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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission File Number 1-7516
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Keane, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2437166
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Ten City Square, Boston, Massachusetts 02129
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-9200
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.10 par value Registered on the American Stock Exchange
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(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by checkmark 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. (X)
The aggregate market value determined by the closing prices reported by AMEX of
the voting stock held by nonaffiliates of the registrant as of March 13, 1998:
Common Stock $.10 par value - $2,528,394,526
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Class B Common Stock $.10 par value - No Public Trading Market
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Number of shares outstanding of each of the registrant's classes of common
stock,
as of March 13, 1998:
Common Stock $.10 Par Value - 66,386,367 shares
Class B Common Stock $.10 Par Value - 286,378 shares
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Index to Exhibits begins on Page ExInd-1
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 27, 1998. 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.
Page 1 of 40 Pages
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PART I
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ITEM 1. BUSINESS
Keane, Inc., a Massachusetts corporation (together with its subsidiaries, unless
the context otherwise requires "Keane" or the "Company"), provides software
consulting, development, integration, management and technical support services
to corporations, government agencies and healthcare facilities. Keane's
services enable clients to leverage their existing information systems ("IS")
capability and more rapidly and cost-effectively develop and manage mission-
critical software applications. The Company serves its clients through two
operating divisions: the Information Services Division ("ISD") and the
Healthcare Services Division ("HSD"). ISD accounted for approximately 95% of
the Company's revenues in 1997. The Company provides services primarily to
Fortune 1,000 companies, including AT&T Corporation, Eastman Kodak Company,
General Electric Company, International Business Machines Corporation,
McDonald's Corporation and Procter & Gamble Company.
INFORMATION SERVICES DIVISION: Keane's ISD delivers (i) IT Information
Technology ("IT") Consulting services, through which Keane helps clients align
IT projects and processes with business requirements, (ii) Application
Development Projects, which include IS planning and assessment, and design,
development and integration of applications using client-server and web-based
technologies, (iii) Systems Migration projects, which include assessment,
planning, migration/remediation and testing services for year 2000 compliance
and re-platform projects, (iv) Application Management Outsourcing services,
encompassing maintenance, support and enhancement for custom applications, and
(v) Help Desk Management services, through which Keane provides technical
support primarily for shrink-wrapped software programs and hardware components.
Keane also provides Project Management Training and Consulting Services through
a seminar series on the Company's project management, estimating and risk
management processes and project management mentoring services.
In all of its assignments, Keane strives to use its proprietary methodologies
and best practices to reduce development time, improve system reliability and
quality, and decrease costs. Keane believes these methodologies, which include
Keane's Application Management Methodology, Productivity Management, Frameworks
for Software Development and Resolve 2000, enable it to provide clients with
consistent, high quality results and give it a competitive advantage in winning
large projects.
The Company believes that the following factors drive market growth in the IT
services business served by Keane:
. Increased Dependence On Information Technology. Globalization,
deregulation and the rapid pace of change have increased reliance on
information technology. Companies are applying technology to bring
products to market first or faster, integrate key business processes to
improve quality and reduce costs, and improve customer service.
Enterprises are using outsourcing strategies to enable them to achieve
business-driven IT initiatives.
. Organizational Focus On Core Competencies. The intense competition and
rapid change characteristic of many industries have led senior management
to concentrate on their core competencies in order to compete more
effectively. Businesses are consequently outsourcing more frequently,
especially IS services.
. The Growing Challenges Of Managing Corporate Is Organizations. The IS
environment has grown increasingly complex, costly and burdensome as a
result of the challenges of deploying new technology, maintaining older
systems (including meeting year 2000 compliance requirements) and finding
skilled staff in a limited pool of qualified IS professionals. Outsourcing
enables companies to bring in the required expertise to gain control over
existing software assets and strategic development initiatives.
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. The Growing Trend toward Reengineering IT Organizations. With the growing
acceptance of IT as a critical business asset and the internal pressures
experienced within IT organizations, executive managers are increasingly
seeking ways to make IT more effective. Similar to the reengineering
efforts undertaken in other parts of the business in recent years,
executives are now focusing on improving processes and performance in IT.
Outsourcing to a vendor with proven methodologies and performance metrics
enables these organizations to implement world-class processes and
systematically target improvements objectives.
As a result of these key factors, the Company believes that there are
significant opportunities for growth in the IT services industry, particularly
in the application management, year 2000 compliance, application development and
help desk markets. Dataquest Incorporated, a market research firm, estimated
the U.S. market for service offerings such as Keane's is $99 billion for 1998.
Moreover, according to Dataquest Incorporated, expenditures on externally
provided IT services in the areas of application management, help desk
management, development and integration services, and consulting (Keane's core
service offerings) are projected to grow at rates of 19.4%, 18.3%, 16.5% and
18.6%, respectively, through 2001.
HEALTHCARE SERVICES DIVISION: Keane's HSD develops, markets and supports
patient care, financial management and clinical software for large teaching
hospitals, hospital chains, community hospitals and long-term care facilities.
In addition, HSD provides facilities management services for many of its
hospital clients. Currently, HSD's Healthcare Information Systems (HIS) products
are used by more than 365 hospitals and 680 long-term care facilities.
HSD's HIS components include applications supporting a full range of healthcare
institutions' information needs. Key products include KEANE/Infinet, a clinical
and financial data repository, Patcom Plus, a comprehensive UNIX-based patient
management suite, Leadership Plus, a UNIX-based financial system for long-term
care facilities, and LabFUSION, a laboratory system. HSD targets hospitals,
long-term care facilities and other sectors of the healthcare field, and seeks
to increase the breadth of its healthcare applications through ongoing product
development efforts, strategic alliances and acquisitions.
Hospitals and long-term care facilities are increasingly challenged to enhance
productivity and cut costs by reducing hospital stay length and insurance
reimbursement cycle times without sacrificing patient care. Keane believes that
effective information systems and greater access to and exchange of information
are essential for achieving these goals and that the need for implementing
improved information technology is intensifying.
Keane believes that the combination of its vertical expertise in the healthcare
industry and its experience and expertise providing IT services within the
commercial and government arena substantially differentiates Keane from
competing vendors. The Company believes this unique breadth of experience can
help healthcare clients as they struggle with the unknowns and continuing
changes associated with healthcare reform issues and managing an IT environment.
HSD's strategic objectives are to continue to grow to obtain critical mass and
to provide a full range of integrated, open information systems to its national
client base of hospitals and long-term care facilities.
BUSINESS STRATEGY: Keane believes that the IT pressures companies are
experiencing, together with requirements to reduce costs, decrease cycle times
and adapt quickly to changing market dynamics, is causing companies to focus on
achieving significant improvements in their IT organizations. Those service
providers best able to deliver reliable results -- i.e., on-time, within budget
and according to technical specifications, business requirements and targeted
performance metrics -- will appeal to organizations focused on using outsourcing
as a strategic business tool. Moreover, service providers with the critical
mass and infrastructure to operate and grow efficiently have a competitive
advantage in servicing client needs. In an effort to achieve profitable growth
in this environment, Keane is increasing market share with both new and existing
clients while deriving an increasing portion of its business from large-scale,
multiyear projects with large organizations. Keane believes the following
strengths allow it to compete effectively against both national and local
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competitors: (i) long-term client relationships, which create greater
opportunities for recurring revenues; (ii) full range of value-added services,
which differentiates the Company from many of its competitors; (iii) strong
branch office network, which enables it to deliver services proactively and
cost-effectively; and (iv) continuously improving methodologies and best
practices, which replicate organizational experience and enable the Company to
achieve more reliable and predictable deliverables. The key elements of the
Company's strategy are described below.
Increase Concentration of Core IT Solutions Business-The Company is focusing on
large, Keane-managed business within its core service offerings. These
opportunities include application development, application management,
migration/year 2000 compliance services, help desk management and enterprise
healthcare information solutions. These IS services represent the areas most
demanded by the markets Keane serves. Growth of Keane's core IT services
continued to increase during the year, representing 66% of total revenue for
1997, up from 45% in 1996. Keane believes its comprehensive capabilities,
supported by proprietary methodologies, differentiate it from many competitors.
To improve its ability to manage large projects and increase the value of its
outsourcing solutions, Keane seeks to continuously improve its methodologies and
identify and apply best practices via a dedicated, centralized Project
Management Practice.
Build Long-Term Strategic Partnerships with Clients-The Company also seeks to
build long-term strategic partnerships with its clients. Sales representatives
and service delivery managers are assigned to a limited number of target
accounts in order to develop an in-depth understanding of and respond to each
client's particular needs. This approach enables the Company to build long-term
relationships with clients based on knowledgeable, highly responsive and cost-
effective service. In addition, Keane's extensive network of branch offices is
situated close to targeted clients, also supporting responsiveness and efficient
service. In 1997, Keane sold $262 million in other services to its year 2000
project clients. Keane's strategy is to leverage its increased client base by
introducing and delivering its other strategic services to new year 2000 clients
where possible.
Achieve Critical Mass at the Individual Account, Branch and Enterprise Levels-
Growing market share and achieving critical mass in each market it serves are
fundamental to the Company's strategy. Keane defines its critical mass
objectives on three levels: at the account, at the branch and at the enterprise
level. By reaching critical mass objectives in each of these three areas, Keane
seeks to strengthen client partnerships through a strong local presence, achieve
economies of scale by spreading costs across a broad revenue base, and implement
continuous improvements by investing in its methodologies and infrastructure.
Critical mass at the account level is measured by revenues generated by
individual clients. Keane targets clients with potential to generate more than
$1 million in revenues annually primarily through delivery of large project and
multiyear outsourcing engagements. This strategy enables Keane to sell and
deliver services more cost-effectively and provides Keane with a more
predictable revenue stream. In 1997, the number of clients from which the
Company generated $1 million or more each increased 67% from 1996.
Critical mass at the branch level equates with being one of the two largest IT
services firms in that market and having the depth and breadth of managerial,
sales and technical capability to deliver complex solutions locally. Reaching
branch-level critical mass objectives produces the local presence Keane relies
on to strengthen client partnerships. Keane measures critical mass progress at
the branch level according to growth in revenues per branch. In 1997, the
average revenues generated by each of Keane's Information Services Division
branches increased more than 35% from 1996. Finally, critical mass at the
enterprise level can be measured by the Company's annual growth rate, which has
been 46% compounded over the last five years. Historically, Keane has used
acquisitions as a valuable and important means of achieving critical mass,
enhancing market share, increasing capabilities to deliver large, complex
solutions and supplementing internal growth. In 1997, however, all of Keane's
revenue growth was internally generated. The Company has demonstrated a capacity
to complete acquisitions and to successfully integrate the acquired companies
into its operations. Keane believes this ability is a competitive advantage in a
consolidating market. Keane will continue to evaluate appropriate acquisition
opportunities. Since July 1986, Keane has completed 17 acquisitions
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of companies with annual revenues at the time of acquisition ranging from
approximately $1 million to approximately $170 million. In identifying potential
acquisition candidates, the Company seeks firms with client profiles, geographic
markets and technical capabilities similar or complementary to its own. Because
the software services industry is highly fragmented, the Company expects that
there will continue to be suitable acquisition opportunities.
