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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-7516
KEANE, INC
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(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2437166
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
Ten City Square, Boston, Massachusetts 02129
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-9200
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
- -----
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 8, 2002, was $1,019,651,000. As of March 8, 2002, 75,475,071 shares of
Common Stock, $.10 par value per share, and 284,891 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 29, 2002. The information
required in response to Items 10-13 of Part III of this Form 10-K is hereby
incorporated by reference to such proxy statement.
1
PART I
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ITEM 1. BUSINESS
OVERVIEW
Keane, Inc. (collectively with its subsidiaries, "Keane" or "the Company,"
unless the context requires otherwise) is a leading provider of information
technology (IT) and business consulting services. In business since 1965, the
Company helps clients optimize business performance through the innovative use
and management of information technology. Keane's clients consist primarily of
Global 2000 companies across every major industry, healthcare organizations, and
government agencies. Keane provides its services through an extensive network of
local branch offices in North America and in the United Kingdom, and through
Advanced Development Centers in the United States, Canada, and India. This
integrated client service model enables Keane to deliver services to customers
on-site, off-site, at its near-shore facilities in Canada and through its
offshore development centers in India. Branch offices work in conjunction with
the Company's business consulting arm, Keane Consulting Group, and are supported
by centralized Strategic Practices and Quality Assurance Groups. The Company
develops a high percentage of recurring revenue as a result of its multi-year
outsourcing contracts, broad range of service offerings, and track record of
delivering quality IT solutions consistently and reliably.
Keane seeks to improve its cash position by marketing services that encourage
long-term relationships with customers. The Company rigorously manages its
internal investments and looks to gain economies of scale by enhancing critical
mass to increase revenues in order to decrease Selling, General, &
Administrative ("SG&A") expenses as a percentage of revenue. The Company also
attempts to continuously improve and accelerate the collection of its
receivables. The Company had $129.2 million in cash and investments at the end
of 2001 after the payment of approximately $73.1 million of cash related to
Keane's acquisition of Metro Information Services, Inc. on November 30, 2001.
Keane is a Massachusetts corporation 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 a full range of services that span the full Plan, Build and Manage
life cycle. Specifically, Keane focuses on three highly synergistic service
offerings: Business Consulting, Application Development & Integration (ADI), and
Application Development and Management (ADM) Outsourcing, which is Keane's
flagship service offering. Business Consulting revenue is reported within the
Company's Plan sector. ADI revenue is reported in the Build sector. As part of
its Build services, the Company also provides a full-line of healthcare
information systems and related IT consulting and IT integration services for
healthcare organizations. ADM Outsourcing revenue is reported in the Company's
Manage sector. Keane believes its broad range of services position it as a
strategic partner to clients, enabling it to identify and implement
comprehensive solutions that meet clients' specific business requirements.
Business Consulting (Plan services)
Keane's management consulting services represent a critical component in the
Company's ability to help clients optimize their businesses for today's economy.
The Company provides its business consulting services through Keane Consulting
Group (KCG), the Company's business and management consulting arm. A recent
study by International Data Corporation (IDC), an independent research firm,
forecasts that the worldwide market for business consulting services is expected
to grow at a compounded annual growth rate of 11% through 2005. KCG helps
companies to maximize productivity, increase revenue, reduce costs, and create
capacity for future growth by identifying high-value business opportunities and
providing clients with both strategy and implementation services. KCG delivers
its 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 Keane to support an idea from its genesis through
implementation and eventual management.
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Application Development & Integration (Build services)
In an increasingly global, networked and information-based economy, application
software is becoming more complex, requiring tighter and more sophisticated
integration between front-end and back-end systems to enhance access to critical
corporate data, enable high-value process improvements, and enhance customer
service. As a result, Keane focuses its project-based Application Development
and Integration (ADI) business on the 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 the year 2001. Typical client engagements include the
development of software to create an integrated supply or value chain, the
implementation of an enterprise Customer Relationship Management (CRM) solution
and its integration with an Enterprise Resource Planning (ERP) system, and the
design and implementation of an integrated online state vehicle registration and
motor carrier services system.
Keane believes that it is well positioned to capture large-scale, ADI projects
from both the commercial and public sector markets due to its core competencies
in project and program management, IT architecture, advanced application
development, and legacy system integration. The Company anticipates that these
competencies, together with its long-term relationships with Global 2000
companies, will enable it to benefit from an economic recovery and an increase
in spending on information technology.
Application Development and Management (ADM) Outsourcing (Manage services)
The need to manage critical business applications continues to expand rapidly as
companies add systems to their application portfolios. Given the need to focus
on core competencies and a growing dependence on information technology,
maximizing return on investment from existing application portfolios has become
a critical objective of many organizations. As a result, Global 2000 companies
are turning to best-of-breed outsourcing as an effective solution for building
and supporting their IT systems better, faster, and more cost-effectively.
According to IDC, the market for application outsourcing is expected to grow at
a compounded annual growth rate of 29% through 2005.
