10-Q 1 d10q.txt FORM 10-Q FOR 06/30/2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 --------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ COMMISSION FILE NUMBER 1-7516 KEANE, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2437166 (State or other jurisdictions of (I.R.S. Employer Identification incorporation or organization) Number) Ten City Square, Boston, Massachusetts 02129 (Address of principal executive offices) (Zip Code) Registrant's telephone number, (617) 241-9200 including area code 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 ------- ------- As of June 30, 2001, the number of issued and outstanding shares of Common Stock (excluding 4,926,408 shares held in treasury) and Class B Common Stock are 67,519,693 and 284,891 shares, respectively. KEANE, INC. AND SUBSIDIARIES TABLE OF CONTENTS Part I - Financial Information Unaudited Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2001 and 2000................................. 3 Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000........................................................... 4 Unaudited Condensed Consolidated Statements of Cash Flows for six months ended June 30, 2001 and 2000................................................ 5 Notes to Unaudited Condensed Consolidated Financial Statements.............. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 9 Part II - Other Information................................................. 15 Signature Page.............................................................. 17 2 KEANE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share amounts) Three months ended SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 Total revenues $196,995 $221,799 $405,341 $438,007 Salaries, wages and other direct costs 137,787 155,232 282,936 309,806 Selling, general and administrative expenses 46,222 52,194 95,549 103,448 Amortization of goodwill and other intangible assets 3,476 2,720 6,938 5,609 -------- -------- -------- -------- Operating income 9,510 11,653 19,918 19,144 Interest and dividend income 1,718 2,163 3,343 4,306 Interest expense 81 146 194 332 Other (income) expenses, net (109) 270 (2,400) 453 -------- -------- -------- -------- Income before income taxes 11,256 13,400 25,467 22,665 Provision for income taxes 4,558 5,425 10,315 9,179 -------- -------- -------- -------- Net income $ 6,698 $ 7,975 15,152 $ 13,486 ======== ======== ======== ======== Net income per share (basic) $.10 $.11 $.22 $.19 ======== ======== ======== ======== Net income per share (diluted) $.10 $.11 $.22 $.19 ======== ======== ======== ======== Weighted average common shares outstanding (basic) 67,817 70,103 67,947 70,595 Weighted average common shares and common share 68,815 70,671 68,825 71,216 equivalents outstanding (diluted)
The accompanying notes are an integral part of the consolidated financial statements. 3 KEANE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) JUNE 30, 2001 DECEMBER 31, 2000 Assets (UNAUDITED) Current: Cash and cash equivalents $ 81,827 $ 53,783 Marketable securities 77,913 59,179 Accounts receivable, net Trade 144,130 164,706 Other 1,371 1,428 Prepaid expenses and deferred taxes 18,001 15,533 -------- -------- Total current assets 323,242 294,629 Long term investments 250 2,250 Property and equipment, net 21,124 24,132 Goodwill, net 72,464 75,497 Other intangible assets, net 38,687 43,164 Deferred taxes and other assets, net 22,334 23,922 -------- -------- $478,101 $463,594 ======== ======== Liabilities Current: Accounts payable $ 11,971 $ 16,820 Accrued expenses and other liabilities 37,995 26,953 Accrued compensation 19,218 17,709 Notes payable - 5,006 Accrued income taxes 9,110 9,003 Unearned income 3,555 4,611 Current capital lease obligations 1,221 1,230 -------- -------- Total current liabilities 83,070 81,332 Deferred income taxes 5,863 9,205 Long-term portion of capital lease obligations 1,814 2,380 Stockholders' Equity Common Stock 7,245 7,245 Class B Common Stock 28 28 Additional paid-in capital 115,520 121,444 Accumulated other comprehensive income (2,596) (4,637) Retained earnings 359,126 343,974 Less treasury stock (91,969) (97,377) -------- -------- Total stockholders' equity 387,354 370,677 -------- -------- $478,101 $463,594 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 KEANE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30, Cash flows from operating activities: 2001 2000 Net income $ 15,152 $ 13,486 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,243 14,419 Deferred income taxes (1,051) (3,092) Provision for doubtful accounts 3,706 (3,732) Loss on sale of property and equipment 97 1,095 Loss on write down of equity investments 2,000 --- Gain on sale of business unit (4,302) --- Changes in operating assets and liabilities: Decrease in accounts receivable 16,927 29,292 (Increase) decrease in prepaid expenses and other assets (3,018) 4,081 Decrease in accounts payable, accrued expenses, and other liabilities, and unearned revenue (734) (16,698) Increase in income taxes payable 624 4,827 -------- -------- Net cash provided by operating activities 42,644 43,678 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (50,997) (14,376) Sale of investments 32,263 12,659 Purchase of property and equipment (5,645) (10,706) Proceeds from sale of business unit 16,087 48 Proceeds from the sale of property and equipment 172 --- Payment for prior year acquisitions (1,032) --- -------- -------- Net cash used for investing activities (9,152) (12,375) CASH FLOWS FROM FINANCING ACTIVITIES: Payments under long term-debt (5,006) (786) Principal payments under capital lease obligations (1,242) (712) Proceeds from issuance of common stock 3,529 1,772 Repurchase of common stock (4,045) (43,934) -------- -------- Net cash used for financing activities (6,764) (43,660) Effect of exchange rate changes on cash 1,316 --- Net decrease in cash and cash equivalents 28,044 (12,357) Cash and cash equivalents, beginning of period 53,783 53,018 -------- -------- Cash and cash equivalents at end of period $ 81,827 $ 40,661 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 Keane, Inc. and Subsidiaries NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands except per share amounts) Note 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods reported and of the Company's financial condition as of the date of the interim balance sheet have been included. Operating results for the six-month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Note 2. Computation of earnings per share for the three months and six months ended June 30, 2001 and 2000.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 Net income $ 6,698 $ 7,975 $15,152 $13,486 Weighted average number of common 67,817 70,103 67,947 70,595 shares outstanding used in calculation of basic earnings per share Incremental shares from the assumed 998 568 878 621 exercise of dilutive stock options Weighted average number of common shares 68,815 70,671 68,825 71,216 outstanding used in calculation of diluted earnings per share Earnings per share Basic $ .10 $ .11 $ .22 $ .19 ======= ======= ======= ======= Diluted $ .10 $ .11 $ .22 $ .19 ======= ======= ======= =======
6 Keane, Inc. and Subsidiaries NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 3. The Company offers an integrated mix of end-to-end business solutions, such as Business and IT consulting (Plan), software development and integration services including e-Solutions (Build), and Application Development and Management Outsourcing (Manage). During the first six months of 2001 approximately 94% of the Company's revenues was derived from these offerings, with the balance from the healthcare industry. Effectively, the Company operates in one reportable segment. Note 4. Total comprehensive income (i.e. net income plus available-for-sale securities valuation adjustments and currency translation adjustments to stockholders equity) for the second quarter of 2001 was $7.5 million and $17.2 million year to date, and for the second quarter of 2000 was $7.0 million and $12.4 million year to date. Note 5. In the fourth quarter of 2000, the Company recorded a restructuring charge of $8.6 million. Of this charge $1.7 million related to a workforce reduction of approximately 200 employees, primarily consultants. In addition, the Company performed a review of its business strategy and concluded that consolidating some of its branch offices was key to its success. As a result of this review, the Company wrote off $3.4 million of assets, which became impaired as a result of this restructuring action. The total restructuring charge included $3.5 million for branch office closings and certain other expenditures. A summary of first and second quarter activity with respect to the restructuring charge is as follows: Branch Office Closures and Workforce Certain Other Reduction Expenditures Total --------- ------------- ------- Balance 12/31/00 $1,405 $4,927 $6,332 Cash Expenditures 1,405 890 2,295 Balance 3/31/01 - 4,037 4,037 Cash Expenditures - 440 440 Balance 6/30/01 $ 0 $3,597 $3,597 7 Note 6. In June 1998, the Financial Accounting Standards Board ("FASB") 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", which made FAS 133 effective for fiscal years beginning after June 15, 2000. Accordingly, the Company adopted FAS 133 in the first quarter of 2001. The adoption of FAS 133 did not have a significant impact on the Company's 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 accounted for by the purchase method that is completed 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 after July 1, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 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. Note 7. On February 5, 2001, the Company completed the divestiture of its Help Desk operations in return for $15.7 million in cash. As a result of this transaction, the Company incurred a one-time gain of approximately $4.0 million, which is reflected in the Company's consolidated statements of income under the caption "Other (income) expense, net". 