The Company's ability to expand successfully by acquisitions depends on many
factors, including the successful identification and acquisition of businesses
and management's ability to integrate and operate the new businesses
effectively. The Company competes for acquisition candidates with other
entities, some of whom have greater financial resources than the Company.
Increased competition for acquisition opportunities may result in fewer
acquisition opportunities being made available to the Company as well as less
advantageous acquisition terms, including increased purchase prices. The
anticipated benefits from any acquisition may not be achieved unless the
operations of the acquired business are successfully combined with those of the
Company in a timely manner. The integration of the Company's acquisitions
requires substantial attention from management. The diversion of the attention
of management, and any difficulties encountered in the transition process, could
have an adverse impact on Keane's revenues and operating results. In addition,
the process of integrating the various businesses could cause the interruption
of, or a loss of momentum in, the activities of some or all of these businesses,
which could have an adverse effect on the Company's operations and financial
results.
Continuously Strengthen Keane's Infrastructure-A strong infrastructure is
required to successfully sell and execute large and complex projects. Keane's
infrastructure encompasses the Company's delivery methodologies and such
internal processes as sales, recruiting and management operations.
To ensure its services meet client needs, Keane strives to continuously improve
its suite of internally developed methodologies and train its professionals in
these methodologies. The Company has a dedicated Project Management Practice to
support these objectives on a centralized basis. Methodologies enable the
Company to improve productivity and predictability in its software services.
For application development projects, Keane has an integrated approach, which
addresses processes for project management, the software development life cycle,
project estimating, risk management and quality assurance. For application
management projects, Keane uses its Application Management Methodology, which
incorporates project management disciplines, process improvement procedures and
performance metrics. Year 2000 compliance projects are driven by Keane's full
life cycle methodology, Resolve 2000, and Help Desk services are delivered
according to its Help Desk Methodology. For managing enterprise-level IT
initiatives, such as year 2000 compliance and new technology deployment
programs, Keane has a Program Management Office methodology, which focuses on
reducing risk and meeting critical business objectives in program execution. At
the foundation of all of Keane's methodologies is Keane's project management
approach, Productivity Management.
Keane also seeks to establish and apply similar discipline and rigor to key
internal processes such as sales, recruiting, training, and financial and
operational processes. Keane believes that the investment made in all of these
processes, combined with its emphasis on accumulating and disseminating
organizational experience, enhances the ability of the Company to accommodate
aggressive growth, attract and retain superior technical and managerial talent,
and consistently deliver high quality solutions to its clients.
MARKETING, SALES AND CLIENTS: Keane markets its software services and software
products through its direct sales force, which is based in each branch office.
Keane's sales representatives are assigned to a limited number of accounts in
order to develop an in-depth understanding of each client's individual needs and
form strong client relationships. These representatives are responsible for
providing highly responsive service and ensuring that Keane's software solutions
achieve client objectives.
Keane focuses its marketing efforts on large corporations and healthcare
entities with significant IS budgets and recurring software development needs.
While Keane performs work for companies, most major industries, and state and
federal governments, most of the Company's revenue is derived from organizations
within the following
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industry groups serviced by ISD: manufacturing, financial services and insurance
services businesses, telecommunications, transportation and public utilities.
All of HSD's clients are in the healthcare industry. ISD projects and services
for manufacturing may involve factory floor operations, materials management,
order processing, accounting and computer operating systems development and
support. Typical development projects for financial services firms include
applications for mutual fund analysis, fund tracking, stock transfer, customer
information, commercial and consumer loans, cash distribution, accounting and
human resource systems. Insurance company projects include such applications as
claims processing, agency management, coordination of benefits and subrogation,
pension, premium and loss reporting, accounting, compensation and benefits
systems. Projects for HSD's healthcare clients include applications for
accounting, patient registration and scheduling, and other patient care and
clinical functions. Organizations in each of these industries are highly
information-dependent and use mission-critical information systems as a
competitive advantage.
The following table sets forth a list of selected clients for which the Company
provided services in 1997:
3M Company
Aldus Corp.
American Express Co., Inc.
Ameritech
AT&T Corporation
Bose Corporation
Bank of Boston Corporation
Baxter Healthcare Corporation
Bell Atlantic
Cargill
Carrier
CIGNA Corporation
Cincinnati Bell Telephone
Department of Justice
Discover Card
Eastman Kodak Company
Elf Atochem North America
Exxon Corporation
Fidelity
Farmers Insurance Group
First Bank
General Electric Company
GTE Data Service Incorporated
Guardian Life Insurance
Hoffmann-La Roche, Inc
International Business Machines Corporation
J.D. Edwards
Jewel Food Stores, Inc.
Johns Hopkins Hospital
Liberty Mutual Insurance Co.
McDonald's Corporation
McKesson Corporation
Microsoft Corporation
Miller Brewing
National Assn. of Security Dealers
Northern Mutual Life Insurance
Northern Telecom, Inc.
The Pillsbury Company
Procter & Gamble Company
The Putnam Companies, Inc.
Reader's Digest Association, Inc.
Robert Wood Johnson Hospital
SD Warren
Transquest
U.S. Customs
Whirlpool Corporation
The Company has historically derived, and may in the future derive, a
significant percentage of its total revenue from a relatively small number of
clients. Keane's five largest clients accounted for approximately 29% and 27%
of the Company's total revenues during the years ended December 31, 1996 and
1997, respectively. The Company's two largest clients during 1996 were
International Business Machines Corporation ("IBM") and General Electric Company
("GE"). For the year ended December 31, 1996, IBM and GE accounted for
approximately 12% and 6%, respectively, of the Company's total revenues. For
1997, the Company's two largest clients were IBM and various organizations
within the Federal Government. IBM and the Federal Government accounted for
approximately 11% and 5%, respectively, of the Company's total revenues in 1997.
A significant decline in revenues from IBM, the Federal Government or GE could
have a material adverse effect upon the Company's total revenues. With the
exception of IBM, GE and the Federal Government, no single client accounted for
more than 5% of the Company's revenues during the three years ended December 31,
1997.
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In accordance with industry practice, nearly all 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 the business. The Company had
orders at December 31, 1997 of approximately $611 million, in comparison to
orders of approximately $202 million at December 31, 1996.
YEAR 2000: Among the services that the Company provides are assessment,
planning, migration/remediation and testing services for year 2000 compliance.
The Company has devoted significant resources to services that address the year
2000 problem and believes the market for these services will grow as the year
2000 approaches. However, there can be no assurance that the market for year
2000 services will continue to develop and if such market fails to grow, or
grows more slowly than anticipated, it could have an adverse effect on the
Company's business, operations and financial results. Although the Company
believes that the demand for its services relating to the year 2000 problem will
continue to exist after the year 2000, this demand will diminish significantly
over time and will eventually disappear. The Company's services addressing the
year 2000 problem involve key aspects of its clients' computer systems. A
failure in a client's system could result in a claim for substantial damages
against the Company, regardless of the Company's responsibility for such
failure. Litigation, regardless of its outcome, could result in substantial cost
to the Company. Accordingly, any contract liability claim or litigation against
the Company could have an adverse effect on the Company's business, operations
and financial results.
BRANCH OFFICES: Keane provides custom software services through its
headquarters in Boston, Massachusetts, and a network of ISD branch offices
located in major metropolitan areas throughout the United States and in the
province of Ontario. Branch offices are responsible for providing marketing,
software planning, analysis, design, implementation and maintenance services for
clients within assigned geographic territories. Each of these offices has the
necessary technical resources and management depth to service its targeted area.
Each office is led by a resident branch manager and has one or more client sales
representatives, service delivery managers, staffing and employee development
managers and personnel recruiters. In 1997, the average revenues generated by
each of Keane's Information Services branches was $16 million, which is up more
than 30% from 1996. Keane believes a strong local presence and capability
enable it to provide its clients with highly responsive and cost-effective
service, as well as dependable results. Keane also maintains HSD branches and
satellite offices located in California, Iowa, Maryland, New York, Texas and
Arizona.
The size and diversity of client projects at Keane's branch offices and hospital
sites enable it to learn from its experience and refine and leverage that
experience at other locations. Keane's infrastructure is designed to capture
and then continuously improve the software development and maintenance process.
Keane's branch offices are afforded the benefits of being part of a large
organization with many resources. Frequently, branches transfer personnel from
other branches with expertise within a specific technology, application or
industry. Each branch office is linked electronically so that experiences can
be shared and continuous process improvements can be realized.
EMPLOYEES: On December 31, 1997, Keane had 8,008 employees, including 7,378
technical staff whose services are billable to clients. At such date, 7,594
individuals were employed by ISD and 272 individuals were employed by HSD, with
the remaining 142 individuals providing Company-wide services at the Company's
corporate headquarters.
The Company believes that its future success will depend in part upon its
continued ability to attract and retain highly skilled managerial, technical,
sales and support personnel. Accordingly, Keane devotes significant resources
to its Human Resources Department, including a staff of over 100 recruiters.
The Company's current employees are also a valuable recruiting tool. During
1997, approximately 32% of the Company's new employees were referred to the
Company by existing personnel. There can be no assurance that the Company will
be able to continue to attract and retain personnel necessary for the
development of its business.
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The Company does not have employment contracts with its key employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
COMPETITION: The custom software services market is highly competitive and
characterized by continual change and improvement in technology. The market is
fragmented, and no company holds a dominant position. Consequently, the
Company's competition for client assignments and experienced personnel varies
significantly from city to city. The Company believes it is among the ten
largest custom software services firms serving the commercial market in the
United States.
The Company's competition also varies by the type of service provided. For
large application development and outsourcing projects, the Company competes
with consulting divisions of large public accounting firms, such as Andersen
Consulting, as well as companies such as Electronic Data Systems Corporation and
IBM Global Services. For systems implementation and maintenance, the Company
often competes with small, local firms, as well as large national firms,
including Analysts International Corp., Cap Gemini America, Computer Horizons
Corporation, Computer Sciences Corporation, and Computer Task Group, Inc. Some
of these competitors are larger and have greater financial resources than the
Company. In addition, clients may elect to increase their internal IS resources
to satisfy their custom software development needs.
The Company believes that the bases for competition in the software services
industry include the ability to compete cost-effectively, develop strong client
relationships, generate recurring revenues, utilize comprehensive delivery
methodologies and achieve organizational learning by implementing standardized
operational processes. The Company believes that it competes favorably with
respect to these factors.
In the healthcare software systems market, Keane competes with such companies as
SMS Corp., HBOC, and MEDITECH, Inc. Some of these competitors are larger in the
healthcare market and have greater financial resources than Keane. The Company
believes that significant competitive factors in the healthcare software systems
market include size and a demonstrated ability to provide service to targeted
healthcare markets.
There can be no assurance that the Company will continue to compete successfully
with its existing competitors or will be able to compete successfully with any
new competitors.