Keane's ADM Outsourcing service helps clients manage existing business systems
more efficiently and more reliably, improving the performance of these
applications while better controlling costs. Under this service offering, Keane
assumes responsibility for the management of a client's business applications
with goals of: instituting operational efficiencies that provide cost savings
over current operations; implementing improvements that reduce time-to-market
and enhance flexibility in responding to changing business needs; freeing
personnel resources and management attention for other strategic priorities; and
achieving higher user satisfaction. Some outsourcing engagements include the
hiring of a client's IT personnel as part of the agreement. In these instances,
Keane trains client staff in its proprietary methodologies and processes to work
on the client outsourcing engagement.
Keane seeks to obtain competitive advantages in the ADM Outsourcing market by
generating measurable client benefit, using world class methodologies,
referencing its Global 2000 client base, and emphasizing its continuous process
improvement and seamless client service delivery model. On March 15, 2002, Keane
acquired SignalTree Solutions, a U.S.-based corporation with two development
facilities in India. The addition of SignalTree's delivery capability expanded
Keane's flexible delivery model to include two offshore software development
centers in India. Since the benefit that Keane seeks to provide its customers is
based on management and 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 have 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 process maturity, and many IT
organizations typically operate at Level 1, the lowest level of maturity. Since
1997, Keane has used the SEI CMM as a standard for objectively measuring its
success in improving its client's application management environment. The SEI
CMM has become the industry's standard method for evaluating the effectiveness
of an IT environment and the process maturity of outsourcing vendors.
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ADM outsourcing provides Keane with large client engagements that usually span
three-to-five years in duration. In addition, outsourcing projects typically
supply Keane with contractually-obligated recurring revenue, and with an
incumbent position from which to cross-sell other solutions. The Company has
observed historically that consistently providing measurable business value
within an existing client account strongly positions it to win additional
outsourcing engagements and development and integration projects.
Healthcare Solutions
Keane's Healthcare Solutions Division (HSD) develops and markets a complete line
of patient management, financial management, clinical, long-term care and
practice management systems for healthcare organizations, as well as related IT
consulting and IT integration services. Keane helps healthcare organizations
overcome the challenge of providing 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 Federal legislation designed to improve efficiency in the
national healthcare system and protect the privacy of health information. It is
expected to have far-reaching implications on the healthcare industry's IT
infrastructure and business operations. HSD revenues are currently reported
under Keane's ADI (Build) business line.
STRATEGY/DISTINCTIVE CAPABILITIES
Keane's mission is to help companies optimize business performance through the
innovative use and management of information technology (IT). In addition, Keane
aligns its internal focus, measurement processes, and compensation systems to
promote the consistent generation of long-term shareholder value. The Company's
vision is to be recognized as one of the world's great IT services firms by its
customers, employees, and shareholders. Keane seeks to accomplish this objective
by providing high quality and effective IT solutions for its customers. The
Company endeavors to create a positive and supportive work environment for its
employees to foster creativity, teamwork, and individual excellence.
Distinctive capabilities that enable Keane to deliver value to its customers,
and to reach its financial milestones, include a relentless focus on processes
improvement, mature competencies in project and program management, consistent
use of methodologies, a strong quality assurance function, and a seamless client
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, and metrics to improve predictability; a single point of
contact to enhance accountability; the flexibility to move and balance workload
based on business need; and the ability to optimize economic benefit. The
Company continues to invest in its delivery model and competencies in order to
add value to its strategic service offerings and to further strengthen its
capabilities.
Keane's goal is to leverage its core competencies and financial capabilities to
gain market share and competitive strength as well as to increase shareholder
value during the current economic downturn, and to strongly position itself to
take advantage of future increases in IT spending. As a result, the Company has
intensified its internal focus to strengthen the differentiation and market
position of its ADM Outsourcing services. In addition, the Company has
concentrated its Business Consulting and Application Development and Integration
(ADI) services within market segments where it believes demand for such services
will increase in the event of an economic recovery. To enhance its efforts, the
Company is seeking to acquire other IT services firms, at what it considers
favorable purchase prices, in order to increase its critical mass and obtain
additional customers to which it can cross-sell its services.
Business Model
Keane remains focused on its core strengths and follows a business model that is
intended to help the Company achieve sustainable growth. This business model
includes five major elements: recurring revenue, critical mass, operational
excellence, synergy across business units and repeatable solutions. The
combination of these elements helps Keane to mitigate short-term fluctuations in
the IT services market and generate significant 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
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typically manages and enhances applications under three-to-five year
contracts. These contracts provide Keane with significant opportunities
for expansion and add-on business, while the 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
Keane's clients consist primarily of Global 2000 organizations, government
agencies, and healthcare organizations. These organizations generally have
significant IT budgets and depend on service providers to help them fulfill
their business optimization and software design, development, implementation,
and management needs.
5
In 2001, the Company derived its revenue from the following industry groups:
Industry Percentage of Revenue
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Manufacturing 21.7%
Financial Services 21.6%
Government 16.5%
Healthcare 12.3%
Energy/Utilities 9.5%
High Technology/Software 8.9%
Retail/Consumer Goods 5.2%
Other 2.8%
Telecommunications 1.5%
The following table is a representative list of clients for which Keane provided
services in 2001:
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3M Corporation McDonald's Corporation
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Allmerica MemorialCare
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Aon Miller Brewing
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AT&T Corporation State of Missouri
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Bose Corporation National Assn. of Security Dealers
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Baxter Healthcare Corporation State of New York
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Baylor Health Care System State of North Carolina
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Cargill Northern Telecom, Inc.