8 KEANE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors That May Affect Future Results." RESULTS OF OPERATIONS ---------------------- The Company's total revenue for the second quarter of 2001 was $197 million compared to total revenue of $210 million in the second quarter of 2000, excluding revenue associated with the Company's Help Desk operations, which was divested during the first quarter of 2001, and business unit closures as a result of the Company's restructuring efforts last year, or $221.8 million in the second quarter of 2000 including these businesses. Keane's revenue in the second quarter was impacted by a difficult economic environment for IT services. However, this was partially offset by increased revenue from the Company's Application Development and Management (ADM) Outsourcing service, which represented 52% of total revenue during the second quarter of 2000 or $102 million, an increase of 8% from $94.9 million during the second quarter of 2000. For the second quarter of 2001, total revenue from the Company's Plan Services, was $19.2 million, down from Plan revenue of $27.4 million for the second quarter of last year. 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 the quarter was impacted by project deferrals and cancellations in IT consulting projects delivered from Keane's network of branch offices resulting from a general decrease in spending on IT consulting projects. However, KCG experienced both improved sales and employee utilization for its business innovation consulting services during the quarter. Second quarter 2001 revenue from the Company's Build Services was $70.6 million, down from $81.7 million in the second quarter of 2000. Build revenue, which consists primarily of application development and integration business, has also been affected by the slowdown in demand for IT services in Keane's operations in both North America and the United Kingdom. However, Keane was able to limit the impact of this slowdown by continuing to generate substantial Build project revenue from its existing Global 2000 customer base, public sector Federal and State governments, and by focusing on high ROI Enterprise Application Integration projects. Revenue from the Company's Manage services, which consists primarily of its flagship ADM Outsourcing service, grew to $107.2 million during the second quarter of 2001, up 4% from $102.9 million during the second quarter of 2000, excluding the divested Help Desk operation. Revenue from the Company's Help Desk operations was approximately $9.8 million during the second quarter of 2000. 9 Revenue associated with business unit closures as a result of the Company's restructuring efforts announced last year represented approximately $2 million in revenue during second quarter of 2000. This $2 million has been included in reported Plan, Build, and Manage revenue for the second quarter of 2000. Total revenue for the six months ended June 30, 2001 was $400.1 million, compared with $412.3 million for the first half of 2000, excluding revenue associated with Keane's divested Help Desk operation and business unit closures as a result of the Company's restructuring efforts last year, or $405.3 million for the first half of 2001 versus $438 million in the first half of 2000 including these businesses. Keane's ADM Outsourcing service represented 50% of revenue during the first half of 2001, and grew to $202.1 million, up 12% from $180.1 million during the first six months of 2000. Plan, Build, and Manage revenue for the first half of 2001 was $39.9 million, $146.7 million, and $218.7 million, respectively, as compared to $58.9 million, $161.2 million, and $212.5 million, respectively, during the first half of 2000. Excluding Help Desk operations, Manage revenue, was $113.5 million for the first six months of 2001, up 8% from comparable Manage revenue during the first half of 2000. This increase in Keane's Manage revenue was driven by the Company's ADM Outsourcing business, which has not been impacted by the recent slowdown in the economy and reduction in IT spending patterns, and in fact, has continued to grow. Based on the increase in ADM Outsourcing bookings and growth of the sales pipeline during the second quarter, the Company anticipates that this business will continue to expand. Although the Company has experienced improved sales and employee utilization within Keane Consulting