ITEM 2. PROPERTIES
The principal executive office of the Company is located at Ten City Square,
Boston, Massachusetts 02129, in an approximately 34,000 square foot office
building which is owned by City Square Limited Partnership. Several of the
Company's officers, directors and shareholders are limited partners of this
partnership. See Item 13 --"Certain Relationships and Related Transactions."
At December 31, 1997, the Company leased and maintained sales and support
offices in 54 locations in the United States. The aggregate annual rental
expense for the Company's sales and service offices was approximately $9,937,000
in 1997. The aggregate annual rental expense for all of the Company's
facilities was approximately $12,045,000 in 1997. For additional information
regarding the Company's lease obligations, see Note K of "Notes to Consolidated
Financial Statements. "
The Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
On December 31, 1992, Four Star Capital Corporation ("Four Star") commenced a
civil action against AGS Computers, Inc. ("AGS"), NYNEX Corporation ("NYNEX")
and Derek Proctor, a former employee of AGS, in Superior Court of California,
County of Marin, alleging among other things breach of contract with respect to
the
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solicitation of business for NYNEX and AGS in China. The case was
subsequently removed to the United States District Court for the Northern
District of California and transferred to the United States District Court for
the Southern District of New York. Four Star originally sought damages in the
amount of $5,600,000. However, on May 3, 1994, Four Star amended its complaint
to provide for a claim seeking relief in the amount of $25,000,000. Keane
acquired all of the outstanding capital stock of AGS in January 1994. In
December 1997, Keane, NYNEX and Four Star agreed to resolve this matter without
further litigation or judicial involvement. The final settlement agreement was
signed on January 12, 1998. The case was dismissed, with prejudice, on January
16, 1998.
On August 29, 1994, Marketing and Management Information, Inc. ("MAMI")
commenced a civil action against the Company, General Electric Consulting
Services Corporation ("GECON") and General Electric Company (General Electric
Information Service) ("GEIS") in the Circuit Court for Montgomery County,
Maryland, Case Number 123797. The Complaint alleged claims for breach of
contract, fraud and negligent misrepresentation in connection with a consulting
contract for computer development work between MAMI and GECON. The Company
assumed this contract as part of its acquisition of certain assets of GECON in
January 1993. The contract price for the consulting work alleged in the
Complaint totaled approximately $425,000. Despite the limitation on recoverable
damages contained in the contract, MAMI alleged damages in excess of $50,000,000
and claimed punitive damages in an amount more than double the compensatory
claim.
The Company denied the allegations of the Complaint and asserted a number of
affirmative defenses, including the defense that the claims of damages asserted
in the Complaint were barred by the terms of the underlying contract. The
Company was granted summary judgment on certain of MAMI's claims. After a trial
before a judge without a jury, on September 24, 1996, the court entered a
judgment in favor of the Company. On MAMI's remaining claim of negligent
misrepresentation against GECON, the court awarded MAMI the sum of
$1,261,276.36. Various post-judgment motions have been filed pertaining to the
award as it relates to damages against GECON. No post-judgment motions have
been filed with respect to the judgment entered in favor of the Company and the
deadline for filing any such motion has passed. In addition, no appeal was filed
regarding the judgment in favor of the Company, and the time for filing any such
appeal has passed.
The Company is also involved in other litigation and various legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the ultimate resolution of any existing matter 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.
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, 1997.
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EXECUTIVE OFFICERS OF THE COMPANY: The executive officers and directors of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
John F. Keane(1) 67 Chief Executive Officer, President, Director
John F. Keane, Jr. 38 Office of the President, Executive Vice
President
Brian T. Keane 37 Office of the President, Executive Vice
President
Edward H. Longo 54 Senior Vice President - Information Services
Division
Raymond W. Paris 60 Vice President - Healthcare Services Division
Wallace A. Cataldo 48 Vice President - Finance and Administration
Renee Southard 43 Vice President - Human Resources
Philip J. Harkins(1)(2) 50 Director
Winston R. Hindle, Jr.(1)(2) 67 Director
John F. Rockart(1)(2) 66 Director
Robert A. Shafto(1)(2) 62 Director
</TABLE>
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(1) Member of Audit Committee.
(2) Member of Compensation Committee.
All Directors hold office until the next annual meeting of the stockholders and
until their successors have been elected and qualified. The Company has no
standing nominating committee. Officers of the Company serve at the discretion
of the Board of Directors.
Mr. John Keane, the founder of the Company, has been Chief Executive Officer,
President and a director of the Company since the Company's incorporation in
March 1967. 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. John Keane, Jr. joined the Company in 1987 and was appointed Executive Vice
President and a member of the Office of the President in September 1997. Prior
to this role, Mr. Keane had been Senior Vice President since December 1996.
From December 1994 to December 1996, he was Area Vice President in the
Information Services Division. From January 1994 to December 1994, Mr. Keane
served as an ISD Business Area Manager. From July 1992 to January 1994, he acted
as manager of Software Reengineering, and from January 1991 to July 1992, he
served as Director of Corporate Development. John Keane, Jr. is a son of John
Keane, the founder, President, Chief Executive Officer and a director of the
Company, and a brother of Brian Keane.
Mr. Brian Keane joined the Company in 1986 and was appointed Executive Vice
President and a member of the Office of the President in September 1997. Prior
to this role, Mr. Keane had been Senior Vice President since
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December 1996. From December 1994 to December 1996, he was Area Vice President
in the Information Services Division. From July 1992 to December 1994, Mr. Keane
served as an ISD Business Area Manager and from January 1990 to July 1992, he
served as an ISD Branch Manager. Brian Keane is a son of John Keane, the
founder, President, Chief Executive Officer and a director of the Company, and a
brother of John Keane, Jr.
Mr. Longo joined the Company in March 1980 and has been Senior Vice President -
Information Services Division since December 1994. From January 1993 to
December 1994, he was Vice President - Information Services Division, Eastern
Region. From May 1987 to January 1993, he was Vice President of the New England
area of the Information Services Division. From June 1986 to May 1987, he was
an Area Manager of the Information Services Division.
Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of
the Healthcare Systems Division in 1981 and has served as Vice President and
General Manager of HSD since August 1986.
Mr. Cataldo joined the Company in June 1975 and has been Vice President -
Finance and Administration since October 1985. Mr. Cataldo served as Chief
Financial Officer from November 1983 to October 1985 and as Controller from
November 1978 to November 1983.
Ms. Southard joined the Company in July 1983 and has been Vice President - Human
Resources since December 1995. 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.
Mr. Harkins has been a director since February 1997. Mr. Harkins is currently
the President and Chief Executive Officer of Linkage, Inc., an organizational
development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins
was Vice President of Human Resources of the Company.
Mr. Hindle has been a director since February 1995. Mr. Hindle is currently
retired. From September 1962 to July 1994, Mr. Hindle served as a Vice
President and, subsequently, Senior Vice President of Digital Equipment
Corporation. Mr. Hindle is also a director of CP Clare Corporation and Mestech,
Inc.
Dr. Rockart has been a director since the Company's incorporation in March 1967.
Dr. Rockart has been a Senior Lecturer at the Alfred J. Sloan School of
Management of the Massachusetts Institute of Technology since 1974, and has been
the Director of The Center for Information Systems Research since 1976. Dr.
Rockart is also a director of ComShare Inc. and Renaissance Solutions, Inc.
Mr. Shafto has been a director since July 1994. Mr. Shafto is Chairman of New
England Financial, an office that he assumed on January 1, 1998. Through
December 31, 1997, he was Chairman, Chief Executive Officer and President of New
England Life Insurance Company, an insurance and investment firm which he joined
in 1972 as Second Vice President for Computer Systems Development and
Information Systems. Mr. Shafto was named President and Chief Operating Officer
of New England Life Insurance Company in 1989 and assumed the position of Chief
Executive Officer in January 1992. He was elected to the office of Chairman of
New England Life Insurance Company effective July 1, 1993. Mr. Shafto is also a
director of Fleet Bank of Massachusetts, N.A.
Compensation of the nonemployee 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 who are officers or employees of the Company
do not receive any additional compensation for their services as directors.
11
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PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's authorized capital stock consists of 100,000,000 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 13, 1998, there were 66,386,367 shares of Common Stock
outstanding and held of record by approximately 2,624 stockholders; 286,378
shares of Class B Common Stock outstanding and held of record by approximately
143 stockholders; and no shares of Preferred Stock outstanding.
COMMON STOCK AND CLASS B COMMON STOCK:
Voting. Each share of Common Stock is entitled to one vote on all matters
submitted to stockholders and each share of Class B Common Stock is entitled to
ten votes on all such matters. 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 to authorize further issuances of Class B
Common Stock and certain charter amendments. Voting for directors is
noncumulative.
As of March 13, 1998, the Class B Common Stock represented less than 1% of the
Company's outstanding equity, but had approximately 4% of the combined voting
power of the Company's outstanding Common Stock and Class B Common Stock. The
substantial voting rights of the Class B Common Stock may make the Company less
attractive as the potential target of a hostile tender offer or other proposal
to acquire the stock or business of the Company 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 the Board of Directors, out of funds legally available, 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 is paid at the same time on the shares of Common
Stock. In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock and Class B Common Stock have the right to ratable
portions of the net assets of the Company available after the payment of all
debts and other liabilities.
Trading Markets. The Company's Common Stock is traded on the American Stock
Exchange. The Common Stock is also registered pursuant to the Securities
Exchange Act of 1934, as amended. The Company furnishes to the holders of its
Common Stock and Class B Common Stock the same information and reports
concerning the Company. Shares of Class B Common Stock are not transferable by
a stockholder except for transfers (i) by gift, (ii) in the event of the death
of a stockholder, or (iii) by a trust to a person who is the grantor or a
principal beneficiary of such trust (individuals or entities receiving Class B
Common Stock pursuant to such transfers being 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 such shares of Common Stock in connection with any transfer of
such 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 Issuances of Class B Common Stock; Retirement of Class B Common Stock
Upon Conversion into Common Stock. The Company may not issue any additional
shares of Class B Common Stock without the approval of a majority of the votes
of the outstanding shares of Common Stock and Class B Common Stock voting as
separate classes. The Board of Directors may issue shares of authorized but
unissued Common Stock
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<PAGE>
and Preferred Stock without further stockholder action. 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 rights, preferences and privileges of holders of 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. See "Preferred Stock" below.
PREFERRED STOCK: The Company's Articles of Organization authorize the issuance
of up to 2,000,000 shares of Preferred Stock, $.01 par value per share.
Preferred Stock may be issued from time to time in one or more series, and the
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions, including the dividend rights, conversion rights,
voting rights, terms of redemption, redemption price or prices and liquidation
preferences, of any such series of Preferred Stock, and to fix the number of
shares of any such series 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.
Issuance 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 prices per
share as reported by the American Stock Exchange. All prices are adjusted to
reflect the 2-for-1 stock split that was distributed on August 29, 1997 to
stockholders of record as of on August 14, 1997.
