ltd in Birmingham, England, Fourth Tier, Inc. in El Segundo, California, Emergent Corporation in San Mateo, California and Advanced Solutions Inc. in New York, New York.totaled approximately $266.8 million. Keane's future growth may be based in part on selected acquisitions. At any given time, Keane may be in various stages of considering suchacquisition 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 agreement, is reached, there is no assurance that Keane will complete any future acquisition will be completed.acquisition. Keane typically anticipates that each acquisition will bring certain benefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine if such benefitsKeane can actually 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 and expenses.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 possibilities mightcould have a material adverse effect on Keane's business, financial condition and result of operations. DependenceThe complex process of integrating Metro and SignalTree Solutions with Keane may disrupt the business activities of the Company and affect employee morale, thus affecting the Company's ability to pursue its business plan and retain key employees. Integrating the operations and personnel of Metro Information Services, Inc., which Keane acquired in November 2001, and SignalTree Solutions, which the Company acquired in March 2002 with Keane is a complex process. The integration of each of Metro and SignalTree Solutions may not be completed in the expected time period or may not achieve the anticipated benefits of the merger. The successful integration of Metro and SignalTree Solutions with Keane requires, among other things, integration of finance, human resources and sales organizations. The diversion of the attention of Keane's management and any difficulties encountered in the process of combining the companies could cause the disruption of, or a loss of momentum in, the activities of the combined company's business. Further, the process of combining Metro and SignalTree Solutions with Keane could negatively affect employee morale and the ability of the combined company to retain some of its key employees after the merger. The inability to successfully integrate the operations and personnel of Metro and SignalTree Solutions with Keane could have a material adverse effect on Personnel.Keane's business, financial condition and results of operations. 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-skilledhighly 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.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 22 Keane. In addition, clients may elect to increase their internal information systems resources to satisfy their custom software development needs. Keane believes that in order to compete successfully in the software services industry it must be able to: compete cost-effectively; develop strong client relationships; generate recurring revenues; utilize comprehensive delivery methodologies; and achieve organizational learning by implementing standard operational processes. In the healthcare software systems market, Keane competes with some companies that are larger in the healthcare market and have greater financial resources than Keane. Keane believes that significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets. 21 Keane may not be able to compete successfully against current or future competitors. In addition, competitive pressures faced by Keane may materially adversely affect its business, financial condition and results of operations. Year 2000 Compliance; Risks Associated with ProvisionKeane conducts business in the United Kingdom and India, which exposes it to a number of Year 2000 Services. - ---------------------------------------------------------------------------difficulties inherent in international activities. As a result of its acquisition of SignalTree Solutions in March 2002, Keane has reviewed its internal computer systemstwo software development facilities in India and has identified certain internal systems that are not Year 2000 compatible (i.e., such systems use only two digitsadded approximately 400 technical professionals to representits professional services organization. India is currently experiencing conflicts with Pakistan over the yeardisputed territory of Kashmir as well as clashes between different religious groups within the country. These conflicts, in date data fields and, consequently, may not accurately distinguish between the 20th and 21st centuries or may not function properly at the turn of the century). Keane isaddition to other unpredictable developments in the process of correcting these systemspolitical, economic and social conditions in India, could eliminate or replacing them with Year 2000 compliant systems. Keane expects to implement successfullyreduce the systems and programming changes necessary to address Year 2000 issues and does not believe that the cost of such actions will have a material effect on Keane's financial condition or results of operations. There may, however, be a delay in, or increased costs associated with, the implementationavailability of these changes. Keane's inabilitydevelopment and professional services. If access to implement changes could have a material adverse effect on Keane's business, financial condition or results of operations. Among the services that Keane provides are assessment, planning, migration/remediation and testing services for Year 2000 compliance. Keane has devoted significant resources to services that address the Year 2000 problem and believes the market for these services 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 U.S. and Canada and soon will decline asbe in India, and has offices throughout the Year 2000 approaches. Although Keane believesUnited States, the United Kingdom, Canada and India. This geographic dispersion requires substantial management resources that the demand for its services relatinglocally-based competitors do not need to the Year 2000 problem will continuedevote to exist after the Year 2000, this demand will diminish significantly over time and will eventually disappear.their operations. Keane's services addressing the Year 2000 problem involve key aspects of its clients' computer systems. A failure in a client's system could result in a claim for substantial damages against Keane, regardless of Keane's responsibility for the failure. Keane could incur substantial costs in connection with any resulting litigation, regardless of the outcome. International Operations. In August 1998, Keane commenced operations in the - ------------------------ United Kingdom with its acquisition of Icom Systems Ltd, now known as Keane Limited. Keane's international operations will beU.K. and India are 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. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not engage in trading market 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. 22Additionally, the Company transacts business in the United Kingdom, Canada and India and as such has exposure associated with movement in foreign currency exchange rates. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) ReportReports of Independent Accountants................................ 24Auditors............................................ 25 Consolidated Balance Sheets as of December 31, 19972001 and 1998..... 252000................26 Consolidated Statements of Income forFor the Years Ended December 31, 1996, 19972001, 2000 and 1998............. 261999........................27 Consolidated Statements of Stockholders' Equity forFor the Years Ended December 31, 1996, 19972001, 2000 and 1998..................... 271999........................28 Consolidated Statements of Cash Flows forFor the Years Endedended December 31, 1996, 19972001, 2000 and 1998........................... 281999........................29 Notes to Consolidated Financial Statements....................... 29-38 23Statements...............................30-43 24 REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.: In our opinion,We have audited the accompanying consolidated balance sheets of Keane, Inc. as of December 31, 2001 and 2000, 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, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.2001. These financial statements are the responsibility of the Company's management; ourmanagement. 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 auditingin the United States. Those standards 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,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the opinion expressed above.financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keane, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ PricewaterhouseCoopersErnst and Young LLP Boston, Massachusetts February 26, 1999 2411, 2002, except for Note O, as to which the date is March 15, 2002 25 KEANE INC. CONSOLIDATED BALANCE SHEETS