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Carrier State of Ohio
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Centrica Optimum Logistics
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CGU Pfizer
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City of Chicago Pharmacia & Upjohn
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Crawford & Company Princess Cruise Lines
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U.S. Department of Justice Procter & Gamble Company
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Eastman Kodak Company Putnam Investments
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Ecolab Reader's Digest Association, Inc.
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Executive Office for U.S. Attorneys Robert Wood Johnson Hospital
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Fidelity Security Benefit Group
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Farmers Insurance Group State Street Bank & Trust
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First Bank Sony
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Ford Square D
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General Electric Company Supervalu
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Great American Insurance TracFone
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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
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Invacare U.S. Customs
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J.P. Morgan West Publishing
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Johns Hopkins Hospital Whirlpool Corporation
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Liberty Mutual Insurance Co. Zurich Financial Services
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State of Maine
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Keane's ten largest clients accounted for approximately 32% and 30% of the
Company's total revenue during each of the years ended December 31, 2001 and
2000, respectively. The Company's two largest clients during 2001 and 2000 were
various agencies within the Federal Government and IBM. Federal Government
contracts accounted for approximately 6.9% and 7.5% of the Company's total
revenue in 2001 and 2000, respectively. IBM accounted for approximately 6.5% and
6% of the Company's total revenue for 2001 and 2000, respectively. A significant
decline in revenue from IBM or the Federal Government would have a material
adverse effect upon the Company's total revenue.
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With the exception of IBM and the Federal Government, no single client accounted
for more than 5% of the Company's total revenue during any of the three years
ended December 31, 2001.
In accordance with industry practice, many of the Company's orders are
terminable by either the client or the Company on short notice. The Company does
not believe that backlog is material to its business. The Company had orders at
December 31, 2001 of approximately $843 million, in comparison to orders of
approximately $740 million at December 31, 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 Strategic Practices Group. Keane's account executives are assigned
to a limited number of accounts so they can develop an in-depth understanding of
each client's individual needs and form strong client relationships. These
account executives are responsible for ensuring that clients receive responsive
service and that Keane's software solutions achieve client objectives. Account
executives receive in-depth training in Keane's sales processes and service
offerings and are supported by enterprise knowledge management systems in order
to efficiently share organizational learning. Account executives are empowered
to collaborate with Keane's Strategic Practice Group, other branch offices, and
Advanced Development Centers as needed to address specialized customer
requirements.
Keane focuses its marketing efforts on organizations with significant IT budgets
and recurring software development and outsourcing needs. The Company maintains
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.
EMPLOYEES
On December 31, 2001, Keane had 7,871 employees, including 6,566 business and
technical professionals whose services are billable to clients. The Company
sometimes supplements its technical staff by utilizing subcontractors.
Management believes Keane's growth and success are dependent 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 continuous improvement. Keane strives to hire, promote, and
recognize individuals and teams who embody these values.
The Company generally does not have employment contracts with its key employees.
None of the Company's employees are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are good.
COMPETITION
The IT services market is highly competitive and driven by continual changes in
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 (such as Accenture, Electronic Data Systems (EDS),
Computer Sciences Corporation (CSC), and IBM Global Services); IT solutions
providers (including Sapient Corporation, American Management Systems, Logica,
and KPMG); and management consulting firms (e.g., KPMG Consulting, McKinsey and
Booz Allen). Some of these competitors are larger and have greater financial
resources than the Company. In addition, clients may seek to increase their
internal IT resources to satisfy their software development and management
requirements.
The Company believes that the basis for competition in the IT services industry
includes the ability to create an integrated solution that best meets the needs
of an individual customer, compete cost effectively, develop strong client
relationships, generate recurring revenue, offer flexible client service
delivery options and use of disciplined methodologies. The Company believes that
it competes favorably with respect to those factors. There can be no
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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 leased from City Square Limited Partnership. Some of the
Company's officers, directors, and shareholders are limited partners in this
partnership. See Item 13 -- "Certain Relationships and Related Transactions." At
December 31, 2001, the Company leased and maintained sales and support offices
in more than fifty locations in the United States and three locations in the
United Kingdom. The aggregate annual rental expense for the Company's sales and
support offices was approximately $16.6 million in 2001. The aggregate annual
rental expense for all of the Company's facilities was approximately $19.4
million in 2001. For additional information regarding the Company's lease
obligations, see Note I 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 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 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 these 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the year ended December 31, 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 (3) 70 Chairman of the Board and Director
Brian T. Keane 41 President, Chief Executive Officer and Director
John J. Leahy 44 Senior Vice President and Chief Financial Officer
Robert B. Atwell 53 Senior Vice President - North American Branch Operations
Irene Brown 47 Senior Vice President
Raymond W. Paris 64 Senior Vice President - Healthcare Solutions
Renee Southard 47 Senior Vice President - Human Resources
Linda B. Toops 47 Senior Vice President
John H. Fain 53 Senior Vice President and Director
Maria A. Cirino (1)(2) 38 Director
Philip J. Harkins(2)(3) 54 Director
Winston R. Hindle, Jr. (1)(3) 71 Director
John F. Keane, Jr. (3) 42 Director
John F. Rockart (1)(2) 70 Director
Stephen D. Steinour (1)(2) 43 Director
(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. Officers of the Company
serve at the discretion of the Board of Directors.