Stock Price
High Low
-----------------
1997
First Quarter $18.56 $14.88
Second Quarter 29.35 15.06
Third Quarter 34.47 27.06
Fourth Quarter 40.69 26.88
1996
First Quarter $ 7.47 $ 5.13
Second Quarter 10.22 7.35
Third Quarter 12.00 8.35
Fourth Quarter 15.88 11.44
The closing price of the Common Stock on the American Stock Exchange on March
13, 1998 was $46.13.
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.
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Year Ended December 31, 1997
Total revenues $141,110 $151,966 $169,930 $191,389
Income before income taxes 17,276 19,474 21,096 22,759
Net income 9,848 11,100 12,023 12,978
*Net income per share (basic) .15 .17 .18 .20
*Net income per share (diluted) .15 .16 .18 .19
Year Ended December 31, 1996
Total revenues $105,761 $113,075 $120,900 $127,354
Income before income taxes 9,276 11,109 11,404 12,543
Net income 5,380 6,443 6,500 7,035
*Net income per share (basic) .08 .10 .10 .11
*Net income per share (diluted) .08 .10 .10 .11
* Adjusted to reflect the 2-for-1 stock split that was distributed on August
29, 1997 to shareholders of record as of August 14, 1997, and restated to
reflect the adoption of SFAS No. 128, "Earnings Per Share."
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Total revenues $175,808 $344,583 $382,739 $467,090 $654,395
Operating income 16,430 31,180 31,611 43,118 77,536
Net income 9,058 16,235 19,257 25,358 45,949
Net income per share (basic) .20 .29 .30 .39 .70
Net income per share
(diluted) .19 .29 .29 .38 .68
*Shares used in per
share calculation (basic) 46,352 55,628 64,700 65,694 66,010
*Shares used in per
share calculation (diluted) 47,592 56,648 65,392 66,454 67,517
- ---------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets $ 99,615 $179,002 $194,398 $235,214 $306,310
Total debt 4,323 12,317 9,146 6,593 3,403
Stockholders' equity 83,114 144,387 167,221 196,630 247,341
Book value per share 1.55 2.26 2.58 2.99 3.73
*Number of shares
outstanding 53,548 63,908 64,778 65,706 66,255
- ---------------------------------------------------------------------------------------
Financial Performance:
Total revenue growth 77.1% 96.0% 11.1% 22.0% 40.1%
Net margin 5.2% 4.7% 5.0% 5.4% 7.0%
Return on average equity 16.7% 16.1% 12.3% 14.0% 20.8%
</TABLE>
* Adjusted to reflect the 2-for-1 stock split that was distributed on
August 29, 1997 to shareholders of record as of August 14, 1997, and restated to
reflect the adoption of SFAS No. 128, "Earnings Per Share."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."
15
<PAGE>
RESULTS OF OPERATIONS, 1997 VS. 1996: In 1997, revenue increased 40.1% to $654.4
million, from $467.1 million in 1996. This increase in revenue resulted from
strong growth in each of the Company's service offerings, including year 2000
application outsourcing, application development, helpdesk and IT consulting
services. Year 2000 revenue increased 835% to $148.8 million, and application
outsourcing revenue increased 108% to $94.6 million. Revenue from application
development services increased 28% to $83.1 million. Helpdesk revenue increased
37% to $37.8 million. IT consulting services revenue increased 38% to $22.0
million. Other revenue increased 33% to $13.9 million. The Company believes that
these revenue increases are attributable to a strong economy in which companies
made substantial investments in their information systems. In addition, the
Company generated new revenues in 1997 as a result of the year 2000 compliance
issue, which is requiring many large corporations to contract with outside
service providers in order to achieve systems compliance by the year 2000.
Revenue from supplemental staffing services decreased 13% to $223.9 million.
This decrease resulted from the Company's decision to de-emphasize supplemental
staffing in 1997 in favor of strategic services, which, historically, produce
higher margins than supplemental staffing. Revenue from the Company's Healthcare
Services Division increased to $30.3 million.
Salaries, wages, and other direct costs for 1997 were $437.9 million, or
66.9% of revenue, compared to $315.9 million, or 67.6% of revenue, for 1996, a
decrease of 0.7%. This decrease is due to the Company's ability to increase its
average billing rates by more than the increase in related technical salary
costs, which, in turn, is attributable to an increase in strategic services work
being performed by the Company. Higher rates can be charged for such work due to
the labor expertise required and the use of the Company's Proprietary
Methodologies.
Selling, General, & Administrative ("SG&A") expenses for 1997 were $124.9
million, or 19.1% of revenue, compared to $95.6 million, or 20.5% of revenue, in
1996, a decrease of 1.4% as a percentage of revenue. The Company's objective is
to continue to attempt to reduce SG&A, as a percentage of revenue, by realizing
the economics of scale associated with increasing revenue without
proportionately increasing SG&A, and to continue to implement cost saving
programs in such areas as travel and employee benefits.
Amortization of goodwill and other intangible assets for 1997 was $14.0
million, or 2.1% of revenue, compared to $12.5 million, or 2.7% of revenue, in
1996.
Interest and other expenses for 1997 totaled $1.0 million, compared to $1.2
million in 1996. Interest and other related income for 1997 totaled $4.0
million, compared to $2.4 million in 1996. The increase in interest and other
related income can be attributed to the increase in investments.
Pretax income for 1997 was $80.6 million, or 12.3% of revenue, up 81.8%
from pretax income of $44.3 million, or 9.5% of revenue, in 1996.
The Company's effective tax rate for 1997 was 43.0% compared to 42.8% in
1996. The effective tax rate reflects a combination of federal and state income
taxes.
Net income and earnings per share for 1997 were $45.9 million and $.68 per
share diluted, respectively, up 81.2% from $25.4 million and $.38 per share
diluted, respectively, in 1996.
RESULTS OF OPERATIONS, 1996 VS. 1995: The Company's revenues for 1996 were
$467.1 million, up 22.0% over 1995 revenues of $382.7 million. The Company's
operations are conducted through two divisions--the Information Services
Division (ISD), which accounted for 93.5% of Keane's revenues in 1996, and the
Healthcare Services Division (HSD), which accounted for the remaining 6.5% of
Keane's revenues.
ISD revenues for 1996 were $436.9 million, up 22.4% from 1995. ISD
services are delivered primarily in the areas of Application Development,
Application Outsourcing, Help Desk and Supplemental Staffing. The Division's
revenue grew in each of these areas in 1996, although Application Outsourcing
and Application Development accounted for over 50% of the Division's revenue
growth. The Company believes that demand for Application Outsourcing has
increased primarily as a result of an economic climate in which companies are
looking to increase their MIS productivity while reducing costs, and that demand
for Application Development
16
<PAGE>
services has increased due to a strong economy in which companies are investing
in their management information systems and in Year 2000 compliance.
HSD revenues for 1996 were $30.2 million, an increase of $4.3 million or 16.6%
from revenues of $25.9 million in 1995. This increase is primarily attributable
to the acquisition of Source Data Systems in November, 1995.
Salaries, wages and other direct costs for 1996 were $315.9 million, or
67.6% of revenues, compared to $256.5 million, or 67.0% of revenues, in 1995, a
0.6% increase as a percentage of revenue. Of this increase in direct cost
percentage, 0.4% is primarily attributable to low margin third-party business
for IBM performed pursuant to Keane's national contract with IBM. The balance
of the increase is primarily due to increased technical salaries which were not
completely offset by corresponding increases in the Company's direct billing
rates. This increase in direct cost is the lowest increase in the last three
years and was more than offset by reductions in SG&A expenses as a percentage of
revenue. The lower increase in direct cost is primarily due to the increases in
revenues from Application Outsourcing, Application Development and Help Desk
business. Revenues from these services typically command higher rates and are
for a longer term with higher employee productivity compared to traditional
supplemental staffing services.
SG&A expenses for 1996 were $95.6 million, or 20.5% of revenues, compared to
$82.5 million, or 21.5% of revenues, in 1995, a 1.0% decrease as a percentage of
revenues. The Company's objective is to continue to attempt to reduce SG&A at
the same or a greater rate than increases in direct costs. The Company seeks to
achieve this objective by realizing the economies of scale associated with
increasing revenues through an aggressive internal growth plan without
proportionately increasing SG&A.
Amortization of goodwill and other intangible assets for 1996 was $12.5
million, or 2.7% of revenues, compared to $12.2 million, or 3.2% of revenues, in
1995.
Interest and other related expenses for 1996 totaled $1.2 million compared
to $0.7 million in 1995. This increase in interest and other related expenses
is attributable to a $0.4 million forfeiture for interest expense on a note
payable to G.E. in 1995. Interest and other related income for 1996 totaled
$2.4 million, compared to $1.6 million in 1995.
Pretax income for 1996 was $44.3 million, or 9.5% of revenues, up 36.1% from
pretax income of $32.6 million, or 8.5% of revenues, in 1995.
The Company's effective tax rate for 1996 was 42.8% compared to 40.9% in 1995.
This increase is primarily attributable to a one-time reduction in state income
taxes in 1995.
Net income and earnings per share for 1996 were $25.4 million and $.38 per share
diluted, respectively, up 31.7% from $19.3 million and $.29 per share diluted,
respectively, in 1995.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
This standard requires that comprehensive income and its components be reported
in a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income, as well as
certain items that are recorded directly in stockholders' equity, such as
foreign currency translation. This standard is effective for years beginning
after December 15, 1997, and will have no impact on the Company's financial
condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires disclosure of
financial and descriptive information about an entity's reportable operating
segments. Segments are defined by the standard as components of an entity that
engage in business activities that generate revenues and expenses, and for which
separate financial information is available that is reviewed regularly by
senior management to evaluate performance and allocate resources. Such financial
information should be reported on the basis that is used internally for senior
management review. This standard is effective for financial statements for
periods beginning after December 15, 1997, with restatement of comparative
information for prior periods. This standard is not expected to have an impact
on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and investments at December
31, 1997 increased to $84.4 million from $69.1 million at December 31, 1996.
This increase was primarily attributable to net income, increased accounts
payable and accrued expenses, offset by increased accounts receivable and
expenditures associated with the adding and expanding of facilities to support
the Company's growth. In addition, the Company maintains and has available a $20
million unsecured demand line of credit split equally between two major Boston
banks for operations and acquisition opportunities. The Company's debt,
including accrued interest, as of December 31, 1997 was $3.4 million, which
consisted primarily of a $3.0 million non-interest-bearing note discounted at 7%
related to an acquisition.
Based on its current operating plan, the Company believes that its cash, cash
equivalents and investments on hand, cash flows from operations and current
available lines of credit will be sufficient to meet its working capital
requirements for at least the next twelve months.
17
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES: Inflationary increases in costs
have not been material in recent years and, to the extent permitted by
competitive pressures, are passed on to the clients through increased billing
rates. Rates charged by the Company are based on the cost of labor and market
conditions within the industry. The Company has been able to increase its
billing rates over its increases in direct labor in 1997. This is due primarily
to our increase in client strategic services in which competition is less and
the quality 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 Annual Report on Form
10-K and presented elsewhere by management from time to time.
