SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORMForm 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(x)[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 19992001
OR
(_)[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-7516
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[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 10, 2000,8, 2002, was $1,508,163,647.$1,019,651,000. As of March 10, 2000, 69,862,4468, 2002, 75,475,071 shares of
Common Stock, $.10 par value per share, and 284,987284,891 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 31, 2000.29, 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
GENERALOVERVIEW
Keane, Inc. (together(collectively with its subsidiaries, "Keane" or "the Company,"
unless the context requires otherwise) is a leading provider of e-business, Information
Technologyinformation
technology (IT), and business consulting services. The Company helps clients plan, build,
and manage business systems and implement business processes, organizational
change, and change management programs to realize value from their IT and
e-business initiatives. In business since 1965, Keane has steadily focused on helping clients leverage
technology to improve business performance. Today, this focus is the thread
tying together all of the Company's service offerings. Keane's clients are
increasingly looking to harness the power of the Internet and newer
technologies, and integrate these technologies with existing systems to
transition to a business-to-business (B2B) e-commerce environment. At the same
time, effectively managing and improving existing systems has become more
critical than ever, given the importance of these systems to e-commerce
initiatives.
As a result, Keane sees its e-business and applications development and
management services as key drivers of growth. To meet this market need, the
Company expanded its e-Solutions capability in 1999 to offerhelps clients a full
life-cycle solution from strategy developmentoptimize business performance through design, implementation,
integration,the innovative use
and management of e-business solutions. Keane also continues to
invest in its Applications Development and Management Outsourcing solution,
which it considers among the best in the industry. This conclusion is based on
consultations with industry analyst firms, audits of Keane's projects by the
Center for Systems Management (against the Capability Maturity Model--the CMM),
and benchmarking Keane's productivity against the Quantitative Software
Management's (QSM) metrics repository of 20,000 completed IT projects within the
industry.information technology. Keane's clients consist primarily of
Fortune 1000 organizationsGlobal 2000 companies across every major industry, healthcare organizations, and
government agencies. The CompanyKeane provides its services clients on athrough an extensive network of
local level through branch offices in major markets ofNorth 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 United Kingdom. These officesCompany's business consulting arm, Keane Consulting Group, and are supported
by centralized practices representingStrategic 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 core services and key competencies.acquisition of Metro Information Services, Inc. on November 30, 2001.
Keane is a Massachusetts corporation headquartered 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 an integrated mixa full range of end-to-end businessservices that span the full Plan, Build and IT solutions. The
Company divides its business intoManage
life cycle. Specifically, Keane focuses on three main lines:highly synergistic service
offerings: Business and IT Consulting, e-Solutions (including its ApplicationsApplication Development and& Integration services)(ADI), and
ApplicationsApplication Development and Management Outsourcing. For each business line,
Keane offers(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 life cycle solution.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 comprehensivebroad range of service positions the Companyservices position it as a
strategic partner to clients, because these
services enable Keaneenabling it to identify and implement
completecomprehensive solutions that meet clients' specific business requirements.
The paragraphs below outlineBusiness Consulting (Plan services)
Keane's core business lines and some of the key
competencies it draws on to deliver its solutions.
Business and IT Consulting (plan services)
Keane'smanagement consulting services represent a critical component in the
Company's ability to help clients achieveoptimize their businesses for today's economy.
The Company provides its business value from IT investments. These consulting services focusthrough 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 services 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 integration 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 assisting companiesKeane to support an idea from its genesis through
implementation and eventual management.
2
Application Development & Integration (Build services)
In an increasingly global, networked and information-based economy, application
software is becoming more complex, requiring tighter and more sophisticated
integration between front-end and back-end systems to enhance access to critical
corporate data, enable high-value process improvements, and enhance customer
service. As a result, Keane focuses its project-based Application Development
and Integration (ADI) business on the rapidly growing Enterprise Application
Integration (EAI), supply chain, and customer 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 transforming their strategy,
processes, organization, and IT infrastructure for competitive advantage.
Findings and recommendations oftentimes become the foundation for successful
transitionsyear 2001. Typical client engagements include the
development of software to e-business as well as key IT decisions, such ascreate an integrated supply or value chain, the
implementation of new technologies, overhauls of existing systems, and integration of
customer-facing business systems with back-office platforms and applications.
The Keane Consulting
2
Group offers the following services: e-Strategy (e-business strategy
development), Operations Improvement, e-Transformation (services that focus on
updating a client's business model and processes in alignment with e-business
requirements), andan enterprise Customer Relationship Management Strategy services. Clients
undergoing organizational change associated(CRM) solution
and its integration with transforming their business to
leveragean Enterprise Resource Planning (ERP) system, and the
Internet, integrating mergers and acquisitions, or adapting to
governmental deregulation may benefit from these services.
e-Solutions (e-Architecture, Online Branding, Applications Development and
Integration) (build services)
Keane's e-business services (marketed under the e-Solutions name) help clients
exploit new technology to meet their business objectives. Offerings and
capabilities range from e-architecture planningdesign and implementation to creative
web designof an integrated online state vehicle registration and
development, application development and integration,
architecture planning, data warehousing, implementation of customer relationship
management (CRM) technologies, and enterprise application integration. This
range ofmotor carrier services responds to clients, which are increasingly concentrating on
ways they can leverage Internet technologies in their organizations. Many of
Keane's clients are focused on supply chain optimization, e-markets, exchanges,
and e-procurement initiatives due to their tremendous return on investment.system.
Keane believes that it is well positioned to manage suchcapture large-scale, ADI projects
because offrom both the strength ofcommercial 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, delivery
methodologies,together with its long-term relationships with Global 2000
companies, will enable it to benefit from an economic recovery and quality assurance processes.
This business line also includes Keane's Healthcare Solutions practice, which
offers a suite of Healthcare Information Systems (HIS) and related consulting
and IT services. Keane's HIS products provide the architecture to streamline and
link financial, patient care, and clinical operations across hospitals, group
practices, long-term care facilities, and HMOs. The systems are compatible with
the operating systems used by healthcare institutions nationwide, including an open UNIX platform as well as IBM's AS/400 and RS/6000 environments. In
addition, Keane's broad range of services can help healthcare clients address
ongoing HIPAA requirements, a legislative act which is expected to have
far-reaching implicationsincrease
in spending on the industry's IT infrastructure and business
operations.
Applicationsinformation technology.
Application Development and Management (ADM) Outsourcing (manage(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 services helpservice helps clients effectively manage and enhance existing business systems
to improvemore efficiently and more reliably, improving the performance of these
applications while better controlling costs. Under this service offering, Keane
manages clients'assumes responsibility for the management of a client's business applications
with commitmentsgoals of: instituting operational efficiencies that provide cost savings
over current operations; implementing improvements that reduce time-to-market
and enhance flexibility in responding to improvingchanging 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 quality, processes,development
centers in India. Since the benefit that Keane seeks to provide its customers is
based on management and costs.process improvements, the Company's ADM Outsourcing
business spans multiple vertical industries and includes a broad range of
technologies.
The effectiveness of Keane's ADM Outsourcing capability is demonstrated by the
fact that 37 of its outsourcing engagements may also encompass developmenthave been independently assessed at
Level 3 or 4 on the Software Engineering Institute's (SEI) Capability Maturity
Model (CMM). In addition, 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 has five levels of new applications, as directed by
clients.process maturity, and many IT
organizations typically operate at Level 1, the lowest level of maturity. Since
1997, Keane has used the Software Engineering Institute's
Capability Maturity Model (CMM)SEI CMM as a standard for objectively measuring its
success in improving its client's application management. This movemanagement environment. The SEI
CMM has given
Keane a strategic advantage inbecome the applicationindustry's standard method for evaluating the effectiveness
of an IT environment and the process maturity of outsourcing area, as Keane is one
of the only leadingvendors.
3
ADM outsourcing providers to actively gauge its delivery
against this industry standard. To date,provides Keane has earned CMM Level 3 or greater
distinction on 27 engagements.with large client engagements that usually span
three-to-five years in duration. In addition, outsourcing projects typically
supply Keane is expanding its metrics
strategywith contractually-obligated recurring revenue, and with an
incumbent position from which to incorporate QSM Productivity Index.
SERVICE DELIVERY MODEL
Throughout the 1990s as Keane refined its end-to-end solutions, thecross-sell other solutions. The Company transformed its service delivery modelhas
observed historically that consistently providing measurable business value
within an existing client account strongly positions it to accommodate profitable growthwin additional
outsourcing engagements and optimal customer service. The transition combines service delivery via local
branch offices with expertise provided by centralizeddevelopment and integration projects.
Healthcare Solutions
Keane's Healthcare Solutions Division (HSD) develops and markets a complete line
of patient management, financial management, clinical, long-term care and
practice groups. These
practices represent core service offerings (e.g., Consulting, e-Solutions, and
ADM Outsourcing) and critical competencies, such as vertical specialization and
Keane's application development center.
Keane considers this client-centric delivery model an important meansmanagement systems for achieving the following:
1. increasing sales and revenue growth,
2. providing higher value services and thereby enhancing margins,
3. strengthening client relationships and recurring revenues,
4. cross-selling the full breadth of its services,
5. lowering the costs of doing business, and
3
6. maintaining employee satisfaction and thus retention.
This delivery model presents advantages to clientshealthcare organizations, as well among them
responsiveas related IT
consulting and proactive service, cost efficiencies, and a greater level of
staffing continuity.IT integration services. Keane client's benefit from the convenience and
attentiveness of being served locally by its branch offices while also
benefiting from Keane's company-wide knowledge and experience through its
centralized practice groups. Each of these factors contributes to client
satisfaction levels. Keane's intent is to maximize synergies between its strong
field organization and its enterprise practices to fuel sales and support
world-class delivery across the organization.
STRATEGIC DIFFERENTIATORS AND STRENGTHS
Keane considers the following competitive strengths vis-a-vis new entrants and
existing competitors.
1. End-to-end solutions. Keane's integrated line of services equip it with the
capabilities to partner with clients in their mission to leverage
Information Technology to improve business performance. Specifically, Keane
can design, develop, integrate, and manage business-critical software
applications and advise clients on process and organizational improvements
to take advantage of these applications. This range of competencies enables
Keane to help clientshelps healthcare organizations
overcome the challenge of "enterprise integration"
whichproviding higher quality patient care while
administering more efficient operations through the use of information
technology. In addition, Keane's broad range of services help healthcare clients
address ongoing Health Insurance Portability and Accountability Act (HIPAA)
requirements. HIPAA is essentialFederal legislation designed to successimprove efficiency in such areas asthe
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 ("B2B"), e-commerce,performance through the
innovative use and customer relationship management. Enterprise
integration encompassesmanagement of information technology (IT). In addition, Keane
aligns its internal focus, measurement processes, and compensation systems to
promote the integrationconsistent generation of new technologies across multiple
platforms, with existing systems, and with core business processes.long-term shareholder value. The Company's
comprehensive offeringsvision is to be recognized as one of the world's great IT services firms by its
customers, employees, and enterprise integration expertise,
together with its high customer intimacy, is a significant combination
distinguishing Keane from existing competitors and establishing barriers to
entry for new competitors.
2. Strong customer relationships. Keane has more than 1,400 client
relationships, which provides a strong channel for developing a deep
understanding of client business and IT requirements, marketing the full
scope of its integrated service offerings, and enabling a high percentage
of recurring revenues.shareholders. Keane seeks to build long-term relationships withaccomplish this objective
by providing high quality and effective IT solutions for its clients
3. Strong distribution.customers. The
demandCompany endeavors to create a positive and supportive work environment for e-business application developmentits
employees to foster creativity, teamwork, and management services, in particular, are mass market opportunities. Keane's
extensive branch office distribution (across North America and the United
Kingdom) allows it to capture and deliver business in each of the
geographic markets where it operates. This allowsindividual excellence.
Distinctive capabilities that enable Keane to cost-effectively
deliver solutions withvalue to its customers,
and to reach its financial milestones, include a minimum of sales, general, and administrative
(SG&A) expense. It also enables the development of high-level customer
intimacy and satisfaction.