December 31, 1997 19982001 2000 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS EXCEPT SHARE AMOUNTS) Assets Current: Cash and cash equivalents $ 40,27665,556 $ 51,696 Short term investments 6,607 6,16553,783 Marketable securities 63,687 59,179 Accounts receivable, net: Trade 157,921 229,457160,172 164,706 Other 2,041 1,5733,109 1,428 Prepaid expenses and other current assets 10,729 23,376 -------- --------deferred taxes 20,026 15,533 --------- --------- Total current assets 217,574 312,267 Long term investments 44,139 71,368312,550 294,629 Property and equipment, net 23,613 29,973 Intangible33,701 24,132 Goodwill, net 224,891 75,497 Customer lists 53,659 10,196 Other intangible assets, net 35,825 35,714 Other26,292 32,968 Deferred taxes and other assets, net 8,025 8,238 -------- -------- $329,176 $457,560 ======== ========28,810 26,172 --------- --------- $ 679,903 $ 463,594 ========= ========= Liabilities Current: Accounts payable $ 22,709 $ 20,22213,723 16,820 Accrued expenses and other liabilities 13,191 30,64751,980 26,953 Accrued compensation 23,691 25,42934,161 17,709 Notes payable 6,927 1,000-- 5,006 Accrued income taxes 3,055 13,5484,675 9,003 Unearned income 5,178 4,611 Current capital lease obligations 822 954 -------- --------1,154 1,230 --------- --------- Total current liabilities 70,395 91,800110,871 81,332 Deferred income taxes 25,656 9,205 Long-term portion of capital lease and other obligations 1,379 1,976 Notes payable 365 ---14,203 2,380 Commitments and contingencies (Note K)I) 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 75,223,971 in 2001 and outstanding 70,361,35472,446,101 in 1997 and 71,363,272 in 1998 7,036 7,1362000 7,522 7,245 Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 286,615284,891 in 19972001 and 285,303 in 1998 29 292000 28 28 Additional paid-in capital 97,680 109,606 Foreign currency translation (372) (764)162,269 121,444 Accumulated other comprehensive income (2,007) (4,637) Retained earnings 155,077 250,546361,361 343,974 Less treasury stock at cost, 305,6155,055,602 shares of Common Stock in 1997 and 313,064 shares of Common Stock in 1998 (2,413) (2,769) -------- --------2000 -- (97,377) --------- --------- Total stockholders' equity 257,037 363,784 -------- -------- $329,176 $457,560 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 25
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1996 1997 1998 - --------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Total revenues529,173 370,677 --------- --------- $ 505,982679,903 $ 706,801 $ 1,076,198 Salaries, wages and other direct costs 341,434 469,433 696,752 Selling, general and administrative expenses 104,481 138,168 193,438 Amortization of goodwill and other intangible assets 12,664 14,037 7,701 Merger costs --- 8,120 ---------- ---------- ---------- Operating income 47,403 85,163 170,187 Interest and dividend income 2,676 4,212 5,189 Interest expense 602 244 163 Other expenses, net 741 1,048 1,057 ---------- ---------- ---------- Income before income taxes 48,736 88,083 174,156 Provision for income taxes 20,563 36,712 77,807 ---------- ---------- ---------- Net income $ 28,173 $ 51,371 $ 96,349 ========== ========== ========== Net income per share (basic) $ 0.40 $ 0.73 $ 1.36 ========== ========== ========== Net income per share (diluted) $ 0.40 $ 0.72 $ 1.33 ========== ========== ========== Weighted average common shares outstanding (basic) 69,780 70,096 71,053 ========== ========== ========== Weighted average common shares and common share equivalents outstanding (diluted) 70,540 71,603 72,284 ========== ========== ==========463,594 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 26 KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYINCOME
For the Years Ended December 31, 1996, 1997 and 19982001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Class B Common Stock Common Stock Additional ----------------- ----------------- Paid-in Shares Amount Shares Amount Capital - ------------------------------------------------------------------------------------------------- Balance December 31, 1995 67,129,584 $6,713 288,258 $29 $88,683 Common Stock issued under 929,307 93 3,380 stock optionTotal revenues $ 779,159 $ 871,956 $1,041,092 Salaries, wages and employee purchase plans Stock issued by pooled 1,751,116 175 companies Conversionsother direct costs 547,883 621,208 702,795 Selling, general and administrative expenses 186,708 201,852 199,009 Amortization of Class B Common 645 (645) Stock into Common Stockgoodwill and other intangible assets 14,457 12,351 9,169 Restructuring charge 10,358 8,624 13,653 ---------- ---------- ---------- Operating income 19,753 27,921 116,466 Interest and dividend income 7,043 7,725 7,827 Interest expense 295 588 -- Other expenses (income), net (2,720) 872 1,480 ---------- ---------- ---------- Income tax benefit from stock option plans 583 Other comprehensivebefore income Treasury Stock purchase Dividends paid to shareholderstaxes 29,221 34,186 122,813 Provision for income taxes 11,834 13,832 49,739 ---------- ---------- ---------- Net income --------------------------------------------------------------- Balance December 31, 1996 69,810,652 6,981 287,613 29 92,646 Common Stock issued under 549,704 55 4,006 stock option and employee purchase plans Conversions of Class B Common 998 (998) Stock into Common Stock Income tax benefit from stock 1,028 option plans Other comprehensive income Dividends paid to shareholders$ 17,387 $ 20,354 $ 73,074 ========== ========== ========== Net income --------------------------------------------------------------- Balance December 31, 1997 70,361,354 7,036 286,615 29 97,680 Pooling of interests with Omega (Note N) Common Stock issued under 769,795 77 6,191 stock option and employee purchase plans Issuance of common stock for 230,811 23 (23) business acquisitions Merger expenses paid by shareholders 1,571 Conversions of Class B Common 1,312 (1,312) Stock into Common Stock Income tax benefit from stock option plans 4,187 Other comprehensive income Dividends paid to shareholdersper share (basic) $ .25 $ .29 $ 1.02 ========== ========== ========== Net income --------------------------------------------------------------- Balance December 31, 1998 71,363,272 $7,136 285,303 $29 $109,606 =============================================================== -------- Treasury Stock Foreign -------- Total Currency at Cost Stock- Trans- Retained -------- holders' lation Earnings Shares Amount Equity - ------------------------------------------------------------------------------- Balance December 31, 1995 ($42)per share (diluted) $ 76,555 (304,314) ($2,412) $169,526 Common Stock issued under stock option.25 $ .29 $ 1.01 ========== ========== ========== Weighted average common shares outstanding (basic) 68,474 69,646 71,571 ========== ========== ========== Weighted average common shares and employee purchase plans 3,473 Stock issued by pooled companies 175 Conversions of Class B Common Stock into Common Stock - Income tax benefit from stock option plans 583 Other comprehensive income (3) (3) Treasury Stock purchase (1,301) (1) (1) Dividends paid to shareholders (158) (158) Net income 28,173 28,173 ------------------------------------------------- Balance December 31, 1996 (45) 104,570 (305,615) (2,413) 201,768 Common Stock issued under 4,061 stock option and employee purchase plans Conversions of Class B Common - Stock into Common Stock Income tax benefit from stock 1,028 option plans Other comprehensive income (327) (327) Dividends paid to shareholders (864) (864) Net income 51,371 51,371 ------------------------------------------------ Balance December 31, 1997 (372) 155,077 (305,615) (2,413) 257,037 Pooling of interests with Omega 589 589 (Note N) Common Stock issued under (7,449) (356) 5,912 stock option and employee purchase plans Issuance of common stock for - business acquisitions Merger expenses paid by 1,571 shareholders Conversions of Class B Common - Stock into Common Stock Income tax benefit from stock 4,187 option plans Other comprehensive income (392) (392) Dividends paid to shareholders (1,469) (1,469) Net income 96,349 96,349 ------------------------------------------------ Balance December 31, 1998 ($764) $250,546 (313,064) ($2,769) $363,784 ================================================share equivalents outstanding (diluted) 69,396 69,993 72,395 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 27 KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS' EQUITY For the Years Ended December 31, 1999, 2000 and 2001 - -------------------------------- (IN THOUSANDS EXCEPT SHARE AMOUNTS)
For the Years Ended December 31, 1996 1997 1998Other Class B Compre- Common Stock Common Stock Additional hensive ------------ ------------ Paid-in Income Retained Shares Amount Shares Amount Capital (Loss) Earnings - ------------------------------------------------------------------------------------------------ (IN THOUSANDS) Cash Flows From Operating Activities:--------------------------------------------------------------------------------------------------------------------------- C> Net income Balance January 1, 1999 71,363,272 $ 28,1737,136 285,303 $ 51,371 $ 96,349 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation29 $109,606 ($764) $250,546 Common Stock issued under 721,893 72 10,689 stock option and amortization 20,551 22,659 21,018 Deferred income taxes (4,267) (6,896) (10,553) Provision for doubtful accounts 3,621 3,391 5,332 Loss (gain) on saleemployee purchase plans Conversions of property and equipment (18) 14 25 Non-cash interest on long-term debt 380 197 --- TaxClass B Common 191 (191) Stock into Common Stock Income tax benefit from stock options 583 1,028 4,187 Changes515 option plans Repurchase of Common Stock Investments valuation adjustment (1,263) Net income 73,074 Comprehensive income Balance December 31, 1999 72,085,356 7,208 285,112 29 120,810 (2,027) 323,620 Common Stock issued under 360,524 36 320 stock option and employee purchase plans Conversions of Class B Common 221 1 (221) (1) Stock into Common Stock Income tax benefit from