Group, which is part of its Plan business, as of the end of the second quarter, it has observed no indication of a healthier economic climate or normalized IT spending. As a result, Keane anticipates continued softness in its Application Development and Integration business, which represents a majority of its Build sector. However, the Company expects to maintain a substantial stream of revenue from such business due to its broad range of development and integration services, strong customer loyalty, and business from the less cyclical public sector. Salaries, wages and other direct costs for the second quarter of 2001 were $137.8 million, or 69.9% of total revenue, compared to $155.2 million, or 70.0% of total revenue, for the second quarter of 2000. The decline in actual expenditures is a result of the sale of the company's help desk operations and its restructuring efforts announced last year to bring cost in alignment with revenue. As a result, Keane's gross margins for the second quarter of 2001 grew slightly to 30.1%, up 100 basis points, from 30.0% during the second quarter of 2000. For the first six months ended June 30, 2001, salaries, wages and other direct costs were $282.9 million, or 69.8% of total revenue, compared to $309.8 million, or 70.7% of total revenue for the first half of 2000. As a result, Keane's gross margins for the first six months of 2001 grew to 30.2%, up 900 basis points, from 29.3% during the first six months of 2000. Selling, General & Administrative ("SG&A") expense for the second quarter of 2001 was $46.2 million, or 23.5% of total revenue, compared to $52.2 million, or 23.5% of total revenue, for the second quarter last year. For the first six months of 2001 SG&A expense was $95.5 million, or 23.6% of total revenue, versus $103.4 million, or 23.6% of total revenue for the first six months of 2001. The decline in actual expenditures for both the second quarter and the first six months of 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 10 revenue. The Company will seek to continue to aggressively control discretionary expenditures until economic conditions improve and IT spending patterns become more positive. Amortization of goodwill and other intangible assets for the second quarter of 2001 was $3.5 million, or 1.8% of revenue, compared to $2.7 million, or 1.2% of revenue, in the second quarter of 2000. For the first six months of 2001, amortization of goodwill and other intangible assets was $6.9 million, or 1.7% of total revenue, compared to $5.6 million, or 1.3% of total revenue, for the first six months of 2000. The increase in amortization for both the second quarter and the first six months of 2001 was attributable to additional intangible assets as a result of the Company's acquisitions of Denver Management Group and Care Computer Systems in July and September of last year. Interest and dividend income totaled $1.7 million for the second quarter of 2001, compared to $2.2 million for the same period last year. Interest and dividend income for the first six months of 2001 totaled $3.3 million, compared to $4.3 million for the same period last year. The decrease in interest and dividend income was attributable to lower yields from investments. Interest expense and other income for the second quarter of 2001 was $30 thousand, as compared to $ .4 million of expense for the second quarter of 2000. For the first six months of 2001, interest expense and other income was $2.2 million, as compared to $ .8 million of expense for the first six months of 2000. This increase was the result of a gain of $4 million from the sale of Keane's help desk operation, and the Company's decision to write-off certain equity investments totaling $2.1 million during the first quarter of 2001. The Company's effective tax rate was 40.5% for the second quarter and first six months of 2001 and 2000. Net income for the second quarter of 2001 was $6.7 million, down 16% from $8 million in net income for the second quarter of 2000, resulting primarily from decreased spending on IT services. However, net income for the first six months of 2001 was $15.2. million, up 12% from $13.5 million in net income for the first six months of 2000. Diluted earnings per share for the second quarter of 2001 was $.10, down slightly from $.11 during the same period a year ago. For the first six months, diluted earnings per share was $.22, up from $.19 during the first six months of 2000. Net cash provided from operations was $20.4 million during the second quarter of 2001, and $42.6 million during the first six months of 2001, before proceeds from the sale of the help desk business of $16.1 and the investment of $4 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 "per share" value. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company's cash and investments at the end of the second quarter increased to $160.0 million as compared to a balance of $145.6 million at the close of the first quarter. This increase was primarily attributable to the decrease in accounts receivable as a result of the Company's efforts to decrease its Days Sales Outstanding ("DSO"). The Company's DSO at the end of the second quarter was 72 days compared to the year- end DSO of 77 days. On February 21, 2001, the Company announced that it had increased the share repurchase authorization under the Company's July 26, 2000 share repurchase program by an additional one million shares. The remaining 869,000 shares available for repurchase under 11 existing authorization brings the total number of shares authorized for repurchase to 1,869,000 shares as of February 21, 2001. During the first quarter, the Company purchased 326,200 shares of Common Stock at a cost of approximately $4.0 million. There were no shares repurchased during the second quarter. During the quarter the Company paid $.4 million associated with the fourth quarter restructuring charge. The payments were primarily related to branch office closures. The Company maintains and has available a $10 million unsecured demand line of credit with a major Boston bank for operations and acquisitions 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 in the next twelve months. 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 1999. This is due primarily to the Company's increase in strategic services such as business innovation consulting and e-solutions, in which the high value of services commands higher rates. 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 Quarterly Report on Form 10-Q and presented elsewhere by management from time to time. Fluctuations in Operating Results. 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 downzing; . 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. A significant portion of Keane's expenses does 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 12 a material adverse impact on the market price of Keane common stock. In addition, many of Keane's engagements are terminable without client penalty. An unanticipated termination of a major project could result in an increase in underutilized employees and a decrease in revenue and profits. Risks Relating to Acquisitions. In the past five years, Keane has grown ------------------------------ significantly through acquisitions. Since January 1, 1999, Keane has completed the acquisitions of Emergent Corporation in San Mateo, California, Amherst Consulting Group, Inc, in Boston, Massachusetts, Advanced Solutions Inc. in New York, New York, Anstec, Inc. of McLean, Virginia, First Coast Systems, Inc. of Jacksonville, Florida, Parallax Solutions Limited, of Birmingham, England, Denver Management Group, of Denver, Colorado and Care Computer Systems, Inc. of Bellevue, Washington. Keane's future growth may be based in part on selected acquisitions. At any given time, Keane may be in various stages of considering such opportunities. Keane can provide no assurances that it will be able to find and identify desirable acquisition targets or that it will be successful in entering into a definitive agreement with any one target. Also, even if a definitive agreement is reached, there is no assurance that any future acquisition will be completed. Keane typically anticipates that each acquisition will bring certain benefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine if such benefits can actually be realized. 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 and may be dilutive to Keane shareholders. Any of these events could have a material adverse effect on Keane's business, financial condition and results of operations. The process of integrating acquired companies into Keane's existing business may also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which Keane might otherwise devote to its existing business. Also, 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 acquisition could result in Keane having to incur additional debt and/or contingent liabilities. All of these possibilities might have a material adverse effect on Keane's business, financial condition and result of operations. Dependence on Personnel. Keane believes that its future success will depend in ----------------------- large part on its ability to continue to attract and retain highly skilled technical and management personnel. The competition for such personnel is intense. Keane may not succeed in attracting and retaining the personnel necessary to develop its business. If Keane does not, its business, financial condition and result of operations could be materially adversely affected. Highly Competitive Market. The market for Keane's services is highly ------------------------- competitive. The technology for custom software services can change rapidly. The market is fragmented. Consequently, Keane's competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided. Some of Keane's competitors are larger and have greater technical, financial and marketing resources and greater name recognition in the markets they serve than does Keane. In addition, clients may elect to increase their internal information systems resources to satisfy their custom software development needs. 