4. Expertise integrating new and old technology. Keane's technical
competencies cut across newer Internet technologies and older legacy
platforms, and in integrating the two. This range of expertise enables
Keane to develop customer-facing e-business applications that are
integrated with the back office and data warehouses--a fundamental
technological challenge that virtually all companies face as they try to
implement e-business initiatives. Keane has extensive experience with
enterprise application integration gained from its efforts in extending the
value of clients' existing business systems.
5. Project management competencies. Unlike newer entrants to the market, Keane
has extensiverelentless focus on processes
improvement, mature competencies in project and program management, along with a comprehensive
setconsistent
use of mature delivery methodologies. Keane also hasmethodologies, a strong quality assurance function, and programa seamless client
service delivery model. This model currently includes providing services to
customers on-site at a client's facility, off-site at a separate location,
near-shore at Keane's Advanced Development Center in Canada, and offshore at one
of the Company's two Software Development Centers in India. The Company believes
that the benefits of its seamless delivery model include: the use of common
processes, management, system.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 these disciplinesits delivery model and assetscompetencies in order to
add value to its individualstrategic 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 assumingIT spending. As a "prime
contractor" roleresult, 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 large e-business initiatives involvingits core strengths and follows a seriesbusiness 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 complexthese elements helps Keane to mitigate short-term fluctuations in
the IT services market and concurrent projects.generate significant long-term per share value.
1. Recurring Revenue - Keane believes the most important ingredient for
long-term success in the IT services industry is recurring revenue. The
Company seeks to build recurring revenue through a combination of services
provided over multi-year contracts and close customer relationships. The
Company attempts to increase contractually obligated recurring revenue
with its ADM Outsourcing service, through which Keane
4
typically manages and enhances applications under three-to-five year
contracts. These contracts provide Keane with significant opportunities
for expansion and add-on business, while the Company's broad range of
Plan, Build, and Manage services enables cross-selling opportunities.
Keane's local branch presence allows the Company to gain a high degree of
customer intimacy and an understanding of customers' evolving needs,
providing a ready market for new services. Keane earns customer loyalty by
providing concrete and measurable business value through the consistent,
high quality delivery of its services.
2. Critical Mass - Critical mass is essential for gaining market and
financial leverage. Increasing critical mass drives down SG&A cost as a
percentage of revenue, allows depth and breadth of capabilities, and
builds market presence and mind share to support sales and recruiting
efforts. Keane's strategy to achieve critical mass is to concentrate on
business lines and geographic markets where the Company has or can
establish leadership. These business lines are Business Consulting,
Application Development & Integration, and ADM Outsourcing. Keane plans to
focus on geographic markets within North America and Western Europe and
strives to achieve significant market share in those markets through
organic growth, supplemented by acquisitions.
3. Operational Excellence - Already a recognized leader in providing cost
effective and predictable delivery of services to clients, Keane is
committed to operational excellence and continuous process improvement in
all of its functions. Being efficient enables Keane to offer its 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 its local branch
presence, process improvements, high utilization of staff, and its
flexible and integrated client service delivery model. Keane's dedication
to continuous process improvement is demonstrated through investments in
measurement programs and the creation of the Keane Center for Excellence
focused on quality and efficiency enhancements. Operational efficiency
enables Keane to maintain profitability regardless of 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 share 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 customers through a local relationship while
providing access to the best solutions and resources across the Company.
Keane seeks to accomplish this goal through knowledge management processes
and systems, methodologies, comprehensive training programs, and strategic
practices. The responsibilities of strategic 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, Keane's solutions are
process intensive and backed by well defined 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 AND MARKETPLACE DRIVERS
Keane's clients consist primarily of the Fortune 1,000Global 2000 organizations, but also
include government
agencies, and healthcare organizations, and "dot com" or Internet
start-ups.organizations. These organizations generally have
significant IT budgets and/orand depend on service providers to help them fulfill
their business optimization and software design, development, implementation,
and management needs.
45
In 1999,2001, the Company derived its revenue from the following industry groups:
Industry Percentage of Revenue
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Manufacturing 21.3%21.7%
Financial Services 17.5%21.6%
Government 16.6%16.5%
Healthcare 12.3%
Energy/Utilities 7.1%
Healthcare 11.7%9.5%
High Technology/Software 10.7%
Telecommunications 5.7%8.9%
Retail/Consumer Goods 5.6%5.2%
Other 3.8%2.8%
Telecommunications 1.5%
The following table is a representative list of clients for which Keane provided
services in 1999.2001:
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3M Corporation GMAC
Aldus Corp. GTE Data Service Incorporated
American Express Co., Inc. Guardian Life Insurance
Ameritech Hoffmann-La Roche, IncMcDonald's Corporation
- --------------------------------------------------------------------------------
Allmerica MemorialCare
- --------------------------------------------------------------------------------
Aon Miller Brewing
- --------------------------------------------------------------------------------
AT&T Corporation International Business Machines CorporationState of Missouri
- --------------------------------------------------------------------------------
Bose Corporation J.D. Edwards
BankBoston Corporation J.P. Morgan
Baxter Healthcare Corporation Jewel Food Stores, Inc.
Baylor Health Care System Johns Hopkins Hospital
Bell Atlantic Liberty Mutual Insurance Co.
BMW Life Care Centers of America
British Airways McDonald's Corporation
b-there.com McKesson Corporation
Cargill Microsoft Corporation
Carrier Miller Brewing
CIGNA Corporation National Assn. of Security Dealers
Cincinnati Bell Telephone Northern Mutual Life Insurance
Department- --------------------------------------------------------------------------------
Baxter Healthcare Corporation State of JusticeNew York
- --------------------------------------------------------------------------------
Baylor Health Care System State of North Carolina
- --------------------------------------------------------------------------------
Cargill Northern Telecom, Inc.
Discover Card The Pillsbury Company
Eastman Kodak- --------------------------------------------------------------------------------
Carrier State of Ohio
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Centrica Optimum Logistics
- --------------------------------------------------------------------------------
CGU Pfizer
- --------------------------------------------------------------------------------
City of Chicago Pharmacia & Upjohn
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Crawford & Company Princess Cruise Lines
Elf Atochem North America- --------------------------------------------------------------------------------
U.S. Department of Justice Procter & Gamble Company
EMC Corporation The- --------------------------------------------------------------------------------
Eastman Kodak Company Putnam Companies, Inc.
Energizer Battery Co.Investments
- --------------------------------------------------------------------------------
Ecolab Reader's Digest Association, Inc.
Exxon Corporation- --------------------------------------------------------------------------------
Executive Office for U.S. Attorneys Robert Wood Johnson Hospital
- --------------------------------------------------------------------------------
Fidelity SD WarrenSecurity Benefit Group
- --------------------------------------------------------------------------------
Farmers Insurance Group SonyState Street Bank & Trust
- --------------------------------------------------------------------------------
First Bank TransquestSony
- --------------------------------------------------------------------------------
Ford U.S. CustomsSquare D
- --------------------------------------------------------------------------------
General Electric Company Supervalu
- --------------------------------------------------------------------------------
Great American Insurance TracFone
- --------------------------------------------------------------------------------
GMAC Transcontinental Gas Pipeline
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Guardian Life Insurance Tufts Health Plan
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Honeywell Unipart
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International Business Machines Corporation U.S. Air Force
- --------------------------------------------------------------------------------
Invacare U.S. Customs
- --------------------------------------------------------------------------------
J.P. Morgan West Publishing
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Johns Hopkins Hospital Whirlpool Corporation
The markets Keane services are experiencing major changes in business climate.
Increased competition, globalization, and deregulation are forcing companies to
devise new ways to differentiate their products and services and more
effectively acquire and retain customers. For most companies, this will require
a major transformation- --------------------------------------------------------------------------------
Liberty Mutual Insurance Co. Zurich Financial Services
- --------------------------------------------------------------------------------
State of the organizational structure and business processes,
and significant investments in information technology.
In this environment, Internet technologies are becoming a channel for continuous
and real-time business transactions, including interaction with customers,
distribution of product and materials, and exchange of information with
suppliers, trading partners, and employees. In addition, companies must optimize
and integrate their back-office and legacy systems with newer technologies to
realize the potential of new technology implementations.
5
Maine
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Keane's executive management, recognizing the implications of these forces,
expects the Company's primary revenue drivers will be its business consulting,
e-Solutions, and applications outsourcing services through 2002. E-business
includes B2B initiative as well as business-to-customer (B2C) projects. Industry
research firm Gartner Group forecasts the B2B market worldwide to grow from $145
billion in 1999 to $7.29 trillion in 2004. Moreover, by 2004, B2B e-commerce
will represent 7% of the forecasted $105 trillion total global sales
transactions, according to Gartner.
The Company has historically derived, and may in the future derive, a
significant percentage of its total revenue from a relatively small number of
clients. Keane's fiveten largest clients accounted for approximately 19%32% and 30% of the
Company's total revenuesrevenue during each of the years ended December 31, 19982001 and
1999.2000, respectively. The Company's two largest clients during 19982001 and 19992000 were
various organizationsagencies within the Federal Government and IBM. Federal Government
contracts accounted for approximately 5%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 revenues
in 1998revenue for 2001 and 1999,2000, respectively. IBM accounted for approximately 6% of the
Company's total revenues for 1998 and 1999. A significant
decline in revenuesrevenue from IBM or the Federal Government couldwould have a material
adverse effect upon the Company's total revenues.revenue.
6
With the exception of IBM and the Federal Government, no single client accounted
for more than 5% of the Company's revenuestotal revenue during any of the three years
ended December 31, 1999.2001.
In accordance with industry practices, nearly allpractice, many of the Company's orders are
terminable by either the client or the Company on short notice. The Company does
not believe that backlog is material to theits business. The Company had orders at
December 31, 19992001 of approximately $786$843 million, in comparison to orders of
approximately $900$740 million at December 31, 1998.
GROWTH STRATEGY
Keane's growth strategy unites a series of complementary initiatives all focused
on increasing revenue, enhancing margins, cross-selling services to existing
accounts, and developing new customers. The core elements of this strategy, as
described below, build on Keane's strengths and strategic programs that have
been under way throughout much of the 1990s:
o Build an operating model capable of generating 25% CAGR. Keane has made
significant strides over the past three years in developing and enhancing a
complete line of services (its end-to-end solutions) to help clients derive
business value from IT. These efforts have enabled Keane to evolve its
revenue mix into higher margin solutions business. Through its operating
model, the Company is focused on positioning itself as a premier provider
of end-to-end solutions. Senior management attention is focused on the
following areas:
o seamlessly integrating its strategic practices and branch operations
to augment sale and delivery of the Company's full range of services,
o leveraging its vast geographic presence in the U.S., as well as its
presence in Canada and the U.K.,
o leveraging its relationships and reputation with its large customer
base,
o developing repeatable solutions to accelerate growth, and
o building scalable systems and processes to accommodate growth.
o Leverage strategic practices to accelerate revenue and margin growth.
Keane's strategic practices are an important means for targeting
mass-market opportunities (e.g., e-business and application outsourcing)
and expanding capabilities at the local level. These practices gather,
refine, and disseminate Keane's best practices, including repeatable
solutions that can be used across multiple client engagements throughout
Keane's branches. Keane will continue to expand the value of these
practices with vertical and domain expertise. The Company has a senior
management team in place to direct integration of these practices with
branch operations to enable Keane to sell and deliver its full
"Plan-Build-Manage" capabilities across local markets.
o Leverage branch structure to drive sales growth. Keane has made significant
strides in developing "critical mass" in its branch organization and
expanding its geographic reach. Today, the Company has branch offices in
major markets across the United States, and in Canada and the United
Kingdom. Through these branches, the Company has cultivated relationships
with more than 1,400 clients. Keane incentivizes its local sales and
management teams to proactively manage their client relationships, by
maintaining a deep understanding of clients' business and operational needs
and marketing the full range of Keane's services to respond to their
requirements. The Company believes its end-to-end solutions are synergistic
in that delivery from one service line (for instance, e-Strategy, a "plan"
service) positions Keane to deliver services in another business line (for
instance, development of web-based applications, a "build" service).