stock 314 option plans Repurchase of Common Stock Investments valuation adjustment 538 Foreign currency translation Adjustment (3,148) Net income 20,354 Comprehensive income Balance December 31, 2000 72,446,101 7,245 284,891 28 121,444 (4,637) 343,974 Common Stock issued under 18,000 1 (8,894) stock option and employee purchase plans Common Stock issued in assetsconnection 2,759,870 276 49,460 with acquisition of Metro Information Services, Inc. Income tax benefit from stock 259 option plans Repurchase of Common Stock Investments valuation adjustment 1,181 Foreign currency translation Adjustment 1,449 Net income 17,387 Comprehensive income ============================================================================== Balance December 31, 2001 75,223,971 $ 7,522 284,891 $ 28 $162,269 $ (2,007) $361,361 ============================================================================== Treasury Stock Total at Cost Stock- ------- holders' Shares Amount Equity - ------------------------------------------------------------------------ Balance January 1, 1999 (313,064) ($2,769) $ 363,784 Common Stock issued under (6,332) (162) 10,599 stock option and liabilities, netemployee purchase plans Conversions of acquisitions: (Increase)Class B Common -- Stock into Common Stock Income tax benefit from stock 515 option plans Repurchase of Common Stock (1,000,000) (23,910) (23,910) Investments valuation adjustment (1,263) Net income 73,074 --------- Comprehensive income 71,811 Balance December 31, 1999 (1,319,396) (26,841) 422,799 Common Stock issued under 394,794 10,389 10,745 stock option and employee purchase plans Conversions of Class B Common -- Stock into Common Stock Income tax benefit from stock 314 option plans Repurchase of Common Stock (4,131,000) (80,925) (80,925) Investments valuation adjustment 538 Foreign currency translation Adjustment (3,148) Net income 20,354 --------- Comprehensive income 17,744 --------- Balance December 31, 2000 (5,055,602) (97,377) 370,677 Common Stock issued under 737,348 15,186 6,293 stock option and employee purchase plans Common Stock issued in accounts receivable (22,377) (59,993) (73,854) (Increase) in prepaid expenses and other assets (220) (451) (1,995) Increase in accounts payable and accrued expenses and other liabilities 12,843 29,098 15,228 Increase (decrease) inconnection 4,644,454 86,236 135,972 with acquisition of Metro Information Services, Inc. Income tax benefit from stock 259 option plans Repurchase of Common Stock (326,200) (4,045) (4,045) Investments valuation adjustment 1,181 Foreign currency translation Adjustment 1,449 Net income taxes payable 5,410 (3,990) 10,493 -------- -------- -------- Net cash provided by operating activities 44,679 36,428 66,230 -------- -------- -------- Cash Flows From Investing Activities: Purchase of investments (34,586) (60,080) (97,592) Sale of investments 15,675 39,577 70,805 Purchase of property and equipment (5,842) (17,502) (16,740) Proceeds from the sale of property and equipment 308 519 385 Payments for acquisitions (747) --- (9,150) -------- -------- -------- Net cash (used for) investing activities (25,192) (37,486) (52,292) -------- -------- -------- Cash Flows From Financing Activities: Payments under long-term debt, net (3,302) (4,161) (7,292) Principal payments under capital lease obligations (1,158) (921) (1,240) Proceeds from issuance of common stock 3,474 4,061 7,483 Dividends paid (158) (864) (1,469) -------- -------- -------- Net cash (used for) financing activities (1,144) (1,885) (2,518) Net increase (decrease) in cash and cash equivalents 18,343 (2,943) 11,420 Cash and cash equivalents at beginning of year 24,876 43,219 40,276 -------- -------- -------- Cash and cash equivalents at end of year17,387 --------- Comprehensive income 20,017 --------- ================================== Balance December 31, 2001 -- -- $ 43,219 $ 40,276 $ 51,696 ======== ======== ======== Supplemental information: Income taxes paid $ 18,241 $ 45,922 $ 68,540529,173 ==================================
The accompanying notes are an integral part of the consolidated financial statements. 28 KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Cash Flows From Operating Activities: Net income $ 17,387 $ 20,354 $ 73,074 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,113 28,991 31,519 Deferred income taxes 1,808 (5,444) 4,996 Provision for doubtful accounts 2,024 3,086 (625) Loss on sale of property and equipment (167) -- 14 Gain on sale of investments (1,233) -- -- Non-cash restructuring charge 825 3,403 5,572 Impairment of long term investments 2,000 -- -- Gain on sale of business unit (4,302) -- -- Income tax benefit from stock options 259 314 515 Changes in operating assets and liabilities, net of acquisitions: Decrease in accounts receivable 41,691 48,432 37,580 Increase (decrease) in prepaid expenses and other assets (1,065) 6,748 (6,910) Increase (decrease) in accounts payable, accrued expenses, unearned income and other liabilities 758 (18,415) (24,064) Increase (decrease) in income taxes payable (2,916) 8,609 (13,548) --------- --------- --------- Net cash provided by operating activities 83,182 96,078 108,123 --------- --------- --------- Cash Flows From Investing Activities: Purchase of investments (104,591) (30,875) (110,915) Sale and maturities of investments 102,340 60,191 96,542 Purchase of property and equipment (7,609) (11,386) (16,418) Proceeds from the sale of property and equipment 419 182 77 Proceeds from sale of business unit 16,087 -- -- Payments for current year acquisitions (7,148) (32,516) (60,996) Payments for prior years acquisitions (1,266) (3,756) -- --------- --------- --------- Net cash used for investing activities (1,768) (18,160) (91,710) --------- --------- --------- Cash Flows From Financing Activities: Payments on acquired debt (65,938) -- -- Payments under long-term debt, net (5,006) (3,523) (563) Principal payments under capital lease obligations (1,303) (1,376) (1,217) Proceeds from issuance of common stock 6,293 10,745 10,761 Repurchase of common stock (4,045) (80,925) (24,072) --------- --------- --------- Net cash used for financing activities (69,999) (75,079) (15,091) --------- --------- --------- Effect of exchange rate changes on cash 358 (2,074) -- Net increase in cash and cash equivalents 11,773 765 1,322 Cash and cash equivalents at beginning of year 53,783 53,018 51,696 --------- --------- --------- Cash and cash equivalents at end of year $ 65,556 $ 53,783 $ 53,018 ========= ========= ========= Supplemental information: Income taxes paid $ 14,922 $ 10,469 $ 62,140
The accompanying notes are an integral part of the consolidated financial statements. 29 KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2001, 2000, and 1999. (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 its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. As described in Note N, 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. The accompanying financial statements and notes have been restated for all periods presented for the three material pooling-of- interests acquisitions. Certain prior year amounts have been reclassified to conform withto the current year presentation. FISCAL YEAR: The Company records activity in quarterly accounting periods of equal length based on a monthly schedule of one five-week month followed by two four-week months. Differences in amounts presented and those which would have been presented using actual year end dates are not material. All references to "fiscal 2001", "fiscal 2000" and "fiscal 1999" in the financial statements and accompanying notes relate to the years ended December 30, 2001, December 31, 2000 and December 31, 1999, respectively. For ease of presentation, December 31 has been utilized for all financial statement captions. NATURE OF OPERATIONS: Keane provides Information Technology (IT) and business consulting services. The Company provides managementdivides its business into three main lines: Business Consulting, Application Development and information technology (IT) consulting, application software developmentIntegration (ADI) and integration, application management,Application Development and call center management services to corporations,Management Outsourcing. Keane's clients consist primarily of Global 2000 organizations, government agencies and healthcare facilities.organizations. The Company serves itsservices clients through a series of corporate practices that support the Company's network of branch officesoffice operations in the major markets of the U.S., Canada,North America and the United Kingdom. These offices are supported by Keane Consulting Group, a centralized Strategic Practices Group representing Keane's core services and key 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. The Company primarily provides services to Fortune 1000 companies. REVENUE RECOGNITION: The Company provides business innovation consulting and system design, implementation, and support services under fixed price and time and materials contracts. For fixed price contracts, revenue is recorded on the basis of the estimated percentage of completion of services rendered. Losses, if any, on fixed price contracts are recognized when the loss is determined. For time and materials contracts, 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 over the period of software implementation. ALLOWANCE FOR BAD DEBTS: The Company providesevaluates its accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services delivered under maintenance agreements. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to multiple General Electric (GE) and International Business Machines (IBM) locations. The Company believes that each GE and IBM location served byreduce revenue in the Companyperiod the risk is essentially autonomous. Each location contracts separately for its services and each contract involves different projects. Aggregate revenues for GE totaled approximately $28 million, $29 million and $31 million in 1996, 1997 and 1998, respectively. Aggregate revenues for IBM totaled approximately $55 million, $70 million and $66 million in 1996, 1997 and 1998, respectively.identified. FOREIGN CURRENCY TRANSLATION: For the Company's subsidiaries in Canada and England, the Canadian dollar and British pound, respectively, are the functional currencies. All assets and liabilities of the Company's Canadian and English 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, 19982001 included investments in commercial paper ($41.2 million), municipal bonds ($1.015.0 million) and money market funds ($1.133.8 million). Cash equivalents at December 31, 19972000 included investments in commercial paper ($22.0 million), corporate bonds ($4.333.3 million) and money market funds ($2.310.6 million). 30 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's debt obligations approximates their carrying value. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of 29 investments and trade receivables. The Company's cash, cash equivalents and investments are held with financial institutions with high credit standings. The Company's customer base consists of geographically dispersedispersed customers in severalmany different industries, thereforeindustries. Therefore, concentration of credit risk with respect to trade receivables is not considered significant. INVESTMENTS: Investments 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. Investments are currently designated as available- for-sale,available-for-sale, and as such, unrealized gains and losses are reported in a separate component of stockholders' equity. The Company views its marketable securities portfolio as available for use in its current operations, and accordingly, these investments are classified as current assets in the accompanying balance sheet. As of December 31, 2001, the Company's investments reflect an increase in market value of $.8 million, which has been reflected in the statement of stockholder's equity. At December 31, 1997 and 1998,2000, the Company's investments reflected a decline in market value of these investments approximated cost.$1.2 million. Realized gains and losses, as well as interest, dividends and capital gain/loss distributions on all securities, are included in earnings. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Repair and maintenance costs are charged to expense. Depreciation is computed on a straight-line basis over estimated useful lives of 25 to 40 years for buildings and improvements, and 32 to 5 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 the lease. 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: Intangible assets consist principally of goodwill the excess of the purchase price over the appraised fair value of assets acquired in acquisitions, and acquired customer-based intangibles, noncompetition agreements, and software initially recorded at fair value. Intangibles are amortized on a straight-line basis over 14 or 15 years for goodwill and 3 to 15 years for other intangibles. At each reporting date, management assesses whether there has been a permanent impairment in the value of its long-term assets and the amount of such impairment by comparing anticipated undiscounted future operating incomecash flows from acquired business units with the carrying value of the related 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. The Company capitalized approximately $0.5Accumulated amortization at December 31, 2001 and 2000 was $46.9 million of computer software development costs during 1996. There were no costs capitalized in 1997 or 1998. Costs are amortized over the expected life of the product, approximately 5 years, upon release.and $35.4 million, respectively. INCOME TAXES: The Company accounts for income taxes under the 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 Comprehensive 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 of currency translation adjustments and available-for-sale securities valuation adjustments. At December 31, 2001, accumulated other comprehensive income was comprised of foreign currency translation adjustment of $2.5 million and securities valuation adjustment of ($.5) million, net of tax. At December 31, 2000, accumulated other comprehensive income was comprised of foreign currency translation adjustment of $3.9 million and securities valuation adjustment of $.7 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 fair value of the shares at the date of grant. The Company accounts for stock options grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and 31 accordingly, recognizes no compensation expense for the stock option grants. 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. 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 operates in one reportable segment-information technology and business consulting services. The Company offers an integrated mix of end-to-end business solutions, such as Business Consulting (Plan), Application Development and Integration (Build), and Application Development and Management Outsourcing (Manage). Approximately 93%, 94% and 96% of the Company's revenue was derived from these offerings for the years ended December 31, 2001, 2000 and 1999, respectively. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards issued Statement of Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging Activities." which required adoption in periods beginning after June 15, 1999. FAS 133 was subsequently amended by Statement of Financial Accounting Standards No. 137, " Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133" and will now be effective for fiscal years beginning after June 15, 2000, with earlier adoption permitted. In June 2000, the FASB issued Statement No. 138. " Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment to FAS 133 and effective simultaneously with FAS 133. The Company adopted FAS 133 as amended by FAS 138 in the first quarter of 2001, and FAS133 has not had a significant impact on its financial position or results of operations. In July 2001, the FASB issued FAS No. 141, "Business Combinations", and FAS No. 142, "Goodwill and Other Intangible Assets." FAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 2001. FAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of Statement 141 are effective for any business combination that is initiated after June 30, 2001. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indictors 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 Statement 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 Statement 142 in their 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 Company is currently in the process of evaluating the aggregate impact all provisions of FAS 142 will have on its financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 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. The Company is required to adopt SFAS No. 144 for the fiscal year beginning after December 15, 2001 and is currently in the process of evaluating the impact on its consolidated financial statements. 32 B. INVESTMENTS At December 31, 1998,The following is a summary of available-for-sale securities:
Gross Unrealized Estimated Cost Gains Losses Fair Value December 31, 2001 US Government Obligations $ 30,017 $ 338 $ 11 $ 30,344 Corporate bonds 27,906 651 285 28,272 Corporate passthroughs 4,997 75 1 5,071 -------- -------- -------- -------- 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 ======== ======== December 31, 2000 US Government Obligations 27,441 30 178 27,293 Corporate bonds 20,886 67 1,203 19,750 Corporate passthroughs 12,092 62 18 12,136 -------- -------- -------- -------- 60,419 159 1,399 59,179 ======== ======== ======== ======== Due in one year or less 5,237 5,237 Due after one year through three years 34,838 33,438 Due after three years 20,344 20,504 -------- -------- $ 60,419 $ 59,179 ======== ========
Proceeds from the Company's investments included obligationssale of the U.S. Government ($33.6 million), municipal bonds ($10.9 million), corporate pass throughs ($12.8 million) and corporate bonds ($20.2 million). At December 31, 1997, the Company's investments included obligations of the U.S. Government ($11.8 million), municipal bonds ($7.6 million), mortgage pass throughs ($9.6 million), corporate bonds ($19.7 million) and commercial paper ($2.0 million). Contractual maturities at December 31, 1998available for sale securities were $6.1approximately $102.3 million due within one year and $71.4 million due after one through five years. Actual maturities may differ from contractual maturities because the issuers of these securities may have the right to prepay obligations without penalty.during 2001. Net realized gains on those sales were $1.2 million. There was no gain or loss, based on a specific identification basis, realized on the sale of available for sale securities during the years ended December 31, 1996, 19972000 and 1998. 30 1999. C. ACCOUNTS RECEIVABLE Accounts receivable areconsists of the following: December 31, 2001 2000 ---- ---- Billed $ 144,896 $ 141,533 Unbilled 28,290 34,163 Allowance for doubtful accounts (13,014) (10,990) --------- --------- $ 160,172 $ 164,706 ========= ========= Accounts receivable is presented net of andoubtful accounts. The activity in the allowance for doubtful accounts of $4.9 million and $8.1 million ataccount is as follows: December 31, 1997 and 1998, respectively. The provisions2001 2000 1999 ---- ---- ---- Beginning of year balance $ 10,990 $ 7,904 $ 8,133 Provision charged to the statement13,706 6,778 7,749 Recoveries (3,448) Write-offs (8,234) (3,692) (7,978) -------- -------- ------- End of operations were $3.6 million, $3.3 million and $5.3 million in 1996, 1997, and 1998, respectively, and write-offs against the allowances were $1.7 million, $2.1 million and $2.1 million in 1996, 1997, and 1998, respectively.year balance $ 13,014 $ 10,990 $ 7,904 ======== ======== ======= 33 D. PROPERTY AND EQUIPMENT (IN THOUSANDS) Property and equipment consist of the following:
December 31, 1997 1998 ------- ------- Buildings and improvements $ 772 $ 772 Office equipment 38,467 50,191 Computer equipment and software 5,517 8,946 Leasehold improvements 5,301 7,387 ------- ------- 50,057 67,296 Less accumulated depreciation and amortization 26,444 37,323 ------- ------- $23,613 $29,973December 31, 2001 2000 ---- ---- Buildings and improvements $ 2,599 $ 772 Office equipment 52,537 71,316 Computer equipment and software 12,019 15,316 Leasehold improvements 10,753 9,885 Construction in progress 13,000 -- ------- ------- 90,907 97,289 Less accumulated depreciation and amortization 57,206 73,157 ------- ------- $33,701 $24,132 ======= =======
Depreciation expense totaled $7,887, $8,622$11.7 million, $16.2 million and $13,317$22.4 million in 1996, 19972001, 2000 and 1998,1999, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of $1,628 and $1,510,$.6 million with accumulated amortization totaling $1,263 and $1,030,$.3 million at December 31, 1997 and 1998, respectively.2001. E. INTANGIBLE ASSETS (IN THOUSANDS) Intangible assets consist of the following:
December 31, 1997 1998 ---- ---- Goodwill $23,695 $23,695 Noncompetition agreements 22,203 2,268 Customer-based intangibles 37,915 44,501 Software 8,089 5,618 Other 1,208 273 ------- ------- 93,110 76,355 Less accumulated amortization 57,285 40,641 ------- ------- $35,825 $35,714 ======= =======
31 F. ACCRUED EXPENSES AND OTHER LIABILITIES (IN THOUSANDS) Accrued expenses and other liabilities consist of the following:
December 31, 1997 1998 ---- ---- Deferred savings and profit sharing plan $ 3,156 $ 5,250 Accrued employee benefits 2,100 3,412 Employee stock withholdings 936 4,265 Accrued payroll taxes 609 6,164 Accrued rent obligations 1,299 2,130 Other 5,091 9,426 ------- ------- $13,191 $30,647December 31, 2001 2000 ---- ---- Accrued employee benefits $ 8,322 $ 8,226 Accrued rent obligations -- 1,609 Accrued restructuring 21,723 6,332 Other 21,935 10,786 ------- ------- $51,980 $26,953 ======= =======
G. CAPITAL LEASE OBLIGATIONS (IN THOUSANDS) The Company finances certain equipment through capital leases. At December 31, 1998, future minimum lease payments under noncancelable capital leases, together with the present value of minimum lease payments, are summarized below: Year ending December 31, 1999 $1,044 Year ending December 31, 2000 1,017 Year ending December 31, 2001 782 Year ending December 31, 2002 564 ------ Total minimum payments 3,407 Less amount representing future interest 477 ------ Present value of net minimum payments 2,930 Less current portion 954 ------ Long-term portion of capital lease payments $1,976 ======
H.F. NOTES PAYABLE In conjunctionconnection with the Company's acquisition of GSE Erudite Software, Inc. on April 20, 1998,Parallax Solutions Ltd. in February of 1999, the Company issued a $1.0$6.6 million dollar note payable due one year from the purchase date. At December 31, 1997, Icom Systems Ltd., had $3.9 million of outstanding debt, which was paid during 1998. I. CAPITAL STOCK In May 1998, the stockholders approved an amendment to the Company's Articlesformer owners. During the year 2001, the Company paid the remaining balance of Organization increasing the number of shares of Common Stock authorized for issuance$4.0 million related to 200,000,000 shares. 32 this note. G. CAPITAL STOCK The Company has three classes of share capital:stock: Preferred Stock, Common Stock and Class B Common Stock. Holders of Common Stock are entitled to one vote for each share held. Holders of Class B Common Stock generally vote as a single classtogether with holders of Common Stock as a single class but are entitled to 10 votes for each share held. 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 price or prices and liquidation preferences, of any series of Preferred Stock, and to fix the number of shares of any such series. The Common Stock and Class B Common 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 B Common Stock is nontransferable, except under certain conditions, but may be converted into Common Stock on a share-for-share basis at any time. Conversions to common stock totaled 645, 998221 and 1,312191 shares in 1996, 19972000 and 1998,1999, respectively. There were no conversions during 2001. Shares of common stock reserved for conversions totaled 285,303284,891 at December 31, 1998. J. STOCK OPTION, STOCK PURCHASE, COMPENSATION AND RETIREMENT2001. H. BENEFIT PLANS STOCK OPTION PLANS: The Company has threefour stock-based compensation plans, which are described below. The Company adopted the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation," in 1996 and has continued to apply APB Opinion 25 and related Interpretations in accounting for its plans. 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 SFAS 123, the Company's net income and earnings per share for the years ended December 31, 1996, 19972001, 2000 and 19981999 would have been reduced to the pro forma amounts indicated below:
Years Ended December 31, 1996 1997 1998 ---------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net income - as reported $ 28,173 $ 51,371 $ 96,349 Net income - pro forma 27,379 49,386 91,020 Net income per share - as reported (diluted) .40 .72 1.33 Net income per share - pro forma (diluted) .39 .69 1.26
34 Years Ended December 31, 2001 2000 1999 ------------------------------ Net income - as reported $ 17,387 $ 20,354 $ 73,074 Net income - pro forma 8,045 2,596 61,811 Net income per share - as reported (diluted) .25 .29 1.01 Net income per share - pro forma (diluted) .12 .04 .85 The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of effects on reported net income for future years. SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are anticipated. The fair market value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing modelBlack Scholes option pricing method, assuming no expected dividends with the following weighted-average assumptions: an expectedYears Ended December 31, 2001 2000 1999 ------------------------------ Expected life of 4.5 years in 1996 and(years) 4.8 4.4 4.0 years in 1997 and 1998, expected5.5 Expected stock price volatility of 37% in 1996 , 41% in 1997 and 47% in 1998, a dividend yield of 0% and risk-free65% 93% 96% Risk-free interest rates between 4.22-6.70%.rate 5.00% 5.00% 5.27% The 1992 Stock Option Plan provides for grants of stock options for up to 3,600,000 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 incentive stock options. The 1998 Stock Incentive Plan, amended in December 1999, provides for grants of stock options for up to 2,000,0007,000,000 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, restricted stock awards and other stock-based awards, including the grant of shares based upon certain conditions not intended to qualify as incentive stock options. 33In December 2000, the Company initiated a new "Time Accelerated Restricted Stock Award Plan" (TARSAP) under its 1998 Stock Incentive Plan, whereby 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 ten 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 future 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 were an important factor in securing employee confidence, commitment, and trust at a critical junction in the implementation of its new strategic plan. 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 $108.9 million to repurchase 5, 457,200 million shares of its common stock under three 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 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 35 of the Internal Revenue Code ("incentive stock options") or nonstatutory options, restricted stock awards and other stock-based awards, including the grant of shares based upon certain conditions not intended to qualify as incentive stock options. In 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 .48. The option price has been proportionally adjusted. The number of adjusted shares under the Metro plan is 571,058. There were no shares exercised under this plan during December 2001. The weighted-average fair value of options granted under both Plans during the years ended December 31, 1996, 19972001, 2000 and 19981999 was $2.45, $8.40$11.96, $11.53 and $14.73,$14.39, respectively. TransactionsInformation with respect to activity under the Companys'Company's stock option plans is set forth below: Weighted Common Average Stock Exercise Price 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 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 ========== Shares available for future issuance under the Company's stock option plans at December 31, 2001 are as follows:
Weighted Common Average Stock Exercise Price --------- -------------- Outstanding at December 31, 1995 1,793,469 $ 4.00 Granted 799,630 5.92 Exercised (346,434) 3.15 Canceled/Expired (128,000) 4.29 --------- Outstanding 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
9,219,291. The following table summarizes information about stock options that were outstanding at December 31, 1998:2001:
Options Outstanding Options Exercisable ------------------------------------------------ --------------------------Weighted Average Weighted Average Weighted Average Remaining Exercise Price Exercise Price Range of Number Contractual Weighted AverageOf Options Number Weighted AverageOf Exercisable Exercise Prices Outstanding Life Exercise PriceOutstanding Exercisable Exercise PriceOptions --------------- ----------- ------------------ -------------------- ----------- --------------------------- ------- $0.04 -- $4.99 10,000 1.8 $ 0.04 - $ 5.19 322,740 1.3 years $ 4.70 154,283 $ 4.17 $ 5.42 - $ 7.25 472,987 2.1 years $ 6.02 60,337 $ 6.06 $ 7.35 - $15.06 361,333 3.0 years $14.46 - - $15.32 - $28.19 145,250 4.6 years $27.70 - - $30.69 - $38.38 822,250 4.3 years $33.97 36,844 $ 32.58 $43.50 - $55.63 113,500 3.9 years $44.41 - - ---------10,000 $ 0.04 - $55.63 2,238,060 3.2 years $20.80 251,4645.00 -- 9.99 2,041,310 8.6 9.75 14,560 9.72 10.00 -- 14.99 192,700 7.9 13.12 55,110 13.02 15.00 -- 19.99 1,830,792 6.1 17.40 484,352 17.30 20.00 -- 24.99 475,073 3.1 22.22 156,514 22.32 25.00 -- 29.99 840,340 2.9 27.31 271,038 27.49 30.00 -- 39.99 743,183 3.1 33.91 568,780 33.89 40.00 -- 49.99 66,600 2.7 44.73 47,674 44.61 50.00 -- 59.99 70,692 5.8 57.21 48,689 57.23 60.00 -- 74.99 6,480 7.0 73.03 4,080 73.10 ----- ----- $0.04 -- $74.99 6,277,170 5.9 $19.20 1,660,797 $ 9.1626.90
36 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 1998. At December 31, 1998, 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 $.10 per share of the purchase price, is amortized to compensation expense over the three-year vesting period. The amount of amortization for 1996 and 1997 was $54 and $47, respectively. There was no amortization in 1998. The Company's 1992 Employee Stock Purchase Plan provides for the purchase of 2,550,0004,550,000 shares of Common Stock by qualifying employees at a purchase price of 85% of the market value of the stock on the purchase date. During 1996, 19972001, 2000 and 1998,1999 participants in this plan purchased 257,776, 136,700575,841, 384,209, and 72,832310,051 shares, respectively. Shares available for future purchases totaled 1,234,0321,963,931 at December 31, 1998. 34 2001. INCENTIVE COMPENSATION PLANS: During 1988, the Company 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 in 1996, 19972001, 2000 and 19981999 approximated $4,224, $6,661$18.3 million, $11.2 million and $9,505,$8.3 million, respectively. 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 1996, 19972001, 2000 and 19981999 amounted to approximately $705, $3,156$4.5 million, $5.0 million and $4,818,$5.1 million, respectively. K.DEFINED BENEFIT PLAN: The Company has a defined benefit pension plan that provides pension benefits to employees of the Company's U.K. subsidiary. 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 based on the employee's compensation and service. The plan is closed to new employees. The Company's policy is to fund amounts required by applicable government regulations. Total pension expense for 2001, 2000, and 1999 was approximately $1.2 million, $1.4 million and $1.4 million, respectively. The Company's projected benefit obligation at December 31, 2000 was approximately $15.2 million. During 2001, service cost and interest cost were $1.6 million and $1.0 million, respectively. Also during 2001, employee contributions, actuarial gain, and benefits paid were $.3 million, $1.0 million and $.3 million, respectively. The projected benefit obligation at December 31, 2001 was $16.8 million. The fair value of the plan assets as of December 31, 2000 was $17.0 million. The actual return for the year ended December 31, 2001 was a reduction in plan assets of $2.6 million. During 2001, employer and employee contributions totaled $1.5 million and benefits paid totaled $.3 million. The fair value of the plan assets at December 31, 2001 was $15.6 million. The components of the 2001 net periodic pension cost were as follows: service cost was $1.6 million, interest cost was $1.0 million, the expected return on plan assets was $1.4 million, and net amortization and deferrals was $.4 million. I. 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 and certain officers, directors and shareholders of the Company are limited partners. The lease is for a term of twenty years at annual rentals of $682,000 through February 1996 andconsidered to be at prevailing market rates in subsequent yearsand lasting through 2006. The Company is also required to pay specified percentages of annual increases in real estate taxes and operating expenses. The Company leases additional office space and apartments under operating leases and capital leases, some of which may be renewed for periods up to five years, subject to increased rentals. Rental expense for all of the Company's facilities, except as noted below, amounted to approximately $11.6$19.4 million in 1996, $13.02001, $22.4 million in 19972000 and $16.1$21.8 million in 1998.1999. The Company is committed to minimum annual rental payments under all leases, except for the new facility noted below, of approximately $17.7 million in 1999, $14.9 million in 2000, $13.0 million in 2001, $10.7$27 million in 2002, $7.2$22.9 million in 2003, $17.3 million in 2004, $11.3 million in 2005, $ 5.1 million in 2006 and an aggregate of $8.8$5.6 million for 2007 and thereafter. 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 under construction at One Chelsea Street in Boston, Massachusetts (the "New Facility"). The Company will lease approximately 57% of the New Facility and the remaining 43% 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. 37 On October 31, 2001, Gateway LLC entered into a $39.4 million construction loan (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. The Company currently expects to occupy the new facility in January 2003. The Company will consolidate several existing facilities it has in the Boston area as part of this move. 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 $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 2004an independent third party. In view of these related party transactions, the Company has concluded that, during the construction phase of the facility, the estimated construction in progress costs for the project will be capitalized in accordance with EITF No. 97-10, "The Effect of Lessee Involvement in Asset Construction." A credit in the same amount is included in the long-term portion of capital lease and other obligations 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. The Company is committed to 2006.an Enterprise Application Architecture (EAA) project for the approximate cost of $8.5 million. A majority of the project will be completed in 2002. On September 25, 2000, the U.S. Equal Employment Opportunity Commission ("EEOC") commenced a civil action against Keane in the United States District Court for the District of Massachusetts alleging that the Company discriminated against former employee Michael Randolph and other unspecified "similarly-situated individuals" by acts of racial harassment, retaliation and constructive discharge. The EEOC has not specified the amount of damages it is seeking. The parties are presently engaged in discovery. Because the lawsuit is in pre-trial stages, management is unable to estimate the effect, if any, it may have on its consolidated financial position or consolidated 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. L.J. INCOME TAXES The provision for income taxes includes federal, state and foreign income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. For financial reporting purposes, income before income taxes includes the following components: Earnings before income taxes: Domestic $27,721 Foreign 1,501 ------- Total income before provision for income taxes $29,222 38 The provision for income taxes consists of the following:
Years Ended December 31 , 1996 1997 1998 ---------------------------------------- (IN THOUSANDS) Current: Federal $19,936 $35,236 $ 67,740 State 4,830 8,161 15,499 Foreign 64 211 5,121 ------- ------- -------- Total 24,830 43,608 88,360 Deferred: Federal (3,948) (7,073) (7,626) State (255) 251 (2,717) Foreign (64) (74) (210) ------- ------- -------- Total (4,267) (6,896) (10,553) ------- ------- -------- $20,563 $36,712 $ 77,807Years Ended December 31, 2001 2000 1999 ---- ---- ---- Current: Federal $ 8,993 $ 16,748 $34,230 State 147 1,958 9,283 Foreign 886 570 1,230 -------- -------- ------- Total Current 10,026 19,276 44,743 Deferred: Federal 1,605 (4,283) 3,570 State 412 (898) 626 Foreign (209) (263) 800 -------- -------- ------- Total Deferred 1,808 (5,444) 4,996 -------- -------- ------- $ 11,834 $ 13,832 $49,739 ======== ======== ======= ======= ========
35 A reconciliation of the statutory income tax provision with the effective income tax provision is as follows:
