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
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KEANE, INC
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(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2437166
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
Ten City Square, Boston, Massachusetts 02129
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-9200
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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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 [_]
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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.
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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
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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.
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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
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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,
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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
-------------------
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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