6
o Build a world-class organization. Keane recognizes that a world-class
organization embodying top people, processes, and IT infrastructure assets
is necessary for the Company's continued success. To enhance its
organization, Keane is focusing on the following:
o attracting, developing, and retaining top business, technical and
managerial talent,
o continuously upgrading corporate support functions, including finance,
marketing, IT, HR and knowledge management, toward a customer
(internal and external) orientation,
o investing in its strategic practices to continually improve its
services, and
o institutionalizing key operational and delivery processes and best
practices.
o Build awareness and strength of the Keane brand. Keane has established
world-class capabilities and key strengths in business, operational, and IT
consulting, e-business, applications development and integration, and
applications management. The Company plans to devote resources to branding
to make its capabilities and its value proposition better known in the
marketplace. Initiatives in 2000 are focused on:
o communicating a unified brand that supports Keane's
"plan-build-manage" services,
o increasing awareness of Keane's presence and competitive advantages in
the e-business space, and
o building on its current brand which embodies reliable,
results-oriented delivery of IT services.2000.
SALES, MARKETING AND ACCOUNT MANAGEMENT
Keane markets its services and software products through its direct sales force,
which is based in its branch offices and regional areas, as well as through its
centralized practices.Strategic Practices Group. Keane's account executives (AEs) are assigned
to a limited number of accounts so they can develop an in-depth understanding of
each client's individual needs and form strong client relationships. These
AEsaccount executives are responsible for ensuring that clients receive responsive
service and that Keane's software solutions achieve client objectives. AEsAccount
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 Groups andGroup, other branch offices, and
Advanced Development Centers as needed to address specialized clientcustomer
requirements.
Keane focuses its marketing efforts on organizations with significant IT budgets
and recurring software development and outsourcing needs. In 1998, theThe Company launchedmaintains
a corporate branding campaign focused on communicating Keane's value proposition
of reliably delivering application solutions with quantifiable business results.
These branding efforts are actively executed through multiple channels.
In 2000, the Company plans to develop and extend its branding program
to reflect Keane's strategic intent.
EMPLOYEES
On December 31, 1999,2001, Keane had 8,9817,871 employees, including 6,9026,566 business and
technical professionals' staffprofessionals whose services are billable to clients. The Company
sometimes supplements its technical staff by utilizing sub contractors.subcontractors.
Management believes Keane's growth and success are attributable todependent on the caliber of
its people and will continue to dedicate significant resources to hiring,
training and development, and career advancement programs. Keane's efforts in
these areas are grounded in the Company's core values, namely respect for the
individual, commitment to client success, achievement through teamwork,
integrity, and the drive for continuous improvement. Keane strives to hire, promote, and
recognize individuals and teams who embody these values.
Keane recognizes that there is significant competition for employees with the
skills and competencies required for its continued success. The Company believes
it has been successful in efforts to hire and retain the managerial, technical,
sales, and support personnel required to deliver its services and manage its
growth. One significant factor advancing Keane's ability to attract and retain
professionals is its branch office network, which allows its staff to minimize
travel time on client projects. At the same time, this network of branch offices
provides employees with broader career growth options through transfers across
the organization or into its corporate practice groups.
Keane also recognizes that it's growing share of multimillion-dollar outsourcing
engagements and its mergers and acquisitions (M&A) strategy are two significant
factors in its growth. As a result, Keane's corporate human resources
organization is directly involved in major outsourcing engagements and M&A
activities in addition to recruiting and career development functions.
The Company generally does not have employment contracts with its key employees.
None of the Company's employees isare subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
7
COMPETITION
The IT services market is highly competitive and driven by continual changechanges in
clients'client business requirements and advances in technology. The Company's
competition varies by the type of service provided and by geographic markets.
Competitors typically include traditional players in the IT services industry,
including large integrators (e.g.(such as Accenture, Electronic Data Systems (EDS),
Andersen Consulting, EDS, CSC,Computer Sciences Corporation (CSC), and IBM Global Services); IT solutions
providers (e.g.,(including Sapient Cambridge Technology Partners,
AMS,Corporation, American Management Systems, Logica,
and Whittman-Hart); pure-play Internet solutions providers (e.g.,
Razorfish, Scient, and Viant); niche players (e.g., companies focused on
specific domain or vertical expertise)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 customer software development.development 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 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 those 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. The limited
partnership is comprised of an officerSome of the
Company, someCompany's officers, directors, and shareholders.shareholders are limited partners in this
partnership. See Item 13 -- "Certain Relationships and Related Transactions." At
December 31, 1999,2001, the Company leased and maintained sales and support offices
in more than 50fifty locations in the United States and fivethree locations in the
United Kingdom. The aggregate annual rental expense for the Company's sales and
support offices was approximately $19.4$16.6 million in 1999.2001. The aggregate annual
rental expense for all of the Company's facilities was approximately $21.8$19.4
million in 1999.2001. For additional information regarding the Company's lease
obligations, see Note JI of Notes to Consolidated Financial Statements.
In October, 2001, the Company entered into a lease with Gateway Developers LLC
("Gateway LLC") for a term of twelve years, pursuant to which the Company agreed
to lease approximately 95,000 square feet of office and development space in a
building 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
A special meeting of StockholdersNo matters were submitted to a vote of the Company was held onCompany's security holders during the
fourth quarter of the year ended December 2, 1999.
The Stockholders approved an amendment to the Company's 1998 Stock Incentive
Plan increasing the number of shares of Common Stock which the Company is
authorized to issue under the 1998 Stock Incentive Plan from 2,000,000 to
7,000,000. Set forth below is the number of votes cast for, against or
abstained.
For Against Abstained
40,658,329 9,670,367 2,421,151
8
31, 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 68(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 ExecutiveFinancial Officer
Brian T. Keane 39 Executive Vice President, Office of the President,
and Director*
John F. Keane Jr. 40 Executive Vice President, Office of the President,
and Director*
John J. Leahy 42Robert B. Atwell 53 Senior Vice President - Finance and
Administration and Chief Financial OfficerNorth American Branch Operations
Irene Brown 47 Senior Vice President
Raymond W. Paris 6264 Senior Vice President - Healthcare Solutions
Practice
Renee Southard 4547 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(1) 52Harkins(2)(3) 54 Director
Winston R. Hindle, Jr.(1)(2) 69(3) 71 Director
John F. Rockart(1)Keane, Jr. (3) 42 Director
John F. Rockart (1)(2) 6870 Director
Robert A. Shafto(1)Stephen D. Steinour (1)(2) 6443 Director
* The Company has previously announced its plan to appoint Mr. Brian T. Keane as
the Company's Chief Executive Officer and Mr. John F. Keane, Jr., as the
Company's President. The Company's Board of Directors intends to effect these
appointments immediately following the Company's 2000 Annual Meeting of
Stockholders, subject to approval of a proposed amendment and restatement of the
Company's by-laws at that meeting.
- ----------
(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. Brian Keane joined the Company in 1986 and was appointedhas served as the Company's
President and Chief Executive Officer since November 1999. From September 1997
to November 1999, Mr. Keane served as Executive Vice President and a member of
the Office of the President in September 1997.of the Company. From December 1996 to September
1997, Mr. Keane had beenhe served as Senior Vice President. From December 1994 to December 1996,
he was an Area Vice President. From July 1992 to December 1994, Mr. Keane served
as a Business Area Manager and from January 1990 to July 1992, he served as a
Branch Manager. Mr. Keane has been a director of the Company since May 1998. Mr.
Keane has served as a trustee of Mount Holyoke College since May 2000. Brian
Keane is a son of John Keane, the founder, and Chairman of the Company, and a
brother of John Keane, Jr., a director.
Mr. John Keane, Jr. joinedhas been a director of the Company in 1987since 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 appointed
Executive Vice President and a member of the Office of the President in September 1997.of the
Company. From December 1996 to September 1997, Mr. Keane had beenhe served as Senior Vice
President. From December 1994 to December 1996, he was an Area Vice President.
From January 1994 to December 1994, Mr. Keane served as a Business Area Manager.
From July 1992 to January 1994, he acted as manager of Software Reengineering,
and from January 1991 to July 1992, he
9
served as Director of Corporate Development. Mr. Keane has
been a director of the Company since May 1998. John Keane, Jr. is a son of John
Keane, the founder and Chairman of the Company, and a brother of Brian Keane.
9
Mr. Leahy joined the Company in August 1999 and was appointed to the position ofas Senior Vice President - Finance
and Administration and Chief Financial Officer. PriorFrom 1982 to these roles,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 served as a Senior
Vice President since January 2001. From January 2000 to December 2000, Ms. Brown
served as a Vice President of the Company. From August 1998 to December 1999 she
served as Managing Director -Keane Limited and from August 1975 to July 1998 Ms.
Brown was 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 to
January 2000. Mr. Paris also served as Area Manager of the Healthcare Solutions
Practice from 1981 to 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, Mestek, Inc. and Simione
Central Holdings,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 the 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 non-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.
1011
PART II
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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 10, 2000,8, 2002, there were 69,862,44675,475,071 shares of Common Stock
outstanding and held of record by approximately 60,0002,482 registered stockholders;
284,987284,891 shares of Class B Common Stock outstanding and held of record by
approximately 120110 registered stockholders; and no shares of Preferred Stock
outstanding.
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 issuanceamendments 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 non-cumulative.
As of March 10, 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-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 Issuance of Class B Common Stock; Retirement of Class B Common Stock Upon
Conversion into Common Stock. The Company may not issue any additional shares of
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
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.
11
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. IssuancesThe issuance of shares of
Preferred Stock, while providing desirable flexibility in connection with
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY: 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
---- ---
1999------- -------
2001
First Quarter $42.50 $21.31$ 18.63 $ 9.76
Second Quarter 31.69 18.0022.00 11.80
Third Quarter 28.75 20.5019.90 12.95
Fourth Quarter 32.75 20.06
199819.70 13.41
2000
First Quarter $56.50 $35.25$ 30.94 $ 22.19
Second Quarter 59.00 42.7529.38 20.38
Third Quarter 60.94 36.0025.00 15.84
Fourth Quarter 39.94 28.1215.95 9.75
The closing price of the Common Stock on the American Stock Exchange on March 10, 20008,
2002 was $25.625.$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.