13 Keane believes that in order to compete successfully in the software services industry it must be able to: . compete cost-effectively; . develop strong client relationships; . generate recurring revenues; . utilize comprehensive delivery methodologies; and . achieve organizational learning by implementing standard operational processes. In the healthcare software systems market, Keane competes with some companies that are larger in the healthcare market and have greater financial resources than Keane. Keane believes that significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets. 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. International Operations. Keane's international operations are subject to ------------------------ political and economic uncertainties, currency exchange rate fluctuations, foreign exchange restrictions, changes in taxation and other difficulties in managing operations overseas. Keane may not be successful in its international operations. 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. Quantitative and Qualitative Disclosures about Market Risk. The Company does ---------------------------------------------------------- not engage in trading market risk sensitive instruments or purchasing hedging instruments or other 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 and as such has exposure associated with movement in foreign currency exchange rates. 14 KEANE, INC. AND SUBSIDIARIES Part II - Other Information -------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of the stockholders at the 2001 Annual Meeting of Stockholders of the Company held on May 30, 2001 (the "Annual Meeting"): (1) fixing the number of directors at seven and electing the nominees listed below to the Board of Directors for the ensuing year, (2) approving the adoption of the Company's 2001 Stock Incentive Plan, (3) approving an amendment to the Company's 1992 Employee Stock Purchase Plan to increase the number of shares authorized for issuance under such plan from 2,550,000 to 4,550,000, and (4) ratifying and approving the selection by the Board of Directors of Ernst & Young LLP as the Company's independent accountants for the current year. The number of shares of Common Stock and Class B Common Stock issued, outstanding and eligible to vote as of the record date of April 2, 2001 was 67,499,400 shares and 284,891 shares, respectively. Each of these matters were approved by the requisite vote of the stockholders. Set forth below is the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each such matter, including a separate tabulation with respect to each nominee for director: Proposal #1 - To fix the number of directors at seven and to elect a Board of Directors for the ensuing year. FOR WITHHELD ABSTAIN NON-VOTES John F. Keane 58,725,520 1,627,024 Brian T. Keane 59,115,434 1,237,110 John F. Keane, Jr. 58,870,265 1,482,279 John F. Rockart 59,688,292 664,252 Robert A. Shafto 59,688,297 664,247 Winston R. Hindle, Jr. 59,680,193 672,351 Philip J. Harkins 58,727,589 1,624,955 Proposal #2 - To approve the adoption of the Company's 2001 Stock Incentive Plan. BROKER FOR AGAINST ABSTAIN NON-VOTES 32,863,397 17,364,207 989,617 9,135,323 15 Proposal #3 - To approve an amendment to the Company's 1992 Employee Stock Purchase Plan to increase the number of shares authorized for issuance under such plan from 2,550,000 to 4,550,000. BROKER FOR AGAINST ABSTAIN NON-VOTES 48,922,484 1,336,994 957,743 9,135,323 Proposal #4 - To ratify and approve the selection by the Board of Directors of Ernst & Young LLP as the Company's independent accountants for the current year. BROKER FOR AGAINST ABSTAIN NON-VOTES 59,804,020 456,962 91,561 1 Item 5. Exhibits and Reports on Form 8-K (a) Exhibits - 10.1 Amended and Restated Guidance Promissory Note (b) Reports on Form 8-K. The Registrant filed no Current Reports on Form 8-K during the quarter ended June 30, 2001. 16 SIGNATURES -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KEANE, INC. (Registrant) August 7, 2001 /s/ Brian T. Keane Date __________________________ ___________________________________ Brian T. Keane President and Chief Executive Officer August 7, 2001 /s/ John J. Leahy Date __________________________ ___________________________________ John J. Leahy Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 17