Years Ended December 31, 1996 1997 1998 ----------------------------- (IN THOUSANDS) Federal income taxes at 35% $17,058 $30,829 $60,955 State income taxes, 2,996 5,164 8,307 net of federal tax benefit Merger related costs - 2,916 Tax credits (130) (35) - Other, net 639 754 5,629 ------- ------- ------- $20,563 $36,712 $77,807Years Ended December 31, 2001 2000 1999 ---- ---- ---- Federal income taxes at 35% $10,228 $11,965 $42,985 State income taxes, net of federal tax benefit 363 1,060 6,530 Merger related costs 1,048 -- -- Other, net 195 807 224 ------- ------- ------- Total income tax provision $11,834 $13,832 $49,739 ======= ======= =======
The components of the net deferred tax assets and liabilities are as follows:
Years Ended December 31, 1997 1998 (IN THOUSANDS) Current: Allowance for doubtful accounts and other reserves $ 5,476 $14,206 Employee medical benefits (374) (367) Accrued expenses 397 946 --------- --------- Total current assets $ 5,499 $14,785 ========= ========= Long-term: Customer based intangibles $ (5,478) $(4,980) Amortization of intangible assets 11,118 11,913 Accrued rents 70 - Depreciation and other 73 117 --------- --------- Long-term assets (liabilities) $ 5,783 $ 7,050 ========= =========
Years Ended December 31, 2001 2000 ---- ---- Current Asset: Allowance for doubtful accounts and other reserves $ 2,208 $ 5,204 Accrued expenses 9,167 3,300 -------- -------- Total current assets 11,375 8,504 Non-current Asset: Amortization of intangible assets 12,453 9,998 Depreciation and other 11,496 7,135 Domestic net operating loss carry-forwards 2,298 2,541 -------- -------- Total non-current assets 26,247 19,674 Non-current Liability: Intangibles (28,150) (9,205) -------- -------- Net deferred tax assets $ 9,472 $ 18,973 ======== ======== At December 31, 2001, the Company had domestic net operating loss (NOL) carry-forwards of $5.6 million expiring in 2017 and 2018, which is subject to a Section 382 limitation due to ownership changes. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences and no valuation allowance is necessary. The current component of deferred tax assets is included in prepaid expenses and other current assetsdeferred taxes on the balance sheet. The long-termnon-current asset component is included in the deferred taxes and other assets, net on the balance sheet. M. RESEARCH AND DEVELOPMENT Research and development expenses included in SG&A were approximately $4.1 million, $2.9 million and $3.5 million in 1996, 1997 and 1998, respectively. N.39 K. BUSINESS ACQUISITIONS In February 1998,On November 30, 2001, the Company acquiredcompleted 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 outstandingof the Common Stock of Metro for 7.4 million shares of Omega Systems, a privately held IT services company in exchangethe Company's Common Stock. Each share of Metro was exchanged for approximately 190,000 shares.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. In accordance with recently issued Statement of Financial Accounting Standards No.141, " Business combinations," and certain provisions of Statement of Financial Accounting Standard No. 142, "Goodwill and other Intangible Assets," 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. 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 byused the purchase method of accounting. Accordingly,accounting for a business combination to account for the merger, as well as the new accounting and reporting regulations for goodwill and other intangibles. Under these methods of accounting, the assets acquired,and liabilities of Metro, including primarily customer-based intangibles and noncompetition agreements have beenintangible assets, were recorded at their respective fair valuesvalues. All 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 $162.4 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation procedures and techniques. In addition, the restructuring component of the purchase price was in place at the date of acquisition. 40 The customer-based intangiblescomponents of the purchase price allocation is as follows: (in thousands) - ------------------------------------------------------------------------------- Consideration and noncompetitionmerger costs: Value of stock issued $ 130,796 Fair value of options exchanged 4,754 Transaction costs 7,786 Restructuring 10,972 Deferred Tax Liability 8,141 - ------------------------------------------------------------------------------- Total $ 162,449 - ------------------------------------------------------------------------------- Allocation of purchase price: Net liabilities assumed $ (37,984) Customer lists 45,200 Non-compete agreements are900 Goodwill 154,333 - ------------------------------------------------------------------------------- Total $ 162,449 The following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of Metro at acquisition date: (in thousands) - ------------------------------------------------------------------------------- Cash $ 622 Accounts receivable 40,820 Other current assets 1,004 Property, plant & equipment, net 2,790 ------- Total assets 45,226 Accounts payable 3,583 Accrued compensation 9,800 Other liabilities 3,889 Note payable 65,938 ------- Net assets $37,984 - ------------------------------------------------------------------------------- The unaudited pro forma combined condensed statements of income combine the historical statements of the Company and Metro as if the merger had occurred at January 1, 2000. Unaudited pro forma combined condensed financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the merger occurred at the beginning of the periods presented, nor is it necessarily indicative of future financial position or results of operations. Twelve Months Ended Twelve Months Ended December 31, 2001 December 31, 2000 Total revenues $ 1,029,871 $ 1,185,547 Net income 14,870 22,778 Net income per share (basic) $ .22 $ .30 Net income per share (diluted) $ .21 $ .30 During 2000 and 1999, the Company completed several acquisitions of businesses complementary to the Company's business strategy. The cost of these acquisitions, which were accounted for using the purchase method of accounting, totaled $35.3 million in 2000 and $67.9 million in 1999. In certain cases, the purchase price included contingent 41 consideration based upon operating performance of the acquired business. During 2001, the Company paid an additional $1.2 million related to these contingencies and has been recorded as additional purchase price. The results of operations of these acquired companies have been included in the Company's consolidated statement of income from the date of acquisition. The excess of the purchase price over the fair value of the net assets has been allocated to identifiable intangible assets and goodwill and is being amortized on a straight-line basis over periods ranging from three to fivefifteen years. On June 1, 1998,Pro forma results of operations for these acquisitions have not been provided as they were not material to the Company completed its acquisition of Bricker & Associates, Inc. ("Bricker"),on either an operations improvement consulting firm, underindividual or an Agreement and Plan of Merger by and among the Company, Beta Acquisition Corp. and Bricker, whereby the Company agreed to acquire all of the outstanding capital stock and options of Bricker 36 in exchange for approximately 2,336,196 million shares of Keane, Inc. common stock (the "merger"). The merger has been accounted for as a pooling-of- interests. During the quarter ended June 30, 1998, the Company incurred a $4.1 million charge to operations to reflect investment banking, legal, accounting and other professional fees associated with the Bricker transaction. Revenue and net income of the combined entities for the three-month period prior to the merger and the corresponding period in the prior year are presented in the following table. Prior to the merger, there were no intercompany transactions between the two companies.
Three months ended March 31, 1998 March 31, 1997 -------------- ------------------ (IN THOUSANDS) Revenue Keane, Inc. $209,162 $141,110 Bricker & Associates, Inc. 5,800 3,191 -------- -------- Combined revenue $214,962 $144,301 ======== ======== Net income Keane, Inc. $ 19,080 $ 9,848 Bricker & Associates, Inc. 1,846 168 -------- -------- Combined net income $ 20,926 $ 10,016 ======== ========
On 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 optionholders. The merger has been accounted for as a pooling-of-interests. During the quarter ended September 30, 1998, the Company incurred a $1.9 million charge to operations to reflect investment banking, legal, accounting and other professional fees associated with the Icom transaction. Revenue and net income of the combined entities for the six-month period prior to the merger and the corresponding period in the prior year are presented in the following table. Prior to the acquisition, there were no intercompany transactions between the two companies.
Six months ended June 30, 1998 June 30, 1997 ------------- ------------- (IN THOUSANDS) Revenue Keane, Inc. $465,655 $299,795 Icom Systems Ltd. 25,861 12,746 -------- -------- Combined revenue $491,516 $312,541 ======== ======== Net income Keane, Inc. $ 41,594 $ 21,450 Icom Systems Ltd. 1,697 425 -------- -------- Combined net income $ 43,291 $ 21,875 ======== ========
On 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-interests. 37 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 as a result of the requirement to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting. Revenue 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 intercompany transactions between the two companies.