1213
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
First Quarter Second Quarter Third Quarter Fourth Quarter
Year Ended December 31, 1999------------- -------------- ------------- --------------
Year Ended December 31, 2001
Total revenues $285,004 $280,465 $255,601 $220,022$ 208,346 $ 196,995 $ 186,637 $ 187,181
Income (Loss) before income taxes 51,147 44,761 32,649 (5,744)14,211 11,256 8,908 (5,154)
Net income (Loss) 30,178 26,633 19,426 (3,163)8,454 6,698 5,302 (3,067)
Net income (Loss) per share (basic) .42 .37 .27.12 .10 .08 (.04)
Net income (Loss) per share (diluted) .42 .37 .27.12 .10 .08 (.04)
Year Ended December 31, 19982000
Total revenues $230,056 $266,904 $285,465 $293,773$ 216,208 $ 221,799 $ 219,671 $ 214,278
Income (Loss) before income taxes 38,300 42,402 48,314 45,1409,265 13,400 13,884 (2,363)
Net income 22,784 22,700 27,249 23,616(Loss) 5,511 7,975 8,260 (1,392)
Net income (Loss) per share (basic) .32 .32 .38 .33.08 .11 .12 (.02)
Net income (Loss) per share (diluted) .32 .31 .38 .33.08 .11 .12 (.02)
1314
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1995 19962001 2000 1999 1998 1997
1998 1999
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Total revenues $394,619 $505,982$ 779,159 $ 871,956 $ 1,041,092 $1,076,198 $706,801 $1,076,198 $1,041,092
Operating income 33,659 47,40319,753 27,921 116,466 170,187 85,163 170,187 116,466
Net income 20,148 28,17317,387 20,354 73,074 96,349 51,371 96,349 73,074
Net income per share (basic) .30 .40.25 .29 1.02 1.36 .73 1.36 1.02
Net income per share (diluted) .30 .40.25 .29 1.01 1.33 .72
1.33 1.01
*WeightedWeighted average common 67,036 69,78068,474 69,646 71,571 71,053 70,096 71,053 71,571
shares outstanding (basic)
*WeightedWeighted average common 67,728 70,54069,396 69,993 72,395 72,284 71,603 72,284 72,395
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 $198,191 $251,771 $329,176 $458,959 $514,825679,903 463,594 519,307 458,959 329,176
Total debt 9,146 16,50215,357 8,616 11,403 3,930 9,493 3,930 11,403
Stockholders' equity 169,526 201,768529,173 370,677 422,799 363,784 257,037 363,784 422,799
Book value per share 2.53 2.897.00 5.48 5.95 5.10 3.65
5.10 5.95
*NumberNumber of shares 67,114 69,79275,509 67,675 71,051 71,336 70,342 71,336 71,051
outstanding
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Financial Performance:
Total revenue growth(decline) 12.3% 28.2%growth (decline) (10.6)% (16.2)% (3.3)% 52.3% 39.7% 52.3% (3.3)%
Net margin 5.1% 5.6%2.2% 2.3% 7.0% 9.0% 7.3% 9.0% 7.0%
Return on average equity 12.8% 15.2% 22.4%3.9% 5.1% 18.6% 31.0% 18.6%22.4%
*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 prior to 1999 have been restated to reflect the acquisitions of
Bricker & Associates, Inc., Icom Systems Limited and Fourth Tier, Inc., which
were accounted for as poolings-of-interests.
14CRITICAL 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 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, 1999 VS. 1998:2001 vs. 2000: The Company's revenue for 19992001 was $774.0
million, a 7% decrease from revenue of $833.6 million in 2000, 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 general deferral of capital 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, as well as Application Maintenance and Migration
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 divested help desk business and one time charges. Keane's 2001
revenue from Manage services included approximately $16.0 million as a result of
its acquisition of Metro Information Services, on November 30, 2001. Revenue
from the Company's divested Help Desk business was approximately $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 during 2001 was driven by continuing
sales growth in the Company's ADM Outsourcing business, as Global 2000 customers
seek to improve 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 Systems 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 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 this 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 in 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, which was approximately $50
million. Keane expects the addition of SignalTree to enhance its value
proposition to customers by providing access to world-class software development
processes as well as the economic advantage of a large pool of cost-effective
technical professionals.
Salaries, wages and other direct costs for 2001 were $547.9 million, or 70.3% of
total revenue, compared to $621.2 million, or 71.2% of total revenue, for 2000.
The decline in costs is a result of the sale of the Company's lower margin Help
Desk operations and its ongoing efforts to bring costs in 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 2001 were $186.7
million, or 24.0% of total revenue, compared to $201.9 million, or 23.1% of
total revenue, for 2000. The decline in SG&A expenditures during 2001 is a
result of the sale of the Company's Help Desk operations and aggressive control
of discretionary spending to bring cost in alignment with revenue. The Company
will seek to continue to control aggressively its discretionary expenditures
until economic conditions improve and spending on IT projects increases.
Amortization of goodwill and other intangible assets for 2001 was $14.5 million,
or 1.9% of total revenue, compared to $12.4 million, or 1.4% of total revenue,
in 2000. The increase in amortization for 2001 was attributable to additional
intangible assets as a result of the Company's acquisition of Metro Information
Services in November of 2001 and the acquisitions of Denver Management Group and
Care Computer Systems in July and September of 2000.
Interest and dividend income totaled $7.0 million for 2001, compared to $7.7
million for 2000. The slight 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 expense 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 totaling $2.0 million during the first quarter of 2001, and
gains from the sale of investments.
The Company's effective tax rate was 40.5% in 2001 and 2000.
18
Net cash provided from operations was $83.2 million during 2001, and $96.1
million during 2000, before proceeds from the sale of the Help Desk business of
$15.7 million and 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 acquisitions, stock repurchases, and to build
long-term shareholder value.
RESULTS OF OPERATIONS, 2000 VS. 1999: The Company's revenue for 2000 was $872.0
million, a 16% decrease from $1.04 billion a 3.3% decrease from $1.08 billion in 1998.1999. The decrease in revenue was
primarily a result of the rapid and anticipated decline in the Company's Year 2000 (Y2K)
compliance revenue. YearY2K-related revenue for 2000 compliance revenue decreased 44.2% towas $5.4 million, down 97.4%
from $206.1 million in 1999. Excluding Y2K-related business, revenue for 1999
from $369.52000
was $871.5 million, an increase of 4.4% as compared to similar core non-Y2K
revenue in 1998. However,1999. The Company believes this increase was indicative of the
Company's 1999 revenuestrong positioning in its three core Plan, Buildbusiness lines, Business
Innovation Consulting (Plan), Application Development and Manage services, excluding Year 2000 compliance, was $835.0
million, up 18.2% from $706.7 million in 1998.Integration (Build),
and Application Development and Management Outsourcing (Manage). Keane's Plan,
Build, and Manage revenue refer to the Company's three core business lines, Business and IT Consulting,
e-Solutions, Applications Development and Management Outsourcing. The growth in
non-Y2Kfor 2000, excluding Y2K-related revenue, was a result of the Company's strategic repositioning executed
during the year. This repositioning has yielded growth in important areas such
as e-Solutions, which totaled $108$107.1
million, in revenue during 1999. Growth in
Keane's core Plan, Build, and Manage revenue was negatively impacted during the
second half of 1999 due to a cross-industry Y2K-related freeze among many of
Keane's clients, which deferred the start of new development projects to lower
their Y2K-related risk. Despite the Y2K freeze, Keane's 1999 Plan, Build, and
Manage revenue was up 34.0%, 21.0%, and 11.1% to $110.9 million, $331.1$327.1 million, and $370.9$437.3 million, respectively, from 1998.respectively.
Salaries, wages, and other direct costs for 19992000 were $621.2 million, or 71.2%
of revenue, compared to $702.8 million, or 67.5% of revenue compared to $696.8 million, or 64.7% of revenue for 1998, an
increase of 2.8%.1999. This
increase as a percentage of revenue iswas due primarily to lower utilization of
Companythe Company's billable headcount, caused by the rapid decline of Y2K revenue and the Y2K-related deferral of new projects. Due to the
extraordinary nature of expenses related to Keane's transition from Y2K andrevenue. In order
to bring costs in closer alignment with revenues,revenue, in the Fourth Quarterfourth quarter of 1999,2000,
the Company incurred a onetime restructuring charge of $13.7$13.5 million, of which $8.6 million, or 1.3%1.0%
of revenue. These charges arerevenue, is related to the consolidation and/or closing of certain
non-profitable branch offices, employee severance costs, costs associated
with asset impairments, paymentsfacility 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 certain employees andaddress
these under-performing business units through the consolidation of less
profitable business unitsoperations,
internal growth, the upgrading of management and the closing of certain facilities. It is expected
that approximately $4.1 million, associated with severance costssales personnel and payments to
certain employees, will be paid in 2000. The remaining $2.9 million will be paid
out as branch office
closures occur.closures.
Selling, General, & Administrative ("SG&A") expensesexpense for 19992000 were $201.9 million
or 23.1% of revenue, compared to $199.0 million or 19.1% of revenue compared to $193.4 million or 18.0% of revenue in 1998, an increase of 1.1%.1999.
This increase as a percentage of revenue was primarily attributable to the decrease in the Company's
revenue and investments the Company continued to make in the development and
marketing of its core service offerings. The Company's objective is to aggressively manage SG&A, as a
percentage of revenue, by realizing the economies of scale associated with
increasing revenue without proportionately increasing SG&A.business lines.
Amortization of goodwill and other intangible assets for 19992000 was $12.4 million,
or 1.4% of revenue, compared to $9.2 million, or 0.9% of revenue, compared to $7.7 million, or 0.7% of revenue, in 1998.1999. The
increase iswas primarily attributable to the acquisitions executedmade 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 each of 2000 and 1999 totaledwere $1.5 million, compared to $1.2
million in 1998.million. Interest
and dividend income for 19992000 totaled $7.8$7.7 million, compared to $5.2$7.8 million in
1998. The increase in interest and other related
income can be attributed to the increase in investments, which grew to $89.7
million at year-end 1999 from $77.5 million at year-end 1998.
Pretax income for 1999 was $122.8 million, or 11.8% of revenue, down 29.5% from
pretax income of $174.2 million, or 16.2% of revenue in 1998.1999.
The Company's effective tax rate for each of 2000 and 1999 was 40.5% compared to 44.7% in 1998.
The decrease is primarily attributable to the high tax rate incurred in 1998
which was impacted by non-deductible merger costs of $8.1 million and $1.7
million as a result of the conversion of Fourth Tier, Inc from cash to accrual
basis for tax reporting..
Net income and earnings per share for 19992000 were $20.4 million and $.29 per
diluted share including all charges, and $28.4 million and $.41 per diluted
share excluding all charges. This compares to net income of $73.1 million and
$1.01 per diluted share including all charges, and net income of $81.2 and $1.12
per diluted respectively, down 24.2%share excluding all charges for 1999.
On February 5, 2001, Keane announced the sale of its help desk business in a
cash transaction valued at $15.7 million. Revenue from $96.3its divested help desk
business and from business units closed as part of its restructuring represented
approximately $52 million and $1.33 per share
diluted, respectively, in 1998.
15
RESULTS OF OPERATIONS, 1998 VS. 1997: The Company'sunprofitable revenue for 1998the year 2000.
19
Net cash provided from operations was $1.08
billion, a 52.3% increase from $706.8at $96 million during 2000, before the
expenditure of $81 million for the repurchase of Keane shares and $32.5 million
in 1997. The increaseacquisitions, 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 revenueperiods beginning after June
15, 1999. FAS 133 was a resultsubsequently amended by Statement of strong growth generated byFinancial Accounting
Standards No. 137, " Accounting for Derivative Instruments and Hedging
Activities- Deferral of the Company's service offerings,Effective Date of FASB Statement No. 133" and by five strategic acquisitions made duringwill
now be effective for fiscal years beginning after June 15, 2000, with earlier
adoption permitted. In June 2000, the year.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
experiencedadopted FAS 133 as amended by FAS 138 in the largest revenue growth in Year 2000 Compliance Servicesfirst quarter of 2001, and Application
Outsourcing. Year 2000 Compliance revenue increased 146.4%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 $369.4 million,
Application Outsourcing revenue increased 48.8%July 2001. FAS 141
further clarifies the criteria 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 resultrecognize intangible assets separately from
goodwill. The requirements of the acquisition of
Bricker & Associates, Inc. Help Desk revenue increased 25.5% to $49.2 million,
Health Care Services and Sales increased 22.4% to $37.1 million, Supplemental
Staffing revenue increased 13.5% to $263.9 million, and all other services
increased 6.8% to $17.2 million.
Salaries, wages, and other direct costsStatement 141 are effective for 1998 were $696.8 million, or 64.7%
of revenue, compared to $469.4 million, or 66.4% of revenue for 1997, a decrease
of 1.7%. This decrease as a percentage of revenue was due 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 increase in strategic services work
being performed by the Company.
Selling, General, & Administrative ("SG&A") expenses for 1998 were $193.4
million or 18.0% of revenue, compared to $138.2 million or 19.5% of revenue in
1997, a decrease of 1.5% as a percentage of revenue. The Company's objectiveany business
combination that is to continue to reduce SG&A, as a percentage of revenue, by realizing the
economies of scale associated with increasing revenue without proportionately
increasing SG&A, investing in MIS to increase productivity, and continuing to
implement cost saving programs such as national purchasing for volume purchase
discounts in such areas as travel, office supplies, and computer equipment.