Mr. John Keane, the founder of the Company, has been Chairman of the Board 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 of Firstwave Technologies, Inc. and Perkin Elmer, Inc.
Mr. Brian Keane joined the Company in 1986 and has 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 of the Company. From December 1996 to September
1997, he served as Senior Vice President. From December 1994 to December 1996,
he was an Area Vice President. From 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. has been a director of the Company since May 1998. Mr. Keane
is the founder of ArcStream Solutions, Inc. and has been its President and Chief
Executive Officer since July 2000. From September 1997 to July 2000, he was
Executive Vice President and a member of the Office of the President of the
Company. From December 1996 to September 1997, he served as Senior Vice
President. From December 1994 to December 1996, he was an Area Vice President.
From January 1994 to December 1994, Mr. Keane served as a Business Area Manager.
From July 1992 to January 1994, he acted as manager of Software Reengineering,
and from January 1991 to July 1992, he
9
served as Director of Corporate Development. John Keane, Jr. is a son of John
Keane, the founder and Chairman of the Company, and a brother of Brian Keane.
Mr. Leahy joined the Company in August 1999 as Senior Vice President - Finance
and Administration and Chief Financial Officer. From 1982 to August 1999, Mr.
Leahy was employed by PepsiCo, during which time he held a number of positions,
serving most recently as Vice President of Business Planning and Development for
Pepsi-Cola International.
Mr. 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 has served as Senior
Vice President - Healthcare Solutions since January 2000 and as Vice President
and General Manager of the Healthcare Solutions Practice from August 1986 to
January 2000. Mr. Paris also served as Area Manager of the Healthcare Solutions
Practice from 1981 to 1986.
Ms. Southard joined the Company in July 1983. Ms. Southard has served as Senior
Vice President - Human Resources since December 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 Clare Corporation, Mestek, Inc. and CareCentric,
Inc.
10
Dr. Rockart has been a director since the Company's incorporation in March 1967.
Dr. Rockart has been a Senior Lecturer at the Alfred J. Sloan School of
Management of the Massachusetts Institute of Technology since 1974, and was the
Director of the Center for Information Systems Research from 1976 to 2000. Dr.
Rockart is also a director of Comshare, Inc.
Mr. Steinour has been director since July 2001. He currently serves as the Chief
Executive of Citizens Bank of Pennsylvania. Prior to his appointment as Chief
Executive, Mr. Steinour served as Vice Chairman of the Wholesale and Regional
Banking Division at Citizens Bank. Before joining Citizens Bank, he served as
the Division Executive at Recoll Management in Boston and as Executive Vice
President at Bank of New 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.
11
PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's authorized capital stock consists of 200,000,000 shares of Common
Stock, $.10 par value per share; 503,797 shares of Class B Common Stock, $.10
par value per share; and 2,000,000 shares of Preferred Stock, $.01 par value per
share. As of March 8, 2002, there were 75,475,071 shares of Common Stock
outstanding and held of record by approximately 2,482 registered stockholders;
284,891 shares of Class B Common Stock outstanding and held of record by
approximately 110 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 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
amendments to the articles of organization that alter or change the powers,
preferences or special rights of their respective classes or as to affect them
adversely, and with respect to such other matters as may require class votes
under Massachusetts law. Voting for directors is non-cumulative.
As of March 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 Keane less
attractive as the potential target of a hostile tender offer or other proposal
to acquire the stock or business of Keane 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 Keane'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 Keane,
holders of Common Stock and Class B Common Stock have the right to ratable
portions of Keane's net assets after the payment of all debts and other
liabilities.
Trading Markets. Shares of Class B common Stock are not transferable by a
stockholder except for transfers:
. By gift,
. In the event of the death of a stockholder, or
. By a trust to a person who is the grantor or a principal
beneficiary of that trust.
Individuals or entities receiving shares of Class B Common Stock pursuant to
these transfers are referred to as "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 shares of Common Stock
in connection with any transfer of those shares other than to a 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 stockholder 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, except as described 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 stock which the
Company may designate and issue in the future.
PREFERRED STOCK: The Company's Articles of Organization authorize the issuance
of up to 2,000,000 shares of Preferred 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
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. The 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 price per
share as reported by the American Stock Exchange.
Stock Price
High Low
------- -------
2001
First Quarter $ 18.63 $ 9.76
Second Quarter 22.00 11.80
Third Quarter 19.90 12.95
Fourth Quarter 19.70 13.41
2000
First Quarter $ 30.94 $ 22.19
Second Quarter 29.38 20.38
Third Quarter 25.00 15.84
Fourth Quarter 15.95 9.75
The closing price of the Common Stock on the American Stock Exchange on March 8,
2002 was $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.