The Company has experienced and expects to continue to experience fluctuations
in its quarterly results. Gross margins vary based on a variety of factors
including employee utilization rates and the number and type of services
performed by the Company during a particular period. A variety of factors
influence the level of the Company's revenues in a particular quarter, including
general economic conditions which may influence its clients and potential
clients to invest in their information systems or to downsize their businesses,
the number and requirements of client engagements, employee utilization rates,
changes in the rates the Company is able to charge clients for its services,
acquisitions by the Company and other factors, many of which are beyond the
Company's control. Since a significant portion of the expenses of the Company do
not vary relative to the Company's level of revenues, if revenues in a
particular quarter do not meet expectations, operating results will be adversely
affected, which may have an adverse impact on the market price of the Company's
Common Stock. In addition, many of the Company'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 revenues and
profits.
In the past five years, the Company has grown significantly through
acquisitions, and the Company's future growth may be based in part on selected
acquisitions. The Company's ability to expand successfully by acquisitions
depends on many factors, including the successful identification and acquisition
of businesses and management's ability to integrate and operate the new
businesses effectively. The Company competes for acquisition candidates with
other entities, some of whom have greater financial resources than the Company.
Increased competition for acquisition candidates may result in fewer acquisition
opportunities being made available to the Company as well as less advantageous
acquisition terms, including increased purchase prices. The anticipated benefits
from any acquisition may not be achieved unless the operations of the acquired
business are successfully combined with those of the Company in a timely manner.
The integration of the Company's acquisitions requires substantial attention
from management. The diversion of the attention of management, and any
difficulties encountered in the transition process, could have an adverse impact
on the Company's revenues and operating results. In addition, the process of
integrating the various businesses could cause the interruption of, or a loss of
momentum in, the activities of some or all of these businesses, which could have
an adverse effect on the Company's business, operations and financial results.
The Company 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. There can
be no assurance that the Company will continue to attract and retain personnel
necessary for the development of its business.
The custom software services market is highly competitive and characterized
by continual change and improvement in technology. The market is fragmented,
and no company holds a dominant position. Consequently, the Company's
competition for client assignments and experienced personnel varies
significantly from city to city and by the type of service provided. Some of
Keane's competitors are larger and have greater
18
<PAGE>
technical, financial and marketing resources and greater name recognition in the
markets they serve than does the Company. In addition, clients may elect to
increase their internal information systems resources to satisfy their custom
software development needs. The Company believes that the bases for competition
in the software services industry include the ability 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, the Company competes with some companies that are larger in the
healthcare market and have greater financial resources than the Company. The
Company believes that significant competitive factors in the healthcare software
systems market include size and demonstrated ability to provide service to
targeted healthcare markets. There can be no assurance that the Company will
continue to compete successfully with its existing competitors or will be able
to compete successfully with any new competitors.
In recent years, the stock market in general and the market for technology
stocks, in particular, including the Company's Common Stock, have experienced
extreme price fluctuations. There is a risk that stock price fluctuation could
impact the Company's operations. Changes in the price of the Company's Common
Stock could affect the Company's ability to successfully attract and retain
qualified personnel or complete necessary business combinations or other
transactions in the future.
The Company has assessed its internal computer systems and has identified
certain internal systems that are not year 2000 compatible (i.e., such systems
use only two digits to represent the year in date data fields and, consequently,
may not accurately distinguish between the 20th and 21st centuries or may not
function properly at the turn of the century). The Company is in the process of
correcting such systems or replacing them with year 2000 compliant systems. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues and does not believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on the Company's business, operations and financial results.
Among the services that the Company provides are assessment, planning,
migration/remediation and testing services for year 2000 compliance. The
Company has devoted significant resources to services that address the year 2000
problem and believes the market for these services will grow as the year 2000
approaches. However, there can be no assurance that the market for year 2000
services will continue to develop and if such market fails to grow, or grows
more slowly than anticipated, it could have an adverse effect on the Company's
business, operations and financial results. Although the Company believes that
the demand for its services relating to the year 2000 problem will continue to
exist after the year 2000, this demand will diminish significantly over time and
will eventually disappear. The Company's services addressing the year 2000
problem involve key aspects of its clients' computer systems. A failure in a
client's system could result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure.
Litigation, regardless of its outcome, could result in substantial cost to the
Company. Accordingly, any contract liability claim or litigation against the
Company could have an adverse effect on the Company's business, operations and
financial results.
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.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Accountants.................................... 21
Consolidated Balance Sheets as of December 31, 1996 and 1997......... 22
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997..................................... 23
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997......................... 24
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997............................... 25
Notes to Consolidated Financial Statements........................... 26-37
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. 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 generally accepted auditing
standards. 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. as of
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
March 3, 1998
21
<PAGE>
KEANE, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 1997
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 38,837 $ 33,644
Short term investments 3,293 6,607
Accounts receivable, net:
Trade 94,773 147,668
Other 2,447 1,588
Prepaid expenses and other current assets 5,536 10,597
------------ ------------
Total current assets 144,886 200,104
Long term investments 26,949 44,139
Property and equipment, net 10,658 20,546
Intangible assets, net 46,815 32,778
Other assets, net 5,906 8,743
------------ ------------
$ 235,214 $ 306,310
============ ============
Liabilities
Current:
Accounts payable $ 9,825 $ 17,892
Accrued expenses and other liabilities 5,454 12,833
Accrued compensation 11,036 22,786
Note payable 3,191 3,004
Accrued income taxes 5,677 2,055
Capital lease obligations 236 211
------------ ------------
Total current liabilities 35,419 58,781
Notes payable 2,807 --
Capital lease obligations 358 188
Commitments and contingencies (Note K)
Stockholders' Equity
Preferred stock, par value $.01, authorized
2,000,000 shares, issued none -- --
Common stock, par value $.10, authorized
100,000,000 shares, issued and outstanding
65,723,340 in 1996 and 66,274,042 in 1997 6,572 6,627
Class B common stock, par value $.10, authorized
503,797 shares, issued and outstanding
287,613 in 1996 and 286,615 in 1997 29 29
Additional paid-in capital 92,646 97,680
Foreign currency translation (45) (372)
Retained earnings 99,841 145,790
Less treasury stock at cost, 305,615 shares (2,413) (2,413)
------------ ------------
Total stockholders' equity 196,630 247,341
------------ ------------
$ 235,214 $ 306,310
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31, 1995 1996 1997
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Total revenues $ 382,739 $ 467,090 $ 654,395
Salaries, wages and other direct costs 256,474 315,921 437,901
Selling, general and administrative expenses 82,470 95,552 124,921
Amortization of goodwill and other intangible assets 12,184 12,499 14,037
---------- ---------- ----------
Operating income 31,611 43,118 77,536
Investment income 1,636 2,404 4,045
Interest expense 486 449 162
Other expenses, net 176 741 814
---------- ---------- ----------
Income before income taxes 32,585 44,332 80,605
Provision for income taxes 13,328 18,974 34,656
---------- ---------- ----------
Net income $ 19,257 $ 25,358 $ 45,949
========== ========== ==========
Net income per share (basic) $ 0.30 $ 0.39 $ 0.70
========== ========== ==========
Net income per share (diluted) $ 0.29 $ 0.38 $ 0.68
========== ========== ==========
Weighted average common share outstanding (basic) 64,700 65,694 66,010
========== ========== ==========
Weighted average common and common share equivalents
outstanding (diluted) 65,392 66,454 67,517
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended
December 31, 1995, 1996 And 1997
- -------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Class B Treasury Stock at
Common Stock Common Stock Additional Foreign Cost
------------------- -------------- Paid-In Currency Retained ----------------------
Shares Amount Shares Amount Capital Translation Earnings Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 63,922,301 $6,392 288,965 $29 $85,226 ($74) $55,226 (303,414) ($2,412) $144,387
Common Stock issued under:
1982 Stock Option Plan 343,000 34 661 695
1992 Stock Option Plan 176,900 18 482 500
1992 Employee Stock
Purchase Plan 316,180 32 1,641 1,673
1983 Restricted Stock
Purchase Plan 34,300 3 188 191
Conversions of Class B Common
Stock into Common Stock 707 (707) --
Income tax benefit from stock
option plans 485 485
Foreign currency translation
adjustment 32 32
Treasury Stock Purchase (900) --
Net income 19,257 19,257
-----------------------------------------------------------------------------------------------------
Balance December 31, 1995 64,793,388 6,479 288,258 29 88,683 (42) 74,483 (304,314) (2,412) 167,220
Common Stock issued under:
1982 Stock Option Plan 329,000 33 634 667
1992 Stock Option Plan 346,434 35 1,054 1,089
1992 Employee Stock Purchase
Plan 255,174 26 1,692 1,718
1983 Restricted Stock Purchase
Plan (1,301) (1) (1)
Conversions of Class B Common
Stock into Common Stock 645 (645) --
Income tax benefit from stock
option plans 583 583
Foreign currency translation (3) (3)
Treasury Stock purchase
adjustment (1,301) (1) (1)
Net income 25,358 25,358
-----------------------------------------------------------------------------------------------------
Balance December 31, 1996 65,723,340 6,572 287,613 29 92,646 (45) 99,841 (305,615) (2,413) 196,630
Common Stock issued under:
1992 Stock Option Plan 413,004 41 1,500 1,541
1992 Employee Stock Purchase
Plan 136,700 14 2,506 2,520
Conversions of Class B Common
Stock into Common Stock 998 (998) --
Income tax benefit from stock
option plans 1,028 1,028
Foreign currency translation
adjustment (327) (327)
Net income 45,949 45,949
--------------------------------------------------------------------------------------------------
Balance December 31, 1997 66,274,042 $6,627 286,615 $29 $97,680 ($372) $145,790 (305,615) ($2,413) $247,341
========== ====== ======= === ======= ====== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31, 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 19,257 $ 25,358 $ 45,949
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,767 19,282 21,442
Deferred income taxes (1,023) (3,994) (7,524)
Provision for doubtful accounts 851 3,621 3,391
Loss (gain) on sale of property and equipment 73 (18) 14
Non-cash interest on long-term debt 135 380 197
Tax benefit from stock options 485 583 1,028
Changes in assets and liabilities, net of acquisitions:
(Increase) in accounts receivable (11,285) (18,487) (54,729)
(Increase) in prepaid expenses and other assets (3,256) (237) (282)
Increase (decrease) in accounts payable and accrued
expenses and other liabilities (4,012) 8,331 25,842
Increase (decrease) in income taxes payable -- 5,677 (3,717)
----------- ----------- -----------
Net cash provided by operating activities 18,992 40,496 31,611
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of investments (13,343) (34,586) (60,080)
Sale of investments 2,012 15,675 39,577
Purchase of property and equipment (5,675) (4,098) (17,494)
Proceeds from the sale of property and equipment 111 216 519
Payments for acquisitions (8,910) (747) --
----------- ----------- -----------
Net cash (used for) investing activities (25,805) (23,540) (37,478)
----------- ----------- -----------
Cash Flows From Financing Activities:
Payments under long-term debt -- (2,982) (3,191)
Principal payments under capital lease obligations (430) (522) (195)
Proceeds from issuance of common stock 2,869 3,472 4,060
----------- ----------- -----------
Net cash provided by (used for) financing activities 2,439 (32) 674
Net increase (decrease) in cash and cash equivalents (4,374) 16,924 (5,193)
Cash and cash equivalents at beginning of year 26,287 21,913 38,837
----------- ----------- -----------
Cash and cash equivalents at end of year $ 21,913 $ 38,837 $ 33,644
=========== =========== ===========
Supplemental information:
Interest paid $ -- $ -- $ --
Income taxes paid 14,463 16,652 45,017
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Keane, Inc. (the "Company") and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NATURE OF OPERATIONS: The Company provides software design, development,
integration and management services for corporations, government agencies and
healthcare facilities. The Company serves its clients through two operating
divisions and a network over 50 branch offices and satellite offices located
across the United States and in Canada. The Information Services Division
("ISD"), which accounted for approximately 95% of the Company's revenues in
1997, provides software design, development and management services to
corporations and government agencies with large and recurring software
development needs. The Healthcare Services Division ("HSD") develops, markets
and supports financial, patient care and clinical application software for
hospitals and long-term care facilities. The Company primarily provides
services to Fortune 1000 companies.