Amortization ofinitiated after June 30, 2001. Under FAS 142, goodwill and
otherindefinite lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indictors arise) for 1998 was $7.7 million,
or 0.7% of revenue, compared to $14.0 million, or 2.0% of revenue, in 1997. The
decrease is primarily attributable to certainimpairment.
Separable intangible assets becoming fully amortized at
the end of 1997.
Merger costs for 1998 were $8.1 million as compared to $0 for 1997. This
increase was the result of investment banking, legal, accounting and other
professional fees associated with the acquisitions of Bricker & Associates,
Inc., Icom Systems Ltd and Fourth Tier, Inc., which were all accounted for as
poolings-of-interests.
Interest and other expenses for 1998 totaled $1.2 million, compared to $1.3
million in 1997. Interest and dividend income for 1998 totaled $5.2 million,
compared to $4.2 million in 1997. The increase in interest and other related
income was attributed to the increase in investments, which grew to $77.5
million at year-end 1998 from $50.7 million at year-end 1997.
Pretax income for 1998 was $174.2 million, or 16.2% of revenue, up 97.7% from
pretax income of $88.1 million, or 12.5% of revenue in 1997.
The Company's effective tax rate for 1998 was 44.7% compared to 41.7% in 1997.
This increase is due to $8.1 million of merger costs that are not deductible for
statedeemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions of
Statement 142 apply to goodwill and federal taxesintangible assets acquired on or after June
30, 2001. With respect to goodwill and a one-time tax expense of $1.7 million as the resultintangible 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 requirementdifferent 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
convert Fourth Tier, Inc. from cashBe Disposed Of" and provides a single accounting model for long-lived assets to
accrual basisbe disposed of. The Company is required to adopt SFAS No. 144 for tax reporting.
Net incomethe fiscal
year beginning after December 15, 2001 and earnings per share for 1998 were $96.3 million and $1.33 per
share diluted, respectively, up 87.6% and 84.7%, respectively from $51.4 million
and $.72 per share diluted, respectively,is currently in 1997.the process of
evaluating the impact on its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and investments at December
31, 19992001 increased to $142.8$ 129.2 million from $129.2$ 115.2 million at December 31, 1998.2000.
This increase was primarily attributable to net income,the continuing efforts by the
Company to decrease its Days Sales Outstanding ("DSO"). The decrease in accounts
receivable of approximately $37.6 million,was offset by decreases in accounts
payable and accrued expensespayments for acquired debt related to the Metro
acquisition of approximately $37.6$65.9 million and purchases of property, plant and equipment of
$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 acquisitions of $61.0 million. On May 26, 1999,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 of up to 1,000,0001,542,800 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 lasting
until May 25, 2000. This repurchase program was completedwere repurchased during the first quarter of 2001. There were no shares
repurchased during the second, third or fourth quarter of 1999, totaling approximately $23.9 million. On February 10, 2000, the
Company announced an additional repurchase program of up to 2,000,000 shares of
Common Stock lasting until February 9, 2001.The buyback program is expected to
cost approximately $53 million.2001. The Company
maintains and has
20
available a $20$10 million unsecured demand line of credit with a major Boston bank
for operations and acquisition opportunities.
16
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.
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 1999. This is due primarily to our increase in
client strategic services in which competition is less and the quality of
services commands higher rates.
YEAR 2000 ISSUES
The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Keane's computer
equipment and software and devices with embedded technology that are time
sensitive may recognize "00" as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
Keane's operations, including, among other things, a temporary inability to
perform mission critical functions like billing and time reporting. Although the
transition from 1999 to 2000 has passed and Keane is not aware of any unresolved
Year 2000 problems relating to the services provided by Keane, its internal
systems, the products developed by Keane's Healthcare Solutions Practice or
third party products used by Keane in its Healthcare Solutions Practice, it is
possible that Year 2000 problems could be discerned in the future.
Keane generally delivers services and not products to its customers. The Company
believes that the services provided by its professionals to its customers are
provided in a Year 2000 compliant manner.
Keane's Healthcare Solutions Practice develops, markets, and sells software
products. In 1999, Keane notified its customers that it did not intend to offer
Year 2000 compliant versions or patches for certain of its products that were
known to be Year 2000 non-compliant. Instead, Keane encouraged its clients to
migrate to new products offered by Keane. Keane believes that it may have had an
immaterial loss of customers in the Healthcare Solution Practice due to clients
who failed to migrate to its newer products.
In addition to its own products, Keane markets certain third party software
products through its Healthcare Solutions Practice. During 1999, the Company
received assurances from substantially all of the vendors of these products that
they are Year 2000 compliant. Customer claims regarding Year 2000 issues related
to these products were immaterial.
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $1,635,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addresses promptly.
Among the services that Keane provided in 1999 was the assessment, planning,
migration/remediation, and testing for Year 2000 compliance. Keane has devoted
significant resources to, and earned significant revenue from, providing
services to address the Year 2000 problem. The market for these services
declined significantly during 1999 and is expected to further diminish and
disappear after the first quarter of 2000. Further, Keane's services addressing
the Year 2000 problem involve key aspects of its client's computer systems. A
failure in a client's system could result in a claim for substantial damages
against Keane, regardless of Keane's responsibility for the failure. Keane could
incur substantial costs in connection with any resulting litigation, regardless
of the outcome.
The total cost of Keane's Year 2000 compliance activities was not material to
its business, results of operations and financial condition. While Keane
believes that it has completed its Year 2000 readiness process, Keane cannot
assure you that it has identified and remedied all significant Year 2000
problems, that Keane will not incur significant additional time and expense or
that such problems will not harm Keane's business.
17
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:
o. general economic conditions which may influence investment decisions or
cause downsizing;
o. the number and requirements of client engagements;
o. employee utilization rates;
o. changes in the rates Keane can charge clients for services;
o. acquisitions; and
o. other factors, many of which are beyond Keane's control.
21
A significant portion of Keane's expenses doesdo not vary relative to revenue. As a
result, if revenue in a particular quarter does not meet expectations, Keane's
operating results could be materially adversely affected, which in turn may have
a material adverse impact on the market price of Keane common stock. In
addition, many of Keane's engagements are terminable without client penalty. An
unanticipated termination of a major project could result in an increase in
underutilized employees and a decrease in revenue and profits.
Risks RelatingKeane has pursued, and intends to Acquisitions.continue to pursue, strategic acquisitions.
Failure to successfully integrate acquired businesses or assets may adversely
affect Keane's financial performance.
In the past five years, Keane has grown significantly through acquisitions. SinceFrom
January 1, 1999 through December 31, 2001, Keane has completed thenine
acquisitions. The aggregate cost of these acquisitions of Emergent Corporation in San Mateo, California, Amherst
Consulting Group, Inc, in Boston, Massachusetts, Advanced Solutions Inc. in New
York, New York, Anstec, Inc. of Maclean, Virginia, First Coast Systems, Inc. of
Jacksonville, Florida, Jamison/Gold, LLC, of Marina Del Ray, California and
Parallax Solutions Limited, of Birmingham, England.totaled approximately
$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 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
18
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:
o compete cost-effectively;
o develop strong client relationships;
o generate recurring revenues;
o utilize comprehensive delivery methodologies; and
o achieve organizational learning by implementing standard operational
processes.
In the healthcare software systems market, Keane competes with some companies
that are larger in the healthcare market and have greater financial resources
than Keane. Keane believes that significant competitive factors in the
healthcare software systems market include size and demonstrated ability to
provide service to targeted healthcare markets.
Keane may not be able to compete successfully against current or future
competitors. In addition, competitive pressures faced by Keane may materially
adversely affect its business, financial condition and results of operations.
Risks Associated with Provision of Year 2000 Services. The Company'sKeane conducts business
may suffer as a result of defects to Year 2000 compliance issues that have not
yet been detected. We have not had any independent verification of our year 2000
compliance efforts. We have not procured any Year 2000 specific insurance or
made any contingency plans to address any undetected year 2000 risks.
Among the services that Keane provided in 1999 was the assessment, planning,
migration/remediation, and testing for Year 2000 compliance. Keane has devoted
significant resources to, and earned significant revenue from, providing
services to address the Year 2000 problem. The market for these services
declined significantly during 1999 and is expected to further diminish and
disappear after the first quarter of 2000. Further, Keane's services addressing
the Year 2000 problem involve key aspects of its client's computer systems. A
failure in a client's system could result in a claim for substantial damages
against Keane, regardless of Keane's responsibility for the failure. Keane could
incur substantial costs in connection with any resulting litigation, regardless
of the outcome.
International Operations. In August 1998, Keane commenced operations in the United Kingdom withand India, which exposes it to a
number of difficulties inherent in international activities. As a result of its
acquisition of Icom Systems Ltd, now knownSignalTree Solutions in March 2002, Keane has two software
development facilities in India and has added approximately 400 technical
professionals to its professional services organization. India is currently
experiencing conflicts with Pakistan over the disputed territory of Kashmir as
well as clashes between different religious groups within the country. These
conflicts, in addition to other unpredictable developments in the political,
economic and social conditions in India, could eliminate or reduce the
availability of these development and professional services. If access to these
services were to be unexpectedly eliminated or significantly reduced, Keane's
ability to meet development objectives important to its new strategy would be
hindered, and its business could be harmed.
If Keane Limited. Keane's international operationsfails 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 be in
India, and has offices throughout the United States, the United Kingdom, Canada
and India. This geographic dispersion requires substantial management resources
that locally-based competitors do not need to devote to their operations.
Keane's operations in the U.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.
19Additionally, 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)
Reports of Independent Auditors............................................21-22Auditors............................................ 25
Consolidated Balance Sheets as of December 31, 19982001 and 1999..................232000................26
Consolidated Statements of Income
For the Years Ended December 31, 1997, 19982001, 2000 and 1999..........................241999........................27
Consolidated Statements of Stockholders' Equity for the
For the Years Ended December 31, 1997, 19982001, 2000 and 1999..........................251999........................28
Consolidated Statements of Cash Flows for the Years
For the Years ended December 31, 1997, 19982001, 2000 and 1999..........................261999........................29
Notes to Consolidated Financial Statements.................................27-38
20Statements...............................30-43
24
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
We have audited the accompanying consolidated balance sheetsheets of Keane, Inc. as
of December 31, 19992001 and 2000, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the year then ended.three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.audits.