13
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Year Ended December 31, 2001
Total revenues $ 208,346 $ 196,995 $ 186,637 $ 187,181
Income (Loss) before income taxes 14,211 11,256 8,908 (5,154)
Net income (Loss) 8,454 6,698 5,302 (3,067)
Net income (Loss) per share (basic) .12 .10 .08 (.04)
Net income (Loss) per share (diluted) .12 .10 .08 (.04)
Year Ended December 31, 2000
Total revenues $ 216,208 $ 221,799 $ 219,671 $ 214,278
Income (Loss) before income taxes 9,265 13,400 13,884 (2,363)
Net income (Loss) 5,511 7,975 8,260 (1,392)
Net income (Loss) per share (basic) .08 .11 .12 (.02)
Net income (Loss) per share (diluted) .08 .11 .12 (.02)
14
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Total revenues $ 779,159 $ 871,956 $ 1,041,092 $1,076,198 $706,801
Operating income 19,753 27,921 116,466 170,187 85,163
Net income 17,387 20,354 73,074 96,349 51,371
Net income per share (basic) .25 .29 1.02 1.36 .73
Net income per share (diluted) .25 .29 1.01 1.33 .72
Weighted average common 68,474 69,646 71,571 71,053 70,096
shares outstanding (basic)
Weighted average common 69,396 69,993 72,395 72,284 71,603
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 679,903 463,594 519,307 458,959 329,176
Total debt 15,357 8,616 11,403 3,930 9,493
Stockholders' equity 529,173 370,677 422,799 363,784 257,037
Book value per share 7.00 5.48 5.95 5.10 3.65
Number of shares 75,509 67,675 71,051 71,336 70,342
outstanding
- ------------------------------------------------------------------------------------------------------------------------------
Financial Performance:
Total revenue growth (decline) (10.6)% (16.2)% (3.3)% 52.3% 39.7%
Net margin 2.2% 2.3% 7.0% 9.0% 7.3%
Return on average equity 3.9% 5.1% 18.6% 31.0% 22.4%
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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of Keane's financial condition and results of
operations are based on consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Keane to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of its financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Application of
these policies is particularly important to the portrayal of Keane's financial
condition and results of operations. The Company believes that the accounting
policies described below meet these characteristics. Keane's significant
accounting policies are more fully described in the notes to the consolidated
financial statements.
Revenue Recognition:
Keane recognizes revenue as services are performed or products are delivered in
accordance with contractual agreements and generally accepted accounting
principals. For general consulting engagements, revenue is recognized on a time
and materials basis as services are delivered. For the majority of our
outsourcing engagements, the Company
15
provides a specific level of service each month for which it bills a standard
monthly fee. Revenue for these engagements is recognized in monthly installments
over the billable portion of the contract. These installments may be adjusted to
reflect changes in staffing requirements and service levels consistent with
terms of the contract.
For fixed price engagements, revenue is recognized on a percentage of completion
basis over the life of the contract. Percentage of completion recognition relies
on accurate estimates of the cost, scope and duration of each engagement. If the
Company does not accurately estimate the resources required or the scope of the
work to be performed, then future consulting margins may be negatively affected
or losses on existing contracts may need to be recognized. All future
anticipated losses are recognized in the period they are identified.
Revenue associated with application software products is recognized as the
software products are delivered or installed on a milestone basis. Software
maintenance fees on installed products are recognized on a pro-rated basis over
the term of the service agreement.
In all consulting engagements, outsourcing engagements and software application
sales, the risk of issues associated with satisfactory service delivery exists.
Although management feels these risks are adequately addressed by the Company's
adherence to proven project management methodologies, proprietary frameworks,
and internal project audits, the potential exists for future revenue charges
relating to unresolved issues.
Bad Debt:
Each accounting period, Keane evaluates accounts receivable for risk associated
with a client's inability to make contractual payments or unresolved issues with
the adequacy of Keane's services delivered under maintenance agreements. Billed
and unbilled receivables that are specifically identified as being at risk are
provided for with a charge to revenue in the period the risk is identified.
Considerable judgment is used in assessing the ultimate realization of these
receivables including reviewing the financial stability of the client,
evaluating the successful mitigation of service delivery disputes, and gauging
current market conditions. If the Company's evaluation of service delivery
issues or a client's ability to pay is incorrect, the Company may incur future
charges to revenue.
Goodwill and Intangible Impairment:
Keane evaluates goodwill and other intangible assets associated with acquisition
activity on a periodic basis. This evaluation relies on assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or related assumptions change, the Company
may be required to recognize impairment charges.
Deferred Taxes:
Keane accounts for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book and tax basis of recorded assets and liabilities. SFAS 109 also
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some portion or all of the deferred tax asset will not
be realized. Based on prior taxable income and estimates of future taxable
income, the Company has determined that it is more likely than not that its net
deferred tax assets will be fully realized in the future. If actual taxable
income varies from these estimates, the Company may be required to record a
valuation allowance against its deferred tax assets resulting in additional
income tax expense which will be recorded in the Company's consolidated
statement of operations.
Restructuring:
Keane has recorded restructuring charges and reserves associated with
restructuring plans approved by management over the last three years. These
reserves include estimates pertaining to employee separation costs and real
estate lease obligations. The reserve associated with lease obligations could be
materially affected by factors such as the ability to obtain subleases, the
creditworthiness of sub-lessees, market value of properties, and the ability to
negotiate early termination agreements with lessors. While the Company believes
that its current estimates regarding lease obligations are adequate, future
events could necessitate significant adjustments to these estimates.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed 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 below under the caption "Certain
Factors That May Affect Future Results."