REVENUE RECOGNITION: The Company provides system design, implementation and
support services under fixed price and time and materials contracts. For fixed
price contracts, revenue is recorded on the basis of the estimated percentage of
completion of services rendered. Losses, if any, on fixed price contracts are
recognized when the loss is determined. For time and materials contracts,
revenue is recorded at contractually agreed upon rates as the costs are
incurred. Revenues for software application sales are recognized on the basis
of customer acceptance over the period of software implementation.
The Company provides services to multiple General Electric (GE) and
International Business Machines (IBM) locations. The Company believes that each
GE and IBM location served by the Company is essentially autonomous. Each
location contracts separately for its services and each contract involves
different projects. Aggregate revenues for GE totaled approximately $33 million,
$28 million and $29 million in 1995, 1996 and 1997, respectively. Aggregate
revenues for IBM totaled approximately $51 million, $55 million and $70 million
in 1995, 1996 and 1997, respectively.
FOREIGN CURRENCY TRANSLATION: For the Company's Canadian subsidiary, the
Canadian dollar is the functional currency. All assets and liabilities of the
Company's Canadian subsidiary are translated at exchange rates in effect at the
end of the period. Income and expenses are translated at rates that approximate
those in effect on transaction dates. The translation differences are charged
or credited directly to the translation adjustment account included as part of
stockholders' equity. Realized foreign exchange gains and losses are included
in other income (expense).
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid
investments with a maturity of three months or less at the time of purchase.
Cash equivalents at December 31, 1997 included investments in commercial paper
($22.0 million), corporate bonds ($4.3 million) and money market funds ($2.3
million). Cash equivalents at December 31, 1996 included investments in
commercial paper ($24.0 million), corporate bonds ($6.8 million) and money
market funds ($1.1 million).
FINANCIAL INSTRUMENTS: The carrying amounts of cash equivalents and investments
approximate their fair values. Based on the borrowing rates currently available
to the Company for bank loans with similar terms and maturities, the fair value
of the Company's debt obligations approximates their carrying value.
INVESTMENTS: Investments are stated at fair value as reported by the investment
custodian. The Company determines the appropriate classification of debt and
equity securities at the time of purchase and re-evaluates such designations as
of each balance sheet date. Investments are currently designated as available-
for-sale, and as such, unrealized gains and losses are reported in a separate
component of stockholders' equity. At December 31, 1996 and 1997, the market
value of these investments approximated cost.
26
<PAGE>
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Repair and
maintenance costs are charged to expense. Depreciation is computed on a
straight-line basis over estimated useful lives of 25 to 40 years for buildings
and improvements, and 3 to 5 years for office equipment, computer equipment and
software. Leasehold improvements are amortized over the shorter of the
estimated useful life of the improvement or the term of the lease. Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is included in income.
INTANGIBLE ASSETS: Intangible assets consist principally of goodwill, the excess
of the purchase price over the appraised fair value of assets acquired in
acquisitions, and acquired customer-based intangibles, noncompetition
agreements, and software initially recorded at appraised fair value.
Intangibles are amortized on a straight-line basis over 14 or 15 years for
goodwill and 3 to 15 years for other intangibles. At each reporting date,
management assesses whether there has been a permanent impairment in the value
of its long-term assets and the amount of such impairment by comparing
anticipated undiscounted future operating income from acquired business units
with the carrying value of the related goodwill. The factors considered by
management in performing this assessment include current operating results,
trends and prospects, as well as the effects of demand, competition and other
economic factors.
The Company capitalized approximately $1.3 million and $0.5 million of computer
software development costs during 1995 and 1996, respectively. There were no
costs capitalized in 1997. Costs are amortized over the expected life of the
product, approximately 5 years, upon release.
INCOME TAXES: The Company accounts for income taxes under the liability method
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. INVESTMENTS
At December 31, 1997, the Company's investments included obligations of the U.S.
Government ($11.8 million), municipal bonds ($7.6 million), mortgage pass
throughs ($9.6 million), corporate bonds ($19.7 million) and commercial paper
($2.0 million). At December 31, 1996, the Company's investments included
obligations of the U.S. Government ($8.0 million), municipal bonds ($4.7
million) and commercial paper ($17.5 million). Contractual maturities at
December 31, 1997 were $6.6 million due within one year and $44.1 million due
after one through five years. Actual maturities may differ from contractual
maturities because the issuers of these securities may have the right to prepay
obligations without penalty. There was no gain or loss, based on a specific
identification basis, realized on the sale of available for sale securities
during the years ended December 31, 1995, 1996 and 1997.
C. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an allowance for doubtful accounts of
$3.7 million and $4.9 million at December 31, 1996 and 1997, respectively. The
provisions charged to the statement of operations were $1.0 million, $3.6
million and $3.3 million in 1995, 1996, and 1997, respectively, and write-offs
against the allowances were $1.6 million, $1.7 million and $2.1 million in 1995,
1996, and 1997, respectively.
27
<PAGE>
D. PROPERTY AND EQUIPMENT
(IN THOUSANDS)
Property and equipment consist of the following:
December 31,
1996 1997
------------- -------------
Buildings and improvements $ 850 $ 772
Office equipment 23,503 35,226
Computer equipment and software 4,897 5,517
Leasehold improvements 2,497 5,301
--------- ---------
31,747 46,816
Less accumulated depreciation and amortization 21,089 26,270
--------- ---------
$ 10,658 $ 20,546
========= =========
Depreciation expense totaled $5,584, $6,783 and $7,406 in 1995, 1996 and 1997,
respectively. Computer equipment and software includes assets arising from
capital lease obligations at a cost of $1,590 and $1,628, with accumulated
amortization totaling $951 and $1,263, at December 31, 1996 and 1997,
respectively.
E. INTANGIBLE ASSETS
(IN THOUSANDS)
Intangible assets consist of the following:
December 31,
1996 1997
------------- -------------
Goodwill $ 20,360 $ 20,360
Noncompetition agreements 22,203 22,203
Customer-based intangibles 37,915 37,915
Software 8,089 8,089
Other 1,208 1,208
--------- ---------
89,775 89,775
Less accumulated amortization 42,960 56,997
--------- ---------
$ 46,815 $ 32,778
========= =========
28
<PAGE>
F. ACCRUED EXPENSES AND OTHER LIABILITIES
(IN THOUSANDS)
Accrued expenses and other liabilities consist of the following:
December 31,
1996 1997
----------------------------
Deferred savings and profit sharing plan $ 705 $ 3,156
Health insurance costs 472 285
Accrued payroll taxes 358 609
Accrued rent obligations 500 1,241
Other 3,419 7,542
--------- ---------
$ 5,454 $ 12,833
========= =========
G. CAPITAL LEASE OBLIGATIONS
(IN THOUSANDS)
The Company finances certain equipment through capital leases. At December 31,
1997, future minimum lease payments under noncancelable capital leases, together
with the present value of minimum lease payments, are summarized below:
Year ending December 31, 1998 $ 228
Year ending December 31, 1999 191
Year ending December 31, 2000 3
-------
Total minimum payments 422
Less amount representing future interest 23
-------
Present value of net minimum payments 399
Less current portion 211
-------
Long-term portion of capital lease payments $ 188
=======
Equipment acquired under capital lease obligations for 1995, 1996 and 1997
totaled approximately $162, $570 and $72, respectively.
H. NOTES PAYABLE
In conjunction with the Company's acquisition of General Electric Consulting
(see Note N), a $4 million note with interest of 5% was payable to General
Electric on December 29, 1995. The note was subject to reduction to the extent
that the Company's average annual revenue from business with General Electric
and its affiliates during the three year period ending December 31, 1995 was
less than a specified amount. The Company's revenue from business with General
Electric was less than the specified amount and, accordingly, the principal
amount was reduced to $324,750 which was paid in January 1996. In addition, the
$400,010 of interest accrued in prior years was reduced to approximately
$52,000. The reduction in the principal amount of the note resulted in a
commensurate reduction in goodwill. The reduction in previously accrued
interest of approximately $348,000 was recorded as a reduction in interest
expense in 1995.
In conjunction with the AGS acquisition (see Note N), the Company and NYNEX also
executed a separate noncompetition agreement covering a four-year period in
exchange for a noninterest-bearing $12.0 million subordinated note due in four
equal annual installments of $3.0 million beginning in January 1995.
Subsequently, the Company made certain disbursements, totaling approximately
$2.9 million, on behalf of NYNEX. In 1994, NYNEX reimbursed these amounts and
made certain other adjustments to the purchase price by offsetting $4.0
29
<PAGE>
million against the first two installments due under the subordinated note. The
Company has recorded the note at its present value discounted at 7% which
equaled $5.8 million December 31, 1996 and $3.0 million at December 31, 1997.
I. CAPITAL STOCK
In November 1996, the Company distributed a stock split effected in the form of
a stock dividend of one share of Common Stock for every one share of Common
Stock and one share of Common Stock for every one share of Class B Common Stock
then outstanding. All share and per share data have been adjusted to reflect
this stock split.
In May 1997, the stockholders approved an amendment to the Company's Articles of
Organization increasing the number of shares of Common Stock authorized for
issuance to 100,000,000 shares.
In August 1997, the Company distributed a stock split effected in the form of a
stock dividend of one share of Common Stock for every one share of Common Stock
and one share of Common Stock for every one share of Class B Common Stock then
outstanding. All share and per share data have been adjusted to reflect this
stock split.
The Company has three classes of share capital: Preferred Stock, Common Stock
and Class B Common Stock. Holders of Common Stock are entitled to one vote for
each share held. Holders of Class B Common Stock generally vote as a single
class with holders of Common Stock but are entitled to 10 votes for each share
held. The Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions, including the dividend rights, conversion rights,
voting rights, terms of redemption price or prices and liquidation preferences,
of any series of Preferred Stock, and to fix the number of shares of any such
series. The Common Stock and Class B Common Stock have equal liquidation and
dividend rights except that any regular quarterly dividend declared shall be
$.05 per share less for holders of Class B Common Stock. Class B Common Stock
is nontransferable, except under certain conditions, but may be converted into
Common Stock on a share-for-share basis at any time. Conversions to common
stock totaled 707, 645 and 998 shares in 1995, 1996 and 1997, respectively.