We conducted our auditaudits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit providesaudits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Keane, Inc. at
December 31, 1999,2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the year thenthree years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst and Young LLP
Boston, Massachusetts
February 11, 2002, except for Note O,
as to which the date is March 13, 2000
21
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Keane, Inc.
and its subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 1999
2215, 2002
25
KEANE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 19992001 2000
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Assets
Current:
Cash and cash equivalents $ 51,69665,556 $ 53,018
Short term investments 6,165 8,58253,783
Marketable securities 63,687 59,179
Accounts receivable, net:
Trade 230,856 213,767160,172 164,706
Other 1,573 2,2483,109 1,428
Prepaid expenses and other current assets 23,376 19,845deferred taxes 20,026 15,533
--------- ---------
Total current assets 313,666 297,460
Long term investments 71,368 81,163312,550 294,629
Property and equipment, net 29,973 27,33033,701 24,132
Goodwill, net 15,446 81,110224,891 75,497
Customer lists 53,659 10,196
Other intangible assets, net 20,268 12,775
Other26,292 32,968
Deferred taxes and other assets, net 8,238 14,98728,810 26,172
--------- ---------
$ 458,959679,903 $ 514,825463,594
========= =========
Liabilities
Current:
Accounts payable 20,222 18,50013,723 16,820
Accrued expenses and other liabilities 30,647 35,46651,980 26,953
Accrued compensation 25,429 18,28834,161 17,709
Notes payable 1,000 7,564-- 5,006
Accrued income taxes 13,548 --4,675 9,003
Unearned income 1,399 8,3695,178 4,611
Current capital lease obligations 954 1,0801,154 1,230
--------- ---------
Total current liabilities 93,199 89,267110,871 81,332
Deferred income taxes 25,656 9,205
Long-term portion of capital lease and other obligations 1,976 2,610
Notes payable 14914,203 2,380
Commitments and contingencies (Note J)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
71,363,27272,446,101 in 1998 and 72,085,356 in 1999 7,136 7,2082000 7,522 7,245
Class B common stock, par value $.10, authorized
503,797 shares, issued and outstanding
285,303284,891 in 19982001 and 285,112 in 1999 29 292000 28 28
Additional paid-in capital 109,606 120,810162,269 121,444
Accumulated other comprehensive income (764) (2,027)(2,007) (4,637)
Retained earnings 250,546 323,620361,361 343,974
Less treasury stock at cost, 313,0645,055,602 shares of Common Stock in 1998 and 1,319,396 shares of Common Stock in 1999 (2,769) (26,841)2000 -- (97,377)
--------- ---------
Total stockholders' equity 363,784 422,799529,173 370,677
--------- ---------
$ 458,959679,903 $ 514,825463,594
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
2326
KEANE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997 19982001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues $ 706,801 $1,076,198779,159 $ 871,956 $1,041,092
Salaries, wages and other direct costs 469,433 696,752547,883 621,208 702,795
Selling, general and administrative expenses 138,168 193,438186,708 201,852 199,009
Amortization of goodwill and other intangible assets 14,037 7,70114,457 12,351 9,169
Restructuring charge -- --10,358 8,624 13,653
Merger costs -- 8,120 --
---------- ---------- ----------
Operating income 85,163 170,18719,753 27,921 116,466
Interest and dividend income 4,212 5,1897,043 7,725 7,827
Interest expense 244 163295 588 --
Other expenses (income), net 1,048 1,057(2,720) 872 1,480
---------- ---------- ----------
Income before income taxes 88,083 174,15629,221 34,186 122,813
Provision for income taxes 36,712 77,80711,834 13,832 49,739
---------- ---------- ----------
Net income $ 51,37117,387 $ 96,34920,354 $ 73,074
========== ========== ==========
Net income per share (basic) $ 0.73.25 $ 1.36.29 $ 1.02
========== ========== ==========
Net income per share (diluted) $ 0.72 1.33.25 $ .29 $ 1.01
========== ========== ==========
Weighted average common shares
outstanding (basic) 70,096 71,05368,474 69,646 71,571
========== ========== ==========
Weighted average common shares and common share equivalents outstanding
(diluted) 71,603 72,28469,396 69,993 72,395
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
2427
KEANE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended
December 31, 1997, 19981999, 2000 and 19992001
- --------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Other
Class B Compre-
Common Stock Common Stock Additional hensive
------------ ------------ Paid-in Income Retained
Shares Amount Shares Amount Capital (Loss) Earnings
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 1997 69,810,652 $6,981 287,613 $29
Common Stock issued under 549,704 55
stock option and employee
purchase plans
Conversions of Class B Common 998 (998)
Stock into Common Stock
Income tax benefit from stock
option plans
Dividends paid to shareholders
Foreign translation adjustment
Net income
Comprehensive income
----------------------------------------
Balance December 31, 1997 70,361,354 7,036 286,615 29
Pooling of interests with Omega
(Note L)
Common Stock issued under 769,795 77
stock option and employee
purchase plans
Issuance of common stock for 230,811 23
business acquisitions
Merger expenses paid by
Shareholders
Conversions of Class B Common
Stock into Common Stock 1,312 (1,312)
Income tax benefit from stock
option plans
Dividends paid to shareholders
Foreign translation adjustment
Net income
Comprehensive income
----------------------------------------
Balance December 31, 19981999 71,363,272 $ 7,136 285,303 $ 29 ========================================$109,606 ($764) $250,546
Common Stock issued under 721,893 72 10,689
stock option and employee
purchase plans
Conversions of Class B Common 191 (191)
Stock into Common Stock
Income tax benefit from stock 515
option plans
Repurchase of Common Stock
Unrealized loss on securitiesInvestments valuation adjustment (1,263)
Net income 73,074
Comprehensive income
----------------------------------------
Balance December 31, 1999 72,085,356 $7,2087,208 285,112 $29
========================================
========================================
Accum.
Other Treasury Stock Total
Additional Compre- at Cost Stock-
Paid-in hensive Retained ------- holders'
Capital Income Earnings Shares Amount Equity
- ----------------------------------------------------------------------------------------------------
Balance January 1, 1997 $92,646 ($45) $104,570 (305,615) ($2,413) $201,76829 120,810 (2,027) 323,620
Common Stock issued under 4,006 4,061360,524 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 1,028 1,028314
option plans
Dividends paid to shareholders (864) (864)Repurchase of Common Stock
Investments valuation adjustment 538
Foreign currency translation
adjustment (327) (327)Adjustment (3,148)
Net income 51,371 51,371
------20,354
Comprehensive income 51,044
---------------------------------------------------------------------
Balance December 31, 1997 97,680 (372) 155,077 (305,615) (2,413) 257,037
Pooling of interests with Omega 589 589
(Note N)2000 72,446,101 7,245 284,891 28 121,444 (4,637) 343,974
Common Stock issued under 6,191 (7,449) (356) 5,91218,000 1 (8,894)
stock option and employee
purchase plans
IssuanceCommon Stock issued in connection 2,759,870 276 49,460
with acquisition of common stock for (23) --
business acquisitions
Merger expenses paid by 1,571 1,571
Shareholders
Conversions of Class B Common --
Stock into Common StockMetro
Information Services, Inc.
Income tax benefit from stock 4,187 4,187259
option plans
Dividends paid to shareholders (1,469) (1,469)Repurchase of Common Stock
Investments valuation adjustment 1,181
Foreign currency translation
adjustment (392) (392)Adjustment 1,449
Net income 96,349 96,349
------17,387
Comprehensive income
95,957
---------------------------------------------------------------------==============================================================================
Balance December 31, 1998 109,606 (764) 250,5462001 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)($2,769) $ 363,784
=====================================================================
Common Stock issued under 10,689 (6,332) (162) 10,599
stock option and employee
purchase plans
Conversions of Class B Common --
Stock into Common Stock
Income tax benefit from stock 515
515
option plans
Repurchase of Common Stock (1,000,000) (23,910) (23,910)
Unrealized loss on securities (1,263)Investments valuation adjustment (1,263)
Net income 73,074
73,074
---------------
Comprehensive income 71,811
---------------------------------------------------------------------
Balance December 31, 1999 $120,810 ($2,027) $323,620 (1,319,396) ($26,841) $422,799
=====================================================================
=====================================================================(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 connection 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 17,387
---------
Comprehensive income 20,017
---------
==================================
Balance December 31, 2001 -- -- $ 529,173
==================================
The accompanying notes are an integral part of the consolidated financial
statements.
2528
KEANE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 19982001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income $ 51,37117,387 $ 96,34920,354 $ 73,074
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 22,659 21,01826,113 28,991 31,519
Deferred income taxes (6,896) (10,553)1,808 (5,444) 4,996
Provision for doubtful accounts 3,391 5,3322,024 3,086 (625)
Loss on sale of property and equipment (167) -- 14
25 14
Non-cash interestGain on long-term debt 197sale of investments (1,233) -- --
Non-cash restructuring charge 825 3,403 5,572
Impairment of long term investments 2,000 -- --
5,572
TaxGain on sale of business unit (4,302) -- --
Income tax benefit from stock options 1,028 4,187 --259 314 515
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decreaseDecrease in accounts receivable (59,993) (75,253)41,691 48,432 37,580
Increase (decrease) in prepaid expenses and other assets (451) (1,995) (6,395)(1,065) 6,748 (6,910)
Increase (decrease) in accounts payable, accrued expenses,
unearned income and other liabilities 29,098 16,627758 (18,415) (24,064)
Increase (decrease) in income taxes payable (3,990) 10,493(2,916) 8,609 (13,548)
---------- ---------- ------------------- --------- ---------
Net cash provided by operating activities 36,428 66,23083,182 96,078 108,123
---------- ---------- ------------------- --------- ---------
Cash Flows From Investing Activities:
Purchase of investments (60,080) (97,592)(104,591) (30,875) (110,915)
Sale and maturities of investments 39,577 70,805102,340 60,191 96,542
Purchase of property and equipment (17,502) (16,740)(7,609) (11,386) (16,418)
Proceeds from the sale of property and equipment 519 385419 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) --
(9,150) (60,996)
---------- ---------- ------------------- --------- ---------
Net cash used for investing activities (37,486) (52,292)(1,768) (18,160) (91,710)
---------- ---------- ------------------- --------- ---------
Cash Flows From Financing Activities:
Payments on acquired debt (65,938) -- --
Payments under long-term debt, net (4,161) (7,292)(5,006) (3,523) (563)
Principal payments under capital lease obligations (921) (1,240)(1,303) (1,376) (1,217)
Proceeds from issuance of common stock 4,061 7,4836,293 10,745 10,761
Repurchase of common stock -- --(4,045) (80,925) (24,072)
Dividends paid (864) (1,469) --
---------- ---------- ------------------- --------- ---------
Net cash used for financing activities (1,885) (2,518)(69,999) (75,079) (15,091)
---------- ---------- ------------------- --------- ---------
Effect of exchange rate changes on cash 358 (2,074) --
Net increase (decrease) in cash and cash equivalents (2,943) 11,42011,773 765 1,322
Cash and cash equivalents at beginning of year 43,219 40,27653,783 53,018 51,696
---------- ---------- ------------------- --------- ---------
Cash and cash equivalents at end of year $ 40,27665,556 $ 51,69653,783 $ 53,018
========== ========== =================== ========= =========
Supplemental information:
Income taxes paid $ 45,92214,922 $ 68,54010,469 $ 62,140
The accompanying notes are an integral part of the consolidated financial
statements.
2629
KEANE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 19982001, 2000, and 19971999.
(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 L, during 1998 the Company completed five acquisitions.
Four of the acquisitions were accounted for as poolings-of-interests and one was
accounted for as a purchase. 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 to 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 is a leading provider of e-business,provides Information Technology (IT), and business
consulting services. The Company divides its business into three main lines:
Business Consulting, Application Development and IT Consulting, e-Solutions (including its
e-architecture, applications developmentIntegration (ADI) and
integration services), and
ApplicationsApplication Development and Management Outsourcing.
Keane's clients consist primarily of Fortune 1000Global 2000 organizations, across every
major industry,government
agencies and healthcare organizations, and government agencies.organizations. The Company services clients through
branch office operations in major markets of the United
States, Canada,North America and the United
Kingdom. These offices are supported by Keane Consulting Group, a centralized
practicesStrategic Practices Group representing Keane's core services and key
competencies.competencies, and seven Advanced Development Centers ("ADC") in the United
States, Canada and India. This delivery structure allows the Company to provide
clients with world-class capabilities representing the organizational experience
and best practices of the entire Company on a responsive and cost-effective
local level.
REVENUE RECOGNITION: The Company provides 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 evaluates 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 reduce revenue in the period the
risk is 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, 19992001 included investments in commercial paper ($24.9
million), municipal bonds ($.915.0
million) and money market funds ($4.833.8 million). Cash equivalents at December
31, 19982000 included investments in commercial paper ($41.2 million), municipal bonds ($1.033.3 million) and money
market funds ($1.110.6 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
investments and trade receivables. The Company's cash, cash equivalents and
investments are held with financial institutions with high credit standings. The
27
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 with maturities between three and twelve months at time
of purchase are considered short-term 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, 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, 1999,2001, the Company's investments
experienced declinereflect an increase in market value of $2.2$.8 million, which has been reflected in
the statement of stockholder's equity. At December 31, 1998,2000, the Company's
investments reflected a decline in market value of the 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 2 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 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. Accumulated amortization at December 31,
19982001 and 19992000 was $40.6$46.9 million and $44.7$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
"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 net income, currency translation adjustments and
available-for-sale securities valuation adjustments. At December 31, 1998, the
only component of accumulated other comprehensive income was foreign currency
translation adjustment of $.8 million. At December 31, 1999,2001,
accumulated other comprehensive income was comprised of foreign currency
translation adjustment of $.8$2.5 million and securities valuation adjustment of
$1.3($.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 adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterpriseoperates in one reportable
segment-information technology and Related Information".business consulting services. The Company
offers an integrated mix of end-to-end business solutions, such as Business
and IT consultingConsulting (Plan), e-Solutions
including e-architecture, online branding, developmentApplication Development and integrationIntegration (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 balanceFASB
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 healthcare industry. Effectively,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 operatesis required to adopt SFAS No. 144 for the fiscal
year beginning after December 15, 2001 and is currently in one
reportable segment.