RESULTS OF OPERATIONS, 2001 vs. 2000: The Company's revenue for 2001 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 in 1999. The decrease in revenue was
primarily a result of the rapid decline in the Company's Year 2000 (Y2K)
compliance revenue. Y2K-related revenue for 2000 was $5.4 million, down 97.4%
from $206.1 million in 1999. Excluding Y2K-related business, revenue for 2000
was $871.5 million, an increase of 4.4% as compared to similar core non-Y2K
revenue in 1999. The Company believes this increase was indicative of the
Company's strong positioning in its three core business lines, Business
Innovation Consulting (Plan), Application Development and Integration (Build),
and Application Development and Management Outsourcing (Manage). Keane's Plan,
Build, and Manage revenue for 2000, excluding Y2K-related revenue, was $107.1
million, $327.1 million, and $437.3 million, respectively.
Salaries, wages, and other direct costs for 2000 were $621.2 million, or 71.2%
of revenue, compared to $702.8 million, or 67.5% of revenue for 1999. This
increase as a percentage of revenue was due primarily to lower utilization of
the Company's billable headcount, caused by the decline of Y2K revenue. In order
to bring costs in closer alignment with revenue, in the fourth quarter of 2000,
the Company incurred a charge of $13.5 million, of which $8.6 million, or 1.0%
of revenue, is related to the consolidation and/or closing of certain
non-profitable branch offices, employee severance costs, facility leases, and
for other miscellaneous purposes.
During the second quarter of 2000, the Company identified ten under-performing
branch offices, which had lost critical mass as a result of the Y2K transition
and were no longer profitable. Throughout the year, Keane took action to address
these under-performing business units through the consolidation of operations,
internal growth, the upgrading of management and sales personnel and office
closures.
Selling, General, & Administrative ("SG&A") expense for 2000 were $201.9 million
or 23.1% of revenue, compared to $199.0 million or 19.1% of revenue in 1999.
This increase was primarily attributable to the decrease in the Company's
revenue and investments the Company continued to make in the development and
marketing of its core business lines.
Amortization of goodwill and other intangible assets for 2000 was $12.4 million,
or 1.4% of revenue, compared to $9.2 million, or 0.9% of revenue, in 1999. The
increase was primarily attributable to acquisitions made during the current and
prior year.
Keane completed two small acquisitions during 2000 at a cost of $32.5 million,
net of cash acquired. On July 19, Keane acquired Denver Management Group, a
management consulting firm focused on supply chain management and integrated
distribution. Denver Management has been incorporated into Keane Consulting
Group. On September 7, Keane acquired Care Computer Systems, Inc., a provider of
software for the long-term care industry, which expanded the healthcare
solutions marketed by Keane's Healthcare Solutions Division.
Interest and other expense for each of 2000 and 1999 were $1.5 million. Interest
and dividend income for 2000 totaled $7.7 million, compared to $7.8 million in
1999.
The Company's effective tax rate for each of 2000 and 1999 was 40.5%.
Net income and earnings per share for 2000 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 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 its divested help desk
business and from business units closed as part of its restructuring represented
approximately $52 million in unprofitable revenue for the year 2000.
19
Net cash provided from operations was at $96 million during 2000, before the
expenditure of $81 million for the repurchase of Keane shares and $32.5 million
in acquisitions, net of cash acquired.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards issued Statement of Financial
Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments
and Hedging Activities." which required adoption in periods beginning after June
15, 1999. FAS 133 was subsequently amended by Statement of Financial Accounting
Standards No. 137, " Accounting for Derivative Instruments and Hedging
Activities- Deferral of the Effective Date of FASB Statement No. 133" and will
now be effective for fiscal years beginning after June 15, 2000, with earlier
adoption permitted. In June 2000, the FASB issued Statement No. 138. "
Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
an amendment to FAS 133 and effective simultaneously with FAS 133. The Company
adopted FAS 133 as amended by FAS 138 in the first quarter of 2001, and FAS133
has not had a significant impact on its financial position or results of
operations.
In July 2001, the FASB issued FAS No. 141, "Business Combinations", and FAS No.
142, "Goodwill and Other Intangible Assets." FAS 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 2001. FAS 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of Statement 141 are effective for any business
combination that is initiated after June 30, 2001. Under FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indictors arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired on or after June
30, 2001. With respect to goodwill and intangible assets acquired prior to June
30, 2001, companies are required to adopt Statement 142 in their fiscal year
beginning after December 15, 2001. Because of the different transition dates for
goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not. The
Company is currently in the process of evaluating the impact of FAS 142 will
have on its financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and provides a single accounting model for long-lived assets to
be disposed of. The Company is required to adopt SFAS No. 144 for the fiscal
year beginning after December 15, 2001 and is currently in the process of
evaluating the impact on its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and investments at December
31, 2001 increased to $ 129.2 million from $ 115.2 million at December 31, 2000.