Shares of common stock reserved for conversions totaled 286,615 at December 31,
1997.
J. STOCK OPTION, STOCK PURCHASE, COMPENSATION AND RETIREMENT PLANS
STOCK OPTION PLANS: The Company has three stock-based compensation plans, which
are described below. The Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation," in 1996 and has continued to apply
APB Opinion 25 and related Interpretations in accounting for its plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1995, 1996 and 1997 would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
----------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income - as reported $ 19,257 $ 25,538 $ 45,949
Net income - pro forma 18,901 24,564 43,964
Net income per share - as reported (diluted) .29 .38 .68
Net income per share - pro forma (diluted) .29 .37 .65
</TABLE>
30
<PAGE>
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of effects on reported net income for future years. SFAS 123
does not apply to awards prior to 1995 and additional awards in future years are
anticipated.
The fair market value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 4.5 years in 1995 and 1996 and 4.0 years in
1997, expected volatility of 37% in 1995 and 1996 and 41% in 1997, a dividend
yield of 0% and risk-free interest rates between 5.5-7.5%.
The 1982 Incentive Stock Option Plan provides for grants of stock options of up
to 1,800,000 shares of the Company's Common Stock to be made to officers and key
employees. Generally, options expire five years from the date of grant, require
a purchase price of not less than 100% of the fair market value of the stock as
of the date of grant, and are exercisable at such time or times as the Board of
Directors in each case determines. The remaining 164,500 options at $4.06 were
exercised during 1995.
The 1992 Stock Option Plan provides for grants of stock options for up to
3,600,000 shares of the Company's Common Stock to employees, officers and
directors of, and consultants and advisors to, the Company. Generally, options
expire five years from the date of grant, require a purchase price of not less
than 100% of the fair market value of the stock as of the date of grant, and are
exercisable at such time or times as the Board of Directors in each case
determines. The Company may grant options that are intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code
("incentive stock options") or nonstatutory options not intended to qualify as
incentive stock options. The number and weighted-average exercise price of
exercisable shares as of December 31, 1996 and 1997 was 219,500 shares at $3.00
and 367,508 shares at $3.57 per share, respectively.
The weighted-average fair value of options granted during the years ended
December 31, 1995, 1996 and 1997 was $2.21, $2.45 and $6.32, respectively.
31
<PAGE>
Transactions under the plan are as follows:
WEIGHTED
COMMON AVERAGE
STOCK EXERCISE PRICE
Outstanding at December 31, 1994 1,492,000 $ 3.21
Granted 746,000 5.28
Exercised (176,900) 2.83
Canceled/Expired (319,000) 3.76
----------
Outstanding at December 31, 1995 1,742,100 4.03
Granted 756,000 6.24
Exercised (346,434) 3.15
Canceled/Expired (128,000) 4.29
----------
Outstanding at December 31, 1996 2,023,666 4.98
Granted 555,000 20.63
Exercised (413,004) 3.73
Canceled/Expired (93,998) 6.83
--------
Outstanding at December 31, 1997 2,071,664 $ 9.25
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- --------------------------
Weighted Average
Range of Remaining Weighted
Exercise Number Contractual Average Number Weighted Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
----------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.78 -- $ 3.84 253,500 0.3 years $ 2.83 253,500 $2.83
4.61 -- 6.17 75,000 1.5 years 4.76 24,000 4.76
5.19 -- 7.25 508,164 2.8 years 5.30 90,008 5.32
6.00 -- 11.19 706,000 3.7 years 6.26 - -
15.32 -- 32.75 529,000 4.8 years 20.78 - -
-------
2.78 -- 32.75 2,071,664 $ 9.25 367,508 $3.57
</TABLE>
STOCK PURCHASE PLANS: The Company's 1983 Restricted Stock Purchase Plan provides
for grants of 2,025,000 shares of Common Stock to be made to key employees at
the discretion of the compensation committee of the Board of Directors. No
grants were issued during 1996 and 1997 with 35,200 shares issued during 1995.
At December 31, 1997, 1,377,760 shares remained available for future grants.
Restrictions on the sale or transfer of
32
<PAGE>
shares lapse three years after the date of grant. As grants are issued, deferred
compensation equivalent to the market value at the date of grant, less $.10 per
share of the purchase price, is amortized to compensation expense over the
three-year vesting period. The amount of amortization for 1995, 1996 and 1997
was $53, $54 and $47, respectively.
The Company's 1992 Employee Stock Purchase Plan provides for the purchase of
2,550,000 shares of Common Stock by qualifying employees at a purchase price of
85% of the market value of the stock on the purchase date. During 1995, 1996 and
1997, participants in this plan purchased 316,180, 257,776 and 136,700 shares,
respectively. Shares available for future purchases totaled 1,306,864 at
December 31, 1997.
COMPENSATION PLANS: During 1988, the Company established incentive compensation
plans for certain officers and selected employees. Payments under the plans are
based on actual performance compared to stated plan objectives. Compensation
expense under the plans in 1995, 1996 and 1997 approximated $5,075, $4,224 and
$6,661, respectively.
DEFERRED SAVINGS AND PROFIT SHARING PLAN: During 1984, the Company established a
deferred savings and profit sharing plan under Section 401(k) of the Internal
Revenue Code. The plan enables eligible employees to reduce their taxable
income by contributing up to 15% of their salary to the plan. The Company makes
discretionary contributions to the plan based on a percentage of contributions
made by the eligible employees and profits of the Company. The Company's
contributions vest after the employee has completed 42 months of service and for
1995, 1996 and 1997 amounted to approximately $1,664, $705 and $3,156,
respectively.
K. COMMITMENTS AND CONTINGENCIES
The Company's corporate offices are located in Boston, Massachusetts. The
building is leased from a partnership in which certain officers, directors and
shareholders of the Company are limited partners. The lease is for a term of
twenty years at annual rentals of $682,000 through February 1996 and at
prevailing market rates in subsequent years through 2006. The Company is also
required to pay specified percentages of annual increases in real estate taxes
and operating expenses.
The Company leases additional office space and apartments under operating
leases, some of which may be renewed for periods up to five years, subject to
increased rentals. Rental expense for all of the Company's facilities amounted
to approximately $8.9 million in 1995, $10.7 million in 1996 and $12.0 million
in 1997. The Company is committed to minimum annual rental payments under all
leases of approximately $12.0 million in 1998, $10.2 million in 1999, $8.0
million in 2000, $6.8 million in 2001, $5.0 million in 2002 and an aggregate of
$5.9 million from 2003 to 2006.
On December 31, 1992, Four Star Capital Corporation ("Four Star") commenced a
civil action against AGS Computers, Inc. ("AGS"), NYNEX Corporation ("NYNEX")
and Derek Proctor, a former employee of AGS, in Superior Court of California,
County of Marin, alleging, among other matters, breach of contract with respect
to the solicitation of business for NYNEX and AGS in China. The case was
subsequently removed to the United States District Court for the Northern
District of California and transferred to the United States District Court for
the Southern District of New York. Four Star originally sought damages in the
amount of $5,600,000. However, on May 3, 1994, Four Star amended its complaint
to provide for a claim seeking relief in the amount of $25,000,000. Keane
acquired all of the outstanding capital stock of AGS in January 1994. In
December 1997, Keane, NYNEX and Four Star agreed to resolve this matter without
further litigation or judicial involvement. The final settlement agreement was
signed on January 12, 1998. The case was dismissed, with prejudice, on January
16, 1998.
On August 29, 1994, Marketing and Management Information, Inc. ("MAMI")
commenced a civil action against the Company, General Electric Consulting
Services Corporation ("GECON") and General Electric Company (General Electric
Information Services) ("GEIS") in the Circuit Court for Montgomery County,
Maryland, Case Number 123797. The Complaint alleged claims for breach of
contract, fraud and negligent misrepresentation in connection with a consulting
contract for computer development work between MAMI and GECON. The Company
assumed this contract as part of its acquisition of certain assets of GECON in
January 1993. The contract price for the consulting work alleged in the
Complaint totaled approximately $425,000. Despite the
33
<PAGE>
limitation on recoverable damages contained in the contract, MAMI alleged
damages in excess of $50,000,000 and claimed punitive damages in an amount more
than double the compensatory claim.
The Company denied the allegations of the Complaint and asserted a number of
affirmative defenses, including the defense that the claims of damages asserted
in the Complaint were barred by the terms of the underlying contract. The
Company was granted summary judgment on certain of MAMI's claims. After a trial
before a judge without a jury, on September 24, 1996, the court entered judgment
in favor of the Company. On MAMI's remaining claim of negligent
misrepresentation against GECON, the court awarded MAMI the sum of
$1,261,276.36. Various post-judgment motions have been filed pertaining to the
award as it relates to damages against GECON. No post-judgment motions have
been filed with respect to the judgment entered in favor of the Company and the
deadline for filing any such motion has passed.
The Company is also involved in other litigation and various legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the ultimate resolution of any existing matter will have a material adverse
effect on its financial condition, results of operations, or cash flows. The
Company believes these litigation matters are without merit and intends to
defend these matters vigorously.
L. INCOME TAXES
The provision for income taxes includes federal, state and foreign income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities.
The provision for income taxes consists of the following:
Years Ended December 31,
1995 1996 1997
-----------------------------------
(IN THOUSANDS)
Current:
Federal $11,097 $18,111 $33,331
State 3,185 4,793 8,722
Foreign 69 64 211
------- ------- -------
Total 14,351 22,968 42,264
------- ------- -------
Deferred:
Federal (847) (3,675) (7,785)
State (176) (255) 251
Foreign -- (64) (74)
------- ------ -------
Total (1,023) (3,994) (7,608)
------- ------- -------
$13,328 $18,974 $34,656
======= ======= =======
34
<PAGE>
A reconciliation of the statutory income tax provision with the effective income
tax provision is as follows:
Years Ended December 31,
1995 1996 1997
--------------------------------
(IN THOUSANDS)
Federal income taxes at 35% $11,405 $15,516 $28,212
State income taxes, 2,127 2,949 5,725
net of federal tax benefit
Tax credits (241) (130) (35)
Other, net 37 639 754
------- ------- -------
$13,328 $18,974 $34,656
======= ======= =======
The components of the net deferred tax assets and liabilities are as follows:
Years Ended December 31,
1996 1997
-------------------------
(IN THOUSANDS)
Current:
Allowance for doubtful accounts and other reserves $ 1,423 $ 5,476
Employee medical benefits (57) (374)
Accrued expenses 124 397
------- -------
Total current assets $ 1,490 $ 5,499
======= =======
Long-term:
Customer based intangibles $(6,156) $(5,478)
Amortization of intangible assets 8,523 11,118
Accrued rents 109 70
Depreciation and other 598 963
------- -------
Long-term assets (liabilities) $ 3,074 $ 6,673
======= =======
The current component is included in prepaid expenses and other current assets
on the balance sheet. The long-term component is included in the other assets
on the balance sheet.