28the process of
evaluating the impact on its consolidated financial statements.
32
B. INVESTMENTS
At December 31, 1999,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 ($32.9 million), municipal bonds ($7.3 million), corporate pass
through ($16.9 million), corporate bonds ($29.2 million) and commercial paper
($3.5 million). At December 31, 1998, the Company's investments included
obligations of the U.S. government ($33.6 million), municipal bonds ($10.9),
corporate pass through ($12.8 million) and corporate bonds ($20.2 million).available for sale securities were approximately
$102.3 million 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,
1997, 19982000 and 1999.
C. ACCOUNTS RECEIVABLE
Accounts receivable consists 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
$8.1 million and $7.9 million ataccount is as follows:
December 31,
1998 and2001 2000 1999
respectively. The
provisions---- ---- ----
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 $3.3 million, $5.3
million and $7.8 million in 1997, 1998, and 1999, respectively, and write-offs
against the allowances were $2.1 million, $2.1 million and $8.0 million in 1997,
1998, and 1999, respectively.year balance $ 13,014 $ 10,990 $ 7,904
======== ======== =======
33
D. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1998 1999
--------- ---------
Buildings and improvements $ 772 $ 772
Office equipment 50,191 64,448
Computer equipment and software 8,946 13,678
Leasehold improvements 7,387 8,691
--------- ---------
67,296 87,589
Less accumulated depreciation and amortization 37,323 60,259
--------- ---------
$ 29,973 $ 27,330
========= =========
December 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 $8,622, $13,317$11.7 million, $16.2 million and $22,350$22.4 million in
1997, 19982001, 2000 and 1999, respectively. Computer equipment and software includes
assets arising from capital lease obligations at a cost of $1,510 and $5,672,$.6 million with
accumulated amortization totaling $1,030 and $2,496,$.3 million at December 31, 1998 and 1999,
respectively.2001.
E. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
December 31,
1998 1999
--------- ---------
Deferred savings and profit sharing plan $ 5,250 $ 620
Accrued employee benefits 3,412 1,776
Employee stock withholdings 4,265 3,803
Accrued payroll taxes 6,164 876
Accrued rent obligations 2,130 2,905
Y2K warranties -- 4,637
Accrued restructuring -- 7,081
Other 9,426 13,768
--------- ---------
$ 30,647 $ 35,466
========= =========
29
F. CAPITAL LEASE OBLIGATIONS
The Company finances certain equipment through capital leases. At December 31,
1999, future minimum lease payments under non-cancelable capital leases,
together with the present value of minimum lease payments, are summarized below:
Years ended December 31:
2000 $ 1,430
2001 1,257
2002 1,132
2003 556
-------
Total minimum payments 4,375
Less amount representing future interest 685
Present value of net minimum payments 3,690
Less current portion 1,080
Long-term portion of capital lease payments $ 2,6102001 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.=======
F. NOTES PAYABLE
In conjunction with the Company's acquisition of GSE Erudite Software, Inc. on
April 20, 1998, the Company issued a $1.0 million non-interest bearing note
payable due one-year from the purchase date. This note is subject to reduction
to the extent required by the purchase agreement and was paid during 1999.
In connection with the Company's acquisition of Parallax Solutions Ltd., in
February of 1999, the Company issued a $6.6 million note payable to the former
owners. This note is
payable in MayDuring the year 2001, the Company paid the remaining balance of 2001 and bears interest at 7.05 %.
At December 31, 1997, Icom Systems Ltd, a company acquired by Keane in 1998 and
was accounted for as a pooling-of-interests, had $3.9$4.0
million of outstanding
debt and was paid during 1998.
H.related to this note.
G. CAPITAL STOCK
In May 1998, the stockholders approved an amendment to the Company's Articles of
Organization increasing the number of shares of Common Stock authorized for
issuance to 200,000,000 shares.
The Company has three classes of stock: Preferred Stock, Common 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 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 998,
1,312221 and 191 shares in 1997, 19982000 and 1999,
respectively. There were no conversions during 2001. Shares of common stock
reserved for conversions totaled 285,112284,891 at December 31, 1999.
30
I.2001.
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," 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, 1997, 19982001, 2000 and 1999 would have been reduced to the
pro forma amounts indicated below:
Years Ended December 31,
1997 1998 1999
---------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net income - as reported $ 51,371 $ 96,349 $ 73,074
Net income - pro forma 49,386 91,020 61,811
Net income per share - as reported (diluted) .72 1.33 1.01
Net income per share - pro forma (diluted) .69 1.2634
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 yearsyears.
The fair market value of each stock option is estimated using the Black Scholes
option pricing method, assuming no expected dividends with the following
weighted-average assumptions:
Years Ended December 31,
1997 1998 1999
----------------------------------
Expected life (years) 4.0 4.0 4.0
Expected stock price volatility 41% 47% 96%
Risk-free interest rate 6.24% 4.83%Years Ended December 31,
2001 2000 1999
------------------------------
Expected life (years) 4.8 4.4 4.0
5.5
Expected stock price volatility 65% 93% 96%
Risk-free interest 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 7,000,000 shares of the Company's Common Stock to
employees, officers and directors of, and consultants and advisors to, the
Company. Generally, options expire five years from the date of grant, require a
purchase price of not less than 100% of the fair market value of the stock as of
the date of grant, and are exercisable at such time or times as the Board of
Directors in each case determines. The Company may grant options that are
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("incentive stock options") or nonstatutory options, 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 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, 1997, 19982001, 2000 and 1999 was $8.40, $14.73$11.96, $11.53 and $14.39,
respectively.
31
Information with respect to activity under the Company's stock option plans is
set forth below:
Weighted
Common Average
Stock Exercise Price
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
Granted 1,582,300 20.60
Exercised (409,112) 6.69
Canceled/Expired (517,389) 25.91
---------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, 1999 is 5,718,978.2001 are 9,219,291.
The following table summarizes information about stock options that were
outstanding at December 31, 1999:2001:
Weighted Average Weighted Average Weighted Average
Remaining Exercise Price Exercise Price
Range of Number Contractual Of Options Number Of Exercisable
Exercise Prices Outstanding Life Outstanding Exercisable Options
--------------- ----------- --------- ----------- ----------- -------
$0.04 -- $5.19 147,876 0.5 years $4.61 147,876 $4.61
5.42$4.99 10,000 1.8 $ 0.04 10,000 $ 0.04
5.00 -- 7.25 245,988 1.1 years 6.02 100,672 6.04
7.359.99 2,041,310 8.6 9.75 14,560 9.72
10.00 -- 15.06 262,780 2.0 years 14.35 68,800 13.93
15.3214.99 192,700 7.9 13.12 55,110 13.02
15.00 -- 28.19 1,439,400 4.3 years 20.07 37,523 28.13
28.5619.99 1,830,792 6.1 17.40 484,352 17.30
20.00 -- 38.38 669,000 3.5 years 33.82 180,978 34.03
39.5024.99 475,073 3.1 22.22 156,514 22.32
25.00 -- 53.00 128,815 3.6 years 42.81 23,000 44.14
--------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 -- $53.00 2,893,859 3.4 years $21.76 558,849 $18.75$74.99 6,277,170 5.9 $19.20 1,660,797 $ 26.90
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 1999. At December 31, 1999, 1,377,760
shares remained available for future grants. Restrictions on the sale or
transfer of shares lapse three years after the date of grant. As grants are
issued, deferred compensation equivalent to the market value at the date of
grant, less the $.10 per share of the purchase price, is amortized to
compensation expense over the three-year vesting period. The amount of
amortization for 1997 was $47. There was no amortization in 1998 and 1999. The Company's 1992 Employee Stock Purchase Plan provides
for the purchase 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 1997, 19982001, 2000 and 1999 participants in this plan purchased 136,700, 72,832575,841, 384,209,
and 310,051 shares, respectively. Shares available for future purchases totaled
923,9811,963,931 at December 31, 1999.
32
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 1997, 19982001, 2000 and 1999 approximated $6,661,
$9,505$18.3
million, $11.2 million and $8,336,$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
1997, 19982001, 2000 and 1999 amounted to approximately $3,156, $4,818$4.5 million, $5.0 million and
$5,065,$5.1 million, respectively.
J.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 someand certain directors
and shareholders of the Company are limited partners. The lease is for a term of
twenty years at annual rentals considered to be at prevailing market rates and
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 $13.0$19.4 million in 1997, $16.12001, $22.4 million in
19982000 and $21.8 million in 1999. The Company is committed to minimum annual
rental payments under all leases, except for the new facility noted below, of
approximately $18.9 million in 2000, $18.1 million in 2001, $15.5$27 million in 2002, $11.1$22.9 million in 2003, $17.3 million in 2004,
$11.3 million in 2005, $ 5.1 million in 2006 and an aggregate of $14.2$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.
K.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,
1997 1998 1999
---------- ---------- ----------
Current:
Federal $ 35,236 $ 67,740 $ 34,230
State 8,161 15,499 9,283
Foreign 211 5,121 1,230
---------- ---------- ----------
Total 43,608 88,360 44,743
Deferred:
Federal (7,073) (7,626) 3,570
State 251 (2,717) 626
Foreign (74) (210) 800
---------- ---------- ----------
Total (6,896) (10,553) 4,996
---------- ---------- ----------
$ 36,712 $ 77,807 $ 49,739
========== ========== ==========
33
Years 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
======== ======== =======
A reconciliation of the statutory income tax provision with the effective income
tax provision is as follows:
Years Ended December 31,
1997 1998 1999
---------- ---------- ----------
Federal income taxes at 35% $ 30,829 $ 60,955 $ 42,985
State income taxes, 5,164 8,307 6,530
net of federal tax benefit
Merger related costs -- 2,916 --
Tax credits (35) -- --
Other, net 754 5,629 224
---------- ---------- ----------
$ 36,712 $ 77,807 $ 49,739
========== ========== ==========
Years 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,
1998 1999
--------- ---------
Current:
Allowance for doubtful accounts and other reserves $ 14,206 $ 3,687
Employee medical benefits (367) (1,079)
Accrued expenses 946 3,741
--------- ---------
Total current assets $ 14,785 $ 6,349
========= =========
Long-term:
Customer based intangibles $ (4,980) $ (4,482)
Amortization of intangible assets 11,913 12,438
Depreciation and other 117 3,449
--------- ---------
Long-term assets (liabilities) $ 7,050 $ 11,405
========= =========
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.
L.39
K. BUSINESS ACQUISITIONS
FiscalOn November 30, 2001, the Company completed the merger of Metro Information
Services, Inc. (Metro), a provider of information technology, or IT, consulting
and custom software development services and solutions. The merger was completed
by exchanging all of the Common Stock of Metro for 7.4 million shares of the
Company's Common Stock. Each share of Metro was exchanged for .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 Company used the purchase method of 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 and liabilities of Metro, including intangible assets, were recorded at
their respective fair values. 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 components of the purchase price allocation is as follows:
(in thousands)
- -------------------------------------------------------------------------------
Consideration and merger 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 900
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 thethese acquired companies and businesses acquired during fiscal 1999 have been included in the
accompanyingCompany's consolidated financial statementsstatement of income from their
respective dates of acquisition.