This increase was primarily attributable to the continuing efforts by the
Company to decrease its Days Sales Outstanding ("DSO"). The decrease in accounts
receivable was offset by payments for acquired debt related to the Metro
acquisition of $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 the acquisition. As a result, this
transaction will reduce the Company's cash position at the end of the first
quarter of 2002.
On September 19, 2001, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 1,542,800 shares of its common stock
over the next 12 months. Since May of 1999, the Company has invested $108.9
million to repurchase 5,457,200 million shares of its common stock under three
separate authorizations. The timing and amount of additional share repurchases
will be determined by the Company's management based on its evaluation of market
and economic conditions and other factors. A total of 326,200 shares of Common
Stock were repurchased during the first quarter of 2001. There were no shares
repurchased during the second, third or fourth quarter of 2001. The Company
maintains and has
20
available a $10 million unsecured demand line of credit with a major Boston bank
for operations and acquisition opportunities.
Based on the Company's current operating plan, the Company believes that its
cash and cash equivalents on hand, cash flows from operations, and its current
available line of credit will be sufficient to meet its current 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 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 costs in 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.
Keane's quarterly operating results have varied, and are likely to continue to
vary significantly. This may result in volatility in the market price of Keane's
shares. Keane has experienced and expects to continue to experience fluctuations
in its quarterly results. Keane's gross margins vary based on a variety of
factors including employee utilization rates and the number and type of services
performed by Keane during a particular period. A variety of factors influence
Keane's revenue in a particular quarter, including:
. general economic conditions which may influence investment decisions or
cause downsizing;
. the number and requirements of client engagements;
. employee utilization rates;
. changes in the rates Keane can charge clients for services;
. acquisitions; and
. other factors, many of which are beyond Keane's control.
21
A significant portion of Keane's expenses do not vary relative to revenue. As a
result, if revenue in a particular quarter does not meet expectations, Keane's
operating results could be materially adversely affected, which in turn may have
a material adverse impact on the market price of Keane common stock. In
addition, many of Keane's engagements are terminable without client penalty. An
unanticipated termination of a major project could result in an increase in
underutilized employees and a decrease in revenue and profits.
Keane has pursued, and intends to 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. From
January 1, 1999 through December 31, 2001, Keane has completed nine
acquisitions. The aggregate cost of these acquisitions 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
acquisition 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. In addition, even
if Keane reaches a definitive agreement, there is no assurance that Keane will
complete any future acquisition.
Keane typically anticipates that each acquisition will bring benefits, such as
an increase in revenue. Prior to completing an acquisition, however, it is
difficult to determine if Keane can actually 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 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. 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 acquisitions could result in Keane having to incur additional
debt and/or contingent liabilities. Any of these possibilities could have a
material adverse effect on Keane's business, financial condition and result of
operations.
The 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 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.
Keane faces significant competition for its services, and its failure to remain
competitive could limit its ability to maintain existing clients or attract new
clients. The market for Keane's services is highly competitive. The technology
for custom software services can change rapidly. The market is fragmented, and
no company holds a dominant position. Consequently, Keane's competition for
client assignments and experienced personnel varies significantly from city to
city and by the type of service provided. Some of Keane's competitors are larger
and have greater technical, financial and marketing resources and greater name
recognition in the markets they serve than does
22
Keane. In addition, clients may elect to increase their internal information
systems resources to satisfy their custom software development needs.
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.
Keane conducts business in the United Kingdom and India, which exposes it to a
number of difficulties inherent in international activities. As a result of its
acquisition of SignalTree Solutions in March 2002, Keane has two software
development facilities in India and has added approximately 400 technical
professionals to its professional services organization. India is currently
experiencing conflicts with Pakistan over the disputed territory of Kashmir as
well as clashes between different religious groups within the country. These
conflicts, in addition to other unpredictable developments in the political,
economic and social conditions in India, could eliminate or reduce the
availability of these development and professional services. If access to these
services were to be unexpectedly eliminated or significantly reduced, Keane's
ability to meet development objectives important to its new strategy would be
hindered, and its business could be harmed.
If Keane fails to manage its geographically dispersed organization, it may fail
to meet or exceed its financial objectives and its revenues may decline. Keane
performs development activities in the 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 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.
Additionally, the Company transacts business in the United Kingdom, Canada and
India and as such has exposure associated with movement in foreign currency
exchange rates.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Reports of Independent Auditors............................................ 25
Consolidated Balance Sheets as of December 31, 2001 and 2000................26
Consolidated Statements of Income
For the Years Ended December 31, 2001, 2000 and 1999........................27
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999........................28
Consolidated Statements of Cash Flows
For the Years ended December 31, 2001, 2000 and 1999........................29
Notes to Consolidated Financial Statements...............................30-43
24
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
We have audited the accompanying consolidated balance sheets of Keane, Inc. as
of December 31, 2001 and 2000, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the 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 audits.