M. RESEARCH AND DEVELOPMENT
Research and development expenses included in SG&A were approximately $4.0
million, $4.1 million and $2.9 million in 1995, 1996 and 1997, respectively.
N. BUSINESS ACQUISITIONS
On January 5, 1994, the Company purchased the stock of AGS from NYNEX Worldwide
Services Group, Inc. ("NYNEX"), a wholly owned subsidiary of NYNEX Corporation.
AGS provides information technology consulting services, including systems
integration and staff supplementation, to businesses and government agencies in
the United States and Canada. The initial amount paid in connection with the
stock purchase was approximately $46.1 million which was financed by internal
cash and investments of $25.1 million and new bank borrowings of $21.0 million.
The Company and NYNEX also executed a separate noncompetition agreement
35
<PAGE>
covering a four-year period in exchange for the Company's $12.0 million
noninterest-bearing subordinated note. (See notes H and K.)
The acquisition of AGS has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired, including primarily customer-
based intangibles, the noncompetition agreement and accounts receivable, have
been recorded at their fair values at the date of acquisition. The customer-
based intangibles and noncompetition agreement are being amortized on a
straight-line basis over fifteen years and four years, respectively. The excess
of the purchase price over the fair value of the net assets acquired has been
recorded as goodwill and is being amortized on a straight-line basis over a 15-
year period.
During 1995, the Company completed three acquisitions. The aggregate purchase
price of these acquisitions totaled $7.9 million. These acquisitions were
accounted for by the purchase method of accounting. Accordingly, the assets
acquired, including primarily customer-based intangibles, noncompetition
agreements and software, have been recorded at their fair values at the date of
acquisitions. The customer-based intangibles, noncompetition agreements and
software are being amortized on a straight-line basis over periods ranging from
three to five years. The excess of purchase price over the fair value of the
net assets acquired has been recorded as goodwill and is being amortized on a
straight-line basis over a 15-year period.
O. BANK DEBT
In January 1994, the Company entered into $45 million revolving credit agreement
replacing its existing line of credit. Borrowings under the line were at the
bank's corporate rate. In July 1995, the Company canceled the revolving credit
agreement and replaced it with a new $20 million demand line of credit from two
banks. Borrowings will bear interest at the bank's base rate (the prime rate).
There were no borrowings under either line during 1997 or 1996.
P. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128. Under SFAS No.
128, primary and fully diluted earnings per share were replaced with basic and
diluted earnings per share, and several provisions of APB Opinion No. 15
"Earnings per Share," which was replaced by SFAS No. 128, were eliminated in an
effort to simplify the calculations and conform such calculations to methods
used internationally.
36
<PAGE>
A summary of the Company's calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
--------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income $19,257 $25,358 $45,949
Weighted average number of common shares
outstanding used in calculation of basic earnings
per share 64,700 65,694 66,010
Incremental shares from the assumed exercised of
dilutive stock options 692 760 1,507
------- ------- -------
Weighted average number of common shares
outstanding used in calculation of diluted earnings
per share 65,392 66,454 67,517
======= ======= =======
Earnings per share
Basic $ .30 $ .39 $ .70
======= ======= =======
Diluted $ .29 $ .38 $ .68
======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is contained in part under the caption "Executive
Officers of the Company" in Part I hereof, and the remainder is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 27, 1998 (the "1998 Proxy Statement") under the
caption "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is incorporated herein by reference to the Company's
1998 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is incorporated herein by reference to the Company's
1998 Proxy Statement under the caption "Stock Ownership of Certain Beneficial
Owners and Management."
37
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is incorporated herein by reference to the Company's
1998 Proxy Statement under the caption "Certain Related Party Transactions."
PART IV
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
--------------------
The following consolidated financial statements are included in Part II, Item 8:
Page(s)
Report of Independent Accountants ................................... 21
Consolidated Balance Sheets as of December 31, 1996 and 1997 ........ 22
Consolidated Statements of Income
For the Years Ended December 31, 1995, 1996 and 1997 ................ 23
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1995, 1996 and 1997 ................ 24
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995, 1996 and 1997 ................ 25
Notes to Consolidated Financial Statements .......................... 26-37
38
<PAGE>
(b) Exhibits
--------
The Exhibits set forth in the Exhibit Index are filed as part of this Annual
Report.
(c) Reports on Form 8-K
-------------------
Not applicable.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KEANE, INC.
(Registrant)
/s/ John F. Keane
-------------------------------------
By: John F. Keane
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
/s/ John F. Keane March 30, 1998 /s/ Wallace A. Cataldo March 30, 1998
- ----------------------------- -------------- ----------------------------- --------------
John F. Keane Date Wallace A. Cataldo Date
President, Vice President - Finance
Chief Executive Officer and Administration
and Director (Principal Financial Officer)
(Principal Executive Officer) (Principal Accounting Officer)
/s/ John F. Rockart March 30, 1998 /s/ Robert A. Shafto March 30, 1998
- ----------------------------- -------------- ----------------------------- --------------
John F. Rockart Date Robert A. Shafto Date
Director Director
/s/ Philip J. Harkins March 30, 1998 /s/ Winston R. Hindle, Jr. March 30, 1998
- ----------------------------- -------------- ----------------------------- --------------
Philip J. Harkins Date Winston R. Hindle, Jr. Date
Director Director
</TABLE>
40
<PAGE>
Exhibit Index
- -------------
3.1 Articles of Organization of the Registrant, as amended, are
incorporated herein by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-3 (File No. 33-85206).
3.2 By-Laws of the Registrant, as amended, are incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994.
*10.1 Key Employees Deferred Compensation Plan is incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (File No. 33-33557), as filed with the Securities and Exchange
Commission (the "Commission") on February 21, 1990 and declared effective
by the Commission on March 8, 1990 (as amended, the "Registration
Statement").
*10.2 Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is
incorporated herein by reference to Exhibit 10.2 to the Registration
Statement.
*10.3 1982 Incentive Stock Option Plan (the "Option Plan") is incorporated
herein by reference to Exhibit 10(c) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988 (the "1988 Form 10-K"). On
January 9, 1990, the Board of Directors of the Registrant adopted an
Amendment to Section 4 of the Option Plan increasing the number of shares
eligible for issuance thereunder to 900,000.
*10.4 Amendments to the Option Plan effective as of February 15, 1990 and
March 7, 1990 are incorporated herein by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990 (the "1990 Form 10-K").
*10.5 1978 Employee Stock Purchase Plan (the "Stock Purchase Plan") is
incorporated herein by reference to Exhibit 10(b) to the 1988 Form 10-K.
*10.6 Amendments to the Stock Purchase Plan effective as of February 15,
1990 are incorporated herein by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 (the "1992 Form 10-K").
*10.7 1983 Restricted Stock Plan (the "Restricted Stock Plan") is
incorporated herein by reference to Exhibit 10.5 to the Registration
Statement.
*10.8 Amendment to the Restricted Stock Plan effective as of February 15,
1990 is incorporated herein by reference to Exhibit 10-4 of the 1990 Form
10-K.
10.9 1992 Stock Option Plan is incorporated herein by reference to
Exhibit 10.9 to the 1992 Form 10-K.
10.10 1992 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10.10 to the 1992 Form 10-K.
10.11 Lease dated February 20, 1985, between the Registrant and Jonathan
G. Davis, as Trustee of City Square Development Trust (the "Trust"), is
incorporated herein by reference to Exhibit 10.6 to the Registration
Statement.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(A) and (C) of this report.
<PAGE>
10.12 First Amendment of Lease dated March 19, 1985, between the
Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to
the Registration Statement.
10.13 Second Amendment of Lease dated November 1985, between the
Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to
the Registration Statement.
10.14 Documents relating to the Demand Lines of Credit with Shawmut Bank,
N.A. and the First National Bank of Boston (the "Banks") are incorporated herein
by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995:
(a) Demand Money Market Promissory Note dated as of May 1, 1995, in the
amount of $10,000,000, between the Registrant and Shawmut Bank.
(b) Loan Agreement dated July 20, 1995, in the amount of $10,000,000,
between the Registrant and Bank of Boston.
16.1 Letter from Coopers & Lybrand L.L.P., dated October 30, 1996
concurring with the statements made by the Registrant concerning the dismissal
of Coopers & Lybrand L.L.P. as the Registrant's principal accountant, is
incorporated herein by reference to the Registrant's Report on Form 8-K, dated
October 24, 1996.
16.2 Letter from Ernst & Young LLP, dated December 19, 1996, concurring
with the statements made by the Registrant concerning the resignation of Ernst &
Young LLP as the Registrant's principal accountant, is incorporated herein by
reference to the Registrant's Report on Form 8-K, dated December 16, 1996.
21. Schedule of Subsidiaries of the Registrant................... EX-21.1
23. Consent of Coopers & Lybrand L.L.P........................... EX-23.1
27.1 Restated Financial Data Schedule for the
year ended December 31, 1995....................................... EX-27.1
27.2 Restated Financial Data Schedule for the three months
ended March 31, 1996............................................... EX-27.2
27.3 Restated Financial Data Schedule for the six months
ended June 30, 1996................................................ EX-27.3
27.4 Restated Financial Data Schedule for the nine months
ended September 30, 1996........................................... EX-27.4
27.5 Restated Financial Data Schedule for the year
ended December 31, 1996............................................ EX-27.5
27.6 Restated Financial Data Schedule for the three months
ended March 31, 1997............................................... EX-27.6
27.7 Restated Financial Data Schedule for the six months
ended June 30, 1997................................................ EX-27.7
<PAGE>
27.8 Restated Financial Data Schedule for the nine months
ended September 30, 1997.............................................. EX-27.8
27.9 Financial Data Schedule for the year
ended December 31, 1997............................................... EX-27.9
<PAGE>
EXHIBIT 21
SUBSIDIARIES
THE FOLLOWING IS A LIST OF THE COMPANY'S SUBSIDIARIES:
Percentage of Voting
Securities Owned By
Organized Keane, Inc. as of
Name Under Laws of December 31, 1997
---- ------------- -----------------
Dataskills, Inc. Massachusetts 100%
Keane Federal Systems, Inc. Delaware 100%
Keane Canada, Inc. Canada 100%
169963 Canada, Inc. Canada 100%
Keane Securities Corporation Massachusetts 100%
Keane Technology Company California 100%
Keane Technology Services Company California 100%
Keane Pittsburg, Inc. Pennsylvania 100%
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Keane, Inc. on Form S-8 (File Nos. 33-00175, 33-16187, 33-00176, 2-76657, 2-
91931, 33-16188, 33-38361, 2-40012, 2-87193, 2-61721, 2-89418, 33-38360, 33-
38361, 33-52760, 33-52758, 33-52756, 33-52762 and 333-16113) and Form S-3 (File
No. 333-46329) of our report dated March 3, 1998, on our audits of the
consolidated financial statements of Keane, Inc. as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995, which report is
included in this Annual Report on Form 10-K.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
March 31, 1998
<TABLE> <S> <C>
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