Amherst Consulting Group
In May 1999, the Company purchased substantially all of the assets of Amherst
Consulting Group, Inc. ("Amherst") for approximately $8 million, including $2
million payable to the former owner in equal installments at the second and
third anniversary of the purchase. Amherst is a privately held management
consulting firm specializing in change management. The acquisition was accounted
for by the purchase method of accounting. Accordingly, the assets acquired have
been recorded at their fair values at the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired has been
allocated to identifiable intangiblesintangible assets and goodwill and is being amortized on a
straight-line basis over a 3 to 15-year period.
Parallax Solutions Ltd.
In May 1999, the Company purchased the stock of Parallax Solutions Ltd.
("Parallax") for approximately $18.7 million. Parallax provides software
services and is based in Conventry England. The acquisition of Parallax has been
accounted for by the purchase method of accounting. Accordingly, the assets
acquired have been recorded at their fair values at the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired has
34
been allocated to identifiable intangibles and goodwill and is being amortized
on a straight-line basis over a 3 to 20-year period.
Anstec, Inc.
In December 1999, the Company purchased the outstanding stock of Anstec, Inc.
("Anstec") for approximately $4.6 million, including approximately $2.8 million
issuable at the end of the contingency period defined in the purchase agreement.
Anstec is a privately held information technology company that provides
solutions to both the Federal Government and commercial enterprises. The
acquisition of Anstec has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired have been recorded at their fair
values at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired has been allocated to identifiable
intangibles and goodwill and is being amortized on a straight-line basis over a
3 to 15-year period.
First Coast Systems, Inc.
In December 1999, the Company purchased substantially all of the assets of First
Coast Systems, Inc. ("First Coast") for approximately $29.5 million, including
approximately $2.7 million held in escrow issuable at the end of the contingency
period defined in the purchase agreement and $3 million that may be issued based
upon future earnings. First Coast is a privately held information technology
company that provides software solutions for the healthcare industry. The
acquisition of First Coast has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired have been recorded at their fair
values at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired has been allocated to identifiable
intangibles and goodwill and is being amortized on a straight-line basis over a
3 to 15-year period.
Other Acquisitions
During 1999, the Company completed three other acquisitions for approximately
$9.9 million, including approximately $2 million and approximately 102,000
shares of Keane common stock that may be issued based upon future earnings. The
acquisitions were accounted for by the purchase method accounting. Accordingly,
the assets acquired have been recorded at their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired have allocated to identifiable intangibles and goodwill and is
being amortized on a straight-line basis over a 3 to 15-year period.
Fiscal 1998
Omega Systems, Inc.
In February 1998, the Company acquired all outstanding shares of Omega Systems,
a privately held IT services company in exchange for approximately 190,000
shares of Keane common stock. The transaction was accounted for as a
pooling-of-interests. Acquired net assets of approximately $800,000 have been
recorded at historical amounts. Prior periods were not restated due to
immateriality, and accordingly, results of operations have been included since
the date of acquisition.
GSE Erudite Software, Inc.
On April 30, 1998, the Company purchased substantially all of the assets of GSE
Erudite Software, Inc. The aggregate purchase price of this acquisition was
approximately $9.8 million. The acquisition was accounted for by the purchase
method of accounting. Accordingly, the assets acquired, including primarily
customer-based intangibles and non-competition agreements have been recorded at
their fair values at the date of acquisition. The customer-based intangibles and
non-competition agreements are being amortized
on a straight-line basis over periods ranging from three to fivefifteen years. Bricker & Associates, Inc.
On June 1, 1998,Pro
forma results of operations for these acquisitions have not been provided as
they were not material to the 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 in exchange for approximately 2,336,196 million shares of
Keane, Inc. common stock (the "merger"). The merger has been accounted for as
pooling-of-interests.
35
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 inter-company transactions between the
two companies.
Three months ended
March 31, 1998 March 31, 1997
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 option holders. The merger has been
accounted for as a pooling-of-interest.
During the quarter ended September 30, 1998, the Company incurred a $1.9 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Icom transaction. Revenue and net income
of the combined entities for the six-month period prior to the merger and the
corresponding period in the prior year are presented in the following table.
Prior to the acquisition, there were no inter-company transactions between the
two companies.
Six months ended
June 30, 1998 June 30, 1997
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-interest.
During the quarter ended December 30, 1998, the Company incurred a $2.1 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Fourth Tier transaction. In addition, an
additional charge for $1.7 million was incurred as a result of the requirement
to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting.
36
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 inter-company
transactions between the two companies.
Nine Months Ended
September 30, 1998 September 30, 1997
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
========= =========
M.aggregate
basis.
L. BANK DEBT
In July 1995, the Company secured a $20$10 million demand line of credit from a
major Boston bank, andwhich expires in MayJuly of 2000.2002. Borrowings will bear interest
at the bank's base rate (the prime rate). There were no borrowings under this
line during 19982001 or 1999.
N.2000.
M. EARNINGS PER SHARE
A summary of the Company's calculation of earnings per share is as follows:
Years Ended December 31,
1997 19982001 2000 1999
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)---- ---- ----
Net income $ 51,371 $ 96,349 $ 73,074$17,387 $20,354 $73,074
Weighted average number of common shares
Outstandingoutstanding used in calculation of basic earnings
per Share 70,096 71,053share 68,474 69,646 71,571
Incremental shares from the assumed exercise of
Dilutivedilutive stock options 1,507 1,231922 347 824
---------- ---------- ----------------- ------- -------
Weighted average number of common shares
Outstandingoutstanding used in calculation of diluted earnings
Perper share 71,603 72,28469,396 69,993 72,395
========== ========== ================= ======= =======
Earnings per share
Basic $ .73.25 $ 1.36.29 $ 1.02
========== ========== ================= ======= =======
Diluted $ .72.25 $ 1.33.29 $ 1.01
========== ========== ================= ======= =======
For the period ending December 31, 1999,2001, there were 950,3152,348,368 options for common
stock, which were excluded because they were anti-dilutive.
O.N. RESTRUCTURING CHARGECHARGES
In the fourth quarter of 2001, 2000 and 1999, the Company recorded a restructuring
chargecharges of $10.4 million, $8.6 million and $13.7 million.million, respectively. Of this chargethese
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 primarily consultants.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 impaired assets, which became impaired as a result of these
restructuring actions. The charges included the
carrying value of specific assets associated with these branch offices,$4.0 million in 2001, $ 3.5 million
in 2000 and incurred charges of $3.8$ 5.1 million in 1999 for branch office closings and $1.3 million for
paymentscertain other
expenditures.
During the fourth quarter of 2001, the Company determined that the cost to
consolidate and/or close certain employees.
37non-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 restructuring chargeaccompanying balance sheet, is as follows:
- -----------------------------------------------------------------------------------------------------------------
Workforce Branch WorkforceOffice Closures
Reduction Impaired Office Payments to
Reduction Assets Closures Certain Employeesand Other Expenditures Total
- -----------------------------------------------------------------------------------------------------------------
Special chargeCharges for 1999 $ 3,800 $ 4,753 $ 3,800 $ 1,3005,100 $ 13,653
Cash expenditures (1,000)Charges for 2000 1,743 3,403 3,478 8,624
Charges for 2001 4,417 825 3,957 9,199
Change in estimates -- -- -- (1,000)
Non cash charges -- (4,753) (819) -- (5,572)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 12/31/99as of December 31, 2001 $ 2,80010,428 $ ----- $ 2,98111,295 $ 1,300 $ 7,081
======== ======== ======== ======== ========21,723
- -----------------------------------------------------------------------------------------------------------------
P.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 EVENTEVENTS
The Company announced on February 10, 200013, 2002, that it intendshas signed a definitive
merger agreement to repurchase up toacquire SignalTree Solutions Holding, Inc., a
privately-held, US based corporation with two million shares of its Common Stock lasting until February 9, 2001.software development facilities in
India and additional operations in the United States. The acquisition closed on
March 15, 2002. The Company will usepaid approximately $64.5 million in cash for the
shares for its stock plans and other general corporate
purposes.
38acquisition.
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 "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 31, 200029, 2002 (the "2000"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
20002002 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
20002002 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
20002002 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)
Reports of Independent Auditors...........................................21-22Auditors.............................................25
Consolidated Balance Sheets as of December 31, 19982001 and 1999.................232000................26
Consolidated Statements of Income
For the Years Ended December 31, 1997, 19982001, 2000 and 1999.........................241999........................27
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 19982001, 2000 and 1999.........................251999........................28
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 19982001, 2000 and 1999.........................261999........................29
Notes to Consolidated Financial Statements................................27-38Statements...............................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
None
40-------------------
The Company filed the following Current Reports on Form 8-K during the
three-month period ended December 31, 2001.
i. Current Report on Form 8-K filed with the 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 filed with the SEC on November 30,
2001, reporting the merger of Metro Information Services, Inc.
into a subsidiary of the Company under Item 2 - Acquisition or
Disposition of Assets.
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/s John F/s / Brian T. Keane
-----------------------------------------------------
By: John F.Brian T. Keane
Chairman,
President and Chief Executive Officer
Date: March 23, 200028, 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/s John F. Keane March 23, 2000 s/s John J. Leahy March 23, 2000
- ---------------------------- ----------------------------------
John F. Keane John J. Leahy
Chairman, President, and Senior Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
s/s Brian T. Keane March 23, 2000 s/s John F. Keane, Jr. March 23, 2000
- ---------------------------- ----------------------------------
Brian T. Keane John F. Keane, Jr.
Executive Vice President, Executive Vice President,
Office of the President, Office of the President,
and Director and Director
s/s John F. Rockart March 23, 2000 s/s Robert A. Shafto March 23, 2000
- ---------------------------- ----------------------------------
John F. Rockart Robert A. Shafto
Director Director
s/s Philip J. Harkins March 23, 2000 s/s Winston R. Hindle, Jr. March 23, 2000
- ---------------------------- ----------------------------------/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 Director
Director
/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
41/s/ Stephen D. Steinour /s/John H. Fain
- ------------------------------------- -------------------------------
Stephen Steinour Senior Vice President and Director
Director
46
Exhibit Index
- -------------
2.1 Agreement and Plan of Merger, dated as of August 20, 2001, by and among
the Registrant, Veritas Acquisition Corp. and Metro Information Services,
Inc. is incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated August 20, 2001, filed on
August 21, 2001.
3.1 Articles of Organization of the Registrant, as amended, are incorporated
herein by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-3 (File No. 33-85206).
3.2 Articles of Amendment to Registrant's Articles of Organization, effective
as offiled on
May 29, 1998.
3.3 By-Laws of the Registrant, as amended,1998, are incorporated herein by reference to Exhibit 3.299.1 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, 1994.
*10.1 Key Employees Deferred Compensation Plan is incorporated herein by
reference2000.
3.4 Amendment to ExhibitSecond Amended and Restated Bylaws of the Registrant.
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*10.2 1992 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 Employee1992.
*10.3 1998 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*10.4 Amendment to 1998 EquityStock Incentive Plan.
*10.11 1992 Employee Stock Purchase 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 10.1010.1 to the 1992Registrants
Quarterly Report on Form 10-K.
10.1210-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.
10.13 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.
42
10.14 Second Amendment of Lease dated November 1985, between the Registrant and
the Trust, is incorporated herein by reference to Exhibit 10.8 to the
Registration Statement.
10.15 Documents relating to the Demand Lines of Credit with Shawmut Bank, N.A.
and the First National Bank of Boston (the "Banks") are incorporated
herein by reference to Exhibit 10.19 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995:
(a) Demand Money Market Promissory Note dated as of May 1, 1995, in the
amount of $10,000,000, between the Registrant and Shawmut Bank.
(b) Loan Agreement dated July 20, 1995, in the amount of $10,000,000, between
the Registrant and Bank of Boston.
21. Schedule of Subsidiaries of the Registrant.......................Ex 21-1
23.1 Consent of Ernst & Young LLP.....................................Ex 23-1
23.2 Consent of PriceWaterhouseCoopers LLP............................Ex 23-2
27.10 Financial Data Schedule for the year ended December 31,
1999.............................................................Ex 27-10
4347