We conducted our audits 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 audits 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, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst and Young LLP
Boston, Massachusetts
February 11, 2002, except for Note O,
as to which the date is March 15, 2002
25
KEANE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Assets
Current:
Cash and cash equivalents $ 65,556 $ 53,783
Marketable securities 63,687 59,179
Accounts receivable, net:
Trade 160,172 164,706
Other 3,109 1,428
Prepaid expenses and deferred taxes 20,026 15,533
--------- ---------
Total current assets 312,550 294,629
Property and equipment, net 33,701 24,132
Goodwill, net 224,891 75,497
Customer lists 53,659 10,196
Other intangible assets, net 26,292 32,968
Deferred taxes and other assets, net 28,810 26,172
--------- ---------
$ 679,903 $ 463,594
========= =========
Liabilities
Current:
Accounts payable 13,723 16,820
Accrued expenses and other liabilities 51,980 26,953
Accrued compensation 34,161 17,709
Notes payable -- 5,006
Accrued income taxes 4,675 9,003
Unearned income 5,178 4,611
Current capital lease obligations 1,154 1,230
--------- ---------
Total current liabilities 110,871 81,332
Deferred income taxes 25,656 9,205
Long-term portion of capital lease and other obligations 14,203 2,380
Commitments and contingencies (Note 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 72,446,101 in 2000 7,522 7,245
Class B common stock, par value $.10, authorized
503,797 shares, issued and outstanding
284,891 in 2001 and 2000 28 28
Additional paid-in capital 162,269 121,444
Accumulated other comprehensive income (2,007) (4,637)
Retained earnings 361,361 343,974
Less treasury stock at cost, 5,055,602 shares of Common Stock in 2000 -- (97,377)
--------- ---------
Total stockholders' equity 529,173 370,677
--------- ---------
$ 679,903 $ 463,594
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
26
KEANE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues $ 779,159 $ 871,956 $1,041,092
Salaries, wages and other direct costs 547,883 621,208 702,795
Selling, general and administrative expenses 186,708 201,852 199,009
Amortization of goodwill and other intangible assets 14,457 12,351 9,169
Restructuring charge 10,358 8,624 13,653
---------- ---------- ----------
Operating income 19,753 27,921 116,466
Interest and dividend income 7,043 7,725 7,827
Interest expense 295 588 --
Other expenses (income), net (2,720) 872 1,480
---------- ---------- ----------
Income before income taxes 29,221 34,186 122,813
Provision for income taxes 11,834 13,832 49,739
---------- ---------- ----------
Net income $ 17,387 $ 20,354 $ 73,074
========== ========== ==========
Net income per share (basic) $ .25 $ .29 $ 1.02
========== ========== ==========
Net income per share (diluted) $ .25 $ .29 $ 1.01
========== ========== ==========
Weighted average common shares
outstanding (basic) 68,474 69,646 71,571
========== ========== ==========
Weighted average common shares and common share equivalents outstanding
(diluted) 69,396 69,993 72,395
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
27
KEANE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended
December 31, 1999, 2000 and 2001
- --------------------------------
(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, 1999 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
Investments valuation adjustment (1,263)
Net income 73,074
Comprehensive income
Balance December 31, 1999 72,085,356 7,208 285,112 29 120,810 (2,027) 323,620
Common Stock issued under 360,524 36 320
stock option and employee
purchase plans
Conversions of Class B Common 221 1 (221) (1)
Stock into Common Stock
Income tax benefit from stock 314
option plans
Repurchase of Common Stock
Investments valuation adjustment 538
Foreign currency translation
Adjustment (3,148)
Net income 20,354
Comprehensive income
Balance December 31, 2000 72,446,101 7,245 284,891 28 121,444 (4,637) 343,974
Common Stock issued under 18,000 1 (8,894)
stock option and employee
purchase plans
Common Stock issued in connection 2,759,870 276 49,460
with acquisition of Metro
Information Services, Inc.
Income tax benefit from stock 259
option plans
Repurchase of Common Stock
Investments valuation adjustment 1,181
Foreign currency translation
Adjustment 1,449
Net income 17,387
Comprehensive income
==============================================================================
Balance December 31, 2001 75,223,971 $ 7,522 284,891 $ 28 $162,269 $ (2,007) $361,361
==============================================================================
Treasury Stock Total
at Cost Stock-
------- holders'
Shares Amount Equity
- ------------------------------------------------------------------------
Balance January 1, 1999 (313,064) ($2,769) $ 363,784
Common Stock issued under (6,332) (162) 10,599
stock option and employee
purchase plans
Conversions of Class B Common --
Stock into Common Stock
Income tax benefit from stock 515
option plans
Repurchase of Common Stock (1,000,000) (23,910) (23,910)
Investments valuation adjustment (1,263)
Net income 73,074
---------
Comprehensive income 71,811
Balance December 31, 1999 (1,319,396) (26,841) 422,799
Common Stock issued under 394,794 10,389 10,745
stock option and employee
purchase plans
Conversions of Class B Common --
Stock into Common Stock
Income tax benefit from stock 314
option plans
Repurchase of Common Stock (4,131,000) (80,925) (80,925)
Investments valuation adjustment 538
Foreign currency translation
Adjustment (3,148)
Net income 20,354
---------
Comprehensive income 17,744
---------
Balance December 31, 2000 (5,055,602) (97,377) 370,677
Common Stock issued under 737,348 15,186 6,293
stock option and employee
purchase plans
Common Stock issued in 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.
28
KEANE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)