Nine months ended September 30, 1998 September 30, 1997 ------------------ ------------------ (IN THOUSANDS) Revenue 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 ======== ========
O.aggregate basis. L. BANK DEBT In July 1995, the Company secured a $20$10 million demand line of credit from two banks,a major Boston bank, which expires in MayJuly of 1999.2002. Borrowings will bear interest at the bank's base rate (the prime rate). There were no borrowings under eitherthis line during 19972001 or 1998. P.2000. M. EARNINGS PER SHARE A summary of the Company's calculation of earnings per share is as follows:
Years Ended December 31, 1996 1997 19982001 2000 1999 ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net income $ 28,173 $51,371 $96,349$17,387 $20,354 $73,074 Weighted average number of common shares outstanding used in calculation of basic earnings per share 69,780 70,096 71,05368,474 69,646 71,571 Incremental shares from the assumed exercise of dilutive stock options 760 1,507 1,231 ----------- ----------- -----------922 347 824 ------- ------- ------- Weighted average number of common shares outstanding used in calculation of diluted earnings per share 70,540 71,603 72,284 =========== =========== ===========69,396 69,993 72,395 ======= ======= ======= Earnings per share Basic $ .40.25 $ .73.29 $ 1.36 =========== =========== ===========1.02 ======= ======= ======= Diluted $ .40.25 $ .72.29 $ 1.33 =========== =========== ===========1.01 ======= ======= =======
For the period ending December 31, 1998,2001, there were 120,0002,348,368 options for common stock, which were excluded because they were anti-dilutive. 38N. RESTRUCTURING CHARGES In the fourth quarter of 2001, 2000 and 1999, the Company recorded restructuring charges of $10.4 million, $8.6 million and $13.7 million, respectively. Of these charges, $4.4 million, $1.7 million and $3.8 million related to a workforce reduction, primarily technical consultants, of approximately 900, 200 and 600 employees for the years 2001, 2000 and 1999, respectively. In addition, the Company performed a review of its business strategy and concluded that consolidating some of its branch offices was key to its success. As a result of this review, the Company wrote off $.8 million in 2001, $3.4 million in 2000 and $4.8 million in 1999 of assets, which became impaired as a result of these restructuring actions. The charges included $4.0 million in 2001, $ 3.5 million in 2000 and $ 5.1 million in 1999 for branch office closings and certain other expenditures. During the fourth quarter of 2001, 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 an addition to the Company's restructuring liability of $1.2 million. 42 A summary of fiscal year 2001 restructuring activity, which is recorded in accrued expenses in the accompanying balance sheet, is as follows:
- ----------------------------------------------------------------------------------------------------------------- Workforce Branch Office Closures Reduction Impaired Assets and Other Expenditures Total - ----------------------------------------------------------------------------------------------------------------- Charges for 1999 $ 3,800 $ 4,753 $ 5,100 $ 13,653 Charges for 2000 1,743 3,403 3,478 8,624 Charges for 2001 4,417 825 3,957 9,199 Change in estimates -- -- 1,159 1,159 -------- -------- -------- -------- 9,960 8,981 13,694 32,635 Cash expenditures for 1999 (1,000) (1,000) Cash expenditures for 2000 (3,138) (2,832) (5,970) Cash expenditures for 2001 (2,620) (2,494) (5,114) -------- -------- -------- (6,758) (5,326) (12,084) Non cash charges for 1999 (4,753) (819) (5,572) Non cash charges for 2000 (3,403) -- (3,403) Non cash charges for 2001 (825) -- (825) -------- -------- -------- (8,981) (819) (9,800) Non cash acquisition charges 7,226 3,746 10,972 -------- -------- -------- Balance as of December 31, 2001 $ 10,428 $ --- $ 11,295 $ 21,723 - -----------------------------------------------------------------------------------------------------------------
As of December 31, 2001, the branch office closures consisted of amounts for properties identified in 2001, 2000 and 1999 in the amounts of $8.3 million, $2.0 and $1.0 million, respectively. O. SUBSEQUENT EVENTS The Company announced on February 13, 2002, that it has signed a definitive merger agreement to acquire SignalTree Solutions Holding, Inc., a privately-held, US based corporation with two software development facilities in India and additional operations in the United States. The acquisition closed on March 15, 2002. The Company paid approximately $64.5 million in cash for the acquisition. 43 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 "Executive"Directors and Executive Officers of the Company" in 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 26, 199929, 2002 (the "1999"2002 Proxy Statement") under the caption "Election of Directors."Directors". ITEM 11. EXECUTIVE COMPENSATION The response to this Item is incorporated herein by reference to the Company's 19992002 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 19992002 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this Item is incorporated herein by reference to the Company's 19992002 Proxy Statement under the caption "Certain Related Party Transactions." 3944 PART IV - ------- ITEM 14. 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) ReportReports of Independent Accountants............................... 24Auditors.............................................25 Consolidated Balance Sheets as of December 31, 19972001 and 1998.... 252000................26 Consolidated Statements of Income For the Years Ended December 31, 1996, 19972001, 2000 and 1998............ 261999........................27 Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1996, 19972001, 2000 and 1998............ 271999........................28 Consolidated Statements of Cash Flows For the Years Ended December 31, 1996, 19972001, 2000 and 1998............ 281999........................29 Notes to Consolidated Financial Statements...................... 29-38Statements...............................30-43 (b) Exhibits -------- The Exhibits set forth in the Exhibit Index are filed as part of this Annual Report. (c) Reports on Form 8-K ------------------- The Company filed the following currentCurrent Reports on Form 8-K during the three-month period ended December 31, 1998:2001. i. Current Report on Form 8-K dated September 30, 1998, reaffirming that there were no known issuesfiled with respect to the Company's business outlook.SEC on October 24, 2001, reporting its third quarter financial results and announced the schedule of the meeting and closing date for its acquisition of Metro Information Services, Inc. ii. Current Report on Form 8-K dated October 6, 1998, announcing agreement to acquire Fourth Tier,filed with the SEC on November 30, 2001, reporting the merger of Metro Information Services, Inc. iii. Current Report on Form 8-K, dated October 9, 1998, announcinginto a subsidiary of the acquisitionCompany under Item 2 - Acquisition or Disposition of Fourth Tier, Inc. 40Assets. 45 SIGNATURES 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/ John F./s / Brian T. Keane ------------------------------------------------------ By: John F.Brian T. Keane President and Chief Executive Officer (Principal Executive Officer) Date: March 26, 199928, 2002 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/ John F. Keane March 26, 1999 /s/ Wallace A. Cataldo March 26, 1999 - ----------------- -------------- ---------------------- -------------- Date Wallace A. Cataldo Date John F. Keane Vice President - Finance/s/ John F. Keane /s/ John J. Leahy - -------------------------------------- ------------------------------- John F. Keane John J. Leahy Chairman Senior Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) /s/ Brian T. Keane /s/ John F. Keane, Jr. - ------------------------------------- ------------------------------- Brian T. Keane John F. Keane, Jr. President, Chief Executive Officer and President, Administration Chief Executive Officer (Principal Financial Officer) and Director (Principal Accounting Officer) (Principal Executive Officer) /s/ Brian T. Keane March 26, 1999 /s/ John F. Keane, Jr. March 26, 1999 - ------------------ -------------- ---------------------- -------------- Brian T. Keane John F. Keane, Jr. Date Director Director /s/ John F. Rockart March 26, 1999 /s/ Robert A. Shafto March 26, 1999 - ------------------ -------------- ---------------------- -------------- Date Robert A. Shafto Date John F. Rockart Director Director /s/ Philip J. Harkins March 26, 1999 /s/ Winston R. Hindle, Jr. March 26, 1999 - ------------------ -------------- ---------------------- -------------- Philip J. Harkins Date Winston R. Hindle, Jr. Date Director Director
41/s/ John F. Rockart /s/ Maria A. Cirino - ------------------------------------- ------------------------------- John F. Rockart Maria Cirino Director Director /s/ Philip J. Harkins /s/ Winston R. Hindle, Jr. - ------------------------------------- ------------------------------- Philip J. Harkins Winston R. Hindle, Jr. Director Director /s/ Stephen D. Steinour /s/John H. Fain - ------------------------------------- ------------------------------- Stephen Steinour Senior Vice President and Director Director 46 Exhibit 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"). *10.2 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 Report on Form 10-K for the year ended December 31, 1988 (the "1988 Form 10-K"). On January 9, 1990, the Board of Directors of the Registrant adopted an Amendment to Section 4 of the Option Plan increasing the number of shares eligible for issuance thereunder to 900,000. *10.4 Amendments to the Option Plan effective as of February 15, 1990 and March 7, 1990 are incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K 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 reference to Exhibit 10(b) to the 1988 Form 10-K. *10.6 Amendments to the Stock Purchase Plan effective as of February 15, 1990 are incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K 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 10.5 to the Registration Statement. *10.8 Amendment to the 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 with and declared effective by the Commission on June 5, 1998. *10.10 1992 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.10 to the 1992 Form 10-K. 10.11 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. 10.122.1 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). 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. 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 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. 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 Amended and Restated Guidance Promissory Note dated August 1, 2001, in the amount of $10,000,000 between the Registrant and Fleet National Bank is incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. *10.11 Keane, Inc. 2001 Stock Incentive Plan 21.0 Schedule of Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(A) and (C) of this report. 42 10.13 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. 10.14 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. Consent of PricewaterhouseCoopers LLP...................................................... Ex 23-1 27.1 Restated Financial Data Schedule for the year ended December 31, 1996...................... Ex 27-1 27.2 Restated Financial Data Schedule for the three months ended March 31, 1997................. Ex 27-2 27.3 Restated Financial Data Schedule for the six months ended June 30, 1997.................... Ex 27-3 27.4 Restated Financial Data Schedule for the nine months ended September 30, 1997.............. Ex 27-4 27.5 Financial Data Schedule for the year ended December 31, 1997............................... Ex 27-5 27.6 Restated Financial Data Schedule for the three months ended March 31, 1998................. Ex 27-6 27.7 Restated Financial Data Schedule for the six months ended June 30, 1998.................... Ex 27-7 27.8 Restated Financial Data Schedule for the nine months ended September 30, 1998.............. Ex 27-8 27.9 Financial Data Schedule for the year ended December 31, 1998............................... Ex 27-9
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